Friday, September 24, 2010

August New Home Sales

The new home sales number came in this morning for August at an annual rate of 288,000.  This extremely low volume is tragic for the home building industry but is important for the long run health of the economy. (We do not need new homes with close to 20 months of current and shadow inventory available)

The following shows the August number from a historical perspective:

The Ultimate Spread

Historically stocks and bonds have tracked each other with opposite correlation.  The reason for this is because when investors sell stocks they typically allocate some or all of that money into bonds.

Stock prices will fall and bond prices will rise.  The same happens when they sell bonds.  Stocks will rise and bonds fall.  You can think of it like a see-saw.

The chart below shows how these two assets have tracked each other since 1999.  The S and P 500 stock index price is on the right and the rate for bonds is on the left. (Higher bond yields mean prices are falling)

Whenever the two separate they always find a way to come back together.  The separation between the two is called the spread. 

You'll notice that in March of 2009 the stock market bottomed and took off upward.  However, bond yields did not budge.  They have since tracked sideways at a very low rate and have recently fallen even further.

This means that the bond market does not believe in the stock market rally. 

One of the two markets must be right.  One of the two is overpriced.  Historically, the bond market has been correct because it is a much larger market than stocks and is less influenced on short term emotion.

The chart above also shows that based on current bond rates, stocks should be priced below the March 2009 low of 666.

So who do I believe? 

I think they are both overpriced.  I think stocks will fall and bonds will fall.  I believe ultimately investors will move away from American stocks, bonds, real estate, and cash.  They will all fall simultaneously.

In the meantime, I continue to accumulate real cash (precious metals) to have gun powder ready to buy when these assets finally reach an attractive purchase price.  Real estate should be hit the hardest and will provide the greatest opportunity during the coming collapse.

Holiday Season

Thursday, September 23, 2010

Existing Home Sales August

Existing home sales came in at 4.13 million for the month of August.  The number continues to bounce off the bottom of a cliff after the tax credit expiration as seen in the chart below:

The next chart shows the staggering amount of inventory on the market at 11.6 months:

Remember this number does not include the shadow inventory currently being held off the market.

Distressed homes rose to 34 percent of all sales in August.

With Fannie and Freddie finally ready to unload some of their inventory, that percentage will move up as we move forward.

The second round of the housing blood bath continues.

The First Flash Crash

The NASDAQ bubble of 1995 - 2000 was the greatest stock market bubble in history.  It was the time of Internet stocks going public and cashing out with no business plan on how they could make a profit.

The market peaked in March of 2000 and trended sideways for about a month.  What is little know is that there was a "flash crash" that took place in the market on April 4th, 2000.  The NASDAQ crashed 15% in a single day before recovering most of its losses that afternoon.

Our stock market peaked in April of 2010 and trended sideways for about a month.  What is very well known is that there was a "flash crash" that took place in the market on May 6th, 2010.  The S and P 500 crashed over a 15 minute span before recovering most of its losses that afternoon.

The important question is, "what happened to the NASDAQ after this similar occurrence, and how close does that relate to our market today?"

The following shows the NASDAQ chart 4.5 months after the flash crash:

The following shows the S and P 500 chart 4.5 months after the flash crash:

The following over lays the NASDAQ with the stock market today, and the pink line continues with what happened to the NASDAQ moving forward:

The chart from the great depression which I have covered in the past correlates even better, but I wanted to show this lesser known chart pattern.


Tuesday, September 21, 2010

Global Liquidity Flood Gates Opening

While everyone assumes that the European debt crisis has passed with the European Central Bank (ECB) and International Monetary Fund (IMF) backing Greek debt, there are some new players entering the arena.

This past Friday there was an enormous scare in the Irish bond market.  Rumours abound regarding problems paying down debt and the Financial Times reported over the weekend that the ECB had to step in to support the market.

The ECB is their version of the Federal Reserve.  "Stepping in" means they printed Euros and bought bonds.

All eyes were on the Irish bond market this morning as they attempted to raise 1.5 billion euros.  They are now using these funds to backstop their banking system which is insolvent.  (Similar to the US only on a much smaller scale)  The auction was a percentage point higher, but ran smooth with the now official stamp of bail out approval in place with the ECB.

In addition to Irish troubles, there are rumblings coming out of Portugal.  The European leaders have been fast at work to back stop all coming problems in an attempt to stay ahead of the curve.

They have recently completed the European Financial Stability Facility (EFSF), which is a fancy word for the European Bail Out Fund. (EBOF)

Because Europe does not have actual funds to contribute, the money will come from the ECB and the IMF. (Printed)

The IMF is a global central bank and a few weeks ago their support to the European Union was raised from hundreds of billions to unlimited, similar to the unlimited support pledged to Fannie and Freddie last Christmas here in the USA.

Not to be outdone, Japan stepped into the action last week and announced currency intervention for the first time since 2004.  This means they plan on weakening their paper currency against competitors to help exports.

Switzerland, once the rock solid form of currency strength, has been doing the same thing as nervous deposits from Europe flood into their banking system.

Look for the ocean of printed liquidity to continue to flood the marketplace from government's around the world as we move forward.

Gold continues to look on with a watchful eye.

August Housing Starts

Housing starts increased to 598,000 for the month of August. Fortunately, the number was very low and continues to bounce along the bottom of a cliff as seen in the long term chart below going back to 1968.

The bad news was that the number was above 0.  With 12.5 months of inventory currently on the market not including the monsoon of shadow inventory on the bank's balance sheets, it would be beneficial for the country long term to shut down all residential construction across the board.