The end of a presidential election cycle typically leads to a quick upturn in the market, regardless of the winner. But this time itchy traders jumped the gun and bid the market up on election, sold it off the day after and the bounce is officially over.
We are now back to waiting on the only thing that really counts — economic data and the window it provides into the economy.
Right now, that window bears a strong resemblance to one in a jail cell. The economy — and eventually the market — is locked into behavior driven by three things: the housing crash, the credit crisis, and the evaporating consumer.
The Housing Crash
Every week or two, a new data point comes out and the pundits try to spin it — “home sales ONLY fell 11%” or “average home prices fell only 16.6 % year-over-year” or some such nonsense.
I don’t hate homebuilders, I have no axe to grind, but I passed third-grade math and eight-grade English, and here is what I see by reading financial and other documents:
Credit standards are tightening, mortgage interest rates are quite high compared to the past five years, and we have a dearth of real buyers. Inventory plus weak demand equals a continuing slide in home prices.
Instead of 2009 (when Wall Street is fantasizing about stability) or 2010 (when Fannie Mae (FNM) and Freddie Mac (FRE), those two paragons of analytical excellence), start thinking the second half of 2011 for stability and mid-2012 for a rise in prices.
The Credit Crisis
Resolved, you say? LIBOR coming down means it’s over? The Fed backstopping commercial paper markets will do the trick, you say? Don’t believe this nonsense. Here’s what I and a few others know and understand, unlike most members of the press and Congress.
Am I too bearish? Let me throw in some human behavior — I know, most people think payers in financial markets are prone to inhuman behavior, but bear with me (pardon the pun). The word credit comes from the Latin cred and credit, words meaning confidence and trust. You think we might have a bit if a shortage of trust and confidence right now? And maybe next year?
And let me throw in new government regulations that uber-analyst Meredith Whitney thinks cold reduce consumer credit card lines by 2 trillion bucks. You add it all up and what you get is a very impaired credit market — for consumers, businesses and even many nations — and credit is the lifeblood of everyone’s economy.
The Consumer
ChangeWave Research and third-party surveys show the consumer has gone on vacation in a used car badly in need if repairs. Spending has hit a wall and since our GDP is about 70% consumer, this is worse news than simply saying there may be a few less shops to peruse at the mall. I just looked at some MasterCard (MA) data for October and electronics were down 19%, home furnishings 21% and sales of anything more than $1,000! bucks d isappeared. And this will only get worse.
Playing the Un-Bounce
I like fundamentals — yeah, “momentum” trading is “sexy,” telling someone at a party you “read charts” is really cool — but fundamentals will always bring you victory and profits when combined with patience. And the way to play this lack of an Obama bounce is by playing (or should I say shorting?) the fundamentals.
Shorting? Yes, shorting.
When people ask me if I am comfortable with shorting stocks — I am … if it is done with put options. I think of a favorite quote from Winston Churchill. “We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.”
To my mind, short sellers are those at the ready; touts of stocks, long-only money mangers and pundits with no stake in the game like Cramer are those doing harm to our portfolios.
Which side do you want to be on?
You want to be on the short side — with the purchase of put options and ETFs, not the actual shorting of stocks. A! nd here is what you should consider right now:
Want to see my take on playing Obama’s first year in office? Check out my story, 7 Trades to Make After Election Day by clicking here.
Michael Shulman is the editor of ChangeWave Shorts. To learn more about him, read his bio here.
We are now back to waiting on the only thing that really counts — economic data and the window it provides into the economy.
Right now, that window bears a strong resemblance to one in a jail cell. The economy — and eventually the market — is locked into behavior driven by three things: the housing crash, the credit crisis, and the evaporating consumer.
The Housing Crash
Every week or two, a new data point comes out and the pundits try to spin it — “home sales ONLY fell 11%” or “average home prices fell only 16.6 % year-over-year” or some such nonsense.
I don’t hate homebuilders, I have no axe to grind, but I passed third-grade math and eight-grade English, and here is what I see by reading financial and other documents:
- Defaults of subprime and Alt-A (near-subprime) mortgage holders will peak in December, which means foreclosures from these mortgages peak in December. And just as this is happening …
- Defaults from option adjustable-rate mortgages (ARMs) — the funkiest of all funky mortgages — will accelerate. Wachovia (WB), now in the snug if increasingly shaky arms of Wells Fargo (WFC), already predicts 22% defaults — it will be far more due to the severity of the recession.
- The recession will cause its normal share of mortgage defaults and foreclosures. So, pile up all these new homes on the market — in addition to the historically high inventory — and you see home prices falling.
Credit standards are tightening, mortgage interest rates are quite high compared to the past five years, and we have a dearth of real buyers. Inventory plus weak demand equals a continuing slide in home prices.
Instead of 2009 (when Wall Street is fantasizing about stability) or 2010 (when Fannie Mae (FNM) and Freddie Mac (FRE), those two paragons of analytical excellence), start thinking the second half of 2011 for stability and mid-2012 for a rise in prices.
The Credit Crisis
Resolved, you say? LIBOR coming down means it’s over? The Fed backstopping commercial paper markets will do the trick, you say? Don’t believe this nonsense. Here’s what I and a few others know and understand, unlike most members of the press and Congress.
