Sunday, November 26, 2006

Currency Markets

The currency market senses the coming recession much faster than anything else. In spite of bullish technical patterns the dollar has decided to go down violently. A technical bull pattern can turn bearish very violently if the bases are taken out.

The coming waves of foreclosures and bankruptcies in the real estate markets is killing the dollar. Millions of properties are hanging there in the hands of so called ‘quick rich’ investors that have to finally declare bankruptcy and eventually the properties will be foreclosed. The effect on the banking system will be hundred times larger that the Saving and Loan scandal in late eighties.

The 4.5% yield in long bond rates (10 year note) with much higher short term rates is significant. It says some thing is happening in the economy that is not being reflected in the reports. It is the housing collapse and stagnating underemployment that is creating the real negative growth while the official reports show all green in the forefront.

The pattern shows, in each of these cases the housing market starts declining first, the stock market for months keep raising. The complacency increases, the money shifts from real estate to stocks. Then stocks start forming a parabolic top. Then finally stocks go down violently leading the bear market.

Friday, November 24, 2006

The US Dollar

Thursday the dollar got whacked overseas, and I mean whacked hard. Then, on Friday, the dollar plunged to a 19-month low against its competitor, the euro. The yen joined the parade, surging 0.65 along with the euro which was up a big 1.46 to close at 130.79. As if waiting for the dollar to sink, December gold closed up 10.00 to 639.00 -- in so doing, gold closed at its highest price since September. Dec. silver closed up a large 43 cents to 13.40.

Immediately, the smart boys come out with their explanations for the dollar's weakness. "Europe might be raising its interest rates, while the US may be lowering its rates." "Productivity in the US is slowing." "The war in Iraq is going badly." "Bush is useless, he's now a 'dead duck'."

Of course, it's just possible that the dollar turned weak because US deficits continue interminably. And no currency can hold up in the face of an economy that survives on borrowed money and debt.

Tuesday, November 21, 2006

The fed and housing

I don't care what the Fed does to "help" housing, the Fed can give money away, and the Fed can bring rates down to one percent again. But the Fed can't change the supply-demand situation in housing, and the Fed can't change the overvaluation equation. If housing inventory is too high, it's got to be worked off, and that takes time. If houses are too expensive, there's nothing the Fed can do about it, except make it easier for some fool to buy an overpriced house.

The Fed knows all about the housing situation. Every analyst and economist knows about the housing situation. If you can read a newspaper you know about the housing situation. What nobody knows with any certainty is how the housing situation is going to work itself out.

I believe in the regression to the mean. When any item, I don't care what the item is, becomes overpriced, then somewhere, ultimately, that item tends to regress to the mean, to its average price over a period of time. It's generally conceded that home prices are anywhere from 25% to 50% above their mean price of the last 25 years. Houses won't stay overpriced forever. Although home prices have been holding up fairly well so far, the bids have dried up. Furthermore, it's taking a lot longer time to sell a home. This suggests that home prices may be just beginning to regress towards the mean.

Monday, November 20, 2006

Housing: many years of decline

The stock and bond markets are fully aware of the housing situation. Then why aren't the markets worried? The housing decline could be slow and very extended rather than sharp and short. Thus, the decline in housing (think Japan) could take many years, with no single year being disastrous. Could this be what the market is "thinking"?

After all, volatility in almost every area is now low, low, low. Why couldn't volatility in housing also be LOW? Meaning, we could see years of gradually declining home prices with never a single disastrous year! Just a long, drawn-out bear market, a regression to the mean.

Any thoughts????

Sunday, November 19, 2006

Contra Costa: New Homes Prices **Down 20%**

Contra Costa County, where the price of a new home fell 20.5 percent from $717,000 to $570,000 between October 2005 and October 2006.

See good article: Sunday's SF Chronicle

Friday, November 17, 2006

San Diego: Crash index lowest since 1982

The Campbell Real Estate Timing Letter is written by the very knowledgeable Robert Campbell (858-481 3235). This is a very unusual real estate report since Campbell uses both a technical approach and well-researched fundamentals.

Robert really covers the San Diego area, but what he says about San Diego applies to all of Southern California. His "Real Estate Crash Index" is now down to a minus 60 reading, the lowest reading since his data was first made available back in 1982. The following areas are now deteriorating in San Diego -- existing home sales, new home building permits, notices of defaults, and foreclosure sales.

