Monday, April 28, 2008

Is It Time?

Top Line: There are too many ways for the market to go down and not enough for it to go up so we are going to proceed with, or at least start, our selling/short program on Tuesday. We look back to the highs set last Thursday for a guide and see that Monday's highs (that would be today's highs for us) managed a look at the underside of them but didn't actually get there. This is a bearish sign and the market took it that way as it sold off the last half hour of the day. Plus, the FSI is giving us a nice overbought signal.

We may be a little early, like we usually are, but we want to re-deploy some funds into the strength we have seen over the past several sessions. The Dow has stayed under that 13K level and doesn't look like it has the umph to make it over any time soon. What have we got to look forward to this week? Well, that would be quite a bit...

First, we have the FOMC meeting this week starting on Tuesday with their announcement of nirvana on Wednesday. Nirvana is not attainable but the FOMC would have us believe that their rate cuts over the past several months will do the trick when it comes to the credit crisis. What they won't tell us is that their method will ultimately fail due to lack of funds.

The situation is that the housing bust is big enough to engulf the entire economy of the world. While that sounds like an overstatement, let's pare it down a little to make it reasonable for public consumption. Analysts have been telling us that housing will bottom "soon" and everyone should be ready to buy at cheap prices. That talk has subsided recently as more and more realistic news has found its way to the headlines.

We would like to mention just a few points in the article since they are important to note.

1. Number of people 'definitely' not buying over next two years surges to 60%; one in four homeowners fear drop in home values.

2. Fully one in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months.

3. "So the value of your house goes down temporarily," he said. Unless the homeowner must sell now or can't afford the payments, "that doesn't have that much of an impact."

The last statement is the one that indicates the underlying bullish tone we have been talking about in the markets, real estate and the stock market. So what if the value of your house goes down, it will go back up later so don't worry...unless you can't afford the payments. Unbelievable. The person that said this needs to read the Update to get an idea of what housing means to the world.

We start again...Housing has represented the most important force in the economy of the US from 9-11, about when we sold our house, to 2006. This force is the ultimate in credit creation especially when loans were made without any money down and prices were moving up. This sort of generates its own liquidity as prices always go up. Right??? Not if prices go down like they have been doing.

As prices go up, there are speculators that come in and buy houses just to "make money" and they didn't want to have to deal with loan documentation. After all, they weren't going to be holding the house very long, just long enough to sell if for more than they paid for it. This technique worked pretty well in the stock market for a while and then it worked well in the residential real estate market for a while, too. Now what???

What is happening now is that people are generally pulling in their horns and are being forced to live within their means. This is almost impossible for many. We saw another article that emphasizes this point. We print the first couple of paragraphs for your pleasure:

From CNN Money: Jason Liebrecht used to write about his motorcycle adventures on his blog. But since early this month, the 36-year-old San Diego computer software engineer's daily musings have been about a less thrilling new experience: unemployment."Do I find a job, or do I head to Central and South America on the motorcycle?" he wrote on Day 4. By Day 7, he had become more realistic: "So far in the last week I've made $1,245 off of EBay sales. Mostly stuff I wasn't using, or don't need much. Nice way to clean the house up!"After selling some stock and applying for unemployment, Liebrecht figures he can pay his $2,300-a-month mortgage and other bills for just two months. When his company health insurance runs out in a few weeks, he'll go uncovered because he can't afford the premiums."You have to just hope you land on your feet," Liebrecht said in an interview.

Reality strikes when credit cards are at their limit and you have sold everything you have on Ebay. This type of behavior in the general public will slow most economic activity and drag the recession into reality. Just take a look around at what your circle of friends are doing. The trend seems to be that the things associated with real estate extravaganza, such as getting loans for declining residential mortgages, are no longer "Cool". With gas prices and food prices up, people are starting to value conservation and reducing debt. These are the things that cause the economy to plunge. In the long run, if we can get this credit psychology changed, the economy will be able to come out better but we don't think that will matter in the short run.

So, engulf the world, yes, we think it will. No matter what the Fed says on Wednesday, the mood will Not change. Even if the Fed lowers rates again, people aren't going to go out and borrow money or the banks/lending institutions will make that activity more difficult.

FSI: 90.19 (hey, look here back in the 90s)

And, then, there is Uncle Jason...

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