That volatility seems like the only thing we can count on in this market. Those that had the Gamma, even if long, sure cleaned up yesterday. I guess that rally was just the “dead cat bounce”! However, my partner made an interesting observation – usually a “dead cat bounce” comes from over selling into the market –followed by a covering rally – he pointed out that with all this government interference and SEC short-selling ban maybe this is a government intervention bounce, maybe we should call it the Barney Frank bounce? Whatever the case – they are all pretty much the same thing – a rally not based on fundamentals and will usually fall right back down.
The big surprise yesterday was the housing price declines of over 2%. What surprised the analyst was that prices seemed to have flattened in harder hit areas – the shocker was areas that had NOT seen as severe price declines are now starting to see homes prices decline because properties are not moving. The drop of over 2% was more than double what analyst expectations were. However, for those like Kudlow who don’t believe in doing the math, the housing market is not that bad. I will leave you with this morning’s Krudload Quotable, “Average home prices have increased, don’t listen to the media!” – Don’t know where he got that info - unless he is only looking at new home sales which are only about 25% of the market – and that takes us to the next story (of course Kudlow will probably spin that as well).
It’s sad that we are on the same side (free market guys) sometimes it is better if he just doesn't open his mouth – I just think he might have been struck in the head a little too hard with something. At least he isn't Barney Frank.
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U.S. Foreclosures Double
Yesterday saw a larger than expected decrease in home prices just when we thought home prices might of found some stability. Well – I guess yesterday’s data on prices is confirmed by today’s foreclosures report. One in every 171 homes was foreclosed on or default notice. Which is an increase of 121% from a year earlier and a 14% increase from the 1st quarter of 2008.740,000 properties were in some state of foreclosure the most ever reported. It is obvious from this data, why yesterday’s home price decline report showed an increase. More foreclosures , means more property fore sale, means more pressure on prices – as there are fewer buyers. This is certainly creating a vicious cycle as even MORE homes are now at risk of foreclosure as non-foreclosed homes are rapidly losing equity as prices are forced further down.
To give a real example how bad prices are getting whacked – in my neighborhood homes on the water were going for $2-$4 million and just off the water prices started at $500,000. The only two homes that have sold in my neighborhood in the last year was one on the water for $750,000 (an REO listed at 60% below the 2007 assessment price) and one off the water for $316,000 (40% below the asking price). Now – a home just last week was listed at $198,000. No home has sold for under $200,000 in the hood in the last 15 years. I think that is a clear sign that we have a long way to go, $198,000 – I am still shaking my head. That home was bought in 2003 for $352,000 and was estimated in 2007 at close to $500,000. More houses in the hood are now listed as a short-sale or getting foreclosed on.
What does this mean – well consumers are still getting pinched and do not have money to tap in their homes. They have moved to credit cards – but now we are seeing a increase in defaults and late payments in credit cards. Increased in foreclosures push prices down on homes – and also equity down. Expect more homes to go underwater. That leaves more people that are current on their mortgages in a predicament – if they have an interest only loan and it is going upside down – we may see more people walk – and the cycle continues.
Until we see foreclosures slow down and home prices STOP from falling – we cannot expect to see a big rally in the market. 70% of the GDP is from consumer spending – and if there equity lines are tapped out and they are out of credit spending we will see the GDP shrink. That means a harder time business !
Of course you could decide to ignore the number and the math – Kudlow does a good job at that.
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Durable Goods orders unexpectedly increased
The durable goods orders increased which was rather surprising as most analyst expected companies to have tightened their spending and batten down the hatches. The .8% gain in the bookings for goods was significantly above the .3% drop that the median estimates from economist. However, if we peer into why this is happening we can see that there is some sectors doing well with their oversea sales because of the weak dollar. These companies, like CAT, are still purchasing strong to keep up with overseas demand. So the number is suspect because it does NOT reflect the economic landscape in this country is getting better, but rather that a couple of sectors are expanding their oversea sales and still ordering. That doesn’t mean that ALL manufacturing is doing well, just look at the auto industry and the recent report by Boeing – I don’t think you are going to see them expanding – they are shrinking.
Spot the worker in this photo!
If we look at the bigger picture – instead of pointing to this one piece of government data – the manufacturing sector as a whole is still under stress. This however does point to several companies that have expanded their multinational presence is surviving the economic storm. It means for investors – you need to do a little more homework picking your stocks rather than blanket buying the manufacturing sector.
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Honda - the Green Machine!
