The Housing Double Dip Intensifies---Altos Research

My favorite leading indicator for the housing market is Altos Research's 10 city composite index which is reported on a monthly basis, giving you a heads up on what to expect from Case-Shiller. The news from December was not good--and is probably enough to keep Banana Ben up at night wondering how many more Federal Reserve notes need to be created from thin air. The report pretty much confirms the trend that housing is officially in a double-dip scenario, despite the Fed's illegal money printing. It will also provide the Fed with an excuse to implement QE 3 sometime in mid-2011. From the report:

December 2010 Highlights


The Altos 10-City Composite is now at $448,996, off 1.63% from last November 2010.

All 27 of the major markets tracked by the report showed seasonal price decreases. Most were relatively minor, with the steepest declines seen in San Francisco (down 4.77%), San Diego (down 3.71%), and Minneapolis (down 3.16%), respectively.

Housing inventory is off by 5.89% nationwide, with dramatic decreases in several major markets, including Boston, San Francisco, and Seattle.

The declines shown reflect expected seasonal downturns.

About the only positive from the report was the slight decrease in housing inventory. Thought that does not seem to be helping prices at the moment. But don't expect this trend to continue according to Altos. Home sellers usually wait to list a property in the spring because that is the best time from a seasonal perspective. Altos anticipates that the level of housing inventory will increase as sellers try to capitalize on the most active period for the housing market. The only question left if how much farther do prices fall during the double-dip. The major banks better pray the answer is not too much more because that would trigger more write downs of already insolvent institutions (here's looking at you BAC). 
 
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The Housing Double Dip Intensifies---Altos Research

NAAIM Survey: Step Away From the Punch Bowl

The National Association of Active Investment Managers released its weekly sentiment survey. The number reflects total equity exposure of participating investment managers. This week the average equity exposure fell slightly to 78.51%, down from 80.21% previously. If you look at the chart below you will see that market corrections generally coincide with a NAAIM reading of 80 or above. So we may be very near to a short-term market peak. Also, we are currently at the same level reached back in late April/early May 2010 right before the big market decline. As a contrary indicator, the NAAIM survey is signaling caution. This number fits nicely with the overly bullish sentiment number we saw in the AAII survey. It may be time for prudent investors to step away from Zimbabwe Ben's punch bowl before the market experiences a major hangover. Good luck trading!   

Here is the chart.

Click chart for larger image

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NAAIM Survey: Step Away From the Punch Bowl

AAII Sentiment Survey: Retailers Still Drunk on Zimbabwe Ben's Kool-Aid

The American Association of Independent Investors released its weekly sentiment survey. This week bullish sentiment increased to 55.88%, up from 51.6%, while bearish sentiment fell 1.8 points to 18.25%. Neutral investors fell slightly to 25.86%.

As has been the case for quite some time, AAII bullish sentiment has remained elevated as investors continue to consume Zimbabwe Ben's QE elixir. If you remember, the extremely high bullish sentiment is one reason Marc Faber thinks a correction is just around the corner. While I generally agree, we have to remember that traditional trading signals seem to be almost useless when you have the Fed openly pumping stocks and explicitly saying the goal is a rising stock market. These truly are unprecedented times where you cannot rely on the usual trading signals. So while bullish sentiment is very high, it does not necessarily mean we will have a correction. One thing I like to keep track of is AAII bearish sentiment, which I have found to be a little more accurate in predicting market movements. Currently, it stands at only 18.25% and clearly indicates widespread complacency, thanks to the Fed's actions. I took a look at what happens when AAII bearish sentiment falls below 18.50%. Over the last 6 years, there have been 13 occasions, which makes it very rare indeed. Over the next three weeks the market fell 7 times and rose 6 times. It should be noted that the decline was not terribly steep, only a few percentage points. You certainly would not want to bet the farm either way based on the numbers. However, it suggests that if you are thinking about establishing new long positions, then you should probably wait for a correction, instead of jumping on the bullish bandwagon.  

Here is a short-term chart of AAII sentiment.

click charts for larger image

Here is a long-term chart which compares AAII bullish sentiment to the SP 500

Finally, here is a a chart which compares AAII bearish sentiment to the SP 500.

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AAII Sentiment Survey: Retailers Still Drunk on Zimbabwe Ben's Kool-Aid

Can We Trust The Improvement in Initial Jobless Claims?

