Black Swan Insights

Weekend Reads and Audio

1. Fed's Bullard indicates QE 2 is on the way

2. China getting ready to surpass Japan as world's second largest economy

3. King World News Interview with Rick Rule (must hear interview)

4. Gold Seek Radio--Jim Rogers and James Turk

5. Dying of Money--Free Ebook

6. Nomura says Fed to begin QE "lite" in August

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Real Time Eurozone GDP Indicator Falls for 4th Consecutive Month

One of my favorite new economic indicators for the Eurozone is the EuroCoin indicator, which provides a real time gauge of GDP growth. While it is considered a coincident indicator, it acts as a leading indicator because it is released on a monthly basis as opposed to quarterly for GDP reports. In July GDP growth fell to 0.40%, which represents the fourth consecutive monthly decline. Here is the news release:

In July, the €-coin indicator declined moderately, but less than in the previous months, from 0.46% in June to 0.40%. The value of the indicator is consistent with the continuation of the cyclical expansion. The latest decline was due to the performance of financial and equity markets, while manufacturing activity and foreign trade continued to exert upward pressure.

At this time the indicator is not pointing to a double-dip, at least not yet. Overall, the indicator shows how weak the Euro-zone area is with almost no economic growth and trapped in a debt crisis. The only good news from the report is that manufacturing was strong thanks to an extremely weak Euro.

Black Swan Insights

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Another Confirmation Of A Slowing Economy-Trucking Activity Declines in June

The American Trucking Association's truck tonnage index fell 1.4% in June, which represented the first back to back monthly contraction since March and April of 2009. This number confirms what we saw in June with railroad carloadings. ATA economist Bob Costello noted:

that the two sequential decreases reflect an economy that is slowing. Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult.

The only question at this point is not if the economy slows, but by how much and if we face a double-dip. Personally I am in the double dip camp and expect it to occur between the 4th quarter of 2010 and the 1st quarter of 2011. The economy got a sugar high in 2009-early 2010 with the stimulus package and money printing by the Fed. These programs are over and the economy is still weak and vulnerable to external shocks (e.g. EU debt crisis).

Black Swan Insights

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The Federal Reserve's Plan To Destroy the Dollar

From time to time I visit the various Federal Reserve Bank websites to see what the Fed and their staff are up to. Well, today I went to the St. Louis Fed's website where there appeared a notice that they had published their monthly Monetary Trends report. The only reason I was intrigued was because the title was "Quantitative Easing: This wasn't the first time." In the report, the Fed outlines how they successfully debased the purchasing power of the US dollar between 1932-1936 courtesy of money printing and more importantly by gold revaluation. The reason I think this is important is because this is no doubt the Fed's current strategy to "save the economy." They rationalize their actions by arguing that the only way to solve America's debt crisis (real estate, consumer debt, and government debt) is to debase the dollar and cause inflation. Below are a few key excepts from the report.

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Jim Rogers calls CNBC a PR Agency while on CNBC program

In one of the more entertaining events recently, respected international investor Jim Rogers called CNBC nothing more than a PR Agency while he was being interview on CNBC. The revealing comment came after Rogers was asked about the European stress tests and whether they worked in calming market fears. Rogers said:

It is PR, they got the stocks up, that's the whole purpose of PR, make the stocks go higher. That's what CNBC and many many PR agencies are all about.

In response to these harsh words the female CNBC anchor tried to make a little humor by stating that Rogers' was being cheeky because he knows that CNBC only reports the news. Both the CNBC anchor and Rogers got a good laugh out of that comment!

Here is the full video below. The comment is around the 3:30 mark. You better check it out soon before CNBC takes the video down.

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Fed's Beige Book Shows Economy Slowing

The US Federal Reserve (AKA. The Bubble Factory) today released its beige book which details economic conditions within the Federal Reserve bank districts. The main take away from this report was that while economic activity increased for the period, the rate of growth slowed pointing to a weakening economy. From the report:

Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.

Surprisingly manufacturing did pretty well according to the report. It will be interesting to see if the trouble in the markets impacts future manufacturing activity considering there is usually a lag between the stock market and manufacturing. The Beige Book also outlined that consumer spending was relatively strong except for auto sales (consumers can't get enough of those Iphones, IPad's. etc):

Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest. Retail sales in the New York, Philadelphia, Minneapolis, and Kansas City Districts were higher than year-earlier sales, and Dallas reported solid gains. But sales in the Boston District were mixed compared with the previous year. Recent sales increased slightly in the Cleveland, Atlanta, Chicago, and San Francisco Districts; sales in the Richmond District weakened; and sales in the Kansas City District were flat compared with the previous report. Several Districts cited apparel, food, and other necessities as recent strong sellers, while big-ticket items were weak sellers. Contacts reported satisfactory inventory levels in the New York District, mixed inventory levels in the Boston District, and low or declining inventory levels in the Richmond, Atlanta, and Chicago Districts. The outlook for sales was mixed: Retailers in the Philadelphia, Cleveland, Kansas City, and Dallas Districts reported that they expect modest positive sales growth in the upcoming months; contacts in the Cleveland, Atlanta, and Chicago Districts reported a less optimistic outlook going forward than in the previous report; and retailers in the Boston District reported a cautious outlook.

The Districts that reported on auto sales during the early summer months generally noted a decrease in recent sales. Since the previous report, auto sales in the New York, Philadelphia, Cleveland, Richmond, Chicago, and San Francisco Districts declined, while auto sales in the Kansas City District increased and were unchanged in the Dallas District. Compared with last year, auto sales in the Atlanta and St. Louis Districts were higher. New York, Philadelphia, Cleveland, Chicago, Kansas City, and Dallas all reported that inventory levels were low or declining. Auto dealers anticipate little change in sales for the rest of 2010 in the Philadelphia District and expect sales to increase slowly in the Dallas District. Contacts in the Kansas City District expect continued strong demand, while those in the Cleveland District do not anticipate strong growth in the coming months.

The most important part of this report was the discussion on the real estate market and how it is holding up after the expiration of the egregious home buyer's tax credit. The answer is not good with declines reported in construction spending, housing starts, homes sales, etc. The report aslo mentioned the precarious situation of the commercial real estate marker:

Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents. Construction activity remained weak in most Districts. The New York District noted that commercial development remained generally sluggish despite some pickup in office and retail leasing in New York City. Atlanta, Minneapolis, and Dallas reported that construction activity continued to be weak or to decline, and Cleveland reported that the increase in construction from previous reports has begun to diminish. Philadelphia reported that projects funded with federal stimulus support were near completion with no prospects for additional major construction, while Chicago reported that public infrastructure construction picked up. Developers reported difficult credit conditions in the Cleveland, Richmond, St. Louis, and Kansas City Districts, while the Dallas District reported a few developers going out of business. The outlook for commercial and industrial real estate across the Districts ranged from further declines in activity to slow growth.