While the US automotive companies are on the brink of failure – it is the Honda and their expanding lines of fuel-efficient vehicles that are growing strong. Ford is late to the party and it will take a year to get their major truck factors to convert over to fuel-efficient smaller vehicles. But this is a good sign – it shows that companies that are positioned to sell hybrids and other type of alternative efficient vehicles are doing well. That leaves you with an interesting question – how would GM and Ford be looking if they had several years ago got on board with their own type of hybrid? However – it takes a long time to bring a car to market from the drawing board, I have read between 2-4 years. So is Kerkorian a fool or getting in at the bottom when Ford and/or GM start rolling out their hybrid or electric cars in 2010 or 2011 or 2012?
For now – GM and Ford have to many problems to see the light at the end of the tunnel. Buying stock now still has too many risks to wait until 2010 to see if they can even get in front of the eight ball. Kerkorian maybe just too early to the party.
Good news – is that a hybrid car business model does equal bigger profits. Just think about this – the 100s of millions of cars around the world at some point will all be running some type of alternative fuel, electric, hybrid, etc. That means the company that has made the move earlier with the biggest line to choose from will be ahead of the game – right now that is Honda, but if GM or Ford can get through their problems – there may be a light at the end of their tunnel. For me – I will watch on the sideline – my money can work a lot better somewhere else.
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Futures Pre-Market
We are seeing a boost in the pre-market from the durable good order increase, but I think once we absorb that data we will see that it is because a few sectors are carrying the load because of the weak dollar and their expansion overseas. Right the futures rally on optimism – the spreads are fairly narrow – so don’t expect Arb traders to get legged going into the opening – especially after yesterday – if the spread remains expect a small pop to the upside at the opening.
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Support / Resistance
Well it look like the 725 area was resistance and now the RUT is back to 700 and the INDU really didn’t have support at 11,500. Riding the Bull means you can also get tossed and HARD! Sorry longs !
INDU 11,000 / 11,500 (We might see support at 11,250. However this is clearly Gamma area. We could get back above the 11,500 line – but I would NOT call that support. I would also have gamma at 11,500 and probably lean short 2:1 (gamma/delta) at 11,500 – in case of a surprise rip to the upside you get flat fast and then decide.)
NDX 1800 / 1850 (Well 1850 was resistance and we seem to be range bound in July. A couple overweight’s have driven us both higher and lower – off-setting each other. It only takes one big mover to shake the crap out of this index.)
SPX >>1250<< (This is big straddle strike in the SPX – we will NOT sit here but move violently away from here either up or down. 1300 and 1200 are both in the cards – I would wager 60/40 downside – lean deltas accordingly with gamma.)
RUT 700/725 (Well it looks like we are back at the 700 level and while the futures show a positive in the pre-market – 700 could be tested, if it doesn’t hold expect a breakdown. Watch the close – 700 will either be the support or resistance. My thought is probably resistance again.) __________________________________________________
Conclusion
I watched the Congressional hearing on the dollar and oil prices yesterday, Ron Paul had a very important point (as did John Williams) – we are so focused on Oil prices – that we are NOT paying attention to the weak dollar. I think the Democrat Congressman would have had a point about the dollar has nothing to do with Oil prices – if Oil was the ONLY commodity that is on the rise and inflation was in check. But it is NOT just oil, but every commodity, food, and energy that is on the rise. The dollar is also falling against the world currencies. Since most commodities are priced in dollars (especially oil) to say that the Dollar’s strength has nothing to do with Oil prices – well that is rather foolish thinking.
Unfortunately – the only people that attended really was Ron Paul – Barney the head of the committee had someone sit in to ask the questions and didn’t really want to hear it. It’s too bad that people are not listening to these hearings. It is also upsetting that the FED stop tracking M3 a couple years ago, but economist John Williams still does (using Fed data). It’s up almost to 17%, the last time it was that high – well guess when – yeah 1930! The system is being FLOODED with cash – all you have to do is pick up the paper or watch TV to hear about all the borrowing at the discount window the bailouts etc. Where do you think that money is coming from? It’s call the printing press. The government is already having problem’s raising more money and Treasuries at these levels are NOT what foreign big money investors want. Ron Paul and John Williams are right – unless things change it is NOT the recession you should be concerned about it’s the possibility of a depression that is on the rise!
Ask yourself this question, why did the Government stop monitoring M3 (Money Supply)? Out of site out of mind and now look where we are!
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