Homeownership: The American Nightmare

August 28, 2010

The S&P500 dropped for the third consecutive week, this time 0.7%.  Volume crept higher, adding conviction to the price drop.  The VIX (or fear) index fell slightly, although within the week, it rose to a higher level than it did the week before.  Were it not for a strong technical bounce on Friday, the S&P would have been down between 2 and 3 percent for the week.

The economic news was horrible.  Existing home sales for July collapsed, falling 27% below June’s level.  July sales were the lowest in 15 years, and almost 26% below the July 2009 level–a time when most everyone thought they couldn’t go much lower.  The supply of existing homes spiked to 12.5 months–well above the highs reached during the depths of the recession in 2009.  New home sales also fell to their lowest level ever in July;  the supply of new homes also soared.  What does all this mean?  Home prices are about to plunge–yet again.  There is simply NO plausible reason why it will not happen.

In other economic news, durable goods orders came in well below expectations.  Initial jobless claims remained near the nosebleed 500,000 region.  Second quarter GDP was revised down to 1.6%–a horribly poor rate, but not quite as bad as was feared.  Finally, consumer sentiment also disappointed, coming in slightly below expectations. 

Technically, the S&P bounced up, as expected, on the last day of the week.  The daily charts leave some more room for this bounce to continue next week.  On the weekly charts, several very ominous patterns are clearly forming.  On is a bearish head and shoulders formation, where the January highs formed the left shoulder; the April highs created the head, and the July highs formed the right shoulder.  Over the next few weeks, if the neckline (around 1,000) gets broken to the downside, then the movement down could be dramatic, with a reasonable target between 875 and 900.

TIME magazine this week featured a cover story that is refreshingly honest, but also very disturbing.

The honesty centered around the myth, or cult of homeownership in America as some sort of religiously moral than proper thing to do.  The article describes how we’ve been brainwashed into believing that owning a home is not only good for our lifestyles and our children’s education, but also good for social community building and America itself. 

But the reality is that it was all a lie, a lie built by the housing and financing industries, and a lie expanded by the political system hellbent on pacifying an uneasy populace.

What’s most disturbing is that this myth has now led to the financial ruin of the average American family and the US government.  These families, whose real median incomes have been stagnating for decades, over-invested in housing to make up for the lost wages.  While this trick worked for 20 years, it has now exploded in the faces of these families, who now face foreclosure, ruined credit ratings, and bankruptcy.  Meanwhile the federal government, which subsidized home ownership (through mortgage tax deduction and cheap financing through Fannie Mae, Freddie Mac and FHA) has now accumulated trillions of dollars in lost revenues and outright credit losses.

But worst of all, what used to be the American Dream, turned American Nightmare, is far from over.  While TIME is helping to deprogram the public, the damage from the housing bubble has only begun.  Home prices, although down 30% from peak, are still another 30% away from the 100 year old price trendline, long-term ratios to median income and median rents.

How will we know that the worst is over?  When TIME runs a cover story–most likely in about five years–with a title that pronounces the “The Death of Homeownership”.  When every newspaper, every friend, every co-worker, and every family member tells you that buying a home is the stupidest and riskiest thing you can do with your savings, then–and only then–will it probably be a good time to buy a home again in America. 

Ponzi USA–Courtesy of the Fed and Treasury

August 21, 2010

The S&P500 slipped 0.7% last week, notching two consecutive weekly declines.  Volume, as with the prior down week, was higher than it was in the last up week that ended on August 7.  The VIX (or fear) index edged down slightly, but this could also be reflecting the end of the summer doldrums when big investment decisions are put off until September arrives. 

Last week’s economic data were awful.  The week began with a disappointing Empire State Manufacturing survey.  The housing market’s builders’ index fell.  Housing starts dropped, well below expectations.  And housing permits were also lower than expected.  Initial jobless claims jumped again, this time to the grim 500,000 level which hadn’t been reached in almost a year.  The leading economic indicators matched expectations.  And the Philadelphia Fed Survey came in a negative 7.7, when the experts were looking for a rise to positive 7.0. This was the worst reading in 12 months.  Ouch!

