Tag Archives: Home sales

The Fed Is Running Out Of Bullets

“The latest University of Michigan consumer confidence report noted that its index tracking those who think it’s a good time to buy a home has fallen by a hefty eight points in the past two months even as mortgage rates have dropped.” – Danielle DiMartino Booth, “The Fed Can’t Help Housing Or Autos At This Point

I’m not the only analyst who has concluded that lower rates likely will not re-stimulate housing market activity. As I’ve argued in my Short Seller’s Journal, the “pool” of potential homebuyers who can qualify for a mortgage has greatly diminished. In fact, mortgage delinquencies are rising because many who stretched to buy a home in the past several years are struggling with the all-in cost of home ownership. Stagnant wages and the rising cost of necessities are largely the culprits.

“Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry-level buyers.” – NAHB Chief Economist Robert Dietz. That quote accompanied the NAHB’s release of its Housing Market Index, which used to be called the Homebuilder Sentiment Index because it’s a “how do you feel?” survey.

The Housing Market index fell to an index level of 64 in June from 66 in May. Wall St’s finest were looking for a consensus 67. All three sub-indices declined: current sales conditions, buyer traffic and expectations for the next six months. Buyer traffic has been below 50 for two months in a row. This is despite more than a 1% decline in the average rate on a 30-year fixed rate mortgage during the last 7 months.

At the end of the day, it doesn’t really matter how homebuilders “feel” about the sales environment now or in six months, declining foot traffic translates into decline sales volume. The quote above reinforces my theory that the “pool” of potential homebuyers, especially first-time buyers, who can qualify for a mortgage and afford the monthly cost of home ownership is drying up. Lower interest expense somewhat offsets high prices relative to income. However, the general cost of home ownership other than debt service is rising beyond the spending budgets of many potential home owners.

Quant-oriented perma-bulls, like Josh Steiner at Hedge Eye, understand the extent to which easy credit has fueled the housing market since 2010. You can’t necessarily call it a “housing bull market” because the until sales level is not even remotely close to the previous peak in 2005. New single family home sales peaked at a seasonally adjusted annualized rate of 1.39 million in July 2005. The current SAAR is 673,000.

Furthermore, the Government “pulled forward” future demand when it began to lower the bar to qualify for a FNM/FRE mortgage. The demand pool Steiner probably imagines is out there for starter homes has mostly already bought OR can’t qualify. This is why that huge drop in the 10yr has not stimulated housing sales.

The rate on a 30yr fixed mortgage has dropped over 100 basis points since November, yet housing sales have been declining. It would be interesting to know to what extent home sales would have have declined over the last few months if rates had not fallen over 1% in 7 months.  Just look at the big gap down in mortgage purchase applications reported this week despite a 10yr yield that has fallen relentlessly.

It doesn’t really matter what the Fed does today with the Fed Funds rate policy decision. To be sure, if the FOMC postures toward take rates to zero if necessary it might juice the stock market temporarily.  But it won’t take long for brains to take over from the algos and interpret the message that would be transmitted by the FOMC  as extraordinarily bearish.

Any attempt at holding off the economic catastrophe creeping into view would require massive money printing.  But given that some FOMC members consider a $3 trillion balance sheet to be “normalized,” I’m not sure at the margin to what degree more money printing  will save the economy.  Perhaps a Debt Jubilee for all households…

The above commentary includes excerpts from my Short Seller’s Journal, a weekly newsletter  ideas for those looking to short stocks – including options strategies – based on fundamental analysis. You can learn more or subscribe using this link:  Short Seller’s Journal information.

Horrifying Comments From A Freddie Mac Phd Economist

The housing market continues show contracting sales volume. April existing home sales fell 0.4% (SAAR – Seasonally Adjusted Annualized Rate) from March and 4.4% from last April. Existing home sales have dropped year-over-year 14 months in a row. This is the worst run since the housing crisis.

Obviously from a seasonal standpoint, if the market were healthy, home sales should be increasing month-to-month notwithstanding questionable statistical “adjustments” imposed on the data by the NAR. Furthermore, existing home sales are based on closings, which mean the report measures contracts that were signed in late February to late March/early April. during this period the 10yr Treasury rate fell from 2.8% to as low as 2.35%. But lower rates are not stimulating home sales in spite of rapidly rising inventory.