- When Bear Stearns (BS) took its curtain call, for every dollar in core capital or equity it had assets (loans and debt) of about $33-$35. Historically a bank — not an investment bank, a real bank with rude tellers — loans out about 11 to 12-to-1.
- We have since discovered many banks were actually much more leveraged than 11-12 to one by using “off balance sheet” entities called structured investment vehicles (SIVs) and variable interest entities (VIEs). We have also discovered the Europeans, especially the Germans, levered up as much as 50-to-1. Do I exaggerate? In a very short document filed with the SEC earlier this year, Citigroup (C) revealed it had something like $350 billion in derivatives in VIEs. Yes, billion with a “B.”
- We are now going back to leverage of 12 to 15-to-1. That means the amount of credit available would contract at least 50% even if there were no write downs of capital. Speaking of write downs …
- Banks have! written down around $700 billion, not all of it replaced by fresh capital. Jim Paulson (no relation to TARP man and Treasury Secretary Hank Paulson) made a few billion last year shorting subprime mortgages. Last week he made a speech and said he expects another $1.4 billion, which is $200 billion more than my own estimate. he Street is gong to be surprised as bank write downs continue apace and continuing problems in mortgages well past 20009 will make these surprises uglier and uglier.
Am I too bearish? Let me throw in some human behavior — I know, most people think payers in financial markets are prone to inhuman behavior, but bear with me (pardon the pun). The word credit comes from the Latin cred and credit, words meaning confidence and trust. You think we might have a bit if a shortage of trust and confidence right now? And maybe next year?
And let me throw in new government regulations that uber-analyst Meredith Whitney thinks cold reduce consumer credit card lines by 2 trillion bucks. You add it all up and what you get is a very impaired credit market — for consumers, businesses and even many nations — and credit is the lifeblood of everyone’s economy.
The Consumer
ChangeWave Research and third-party surveys show the consumer has gone on vacation in a used car badly in need if repairs. Spending has hit a wall and since our GDP is about 70% consumer, this is worse news than simply saying there may be a few less shops to peruse at the mall. I just looked at some MasterCard (MA) data for October and electronics were down 19%, home furnishings 21% and sales of anything more than $1,000! bucks d isappeared. And this will only get worse.
- The continuing decline in home prices — yes, there is a connection — makes people fell less wealthy, more nervous and more frugal.
- The recent sharp declines in the stock market — and the upcoming declines (I am giving away my ending, this is called foreshadowing) will also make people feel less wealthy and for many consumers, reduce their income.
- Speaking of reduced income — the recession is already going that and is going to hit much, much harder in the coming months. And as it hits, and spending contracts, the recession begins feeds itself.
Playing the Un-Bounce
I like fundamentals — yeah, “momentum” trading is “sexy,” telling someone at a party you “read charts” is really cool — but fundamentals will always bring you victory and profits when combined with patience. And the way to play this lack of an Obama bounce is by playing (or should I say shorting?) the fundamentals.
Shorting? Yes, shorting.
When people ask me if I am comfortable with shorting stocks — I am … if it is done with put options. I think of a favorite quote from Winston Churchill. “We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.”
To my mind, short sellers are those at the ready; touts of stocks, long-only money mangers and pundits with no stake in the game like Cramer are those doing harm to our portfolios.
Which side do you want to be on?
You want to be on the short side — with the purchase of put options and ETFs, not the actual shorting of stocks. A! nd here is what you should consider right now:
- The banks are broke and getting broker, held aloft by Uncle Sam’s greenbacks and the promise of more to come. Check out the UltraShort Financials ProShares (SKF) — the SKF is an exchange traded fund that goes up 2% every time the Dow Jones Financial Index goes down 1%. It trades like a stock, is very liquid, and if you postpone that trip to Las Vegas, you could gamble and take that poker money and look at calls on the SKF. A 2% drop in the financials can lead to a 4% pop in the ETF and a 50% pop in the calls. While you are having a cup of coffee.
- The homebuilders are already hiring lobbyists to get Obama to spend some dough and help people buy new homes. That is funny — with foreclosures accelerating as they are, and all sorts of other problems, bailing out homebuilders with funky new programs for home buyers is a laughable thought. His probable answer? “Ask not what your country can do for you, it is dead broke.”Here is the dirty little secret — the homebuilders are getting cash rebates from the IRS based on losses they declare in 2008. Well, that well will soon go dry and once this source of cash dries up, getting new credit lines is going to be harder and eventually one builder will blow up, go bankrupt and the entire sector will be cut in half. Among the dozen or so publicly held homebuilders, look for ones with weak balance sheets, big debts coming due in 2009 and exposure to sunbelt markets.
- Also look at the cousins of homebuilders — material suppliers such as Masco (MAS) and Louisiana Pacific (LPX).
- And, of course, the consumer. Joe the material boy and Jane the material girl are now going frugal. There are a myriad number of choices, but stick with the most discretionary of spending — restaurants, travel, leisure goods. The Las Vegas casinos have been whacked but may also be ripe for another leg down.
Want to see my take on playing Obama’s first year in office? Check out my story, 7 Trades to Make After Election Day by clicking here.
Michael Shulman is the editor of ChangeWave Shorts. To learn more about him, read his bio here.