One of the major divergences in data recently has been between the SA initial claims and NSA initial claims. According the government's doctored SA number, initial claims have fallen off a cliff, signaling a pick up in the job market. The number of new initial claims has declined from 438,000 to 388,000 in just 5 weeks. Generally, a sustained drop below 400,000 has been consistent with a recovery in the economy, which, of course, means further gains in the stock market. Some in the blogosphere have questioned the validity of these numbers noting that while the SA number has improved, the NSA number has surged from 413,000 to over 521,000. So who is correct?

Let's take a look at a chart which plots initial jobless claims on both a SA and NSA basis.

You can clearly see from the chart above that the NSA data is much more erratic than the seasonally adjusted data. But you will note that the large divergences seem to follow a pattern towards the end of the year and quickly fall back into line. Based on the chart, it looks like the pick up in the job market is for real despite the consensus for another sluggish year for employment. It is hard to say what in particular is the catalyst for the dramatic improvement. The only real thing that comes to mind is Zimbabwe Ben's signature brand of kool-aid, which has gotten everyone back into the Goldilocks stupor that the market can never decline, despite Europe being on the verge of collapse. Once the Fed induced liquidity party is over, there is going to be one hell of a hangover. That is why the Fed will almost certainly never again implement positive real interest rates--it would ruin the party of dollar debasement and speculative bubbles, which according to our Beloved Chairman boosts the "wealth effect" and helps keep the ponzi economy going.

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Can We Trust The Improvement in Initial Jobless Claims?

Marc Faber's January 2011 Outlook---Correction Imminent

Investor extraordinaire Marc Faber is out with his latest Gloom, Boom, and Doom report, which discusses his outlook for 2011. Here are a few highlights:

1. Equity Markets--Faber believes a correction is imminent for the stock market as bullish sentiment (AAII sentiment) nears record levels and mutual fund cash positions remain very low. Furthermore, the latest upward move in stocks has occurred on declining volume, which is usually bearish from a technical point of view. The correction should occur in January. That being said, you should be buying into the correction as it represents a good buying opportunity. Faber prefers energy companies and speculative stocks such as home builders and even AIG. He goes on to say that the third year of a Presidential cycle is very good for speculative stocks versus traditional blue chip value plays.

2. Gold and Silver--Reiterates his favorable opinion on gold and silver. Doubts they are currently in a bubble as some analysts postulate. Faber notes that investor exposure is very low when you look you compare it to the world's financial wealth, meaning that gold and silver are still under-owned and have room to run.

3. Emerging Markets--While he is very bullish long-term on emerging markets, investors should avoid (or at least lighten up on) emerging market stocks right now. They should only be bought on corrections which would represent favorable entry levels. Overall, Faber thinks the SP 500 will outperform emerging markets in 2011. The only emerging market that looks attractive right now is Vietnam (VNM).

4. Commodities--On a correction, Faber likes energy companies since the long-term trend in oil is up, as supply fails to keep up with surging demand from emerging markets. Notes that emerging markets have surpassed the developed world in oil consumption and that this trend should keep demand strong for the foreseeable future. Faber likes the majors like Exxon, Hess, and even Chesapeake as natural gas is too cheap on an inflation adjusted basis. Continuing the energy theme, coal and uranium stocks should be gradually accumulated on weakness as the world looks for alternative sources of reliable energy. Peabody on the coal side and Cameco for uranium should outperform over the next few years. 

5. Bond Market--Reiterates his bearish long-term view on US Treasuries, but notes that they are currently oversold and could be a good trade at this point (TLT). But this would only be a short-term bounce as rates have likely bottomed and higher inflation will erode future returns.

6. Japan Equities--While everyone is still bearish on Japan, Faber likes Japanese equities and thinks they have the potential for more upside. In particular, he likes Japanese financials such as Nomura and Mizuho Financial.

Overall, Marc Faber is pretty bullish on equities despite his prediction of a short-term pullback in January.
Happy New Year!

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Marc Faber's January 2011 Outlook---Correction Imminent

LMAO: US Government Fails Audit--GAO Can't Render Opinion on Bogus US Financial Statements

Attention owners of US government bonds! The Government Accountability Office was unable to render an opinion on the 2010 consolidated financial statements of the US government because of "widespread material internal control weaknesses, significant uncertainties, and other limitations." Not that this is anything new; the GAO has not signed off US government financial records for the last 14 years, indicating that even US auditors are unwilling to expose themselves to potential jail time for assisting the US in the largest financial fraud in history. Quick question: If you heard that a publicly traded corporation was unable to get their auditors to sign off on their financial statements, what is your first thought? If you are like me, you would be racing to the computer to short as much stock as my margin account will allow. After all, the first indication of fraud is when even the auditors refuse to sign off on financial statements. Is this perhaps why we have seen US bond yields surge recently as the smart money begins to move out of US government debt? We shall see.

