This Week in Barrons - 6-2-2013

This Week in Barrons – 6-2-2013

Are We Healed?

Factually:

-       The initial jobless claims rose by 10K to 354K, which is really bad.  But if the jobs picture stinks, it keeps The Ben Bernanke's foot on the gas, and that's all Wall Street wants.

-       Last month’s viewership of CNBC fell to levels not seen since 2005.

-       The Case Schiller housing index showed that home values in some areas had risen over 20% YOY (year over year).

-       Consumer confidence came in at 76.2 beating the estimates of 71 quite handily.   

-       The Richmond Fed manufacturing index came in at -2 (contracting), and the wages dropped to a one year low, new orders fell to below January levels, employment went negative, and the workweek contracted.

-       The Dallas Fed reported a manufacturing index of -10.5 (worse than expected) for a state that we all thought was booming – yes?

-       And 48 million Americans are still on food stamps.

When economic reports start to show something that resembles economic growth, I lift my eyebrows and ponder the idea that some form of healing is taking place.  But let’s look inside housing figures because unemployment is still raging, and most of the jobs that were created were in services, hospitality, and food delivery.  I’m wondering how someone working for $10.50 an hour has the money to buy a $200K home?  If a bank needs 20% down, then our $10.50 an hour worker would have to put every single penny of his income into a savings account for over two years.  And assuming that people on food stamps cannot purchase a house, this means that an additional 15.2% of the U.S. population is automatically excluded from the housing market.  Ah – but the key to housing seems to be investment money.  For example, Blackrock is buying 20,000 homes at a clip.  It doesn't take long to buy every single $100k to $190k house in an area if ONE investor is buying 20,000 of them.

Now, housing serves two purposes, and they do not necessarily coincide.  (1) For someone looking to enjoy their life, raise a family, and feel good about building equity in an asset – buying a home makes a lot of sense.  You get the mortgage deduction.  You have a bit of security.  And you build equity in the asset itself.  All that said, housing is an investment unequaled in the history of building wealth.  One of my favorite lines has always been: “A good way to get rich is to own many homes and let someone else pay for them (via rent).”  And then because of inflation, you can sell them (as you need to) in order to create a nice income stream.  So housing can be a home, or it can be a true investment.

However, when housing is gaining 20% a year (and in certain areas we’re hearing of bidding wars again), at what point does the word ‘bubble’ resurface?  Interestingly, what the TV reporters didn't tell you was that if you take out the ‘distressed’ sales (foreclosures, short sales, etc.) the rise in housing prices was only 5% YOY.  However, I am puzzled to explain how lumber prices have fallen 30% off their highs?  What are they building all these homes with?  And this week we heard that the mortgage applications fell 8.8% - after falling 9.8% last month.  So how are houses selling fairly well?

This week Carrington came out and told us that they were ending their ‘buying of houses and turning them into rentals’ campaign – because they are not getting the return that they expected for the 25,000 rentals that they have accumulated.  Over at Colony American Homes, they have purchased 9,950 houses for over a $1Billion to rehab and rent out, but have only found tenants for 51% of those rentals.  Goldman Sachs estimates that investors have purchased approximately 14 million ‘leased’ single-family residences that are worth an estimated $2.8 Trillion.  If all these investors decide that they would rather sell their houses (than try and rent them profitably), we are going to see a wave of homes come to market that rivals the 2008 foreclosure mess.

So, are we healed?  We know the Fed has placed over $3+ Trillion dollars with banks, trying to make them whole, and hoping that it would all trickle down via loans.  Unfortunately banks are not machines, and banks have done what is best for banks – not necessarily what is best for the economy.  Pour in a little greed and manipulation, and you get a very different outcome than what may have been planned.  Bankers got rich, and small pockets of the economy received a stimulus.  However, the overall effect has been more of a distortion than anything else.  Never before have the 1% gotten so rich, while the 99% continue to struggle to eat.

The talk now is that the Fed is going to "taper" off its QE.  Along with that discussion, there is talk that someone else is going to get selected to run the Fed as The Ben Bernanke may soon step down.  The analysts are saying that if the Fed tapers, it is bullish for everything – because it shows that the economy is firing well enough to take off on its own.  I tend to think that there is some real whistling past the graveyard going on here.  If $3 Trillion in Fed money has the Dallas manufacturing index at a minus 10.5 after almost 6 years, how is cutting QE going to fix it?  If durable goods are selling slowing with interest rates at historic lows, how will higher interest rates spur sales?  If 48 million people are on food stamps now, how does reducing Fed money get them off food stamps?  If all these so called housing sales grind to a halt because investors are choking on them, how does that help the economy?

