Financial Crisis Alive and Well

Every Friday, all across the country, bankers hold their breath.  This is the day that the FDIC chooses to show up and take over banks that are on the verge of failure.  This past Friday, FDIC employees were especially busy when they showed up at 9 different banks.   The banks had combined assets of 19.4 billion dollars. 

On Sunday one of the largest bankruptcies in corporate history occurred.  CIT who lends money to hundreds of thousands small to medium business filed for bankruptcy protection.  This could have some pretty large ripple effects.

The problem is the lack of capital to those lenders and banks who focus on the small business owner.  The Obama and Bush Administrations failed miserably in taking care of  the heartbeat of America, the small business owner.   Take that capital they are dealing out like candy and give it to those banks that service the small business owner.  Further, if you want to solve the unemployment problem in this country, help the small and medium sized businesses.  Of course, that would be the promotion of capitalism which is something none of the politicians seem to understand.

The Obama Administration stated that they might infuse money to small banks if they will agree to lend to small businesses.  The Obama Administration needs to get a backbone.  If they are going to give money to the big banks,  put stipulations on the money and stop requesting what they want the banks to do in return of receiving the bail-out money.  They are dealing all of this money out to the big banks and at the same time wanting these big banks to stop abusing credit card customers and start lending it.   Here is an idea – STOP GIVING MONEY WITHOUT STIPULATIONS!!  Go ahead and give money to the small banks without stipulations and they still will not lend it out.  It is all about survival.

You got to love bank nationalization and the march to socialism.

Levels to Watch

Let’s take a look at the price levels on the S&P 500 because some damage was done last week.   We have broken through some pretty significant price levels.  However, the BIG ones are in front of us.  The range to watch on the S&P 500 is 989 to 918.  It will be interesting to see what happens around those levels.  Yes, this is a wide range.  However, it does give you a good range in which to monitor risk if you are heavily invested in stocks.   Remember, the question is always,  “Is the rise in the stock market from March a new bull market or just a bear market rally?”  The answer to that question is crucial to the future of your invested money.

What the Government Bond Markets are Saying About Stocks, the Dollar, and Gold

Did you ever wonder why mortgage rates have been so low this year?  Well, let me take you on a journey.  Mortgage rates are influenced by government bond interest rates.  Government bond interest rates are influenced by the price of Government bonds.  If bond prices go up, then interest rates go down.  In order to raise the money to pay for all of the irresponsible spending of the Government, the Treasury sells Government Bonds.  Institutions, other countries, investment firms, etc. buy the bonds from the Government.  That money then goes to work to pay for all of the spending created by the Government.

The Government has a lot riding on those government bond sales or auctions.  If they go well, the Government sells the bonds and gets the money, bond prices go up, and interest rates stay low.  Since most people don’t want to lend the US money because we are in so much debt as it is, someone had to step in and help buy those bonds.  Yes, the Federal Reserve Board has been buying bonds all year creating more debt and keeping bond prices higher and interest rates lower.  I will not even go into how incredibly irresponsible it is for the US to buy its own bonds.  That goes without saying – the problem is that program is coming to a grinding halt at the end of this week following the largest bond auction on record this week – 123 billion dollars worth of government bonds to be issued.  The Fed will get out of the way and the bond markets will be allowed to function freely again.  That might not be so good.

Interest rates started going up today and are at a 2 month high.  What happens when you suppress something that should be going up and then stop?  It is like compressing a spring.  If you let go of the spring, it takes off.  I think that the same thing could happen with interest rates.  If this happens it could disrupt the credit markets, consumer interest rates will go up, businesses will have even more trouble borrowing money, and homeowners will now have trouble getting low cost mortgages. 

The stock market would have a tough time with raising rates.  However, the rising interest rates should help the dollar. If the dollar is going up, the price of gold should take a hit.  Welcome to Deflation!  The economy might start the debt detox process that should have started when this crisis started. 

If you are looking for a catalyst, this could be it.  Interest rate risk is not something that the stock market is ready to face.  However, China and others would certainly like to see the value of our dollar go back up.