The Beige Book noted that loan volume at banks declined, especially for mortgage loans indicating that banks are still not lending to the real economy. Another problem was that loan demand was weak.

Most Districts reporting on credit standards continued to note that lending standards remain restrictive. New York reported tighter credit standards for all categories except consumer loans, while Kansas City reported tighter commercial lending standards. Reports on credit quality were mixed in Cleveland and Kansas City, while quality was stable in San Francisco. Credit quality improved slightly in Philadelphia, Richmond, and Chicago. In the Dallas District, nonperforming loans have stabilized and are not expected to worsen. Meanwhile, Philadelphia, Cleveland, and Richmond continued to report delinquencies above historic norms. Delinquency rates in the New York District decreased for consumer loans but experienced little or no change in other categories.

Overall there is not much news from this report from the Fed. The economy is expanding but the rate of growth is slowing quite a bit. The real estate market looks weak and is likely to double-dip without further government stimulus. Credit is hard to come by because the banks are more interested in borrowing from the Fed a 0% and buying 10 year US treasuries yielding 3-4%. It is hard to see how the economy can ever recover if this process keeps up.

Black Swan Insights

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Gold Breaks Trendline Support

Well the cartel was back today to hammer gold and force it below trend line support. This will likely force the momentum and technical funds out of the gold market. Why is gold down today? It is not entirely clear--EUR/USD is relatively flat along with the stock market. The only explanation is that fears of a Euro collapse are dissipating with the release of the (bogus) bank stress tests. A large reason for the run-up in gold was because Europeans (particularly Germans) feared a dissolution of the EU and were buying gold to protect themselves. It seems the bank stress tests results along with the bailout package for Greece have temporarily eased concerns (long term is a different story). Other explanations suggest gold options expiration is to blame for the decline. But all is not lost, the long-term trend is still up as long as gold stays above $780. I am happy gold is declining in the short-term. It is always interesting to watch people get depressed when gold goes down when they should rejoice as they can now purchase gold at a lower price. Yet people never think of it that way. If you are interested in accumulating gold this is a good thing for you. Personally, I am looking for gold to fall to around $1050 before I buy any more. My goal is to have around 25% of my portfolio in gold bullion (right now I only have 5%). If the Fed keeps printing money that may eventually rise to 100%.

Black Swan Insights

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Elite Bankers Preparing for Hyperinflation-Evans-Pritchard

Ambrose Evans-Pritchard has written a very illuminating article titled "The Death of Paper Money" which discusses how the social fabric of society is destroyed by hyperinflation. He notes that bankers around the world are currently reading a book called Dying of Money: Lessons of the Great German and American Inflations to educate themselves on the mechanics of hyperinflation. Evans-Pritchard goes on to describe some of the conclusions reached in the book as to what sparked hyperinflation in the Weimar Republic:

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

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WikiLeaks Does It Again--Releases 91,000 Classified Military Documents About Afghan War

Hat tip to WikiLeaks.org who has outdone themselves once again by obtaining 91,000 documents concerning the Afghan War and what is really going on. The US government has lied about the number of civilians killed during air strikes and according to the leaked documents the war is a lost cause. The Taliban is increasing its attacks and is likely working with members of Pakistani Intelligence. The website gave the information to the New York Times and London Guardian to review. Here is the Guardian's review of these unbelievable documents. Below is analysis from Channel 4 news who looked through the documents and computed the death toll.

The classified reports contain detailed logs of fatalities - both military and civilian.

Here is the breakdown:

Enemy killed: 15,506

Civilians killed: 4,232

Afghan Army (ANA) killed: 3,819

Nato forces killed: 1,138

If you think that the revelation of these incriminating documents would do anything to change US government strategy in Afghanistan you would be mistaken. The Whitehouse came out late today with a statement condemning WikiLeaks for releasing these documents and noted:

These irresponsible leaks will not impact our ongoing commitment to deepen our partnerships with Afghanistan and Pakistan; to defeat our common enemies; and to support the aspirations of the Afghan and Pakistani people.

You bet we are staying in Afghanistan--and for a long time. There is too much money to be made through opium trafficking!

Black Swan Insights

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Fannie Mae Lowers Economic and Housing Forecasts--Cites Economic Reality

You know economic conditions must be really bad when government run agencies like Fannie Mae are forced to revise down their economic forecasts. It seems even they could not stomach the government's propaganda about a recovering economy, green shoots, blah blah blah. In a sobering does of reality, Fannie Mae's July report opens up and tells it like it is:

U.S. economic data over the past month have generally been downbeat, with a barrage of dismal news on housing and consumer fundamentals calling into question the durability of the U.S. recovery. Consumer confidence has moved lower, reversing its gradual uptrend. Leading indicators of housing activity suggest that a pullback in home sales in the third quarter will likely be more significant than we initially anticipated. Most importantly, private payroll gains have weakened in recent months. While we had anticipated a slowdown in economic growth in the second half of the year (as the impacts of inventory building and fiscal stimulus wane), we now believe growth will slow by more than we previously projected. For all of 2010, we have revised lower our projected growth by four-tenths of a percentage point to 2.8 percent, and we remain on guard for a setback amid increased uncertainty and downside risks.

I wonder if the White House is going to incorporate this in to their "we saved the economy" pitch ahead of the November elections. It seems like all of the stimulus packages and money printing did nothing to help the real economy. It only enriched the Wall Street banks who were happy to borrow from the FED at 0% and buy anything with a positive yield. Then they use the profits to pay billion dollar bonuses to their employees. According to the Fed and the White house this should help the economy, but the truth is that the banks are the only ones who have profited. Another interesting part of Fannie Mae's July report is the discussion on housing which says:

The near-term outlook for the housing market looks bleak, according to leading indicators. Since the end of April, mortgage applications have fallen by over 40 percent, reaching the lowest levels seen since early 1997. Pending home sales, which are recorded at contract signings, posted a 30 percent drop in May to the lowest level on record. Given recent developments in the housing and labor markets, we have increased substantially our projected pullback of home sales in the third quarter and reduced our assessment for a rebound in the fourth quarter

Fannie Mae goes on to note that the only way the housing market will ever recover is if employment improves which according to the Federal Reserve will not happen anytime soon. Fannie also goes on to say that:

another significant factor that will keep the turnover rate of homes for years to come below the levels seen prior to the housing bust is the number of homeowners whose mortgages are significantly underwater. Borrowers with a mortgage loan-to-value (LTV) of 125 percent or more totaled nearly five million in the first quarter of 2010, according to First American CoreLogic. These homeowners are unlikely to prepay their mortgages regardless of how attractive mortgage rates are. This also has a negative implication for the outlook of the labor market, as it is an obstacle for skilled workers to relocate because they cannot afford to take losses on their homes.