This is because the much of the remaining “pool” of potential home buyers can not afford the all-in cost of home ownership in spite of lower financing costs. Almost 30% of all mortgages that Fannie and Freddie underwrote and packed into bonds last year were for home buyers whose total debt payments were in excess of 43% of their gross (pre-tax) income. This metric – the borrower’s DTI – has nearly doubled since 2015. The mortgage/housing market is headed for a repeat of 2008.

New home sales also showed a drop from March. But the March number was curiously revised significantly higher – an upward revision to 723k SAAR. The number is so much higher than any number reported for any month in the last 12 months that it looks comical in the data series. John Williams (Shadowstats.com) referred to the report as “regular nonsense monthly volatility and lack of statistical significance.”   In fact, the jump in new home sales tabulated by the Government does not remotely correlate with mortgage purchase application data released by the Mortgage Bankers Association, which shows a decline in purchase applications that would correspond to April’s new home sales data

NOTE:  new home sales are based on contracts signed.  90% of all new homebuyers use a mortgage. Therefore declining purchase apps would translate into decline new home contract signings.  New homebuilders, for the most part, have been reporting declining new home orders (see Toll Brother’s latest earnings release from last Monday, for instance).

This brings me to an exchange between Texas real estate professional, Aaron Layman, and the deputy chief economist at Freddie Mac – Lawrence Kiefer. It seems that this Freddie Mac executive could not understand by lower interest rates were not translating into higher home sales. This economics Einstein was puzzled that the large pool of millennials were renting rather than buying. It’s pretty clear that this ivory tower dork is clueless about the amount of student debt held by the millennial demographic.  Kiefer suggested to Aaron that higher student debt levels could possibly be net positive for the housing market if it leads to higher incomes. The Twitter exchange between Aaron and Mr. Kiefer has left me speechless. You can read more here: Aaronlayman.com

Perhaps studying this chart might help Freddie Mac’s Mr. Kiefer better understand the basic problem:

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Actual Home Sales Are Tanking – Here’s Proof

The National Association of Realtors (NAR – existing home sales reports) and the Census Bureau (new home sales reports) report monthly sales on a “seasonally adjusted annualized rate” basis (SAAR). Notwithstanding the reliability – or lack thereof – of the “seasonal adjustments,” it would seem absurd to report monthly home sales on an annualized rate basis.

To the extent the NAR and Census Bureau’s data sausage-grinder is fed inaccurate data and thereby vomits a bad monthly “adjusted” number, annualizing that result magnifies the error. As it turns out, when sales are declining, the regression models used to “seasonally adjust” the data collected overstates actual sales (year over year monthly existing home sales have declined 13 months in a row).

A better measure of real homes sales is to look at actual numbers from companies in the business of pimping used homes or building and selling new homes. Realogy (RLGY) is the perfect laboratory rat for existing home sales. Realogy is the leading provider of real estate services in the U.S. under the brand names of Coldwell Banker, ERA, Sotheby’s, and a few others. Its shares plunged 15% on Thursday as losses from Q4 accelerated in Q1. Revenue declined 9% year-over-year vs a 6.2% in drop in Q4. The culprit was a 4% drop in transaction volume. The actual “same store sales” decline was likely larger because RLGY’s Q1 numbers are skewed by the acquisition and franchising of Corcoran, making the this quarter’s year/year comps irrelevant.

If any business reflects the true condition of the housing market, it’s RLGY. Existing home sales represent 90% of total home sales and RLGY is the largest real estate brokerage concern in the country. Yes, some select areas may still be showing “red embers” of activity. But most of the country is headed into what will ultimately be a severe housing recession. RLGY was down another 8.7% on Friday. It’s now down 33% since reporting its numbers last week.

RLGY may still be worth shorting here. It’s bleeding cash. It lost $135 million on an earnings before taxes basis (the income statement did not show operating income as line item). Its operations burned $103 million. The Company added an additional $100mm in debt, which now stands at $3.3 billion. The bond issue which it floated in Q4 had a coupon of 9.375% – a triple-C rated yield. Triple-c rated companies typically have a high probability of eventually going bankrupt. The tangible book value of the company – i.e. subtracting goodwill – is negative $1.6 billion. I wouldn’t touch RLGY’s bonds any more than I would touch TSLA’s or NFLX’s bonds. RLGY is on track to run out of cash by the end of September.