Break Out the Dow 10,000 Party Hats

Being in the business of money management, you are almost held hostage to financial television. You have to watch a certain amount of it to catch breaking news. Besides the CNBC cheerleaders celebrating Dow 10,000, that level is nothing more than a round number with 4 zeros. Sorry, President Obama, it is neither a milestone nor evidence that your economic stimulus package is working. However, that was a nice sound bite this past week.

So the question arises why can’t I just acknowledge the bullish case and join in with the madness of the crowds? Well, it comes down to those pesky fundamentals. They represent reality and not the fantasy world where the politicians reside and everyone else that has skin in the game live. The reality is that the economic backdrop does not support what is occurring in the stock market. As I have written before, it is going to be quite the rude awakening when those lights come back on and the clean-up of the after party begins.

Every week we get more reality. Soon enough it is going to be tough for this market to block it out. Last week we received the latest on the foreclosure crisis. During the last 3 months, 937,840 people received a foreclosure letter. That means 1 in 136 homes were in foreclosure. That is also the worst 3 months on record. All of this is going on at the same time that the government has rolled out all types of programs to prevent this from happening. This of course is just one example of reality. The real estate markets cannot even begin to bottom and recover while this is occurring.

Potentially further the problem is the fact that we are starting the second wave of adjustable rate mortgage adjustments. The re-setting of adjustable rate mortgages are a main contributor to the foreclosure crisis. You can read about it here.

There is some good news. Yes, I did utter the words “good news”. Businesses are figuring out how to work in the new normal. Beyond some improvement in the economic numbers the only thing that has been positive has been the stock market. Banks are still not lending and consumers are still in lock down mode and unemployment is still at dangerous levels.

Even within that backdrop, businesses are figuring out how to start getting deals done and activity is picking up. So, I don’t think that we are going to find ourselves again in the economic meltdown where everything comes to a grinding halt. Businesses are figuring out how to navigate in our new normal. The strong businesses will become stronger. The bad business models will go away. Well, the ones that are not on government life support.

So, how do you handle this environment? It is standing advice. You watch the amount of risk that you are taking with your investments. Know the risk, be comfortable with the risk, and have a plan B in the event that we run into trouble again.

As for this week, watch corporate profits. Minus the earnings report for Alcoa, the market didn’t particularly care for many of these reports. The Dow should be heavily impacted (one way or another) as many of the Dow components report this week.

Potential Market Myths

A client of mine forwards me an e-mail from time to time that he receives from another financial advisor.  These e-mails are typically very positive on the state of the market.  I also find that they are filled with what I would refer to as market myths.  I thought I would share some of these with you.

(1)  Companies are showing strong profit reports – thus we are definitely in a strong recovery

Companies have slashed their expenses (and people) to the core.  It doesn’t take much to report strong earnings when you drastically cut your expenses.  Much of what is reported has nothing to do with actual profit growth and has more to do with the ability to cut expenses. 

(2)      Weekly jobless claims have been falling – that is a good sign

Every Thursday the government reports how many new people filed for unemployment benefits.  Over the course of the last few months those weekly numbers have marginally improved.   Does that mean that things are getting better in the job market?  I don’t think that the weekly number means much of anything at this point.  First, they should be decreasing just because companies have cut employment back just about as aggressively as they can afford to and still run a business.   Second, I would argue that the unemployment claims numbers still running this high is a negative.  As I pointed out, they should be on the decline.   Recovery in the jobs market comes as soon as companies start aggressively hiring.  This is something that we are not seeing.

(3)    The Price of Gold is signaling that we are heading for inflation

This is not necessarily true when there is nothing there to produce inflation.  Yes, we are printing money by the truckloads in this country.  However, that money is not being used to boost consumer purchases or being put together as new consumer loans.  All of that printed money is being used to absorb massive losses that would ordinarily not be there.  Remember that gold is a psychologically driven investment.  It does not have any value nor does it produce anything.  It is not a currency.  It goes up or down because people think that it should.  There is nothing to back up the price of gold.  The price of gold didn’t start going up until the dollar started having problems.  Ultimately, the government will do whatever it has to do to shore up the dollar.  However, longer-term, the dollar is in real trouble.

