• A stronger dollar and falling oil prices helped U.S. stocks to suffer a sharp drop yesterday (Monday), as investors continue to find it difficult to see real signs of an economic rebound, Reutersreported. All three major U.S. indices – including the Dow Jones Industrial Average and the Standard& Poor’s 500 Index, dropped more than 2%. Hardest hit were the shares of energy companies such as Chevron Corp. (NYSE: CVX), which closed down more than 2% at $71.08. The dollar gained against all 16 of its major counterparts currencies, except for the Japanese yen, after Russian Finance Minister Alexi Kudrin said it was too early to consider an alternative to the greenback following a Group of Eight meeting. Of note, the euro fell versus the dollar following the European Central Bank said commercial banks in the 16-country euro region may lose an additional $283 billion by the end of 2010, Bloomberg News reported.

• Homebuilder confidence has dipped by one point, according to theNational Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. “The outlook for home sales has improved somewhat in recent months, due largely to implementation of the first-time homebuyer tax credit and gains in housing affordability,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “However, looking forward, homebuilders are facing a few headwinds, including expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans.” The index is based on a monthly survey of 548 homebuilders.

• The International Monetary Fund (IMF) raised its outlook for the United States and called for steps to reduce concern about increasing public debt and inflation, Bloomberg News reported. The IMF forecasts the United States’ gross domestic product (GDP) will contract 2.5 % this year before growing 0.75% next year, according to a statement today after an annual staff analysis the world’s largest economy. Previously, the IMF’s World Economic Outlook report, released in April, had the United States’ economy contracting 2.8% this year, before stalling in 2010.

• President Barack Obama yesterday (Monday) told the largest doctors group in the country that changes are needed in areas from insurance to payment procedures to lower costs and cover the uninsured, MarketWatch.com reported. “What I am trying to do and what a public option will help do,” he said to the American Medical Association, “is put affordable health care within reach for millions of Americans.” The group said last week it opposes any public plan that forces doctors to participate or expands Medicare or pays Medicare rates. In his weekly radio address on Saturday, Obama laid out a proposal to cut $313 billion in government health spending, saying the reductions in Medicare and Medicaid payments to health-care providers would increase efficiency and the quality of care, while setting aside about $950 billion for reform over the next 10 years.

• In a sign that more Americans are curbing their discretionary spending, Six Flags Inc. (OTC: SIXF) filed for Chapter 11 bankruptcy protection on Saturday, Reuters reported. The New York-based company said the move will deleverage its balance sheet by $1.8 billion and eliminate $300 billion in redeemable preferred stock obligations. Day-to-day operation of its 20 parks will not be affected, and the filing “paves the way for a full revival of the company,” Chief Executive Officer Mark Shapiro said.

Source: Investment News Briefs Tuesday, June 16, 2009

Initial construction of new homes in the U.S. fell to the lowest level on record last month, the Commerce Department announced early today. Housing starts in April fell 12.8%, to an annual rate of 458,000, the worst since at least 1959, when the government started keeping track. Applications for building permits fell to a record low as well.

Here’s what we don’t get: The market hates this. Futures were aiming for another day in the black early this morning, and then reversed seconds after the numbers were announced.

But we see the housing starts number as an encouraging development. In the worst housing crisis of our lifetimes – with a 9.8-month supply of existing homes on the market and a record 342,000 homes in foreclosure in April alone – who in their right mind is starting construction on a new house?

If the biggest hurdles in ending the housing crisis are price discovery and clearing supply, and if true recovery is a curtailment of home price expectations and a return to living within our means… why are record low housing starts a bad thing?

At this stage, isn’t the best possible housing start number… 0?

Source: Encouraged by Plummeting Housing Starts

Martin Denholm of the Smart Profits Report shows us where to find the profits in the wreckage.

This from Martin:

Hey… wake up, Larry. The coffee is ready.

If you were as amazed as I was at the sight of President Obama’s chief economic advisor, Larry Summers, snoozing through Obama’s Fiscal Responsibility Summit on Monday (on the podium, no less), hopefully these numbers will shake him out of his slumber…

The latest S&P/Case-Shiller index shows that home prices in 20 U.S. cities plummeted by 18.5% in December, compared with December 2007. On the back of an 18.2% slide in November, it was the fastest decline on record and extends a decline that began in 2005. The 10-city index fared even worse, sinking by an annual 19.2%.

