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August 9, 2009
Issue 57  -  Stock Market Madness
 
The stock market has soared to a new high for the recovery but is it for real?  This week I want to explain how the stock market can move in a completely contrary way to reality.  When you step back from the propaganda about "green shoots" and examine what is REALLY happening in the economy, to bid up the stock market at this point seems like folly.  For instance, why didn't this get a lot of press on CNBC?:
 
 
"Planned layoffs accelerate again in July

NEW YORK (Reuters) - Planned layoffs at U.S. firms increased in July for the first time in six months, signaling more uneasy times for workers and a continued drag on consumer spending and the broader economy.

Planned job cuts announced by U.S. employers totaled 97,373 last month, up 31 percent from June when it had hit a 15-month low, according to a report released on Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

July's announced job cuts brought the total so far this year to 994,048, 72 percent higher than the same span in 2008.

Transportation companies announced the most layoffs in July with 27,954. They were followed by the telecommunication sector that laid off 17,601 workers, Challenger said.

"We are still a long way from a fully recovery," the firm's chief executive John Challenger said in a statement.

In fact, monthly job cuts will likely shoot above 100,000 again by the fourth quarter, he said.

While job prospects in the transportation and telecommunication industries worsened in July, layoffs in the battered auto sector slowed to 2,716, the lowest since June 2008, Challenger said.

So far in 2009, the auto industry has announced the most job cuts with 122,212, followed by the government sector which got rid of 109,433 jobs.

"Declining layoffs in the automotive industry may not be indicative of a turnaround," Challenger said.

Auto and car-part makers may have slowed their job cuts in hopes of building more "green" cars, he said.

On Monday, data showed U.S. vehicle sales rose to the highest level of 2009 in July, as Americans scrambled to take advantage of the government's $1 billion "Cash for Clunkers" program."
 
 
But wait, things are getting better, the president said so.  Remember there are two categories of politicians:  liars and those without an job.  Everyone of these idiots will lie, cheat and steal to get reelected.  They don't care about the truth, only what half truths will sound the best to the sheeple.  How about this one:
 
"U.S. CMBS delinquencies eclipse 3% in July

(The following statement was released by the ratings agency)

Aug 10 - U.S. CMBS loan delinquencies gained nearly a half-point to end the month of July at 3.04%, according to the latest delinquency index results from Fitch Ratings. At this current pace, Fitch anticipates the delinquency index to rise above 5% by year end.

Contributing to the rising number of past due loans is the current volume of performing specially serviced loans; the number of loans with low coverage that are depleting their reserves; and economic factors such as rising unemployment and lack of consumer spending, which will continue to impact commercial property fundamentals going forward.

'For the past several months, delinquencies have increased at a rate of over $2 billion per month; the 30-to-60 day rollover rate has consistently exceeded 50%, and resolutions from the index have been slow due to the lack of refinancings and dispositions,' said Mary MacNeill, Managing Director of Fitch's U.S. CMBS Group. 'If current trends continue, delinquencies are likely to pass 5% by the end of 2009, though the likelihood of large recent vintage proforma loans depleting their debt service reserves by year-end could drive the percentage of delinquent loans past 6% by first-quarter 2010.'... "
 
 
So if delinquencies are increasing and expected to keep increasing, how in the world is the recession over?   It's not, and won't be until the housing market improves.  If the delinquencies hit 6% do you really think things will be hunky dory next quarter?  I hope you're not that gullible.  But the banking sector is getting better, right?  Those stocks are up, so things are improving, no?  Maybe not:
 
  "U.S. regulators close 3 banks, total now 72

WASHINGTON (Reuters) - Bank regulators closed three banks on Friday, bringing the number of failures so far this year to 72 as the weakened economy takes its toll on the financial services sector.

The Federal Deposit Insurance Corp estimated the three closures would cost its deposit fund a total of about $185 million.

In 2008, 25 U.S. banks were seized by officials, up from only 3 in 2007.

During the current financial crisis, Seattle-based lender Washington Mutual became the biggest bank to fail in U.S. history. It was closed in September while suffering from losses from soured mortgages and liquidity problems…."
 