Economists declare that the recession is over – When the majority of economists thing one way, typically the minority is right.  Economists as a collective body rarely make the right forecast. 

This Week

It is all about earning, earnings, and more earnings.  It is very hard to predict how the market will react to earnings reports.  My guess is that companies will need flawless reports and near perfect outlooks for the near-term. Anything other than a show of strength might be tough for the market.  The stock market has very large expectations right now.   One thing for sure – this should make for an interesting week.

Unemployment Starting to Look a Lot Like the 30’s

Unemployment numbers came out last Friday and they paint a very concerning situation.   The unemployment rate is 9.8% and the economy lost another 263,000 jobs.  That is 22 months in a row of job losses.  I looked back at historical data that I have that goes back to 1939 and cannot find a string of job losses this bad.  You would have to go back to the Great Depression. Fortunately, unemployment is not as bad thus far.  Here is what it looked like in the 30’s.

 

Now take a look at the latest from Shadowstats.  It shows a comparison between what the Government reports, the Department of Labor (which is higher and more accurate), and then their data which includes everyone effected by unemployment.  As you can see, Shadowstats is close to 22% unemployed.  That is a far cry from what the Government is reporting. 

Now we also always like to see how many jobs the Government “estimated.”  Every month, the Government estimates jobs created or lost that they feel that the Department of Labor misses.  Yes, this is purely a bogus number.  This last month it was actually on the low side. They added 34,000 jobs into the total.   In 9 months, they have created 1,063,000 jobs out of thin air.  Now do you know why you can’t trust Government reporting?

In 2008, they created 904,000 jobs out of thin air.

In 2007, they created 883,000 jobs out of thin air.

Dating back to early 2000, I cannot find a year where they have been so aggressive.  The problem is that we continue to lose 250,000 jobs a month with no job creation in sight.  We aren’t even stopping the bleeding much less creating jobs.  They have let this problem get way out of control and now the problem is going to be tough to eliminate.  Let’s all hope that the graphs don’t end up looking like the one in the 1930’s.

Unemployment Numbers Due This Week

This should be an interesting week in the markets.  We have the end of the quarter which typically produces some volatility for the market.  We also have the very important unemployment report that will be due out on Friday.  The unemployment indicator has become one of most important monthly indicators.  Although employment is considered a lagging indicator (an indicator that is one of the last to recover), its continued weakness might be signaling a bigger problem.  In his weekly newsletter John Mauldin wrote about the unemployment situation from another perspective.  To sign up for John’s free newsletter go to www.frontlinethoughts.com

He wrote that it takes the creation of 15 million jobs just to get us back to normal employment around 5%.  He makes that estimate by assuming the monthly job destruction will soon becoming to an end.  I think that he estimates another 500,000 jobs will be lost.  He writes, “that means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month.  As an Average!!”   

Then he states these statistics:

“If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.”

I equate the destruction in employment much like a perfect storm.  The damage has been so great that it will take a long time to recover.  Both the Bush and the Obama Administrations allowed the unemployment situation to get this bad without doing anything about it.  In fact, I still don’t see anything in the works to fix this problem.  The stimulus bill will create mostly government based jobs.  However, I don’t think it will create enough to even put a dent in these numbers.

So, do you think that the market already expects the unemployment situation to remain this ugly?  Of course, there is the notion of a job-less recovery (which that has never made sense).  However, I think that this situation goes well beyond a typical unemployment problem.  Can the market continue to remain positive in the midst of so many people being affected by lack of employment?  I personally think that we see this problem manifest slowly and at some point the markets feel the impact. 

I know that this is far from positive but it is important to see all sides so that you can make prudent decisions with retirement dollars.

Levels to Watch on the S&P 500

From time to time, I like to point out important price levels on the S&P 500. 