From its high in 2006, the 20-city index has tanked by 27%, with Phoenix, Las Vegas, and San Francisco leading the way down during December. On a national scale, the Case-Shiller index showed an 18.2% drop compared with Q4 2007.

Let’s take a look at the real estate market and see how investors could play this news…

Homebuyers Should Have Adopted The PAYGO Plan

The housing numbers came just a day after Obama proposed a PAYGO approach to government spending at the Fiscal Responsibility Summit. Simply put, it’s based on the “You don’t spend what you don’t have” concept, making cuts to fund spending plans.

Forcing the government to balance its books and pay more attention to the national debt sounds great in theory. It’s an approach that helped turn America’s federal deficit into a surplus over the 1990s and the early part of the 2000s.

But of course, the country wasn’t mired in two prolonged military conflicts, nor did it face the worst economic climate in a generation – issues that don’t discriminate when it comes to book-balancing efforts or debt levels.

And at the current rate the government is going, it’s going to have to find a lot of extra pennies buried in the couch – or make some significant cuts – because Obama is clearly determined to spend his way back into prosperity.

There’s No Place Like Home For $275 Billion

With housing however, this fiscally responsible PAYGO approach would have worked wonders for many homebuyers who now find themselves clutching for the last bit of rope. Record foreclosures (up 83% to 2.3 million in 2008, according to RealtyTrac) and slumping property prices (down a record 8.2% in 2008, according to the Federal Housing Finance Board) have eaten into Americans’ wealth and eroded consumer spending, which makes up about two-thirds of the economy.

To combat it, Obama wants to pump $275 billion into the real estate market in order to flatten out its freefall. And as I wrote last week, $75 billion of that housing aid package will go towards allowing homeowners to refinance and lower their monthly mortgage payments in a bid to slow the foreclosure rate.

Whether these efforts will work… time will tell. But check out this interesting nugget from Minyanville:

“While pundits and politicians debate the various aspects of President Obama’s $275 billion housing bailout, one piece of data proves just how misguided federal efforts to revitalize the housing market are: $275 billion could buy more than half of all American homes already in foreclosure.

“Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.”

The housing recovery isn’t going to happen anytime soon. With the foreclosure rate still rising (up 18% in January), it’s still squashing prices. And with home demand very weak, there’s a big supply of excess homes on the market.

And that’s crippling this industry…

Trouble For Toll

“The past five months have been among the most difficult in U.S. economic history.”

And the award for “Most Obvious Statement” goes to…

Robert Toll, CEO of fallen homebuilder giant Toll Brothers (NYSE: TOL).

Toll was speaking on the back of a 51% plunge in his company’s first quarter revenues – a trend symptomatic among the nation’s homebuilders.

Prospective buyers aren’t buying, amid job security fears. And sellers can’t sell their homes, due to the depressed economy and market. And with the glut of unsold homes on the market and prices falling, homebuilders have no reason (and no money) to build any more. Toll says new home construction is at its lowest level in 50 years.

And profits are tanking. Analysts project a $0.30 per share first quarter loss for the company – but Toll is so concerned about the economy and uncertain about the market that it hasn’t even bothered to issue any guidance itself.

Others aren’t hanging around to participate in the carnage any more…

Insiders Are Bailing On This Builder

Recent SEC filings show that Dwight Schar, founder of NVR Inc. (NYSE: NVR) recently cashed in his housing chips, dumping 339,059 shares worth $139 million.

Smart move. He sold at an average price of $409.90 each. The stock’s current price is around $348.

He’s not the only one either. Four other company directors and the CEO have also been busily selling their holdings this month.

One razor sharp analyst called this spate of so-called “cluster selling” (which occurs during particularly weak periods) “a pretty bad signal” for investors (okay, so I’m giving that “Most Obvious Statement” award to him now).

Profit From The Housing Pain

With the National Association of Realtors announcing this morning that existing U.S. home sales defied projections for a rise and dropped by an annual 5.3% in January from December – the lowest since July 1997 – homebuilder stocks are getting knocked around again.

The median home price: Down 14.8% to $170,300 in January – the lowest price since March 2003. And 9.6 months worth of unsold housing inventory.

