Friday, August 14, 2009

Unreal Estate

Much like the stories of economic recovery lately, I have been astounded by the bottom-calling that is going on in real estate.

Here's how the storyline goes: Median prices have ticked up, as have some pending sales, and the rate of change in decline has tempered. The problem with business journalists nowadays is that they know how to write, but not what they write about. Any random noise for a month or two in a longer-term data trend is weighted more heavily than it should be.

The reason that median prices have ticked up is because the sales have been so skewed to the lower-end, that any slight increase carries a heavier weighting in the data and elevates it. However, does anyone really believe housing has bottomed because some foreclosures have moved up temporarily from an average of $100k to $105k (example for illustrative purposes only)?

The middle and higher end are still falling substantially. And Google a chart of OptionARM and NegativeAM loan resets, and then reconcile them concurrently with current Notices Of Default (NODs) and foreclosures. The future of housing is indeed bleak.

Further, as Calculated Risk has noted "the increase in pending sales has been mostly from lower priced homes with demand from first time home buyers (taking advantage of the tax credit) and investors. As [Lawrence] Yun notes, the demand from first time buyers will probably fade in another month or two."

But I don't want to get to far into these details, because in this post, I am primarily concerned with one, which I'll address after this rosy article from my city's newspaper.

From the Dallas Morning News: It's a risk to say it, but it looks like the worst is over for real estate market

...All that being said, I'll go out on a limb and say that the North Texas home market has bottomed out. After some significant declines in sales and prices early this year, the numbers are showing a definite leveling.

This week, North Texas pre-owned home sales data showed that July had the lowest percentage decline in almost two years. And median prices last month were up 3 percent from a year ago, according to statistics prepared by Texas A&M University's Real Estate Center.

The National Association of Realtors reports that median home sales prices for the entire second quarter were basically flat in D-FW when compared with prices a year ago. That follows five consecutive quarters of falling prices in the Realtors' benchmark report.

Yet another home price measure, by Standard & Poor's Case-Shiller, recently found that the Dallas region was one of only two metropolitan areas in the country with three consecutive months of home price increases...

...Home inventories – new and pre-owned – are now at the lowest levels in several years. Tight lending restraints will make it hard for builders to put up a bunch of spec houses.

The only real wild card left is the foreclosure situation.

My focus is Interest Rates...unlike the author's view, they are the key real unobserved wild card (although I will be the first to admit there are many). I don't know why NO ONE will address them.

Well, maybe I do.

The recovery story loses its luster when you have to address interest rates. Not one person has been able to articulate to me - in a data-driven, historical context - how recovery built upon inflation expectations can be achieved without higher interest rates.

But, maybe they won't go higher, maybe this is the new norm.

Um, no.

The chart above is as far back as I could dig up (with limited time) for the 10-year Treasury yield, which most closely approximates a 30-year fixed mortgage because of its normal life (people do sell their house before the mortgage is paid off after all). It shows that we are at the bottom of a range stretching 50 years.

Further, average mortgage rates for the last 35+ years demonstrate the same. Doing some rough calculations off of rate approximations, I come up with an average rate of 9.125% for this time period.

It can be argued whether rates will go that high, but based on a legitimate recovery case - and with all of the monetizing of debt and printing that has gone on (getting those Excess Reserves at the Fed into circulation), I think it is reasonable.

Let's examine what happens to the bottomed housing market when stagnant incomes that can't lift the demand curve much beyond where it currently is are suddenly hit with higher interest rates:

$400,000 house @ 6% interest rate = $2,398 P&I

$400,000 house @ 9.125% interest rate = $3,254 P&I

Payments just went up 36%.

Looking at it another way, to maintain the same housing payment that could be afforded before, the house price must now drop to $294,750. The price just decreased by another $105,250, or 26%.

So, buyer beware. This is just one element of a housing collapse that I expect will continue for years to come based on fundamentals and not noise in data sets.


Thursday, August 13, 2009

History Speaks to the Future: You're Gonna Suck

I am currently reading "America's Great Depression" by Murray Rothbard. It analyzes the period from an Austrian Economics point-of-view - one where business cycles of a significant and disruptive nature are caused by interventionist monetary policy alone.

It shouldn't come as any surprise, but early on, I am already struck with how eerily - and perilously - similar the crisis and policy prescriptions are between then and now. To cast aside historical experience to make way for a "new" paradigm is something frequently done, but without legitimacy. Human nature, as pertaining to incentivization, emotional response, and self-preservation is rather constant, whether in the 1700s or 2000s.

That is the primary reason why I give high credibility to the research behind cycle theory, price waves, and general trending as it can pertain to markets or social structure.

There have been some startling predictions to come out in research reports recently from various funds, and while I may disagree with some of the details (I do not believe currency collapse will stem from hyperinflation but rather a deflationary spiral catalyzed by Treasury auction failures), I believe that escalating unemployment, social unrest, market crashes like not seen before, and a flatlining economy are very real possibilities.

Again, be wary of ignoring warnings stemming from history. Every major empire has collapsed under the weight of its own imperialism, debt, and money printing.