In the new home sales arena, Beazer (BZH) stock has plunged 18.4% since reporting its latest quarterly numbers on Friday. BZH’s closings were down over 10%, revenue down 4.6% and its gross margin plummeted (sales incentives to move inventory). Even adding back the write-down of California inventory, BZH’s net income was nearly cut in half and new orders were down close to 8% in the first 6 months vs 2018.

Note: it looks like homebuilders will begin the inventory write-down cycle again. It starts slowly and snowballs into an avalanche. So much for the “tight inventory” narrative that shoved down our gullet the NAR’s little con-artist, Larry Yun.

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Recession Fears Fading? ROFLMAO

The news headlines explained the sudden jump in the S&P futures this morning by stating that “recession fears had faded.”  Just like that. Overnight.  I guess the fact that the housing starts report showed a 9% sequential drop in housing starts last month and and a year-over-year 10% plunge means that the housing market is no longer considered part of the economy.

That report was followed by a highly negative March consumer confidence report which included that largest drop in the “present situation” index since 2008.  What’s stunning about this report is that consumer confidence usually is highly correlated with the directional movement of the S&P 500. Obviously this would have suggested that consumer confidence should be soaring.

I explained to my Short Seller Journal subscribers that, once it became obvious the Fed would eventually have to start cutting rates and resuming QE, the stock market might sell-off. I think that’s what we saw on Friday. The “tell-tale” is the inversion in the Treasury yield curve. It’s now inverted out to 7 years when measured between the 1-yr and 7-yr rate. On Friday early the spread between the 3-month T-Bill and the 10-yr Treasury yield inverted. This has occurred on six occasions over the last 50 years. Each time an “officially declared” recession followed lasting an average of 311 days.

The yield curve inversion is a very powerful signal that economy is in far worse shape than any Fed or Government official is willing to admit. the Treasury yield curve “discounts” economic growth expectations. An upward sloping yield curve is the sign that the bond market expects healthy economic growth and potential price inflation. An inverted curve is just the opposite. If you hear or read any analysis that “it’s different this time,” please ignore it. It’s not different.

The inverted yield curve is broadcasting a recession. For many households, this country has been in a recession since 2008. That’s why debt levels have soared as easy access to credit has enabled 80% of American households to maintain their standard of living. The yield curve is telling us that credit availability will tighten considerably and the recession will hit the rest of us. This is what Friday’s stock market was about, notwithstanding the overtly obvious intervention to keep the S&P 500 above the 2800 level on Monday and today.

Without a doubt, through the “magic” of “seasonal adjustments” imposed on monthly data we might get some statistically generated economic reports which will be construed by the propagandists as showing “green shoots.” Run, run as far away as possible from this analysis. The average household has debt bulging from every orifice. In fact, the entire U.S. economic system is bursting at the seams from an 8-year debt binge. It’s not a question of “if” the economy will collapse, it’s more a matter of “when.”

The Stock Market Is Back In Idiot-Mode Again

I don’t know if it was the intent of the Fed, but Jerome Powell has managed to trigger a rush into stocks more frenzied than the one that engulfed the last days of the dot.com/techbubble. The vertical ascent since Christmas in the Dow/SPX is unprecedented on a percentage basis over an 8-week period of time. All sense of logic, sound analysis and fear of risk has disappeared. I don’t know how much longer this move will last, but it will likely be followed by a spectacular reversal.

What I can say with 100% certainty is that the stock market continues to dislocate from economic reality. This is a situation that will be corrected sooner or later, with the stock market re-pricing significantly lower to a level that better reflects the deterioration in both the global and U.S. economy.

A perfect example of this is housing starts, which were released today for December and showed an 11.2% drop from November. The better comparison is the 11% plunge from December 2017, as “seasonal [statistical] adjustments” are used to obfuscate the real data trends month to month. The year/year comp is somewhat “cleansed” from “seasonal” manipulation adjustments.