Whether this marks anything approaching a bottom or not remains to be seen. But in any event, homebuilders that have struggled to turn a profit over the past few years are now closer to going bust instead.

To combat the slide, homebuilders have dumped as much land as they can and trying to load up on cash instead. But in this market, that’s obviously coming at a loss. And when the assets run out… what then in a still-depressed market? Not to mention the debt that many companies have accumulated, due to excess leveraging during the boom times.

On a broad scale, you could take a look at playing the downside of sector ETFs like the SPDR S&P Homebuilders (NYSE: XHB) – already down 55% over the past year.

But if you want to look for downside in individual stocks, focus on ones whose debt-to-equity level is high and/or who are running low on cash. And when insiders are selling, that’s usually a good indication that you should do the same.

Source: How To Send Your Profits Up As America’s Homebuilders Go Down

This from Today’s Financial News:

Well look at that. Government intervention is actually helping in a way our lawmakers intended. While not all of the Fed’s programs have been a success, the one it created last week is working to get the nation’s economy back on track.

You may recall the Federal Reserve announced last week that it planned to purchase up to $500 billion worth of mortgage-backed securities from government-sponsored agencies like Fannie Mae and Freddie Mac. Its goal was to grease the rusty gears of the real estate industry and force mortgage rates lower.

The plan worked.

The Mortgage Bankers Association announced this morning that last week’s mortgage application rate skyrocketed a record 112%. With the gauge at 857, applications last week were at their highest levels since late March.

Of course, buyers were not gobbling up homes during the Thanksgiving week because Fannie and Freddie were getting a break. They were applying for mortgages because interest rates are at their lowest rates since 2005. Buyers are getting a fantastic deal.

The boosters are ignited

A week or so ago, a 30-year fixed mortgage came with a rate of close to 6.5%. Today, perspective buyers can lock in a rate with Wells Fargo (NYSE:WFC) of just 5.375%. That is enough to pull monthly mortgage payments down by several hundred dollars each month.

With rates this low and homes this cheap, buyers are finally realizing the opportunity they have on their hands. Out of all of the deals the Fed has created over the past three months, this one has the most potential of directly helping the American people.

But what about you as an investor? Well, the news is even better. The real estate industry has traditionally been a leading indicator. In other words, it rises ahead of the financial markets. An increase in home purchases and therefore home values, is a surefire indication that the equities market will be making similar moves in the near future.

There are some great investment opportunities out there.  But for now, stay away from traditional real estate plays like REITs and the nation’s large homebuilders. The deleveraging tsunami is still pulling these sectors under and there will likely to be more pain in the near future.

If you want to make conservative investments with larger-than-usual profit potential, stick with the big guys. Blue Chips are a great investment as the nation gets back on track. Companies like General Electric (NYSE:GE) and Altria (NSYE:MO) with their strong dividends and proven history of healthy revenue growth are worth your money.

The Federal Reserve is making positive moves, the real estate market is on the rebound and moneymaking opportunities are all over the place. If you are not going to buy a house or two at these great prices, at least invest in a few discounted stocks.

Source: The real estate industry gets a favor from Bernanke

This from Money Morning:

The U.S. housing market is already being pounded by the “perfect storm.” And the outlook for the New Year is for the stormy weather to continue – and probably to get worse.

As if a locked-up credit market and tidal waves of foreclosures weren’t already enough, we’re now watching unemployment climb and consumer confidence plunge.

But even when the housing market is taking on water, there are ways to stay afloat. Indeed, investors nimble enough to maneuver can even make money.

The watchword on this market, though, is caution.  If an investor decides to test the waters, beware of the extraordinary financial undertow.

Here’s a look at what’s happening now, and what the implications there are for investors in the New Year.

Rising Unemployment Feeds into Sinking Demand

The grim reality is that skyrocketing unemployment is a major threat to the recovery of the U.S. housing market.  And consumers shackled with record levels of debt are unlikely to ride to the rescue this time.

Since this recession is expected to be long and deep, economists are projecting high rates of unemployment. And the latest statistics released by the U.S. Labor Department show the crucial jobs market deteriorating at an alarmingly rapid pace.

