This
Week in Barrons – 10-6-2013
Housing Recovery – meet ‘The Matrix’…
When I think of the movie
‘The Matrix’, I think of a virtual world, where reality has been ‘checked at
the door.’ I’m seeing more and more characteristics of ‘The Matrix’ in my
everyday life – for example:
-
‘Matrix’ Responses
often tell you what you want to hear – such as the publicized unemployment rate
of 7.5%. When ‘in truth’ an
‘under-employed’ nuclear scientist (age 77) works part-time at a burger joint
to ‘make ends meet’.
-
‘Matrix’ Behaviors
favor the belligerent, the combative, and their lies often become
‘louder’. Such as a Pittsburgh, PA based
University that paid an Adjunct Professor $3,500 for a course where they took
in over $130,000 in tuition, and ‘in fact’ the University stood idly by, while
the Adjunct Professor died in poverty and without proper medical care.
-
‘Matrix’ Beliefs begin
to adapt and invent reasons for a particular situation to exist the way that it
is. For example: real estate agents continue
to tell J. Q. Public how great the housing recovery is and how pent up demand
is pushing prices and values back up and over pre-2007 levels. When ‘in
fact’ rising prices are attributable to investors (not buyers) converting homes
into rental properties, and to banks allowing foreclosed owners to continue
living in their homes ‘mortgage free’.
Over a month ago I wrote on the ‘Illusion of a Housing Recovery’, because of the many companies (including Blackrock) that were buying 10 to 20,000 houses in an area, fixing them up a little, and putting them up for rent. Obviously, when an investment company takes 20,000 houses out of any particular availability pool, it leaves fewer houses on the true market to buy, and the homes that are there increase in price.
However, there is something more insidious than that going on. Banks are no longer foreclosing on homes. Four or five years ago, a bank would rush in and foreclose if you hadn't paid your mortgage in 8 months. Banks then found that they would have to account for that foreclosed property, and place yet another home in the foreclosure pipeline. When a particular area shows up on foreclosure websites – and is overloaded with these properties – property values in the area plunge, effecting the payments on other mortgages within that area. Well, banks certainly don’t like that – so (currently) they are choosing NOT to actually foreclose on a lot of deadbeats, but rather simply ignore them. For example: in Miami, FL, you will see houses that are owned (and being paid for), along-side houses that are ‘in the foreclosure process’ – a) without any signage, b) with people living in them, and c) that haven’t made payments in years! Thus continuing the housing illusion that demand is strong, supply is short, and therefore prices are rising.
RealtyTrac recently
proclaimed that over 47% of U.S. homes ‘in the foreclosure process’ have people
living in them. In Miami – over 65% of
the foreclosed homes have families ‘living large’ inside of them, without paying
any mortgage or rental payment(s).
Therefore, of the 31,000 Miami homes in foreclosure, only 11,000 are
truly in foreclosure – awaiting new occupants.
These facts seem to sever the ‘virtual reality’ of a housing recovery:
-
First, it’s bad for
existing homebuyers to be buying into a market that has an artificially reduced
supply of homes, because the existing homes will have an inflated price associated
with them. Imagine when all of these
houses DO come to market – then all homes will drop like a rock in value –
again!
-
Secondly, with all
of the families living ‘rent free’ – it pushes excess dollars into the economy
in a dislocated way. Without a mortgage
payment, people are spending money on items that they should NOT be able to
afford. So, when you see amazing
automobile sales figures, just know a significant portion of them are going to sub-prime
loans by folks squatting in homes they don't own. Again, a picture that is fraught with disaster.
-
Lastly, Wall Street
and Main Street are in this one together.
Wall Street needs to drive up earnings while Main Street needs
statistics to support our current economic path.
Just know that a) housing
didn't recover, b) squatter spending won't carry an economy, and this ‘virtual
reality’ always ends badly.
The Market:
From the day The Ben Bernanke told us that he wasn't going to taper, the market has pulled back. Part of that was simply because we had ‘run up’ into the announcement, and they sold us down a bit afterwards – in the classic: "Buy the rumor, Sell the news" response. But (for several reasons) the pullback has gone much further than just that event would generate:
The Market:
From the day The Ben Bernanke told us that he wasn't going to taper, the market has pulled back. Part of that was simply because we had ‘run up’ into the announcement, and they sold us down a bit afterwards – in the classic: "Buy the rumor, Sell the news" response. But (for several reasons) the pullback has gone much further than just that event would generate:
-
First, a lot of
‘bets’ had been placed on the ‘Taper of QE’ side, and those positions had to be
unwound.