Above 1080 – Positive

Between 1080 and 1043 – Neutral

Below 1041-Negative

Cash Levels of Mutual Funds Can Be a Good/Bad Indicator

There all types of indicators that you can look at in the stock market that can give you an idea of what might lie ahead.  Many of the indicators that I follow would suggest that we are nearing the end of this stock market rally which began March of this year.  One of the areas of focus concerns optimism.  Typically, over the top optimism has been historically associated with tops in the stock markets.  In other words, it has been historically negative for stocks when everyone is so optimistic.   

One indicator of optimism worth following is the percentage of cash that mutual funds hold.  Generally speaking, mutual fund managers hold 5% on average of their assets in cash.  It is considered bullish for the market if cash holdings are between 5% and 8%.  If cash holdings are above 10%, that would indicate that mutual fund managers are generally negative. However, when you take these percentages to the extreme it can mean that things are about to change.  Extreme would be above or below that range.     

Consider these statistics that date back to 1961. Throughout the 60’s mutual funds held on average 5 to 6% of their portfolios in cash. In some instances, it was as high as 9% to 10%. Cash levels of 4% or lower was a precursor to a market decline. In other words, when mutual fund managers held around 4% of cash, it was a signal that the stock market was about to go into a bear market or at least go through some type of a decline. For example, in 1972 these cash levels went as low as 3.9% and a -42% decline followed.   In March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.  In July 2007 (right before the worst bear market since the Great Depression), we saw cash levels at a record low of 3.5%. 

Today the latest reading shows cash levels at 4.2% and heading lower.  Could that be telling us something?  Only time will tell.  It is just another indicator telling us that risk to being invested in stocks continues to increase. 

As far as levels on the S&P 500 to watch?  The price level of 1062 is still key.  Falling back below that level would be a key indicator that we are going back into a decline of some type.

Unprecedented Times Create Unprecedented Events

A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession.  A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again.  Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about.  Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles.  The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression.  I do think that in the least a double dip recession is a high probability. 

People are distrustful regardless of the rise in the stock market.  There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt.  That is not even considering a Congress that is trying to ruin this country through socialistic policies. 

To get a good comparison, you can’t look at post WWII recessions.  It would be a lot like comparing apples to oranges.  This is what makes this situation so dangerous.  Yes, people are distrustful.  At the same time, people are also hopeful.  They are hopeful that the worst is behind us.  If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face.  Today, at least confidence is on life support after a grueling 2008. 

Levels in the Market

I haven’t covered significant levels in the stock market in a long time.  (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us.  It is a range of levels between 1042 and 1062.  The ability for the stock market to get above 1062 and stay there would be a very bullish event. 

Isn’t a rise of 55% in the stock market a bullish event in itself?  Only if the bear market is over.  Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred.  It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

The Main Question Might Be Getting Answered

Back in March of this year when the stock market found a bottom, I posed a question that I felt would be “the” question for investors. Is this a bear market rally or is this the beginning of a bull market?

I have felt all along that this is nothing more than a bear market rally. A bear market rally is a pause in the bear market where the stock market goes up for a period of time.  Think of it as the bear resting and gathering energy for the next big decline. 

Of course, if it is a new bull market, then the March low of this year was the worst that it will get. 

I believe that we might be getting close to finding out.  Many of the indicators are stating that the moment of truth is here.  If this were a healthy normal market, we would at least see some type of market decline in the course of a new bull market.   I think that we might have already started that process.  If this is a bear market rally, then this decline will morph into something serious.  This should be a big test. 

For this stock market to change from a bear to a bull, the important level for the S&P 500 to reach would be 1121.  The S&P 500 would have to surpass that level and stay above that level.  If that were to occur, the evidence would support a major change for the stock market trend.

The unemployment numbers came out again this past Friday and showed more disturbing news for the economy.  Remember, if they cannot fix unemployment, this economy is going to have a tough time getting going again.  Unfortunately, Obama’s answer to more jobs is Government jobs through the stimulus program.  That is not the type of solution that will solve this problem.   

According to the Government’s “version” of the unemployment report, we lost 216,000 jobs. Of course, that was after they “added” back in 118,000 jobs that they created out of thin air.  As a review, each month the Government “estimates” the number of jobs created each month that they “feel” the Department of Labor misses.  It is such a farce. 