The U.S. unemployment rate jumped to a 14-year high of 6.5% in October as another 240,000 jobs were cut – an uptick from 6.1% in September and the 10th month in a row the jobless rate has risen. Most forecasts are calling for unemployment to spike as high as 8.5%, which would be the worst showing since 1980.

So far this year, a staggering 1.2 million jobs have disappeared. More than half the decrease occurred in the past three months alone, Money Morning reported in its “Outlook 2009” series economic forecast story. Even worse: A year ago, job cuts were concentrated in the financial-services and homebuilding sectors. Now they’re rising across the board; virtually every part of the economy is feeling the squeeze.

For instance:

• U.S. automaker Chrysler Corp., one of Detroit’s wheezing “Big Three,” is laying off 25% of its white-collar work force of 18,500.
• Appliance maker Whirlpool Corp. (WHR) recently announced it would cut 5,000 jobs to cope with declining sales.
• Worldwide shipping giant DHL, a subsidiary of Deutsche Post AG, is laying off 9,500 people, and threatening to close its U.S. distribution center.
• Onetime Internet search giant Yahoo! Inc. (YHOO) plans to let 1,100 workers go – on top of the 1,000 already jettisoned in January – the result of several botched merger attempts.
• Ailing banking giant Citigroup Inc. (C) heaped more bad news on the financial sector, announcing whopping 50,000 layoffs in the next 12 months.

Layoffs of this magnitude are more than a mere shot across the bow of the housing market – they’re actually a direct hit amid ship. People who are unemployed cannot buy homes. Period. But even consumers who are afraid that they might be joining the jobless ranks are loath to take on the added risk – making them unlikely candidates to buy a new home.

Foreclosures Still Rising

As unemployment climbs, foreclosures will continue to multiply. That only exacerbates an already unappealing combination – more houses being dumped onto the market even as the pool of potential buyers grows increasingly smaller.

RealtyTrac Inc. reported that more than 81,000 homes were foreclosed on in September – 71% increase from the same period just a year ago. For 2008, foreclosures rose to a record 765,558.

“I wouldn’t be surprised to see foreclosures increase as the economy slows down,” said Rick Sharga, RealtyTrac’s vice president of marketing. “The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes.”

And while foreclosure volumes are outpacing projections, the cumulative losses by banks on bad mortgages may have yet to hit their books.  Since loan losses don’t get recorded until the property is sold, it’s likely there’s a lot of bank-owned inventory that hasn’t been unloaded – meaning there may be more foreclosures out there investors don’t yet know about.

“We are in uncharted waters,” said Brian Bethune, an economist at research firm Global Insight (IHS).

Making the waters even rougher was the decision by Standard & Poor’s Inc. (MHP) to cut the ratings on $34.1 billion of “Alt-A” residential loan packages that had been issued in 2006 and 2007.  Alt-A mortgages are those written with little or no documentation, i.e., without proof of income or assets. Even worse, S&P put an additional $351.7 billion of Alt-A securities up for possible review reflecting the rating company’s “belief that further declines in home sales will depress prices further and push loss severities higher than we had previously assumed.”

On top of all that, record numbers of borrowers are already “underwater,” or “upside down” on their mortgages, making it more attractive for them to default by simply walking away, than to hang around and drown.

About 18% of homes nationwide are now “upside down,” according to a report from First American CoreLogic.  Almost two-thirds of those homes are in just seven states: Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio. In Mountain House, Calif., an unincorporated planned housing community located in the foothills of the Diablo mountain range, the housing crisis right now has nearly 90% of the homeowners owing more on their houses than they are worth – the highest percentage in the country, The New York Times reported on Nov. 10. The average homeowner is underwater by $122,000, the newspaper said.

Other areas are suffering almost as much: In Nevada, alone, borrowers owed a whopping 89% of the value of their homes.

Despite such dramatic anecdotes, this housing slump is nationwide in nature. It’s more severe than any other such downturn since World War II, mostly because of the risky lending practices that inflated the real-estate bubble in the first place.

The Downdraft in Housing Prices

Meanwhile, while unemployment rises, the downward spiral in housing prices is gaining momentum.

“The No.1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.”

The S&P/Case-Shiller Index of home prices plunged 16.6% in August from the year before, following a 16.3% drop in July. The index has fallen every month since January 2007 (See accompanying chart, “Plummeting Prices.”).