I don't blame people who stopped paying their mortgage because they were severely underwater. The only alternative is to become a slave to the banks for the rest of your life by paying a mortgage that is more than the value of your home. Who the hell wants to do that? And before I hear the argument that you have a responsibility as a borrower and an obligation, lets remember that the banks stole $800 billion cash + trillions in government backstops (10T?) and liquidity facilities all while paying themselves billions in bonuses. I would rather hold these banks responsible than foolish, stupid, and sometimes criminal people who took out mortgages they could not afford. This is not to say that I would assist these people in any way. The law is pretty simple--if you default on your mortgage the bank gets your home (assuming this is a non-recourse state). The banks knew the risks and took them. No one should get an illegal taxpayer bailout. The current situation of 5 million people who are underwater should but a lid on the housing market for a long time. Obama can try all of the failed mortgage restructuring ,which does nothing to solve the problem because it does not reduce principal. All these programs do is lower the monthly payment for a few years. The housing market is going to take a minimum of 3-5 more years to gradually settle out and reach a proper clearing level. This of course assumes the government does not invent another scheme to "keep people in their homes." These programs simply delay the inevitable. If people cannot afford their home they have no right to be living in it! So the next time you hear some propaganda agent tell you the housing market is recovering you will know better.

Black Swan Insights

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Stress Test Is Really No Stress for Euro Banks

The Committee of European Banking Supervisors announced their much anticipated stress test results of 91 major EU banks. As we discussed earlier the test was set up so that almost every bank could pass it and they did. The result was that out of 91 banks tested, all but seven (Hypo of German, Agriculture Bank of Greece, and the 5 Spanish cajas) passed with flying colors (even the Irish banks). This farce seems to have worked for US markets with the Dow up around .5% at the time of this writing. I have read the 55 page summary of the stress test results and have listed a few important facts:

The stress test focuses mainly on credit and market risks, including the exposures to European sovereign debt. The focus of the stress test is on capital adequacy; liquidity risks were not directly stress tested.

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The Gold/Silver Ratio--Silver Is Not Cheap

You often hear proponents of silver argue that silver makes a great investment right now because it is cheap compared to gold. The argument goes that since there is approx. 15 times the amount of silver in the earth as compared to gold, than the price ratio between the two should be roughly 15-1 gold to silver. Following this logic silver does appear cheap considering the ratio is currently around 65-1. However, it is not a good idea to make an investment in silver based on this mythical ratio. Why? The ratio has never been followed at least by the market. If you look at a long term gold/silver ratio you will notice that the ratio has never been 15-1. At best it has gotten to around 20-1 and that was only twice in the last 110 years. On average the ratio between gold and silver is about 40-1 and trying to make trades based on this ratio have not proved successful. The only way to trade the spread is to take advantage of truly egregious spreads between the two (around 80-1 or more) and buy silver and short gold. Other than that you are wasting your time with this ratio because it means nothing in the real world. The reason the ratio ever existed was because the US had a bi-metallic monetary standard up until 1873. During this period the US government fixed the price of gold and silver and the ratio was around 15-1. It was only during this time did the ratio every have any real validity. Until the day we return to a bi-metallic standard, the gold/silver ratio will never be 15-1.

Black Swan Insights

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Update On Anthony Ward's Cocoa Corner

Well it has been four trading days since news leaked about Anthony Ward's attempt to corner the cocoa market and so far things have not worked out well for the hedge fund manager. The price of cocoa has fallen for 4 consecutive days for a total decline of around 7%. This adds up to a loss of over 40 million pounds for Mr. Ward and company. The reason given for the sharp decline is hedge funds liquidating their long positions and I imagine initiating short positions. As we have speculated earlier, Ward made a mistake letting the news of his large purchase leak out because it would encourage other hedge funds to target his position. This seems to be occurring right now and would account for the large decline in cocoa prices. Is Mr. Ward in trouble yet? It is difficult to say and depends on the leverage he is using for his speculation. Usually commodity speculators use quite a bit of leverage which often leads to their demise, but Mr. Ward is a real professional--he used to trade for the commodity trading firm Phibro and is an expert in the cocoa market. It will be interesting to see how this saga plays out.

Black Swan Insights

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Go East, Young Man; It's a Changing World

If you have been following the market over the last year, you have noticed the glaring dichotomy between the rebound in corporate earnings and continued sluggishness in the US economy. It seems almost impossible for companies to be doing so well when there is 10% unemployment, a housing depression, and debt deleveraging in all aspects of the economy. Yet with all of these headwinds, corporate earnings are strong and growing. Why?

S&P 500 earnings are no longer as reliant as they once were on US profits. In fact, 30% of total sales are coming from outside of the US, and in some instances (top 50 largest companies in the S&P 500) the number is around 50%. So in many respects S&P earnings are no longer a great gauge of how the US economy is doing. It is more of an indicator of how the world economy is faring. This situation is masking how truly weak the US is, while revealing how well emerging economies and Asia are doing. As we have discussed on this blog before, through economic data such as railroad carloadings in the US and port volume in Asia, the US economy never recovered from the financial crisis. At best, we can say the US economy stabilized at a permanently lower level of economic activity. However, the crisis proved to translate into only a minor panic in Asia (ex-Japan); other emerging markets almost instantly recovered and never looked back. You can clearly see this in the GDP numbers from Brazil, China, Taiwan, Singapore.