The mainstream media is already putting a positive spin the starts number by explaining that permits rose. A permit is not indicative of a future start. Homebuilders have been loading up on land, as tends to happen at the end of housing cycles. A permit is a cheap “option” to initiate a start if the market picks up. In fact, starts should be increasing right now. It takes 3-5 months to build the average priced new home. If homebuilders truly thought that the market was going to improve, housing starts should be increasing in November/December in anticipation of peak selling season in June.

Funny thing about the housing starts commentary.  Most homebuilders are sitting on a record level of inventory.  An example is LGI Homes, which just reported this morning.  LGI’s  year-end inventory soared 34% from year-end 2017.  The Company financed most of this with debt.  Home closings for 2018 were up 11% but decelerated during the year and new orders were down in January 2019 vs 2018.  Given the big jump in existing home inventory during the 2nd half of 2018, it’s safe to say that most homebuilders will likely try to work off existing inventory before starting new homes in excess of what is sold.

The housing market and all the related economic activity connected to building, selling, and financing home sales represents  20-25% of the GDP.  Inflating the money supply and dropping interest rates is not a valid method of stimulating economic activity when most households are over-burdened with debt, living paycheck to paycheck and depleting savings just to remain on the gerbil wheel.

Notwithstanding the propaganda coming from policy makers, Wall Street and the hand-puppet mainstream media, the economy is sinking.  The current spike in the stock market is nothing more than a rabid bear market rally of historic proportions. The stock market is not trading higher on fundamentals or hedge funds plowing investment capital back into the market (away from algo-based momentum trading).

According to data tracked by Goldman Sachs, hedge fund exposure to the stock market is well below levels registered during the last 18 months. As it turns out, corporate stock buybacks and short-covering are driving stocks higher. Buybacks YTD are tracking 91% higher than the same period last year. Short interest in the S&P 500 is now at the lowest level since 2007. The stocks that have performed the best since Christmas are the most heavily shorted stocks.

We’re not hearing anymore whining about the hedge fund computers dictating the direction of the market as was commonplace during the December sell-off. But when this market rolls over and rips in reverse, the Leon Cooperman’s of the world will be spilling tears all over the Wall Street Journal and CNBC complaining about hedge fund algos driving stocks lower. Funny thing, that…

The commentary above is partially excerpted from the latest Short Seller’s Journal. This is a weekly subscription service which analyzes economic data and trends in support of ideas for shorting market sectors and individual stocks, including ideas for using options. You can learn more about this here: Short Seller’s Journal information.

As The Fed Reflates The Stock Bubble The Economy Crumbles

I get a kick out of these billionaires and centimillionaires, like Kyle Bass yesterday, who appear on financial television to look the viewer in the eye and tell them that economy is booming.  Kyle Bass doesn’t expect a mild recession until mid-2020. Hmmm – explain that rationale to the 78%+ households who are living paycheck to paycheck, bloated with a record level of debt and barely enough savings to cover a small emergency.

After dining on a lunch fit for Elizabethan royalty with Trump, Jerome Powell decided it was a good idea to make an attempt at reflating the stock bubble. After going vertical starting December 26th, the Dow had been moving sideways since January 18th, possibly getting ready to tip over. The FOMC took care of that with its policy directive on January 30th, two hours before the stock market closed. Notwithstanding the Fed’s efforts to reflate the stock bubble – or at least an attempt to prevent the stock market from succumbing to the gravity of deteriorating fundamentals – at some point the stock market is going to head south abruptly again. That might be the move that precipitates the renewal of money printing.

Contrary to the official propaganda the economy must be in far worse shape than can be gleaned from the publicly available data if the Fed is willing to stop nudging rates higher a quarter of a point at a time and hint at the possibility of more money printing “if needed.” Remember, the Fed has access to much more detailed and accurate data than is made available to the public, including Wall Street. The Fed sees something in the numbers that sent them retreating abruptly and quickly from any attempt to tighten monetary policy.