Prices were lower in all 20 of the major cities the index covers, with Phoenix and Las Vegas down nearly 31% from last year.

Nationwide home prices have fallen 20.3% since peaking in June 2006.

And the skid isn’t over.

According to Fitch Ratings Inc., U.S. home prices will fall another 8% to 10% before they show signs of stabilizing.  According to a Fitch forecast, the peak-to-trough price decline will be 30%.
And still one other reliable indicator of housing prices seems to confirm that, in many cities, home prices still have further to fall.

According to analysis by Moody’s Investors Service (MCO), Miami houses are right now priced at about 22 times annual rental income – versus an average of just 15 over the past two decades. This suggests that a home currently priced at $350,000 is actually worth only $238,600 – meaning the price would have to drop 32% to reach the fair-value point.

Congressional Missteps

In an effort to help more than 400,000 homeowners avoid foreclosure, Congress came up with the “Hope for Homeowners” program.  Unfortunately, in their infinite wisdom, federal lawmakers designed a program that is almost certain to fail.

The program supposedly makes as much as $300 billion available to at-risk borrowers, enabling them to refinance into a 30-year, fixed-rate loan insured by the Federal Housing Administration (FHA).

The biggest mistake Congress made was to make this program strictly voluntary for participating banks, experts say.

Just as bad: In an effort to make the program more affordable for beleaguered homeowners, it also requires the lenders to write the value of the home down to 90% of its current market value. So in a downtrodden market like Phoenix, if a lender holds a $400,000 mortgage on a home currently appraised at $300,000, the bank would have to settle for a new mortgage worth only $270,000.

Needless to say, the response has been underwhelming.  After four weeks, a whopping 79 people had applied for the program.

Not to be deterred, the Federal Deposit Insurance Corp. (FDIC) is proposing another package, which would extend the terms of at-risk loans from 30 years to 40 years, with interest rates as low as 3.0%.  Housing payments for delinquent borrowers could not exceed 38% of gross monthly income.

In order to sweeten the pot for lenders, the government would share as much as 50% of the losses if a borrower ended up in default anyway.  In addition, the FDIC would pay servicers who process these new mortgages a fee of $1,000 for each re-worked loan.

FDIC officials estimate that this anti-foreclosure program would cost $24.4 billion, and would prevent 1.5 million of the 2.2 million at-risk homes from falling into foreclosure.

But that also means the taxpayer will be on the hook for half the value of 700,000 mortgages that do fail.

Can you say “fuzzy math?”

Homebuilders on the Ropes

You can probably guess where this leaves the nation’s homebuilders – gasping for air.

D.R. Horton Inc. (DHI), one of the nation’s biggest homebuilders, just wrote down $1.1 billion in land, deposits and inventory in the third quarter, as sales fell by half. The Ft. Worth, Tex.-based company expects to post a fourth-quarter net loss of between $800 million and $900 million, 18 times more than it lost in the fourth quarter a year ago.

Other builders are in similar shape. Pulte Homes Inc. (PHM) and The Ryland Group Inc. (RYL) just reported quarterly losses of $280.4 million and $65.7 million, respectively.

Even Toll Bros. Inc. (TOL), which caters to the high-end buyer, said fourth-quarter revenue fell 41% from the same period last year.

The Forecast for 2009: More Pain Before Any Gain

No matter what happens in the U.S. housing market, until a large inventory reduction takes place, housing prices will not stabilize.

In a recent Forbes magazine column, A. Gary Shilling, president of an economic consulting firm of the same name, said the worst is yet to come. Says Schilling: “Excess inventory, the mortal enemy of prices, now amounts to 1.8 million homes, which is a huge number relative to the net demand (new families minus departures due to deaths and moves to nursing homes) which is only 1.5 million a year.”

And one of the architects of the U.S. housing debacle – former U.S. Federal Reserve Chairman Alan Greenspan – is also downbeat: “At a minimum, stabilization of home prices is still many months in the future,” Greenspan said in an October speech.

The question that needs to be answered, then, is this: In the current atmosphere, does anyone believe we actually need homebuilders to add even one new home to the market?