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The Future According to Intrade--the prediction market

Have you ever wanted to know the outcome of a future event? Of course you have, but you know that it is impossible because you are not clairvoyant. Well meet the next best thing--the market. Intrade is a interesting site that makes a market in future events--political, economic, social ,etc by allowing users to bet on future outcomes. As it turns out the market is surprisingly accurate and can give you a leg up 3-5 months before the actual event happens. I always like to keep an eye on what Intrade is thinking. Here are some future outcomes predicted by the Intrade market:

BP

will not go bankrupt by Dec 2011 (only 10% chance)
CEO Tony Hayward will depart by Dec 31, 2010 (90% chance)

US November Elections

Republicans will take control of the House of Representatives by a slim margin (very close--only 54% chance)
Democrats will hold on to their Senate Majority by a small amount (72%)

Climate, and Cap and Trade Legislation

little chance of the US Congress passing a climate bill by Dec 31, 2010 (only 20%)
average global temperatures will increase in 2010 compared to 2009 (quite high conviction 90%)
the US will have at least 1 Category 3 hurricane make landfall before Nov 30, 2010 (70%)

Middle East Politics/War On Terror

the US/and or Israel will not strike Iran by Dec 31, 2011 (only 20% chance)
almost zero chance the US will capture Bin Laden by Dec 2011 (only 7%)
contrary to what Obama says the US will still have prisoners in Guantanamo Bay by Dec 2011 (only 15% say all prisoners will be gone)

Sarah Palin

unfortunately Intrade is predicting that Sarah Palin (bimbo) will announce she is running for President (65% chance)
but she will not win the Republican nomination--only a 22% chance (thank god)

Well there you have it, the future according to Intrade. Will the market be correct?

Black Swan Insights

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A glimpse into Europe's Bank Stress Test Scenarios

Bloomberg has an article which outlines the the 3 scenarios involved in the European bank stress tests, which are looking more and more like a complete sham. The scenarios will simulate banks 2011 tier 1 capital assuming a yet undisclosed benchmark scenario, an adverse(recession), and a "sovereign shock," but not a sovereign default which kind of defeats the purpose. After all the threat to the European banks is not losses on corporate and real estate debt (just lie about that), but a default by Greece, Ireland, Spain, Portugal, and most of eastern Europe. But of course these stress tests are meant to be easy as possible for the banks to pass so that Europe can claim they have a "strong and healthy" banking system. The article goes on to state how the banks will have to account for sovereign debt losses:

Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.

No problem here for the major European banks--just transfer all of your sovereign debt into your banking book and repeat the EU's proclamation that no European country will ever default. So in the case of Greece you simply take a 1-2% haircut even though those 4% 10 year bonds you bought in 2008 are now yielding 10%. Under the EU's worst case sovereign shock scenario banks would have to:

assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.

The real question is whether this charade will be enough to fool the market as it did in the US. Remember how American banks magically went from bankrupt institutions (in Fed-March 2009) to superior companies which were able to raise 100's of billions in new capital (by June-July 2009). We shall see.

Black Swan Insights

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Eric Sprott on King World News

Hat tip to King World News for again delivering another insightful interview with Eric Sprott, of Sprott Asset Management. He has an excellent track record of navigating the markets and the economy. He is a highly respected financier who does what financiers used to do--provide capital for new and emerging companies to grow, create jobs, and benefit society. Unlike today where financiers have become parasitic viruses who steal money from the real economy and threaten the world's financial system. In the King World News interview Sprott discusses everything from failed bailouts, QE 2, insolvent German banks, gold, and more. Of note Sprott says that QE 2 might already be occurring through a backdoor arrangement between the Fed and the banks. Fed lends banks money at 0% and and the banks buy treasuries at 3-4%. Sprott also sees the economy falling off a cliff and that QE 2 from the Fed will not work this time. The bond market will not get fooled again. Finally, Sprott says there is a possibility for hyperinflation which makes gold a must own asset.

Here is the link for the entire interview.

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Crazy Day so Far in the Market

    Today's market action shows how schizophrenic the market is acting. We get the 1% gap down at the open due to poor earnings from IBM, AK Steel, and others. Economic news this morning was not positive with new housing starts missing expectations. A rational person would assume that the market would decline, but you would be wrong because the only thing that matters is what the computers think (yes with neural networks they can now think for themselves). The market has staged an impressive intra-day rally so far with the major indexes up .3-.5%. Not bad, but we are still below the 200 DMA which is a good marker of whether we are in a bull or bear market. The market environment remains challenging. There is no trend, just wild fluctuations up and down dictated by computer algorithms.

    Does anyone have a problem with the fact that we no longer have a market made up of people? Computers dominate the entire market and account for up to 70% of total volume. You could walk into work in the morning and see the market down 6,000 points on the Dow. CNBC tells you that the reason for the decline was because the computer algorithms decided the US was going to have a depression. What are you supposed to say? Well I guess those computers are smarter than people so let's have a economic depression, after all they have been back-tested thousands of times by Ph.D's and are correct 99.999% of the time.

    Anyway, the big news after the bell will be Apple's earnings which will have a huge impact on the markets tomorrow considering Apple makes up almost 20% of the QQQ's.

   On a side not cocoa prices are down again-good luck Anthony Ward.

Black Swan Insights

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Cocoa Market Cornered by Anthony Ward

Boy, it sures takes you back to the old days of Wall Street when audacious speculators would attempt to corner a commodity. In those good old days, they lost and were ruined as a result of their temerity. Well, news leaked out over the weekend that British hedge fund manager Anthony Ward has tried to corner the cocoa market by taking delivery of 240,000 metric tons, which is the equivalent to 7% of world cocoa production. The obvious goal is to create an artificial supply shortage of cocoa in Europe and force prices higher. It should be remembered that Mr. Ward is not some dilettante rogue speculator; he has a very successful history of trading cocoa and other soft commodities. He also has fundamentals on his side due to poor cocoa crops in the Ivory Coast. Furthermore, warehouses stocks are very low. I would also argue that he is acting in collusion with other entities--be it hedge funds or otherwise. Cornering a commodity takes a lot of money and more importantly strong financial backers who are willing to see the operation through to its resolution.

However, Mr. Ward and company made a serious mistake by allowing word to leak about the operation. Rule #1 when it comes to market manipulation is secrecy. If rumors of your operations become known, the market will start to turn against you. Hedge funds in particular will start shorting cocoa because they know that if they can force heavy losses for Anthony Ward, at a certain point, he will be forced to sell his entire position for a steep loss. This will in turn cause cocoa prices to plummet as everyone tries to get out ahead of Ward and company. We might already be seeing this happen considering today's action in the cocoa market. Cocoa prices are down 5% as the market digests this recent news. It seems the market is going against Mr. Ward. Will this end well for Mr. Ward? We don't know yet, but if history is any guide, it probably won't.

