by Addison Wiggin & Ian Mathias
- Stocks stand still in August… Dan Amoss, Frank Holmes on the market’s next move
- Prime mortgage woes lead to record foreclosures… yet NAR says the worst is over?
- Chris Mayer with a simple solution to the banking crisis (and picking long-haul stocks)
- Plus, are credit card companies to blame? A reader and The 5 sound off
After a remarkable 51% rise, the S&P 500 has spent all of August wondering what to do next. There have been some sell-offs and rebounds, but essentially, stocks have taken the month off. See for yourself:
Since forecastin’ is our business, we’ll start today with the mother of all bar stool queries: Where’s the market heading?
“Consider the sentiment toward the overall market,” Dan Amoss suggests. “Aside from the investor sentiment polls, you can tell how bullish investors are by the multiples they are willing to pay for stocks. And right now, after the sharpest five-month rally since the 1930s, the market is trading at valuations that require a strong economic recovery and a return to credit bubble conditions. The rally was powered entirely by P/E multiple expansion, not earnings growth. That sort of rally would be justifiable if corporate revenues and earnings were about to soar, but they’re not. Most earnings surprises were due to cost cutting, rather than top-line growth, which is like burning your furniture to stay warm.
“The market is not even that cheap when you consider how artificially inflated earnings were at the 2007 peak. Financial earnings made up 18% of the S&P 500’s earnings in 2007 — much more if you add the ‘earnings’ from the finance divisions of industrial conglomerates like GE and GM. Any claims that the S&P 500 is cheap because 2007 somehow represents ‘normalized earnings power’ are bogus. The corporate profit margins and earnings won’t return to that level for many years.
“The talking heads are getting more creative in their rationale for owning stocks right now. Most money managers seem to be thinking: ‘I don’t believe in this rally, but I’ll ride it until it looks like it’s over, and then I’ll sell.’ This is the type of dangerous crowd psychology that consumes most people during bubbles. When enough investors share this Ponzi sentiment, and nobody’s investing on the basis of sober, rational fundamental analysis, the result is sometimes a crash.”
If a crash comes, will you be ready? We’ve been offering $1 trials of Dan’s Strategic Short Report all week. Monday at midnight, the deal’s off. So before it’s too late… click here for a month of Dan’s analysis, plus his latest financial short play, for just $1.
“If history is any guide, a correction is coming — but we’re not there yet,” adds Frank Holmes, always a crowd favorite at our annual Investment Symposium.
“Morgan Stanley recently evaluated the performance of 19 bear markets in different countries around the world. It’s a comprehensive list that includes the bear market in Switzerland during the 1960s, Japan in the 1990s and Australia in the 1980s, among others.
“What they found is that the median fall from a market’s peak is 56% and lasts 29 months. The S&P fell 58% over 18 months from its peak in October 2007.
“U.S. markets have rebounded roughly 51% in five months from March lows, but the median bear market rebound is 70% over 17 months. This suggests the market rally still has some legs.”
The Fed seems fully committed to keeping this rebound alive. The Fed announced today it is balance sheet expanded by $46 billion… just last week! In a quiet press release, the central bank showed its holdings of mortgage-backed securities rose to $609 billion, from $542 billion a week before. U.S. bond buying picked up too, up $8 billion, to $736 billion.
A record 4 million American mortgages were delinquent in the second quarter, a 44% rise from the same time last year. That means over 9% of all mortgages in the U.S. are — at best — 30 days late on a payment, says the Mortgage Bankers Association’s National Delinquency Survey, released yesterday.
That rate doesn’t include loans already in foreclosure… roughly 4% of all American mortgages (also a record) are in that mess. Thus, 13.16% of all mortgages are either past due or in foreclosure… no surprise, an MBA record.
Also, precisely as we warned earlier this month: "There was a major drop in foreclosures on subprime ARM loans," said the MBA statement. "The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase."
One in every three foreclosure starts in the second quarter was on a prime fixed-rate mortgage. Still think the worst of the housing bust is behind us?
“The housing market has decisively turned for the better,” National Association of Realtors chief economist Lawrence Yun declared today. This morning’s NAR report showed a 7.2% rise in July existing home sales. That’s the highest month-over-month move in 10 years, and at an annual clip of 5.24 million, the largest home sales rate in two years. Given those expectation-topping numbers, Yun — and the market in general — are celebrating a major housing victory today.
But as you’d guess, we’re hesitant to join the party. The fine print still looks ugly:
· Sales were driven by a crash in prices. The median fell 15% from last year, to $178,400
· Distressed sales accounted for 31% of July’s number
· The inventory of empty homes actually rose 7.3% in July, to 4.09 million. That’s a 9.4-month supply
Then consider the foreclosure stats from above… market manipulation from the Fed via Treasury and mortgage-backed security purchases… manipulation from the White House with that $8,000 tax credit. We don’t know. Seems premature.
