RF's Financial News

RF's Financial News

Sunday, May 15, 2011

This week in Barrons - 5-15-11

This Week in Barons – 5–15-11:

Welcome my friends – to the Housing Crash that never Ends!

This weekend is graduation at Carnegie Mellon University – so my hat goes off to all the graduates – CONGRATULATIONS for a job well done!

For several week people have written me asking my opinion on the ‘housing bottom.’ Well, for a couple years, everyone (from Jim Cramer on down) has declared "unequivocally" (at least four times since the big crash) that the “bottom is in.” Well, I’m here to tell you not yet, and with a couple reasons why:
- Too much shadow inventory is waiting to come to market,
- 40%+ of the homes are being purchased by investors for ‘cash’,
- And prices are still too high!

Currently everyone is saying that housing has double dipped, and is in a recession - again. Clearly housing is a train wreck, and is going to get much worse before it gets any better. Why? With an estimated 6 to 8M homes sitting in foreclosure waiting to come to market – there just isn’t the demand to soak up the supply. Also, a lot of housing is still drastically over priced compared to where it "should be". [Go back to 1990 – do a trend line of gaining 2 to 4% per year – and then see where the price of the home should be.] Also, with over 9 million jobs lost in the last several years, and most of the new jobs being low paying service jobs like the recent McDonalds hiring spree – you just can’t afford to purchase a home with: “Do you want fries with that?” Finally, banks are not in any hurry to loan money, fully knowing that prices may still drop, the mortgagee gets upside down, and could simply walk away from the home – leaving the bank in a difficult situation (again).

I think that this next drop in pricing will be as dramatic as the last. Empirically, several mortgage insurers have simply refused to write policies in the "hot" states like Florida and Nevada. And who can blame them – when there’s a pretty good chance that the house is going to be worth ‘less’ a year from now – thereby inviting more ‘strategic defaults’.

A friend wrote me about a house he tried to sell in Florida. He wanted to sell it quickly so he went the ‘auction’ route. Usually an auction will drag out even the coldest of bargain seekers, and he advertised this one heavily. And on auction day – no one showed up! It’s that bad. I have another friend who wanted to purchase a house – and could afford to pay cash for it. But he thought that with a 4% mortgage, the mortgage interest tax deduction, putting over 40% down, assuring that the appraisal came in substantially above the asking price, that there wouldn’t be a problem. On two different properties with two different banks each bank ‘declined’ due to the fear that the house would be worth ‘less’ next year than now – irrespective of the down payment and the appraisal. So as you can see, housing is in a major funk and it will NOT be fixed any time soon.

If housing isn't going to appreciate and add to your net worth, the only benefit to owning versus renting is the stability of ownership, the mortgage deduction, and the ability to do what you want with it. But as far as simple "shelter" goes, the typical home isn't such a great deal. And when you add in maintenance, repairs, insurances, local taxes, etc. – owning isn’t such a great idea at all! As the economy continues to be kept on life support with Fed money, and the foreclosures still continue to roll in, more and more people are going to decide that there is too much risk, too much at stake to own a house. Housing prices will find a level where they don't fall any further, but there will be NO big fast explosion in higher prices to follow. Very simply – the price of a home needs to return to trend line – and then it well sell (be granted a mortgage), and then resume it’s 2 to 4% per annum increase. Bottom line – the gurus were wrong, Jim Cramer was wrong, the National Association of Realtors (NAR) were wrong – until all the excess is out of a bubble the sector will truly not expand. How long – I’m betting that a better market doesn’t appear for another six to ten years.

The Market:
Each and every day there's a power struggle that normally goes on between sellers and buyers, but today is a different world with the Central Bank handing Wall Street Billions of dollars each day, and some portion of that is getting plowed back into stocks.

Nine trading sessions ago, we hit a brick wall at 12,800 after a spectacular rise from 12,200 in mid April. Since then we’ve had 3 closes under the 18-day and the 10-day moving averages. In a technical sense, this isn't good for the bulls. But that’s in a normally functioning market, which we haven't had in years. Over the next several days POMO is scheduled to pour between $21B and $25B into the market place for the purchase of treasuries. Just to refresh, POMO is the name of the operation whereby the Federal Reserve is buying Treasuries from the 18 primary dealers on Wall Street. This is part of: “Quantitative Easing.” What I don’t know and am unable to find out – is when the primary dealers sell treasuries to the Feds – What is the Mark-Up? Are they making 10% or 50% on the sale? Now – we can factually – look back thru the charts and on days where there are large POMO buys (especially an outright treasury coupon purchase) – the market magically goes higher. So although we don't know how much of those Billions Wall Street gets to play with, my guess is that it's quite a bit.

So that is the problem with determining market direction. The simple (and frankly correct) thing to do up until now has simply been to buy every dip. For someone like myself, who has a track record of predicting market direction, this drives me insane. In normal times we would have seen increases in buying pressures, and increases in upside volume to halt any slide and reverse it to the upside. Today, due to dark pools and other programs, the reversals, saves and pushes higher are often on volume that cannot possibly be enough for the gains we get. If I were to look at the DOW chart right now – I would think that more downside is to come. But we’ve seen this movie before – and in the end The Ben Bernanke rides in and saves the day. I'm thinking like this: if we put in a close under 12,580 – that would be the lowest closing price in 12 sessions, and could finally lead to a hefty drop off. If on the other hand, we put in a close over 12,720, that would exceed the last couple highs, and probably would signal a move back up. So we’ll lean long – since that's been the trend, and we'll lean heavier on a move over 12,720. But if we hover under 12,580 and we close down there – it will be interesting to see the POMO money rescue us from that fall.

Be careful out there folks. We know The Ben Bernanke is trying to keep the market up so everyone feels great. But its failure will be ferocious when it hits. We’re using smaller positions and taking profits early. It's much more work than we like, but in this atmosphere, it's all we can do.

It’s for weeks like this past one where setting stops really comes in handy. Nobody can ever get mad at you for taking a profit!

Our long holds still look like: SLV, NG, AAU, DNN, AVL, SLW, SQM and USSIF.

We continued nibbling with small positions on SLV, SLW and GLD last week – and continued to purchase physical silver and gold with the profits on the previous short-term holds.

Honestly – my purchases are smaller than normal and we’re holding them shorter than normal so tweeting about them almost defeats their purpose – but the show must go on. Please be safe out there!

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