According to the GAO the major accounting problems included:

1) serious financial management problems at the Department of Defense (DOD) that made its financial statements unauditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.

I was not particularly surprised that the DOD was the worst offender considering their new slogan "What some call fraud, others call good business." The military-industrial complex has been stealing trillions through illegal bid rigging, kickbacks, and procurement fraud for years. The GAO goes on to say that an estimated $125.4 billion in improper payments, information security across government, and tax collection activities were detected. This is generally accounting-speak for massive fraud with nobody really knowing where the money really went.

Another interesting tidbit from the report, which should not come as a surprise to anyone, was that the GAO was not able to sign off on the 2010 statement on Social Security. The obvious reason is that Social Security is nothing more than a bookkeeping entry with no trust fund. Not even Enron's auditor Aurthur Anderson would have the balls to attest to the accuracy of the mythical Social Security trust fund. But I love it how politicians herd the sheep to the financial slaughterhouse by insisting Social Security is solvent and a promise to future generations. The only promise, of course, is that you will likely starve to death relying on Social Security to provide you with any retirement.

The only question left to ask is how long will it take for US bond holders to see that that they have lent money to a fraudulent reporting entity, engaged in a massive shell game of debt and money printing? That is probably a question for the Chinese to be asking themselves right now. Got gold?

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LMAO: US Government Fails Audit--GAO Can't Render Opinion on Bogus US Financial Statements

My Outlook For 2011: Turbulence Ahead

You don't need a crystal ball or Svengali to see that 2011 will be a trubulent year for the ecoomy and the markets. Here are some prognostications for 2011:

1. Housing Surprises To the Down Side--Yes, everyone with a pulse already knows the housing market is depressed, but I think the market is generally underestimating the impact of further price declines (call it the Bernanke Put perhaps). We have already seen confirmation from key housing indices like Case-Shiller, CoreLogic, and Altos 20 City Composite of a dramatic deterioration in home prices. This is surprising, given the fact the Fed is printing trillions of dollars to prop up asset prices. It goes to show how egregiously overvalued US home prices are. The only question is: How much worse does it get? I think we could easily see 10% across the board declines, which would mean new lows for home prices, putting more pressure on the banks as they continue to hide losses (with government approval).

2. Stocks Decline When Priced In Gold--I do not waste any more time trying to predict stock market movements. After all, I am not a HFT bot and do not understand their algorithms very well. On top of that, the Federal Reserve has openly announced they are manipulating the market higher to increase the "wealth effect." To put it plainly--THERE IS NO MARKET ANYMORE---just government intervention. Under the circumstances, it is foolhardy to guess if the market will rise or decline in 2011. What I can bet is that when compared to gold, stocks will continue their multi-year decline as dollar debasement takes it toll (thanks Zimbabwe Ben).

3. EU Debt Crisis Worsens---Again, most market participants already know the problems facing the PIIGS, but they continue to downplay the potential consequences. You can't blame them really; the Fed, ECB, etc have showed they will always bail out irresponsible gamblers even if it means destroying the value of the national currency. So I think it is reasonable to conclude that Spain and Portugal will receive a EU bailout financed, of course, by ECB monopoly money. I do not think Italy or Belgium will receive a bailout in 2011--that is what will happen in 2012. Right now, the markets remain completely ambivalent to the problems down the road in Europe. It is like the whole "sub-prime is contained" slogan in 2007 which the bulls used to propel stocks higher. Everybody with a brain knew it was a problem, but they ignored it at their peril.

4. Debt Deflation In Europe---The combination of ECB monetary policy along with recent austerity measures in the PIIGS region will all but ensure numerous countries in Europe enter a new recession. This keeps the ECB on hold throughout the entire year. Can you imagine what would happen to Spain, Ireland, etc if the ECB starts a rate hike cycle? Depression! That is why I am shocked when analysts predict an ECB rate hike in 2011. The market is expecting 50 bps by the end of 2011 which still seems too aggressive. The bifurcated economic growth in Europe is finally putting strains on the ECB. For example, the German economy needs higher rates as it is growing quite well, thanks to strong exports. But the PIIGS need low rates forever just to limp along and skirt a full blown depression. Because the EU and therefore ECB are politically oriented, they will side with easy monetary policy to preserve this misguided monetary union at all costs.   