For me, this graphic conveys the economic reality as well as any economic report:

The chart above shows the Wall Street analyst consensus earnings growth rate for each quarter in 2019. Over the last three months, the analyst consensus EPS forecast has been reduced 8% to almost no earnings growth expected in Q1 2019. Keep in mind that analyst forecasts are based on management “guidance.” The nearest next quarter always has the sharpest pencil applied to projections because corporate CFO’s have most of the numbers that go into “guidance.” As you can see, earnings growth rate projections have deteriorated precipitously for all four quarters. The little “U” turn in Q4 is the obligatory “hockey stick” of optimism forecast.

Perhaps one of the best “grass roots” fundamental indicators is the mood of small businesses, considered the back-bone of the U.S. economy. After hitting a peak reading of 120 in 2018, the Small Business Confidence Index fell of a cliff in January to 95. The index is compiled by Vistage Worldwide, which compiles a monthly survey of 765 small businesses. Just 14% expect the economy to improve this year and 36% expect it to get worse. For the first time since the 2016 election, small businesses were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment.

The Vistage measure of small business “confidence” was reinforced by the National Federation of Independent Businesses confidence index which plunged to its lowest level since Trump elected. It seems the “hope” that was infused into the American psyche and which drove the stock market to nose-bleed valuation levels starting in November 2016 has leaked out of the bubble. The Fed will not be able to replace that hot air with money printing.

I would argue that small businesses are a reflection of the sentiment and financial condition of the average household, as these businesses are typically locally-based service and retail businesses. The sharp drop in confidence in small businesses correlates with the sharp drop in the Conference Board’s consumer confidence numbers.

The negative economic data flowing from the private sector thus reflects a much different reality than is represented by the sharp rally in the stock market since Christmas and the general level of the stock market. At some point, the stock market will “catch down” to reality. This move will likely occur just as abruptly and quickly as the rally of the last 6 weeks.

It’s Lose-Lose For The Fed And For Everyone

A friend asked me today what I thought Powell should do.  I said, “the system is screwed. It ultimately doesn’t matter what anyone does.   The money printing, credit creation and artificially low interest rates over the last 10 years has fueled the most egregious misallocation of capital in history of the universe.”

Eventually the Fed/Central Banks will print trillions more – 10x more than the last time around. If they don’t this thing collapses. It won’t matter if interest rates are zero or 10%. You can’t force economic activity if there’s no demand and you’ve devalued the currency by printing it until its worth next to nothing and people are toting around piles of cash in a wheelbarrow worth more than the mountain of $100 bills inside the wheelbarrow.

The price of oil is down another $3.50 today to $46.50. That reflects a global economy that is cratering, including and especially in the U.S. Most people will listen to the perma-bullish Wall Streeters, money managers and meat-with-mouths on bubblevision preach “hope.”

Anyone who can remove their retirement funds from their 401k or IRA and doesn’t is an idiot. Anyone thinking about selling their home but is waiting for the market to “climb out of this small valley in the market” will regret not selling now.

Forget Powell. What can you do? There is no asset that stands on equal footing with gold. You either own it or you do not.

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” – George Bernard Shaw

The Housing Market Is Sliding Down The Wall It Hit In Late August

A couple of my subscribers emailed me expressing frustration over the fact that their recent homebuilder puts are either not moving higher or losing value despite the sell-off in the overall stock market. There’s two factors. First, the homebuilder sector has dropped well over 30% since late January. To an extent there may be some seller’s fatigue. At some point there will be short term rally that could generate at 15-25% bounce in the sector. I believe that rally will occur from a lower level on the DJUSHB currently, but it’s always a risk if you are short.

The second factor is the abrupt move in the 10yr Treasury yield from 3.25% down to 2.85%. This move occurred in four weeks. This is a big move in that period of time. Hedge fund algos are programmed to buy homebuilders when interest rates drop on the premise that lower rates stimulate home sales. It’s really that simplistically knee-jerk. That’s why the Dow can fall 400 points and the homebuilders remain flat or even move higher (stocks fall and the money flows into Treasuries which drives yields lower and homebuilders higher). Since the stock market began dropping in late October, the DJUSHB has moved from 595 to as high as 683 intra-day on November 28th. I’m surprised it didn’t bounce over 700. The move from 595 to a high-close of 686 on November 29th. This is nearly a 15% bounce. The DJUSHB closed at 643 this past Friday, down 5.6% from the 686 close.