Some pundits claim this may be a golden opportunity to short U.S. homebuilders. Even though they’re already down 80% from their highs, the deadly combination of skyrocketing unemployment, deflating prices and tight credit continue to spell further pain for the industry.

Short sellers would obviously look at any of the companies mentioned above. They might also consider iShares US Home Construction (ITB), the prominent exchange traded fund (ETF) for the group. However, any such move would have to be made with extreme caution.

The reason: All bets are off if the new Barack Obama Administration implements a moratorium on mortgage foreclosures. There’s also the possibility that Obama will be able to shepherd through any one or more of the proposed mortgage guarantee programs now on the table.

Those kinds of moves could provide a boost to homebuilders and leave short sellers in the grips of an uncomfortable squeeze – just like the millions of homeowners saddled with mortgages they can no longer pay.

Source: New Year U.S. Housing Market Forecast: No Gain, More Pain

Monday’s open interest numbers showed another substantial decrease in gold open interest…this time 4,551 contracts. But in silver, o.i. rose 1,191 contracts to 93,757. Was it short selling? I’ll let you know on Saturday morning.

Talking about silver, here’s a graph (courtesy of Gene Arensberg) showing Comex silver stocks from October 17th to November 17th. Since that graph was published early yesterday, Comex silver stocks have fallen again…this time by 314,095 troy ozs. to 128,720,340 troy ozs. Options expiry and first day notice for the December contract are Thursday the 20th and Friday the 28th respectively. It will be interesting to see if there are any delivery fireworks forthcoming.

And from the usual NY gold commentator…”The weekly European Central Bank statement of condition reported that ‘gold and gold receivables’ fell €10Mm last week (0.496 tonnes). This was said to be caused by sales by two captive CBs, partially offset by a gold coin purchase by a third. Of course this is far below the notional 9.6 tonnes which could be sold if the WAG2 quota was disposed of evenly; although last week’s total was a €1Mm gain. The ECB group still chooses not to appear active in gold at present…. Tuesday saw another attempt on $750 during Comex hours which was of course blocked. Gold traded across a $15.30 range, with the floor close down $9.30. Estimated volume was 113,428 with a switch effect of 38,734, so net volume was not heavy.” (Not heavy? That’s an understatement! It’s almost no volume at all. No wonder JPMorgan can keep the gold price under $750. But why are they doing that? What surprise have they got up their sleeve that they’re not telling us? – Ed)

There have been several stories over the past week that coin melt bars (0.900 fine) are showing up in the Middle East. The only bars that match this description are the US coin melt bars. In a story filed from Beijing over at djnewswires.com/eu early this morning, came this comment…”China’s central banks is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country’s huge foreign exchange reserves, the Guangzhou Daily reported, citing unnamed industry people in Hong Kong. The newspaper didn’t elaborate on the plan.” And in a story at foxbusiness.com, they comment on the two tiered gold price with a story headlined “Why Gold is Down, But You Can’t Get Your Hands on Any”. Congressman Ron Paul and Comrade Ben Bernanke had an interesting exchange on gold yesterday. The youtube.com video is linked here. And lastly, I see that the Plunge Protection Team got some unwelcome air time on CNBC yesterday. The talking heads were not happy to be discussing this, and did everything they could to pour cold water on the idea. The you tube.com link is here.

I’ve never seen as many negative stories as I saw yesterday. But here’s a graph from a Reuters story yesterday concerning current sentiment over at the National Association of Home Builders which should put it all into perspective.

click to enlarge

Mercifully, I only have two stories today. The first is a Reuters article filed from Washington that quotes Kansas City Federal Reserve President, Thomas Hoenig, who said on Monday that the central bank has “done what it can” to buffer the economy through a downturn. The story is definitely worth the read and is linked here.

The second offering today is silver analyst Ted Butler’s latest piece on silver. Ted’s commentaries are always worth the read…as is this one. It’s entitled “Sure Thing?” and is linked here.

Democracy must be something more than two wolves and a sheep voting on what to have for dinner. – James Bovard, Civil Libertarian (1994)

How about that Dow…eh! A 300+ point rally in about an hour and fifteen minutes. How many times in the last six months have we seen a major rally in the closing hour of trading at some crucial point? Could it be the PPT…or the President’s Working Group? According to CNBS…it doesn’t exists. If President Ronald Reagan were alive, he would put an end to that discussion, because his executive order that made it so, is linked right here.