Black Swan Insights

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Corporate Governance: What a Joke

If it seems to you that it is just too easy for corporate executives to openly loot a corporation without suffering any repercussions, you are not alone. It is. Corporate executives within the Fortune 500 have free reign to steal as much money as they want through egregious pay packages, corporate perks, and dilutive stock options. It seems that the deck is stacked against the individual investor as corporate executives put their own financial well being ahead of shareholders. Sarbanes-Oxley was supposed to stop corporate fraud, but, unfortunately, the most nefarious corporate activities are considered legal. That's right: It is perfectly legal to loot a corporation for a few hundred million dollars as long as you get the BOD's approval (just make sure to disclose it in the 10k). The problem is that while there is great emphasis put on the concept of corporate governance, it is only a myth and does not really exist in practice.

It never used to be as bad as it today when it comes to executive theft and corruption. In a time not long ago corporate executives used to be accountable to the stockholders. They were always paid well (but no more than 20 times the average wage of a worker) for their services and respected by society. The difference back then was that the board of directors were completely independent of management and usually represented the company's largest stockholders and creditors. These people did not simply rubber stamp what management put in front of them. They looked out mainly for their own interests, which, in turn, resulted in what was best for the corporation. Why? Because it was their money at stake. Today the board of directors are nothing more than a bunch of paid fraudsters who work for management. They care nothing for the company or its shareholders and have absolutely no financial interest in the company. The only thing they are concerned about is appeasing management so that they get their $80-100,000 salary and stock options. They owe their position to management, which is allowed to nominate a slate of directors who will never disagree or challenge management in any way. It is great deal for management--install your best friends as board members and get them to pay you hundreds of millions + stock options. Whether the company does well or not, you make out like a king and retire in five years.

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Marc Faber Predicts more Money Printing by October 2010

Marc Faber was interviewed on Bloomberg yesterday and predicted that due to weakness in the economy, the Federal Reserve would begin a new round of Quantitative Easing (money printing) by October 2010 to prevent deflation. His outlook for the economy is not positive.

Here is a link to the video: Click Here

If Faber is correct and the Fed prints $2-3 trillion more this wold be a boon to gold and other hard assets. However this money printing will eventually lead to hyperinflation despite what the deflationists say. I think history is pretty clear that the Federal Reserve will never allow deflation even though it is a natural part of the credit cycle.

Black Swan Insights

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Another takedown of Gold

Like clockwork Gold gets hit in the NY session. This pattern is too regular to be just another random occurrence. I am starting to think that a great trade in Gold is to short the futures at around 7:00-8:00 am eastern standard time and cover for a large gain by 10-11. As I have previously discussed, Gold has a routine trading pattern throughout the day that defies belief. It rises in Asia, flattens in Europe, and gets smacked in NY. This happens every day. It may be time to profit from this manipulation.

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GS gets away with Fraud thanks to the SEC

   Late today news broke that the SEC and GS have settled their civil fraud lawsuit one is left to wonder how far gone America is. We truly live in a fascist police state where justice is only for the billionaires and favored corporations (GS big contributor to Obama). We no longer have a real country--instead we are starting to resemble a banana republic where corrupt oligarchs openly loot and pillage the country. They are above the law and can do as they please. All it takes is $550 million which is nothing to GS, which steals billions through their High-Frequency trading programs(which win 95% of the time). Not bad, if your are Loyd Blankfein and company because it is simply a small cost of doing business.

     Some apologetics have argued that Goldman was not guilty of fraud. That is complete nonsense. I have a background in accounting and have found the exact definition of fraud from one of my old textbooks: the misrepresentation in or intentional omission from the financial statements, transactions, or other significant information. According to this definition GS is guilty as charged of committing fraud against investors who purchased notes related to the Abacus transaction. The synthetic CDO reference collateral was set up to fail by choosing mortgages most likely to default (sub prime mortgages from CA, AZ, and FL). The reason for this was so that Paulson & CO and GS could buy credit protection on the CDO tranches, which would profit if the CDO failed due to reduced cash flow from the mortgages. GS went around marketing the transaction as a great opportunity for investors because it would provide steady cash flow. Goldman Sachs intentionally mislead investors by failing to disclose that they were short the CDO notes through credit protection and that the CDO was set up so that Paulson could short the transaction (and Paulson only wanted the worst mortgages included in the transaction). This is fraud plain and simple. But the SEC is in bed with the Wall Street banks so you do not have to worry about pesky things like jail time or criminal charges. All the criminals have to do is pay a fine and admit no guilt. GS only acknowledged that they should have provided more information relating to how the collateral was chosen. That is it, they get to go free when top management should be in prison for the rest of their lives. Ah America the Great!!!! Now lets fight another freedom war in Iran. I am sure GS will be long oil options by mistake and make billions!!!

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China Reduces rare earth export quotas for second half 2010

China announced that it will reduce export quotas for rare earth's by 72% for the second half of 2010, indicating that Beijing wants to keep its production for domestic consumption. According to the Department of Commerce, shipments will be capped at 7,976 tons, down from 28,417 tons for the same period a year ago.

The only reason I bring this up is because it bodes well for one of my investments Stans Energy, which is bringing back a previously operated soviet era mine in Kyrgyzstan. If China were to completely restrict supply (which it is expected to do in the next few years) this would cause the price of rare earths to increase quite dramatically. This is because China accounts for 90% of rare earth production globally. The outlook for rare earths is looking up.

Black Swan Insights

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Singapore Port Volume Strong in June and up for the year

While economic growth is weak to non-existent in the US and EU, Asia has shown that it can grow on its own especially the city-state of Singapore. Singapore is a good representation of how Asia as a whole is doing because its economy is heavily dependent on trade and it operates the 2nd largest port in the world measured by TEUs. Recent port volume from Singapore indicates continued growth in June with total cargo reaching 41,969,000 million tonnes, which is an increase of just over 10% year over year. Furthermore 2010 year to date cargo volume is tracking well ahead of 2009 by about 8%, signaling that Singapore has so far escaped from the EU debt crisis and possible double dip in the US economy.

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US Weekly Rail Traffic Declines-AAR

A few days ago we looked at June rail traffic which showed a decline. Well the Association of American Railroads has just released their weekly report on US railroad carloads. The news was not positive with a 3.5% decline year over year for the current week ending July 10. The weak report was blamed on reduced shipments of coal, chemicals, and scrap materials. Eastern railroads were particularly hard hit reporting a decline in traffic of 5.7%. The AAR noted that the 4th of July holiday did not have an impact on results. While the the rail numbers were not very encouraging, intermodal shipments (trailers and containers) did increase 9.1% to 192,954 year over year.