The number of those jobless as well as the overall unemployment rate is much higher than reported.  It is an absolute joke that they continue to report this garbage. 

I wanted to give you a link to an article about Robert Prechter.  He is a well regarded market analyst that has called major tops and bottoms of the market.  He uses a discipline called the Elliot Wave Theory. According to Elliot Wave, we have again hit a major top and it is about to get ugly.  Who knows if this is right or not?  I do know that he has a very strong track record and warrants some attention. 

Hurricane Jimena Offers a Good Example of What Might Lie Ahead

I just got back in town yesterday from a trip with my wife Cheri.  We were celebrating 10 great years together.  So, I am a little out of touch with the economic data that has come out last week.  Plus, this is a slow time of the year.  The real action in the stock market should kick into gear following Labor Day.  I wanted to share with you something that I wrote in my letter to my clients this morning.

It wasn’t until last night that I realized how fortunate we were in going to Cabo last week versus this week.  I discovered that a monster hurricane, Hurricane Jimena, is barreling towards Cabo. This could actually be a Category 5 hurricane by the time that it makes landfall. 

While in Cabo we took an excursion into the city.  People were having a great time in Cabo.  In fact, there was not even a mention of the Category 4 hurricane heading their way.  Residents acted as if there was not a care in the world.  One tourist commented to a reporter, “Are you saying it would be a good idea to stock up?  No fear. I’ve been through tornados and earthquakes and everything else, but never a hurricane.”  There was almost an arrogance that came with that reply.  I don’t believe that there is anything to joke about when it comes to Category 4 or 5 hurricanes. 

It is a common attitude with people who are facing the arrival of a hurricane.  There is the notion that it will miss us or it will not be a big deal.  It is almost as if it could never happen.  These things are always forecasted as potentially being bad and they never turn out to be.

I think that the general attitude about the stock market is the same right now.  The attitude is that there is no way we are going to see a steep decline in the stock market.  There is no way that we are going to decline back down to where we were in March of this year.  There is no way that the worst is yet to come.  Don’t you look at history?  Plus, all of the financial press says that the worst is behind us.  These are the types of things that you hear these days.

This is a big bet to make against this financial crisis.  Just like a Category 5 hurricane, there are enormous penalties for those who blow this off and don’t take precautions.  As an investor, I think that it is prudent to face the upcoming months as if a Category 5 financial hurricane were brewing and potentially heading our way.  After all, we are heading into the particularly dangerous months of September and October.  These are two months that have not historically been kind to investors.

I think that Proverbs 22:3 says it best:

 A prudent person foresees danger and takes precautions.  The simpleton goes blindly on and suffers the consequences.

Deceptively Great Stock Market

What motivates the stock market to go up?  Well, lately it doesn’t take anything of real substance. A great consumer confidence number could be the reason (even though the consumer confidence report gets the consensus of only 5,000 households), a reduction in the loss of jobs for a month(even though the Government accounting method greatly distorts the actual loss of jobs),  positive earnings reports that surprise the analysts (even though most of those profits came as a result of extreme cost cutting)…Then there are the times that  Ben Bernanke speak.  Yes, his words can move a market.  He did so just last Friday.

Ben Bernanke said what investors wanted to hear - that the economy is indeed on the verge of recovery – and they responded with a rally that sent the major indexes to new highs for the year (yahoo.com). 

Did it sound something like the following?

“Our forecast is for moderate but positive growth going into next year. We think that by the spring, early next year, that as these credit problems resolve and, as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.”

As John Hussman points out in his weekly writing, this was what Bernanke said in November 2007 right at the beginning of the bear market.  If you are stock market invested, these shallow reasons are why the market continues to go up. 

I know that my bearishness on the stock market is probably getting old by now.  In fact, I feel a lot like I did back in 2007 when it seemed like you couldn’t find anyone who is bearish.  The market welcomes any positive economic news as the worst is behind us and everything is great going forward.    The headlines are looking better.  However, the fundamentals behind the headlines are awful.  You might even get some positive economic growth numbers here in the near future.  Growth as a result from printing money and the Obama stimulus package is not real good health growth. 