Things are NOT getting better.  They are slowing their decent and that is all.  If you fell off a cliff and were speeding toward the ground at 100 mph, would you feel better if you slowed to 80 mph?  Did things get better?  Would that be a green shoot?  Probably not.  I expect a major bank to fall before this thing is over perhaps Bank of America.  This might be the catalyst: 
 
 
About half of U.S. mortgages seen underwater by 2011
 
By Al Yoon

NEW YORK (Reuters) - The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said."
 
 
Half of all mortgages underwater.  That means that things will get WORSE until 2011.  So how are things getting better now?  They are not.  The rate of deterioration is slowing.  This is NOT a sign that things have "bottomed".  In fact, things are continuing to get worse, albeit it more slowly.  So why is the stock market up 50% since its lows?  This is a complicated topic.
 
First, remember that the volume of trades on Wall Street is dominated by institutions (hedge funds, investment banks and mutual funds).  Over 80% of all trades are done by these entities.  I would imagine that it may even be 90%.  They ARE the market.  Nothing you or I do really can affect the market.  These guys affect it ALL the time.  Big difference.  Now there is a new type of trading that is being done by these guys that is probably illegal.  It is called Flash trading:
 

Why the SEC Is Targeting Flash Trading

The crackdown on super-fast electronic trades may be SEC Chairwoman Mary Schapiro's bid to show the Obama Administration that the agency can still pack a punch

ByDavid Bogoslaw

Some observers see Securities & Exchange Commission Chairwoman Mary Schapiro's announcement on Aug. 4 that the SEC will seek to ban ultra-high-speed stock trades—which give institutional traders a big edge over retail investors—primarily as an issue of competition between traditional and alternative trading platforms.

But there's reason to believe the SEC's move is, at least in part, motivated by bureaucratic survival instinct. Schapiro's announcement came within a week of a private meeting on July 31 in which Treasury Secretary Timothy Geithner reportedly lambasted top regulators for their criticism of aspects of the Obama Administration's proposed overhaul of U.S. financial regulations. It may well be that, amid general resistance to cede some of their authority to a new consumer protection agency that President Obama wants to create, regulators such as Schapiro are eager to demonstrate their relevance and ability to get things done.

The ultra-high speed trades, known as flash orders, give a group of high-frequency traders a millisecond-ahead peek at buy or sell orders before they get routed to the entire market to be filled. The concern is that they give an unfair advantage to a only the handful of investors with access to the very expensive technology that allows this.

Until recently, Direct Edge ECNhad been one of just two electronic exchanges (the other is CBSX, the Chicago Board Options Exchange's stock market, which has very small daily volume) that offered flash orders. The Nasdaq Stock Market (NDAQ) and BATS Exchange started offering the feature in early June, but on Aug. 6 both exchanges said they will no longer offer them as of Sept. 1. BATS, in a July 7 newsletter, outlined possible inequities around the use of flash orders and said it would be willing to take part in an industry review of these issues before telling its customers and other trading community members in a separate letter at the end of July that it would support a ban on flash orders based on those rational concerns. Nasdaq Chief Executive Robert Greifeld, in a July 27 letter to Schapiro, cited concerns about the securities industry's apparent "willing[ness] to accept more and more 'darkness' and limits on the availability of order information," and had recommended eliminating any type of order or market structure that doesn't contribute to public price information and market transparency.


 Boy, that would be nice.  To be able to freeze the market for 1/2 of a second.  That sounds like a way to PRINT money, doesn't it?  It doesn't sound like a long time, but using computers to enter trades based on what is being seen at the bid and ask, when multiplied by thousands of shares is WILDLY profitable.  Hopefully this will be stopped.  What won't stop is there domination of the market.  
 
In the institutional field, everything is based on your bench mark.  This could be the SP 500 or the Wilshire 5000.  All performances are expressed in relation to the bench mark.  It doesn't really matter what the actual bench mark is, but how you are doing compared to the other funds.  If the bench mark is up 10% and your fund is down 5%, that is ok if the average fund is down similarly.  If, however, the other funds are mostly flat, than you are looking bad in comparison.  Notice the emphasis is not on ultimate performance, but on performance relativity.  
 