But lower rates in the current context are not going to be a benefit for home sales. The mini-crash in the 10yr yield, combined with the flat yield curve, reflects a weak economy growing weaker. Potential homebuyers, in conjunction with the tightening credit market discussed above, are going to find it hard to qualify for a mortgage. Many no longer have the ability to make even a 3% down payment. Two weeks ago on Friday, when the stock market began to tank, the DJUSHB was up as much 14 points from Friday’s close. The DJUSHB closed down 8 points (1.2%) for the day. This was with the 10yr yield closing at its lowest yield since August 31st. On that day, the DJUSHB closed at 768. With the DJUSHB at 661, it’s 14% below where it was trading the last time the 10yr hit 2.85%.

Reinforcing my assertions above about the financial condition of prospective middle class homebuyers, The U of Michigan released its December consumer sentiment index on Friday. While the overall index was flat vs November, the future expectations component (the “hope” index) fell to its lowest level since December 2017. However, the homebuying conditions index fell to its lowest in 10 years. Recall that the homebuilders sentiment index for November plunged.

The graph below shows what’s going with builders in terms of actual economics. The chart plots the ratio of homebuilding permits to completions. Permits can be a fluff number because a homebuilder does not have put up much money to file a building permit. But completions reflects both demand and a homebuilder’s willingness to build spec homes (homes without buyer orders). A falling ratio indicates falling demand from buyers, rising order cancellation rates and risk aversion from homebuilders.

Another indication of the air flowing out of the housing bubble is the bidding war indicator. A subscriber sent me an article from the Seattle Times on the stunning drop in multiple bids for the same home across the country in the previously hottest bubble areas. In February 2018 in Seattle, for instance, 81.4% of listed homes had multiple bids. By November that number plunged to 21.5%, the lowest percentage of multiple bids on homes for sale in the history of the metric (Redfin began tracking this data in 2011). Other cities that made the top-10 list by Redfin include Boston, L.A., San Diego, Washington DC, Denver, Portland, Austin – all included in any list of the hottest bubble markets over the last 5 years.

The bottom line: We may have just seen the first real bear market counter-trend rally in the builders when the DJUSHB jumped 15% over three months. If the 10yr continues to drift lower, we might see one more push higher.

The above commentary is an excerpt from a recent Short Seller’s Journal.  The latest issue has a short idea related to new housing starts that has at least 50% downside.  To learn more about this newsletter, click here:   Short Seller’s Journal information

The Trade War Shuffle And The Fukushima Stock Market

The market is already fading quickly  from the turbo-boost it was given by the announcement that China and Trump reached a “truce” on Trump’s Trade War – whatever “truce” means.   Last week the stock market opened red or deeply red on several days, only to be saved by a combination of the repetitious good cop/bad bad cop routine between Trump and Kudlow with regard to the potential for a trade war settlement with China and what has been dubbed the introduction of the “Powell Put,” in reference to the speech on monetary policy given by Fed Chair, Jerome Powell, at the Economic Club of New York on Wednesday.

It’s become obvious to many that Trump predicates the “success” of his Presidency on the fate of the stock market. This despite the fact that he referred to the stock market as a “big fat ugly bubble” when he was campaigning.  The Dow was at 17,000 then. If it was a big fat ugly bubble back then, what is it now with the Dow at 25,700? If you ask me, it’s the stock market equivalent of Fukushima just before the nuclear facility’s melt-down.

Last week and today are a continuation of a violent short-squeeze, short-covering move as well as momentum chasing and a temporary infusion of optimism. I believe the market misinterpreted Powell’s speech. While he said the Fed would raise rates to “just below a neutral rate level,” he never specified the actual level of Fed Funds that the Fed would consider to be neutral (neither inflationary or too tight).

I believe the trade negotiations with China have an ice cube’s chance in hell of succeeding. The ability to artificially stimulate economic activity with a flood of debt has lost traction. The global economy, including and especially the U.S. economy (note: the DJ Home Construction index quickly went red after an opening gap up), is contracting. Trump and China will never reach an agreement on how to share the shrinking global economic pie.