Heh, and consider Mr. Yun’s forecast history. Here’s what he had to say in the exact same report this time last year: “We expect more balanced conditions in 2009 and will eventually return to normal long-term appreciation patterns.” He spearheaded the NAR’s projection that month for home prices to “increase 3-6% in 2009.” 14.5 million Americans are unemployed, and this guy still has a job?
As we forecast yesterday, the Obama administration will end the “cash for clunkers” program Monday at 8 p.m. EDT. After officially burning through $1.9 billion and selling over 457,000 cars, the government wants to end the program before it exceeds its $3 billion budget. Between the expected rush this weekend and a long backlog of dealer reimbursements, they shouldn’t have any trouble spending the rest by Monday.
"It’s been a thrill to be part of the best economic news story in America," Transportation Secretary Ray LaHood beamed. "Now we are working toward an orderly wind down of this very popular program."
Feeling sick to your stomach? Take a second… deep breaths. Think a happy thought, like this:
“I always wonder how things might’ve happened differently if the banks had more owners,” says Chris Mayer. “What if a family trust owned a third of the shares of Citigroup?
“One of the greatest stories in this vein is that of Beal Bank, a Plano, Texas, bank owned by Andy Beal. For three years, 2004-2007, Beal Bank practically ceased making loans. Beal actually shrank the bank’s assets because he thought the loan market would blow up. Beal Bank shrank from a $7 billion bank to a $3.7 billion bank. His bank pretty much did nothing while the credit boom raged on.
“He had to take a lot of flack while he was doing this. Credit ratings agencies said his business model was not sustainable. He had lots of critics among regulatory agencies who wanted him to join the party and start giving money away.
“But of course, in the aftermath of the credit debacle, Beal Bank had plenty of capital to invest. He’s been buying loans at deep discounts to face value, or par. As Beal says: ‘All these guys were stumbling over each other 18 months ago to pay over par,’ he says. ‘Now they can’t sell fast enough at a discount. Why do people not do the great deals and do all the stupid ones? It’s crazy.’
“Beal is an experienced banker. He’s been in the business for 20 years. His bank has been one of the most profitable in the country. In 2000, American Banker officially declared it so, as Beal Bank earned a five-year return on equity of 50%. And yet Beal did it safely…
“What’s the mystery here? Is Beal just smart or what? I think that is part of it. I also think there is an overlooked fact that is more important: Beal owns 100% of his bank.
“It’s one reason why I like to invest in companies in which the management team is a significant owner, or where there is some strong hand behind the scenes.”
We published Chris’ latest special report yesterday. Did you get a chance to check it out? If not, here’s how you can make 402% in a market you never knew existed.
The S&P 500 is up 1.5% as we write, driven mostly by that way-better-than-expected existing home sales report.
That’s giving commodities a nice kick in the pants. Already on the rise this week, oil added another buck, to $74 a barrel. Copper, essentially the world’s gauge of future growth, is up 3% to $2.84 a pound. Gold shot up $12 at the N.Y. open, to $955 an ounce.
With stocks and commodities up, it’s no surprise to see the dollar is down. The dollar index shed about half a point this morning, to 78.2.
“You have listed many of the reasons consumers are not buying,” a reader writes, “but seemed to have missed one very important factor: disgust with the way credit card companies are treating us…
“The credit card companies are responsible for their own problems, being exasperated by how they are treating their customers. They are raising interest rates for on-time paying customers. My credit limits have not been reduced, but I know of many others who had this happen to them. My attitude, and the attitude of many friends and, I suspect, many consumers is let the credit cards go to hell (belly-up land). I’m only using my credit cards when it’s convenient and I’m keeping the balance paid down because I don’t want to be ‘kicked in the gut’ with ridiculously high interest rates.
“In fact, the attitudes of the credit card companies (how they are treating their customers) has convinced me to change my way of doing business — permanently. I don’t want to be caught in another future predicament where they throw ALL their customers (not just the bad ones) against the wall, so I’m kicking them to the curb now!”
The 5: Our only real beef with credit card companies is their participation in the TARP. When the going got tough, companies like Discover, AmEx and Capital One scurried to Washington with their tin cups. Under the typical guise of “systemic risks,” the government obliged… lame.
But frankly, we don’t get the “consumer disgust” part. It’s hard to have too much sympathy for those who spent more than they could afford and were then “victimized” by the rate stipulations they agreed upon, just never took the time to comprehend. We like the push to take lawyer talk out of the agreements and simplify the fine print. But other than that — as with everything else in this crisis — where’s the personal accountability?
Have a nice weekend,
Ian Mathias
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