Campbell states, "The housing decline is in its early stages. Due to its powerful downward momentum, the decline is nowhere near its end." Campbell shows how and why this has been the biggest housing bubble in US post-war history, the bubble buildup extending from 1990 through to the present.

It's obvious that the stock market, so far, is not taking the bursting of the housing bubble seriously. And neither is the Fed. In fact, various Fed governors are still fretting about inflation and warning that higher interest rates may be needed to forestall inflation. My own take on the Fed is that there is slight to zero chance that the Fed will raise rates any further than the current 5.25%. The reason -- the Fed wants to avoid any further pressure on the deteriorating housing situation.

Home prices have not backed off very far except in isolated instances. What has happened is that bids have dried up. If you are serious about selling a house, you have to price that house about 25% under the prevailing market in your area. But in general, sellers are standing their ground and potential buyers are waiting -- and holding back on bids. It's a standoff with neither side conceding -- yet.

Thursday, November 16, 2006

Market thoughts

What's with housing? After all, almost every analyst agrees that if housing falls apart (the so-called "hard landing"), the US will sink into recession. So again, what's with housing? Studying all the major homebuilders charts, we note the initial collapse (which was really a crash) which took place from mid-January 2006 to mid-July 2006. Then we have the sideways movement into November. And most recently, a rally to the highest levels since the July lows.

How would I interpret this? First, the surest action in the stock market is the recovery (often as much as 50%) following a crash. The homebuilding stocks could be in that type of recovery situation. But beyond that, I believe the action of the homebuilders is telling us that if there's to be any real trouble in housing, it's probably won't occur until well into next year. In other words, if there's to be truly bad news in housing, it could be months or even a year or so away. I think that is what the stocks of Ryland and KB homes are telling us by their actions.

In the meantime, the stock market itself appears to be saying that it sees no immediate trouble. Yes, the dollar could be in trouble, yes, housing could be in trouble, yes, the US deficits are horrendous and the economy itself could be in trouble -- but NOT YET.

Consider this -- stocks are overvalued and the dividend yield on stocks (those that provide any dividends) are ridiculously low. The trend is up, and it will remain up until proved otherwise.

For months the talk has been ugly. Huge deficits, warnings from leading authorities, housing disaster in the making, consumers ready to cut back, the dollar on the edge of a cliff, an inverted yield curve, declining leading indicators -- yet the stock market was looking the other way. The obvious play, based on the warnings, was to short the market. But those who shorted the market had their heads handed to them. At the same time, tens of thousands of puts expired worthless.

Monday, November 13, 2006

Contra Costa Vacancy

I showed you the rise of the Rental Vacancy Rate from the low of around 8% in 1998 to above 10% in 2004. In a historic prospective, however, 8% was actually a high vacancy rate. Chart above shows that the rental vacancy rate was above 8% in 1965/1966, in the beginning of the Vietnam War. But, as this vacancy rate declined below 8% in the subsequent years, the median home price experienced its largest gains from 1968 to 1988. The median price of a single family home in California rose from $23,210 to $168,200, a total increase of 624% or 31.2% per annum. My concern here is that, rather than moving down, the vacancy rate is now rising to a historic high of around 10%. If history serves as a good learning lesson, where would the housing market go from here???

Friday, November 10, 2006

Contra Costa: expired listings a NEW HIGH

The number of expired listings made another new high in October. There were 2,204 property listings that didn't sell at the end of their listing contract periods.

Thursday, November 09, 2006

Housing thoughts

Housing is vastly overpriced. A house is fairly priced when you can buy a home, then rent it out and the rent will cover all costs including upkeep, damage, insurance and taxes. You can't do that today -- you can't even get close.

The housing boom topped around August 2005. Historically, it take about two years after a housing top before the big trouble hits. This suggest that we'll see the housing agony hit around mid-2007. The market should start discounting the housing situation fairly soon.

Wednesday, November 08, 2006

4 problems

The reign of Bush and the neo-cons is over. Today there is one less neo-con, Rumsfeld is gone. What turned the tide? Actually, it was the belated back-stiffening of the press. The newspapers, early on, were cowed by the Bush crowd. Later, Iraq, lies, and the administration's arrogance was too much for the press. The press regained its courage. With the recovery of courage by the press, the truth emerged, and the Bush people were doomed.

