Can we ever CURE what started this mess – Housing?
Last week new home sales fell 32.7%, to a level just about equal to the disaster of 1981 when we had 20% interest rates. And if you discount the ‘seasonality’ slightly – it was the LOWEST amount of new homes EVER SOLD! Now you can certainly equate this to ‘hitting bottom’ – or ‘potentially trending higher’ – but how many of us make our livings catching falling knives? It doesn’t take a rocket scientist to figure out that when Uncle Sam stopped giving people $8,000 to buy a house – they stopped buying houses. Meredith Whitney – the person that went public with the banks impending doom said: “Consumers have stopped paying their mortgages so that they can cover other bills, leaving banks with rotting assets and a mounting foreclosure problem. A double dip is coming in housing, no doubt about it." Couple that with Richard Russell (the gent that spawned the idea of the DOW theory) stating: “We're now in the process of building one of the largest tops in stock market history. The result will be the most disastrous bear market since the '30s, and maybe worse.”
Now on July 2nd, we are going to get the "Non-Farm Payrolls Report" – often termed the “Unemployment Report”. Last month the addition of U.S. Census workers caused this report to show an addition of 431K jobs – with only the ‘fine print’ telling people (a) these were only temporary positions and (b) they would be all gone by September. This months’ report should show the beginning of some of those layoffs. Combine that with this past Thursday, Congress decided NOT to extend unemployment benefits past the existing 99 weeks - means that upwards of one million NEW people are going to have "no" income in July – as their benefits expire.
Now – I think we’re running out of things to hype? If it's not a bottom in housing, and it's not job creation, and it's not an increase in credit, what’s left à Earnings! They are going to do their best (this week) to tell you to ignore all the other ills and just focus on earnings – but understand – corporations don’t have Europe to lean on any longer – there’s still an oil spill in the Gulf to contend with – most of our states are virtually insolvent – we haven’t solved the regional banking crisis and potentially we may not even have world peace (that much longer) as we begin to see some form of hostility in the Iran Theatre.
But let’s talk about earnings – right now the accounting of today doesn't even resemble the accounting of years past. Words like ‘Proforma’ and ‘Intent based’ have all but replaced GAP and FASB as our national standards. At "some" point there are so many out of work, so many making lousy wages, so many in desperation, that a company won’t be able to sell its goods and services any longer – without either (a) a huge increase in economic activity, or (b) economic activity slowing to a pace where products and services have to be priced much lower just to sell – which will cause a company not to make as much profit – and then ‘miss’ or ‘fail to beat’ estimated earnings – and the stock price falls. It's my guess that this next earnings season will mark the "top" of the earnings cycle for quite some time. Combine lower outlooks for earnings with all the other ills we face, and you can make a pretty strong case for the market loosing an awful lot of ground. It's also my guess that sometime during the year 2011 we are going to see an even bigger stimulus package than anything we've seen before. Central Banks around the globe will flood the planet with as much liquidity as possible – trillions of dollars.
In the meantime, there is money to be made. Gold and silver will still rise. People who know how to go short via puts and inverse ETF's will do fine. The key will be active management.
I think we hit DOW 9K this summer (September is my guess) – and my longer-term outlook is DOW 5K – potentially lasting years. The only reason we don't have mile long bread lines right now is because of 40 million people on food stamps. The only reason we don’t have riots in the streets is people deciding to stop paying their mortgages, and 6 million people more on extended unemployment benefits. Municipalities, healthcare, insurance, even education – will all need to trim/cut costs fairly dramatically going forward. Into the fall we should see a bounce of some type, followed by the next round of stimulus that will evoke hope – and it won’t be until that final, enormous, tidal wave of coordinated stimulus wears off that we can finally hit bottom, and finally dig our way out of this mess – which could be 2012 (another election year!) I do think third quarter earnings are going to miss the mark – and that will prompt an interesting run till year end.
Now onto the market:
This week the action in the market was all about Ben Bernanke and the Federal Reserve. After two years of 0 % interest rates, and Bernanke telling us we were in a “V-Shaped” recovery and thinking about exit strategies for all the stimulus programs – which became a "U-Shaped" recovery and keeping interest rates "exceptionally low for an extended period of time" – which became a ‘fragile recovery’ – and NOW, we see from the most recent data that the economy has burned through the stimulus money and everyone wants to know "What’s next?"
I think next week we’ll see a push higher for a couple of days – for two reasons: (a) it's the end of the quarter and (b) it's the end of the "half" year. Both of those are fairly important for the fund manager ‘window dressing’ – so all the funds will be buying the leader stocks like AAPL – trying to get into winners ahead of July.
With that in mind, we "should" have a green Monday – potentially Tuesday – and we’ll start getting edgy around Wednesday – as thoughts drift toward Friday’s Jobs Report. Potentially – worse than the jobs report – is that we are seeing some major index's all around the world approach a nasty "technical pattern". It is not good for the Bulls when the 50-day moving average falls below the 200-day moving average. The London ‘Footsie’ has just done that – our S&P is racing toward it – and all around the globe that pattern is showing up, and that pattern often leads to a very sharp decline.
I think the main theme for the next couple weeks is going to be continued volatility. Let's suppose they sell us lower on the jobs report – in a nano-second they will switch to focusing on the earnings season coming up and try and hype that. So, we could be up for a few days early, then drop out Friday into next week and then see them try and rally us into earnings again. I still believe that sometime between this week and approximately July 20, this market will begin to slide down into the DOW 9K area. However, remember the old adage that the market can remain irrational longer than you can remain solvent. Simply put – we need to be patient and let the market "come to us". Please be careful out there.
AN ASIDE: Since last week’s letter on Silver – I’ve gotten a tremendous number of requests surrounding where to invest and where to purchase. I will be putting out a supplemental letter today on this topic – thanks to all for your interest.
We’re still almost totally in metals, and they’re performing nicely – all things considered:
- GG at $43, IAG at $17, SLW at $18, SSRI at $20, GDXJ at $27, GLD at $115.86, NG at $6.64 and PHYS at $11.65
- We dabble during the week – taking advantage of day trades here and there – but until we feel comfortable about shorting this market – we’ll stick with the metals for longer term holds, potentially looking again at the VXX, and seeing which way the wind takes us during these next several weeks.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a month or so ago now:
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.