Black Swan Insights

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Market Update

The market has failed near the 200 DMA, which would go along with the idea that we are indeed in a bear market and the 200 DMA is now resistance. So at this point I am looking to short select stocks with a perhaps 6% stop loss on any one individual position. Right now I am looking at shorting/purchasing puts (3-5 month duration) in FCX, X, POT, short oil (DTO), short AUD/JPY (the infamous carry trade). I am still long Africa Oil and Stans Energy which I consider call options. At this point I do not think we are going to have a crash in the market, but we are going to continue to decline to around 850-900 on the S&P.

Black Swan Insights

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Small business Optimism declines in June

The National Federation of Independent Businesses is out with their monthly optimism index, which fell 3.2 points in June indicating that small businesses are still under considerable strain. Unlike multinationals, small business cannot offset weakness in the US economy with growth from Asia or emerging markets. Thus, this is an important economic indicator that shows that the US economy remains weak at least for small businesses. From the chart below you can see that small businesses have a decisively negative outlook regarding the US economy and do not plan on expanding their operations in the near future.

The main reason cited for the reduced optimism was weak demand and a deflationary price environment. The FRIB noted that:

The weak economy continued to put downward pressure on prices.
Seasonally adjusted, the net percent of owners raising prices was a
negative 13 percent,a two point increase in the net percent raising prices. June is the 19th consecutive month in which more owners reported cutting average selling prices that raising them. Widespread price cutting contributes to the high percentage reporting declining sales revenues. Plans to raise prices fell three points to a net seasonally adjusted 11 percent of owners.

Since small businesses have had to lower prices, they face shrinking profit margins and revenues. Furthermore, small businesses cited the expiration of the Bush tax cuts and the recently enacted health care bill as reasons for the reduction in optimism. Another major factor was the fact that small firms have trouble getting credit to finance operations. This shows that there is a dichotomy between large and small businesses when it comes to accessing credit. A full 30% of small businesses noted that it was hard to obtain credit in June.

In conclusion, small businesses are not benefiting from the recent upturn in the economy, unlike their multinational peers. Weak overall demand is still widespread, which has forced price reductions and led to decreased optimism. I believe that small businesses are a better indicator of how the US economy is doing because they account for the majority of new job creation. With optimism as low as it is, don't expect small businesses to be hiring anytime soon. This does not bode well for future employment in the US.

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EuroCoin Indicator falls for third straight month in June

The Eurocoin indicator, which bills itself as the "Euro Area Economy in One Figure." reported a decline in Euro area GDP growth from 0.55% in May to just 0.46% in Jun. This marks the third consecutive monthly decline for the indicator. The Eurocoin claims to represent real time GDP data of the Euro-zone on a monthly basis. It seems the PIGS debt crisis has begun finally to take its toll on the larger EU economy. This little known indicator has a good track record as a leading economic indicator, which is consistently ahead of quarterly GDP reports. Their website explains how the methodology works:

€-coin collates a large collection of statistical data (industrial production, business surveys, stock market and financial data, demand indicators, and more) and extracts the information that is relevant to forecast GDP. It tracks underlying GDP growth, preceding official GDP releases by several months. Essentially, the index:

(i) gives a monthly “smoothed” estimate of quarter-on-quarter GDP growth in the euro area;

(ii) highlights the underlying trend by adjusting the growth rate for short-term fluctuations and measurement errors; that is, the index figure is an indicator of the euro area’s actual growth momentum.

I am surprised more people don't follow this helpful indicator.

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Port Volumes: Stormy Weather Ahead?

    Yesterday we took a look at railroad carloads which showed a weakening in June. Today let's consider port volume out of Los Angeles and Long Beach to see if they confirm the double dip scenario. In June the port of Los Angeles handled 730,317 TEUs (20 foot containers) compared to 551,679 TEUs last June, which is up 32% year over year. However, you can see in the chart below, the main growth was from inbound containers (imports) and empty containers, which increased 32% and 53% respectively. So we can see from the numbers that Americans are back to buying useless trinkets from Asia (the consumer is back?), and exports increased by 13%, which is positive. Note that total volume for the port's fiscal year (ends June 30) is 7.2 million TEUs, which is flat with last year's numbers, but port volume is still down from the high of 8.5 million reached back in 2006. Not exactly a sign of a healthy and growing economy.

June                                    2010               2009             Change         %Change

Loaded Inbound            371,888.60       281,175.05     90,713.55        32.26%
Loaded Outbound          154,558.00       137,214.40     17,343.60         12.64%
Total Loaded                 526,446.60       418,389.45     108,057.15       25.83%
Total Empty                   203,871.25       133,290.25      70,581.00        52.95%
Total                             730,317.85        551,679.70     178,638.15       32.38%

    Looking at the port of Long Beach you will see similar numbers across the board except for a smaller increase in outbound containers(only 1.8%) year over year in June. Long Beach's volume benefited from a surge in inbound containers and empty containers. According to the port, the reason for the increase in empty containers has to do with a shortage of containers in Asia as a result of higher import volumes. So these empty containers are returning to Asia again.

Port of Long Beach

                                               June                            Fiscal Year to Date

                                 2010       2009     %Change     2010       2009     %Change

Loaded Inbound      262,053   206,358   27.0%     2,088,297   1,915,664    9.0%
Loaded Outbound   116,112   114,107    1.8%      1,108,373    983,492      12.7%
Empties                  141,935    92,882     52.8%     965,723      1,016,513   -5.0%
TOTAL (T.E.U.)    520,100    413,347   25.8%     4,162,393   3,915,669    6.3%

    We can conclude from these numbers that yes, volumes have increased year over year (signaling a slight rebound in the economy), but volumes are still lower than the peak years of 2006 and 2007. It certainly does not indicate a V-shape recovery in the US economy, especially if you exclude empty containers from the numbers. These numbers largely correspond with the railroad carloads that we looked at yesterday, which show that the economy remains very weak. Right now it is too early to tell based on port volume, whether we are entering a double dip in the economy.

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Rail Traffic still weak

The American Association of Railroads (AAR) just came out with their monthly report on railroad traffic. The major news is that railroad carloads declined in June as compared to May by 1.3%. This will mark the second consecutive monthly decline in railroad carloads. However, carloads were up 10.6% year over year in June. One would expect some improvement considering we were at depression levels last year. But as you can see from the chart below, railroad volume has never fully recovered from the highs in 2006 and 2007, which shows that despite all the hype about a recovery, the US economy is still depressed.