Economically, the big picture will now boil down to four phenomena: (1) Iraq, (2) the continuing massive US deficits, (3) the longer-term effects of the deteriorating housing picture, (4) the incredible disparity between Wall Street and the rich -- and the great mass of struggling Americans.

Iraq will be a continuing cancer. I have no idea how it will be resolved.

The deficits will probably be ignored despite much hand-wringing.

The housing situation (in my opinion) will deteriorate and become a huge problem.

The disparity between the rich and the poor will remain an unsolved cancer -- it will also be a source of anger on the part of most Americans.

The consensus continues to be that housing is due for a "soft landing." In my opinion, the soft landing is a fantasy. I think it will be well into next year before we know what kind of landing housing is headed for. I think it's going to be a very hard landing, one that will work a hardship on the entire nation.

Tuesday, November 07, 2006

Contra Costa Active Listings: Another new high

While the number of active listings continues its seasonal decline, the number of days these active listings stay on the market made another new high last week. This "higher high" technical formation confirms the continuation of the trend. This means that it's a statistical probability that active inventory is likely to stay on the market longer until this trend is reversed.

Sunday, November 05, 2006

Housing Psychology

Barry Schwartz, professor of psychology and economics at Swarthmore College, has studied housing physcology. For most people, he says, the joy felt when investments such as housing gain in value is greatly outweighed by the pain felt when those same investments lose money, even when the loss isn’t real at all.”

“‘If the baseline is their initial asking price, then people are consigned to misery,’ Schwartz says. ‘They will feel their loss on what’s probably the best single financial transaction of their lives.’”

“One huge issue that most sellers don’t pay attention to: New-home builders are exempt from such personal distress. ‘They have the ability to discount more than you do, They look at it more from a business sense, and it’s easy for them to cut prices because they’re not in love with their homes.’”

“‘The first and sharpest corrections are always in new homes, because existing homeowners have the option of waiting and they are wedded to the price their neighbors got. New homes have a high carrying cost and developers need to move that inventory.’”

From: Marin Housing Bubble Blog

Friday, November 03, 2006

Japan's housing market and Gold

The Japanese stock and real estate market topped out at the end of 1989. Japan's real estate declined for over ten years after that and wiped out $12 trillion in values. Japan fought the deflationary situation year after year. Japan brought their interest rates down to zero, and that still didn't halt their massive deflationary real estate decline.

Will our real estate picture be different? Richard Koo in his great book, "The Balance Sheet Recession," stated that to avoid the Japanese experience, the US must run massive and continuous government deficits and at the same time allow the dollar to decline in a major way.

Big deficits, a declining currency -- both of these are highly inflationary. And that was Japan's problem -- it couldn't produce inflation. Japan was in the grip of deflation year after year.

What about the US? Well, we certainly have the deficits. But the dollar continues to hold up. The fact is that to offset a deflationary housing situation, the US is going to need INFLATION. The Fed governors can warn and threaten and complain in public about inflation -- but the name of the game is going to be inflation -- or I should say, it better be inflation!

Is gold "just another commodity" as so many analysts claim?
Since September 2005 gold has outpaced the CRB Commodity Index. If gold was "just another commodity," why this superior action on the part of gold? The answer, of course, is that gold is unlike any other item -- gold is eternal wealth. There seems to be no way of getting that thesis into the heads of the anti-gold crowd. Maybe I should stop trying.

The Fed must inflate to ward off the deflationary effects of the housing slide. Gold is discounting the Fed's actions.

-- Stock Market down six days in a row -- most unusual. No huge decline on any one day, just deterioration. You'd think the market would be ready to put on some kind of a rally next week.

But we may not see a lot of anything until after the election. It seems to me that the declining market is discounting a Democrat victory, perhaps winning one or both houses. Of course, that would produce a stalemate, which the market would like. The less the pols can do, the better the stock market likes it.

Wednesday, November 01, 2006

Contra Costa: inventory numbers lower

As we're going through another 4th quarter seasonal inventory decline cycle, the inventory of all residential properties for sale in Alameda and Contra Costa counties fell to 13,380 units on Friday, from the record high of 14,503 units in September.