The Bottom Line – As we continue to go up in the market, the risk continues to increase.  Caution is still warranted.

Financial Hurricane Getting Stronger

In 2006, I was writing to my clients in my private client letter about what I felt was occurring in the financial markets.  I described what I felt was coming as a Category 5 hurricane.  I think that I even named it Hurricane Greenspan at the time.  Although he is a distant memory, he had a lot to do with the problems that we are facing today.

It feels like we were hit with a category 5 hurricane last year.  Unfortunately, I think that another one is brewing and might even be getting very close to shore.

Every Friday it seems another bank fails.  Last Friday we saw a sizable bank fail.  The Failure of Colonial Bank marks the 6th largest bank failure in U.S History.  It is a bank of $25 billion and 346 branches in 5 states.  Besides the troubling nature of this story and the fact that the Government cannot bail all of them out, the FDIC insurance pot takes another big hit.  It looks like the 13 billion dollar fund will lose another $2.8 billion because of this bank failure. That insurance fund designed to protect you and me is quickly dwindling.

Another hurricane indication would be the Government’s sale of Government Bonds. The Treasury Department sells bonds to raise money for Government spending.  It is the way the Government borrows money.  Last week the Treasury Department sold 75 billion dollars in bonds.  Do you really think that China and other countries are lining up to lend us money?  No, you would be correct.

So, who is buying these treasury securities and lending money to the United States?  Ok, if you have high blood pressure or a weak heart, please stop reading.

Our own Federal Reserve Board is buying many of those securities and lending money to the US. For a great expose on this, read this article.  I don’t need to tell you how desperate that is and how much trouble we are in considering that is occurring.

I hate to say it but this is going to end badly.  All of this is going on at the same time we are facing an unemployment crisis and a whole list of problems in this country.  Once again, I advise you to watch your risk and don’t fall for the notion that this is just a normal cycle.  In other words, don’t drink the kool-aid.

Unemployment Reports Better than Expected – Are we in the clear?

 

The recession is declared to be over or over soon states many media outlets on Friday.  Unemployment was not as bad as expected and it appears that we are starting to lose less jobs. All of that is good news and it took the media and Wall Street no time at all to react positively. 

 

I really do regret taking the opposing view on this one.  I would like for it to be true.  There are just a few problems.  We have 14.462 million people unemployed.  The number is likely higher. This is the estimate from the Department of Labor.  Where are these people going to get jobs?  Unless you are ready to pick up a shovel and get on the Obama job creation bus, you might just be out of luck.  Once again, the Obama administration does not have a plan in place to fix the job situation. 

 

Looking back to 1948 (as far back as records take us), there has never been as big of a spike in the number of those unemployed.  The closest spike that you can find was between 1979 and 1982.  In 43 months, the unemployment numbers jumped 106% to a high of 12.051 million people. Today, in just 33 months the unemployment numbers jumped 125% to 14.462 million.  The following is a chart from www.freelunch.com that illustrates this dramatic rise.

I think that the monthly unemployment numbers could continue to look better.  However, that doesn’t mean that companies are hiring. I think that it means that companies have cut as far as they can cut.  Those lay-offs might start to slow.  Until there is a solution to the problem that over 14 million people are facing, we will continue to have this crisis. 

 

Regarding the market…the 1929 comparison that I wrote about still tracks very closely.  I would still suggest that there is extreme risk on the table.  As long as we stay below 1020 on the S&P 500, that will remain the case.

Has the Housing Market Bottomed?

“Worst of the housing recession is now behind us” declares one economist.  New home sales rose last month at the fastest clip in more than 8 years.  There is a good reason why home sales are increasing but there is another reason not to get too giddy over this economic data. 

First, prices are falling to the levels where people are motivated to buy and sellers are motivated to dump properties.  Second, the Government has made a sweet deal with the federal tax credits good until the end of this year.  There is a huge fly in the ointment.  Prices are continuing to fall. In addition, there is a tremendous number of homes for sale or supply on the market.  This supply will keep prices low.  People are only looking for bargains. Plus, banks have thousands of homes on their books that they have yet to send to auction. 