5. The Fed Keeps Interest Rates at 0%---As they continue with their policy of bleeding the middle class and honest savers to funnel money directly to their overlord bankster owners. This will complete 3 consecutive years of the almost 0% rate earned on money. To recoup their lost income, millions of Americans will be forced to gamble their money away in the ponzi-scheme we refer to as the stock market. All part of Zimbabwe Ben's attempt to create new and more powerful bubbles to "rescue" the economy. Commodities will continue to be favored by investors as real assets increase in popularity as they cannot be printed out of thin air. The only problem for the Dear Chairman at the Fed is what to do when oil surpasses $100 and starts to really depress consumer spending and increase input costs for companies, thereby putting pressure on margins? I can hear the term "margin contraction" becoming a popular buzz word on CNBC in 2011. The surgically enhanced stock fluffer at CNBC, Maria Bartiromo, may at first have trouble saying the term correctly, but after a few speech lessons, she will master it. But to conceal her depression at having to announce earnings misses, she may have to load up on some BOTOX extra strength to get through the year intact.          

Well, there you have it, my outlook for 2011 for what it is worth. Happy trading!

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My Outlook For 2011: Turbulence Ahead

With AAII Bullish Sentiment Near Historical Highs, Is A Market Top Imminent?

According to the latest AAII sentiment survey, the retail crowd has evidently had one too many drinks from Zimbabwe Ben's limitless punchbowl (now with extra alcohol). Does this mean the market is near a top or simply vulnerable to a market correction to sober up some overly optimistic bulls?

Let's take a look at the current AAII reading and compare it to other movements of unwarranted bullish sentiment. Right now, 63.3% of retail traders are bullish and expect higher prices. Only 16.4% are bearish and no doubt are regretting every minute of it, indicating widespread complacency within the markets.

How does this compare historically for the AAII sentiment survey? The average sentiment is 39% bullish with occasional readings above 50% with a few occasions of 65% or better. The all time high for bullish sentiment was back in early 2000 (1-6-00 to be precise) at the height of the dot com mania, where every housewife was making a fortune day trading Internet stocks. Just the kind of days our criminal Chairman of the Fed is trying to bring back. It was at this time that bullish sentiment hit 75%, indicating the entire market was positioned for perpetually high stock prices. We, of course, know what followed as we entered a secular bear market in stocks.

I have looked back over the last 10 years see what has happened 3 weeks and then again 3 months after a bullish sentiment reading of 63% or more and bearish sentiment below 20%. Here are the results:

• Since Jan. 2000, the condition (that is, a bullish sentiment of 63%) has only occurred 14 times making it very rare.
• 3 weeks later the market was up 50% of the time, which does not help very much and is akin to tossing a coin
• 3 months later market was down 57% of the time, which does not exactly make you comfortable betting the farm either way
• There was a strong cluster of these signals in late 2003-early 2004, which as we know now meant higher stock prices ultimately.

So what can we conclude from the current AAII sentiment reading? It is obvious that while helpful, the AAII sentiment indicator is far from perfect and should never be relied upon in isolation. It also shows that the market can stay irrational longer than you can remain short. While most people obsess about the AAII bullish sentiment, I think the bearish sentiment is a better indicator to watch. It is currently very low and suggests to me a correction rather than a top in the market. This will no doubt disappoint the bears who have been praying for a market top for quite some time. I was in the game in 2009, but gradually I saw that money printing equates to higher stock prices, regardless of economic fundamentals. The Fed does not care anymore about the appearance of monetary prudence. If the market starts to fall as it did in May-August period, the Fed will simply print more money! It is tragedy that the market is a mere reflection not of the economy, but only government interventions and manipulations. Trade accordingly! 

Now here are the charts.

click charts for larger image

Here is a shorter term chart of AAII sentiment

Here is a longer term chart which compares AAII bullish sentiment to the SP 500

Here is a longer term chart of AAII bearish sentiment compared to the SP 500

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With AAII Bullish Sentiment Near Historical Highs, Is A Market Top Imminent?

Finally Back From France---The Trip From Hell

I had thought this would prove to be a simple and quite vacation---I was wrong.

1. Departing flight to France (connected through Amsterdam) was delayed over 5 hours. This would not have been a problem if I had not been trapped in the plan the entire time! The last thing you want when you are facing a 10 1/2 flight is to be packed in a cattle car for an additional 5 hours. Thanks KLM you miserable pieces of trash. What was the great problem which prevented us from taking off? Communications difficulty between the flight cabin and flight crew. Big F-ing deal in my opinion. If it had been a engine problem I would have not be complaining. As a little gift for confining me in a cattle car for 15 hours, KLM gave everybody a $100 travel voucher. Thanks, but no thanks.

