The Housing Price Subsidy

To illustrate what Bill Gross was talking about yesterday, Goldman recently released a report discussing the impact of Government intervention on the price of houses. The conclusion – it increases housing prices by 5%.

“Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.”

http://blogs.wsj.com/developments/2009/10/24/uncle-sam-adds-5-to-prices-of-homes-goldman-says/

That 5% goes directly to increasing the Equity of homeowners. I think it keeps a lot of people from going into “negative equity” – and that is the goal of the government.

“Strategic Default”
Walking away from Mortgages you can afford to pay but choose to not pay, because you owe more than the property is worth.

http://www.miamiherald.com/251/story/1298873.html

Those underwater tend to walk away. It is a nationwide phenomenon.

I think the solution is to allow (or force) banks to lower the value of mortgages to levels more in line with the real value of the underlying property – “cram downs”. Washington/Wall Street seem to disagree with me…

The government is going to extend the tax credit for home purchases. This effectively decreases the after-tax cost of a home, while maintaining the selling price of the home. Think of it as a government subsidy – because it is one. It is designed to artificially prop up the selling price of the house, while giving the buyer the ability to buy the house at a lower price.

This allows your neighbor to get his house appraised at the sell price and not the buy price. This makes him appear to have more “Equity” in his house, because he is basing his appraisal value on comparable sell prices and makes him less apt to walk away from his not-quite-so-underwater house.

In the mean time, as taxpayers, you and I will be writing another huge check for this subsidy.

Defense Was The Right Call

October 14th I wrote the following –

“You’d Better Know How To Play Defense Real Soon”

Right on!

Indexes were at or near significant resistance and prices had risen too far too fast. Market Internals were deteriorating, some leaders were failing big on earnings and several sectors were starting to implode. I booked a lot of my September/October gains and am looking to reload in November.

Institutional Selling
Mortgage Finance is testing the lows of March!
Financials broke the 50-day – BAC, GE, WFC, JPM, GS!, RY
Regional Banks look worse – STI, STT, ZION, RF, KEY
Retail is starting to break down. Leaders ARO, JNY, GYMB, JOSB, CRI, UA
Home Builders and Home Imporvement are breaking – XHB, HD, TOL, RYL, PHM
Airlines have totally broken down. AMR, LCC, CAL
Railroads are cracking – BNI, UNP
Casinos have topped and are rolling over. Look at BYD!
Steel Stocks have imploded. X, AKS, SCHN, NUE, STLD
Biotech is nose diving – AMGN, CELG, BIIB
Healthcare is blowing up – ILMN, PSYS, CYH
Semiconductors are now definitively below the 50-day. STEC, BRCM, VSEA
Disc Drives are failing after earnings. WDC and STX broke the 50-day today
Semiconductors and Disc Drives always lead!
China. Holy cow, look at high-growth Chinese companies!! FUQI, EJ, SOHU, SNDA

Look at Austria today! South Africa (EZA) looks similar.

Brazil was done huge today (EWZ). So was the Emerging Markets Index (EEM).

What This All Means
For the first time since March, we are getting some serious selling and some sectors are now off the radar for future purchases.

I expect the next rally to have fewer sectors and companies participating. I also expect larger companies to start to lead smaller companies as the big boys look to buy liquid holdings ahead of the next Bear Market. I will also continue to focus on late-stage Bull Market sectors – Energy, Gold…

I expect a lot of money to be taken off the table on the next leg up. The last few weeks, I have had a lot people ask me when they should be selling. I don’t think many of them sold the last few weeks and they will get very anxious over the next few days, thinking they have missed the top and need to get out - the now or never panic of fear...

I will be looking to buy any panic selling in November, in anticipation of a Year-End rally. After that, all bets are off. If the move is accompanied by another spike in the price of Oil and a spike in Gas above $4 per gallon, then the Bull Market will probably be over and the next leg of the Derivative Implosion will smack us in the face.

Is the Hot Money Leaving PALM for Verizon?

Doesn’t Verizon have that new Android rolling out?
Or maybe it is the risk aversion trade going on right now as Institutions sell risk and buy Large Cap Value.

Available Credit

Credit peaked last year and has been falling since. By now we all know that the US Economy is driven by credit. Falling credit either means falling consumption or it means that the Government has to print more money to keep consumption up.


Available Credit for business loans has contracted at the fastest rate on record. This tells you that banks aren’t lending and money available for buy bonds has flowed into Mortgages and Government Issued Debt.