And as they would say in New Orleans…see y’all tomorrow!

Source: And Then There’s This…Wednesday, November 19th, 2008

Existing-home sales were up 3.1% in July. But the sales rate was still 13.2% below a year ago. Meanwhile, inventories spiked 3.9% from last month to a record 4.67 million homes for sale at the end of July – 11.2 months of supply at the current prices.

The sector’s drubbing could be a great opportunity for value investors. But Ian Davis in The Growth Stock Wire advises investors to hold off on bottom fishing for homebuilders…

Predictably, homebuilder stocks dropped on yesterday’s existing-home sales news. The SPDR S&P Homebuilders (AMEX:XHB), an ETF that tracks the sector, dropped 1.3%. But Ian says there could be more bleeding in this sector yet.

The value may already be there, but the situation is still murky. For starters, most of these companies don’t have any earnings right now. Therefore, we can’t use price to earnings (P/E) as a guide. Instead, let’s look at the sector’s price-to-book value.

As you can see, in terms of book value, homebuilders are dirt-cheap.

Thing is, Datastream only updates book value on a fiscal year-end basis. Since all of the homebuilders in the index have fiscal year-ends between October and December, these book values are at least eight months old (most big builders are showing price-to-book values around one according to second-quarter reporting).

The median price of a new home is down 5.6% since 2007’s fiscal year-end, so you can bet that homebuilders’ book values will be revised lower in December.

It’s 3 a.m. Aymer Vinoy Laughner, son of an oil baron and savvy businessman, entertains various well-to-do friends and celebrities at his St. Petersburg, Fla., home. Among them is Walter Hagan, the celebrated golf pro of the 1920s, and Gene Elliott, a big-time real estate developer.

Laughner makes a wager with Elliott that will change the face of St. Petersburg forever…

The bet is this: If Walter Hagan can drive three golf balls off the face of Laughner’s pocket watch without damaging it, Laughner will buy the 12-acre site across the street and build a resort there.

I still have a hard time imagining it, but they place the pocket watch out on the lawn somewhere.

Hagan succeeds, bouncing golf balls off the face of the watch, but never breaking it. Moments later, the men draw up a contract on a brown paper bag for the purchase of a 12-acre site that would open two years later as the Vinoy Park Hotel.

The story that follows is historical, but it illustrates how the ebb and flow of markets never cease. It truly speaks to President Truman’s old line: “The only thing new in the world is the history you don’t know.”

The Vinoy opened in the sun-drenched opulence of the Roaring ’20s. Optimism and opportunity abounded. Think we had a real estate bubble? They knew how to put on a good show back then too.

Board writes of a lot selling for $500 on Monday and $1,300 on Tuesday… only to flip yet again for $2,000 on Friday. I looked over black-and-white photos in Prudy Taylor Board’s book on the history of the Vinoy. I saw some happy chaps in straw hats walking along a street near Tampa Bay. The caption actually read, “Smiling realtors.” In the background, I could make out a placard that read: “Our flowers never die.”

Bullish optimism at its best.

Signs of prosperity were everywhere. Building permits nearly tripled from 1920-1923. Bank deposits nearly tripled, too. All those real estate commissions, you see.

It wouldn’t always be smiles and easy money. The hotel itself passed through many ups and downs throughout its history. In fact, within 20 years of its grand opening, the Vinoy was in trouble. The property actually held up well during the Great Depression. War was what finally did it in.

In 1942, the number of guests dropped by more than 50%. Profits were insufficient to cover maintenance expenses and the interest on the mortgage. By 1943, the Vinoy ceased operating as a resort. Instead, it became the local headquarters for the U.S. Army Air Corps. Laughner wrote to his shareholders in his annual report that the lease with the War Department “was made against the better judgment of the officers and directors of the company, and was done mainly as a contribution to the war effort.”

Hard to imagine how different St. Pete must’ve looked in that dark year of 1943. Today, the palm trees still sway in the salty breezes off the bay. The sunshine beams as brightly as ever. But instead of chunky Americans with fanny packs wobbling around, there were GIs in combat fatigues marching in the parks.