While Trump might be able to temporarily bounce the stock market with misguided tweets reflecting trade war optimism, even he can’t successfully fight the Laws of Economics. His other war, the war on the Fed, will be his Waterloo. The Fed has no choice but to continue feigning a serious rate-hike policy. Otherwise the dollar will fall quickly and foreigners will balk at buying new Treasury issuance.

For now, Trump seems to think he can cut taxes and hike Government spending without limitation. But wait and see what happens to the long-end of the Treasury curve as it tries to absorb the next trillion in new Treasury issuance if the dollar falls off a cliff.  Currently, the U.S. Treasury is on a trajectory to issue somewhere between $1.7 trillion and $2 trillion in new bonds this year.

Despite the big move higher in the major stock indices, the underlying technicals of the stock market further deteriorated. For instance, every day last week many more stocks hit new 52-week lows than hit new 52-week highs on the NYSE. As an example, on Wednesday when the Dow jumped 618 points, there were 15 news 52-week lows vs just 1 new 52-week high. The Smart Money Flow index continues to head south, quickly.

For now it looks like the Dow is going to do another “turtle head” above its 50 dma (see the chart above) like the one in early November. The Dow was up as much as 442 points right after the open today, as amateur traders pumped up on the adrenaline of false hopes couldn’t buy stocks fast enough. As I write this, the Dow is up just 140 points. I suspect the smart money will once again come in the last hour and unload more shares onto poor day-traders doing their best impression of Oliver Twist groveling for porridge.

Powell Just Signaled That The Next Crisis Is Here

Housing and auto sales appear to have hit a wall over the last 8-12 weeks.  To be sure, online holiday sales jumped significantly year over year, but brick-n-mortar sales were flat. The problem there:  e-commerce is only about 10% of total retail sales.  We won’t know until January how retail sales fared this holiday season.  I know that, away from Wall Street carnival barkers, the retail industry is braced for disappointing holiday sales this year.

A subscriber asked my opinion on how and when a stock market collapse might play out. Here’s my response: “With the degree to which Central Banks now intervene in the markets, it’s very difficult if not impossible to make timing predictions. I would argue that, on a real inflation-adjusted GDP basis, the economy never recovered from 2008. I’m not alone in that assessment. A global economic decline likely started in 2008 but has been covered up by the extreme amount of money printed and credit created.

It’s really more of a question of when will the markets reflect or catch up to the underlying real fundamentals? We’re seeing the reality reflected in the extreme divergence in wealth and income between the upper 1% and the rest. In fact, the median middle class household has gone backwards economically since 2008. That fact is reflected in the decline of real average wages and the record level of household debt taken on in order for these households to pretend like they are at least been running place.”

The steep drop in housing and auto sales are signaling that the average household is up to its eyeballs in debt. Auto and credit card delinquency rates are starting to climb rapidly. Subprime auto debt delinquencies rates now exceed the delinquency rates in 2008/2009.

The Truth is in the details – Despite the large number of jobs supposedly created in October and YTD, the wage withholding data published by the Treasury does not support the number of new jobs as claimed by the Government. YTD wage-earner tax withholding has increased only 0.1% from 2017. This number is what it is. It would be difficult to manipulate. Despite the Trump tax cut, which really provided just a marginal benefit to wage-earners and thus only a slight negative effect on wage-earner tax withholding, the 0.1% increase is well below what should have been the growth rate in wage withholding given the alleged growth in wages and jobs. Also, most of the alleged jobs created in October were the product of the highly questionable “birth/death model” used to estimate the number of businesses opened and closed during the month. The point here is that true unemployment, notwithstanding the Labor Force Participation Rate, is much higher than the Government would like us to believe.

Fed Chairman Jerome Powell signaled today that the well-telegraphed December rate hike is likely the last in this cycle of rate-hikes, though he intimates the possibility of one hike in 2019. More likely, by the time the first FOMC meeting rolls around in 2019, the economy will be in a tail-spin, with debt and derivative bombs detonating. And it’s a good bet Trump will be looking to sign an Executive Order abolishing the Fed and giving the Treasury the authority to print money. The $3.3 billion pension bailout proposal circulating Congress will morph into $30 billion and then $300 billion proposal. 2008 redux. If you’re long the stock market, enjoy this short-squeeze bounce while it lasts…