Now you may have heard on the CNBC or similar of the enormous amount of cash sitting on the sidelines which is just waiting to jump back into the market which will send it spiraling higher.  This is true, there is a large amount of money in low yielding instruments.  So as the stock market has increased, those funds with a large cash position are falling behind their competitors.  This puts incredible pressure on them to get back in the market, and that is what has been happening.
 
It doesn't really matter if the fundamentals are good or bad, they have to keep up with the Joneses.  If, at the end the year, they lag 15% to their peers, they could find their way out of a job.  As the market keeps going up higher, those who have been the most stubborn in reentering will finally capitulate and get back in.  This drives the market higher and higher.  Fundamentals be damned.
 
That's what has been happening lately.  The bear hold outs keep seeing the markets go higher and eventually they just can't take the pain anymore and they start buying.  Now these managers are not betting that the market will go higher, only that they don't want to fall further behind their peers.  This is cowardly investing at it's best.  In conclusion, this is not a good time to enter the stock market.  It's already up 50% from the lows and the risk to reward ratio is not in your favor.  If you are in the market, it would be a good time to start withdrawing to the sidelines.
 
A couple more things and I'll call it a day.  Did you see this: 
 
"Fannie Mae to Tap $10.7 Billion in Treasury Capital 

By Dawn Kopecki

Aug. 6 (Bloomberg) -- Fannie Mae, the mortgage-finance company taken over by the government, asked the U.S. Treasury for a $10.7 billion capital investment as an eighth straight quarterly loss drove its net worth below zero once again.

A second-quarter net lossof $14.8 billion, or $2.67 a share, pushed the company to request money for the third time from a $200 billion government lifeline, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Today’s results bring the company’s cumulative losses over the last two years to $101.6 billion and will bring its total draw on the Treasury to $44.9 billion since April.

The credit quality of loans and mortgage bonds that Fannie Mae owns or guarantees have deteriorated as a recession that began in December 2007 pushed more homeowners into foreclosure. A record 1.5 million U.S. propertiesreceived a default or auction notice or were seized in the first half of this year, 15 percent more than a year earlier, as employers cut jobs and temporary programs to assist homeowners came to an end, RealtyTrac Inc. said July 16.

Fannie Mae said it expects the quality of its assets to worsen further and to continue accumulating losses as it executes President Barack Obama’s efforts to modify or refinance loans for as many as nine million homeowners.

“We do not expect to operate profitably in the foreseeable future,” the company said in its filing. “We expect that we will experience adverse financial effects as we seek to fulfill our mission by concentrating our efforts on keeping people in their homes and preventing foreclosures.”

Fannie Mae and smaller competitor Freddie Mac, which own or guarantee almost half of U.S. residential mortgage debt, are integral to Obama’s plan to help homeowners. In February, the government doubled its emergency capital commitment for each company from $100 billion, which the Treasury makes through preferred stock purchases."
 
What's that saying about throwing good money after bad?  This is just a giant black hole for our money.  Fannie Mae and Freddie Mac should have been dissolved and disbanded.  They are both bankrupt and propping them up with tax payer dollars is not going to make them solvent.  Does anyone REALLY believe that after we give them this money, that they won't be back for more?  Whatever happened to the survival of the fittest?  Isn't that what this country was founded on?
 
A chart from Contrary Investor:
 
 
 
 What you see here is the percentage of GDP that the consumer (you and me) contributes.  If you look closely, since 2002 the percentage has been about 70%.  This means the business contributes 30%.  Since we are in a recession, one would think that the consumer would be spending less, and he is.  So why is the percentage going up?  Businesses are actually contracting their spending more.  This does not portend an imminent boom.  If a cash strapped, job losing consumer is contributing more to the economy than businesses, the corner has not been turned.  One more chart to show that things have changed drastically:
 
 
 
 
As I have written before, the United States is going through a change.  Consumption is falling and the mindset is changing.  This was inevitable.  A nation can't have a negative savings rate forever.  Prosperity is built on savings and capital investments, not debt and consumption.  As the U.S. works out of this we will settle in to a new "normal".  This normal will be at a much lower level of consumption than existed in 2000.  That's just the reality of things.  I would advise everyone to lower your expectations for the future of this country or prepare to be disappointed.  Have a great week!