Today, my youngest son will graduate from high school.  I want desperately to believe he's got a shot at a tremendous career, and a bountiful life.  I want him to have all the things that I've been blessed with.  I want to believe that the Fed has solved the problems, the economy is really fixed, and great opportunities lie at his feet.  But alas, I feel we're in a decade of long struggle, and there are going to be a lot more dislocations to deal with.  I feel he's got a lot of wind in his face as he embarks on his move into college and his ultimate career path.

The economy is not healed.  Housing is being driven by speculation first, desperation second.  Manufacturing is limping along, while handouts grow exponentially.  Companies are buying back stock for their short-term gains, and ignoring the process of establishing long-term expansion and renewal.  If the Fed does try and pull back from its QE programs, there's no growth to fill the void, and things will get ugly very quickly.  I truly wish it wasn’t so.

The Market...

We came into the Holiday shortened week on Tuesday, and they made it 20 consecutive ‘up’ Tuesdays in a row.  On Tuesday the market was up 200 points early – so we sold our DIA calls for a gambler’s profit.

One of the long running adages of the market is that you're best off to sell in May and "go away".  Meaning, that for the most part the market does most of its gains between October and April.  This has indeed been historically accurate, but like most things it isn't 100%.  And this May did not keep to the script, as it ended the month up from where it started.  But this May is so completely dislocated from historical norms that you can't pin any type of age-old adage to it. And honestly, you can't really look at the entire year with anything but skepticism.  We've simply seen too many bizarre market moves that defy reality.  We haven't had a 10% correction in months.  20 Tuesdays in a row have been up, accumulating almost 78% of all the market gains. 

Last week I started "feeling" that something was changing.  Maybe it was the insanity that is Japan, as their bond market has been halted a dozen times for strange imbalances.  Or maybe it is the increasing drumbeat of "QE tapering" that TV is trying to scare into me.  Maybe it is the fact that the lies are so deep, and the disconnects so wide, that people are becoming fearful.  Even someone with a grade school education can’t reconcile soaring housing prices – linked with lumber and iron ore prices down 30%.  The math just doesn’t add up.

Lately, the most ink is being spilled over QE, and the market’s reaction to “removing the punch bowl.”  TV is trying to convince me that it will be fine, no worries.  They say the economy is improving to the point where tapering off is a good thing.  But those of us in the real world simply ask the obvious: if we are posting such horrific economic numbers while enjoying the Fed pushing $85 Billion a month into the system, how is this going to stand on its own when/if it is removed?  I content that it cannot.

Calling any form of a "top" in this market has been suicide.  Just when we set up for a picture book correction, they rush in and force it higher, burning the shorts to death.  Yet we know that nothing can just go straight up for ever.  It might seem that way, but even Japan’s famous run from 9,000 to 45,000 ended in a two decade long struggle that brought it down to 9,000 again.  The only question is: When?

I am not calling a top here.  I'm honestly scared to even consider the word "correction", since they've short-circuited every correction since November of 2012.  But all that said we are once again set up for a meaningful pull back.  The stochastics are rolling over, and the transports and the utility sector are hanging by a thread.  If this were any other period of time, you could look at the data and declare: "We are in for a 10% correction".  But today, it’s all about The Ben Bernanke.

For example, in the entire month of June, there will only be two days without POMO (Permanent Open Market Operations).  In other words, the Fed is going to inject billions of dollars into the system virtually every single day of June.  Can we really get a normal 10% correction with that kind of stimulus going on in the background?  Thus far the answer has been no. 

I think this is a good time to sit on your hands and do a lot of nothing.  While they might rescue this correction and push us right back up, I need to see the S&P get over 1675 for a clear break to new highs.  Between here (S&P at 1630) and there, virtually anything could happen.  We could chop sideways, or actually fall through 1620 and go down and visit the 50-day moving average down at 1600.

Safety right now is key.  Keep your powder dry and wait to play another day.

  

Tips:

We sold out of our DIA Calls on Tuesday at the open – for a nice 67% gain.  Wow – 67% over a holiday weekend.  You have to love the 20^th consecutive up Tuesday!  This week I did take:

-       C @ 53.03 (currently 51.95) – sold out flat,

-       XLF @ 20.20 (currently 19.80) – sold out flat, and

-       CCJ @ 21.80 (currently 21.72) – sold out flat.

My current short-term holds are:

-       ABX @ 20.20 (currently 21.16) – stop at entry,

-         SIL – in at 24.51 (currently 14.34) – no stop yet

-         GLD (ETF for Gold) – in at 158.28, (currently 134.12) – no stop ($1,392.60 per physical ounce), AND

-         SLV (ETF for Silver) – in at 28.3 (currently 21.45) – no stop ($22.22 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there! 

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