2. After flying for what seemed like an eternity and not being able to sleep in a packed flight with little leg room, I got to the hotel and was not able to sleep. Jet lag had screwed up my whole circadian clock and I had insomnia for 4 consecutive nights. That's right, I only got around 6 hours of sleep for the first 4 nights. By the 5th day I was on the verge of complete collapse due to sheer exhaustion and the relentless pace of a guided trip through southern France (almost all of it was walking). Luckily, on the 5th night and with the help of copious amounts of alcohol, melatonin, and aspirin I finally got some much needed sleep. I do not recommend this combination to anybody, but at a certain point you have to get to sleep no matter what the risk. It was a god-send because the next step was hospitalization where they shoot you up with sedatives.

3. The next problem facing the trip was constantly poor weather in southern France. I mean cold, rainy weather with strong wind and the occasional amount of snow. The most bizarre part was that everyone I meet told me that the weather was usually nice and pleasant in southern France. As it turns out the weather had only taken a turn for the worse when I showed up! The most frustrating aspect was that it seemed to follow me across France from Toulouse, Albi, Carcassone, Avignon, and finally back to Toulouse. It was only the last two days in Toulouse when the weather moderated and I had some fun.

4. The issue of security at airports was one another problem of the trip and proved burdensome and unnecessary. Ironically, my departing flight was not too bad (after all, I have been conditioned living in LA to have low expectations). It took 2 1/12 hours to get through check in and airport security. I was not groped by TSA and did not have to go through any naked body scanners. The same was not true for my trip coming home to police state USA. I took a flight from Toulouse to Amsterdam on the way back. Went through the metal detectors and usual security. Got busted trying to bring a bottle of wine back (apparently that is prohibited), but that was not a major issue. Then I got to Amsterdam where I had to go through security again, along with a passport check. It took over 1 hour of waiting in line to get through some new passport control area. This is a bullshit security measure considering I already had my passport checked in Toulouse (and don't terrorists always have valid passports?). But it gets worse. Right before I boarded the flight to LAX from Amsterdam, I had to got through another layer of security. This time with a mandatory naked body scanner and another check of my personal belongings. I said that I did not want to go through the naked body scanner and was told "too bad, you are in the EU and have no choice.. You either miss your flight or you go through the naked body scanner." It is times like these when you hope the EU collapses very soon, instead of a prolonged and drawn out affair. I wanted to get home so I went through the machine. But I did notice that children under 13 were allowed to go through only a metal detector. No doubt this is because the machines violate child pornography laws and the airline would face lawsuits.

After flying for another 15 hours I finally got to LAX. Had to go through customs, which took over an hour. Some first generation immigrant gave me a hard time during customs when they ask you questions. They asked me how long I was going to stay in the US. I replied "for a long time I live here." The supercilious customs agent did not like the answer and we went back and forth, with him asking me the same goddamn question over and over. Next I got to wait in line for another customs check where some fat, slothful, old guy asks you what you did when you were abroad. I joked that I went there for some hot sex with lots of French women! He started laughing and I finally got through US customs. Oh and by the way do not even think about trying to sneak marijuana through US customs from Amsterdam--they have the dogs out and waiting for you.---and no I did not have anytime for that kind of thing in Amsterdam.

5. French food is terribly repetitive and boring which was a shocker to me. Generally, French cuisine is thought of very highly internationally, with unique sauces and flavors. But the truth is that during my 2 weeks in France, the best two meals were not French, but Italian and Middle Eastern. In fact some of the members of group actually went to McDonald's (much better than the slop you get in the US)

Overall, I think I would have enjoyed the trip more if the weather had been more accommodating. I am a big history buff and love medieval castles and cities and that kind of thing. But the problems of the weather and an overly rigid travel schedule made it hard to enjoy the surroundings. However, I met someone on the trip so all was not in vain.

I will be back to posting regularly on Monday. Have alot to cover including something on the dire state of Spain and its eventual economic collapse.

Merry Christmas and Happy Holidays!

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Finally Back From France---The Trip From Hell

Quick Note: I will be on vacation for the next 2 weeks

Going to Toulouse, France, and nearby Albi, Carcassonne, Avignon and Montpellier, so posting will be light until I return on the Dec 23rd. The best part is that I have a stop over in Amsterdam and you know what that means!

The one negative is the new security measures at LAX. I am certainly not going in to the naked body scanners to be radiated. However, the enhanced pat-downs, which resemble sexual groping,  are not a pleasant alternative either. Hopefully, I do not have to make the choice and only go through the metal detector. If I have to make a choice, I will probably choose the groping. When some TSA thug is feeling me up, I will quip " I hope you are enjoying this as much as I am!"

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Quick Note: I will be on vacation for the next 2 weeks