In order to say we have bottomed, there is one area that has to get better.  The foreclosure crisis has to start to bottom out.  Here was the latest from Realtytrac who keeps up with the foreclosure crisis.

“RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its Q2 2008 U.S. Foreclosure Market Report™, which shows foreclosure filings were reported on 739,714 U.S. properties during the second quarter, a nearly 14 percent increase from the previous quarter and a 121 percent increase from the second quarter of 2007. The report also shows that one in every 171 U.S. households received a foreclosure filing during the quarter.”

Let’s backtrack for a second and look at what created these foreclosures.  It all comes down to the adjustable rate mortgage.  Starting in 2007, adjustable rate mortgages starting coming due for 100,000’s of subprime homeowners, causing the beginning of the foreclosure crisis.  Those peaked in the first quarter of 2008.  Through 2008 and into 2009, those adjustable rate mortgages subsided. 

However, now all of the other types of adjustable rate mortgages will start coming due and this cycle will not peak until 2012.  It is a much bigger cycle.  To assume that the housing market has bottomed would be to assume that there will not be a problem with all of these ARM’s that will reset over the next 2 to 3 years.  It is a big assumption. 

This is pretty typical.  The minute the data starts to be positive, economists declare the worst is behind us.  I would describe right now as a period that is in between 2 crises.  Unfortunately, I think that the second wave of crisis might be worse than the first.  Round two involves more housing foreclosure and the upcoming crisis in commercial properties.

Follow up from Last Week

I wrote about the similarity between the first major stock market rebound in 1929 and today.  If you have not read last week’s post, go back and read it so this makes sense.  We are now tracking almost identically in time (146 days) and gain (46% rise).  It will be interesting to see what happens from here.

The Bear Market has to be over…Right?

Those of you who have been reading my analysis are probably wondering when I am going to throw in the towel and just admit that the bear market is over and start talking about buying stocks again.  Well, I hate to disappoint you.  It is not going to happen yet.  Let’s take a much bigger picture look at what is occurring.  First, we are in a financial crisis produced by the bear market and those don’t just go away without a strong fight. 

Second, how could a 40% plus rise in stocks not mean the bear market is over?  Well, let’s take a look at history for that answer.  In 1929, a bear market started as a result of a credit/debt crisis.  There are many similarities between that period and today.  The big difference is the type of debt crisis.  The bear market eventually bottomed in 1932 after an 86% decline.  The first “crisis” decline in 1929 saw the market drop -44%.  Following that -44% decline, the stock market went up 46% over the next 147 days.  If you compare that to today, we are going through a similar experience.  The crisis of last year resulted in a -48% decline.  Thus far we are a little over a 40% increase in the stock market over 137 days.   This is not in any way unprecedented.  The problem for stock market investors in 1929 was what followed the 46% increase.  Following that incredible stock market rally was an -82% loss over the next 3 years. 

Third, the market has been rising over the past two weeks as a result of earnings season reports.  Over 70% of the companies of the S&P 500 have reported better than expected profits.  However, a closer look would reveal that the vast majority of these “profits” were due to cost cutting and not real growth.  These are clearly not sustainable. 

Fourth, Wall Street is beating the drum that the recession is just about over.  The index of leading indicators came out last week “and is rising at a rate that has accurately indicated the end of every other recession since the index began being compiled in 1959″ (Dallas Morning News).  Is that really valid when we are dealing with the worst recession since 1929 when no leading indicator index was even around? It is important to compare apples to apples.  Wall Street has a history of claiming the recession over prematurely many times before.

Finally, unemployment is a major crisis and there is nothing in the works to fix it.  Of course, you can always get a job working an Obama induced construction job. 

Let’s not get to ahead of ourselves.  I was premature to write that the stock market rally was nearing the end.  Obviously it still has more to go.  I don’t think that I am wrong to suggest the bear market is over.