Saturday, August 22

Weekly Update 22 August 2009

About That Bull Market...

Hello folks. I hope this note finds you well. I literally have too much news to summarize this week, so I am going to give you lots of appetizers instead of one big entree'. Here's the headline we will start with.

Housing Gooses Stock Market

WHAT IT IS: The market rose on Friday on news that sales of existing homes jumped at the fastest rate in 10 years.
WHAT IT MEANS: The WSJ article I linked here has a side-bar with this odd headline: "...But Prices are Still Falling..." They make it sound as if the link between falling prices and increasing sales is mysterious. Quick economics lesson: When prices are too high, buyers stay away. When prices come down far enough, buyers come back. It's that whole supply & demand thing. So what this story means is that housing is finally starting to get affordable.
WHY IT MATTERS: Well, here’s where it gets tricky. The perma-bulls, talking heads and government shills say that it means that the economy is stabilizing and things are looking up. But that is deceptive. For every positive sign the economy is stabilizing, there are hundreds that say we are not nearly through the storm yet.

This week I read an excellent analysis called "The New Bull Market Fallacy". It is a lengthy read, but well worth the time. Here are some juicy tidbits I pulled from it.

  • Wells Fargo, via their purchase of Wachovia, now holds about $115 billion in Option ARMs on their books. They are valuing this stuff at 85 cents on the dollar - a 15% mark down.
  • The Fed took a bunch of mortgages onto their books as collateral when they swapped Treasuries for Mortgages with the big banks. They took a 30%-40% markdown on the Maiden Lane properties.
  • JPMorgan-Chase has $90b of Option ARMs on their books.
  • Citibank is marking their residential and commercial real estate loans at 90% of loan value.
  • Housing prices nationwide have fallen an average of 50%.
  • The International Monetary Fund says that there will be $4.1 trillion in real estate related losses in 2010. So far, only $1t of that has been marked.
If Wells values their Option ARM portfolio at $115b after a 15% mark down, in reality it is probably worth something in the neighborhood of $67b. If that were the case, Wells Fargo would be insolvent under the banking rules prior to April 1st, but since the FASB changed the rules on that date, Wells gets to carry this stuff on their books at any value they want to, rather than at market value. Thus, they get to pretend to be solvent. Same situation with JPMorgan. Same with Citi and most of the other big banks that got all the government money are in the same situation. It is nothing but accounting tricks and collusion with regulators that keeps these giant banks afloat.

Here's Professor Elizabeth Warren explaining on MSNBC how the banks cheat.

23% of all single family home mortgages are greater than the value of the homes. Deutsche Bank analysts have predicted that such "underwater loans" could reach 48% of all mortgages by Q1 2011.

Finally, the "second wave" of mortgage resets - Option ARMs and Alt-A's - is scheduled to start in 2010. The dollar amount of mortgages scheduled to reset in this second wave is actually higher than the amount of resets during the sub-prime wave.

What are those banks gonna do then? We the people have already been soaked for well over $2 trillion because these vampire banks were supposedly "too big too fail". What happens next year when they are in even worse shape?

Oh, and the FDIC - which as recently as April said they'd need no more money - is bankrupt as of last Friday with the failure of Colonial Bank. Prior to the failure, they had $641m in assets. Colonial alone had over $2b in deposits which the FDIC had to cover. Betcha didn't hear about that on the news, did you?


The number of jobs lost in July was less than the rolling 3 month average, but the reason for the drop is that the number of people who have quit looking for a job increased dramatically. These people are not counted in the government's new unemployment statistics.


The federal government increased spending by 11% year over year in the second quarter. Many states are bankrupt. Tax receipts at the federal level are down 28% year over year, while the federal deficit has tripled.

Over the last several weeks, as the market makes new high after new high, insider selling outnumbers insider buying by about a 23:1 margin. In other words, the people who know what is coming are selling.

The S&P 500 as of the close Friday is valued at 143 times earnings. By comparison, the historical average of the S&P 500 runs about 15, so the S&P 500 is currently valued 10 times higher than its historical average. Is this supposed to be a bottom? Historical values for market bottoms run about 8 - 9 times earnings.

According to this chart, China is starting to divest themselves of US Treasury debt. Since they are the largest holder of US debt, if the US defaults, they have the most to lose. If the US economy is strong and growing, it's kinda stupid to divest themselves of treasuries.

By every possible definition, the stock market is once again a bubble. The government and the bankers, (**cough** Goldman-Sachs 8*cough**) have succeeded in creating yet another bubble. The 90s bubble was dot coms, the early 2000s was real estate, and this one is nothing but government money. It will end badly.

WHAT CAN YOU DO: This is important. If you are invested in the market, please please please protect your profits. That means put a Stop-Loss order into the market now. When the correction comes - and it WILL come - it will be mean, nasty, ugly and fast. A lot of people lost a lot of money last fall, and it will happen again - likely sooner rather than later. Don't get caught short.

WHAT ELSE CAN YOU DO: Save like crazy. Get out of debt. Don't buy on credit. All those things our grandparents learned in the 30s, we get to learn again.

Till next time...

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