These are must-reads:

THE DARK YEARS ARE HERE (Hat Tip to Matterhorn Asset Management and Zero Hedge)


Wednesday, August 12, 2009

Bear Market Rally Over Now?

Click on the bear to play the latest video from Bob Prechter of Elliott Wave International discussing what's next to come in the markets.

Thursday, August 6, 2009

The Stock Market Kiss of Death

Many investors and traders staunchly believe in "contrarian indicators" as a tool for predicting market tops and bottoms. The reason has to do with emotions and momentum in an extreme sense, such that at that point, there are few bystanders left to be sellers in a downtrend, or buyers in an uptrend.

So, while I have seen many lately, none were quite as promising as today's from none other than the total failure of a clairvoyant, Abby Joseph Cohen from Goldman Sachs. I can't even remember how many times she has been wrong, but I'm sure others can, and I can pretty much guarantee they'll be front-running the market down now that she has piped up.

According to the WSJ, she has made the following comments:
  • The S&P 500 Index may rise as high as 1100 this year

  • "We do think the new bull market has begun"

  • Investors have seen improvement in key areas such as the job market and business inventories.

  • "We are beginning to see improvement even in the labor market, where it appears that the job losses are slowing and there is some job creation going on,"

  • Earnings of $75 a share for the S&P 500 next year are "reasonable" and that the S&P 500 at 1050 would put the price-to-earnings ratio around 14.

I don't think it's a stretch to say that she is my new favorite person. Her sense of humor and grand delusions are infectious and endearing.

Seriously, what the $%&* is she talking about? Investors have seen improvement in the job market? WHERE?! The job market is escalatingly abysmal and the only reason that the loss rate looks LESS BAD is because people have been unemployed so long, they're falling out of the ranks of those that still qualify for benefits.

Oh, and, I hate to be the bearer of bad news (i.e., reality), but the current P/E Ratio on the S&P is now 140. Earnings have dropped 97% from peak.

Keep that in mind.

The Myth of Stabilization: GDP Really Down 15%?

In my post from back in April, How Low Can You Go?, I wrote:

The Elliott Wave experts currently believe that we are in a primary up wave (i.e., countertrend rally / retracement wave) within the context of a secular bear market. While there may be a very near-term pullback, the expectation is for prices to retrace a previous wave pattern to around 10,000 on the Dow. Near this level also represents a valid Fibonacci retracement level, which could add credibility to it as a final target.

But make no mistake, this bullish frenzy will end.

While this bear market could be halfway done in terms of time, it is likely less than halfway over in terms of price decline. And it is extremely naive to assume that prices will quickly rally off of the ultimate lows when they are formed. Neither the technical, nor fundamental picture makes this probable. Anything is possible. But probable? No.

A supercycle (think Kondratieff) ascending price channel on the Dow that has held up for 80 years has now been broken. It appears that the lower channel support sits between 3800 - 4000 on the Dow. This would be bad enough if prices were expected to halt their decline at this level.

That is not the case.

Many that I know have long since forgotten that I made a call for the Dow to return to a 9,500-10,000 level based on retracement targets during the up-wave expected. I'm bearish but I'm also a realist. As such, the market and economic picture continues to play out quite closely to what I expected based on historical parallels and price waves.

Make no mistake - our situation is dire and reality will set in soon enough. We have ADDED leverage during a time when recovery could only be achievable with massive reductions in the trillions.

The current data is being manipulated in order to inspire confidence that the economy is stabilizing.

It is not.


I am thankful that another blog took a creative approach to analyzing and reconciling what was obviously a joke of a GDP release. Of course, this was to be expected. The government will do everything and anything in its power to hide the true state of affairs from our country until they realize it for themselves through their own hardships and not data releases.

The GDP report was released this morning and it was a compendium of incomprehensible and illogical numbers and, worse, it is just plain wrong.

Of course, since so much rides on an accurate assessment of our true economic state of affairs, it behooves us to make sense of it as best we can, understanding that the GDP report is less than perfect and riddled with difficult-to-rationalize statistical manipulations and quirky additions.

For example, the imputed value of "owner occupied housing" is a non-cash 'addition' to GDP meant to capture the value that people derive from their houses, due to the fact that they own them and do not pay rent to themselves in order to live there. If this does not make sense to you, that means you are normal.

So we gamely march off into the most current GDP report, which came out this morning (Friday, July 31, 2009), mostly to expose just how wrong it is.

First, I want to reveal how I look at data. It comes in three buckets for me. From the most recent Martenson Report:

As I tell people in my seminars, I divide my data (or facts) into three buckets: good, murky, and unreliable.

Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Good Data

  • Sales tax data
  • Income tax data
  • Truck tonnage moved
  • Port shipping container traffic
  • Air transport
  • UPS, FedEx, and other major shippers' volume
  • Corporate Revenues (just added to list)

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Murky Data

  • NAR home sales data
  • Continuing claims
  • Retail sales data
  • Trade deficit reports
  • Corporate Income (just added to list)

Into the final bucket goes the utterly unreliable 'data,' so bad that I need to use quotes around it. This 'data' is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says...), is self-referential (e.g. LEI or 'leading indicator' data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

  • New home sales data
  • Employment data (due to the Birth-Death model)
  • All survey data
  • Leading indicator data
  • GDP (just added to list)
I realize now that I goofed in that report and left out of the largest and most unreliable source of data from that final list. And that is the GDP report itself. So I have added it here.

Also, into the "good" bucket, I have now included corporate revenues, because, unlike a corporate earnings statement (now in the murky bucket), there are many fewer games and shenanigans that can be played with revenue. Apart from sliding revenue forwards and backwards a quarter or two, it is relatively pure data. GAAP accounting assures as much.

Added up across all companies, revenue provides a nice, clean picture of where things are going. Perhaps the best we have.

What we see here is a comprehensive enough sample for ALL companies in the S&P 500 that we can use it as a reliable measure of revenue across the entire corporate landscape. We find that revenues are down more than -15% in Q2 2009, compared to 2Q 2008.

Now, if you think about it, when people buy (or consume) anything, that transaction passes through a company somewhere, somehow. So we might use this -15% decline in corporate revenue as a pretty good approximation of how much less stuff is being consumed this year, compared to last year.

Okay, now let's look at the GDP report.

I am going to avoid all of the massive complexity that normally accompanies discussions of the GDP report and go for the simplest possible illustration of just how spectacularly off-base and misleading it is.

On TeeVee, and from a raft of well-meaning experts, you will hear explanations for why this GDP report makes sense. They will trot out things like increase in government expenditures, falling imports, inventory builds, and all the rest. But we can skip all that and simply look at one thing.

The formula for calculating the GDP is shown below.

All I want to focus on here is just one component, circled in green above: consumer spending, which represents over 70% of the economy. Given this prominence, and taking our argument that there must be some proportional relationship between consumer spending and corporate revenues, we need look no further than this one simple measure to determine that something is seriously out of whack in the GDP report.

From today's GDP release, we get these numbers for the total GDP, along with something called "PCE" which stands for Personal Consumption Expenditures (i.e. "Consumer Spending" in the formula above):

Going from the very peak of the economy in QIII of 08, we can see that the BEA reports that GDP and PCE have only dropped by 2.7% and 2.3%, respectively.


PCE is only down -2.3% from peak? With corporate revenues in total down more than 15%? How does that work?

Is there some way to explain how people are consuming away, but doing so without spending money on products and services offered by companies? How do we explain a 15% drop in the solid, reliable corporate revenue numbers but a 2.3% drop in Personal Consumption Expenditures?

I really can't think of any possible explanation that makes sense. And so I have to defer to the more reliable and trustworthy of the two numbers; corporate revenues.

Of course, comparing from the peak to current is not exactly what we should be doing, because that is comparing a QIII to QII drop in PCE to a QII to QII drop in corporate revenues.

When we ask the question, "How much have GDP and PCE dropped between QII 08 and QII 09?" we get these results:

Well, there, that certainly makes me feel better!

Just kidding.

This means we are being asked by the Bureau of Economic Analysis (BEA) to accept a reported -2% drop in PCE and a decline in corporate revenue of -15% , a figure more than seven times

Of course, the discrepancy between the two cannot be reconciled. It is impossible. One must accept one or the other.

I will point out that a -15% decline in corporate revenues is also in alignment with sales tax data from the states (down some 10% yr/yr), unemployment (9.5% and climbing) and many other economic measures. I will recall here that good data is that which aligns with other data.

How is such a misleading GDP report created? (Hint: think sausages)

The answer lies in a disturbing mixture of seasonal and hedonic adjustments, imputations and other statistical wizardry not subject to review or insight. We are asked to simply accept the results without question. Disturbingly, the Wall Street/MSM (Main Stream Media) spin-machine runs off with the GDP report as though it were the sacred truth itself, as we can see in this series of headlines I captured off of Google shortly after the release.

The triple combination of stocks up(!), bonds up(!), and gold down(!) constitutes a "win-win-win" for government statisticians/politicians and the Federal Reserve, because such a result means that their efforts are being taken "the right way" by the markets.

Such a trifecta constitutes a vote of confidence in their suite of actions generally, and in paper wealth specifically.

Of course, curious minds might be interested in learning how such articles manage to come out within mere minutes of the GDP release, almost as if they were pre-written.

If they are (as many suspect), then this implies that the "market responses," as well, were already known in advance, implying that they are as fake as the report itself.

In the scheme of things, one might question whether a country that routinely lies to itself, and then accepts those lies, then reprints those lies, and ignores the obvious discrepancies, is really on a sustainable path to recovery, complete with green shoots, or whether it is merely leading itself astray.

But if one is like me, then no wondering is involved. Such self-deception is viewed as a prescription for failure.

Other Links to Excellent Articles Disproving Recovery:

TrimTabs Continues Throwing Sand In The Eyes Of Fake Economic Data

About half of U.S. mortgages seen underwater by 2011