Europe
It is not just in the US. Here is the headline today from Euroland –

“Bank lending to companies operating in the Eurozone fell in September for the first time on record, according to the European Central Bank.”

http://news.bbc.co.uk/2/hi/business/8327809.stm

The US Government
In an effort to make up for tightening credit at banks, the Fed has been pumping money into the system to try and prop up the system. The Monetary Base is at a new all time high, so does it surprise you that Gold hit an all time high and Oil is rallying again?


Here is a visual example at what is occurring in the lending markets. The US Government (Ginnie Mae, Fannie Mae and Freddie Mac) have gone from originating about 55% of all mortgages in 2007 to over 90% in 2009. Banks and private lenders simply aren’t willing to lend money (or can’t lend) at these low interest rates.


http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Midnight+Candles+Gross+November.htm

Why do we need all of this cheap money? Bill Gross at PIMCO describes it like this –

“(A)lmost all assets appear to be overvalued on a long-term basis, and, therefore, policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies on the ‘right side of the grass.’”

Let me know if what Mr. Gross says next sounds familiar –

“Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services.”

This is probably the most important thing Bill Gross will write over the rest of my career –

“Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.”

Asset Price Appreciation as a policy tool…

“Asset appreciation in U.S. and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high yield bonds, central banks must keep policy rates historically low for an extended period of time. If policy rates are artificially low then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates.”

“(The Fed, the Treasury, the FDIC) recognize… that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. The virus has infected far too many parts of the economy’s body, for far too long, to go cold turkey.”

“That support, of course, comes in numerous ways. Financial system guarantees, TARP recapitalization of banks, TAFs, TALFs, PPIFs – and in Europe and the UK, low interest rate term financing, semi-bank nationalizations, and asset purchase programs similar to the United States. In the case of the U.S., the amount of the implicit and explicit financial support given by policymakers totals perhaps as much as $5 trillion, which goes part way to support the $15 trillion overvaluation of assets theoretically calculated in the PIMCO model (100% of nominal GDP).”

“At the center of U.S. policy support, however, rests the “extraordinarily low” or 0% policy rate. How long the Fed remains there is dependent on the pace of the recovery of nominal GDP as well as the mix of that nominal rate between real growth and inflation.”

Any way you slice it, the name of the game is for the Government to use newly printed money to buy stuff from those who are looking to sell and deleverage.

The Market Narrows

For the first time in a while, I am seeing sectors starting to top and roll over. The Market is narrowing. The Summation Index fell to 960 today, after breaking the key 1,140 level late last week. The Bullish Percent Index has put in its first lower high since early June.

Transportation
Airlines


Real Estate Related
Mortgage Finance


Home Construction


Healthcare
Biotech


Health Care Providers

All the Pieces Were There to Move The Markets Higher

Friday morning I fired up the computer at 5:30 am, knowing the following 2 facts –

Microsoft had blown away their earnings estimates, with the accompanying CNBC buy everything that moves fan faire

The Markets were extended and brushing right up against significant resistance

My only question was who would win Friday’s trading – buyers or sellers? It was strange to see the Futures for the NASDAQ up big, but the Futures of the Dow and S&P 500 only marginally up. I also noted that many stocks were trading down big in the pre-market trading.

Buying Bad News is Bullish and selling Good News is Bullish. Today the Good News was sold.

Leader Agruim (AGU) really caught my eye, because it was down over -4% before trading started. So I figured that maybe Tech would try and be strong, but Commodities would weigh on things. Agrium gapped down hard on the day and ultimately got smoked for -7.05%!


But in the big picture, all Agruim did was pull back to its breakout point and near it rising 50-day (Black Line). I will be watching this leader closely to see when to buy it.


I’ve have known for over a week that the markets were stretched and that a pullback was highly probable, so I have been taking money off the table. I have missed some things, but the markets have seen a lot of selling from the Big Boys and I would rather sell into some strength and capture a lot of the gains, then sell into weakness and take my chances. I am now flush with cash to buy the likes of Agruim…

Juniper (JNPR) gapped up big and then was immediately sold off hard. While doing my homework on Thursday night, I noticed the chart of Juniper and listed $28.30 as a stop buy. However, knowing the position of the market relative to resistance, I chose to not enter the order right away and see how things traded in the early going.


For those who wonder why charts are used to better time entries, Juniper is a perfect example of how the Big Boys trade off of key levels. When you pull up a chart, it is a blank slate. You are responsible for adding the lines that show the important data. In the last 19 years, I have read a lot and figured out what levels and indicators are important.