Technically, the S&P is in a newly formed downtrend–on the daily charts.  While this does not mean that a meaningful bounce to say 1,100 can’t occur, the downturn that began two weeks ago changed many of the daily indicators to now suggest that there’s more risk to further downward moves.  On a weekly basis, the downward sloping channel that began in late April has been redefined to use the early August top (at around 1,130) to mark the top of the channel.  Also, the 1,130 high more clearly completed the right shoulder of a large head and shoulders pattern that began to take shape after the April 23 head was formed.  If the early July lows near 1,000 fail to hold over the next four weeks or so, then there’s a lot of air before some minor support kicks in around the 950-970 range.  And if this fails to hold, then we could be looking at sub-900 levels for the next major source of support.

Most folks on the street do not understand how the Fed is propping up the Treasury and the banking system.  By creating $1.5 trillion out of thin air, the Fed can only put the new money to work by purchasing securities.  And it purchased two types of securities:  Treasuries and mortgage securities.  And the Fed bought the mortgage securities mostly from banks and primary dealers who turned around and bought Treasuries with the proceeds. 

So who benefits?  Well, the banks have replaced risky mortgage securities with safer Treasury securities to boost their risk adjusted returns.  In addition, banks have access to additional funds–from other banks and from the Fed itself–at near zero rates (the Fed, by creating so much more demand for Treasuries, drives down the interest rates) to buy more Treasury notes and bonds, from the Treasury, that pay 3% to 4%, locking in fat risk-free rates of return.

Who loses?  Well, mostly you the taxpayer.  You get to pay all that interest (to the banks holding the Treasuries) on all that extra borrowing that the Treasury is doing.  And you suffer from the debasement of your dollar; since the Fed just created $1.5 trillion of new money backed by now risky mortgage backed securities (and is showing no signs of removing this new money), the huge increase in supply of dollars, now backed by shakier assets, translates into a drop in the value of each dollar–the dollar that you get paid in, the dollar that your assets will provide you when you sell them.  Finally, if the Treasury goes too far, borrows too much money, causing the bond market to revolt, then watch out–soaring rates and a dollar crisis would force to the government to slash borrowing and spending.  This would plunge the US economy into an almost certain depression, shoving unemployment rates into the stratosphere, putting millions of taxpayers out of work and into desperation.

The final result?  Bankers win.  Taxpayers lose. 

Welcome to the Great American Ponzi scheme, courtesy of the Federal Reserve and the US Treasury.  The country is being looted.  And the public doesn’t even know it.

Bernie Madoff would be proud.

Time to Sound the Alarm?

August 14, 2010

The S&P500 sank almost 4 percent last week to close below 1,080.  Volume, in this down week, was higher than it was in the week before when the S&P rose.  The volume story–for most of 2010–is suggesting that there is much more conviction behind selling than buying.  The VIX (or fear( index) surged almost 21%, also adding confirmation to the price drop.

The macro economic data just seems to keep deteriorating.  Productivity fell, when it was expected to stay flat.  The international trade deficit soared; imports exceeded exports by almost $50 billion, the highest deficit since October 2008.  Initial jobless claims rose again, this time to 484,000; and the prior week’s level was revised upward.  Retail sales rose less than expected; and when sales of gas and cars are excluded, retail sales fell–when they were expected to rise.  Although consumer sentiment was slightly better than expected, the Fed came out with an ominous announcement that included the resumption, in part, of the quantitative easing that had ended in March of 2010.

Technically, the signs are very negative.  On the daily charts, the uptrend that began in early July has been decisively broken.  And there appears to be much more room to fall.  On the weekly charts, the downturn that began in late April is still intact.  Several momentum and oscillator indicators are pointing to a renewal of the strength of the downtrend. 

Spreading across many financial blogs and several major newspapers is the warning from the Hindenburg Omen, a technical indicator that called the crash of 1987 and 2008.

