This week in Barrons - 08-16-09

This Week in Barrons – 08-16-09:

Thoughts:
The wheels are coming off the train. It's a slow motion train wreck, but make no mistake about it, the wreck is in progress.
- Toll Brothers released earnings – Q3 signed contracts were up 3%, and revenues down 5% from a year ago. Deliveries were down 36% and 42% respectively.
- Home foreclosures rose 3.8% - so of those home sales – 36% were foreclosures – with the median price of a home sliding 15.6%. So much for Cramer’s call for a ‘housing bottom’ (two months ago)!
- FACTUALLY -- We are currently running 18.7M home vacancies (that’s not counting new homes unsold) – but ONLY 3.8 of those homes are for sale! That means that 14.9M homes are NOT even being offered for sale because the banks that have foreclosed on these home (14.9M of them) – as soon as they put them up for sale – will need to do all the paperwork on them – show the loan losses for what they really are – and potentially file for ‘bankruptcy’ protection themselves. So these ghost homes sit vacant – for the time being.
- Reuters came out and said that almost 48% of the people in 2011 will owe more on their houses than what they are worth!
- Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors, the latest sign that rising vacancies and falling rents are causing stress in the commercial real-estate sector.
- Over the coming months – as many as 1.5M jobless Americans will exhaust their unemployment insurance benefits – now do you suppose that just some of those 1.5M people might have homes that they are just barely clinging to?
- Thanks to Steve F. for contributing → From the perspective of second quarter GDP, it appears that it has been revised downward to -1.7% from -1.0%. Along with the Census Bureau reporting that sales and manufacturers' shipments although improving – the recovery will have a long way to go, as sales are still down 18% since June 2008.
- On Friday the regulators closed 300+ branches of Colonial BancGroup – a major lender in the real estate development market.

Now let’s look at the working ‘Average Joe’ in this country.
In 2007, the latest census bureau reading, the "average household" takes in was 50,233 dollars. Now, the median income per household member (including all working and non-working members above the age of 14) was $26,036. Now, if you start to take expenses, and taxes out of that income, we come up with a shocking problem - life costs more than the ‘Average Joe’ makes. The only true reason we as Americans have lived life so very high on the hog – for so long - has been CREDIT. With both parents already working – the cost of life exceeding wages – the only logical movement is to have (wage earning) children move back in with parents – in order to reduce costs and potentially increase earnings.

But it's not just jobs, falling housing, crashing Commercial real estate - this is just the warm up pitcher. (Reuters) - Banks in the United States are poised to make $38.5 billion in customer overdraft fees this year, citing research by Moebs Services. A large portion of the revenue is likely to come from the most financially stretched consumers, according to the paper. Many banks have increased charges on overdrafts and credit cards in order to boost profits. Banks are returning to a fee-driven model and overdraft fees are the mother lode. Overdraft fees accounted for more than 75 percent of service fees charged.

So how’s this playing out in the rest of the world? The Baltic Dry Index (one of the best indicators of true growth we have) – has crashed because the global economic crisis is wreaking havoc on shipping. Ports are filling up with fleets of empty freighters. We’ve never had a shortage of ‘cargo’ before – and this crisis has fueled cut-throat competition and not all companies will survive.

What's really happening is the "monetization" of all our debt. Don't forget – the FED has pledged to buy $1.2 trillion in mortgage backed stuff, and several hundred billion in straight treasuries. This money goes straight into the major investment banks – who are buying up stocks and commodity futures. When we let "them" change the rules and allowed assets to be market to fantasy versus marked to market, the banks were allowed to carry all their toxic sludge, without accounting for it's true value. So, they took the TARP money, and all Bernanke's monetization money and went to work in the markets.

This is NOT an accident, however we are in completely unexplored territory. Never before, and I mean NEVER has the world been in a synchronized recession, while at the same time operating on Fiat currencies. To think that all these Central bankers are going to be able to pull the right levers and push the right buttons to right this ship is just beyond my scope of imagination. I don't believe they can pull it off correctly. In other words, it's my guess that the truly worst of this nightmare lies ahead of us, not behind us. Nothing has been fixed, all we've done is rearrange the chairs on the Titanic. Please continue to buy gold and silver as they are the only two things that have a shot at remaining valuable.

The Market:
Last Week's Insiders Transactions: 10 Buys For $60 Million, 136 Sells For Over $1.15 Billion. NOW, if all these company insiders really thought things were as rosy, wouldn't they be BUYING their own stock?

My ‘recent’ bottom line is that the market will always do what inflicts the most pain on the most people. At this point in time, who would stand to take the biggest beating over the next week? Would it be the shorts as the market just plows higher, or the bulls as it rolls over? Unfortunately the cries are pretty even from both sides, and that is a major problem. There's an awful lot of people screaming that this market is overdone and needs a rest. But there's also quite a few saying that with the stimulus coming, the "better" earnings, the shot at a positive GDP because of inventory rebuilding, we are going higher. The camps are so equally divided that I can't get a real feel for whom the market is going to "smack".

Now I understand that this isn't how you were taught to invest. You were taught to invest in good companies with stable incomes, and pay attention to their earnings, etc. The new game is simply "which way do the criminals want the market to move?" For an example of how that works, from March to June – we had a stunning run - better economic numbers - analysts preaching we were going to the moon - people were buying hand over fist – then from 8800 in early June to 8051 on July 10th – the late comers to the party got seriously singed. Then the guru’s started screaming that the market was putting in a "head and shoulder" pattern and it was going to plunge for over 1000 points – people got nervous – started taking profits and going short – we said that this market ‘will go up’ – and it went from 8051 to 9466 – again burning the maximum amount of people.

Now, in the big picture, I think this rally still has legs – but my guess is in the short term we see some more soggy, sideways trading with a slant to the downside for a few days. But if chorus for "the market is going to tank" gets louder and louder, it will blast higher.

TIPS:
- we’re holding the GDX (a basket of gold mining stocks) with No Auto Stop
- we’re holding NGD (a gold miner) @ $2.48 – hard stop @ 3.25
- we’re holding MOO (agricultural business ETF)
- we’re holding IPI (a potash hold – again in the agricultural theme)
- we sold our XLK (a technology (minus healthcare) ETF)
- we sold our DIA’s @ 84.45 with a stop @ 93
- we sold our SPY’s @ 91.97 with a stop @ 100
- we sold our QQQQ @ 36.26 with a stop @ 39.40
- we sold our UYM @ 22.11 with a stop @ 23.40 → all with nice profits across the board !!