The chart you pull up on CNBC or Yahoo Finance would look something like this. About the only information you can take from this chart is that Juniper is trading above its 50-day and it was sold off a big volume today.


Here is the chart I have created. You can see that on each of Juniper’s the four pullbacks in October, the -1 Standard Deviation Band has served as support (Red Arrows). You can also see that the +2 Standard Deviation Band has served as resistance (Green Arrows). It isn’t mom and pop moving JNPR off of these levels, it is the big boys pumping through 20 million shares of volume today. They have certain indicators that they use and you need to know what they are.


The Summation Index has broken below 1,140 and now sits at 1,032. The Accumulation / Distribution reading from Investors Business Daily has fallen to the grade of “C” – which means that the big boys are no longer net buyers.

Transportation stocks got smoked today. That is never a good thing. I am nearly certain that the printing of money will cause the price of Oil to get so high that it will strangle the economy. That will lead to the next Bear Market. I don’t think that we are there just yet.


My list of leaders in bases is starting to get long again. My > ADX(15) List is now up to 390 names, where as two weeks ago it only had 40 names. So corrective work has been taking place under the surface, while the markets have held up. Normally you see the markets play catch up to the downside, as they make violent moves lower during the last part of the correction. We’ll see how this one plays out.

Wedging into a Ceiling?

Here is another big chart. Sorry, but there is a lot going on and I want to point a few things out.

The 50% retracement (Black Line and Arrow) of the Bear Market sits right above here at 1,120 (versus today’s 1,091 close). That is a key technical level and may lead some traders to lock in some profits.

Over the last few weeks I have been pointing out how moves tend to be over when price jumps up through the Upper Channel Line (Green Line). If the line holds again, then the next move down to the 50-day (Purple Line) will be a critical test for the uptrend.

As if that weren’t enough, $SPX is now 20% above the 200-day (Red Line). The markets have only been this “overbought” 6 times over something ridiculous like the last 30 or 50 years. I forget which, but the point is that this is a rare occurrence…

So you have a Market that is historically overbought, compressed up against a critical Fibonacci Level and its upper trendline.

But it gets better still. You also have a divergence between Price and two critical indicators of overall Market health – Bullish Percent ($BPSPX) and The Summation Index ($NYSI). That means that as Price is going to higher highs, fewer stocks are powering the market higher.


The rally off the March lows has seen virtually everything go up – over 92% of stocks are now above their 200-day. You are starting to see deterioration in the Technicals and some divergences between Price and key Indicators.

Summation Index ($NYSI) is essentially a longer-term method for measuring the Accumulation and Distribution of stocks. Bull Markets have historically topped out when the indicator gets near 1,600. You can see that 1,140 is a key level for $NYSI. A break below 1140 on the Summation Index would probably be a pretty Bearish event.

Momentum (RSI14) continues to diverge with Price.



As the Bull Market matures over the next few months, I expect to see fewer companies leading the markets higher – I will refer to this as the rally “narrowing”. That will mean fewer sectors going up and fewer stocks leading things higher. Stock and Sector selection will become more and more important as the Bull Market matures and fewer Sectors and Stocks are going up.

Emerging Market Currencies versus the US Dollar
Brazil rocked the markets today, when they announced that they will start taxing new Foreign Capital flowing into Brazil at a rate of 2%. It is a pretty novel idea. The issue Brazil, and the rest of Emerging Markets have, is that they need to raise Interest Rates to slow down their economies. But they know that when they raise Rates, that hot money will flow into their economies, creating Asset Bubbles.

This is the old Carry Trade, where you borrow in US Dollars at effectively 0% and lever up to buy Brazilian Bonds at a substantially higher yield than 0%. Money pours into the economy with higher rates, chasing Yield and sending Asset Prices vertical.

I think this new tax is pretty smart. It gives Brazil the ability to raise Interest Rates by at least 2%, without the threat of a bunch of hot money flowing into the economy overnight.

The ETF for Brazil (EWZ) was down on gigantic volume today (Red Box). Today’s tax appears to be a game changer for Brazil, at these for the near term. Huge volume down days, late in a trend, are often very bearish signs. Hot money will probably now look elsewhere – maybe China, or Australia.

My understanding is that there are a lot of bets right now for Emerging Market Currencies and against the US Dollar. That could be unwound in a hurry. I will continue to watch the Dollar closely for a potential bottom.

All of that said, there are still potentially Bullish setups. I will continue to sell extended and buy breakouts, with tight stops.