It’s based on several market signals, several of which involve the breadth of the market—an analysis of the number of advancing issues relative to the number of declining issues. 

Here’s a publication of the signal in Barron’s from July 2008: http://online.barrons.com/article/SB121512476279728057.html?mod=googlenews_barrons

More importantly, the Hindenburg Omen flashed its warning sign–LAST WEEK. 

Does this mean that the stock market will crash over the next 60 to 90 days?  Not necessarily. 

But given the relentlessly pessimistic macro data over the last several months, it’s becoming increasingly clear that the US economy will NOT bounce back in a typical post-WWII recovery manner.

Why does this matter?  Because today’s stock prices are predicated on the  assumption that the US economy will NOT go back into a recession. 

So this divergence is setting the stock market up for a major test.  If the US economy does NOT suddenly start to bounce back up, robustly and sustainably, then the stock market will most likely reprice all equities at a much lower price level.

Some folks would call a such a repricing a crash.

The Hindenburg Omen is signalling that this WILL happen.  And it’s been remarkably accurate in the past.

Is it time to sound the alarm?

Japanese Society. Coming to America?

August 7, 2010

The S&P500 melted up last week–in the face of stunningly bad economic data–to close 1.8% to the upside.  Volume, as usual during up weeks, fell off significantly.  While the VIX (or fear) index fell off as well, it is still well above the low levels reached in the January to April period.

The week’s economic data were dismal.  Personal income and personal spending both came in lower than economists had predicted.  Pending home sales were down 2.6% month-to-month and almost 19% year-over-year.  Initial jobless claims soared to 479,000–a level well above the consensus estimates.  Non-farm payrolls also disappointed badly.  When the effects of the census are stripped away, only 12,000 new jobs (private together with public) were created in July.  Average hourly earnings rose slightly, but only as expected.  The unemployment rate inched down from 9.6% to 9.5%, BUT only because almost 400,000 unemployed people left the workforce–because hiring prospects were so poor.  Had folks like these not given up (over the last three months), the unemployment rate would be closer to 10.5%.

Almost three years after the Great Recession started at the end of 2007, the US economy is NOT recovering.  After $20 trillion in stimulus (direct fiscal, direct monetary and indirect guarantees–combined), the US economy is sputtering; it’s slowing to stall speed and about to nosedive–again.

Technically, the S&P is in an uptrend on the daily charts, but this move is starting to look toppy.  On a weekly basis, the 50 day moving average is still below the 200 day moving average and traders should be alert to resistance levels near the 1,130 level and the 1,150 level, which was the high reached in January.  This level could complete right shoulder, a level that would match the left shoulder formed in January.

Paul Krugman, recently in the New York Times, highlighted a story (in AOL’s Daily Finance) written by Charles Hugh Smith.  In it, Smith describes how 20 years of economic stagnation (the US economy has been stagnating for four years) have begun to destroy Japan’s society. 

He focuses on the younger generation of people who are no longer working hard in school, who are not even attending school, who do not pursue long-term careers at large companies.


Because there is no opportunity for them to attain these jobs.  The same types of jobs that their parents and their grandparents attained.  So Japan is rapidly becoming a society of haves and have-nots, where the younger generation is clearly among the have-nots.

So what are they doing instead?

Faced with unstable employment and low wages, they’re showing signs of quitting, or giving up, in all aspects of life.  They’re not getting married.  They’re not having kids.  They’re not moving out or their parents’ homes.

Smith refers to them as “parasite singles” who, instead of contributing to society through productive work, create a major burden. 

In the most extreme cases, these young people literally isolate themselves in their parents’ homes, not coming out of their rooms for long stretches of time. 

An entire generation in Japan is withering away, all because of a massive balance sheet recession that began in 1990. 

The US is in a balance sheet recession.  It began in 2007.  It’s showing no signs of abating. 

Will the US economy destroy a generation of young people in 10 or 15 years?