If you are worried that this indicates a possible double dip, the AAR is quick to set you straight:

The declines in rail carloads over the past couple months have not been huge,and they
certainly don’t prove that the wheels are coming off the economy’s bus. After all, the
improvement in carloads this year over last year is still significant: U.S. railroads originated 136,136 more carloads in June 2010, and 454,708 more carloads in the second quarter of 2010, than they did in the comparable periods in 2009.

It was the AAR which had the first sentence in bold to make sure you don't get the wrong idea. I guess the AAR is part of the "hope bandwagon" which believes that a recovery is possible as long was we all believe in it. Forget data, forget facts, logic, reason, etc--just believe. Then right below the above paragraph, the AAR throws viewers a screwball statement like:

That said, an economy several months into a recovery from the worst recession in decades should be yielding rail traffic levels heading north, not south. (Remember, demand for rail service occurs as a result of demand elsewhere in the economy for the products that railroads haul.)

If you are confused by the two seemingly contradictory statements, you are not alone. On one hand, you are supposed to ignore the decline in carloads as just another inconvenient truth about the economy, but, on the other hand, remember that carload data is an important economic indicator. What are we to believe? Oh, it is so easy to just drink that bullish Kool-Aid, but for some of us, the Kool-Aid has a foul taste.

Black Swan Insights

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Markets at Key Juncture: make your bets

Well, the market certainly liked the news out of Alcoa even though I think the market reaction is somewhat misguided. Alcoa did beat earnings, but they were reduced estimates from 30 days ago. It is a really simple trick: under promise and over deliver (and Wall Street will love you). Anyway, with Wall Street optimistic about company earnings, the market is up strongly today. This brings us to an interesting level in the market, which sets up for a good risk/reward trade--the 200 DMA. If we are indeed entering a bear market, the market should stop its advance at the 200 DMA, which makes this a good place to begin shorting. You can put a stop-loss at say 5% above the 200 DMA to give the trade some leeway. If you are a bull, you can wait until the market holds the 200 DMA for a week and then go long with a similar stop-loss for protection. Personally, I am taking the bear side because we are already below the 200 DMA and have been repulsed here before in June. Furthermore, the slowdown in China and the US is going to continue since the stimulus packages have both run their courses. Also, the real estate market rolling over should put strain on the already fragile banking system as well as the consumer. Hard to see a sustained recovery under these conditions. Gentleman, make your bets

Disclosure: None--yet

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Don't bet the Farm on the Baltic Dry Index

You will often hear the talking heads on TV and blogs refer to the Baltic Dry as a leading economic indicator worth following. It has become a sexy indicator that people use to predict movements in the stock market. They constantly analyze what the Baltic Dry is "telling" investors. I disagree, the Baltic dry is not a good indicator of world economic growth. It is however a good indicator when it comes to the Chinese economy. You see China controls all commodity markets these days and so the Baltic dry will tell you whether China is buying commodities. It will not help you trade the market (outside of China). The Baltic Dry is also influenced by the supply/demand relationship of global shipping. This has pressured it recently due to the large number of new ships entering the market. Lets go the charts. The first one is of the Baltic Dry, the second is of the Chinese stock market, and the third is the S&P 500. You will see that the Baltic Dry has been consolidating for the past 13 months along with the Chinese stock market. If you had followed the Baltic Dry's signal you would have missed out on a large rally in world markets over the past year. So while the index is skewed more to the Chinese economy it is always worth paying attention to.

Black Swan Insights

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Social Security: America's Largest Ponzi Scheme

Like clockwork in the media we have the periodic spectacle of the "Social Security debate." One party or candidate proposes timidly a partial voluntary privatization of Social Security. This is the followed by the other party or candidate taking extreme umbrage at the suggestion that the Social Security "net" for elders will be dismantled, and old people will starve on the streets. The hallowed spirit of FDR will rise up and haunt us until we restore his holy system once again. We can make it work, so the argument goes, if we just raise the retirement age to 79 and increase payroll taxes by another 50%.   I for one am sick of the spectacle, and here's why.

Let's first discuss a few common myths regarding Social Security:

1. Social Security is NOT a benefit; it is a tax--That right, just ask the IRS. and they will tell you that Social Security is indeed a tax. Furthermore, the courts have declared the only way Social Security can be interpreted as constitutional is if it is a tax.

2. Your Social Security payments are not guaranteed-- There is no requirement that the government pay you your social security check. Congress can cancel, abridge, or alter the social security system anytime it wishes. This was summed up nicely by the courts in Flemming v. Nestor which said "entitlement to Social Security benefits is not a contractual right." Theoretically, you could pay your social security taxes all of your working life and then be denied the monthly checks. While this is unlikely, you notice that the government is always increasing the retirement age. Eventually you will only be able to retire at 85 and get 50% fewer benefits.

3. There is no Social Security Trust Fund--Contrary to what you hear from the media and politicians, no trust fund exists (it is only an accounting entry). All Social Security taxes are sent directly to the government's General Revenue Fund and is spent by Congress on anything they want to. Even if there is a surplus (more collected than paid out in benefits), Congress can spend it and write an IOU to Social Security. Congress (Republicans and Democrats) have looted the surpluses from Social Security over the last 75 years, and all that is left are useless IOUs.

4. Social Security "benefits" are taxable--One of the more hilarious aspects of Social Security is that if you work after you retire (say part-time) and earn depending on your filing status more than $25,000-32,00, your social security payments will be taxed. LOL!!! And you thought this was a generous benefit from your government. Instead, it is really a system to keep you in poverty.

5. Social Security is a Ponzi-Scheme--According to Wikipedia, "a ponzi scheme operation pays returns to separate people from their own money or money paid by subsequent people, rather than from any actual profit earned." That pretty much sums up Social Security, which pays current recipients with money from taxes collected by current workers. Social Security is a ponzi scheme that Bernard Madoff would envy. Is it all right that the government is operating the largest ponzi scheme in US history?

   Now that we have discussed various misunderstandings concerning Social Security, allow me to show why it is such a bad deal for Americans and keeps them poor. First off, the rate of return on your Social Security contributions is incredibly low (estimated at 1-2% nominal return) as compared to the investments. There was a famous example of county employees in Galveston, Texas, who were fortunate enough to get out of paying social security taxes. Instead the county set up an alternative plan and invested their monthly contributions in safe low risk investments. The results were startling and are reported in a GAO report. Assuming a worker made $50,000 and paid into Social Security, their monthly check was $1,302. Under the private alternative plan set up by Galveston County, that same employee received $6,843. Now which plan would you like to participate in? So you rely on Social Security, you will be able to afford dog food (perpetual poverty), but if you have a private plan and would be able to afford filet mignon (comfortable and dignified retirement).