-
Second, we are
experiencing a legitimate Government shutdown – with no end in sight.
-
Third, we still have
a debt ceiling problem.
These three elements have
combined to promote a profit-taking pause in the market’s climb. For all of 2013 we have NOT had a true 10%
‘correction’ – with the largest pullbacks being in the 4 to 6% range. Heading into Friday, the market was down
4.5% from its recent highs. With Friday's 78-point bounce, we are
currently in the middle of the area that the previous pullbacks have
established.
I think that it is possible that we see the market fade to the 6% drop area, but I don't think they're going to let this turn into a full-blown 10% correction. I say this, fully knowing that Octobers can be odd creatures, and knowing that we still have the Government shutdown and debt ceiling to contend with. Remember that The Ben Bernanke still has his foot on the pedal – printing money, and that Wall Street loves it’s holiday bonuses.
If (however) the market does drop for an additional 5%, I think that ‘drop’ will be bought-up savagely and we ‘V’ right back up into the yearend. Anyone who didn't jump on the market’s train this year (and is lagging the market) will want to squeeze it for all they can get, and honestly, there's very little (other than stocks) that can make any money right now.
So, I’m expecting a year end run, and I just don't know if it will be preceded by more downside. I tend to think we'll trade sideways and choppy until we get past the debt ceiling issue, and then start to turn it back up.
I think that it is possible that we see the market fade to the 6% drop area, but I don't think they're going to let this turn into a full-blown 10% correction. I say this, fully knowing that Octobers can be odd creatures, and knowing that we still have the Government shutdown and debt ceiling to contend with. Remember that The Ben Bernanke still has his foot on the pedal – printing money, and that Wall Street loves it’s holiday bonuses.
If (however) the market does drop for an additional 5%, I think that ‘drop’ will be bought-up savagely and we ‘V’ right back up into the yearend. Anyone who didn't jump on the market’s train this year (and is lagging the market) will want to squeeze it for all they can get, and honestly, there's very little (other than stocks) that can make any money right now.
So, I’m expecting a year end run, and I just don't know if it will be preceded by more downside. I tend to think we'll trade sideways and choppy until we get past the debt ceiling issue, and then start to turn it back up.
Thanks to
DS – a fact that I hadn’t considered is that the government shutdown could push
the ‘agriculture’ markets into turmoil this week. It seems that the Government shutdown has prompted a
lack of official statistics surrounding commodities. With a vacuum of data – often comes fear, and
with fear – often comes selling (aka - a flight to cash). Likely to fall victim to the shutdown is the
USDA's monthly crop production report, due out on October 11 – which affects
prices of grains and other agricultural commodities around the world. And once the USDA resumes operations, a
torrent of backlogged data could trigger a highly volatile reaction. Exchange Traded Funds (ETF’s) that could be
affected by this lack of data are: MOO, CROP. PAGG, VEGI, JJG, GRU, CORN, WEAT,
SOYB, COW, UBC, JJA, RJA, AGF, DBA, FUD, UAG, DAG, AGA, ADZ, JJS, TAGS, USAG,
and RGRA.
Tips:
Congrats to those of you who adopted the strategy of
selling slightly out of the money covered call options last week. For example: on Apple (AAPL) you netted over
a 54% annual return last week, and I would suggest that you do it again this
week. For example: Apple is selling for $483+ (per share) right
now. If you own some, you could sell the
$485 weekly call option (expiring on Friday, Oct 11) – and collect the $5.20
per share. If the option expires
worthless – that’s about a 53% annual return, and if you’re ‘called out’ the
return is even greater. “Rinse ‘n Repeat”
with many of the weekly options stocks – some with better returns than
Apple.
Now to further take advantage of any upside – and
balancing out any ‘downside’ risk – you could take a position slightly further
out on the call premium. Some stocks
that are better positioned for this than AAPL are: AMD, TSLA, PRLB, SSYS, DUST and NUGT.
When the market does turn – look
at: AMZN over 321.75, CIEN over 26, TEX
over 35, KBR over 34, SBUX over 78, POT over 33, IPI over 17, MOS over 46, WNR
over 31.50, NBR over 17.50, and COH over 56.
My
current short-term holds are:
-
FB – in at 25.61 (currently 51.01) - stop at 49.00,
-
SIL – in at 24.51 (currently 12.64) – no stop
-
GLD (ETF for Gold) – in at 158.28, (currently
126.50) – no stop ($1,309.70 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 20.95)
– no stop ($21.70 per physical ounce).
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there! a
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