By the end of 1944, the War Department canceled the lease. The good news was that the cash flow from the lease paid off all the debt on the property. The bad news was that the hotel took quite a beating and needed a major renovation.

Laughner sold the Vinoy in 1945 for $700,000. The saga continues, but I will stop here. I’ll add only that the hotel had years of ups and downs (and another closure) left in its future. In a nutshell, the Vinoy story is part of the ebb and flow of markets. Few investments are good for all seasons. What worked for a while later stops working. And what seems cheap today becomes dear tomorrow. And back again.

It takes time to work these things out. The Vinoy was profitable for years, but trouble encountered in ‘42 essentially put it out of business by ‘43. It’s always easier to destroy than to create. I stayed at the Vinoy recently for an investment conference in which I was a speaker. It’s a grand old hotel, looking like a pink wedding cake, with its distinctive observation tower on top dominating the view on the waterfront.

The market is itself always writing a new story. It’s hard to know sometimes where we are in the grand cycle of creation and destruction. But I think there are opportunities out there. It helps to have the kind of perspective that sees these long patterns. You come to appreciate that things take time. The recent credit crisis, for instance, will take some years to cycle through, just as it took years to wash out the effects of the 1920s speculative fervor. The banks and financials had a long run, both in the ’20s and in the two decades before 2007.

Now comes the long period of convalescence. As the Vinoy history illustrates in a nutshell, prosperity comes and goes…and comes back again.

Source: Market Cycles Never Cease

We knew it was going to happen. Heck, we had the canary in the coal mine, the volatility index, investor sentiment, and a host of other technical indicators all screaming it was time to get defensive. And the screams came just in time…

Last week, the Dow Jones Industrial Average, the Nasdaq Composite Index, and the S&P 500 all lost about 3.5%. The semiconductor index was down about 5%. Retail and financial stocks fell more than 6%. Brokers lost 7%. And homebuilders gave up 10%.

The bad news, of course, is it’s going to get worse.

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Here’s another look at the monthly chart of the S&P 500 plotted against its 20-month exponential moving average (EMA)…

If the S&P 500 is trading above the line, then stocks are in a bull market. If stocks are trading below the line, then the bear is in charge.

Stocks entered a bear market back in December. The S&P 500 declined for five straight months, and then put on a blistering two-month rally.

Today, the S&P is back up near the line. If history is any sort of a roadmap, then investors are in for a very long summer.

Take a look at what happened in the last bear market. Stocks broke down, rallied back up, and challenged the line… then cascaded lower again.

Get ready for the cascade.

Of course, stocks don’t go straight down. After such a nasty beating last week, stocks should enjoy a brief bounce higher early this week. In fact, the odds look pretty good that we may see the S&P rally back up and test the EMA at about 1,407.

At that point, though, traders ought to look at exiting long positions and adding on a few short sales.

Best regards and good trading,

Jeff Clark

Source: Warning: Trouble Ahead

Bloomberg reports that the S&P 500 has climbed 9.8% since reaching a 19-month low on March 10. And some Wall Street analysts, like Lehman Brothers Ian Scott, are predicting that better-than-expected earnings will pave the way for a bigger rally.

Eric Roseman thinks Ian and his Wall Street pals have it dead wrong.

“This is the biggest sucker’s rally since 2001,” says Eric in the Offshore A-Letter.

“This economic cycle marks the first time in the post-WW II period that inflation and deflation are running side by side. It is unprecedented. Consumers are spending less, losing their jobs and banks are denying credit. Also, soaring food and energy costs are killing consumers’ discretionary funds.

“Housing, however, is my primary concern. New home sales tanked 8.5% in March to their lowest levels since 1991. Housing shows absolutely no signs of bottoming. In my opinion, that’s the biggest deflationary tug on the economy.

“What we are seeing now is a long overdue bear market rally for stocks, including the homebuilders and REITs.”

“The problem with the recent shiny-happy talk,” says Justice Litle in Taipan Daily, “is that bear market rallies often last long enough to pull in the foolish or the over-eager… and then promptly fail when the max number of buyers have been roped in.

“That’s why, in an environment like this, it makes more sense to look at the big indexes with a skeptical trading eye, as opposed to a hopeful investing eye. I forget who said it first — maybe Jesse Livermore? — but it’s quite true that ‘hope is not a strategy.’”