   Another major negative of Social Security is that when you die, you cannot leave your children any inheritance, which prevents families from building generational wealth. Social Security will only pay $255 as a one time death benefit. If you had a private plan, you could leave your children at least something, but the government can't allow this. This is especially true for groups which have a lower life expectancy (e.g. obese individuals, etc.). Why would our government deny people this opportunity? Because if the overwhelming majority of the population were financially independent, they would not be welfare slaves to the government. Instead, the Social Security system has created a generation of welfare dependents who are no longer free and independent. They no longer care about the Constitution and Bill of Rights. All they want is their monthly checks. And you wonder why America is gradually becoming a welfare police state?

   So after hearing all of the above facts, you may ask why people defend Social Security and resist any change to the system? After all, they don't benefit from this system. In fact, the only entity which profits from this illegal system is the government which uses the surpluses as slush funds and keeps people in poverty. To me the answer is relatively simple: People have been so dumbed down by public education and the media that they are very susceptible to government propaganda. The public has been indoctrinated into believing that Social Security is a benefit and protects people from poverty. And as Joesph Goebbels noted, all you have to do is repeat the same propaganda over and over, and gradually people will believe it. The situation is so dire in the US that people will fight for the current Social Security system that even when it is the instrument of their own enslavement. Now that's good propaganda--convincing slaves to demand their chains!

Black Swan Insights

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Weekend Reading and Audio July 10

1. Interview with Rick Rule-- Part 1, Part 2 Great interview where Rick discusses his view on oil (hint he thinks its going to $200), gas, and alternative energies.

2. Jim Rogers says buy metals and rice--sell bonds.

3. John Paulson facing large redemptions--- This could account for the recent weakness in the price of gold.

4. Bank of America's $10.7 billion mistake---or fraud? Its hard to tell with the major banks.

5. Oracle Octopus faces angry Germans

6. James Turk Blog article on the dollar---he correctly points out that the real threat is hyperinflation not deflation

7. King World News Interview--Jeffrey Saut, James Turk, and Bill Fleckenstein---big fan of King World News--it should replace CNBC.

Have a great Weekend!

Black Swan Insights

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Some Humor

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Market Wrap--Happy days are here again

    All three major indices closed about 1% higher thanks to a late day surge. This marks the 3 straight day of gains. No real reason for the rise except that we are working off recent oversold conditions(mission accomplished). Right now the markets are in no-man's land and are bouncing up and down with little clear direction. The real test for this market will be what it does at the 200 DMA, which for SPY is around $110. Personally I am waiting for a test of the 200 day before I make any new trades. It has hard to make trades when there is a lack of trend and choppy action. Because we are below the 200 day I am going to be taking a bearish stance if or when the market gets close to testing the moving average. The trade will be relatively simple--short high beta names and place a stop loss at 8%. If the market breaks convincingly through the 200 DMA I will cover shorts and go long.

    The only other trades I am looking at right now are gold and gold stocks. I happen to believe that gold is going to fall back down to $1050-1100 level which will present a great buying opportunity. I am somewhat cautious on gold stocks because of their anemic performance against the yellow metal. This situation cannot last forever and I expect them to surge higher eventually. The only question is when. I was reading a piece from Pierre Lassonde (chairman of Franco-Nevada) in which he said now is the time to stock up on gold stocks because they will deliver strong near-term results. He notes that energy prices have stayed low (as compared to gold) which should boost mining profits and serve as the catalyst for higher prices. I hope so. Over the last 3 years gold stocks have largely disappointed.

Good Luck

Black Swan Insights

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How Low can Home Prices go?

   With the expiration of the home tax credit we can now expect home prices to roll over and continue their downward trend. The question is: How much lower can they go before the market finally clears? As you can see from the chart above. nationwide home prices are currently hovering around $166,000, but this is very misleading because of the large fluctuations in regional home prices (West expensive, South and Midwest cheap). But it does show that in aggregate, home prices could fall to around $150,000 to get back within the historical norm. This would represent at least another 10% decline. This is likely a conservative estimate because post bubble prices usually overreact to the downside which could send nationwide prices into the $125,000-135,000 region.  However, there is one key variable in the housing market, and that is interest rates. If rates increase even 100 bps, this could have a very negative effect on prices. Currently, rates are at historical lows of around 4.7% which is allowing people to afford more house than they would normally be able to purchase. If you look at a longer term chart of mortgage rates, you will see that they usually average between 6-8%. Since it is hard to see rates moving any lower (unless the Federal Reserve steps in), one would have to conclude that rates will eventually find their way back to the historical range. This should keep prices capped for an extended period of time as the market establishes an equilibrium.

   One last thing to remember about the housing market is that there is no need to try to time the bottom. The housing market, unlike stocks or other asset classes, moves incredibly slowly. If you look at other boom/bust cycles in the housing market, you will see that once prices hit bottom, they usually stay there for a while and tread water (3-5 years). So don't believe the liars at the National Association of Realtors who claim that you have to "get in now" to get the best price. When it comes the housing market, patience is a virtue.

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Lumber--a failed market

I always get a kick out of people who say the market is a discounting mechanism that anticipates things 6-9 months ahead. My opinion is the market is nothing but a bunch of people trying to predict the future. Sometimes they are right and sometimes they are wrong. The market is not always correct as some market aficionados claim. This is evident in the recent action in the lumber market. As you can see from Nov 2009 to mid May the price of lumber surged from 190 to 320. To a casual observer this would indicate that the housing market would do well over the next 6-9 months. Some pundits even used this as evidence of an improving economy. But as we all know the housing tax credit expired in June, so the idea that we are going to see a dramatic turnaround seems unlikely. The government simply pulled demand forward which will depress home sales after the expiration of the credit. But the question is why did lumber surge in the first place? Does it mean anything? If you believe in the efficient market hypothesis this would be proof of a rebound in the lumber market. If you are like me it means almost nothing. During the price surge in 2010 the market was betting that there was a real rebound in the housing market which would be bullish for lumber. The market was wrong and quickly corrected this mistake by sending prices down $140 in less than 2 months.

The reason I bring this example up is because it is important to remember that the market is not always forward looking, so don't obsess about what the market is telling you. The only way to make money is follow the trend even if it goes against fundamentals.

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