Thanks to China's ?one child only? policy adopted 30 years ago, and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than girls. Large scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences.
Until early in this century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by ?spirits.? Today, pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.
Millions of children are ?little emperors,? spoiled male-only children who have been raised to expect the world to revolve around them. The resulting shortage of women has led to an epidemic of ?bride kidnapping? in surrounding countries. Stealing of female children is widespread in Vietnam, Cambodia, Laos, and Mongolia.
The end result has been a barbell shaped demographic curve unlike that seen in any other country. The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate. As a result, the Middle Kingdom's population today is only 1.2 billion instead of the 1.6 billion it would have been.
Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom. But so far the choice has been for commerce, to the detriment of America's trade balance.
In practice, the one child policy has only been applied to those who live in cities or have government jobs. That is about two thirds of the population. On my last trip to China I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn?t have been more bizarre.
Economists now wonder if the practice will also understate China's long term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big ticket items in life, like an education, homes, and even cars. The end game for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.
I am a numbers guy. Show me the data and I?ll draw my own conclusions, ignoring conflicted brokerage research, the paid talking heads on TV, and all the politically motivated garbage pumped out by industry sponsored fake research institutes. I am also a glass half full kind of guy, willing to make a positive interpretation when all else is equal. After all, over the very long term, everything goes up in value.
Having said all of that, I have to tell you that the economic data flow has recently been rolling over like the Bismarck. In January and February it was uniformly positive. In March, it turned decidedly mixed. Since the beginning of April they have turned overwhelmingly negative. This is what tops in both the economy and the stock market are made of.
I normally don?t bother you with such details, as most readers prefer me to distill my comments down to ?BUY? or ?SELL?. But the deterioration has been so dramatic in recent weeks that I thought you should see what I am looking at. Let me give you this week?s sampling:
April 19? March existing homes sales -2.6%
April 19? Philly Fed down from 12.5 in March to 8.5 in April
April 19? Leading economic indicators down from +0.7% in February to +0.3% in March.
April 19? Weekly jobless claims down 2,000, but held most of last week?s 13,000????? .?????????????? spike upward
April 17? New permits for Single Family homes -3.5% in March
April 17? Housing starts down from 2.8% in February to -5.3% in March
April 16? February business inventories +0.6% because people aren?t buying stuff.
April 16? Empire state down from 22 in March to 6.6 in April
April 16? March Consumer Price Index 0.3%, but most of the increase was for?????? gasoline.
Any one of these data points is relatively unimportant. When they are all moving in the same direction, that is important. And this has been going on for more than a month now. When preparing my last two biweekly strategy webinars I had difficulty finding any positive data points to report. The only plus figure that I have seen recently was the International Monetary Fund?s upgrade of its outlook for the global economy for 2012 from 3.3% to 3.5% which no one pays attention to anyway.
There is a big problem for the stock bulls in all of this. We have a stock market that is priced for perfection, having taken earnings multiples up from 11 to 14 in six months. As a result, we now have a market that is priced for 4% GDP growth in a 2% GDP economy. But guess what? The 2% GDP is coming through. Instead of perfection we are getting mediocrity. Look out below.
I am not a permabear, but I know plenty of people who are. Maybe it is time for me to start paying them more attention, reading their research, answering their e-mails.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/Angry-Grizzly-Bear.jpg399266DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-19 23:03:592012-04-19 23:03:59Another Alarm Bell
I ran through a number of charts provided by my friends at Stockcharts.com, and as a person who has been piling on the shorts for the past two weeks I was greatly encouraged. Almost every single one was pregnant with gloomy implications. This is all happening a mere 12 days before the Great Escape in May commences. Virtually every technical indicator I follow is now flashing warning signs and ringing alarm bells.
Here is my own personal interpretation. The Russell 2000 (IWM) could potentially be setting up a head own shoulder top targeting $75 on the downside. My short here is one of my biggest positions. The Consumer Discretionary Select SPDR (XLY) is pulling away from the absolute top end of its upward channel and is ripe for a 10% pullback. Ditto for the Technology Select Sector SPDR (XLK), which could give back 15%. The Financials Select Sector SPDR (XLF), one of the hottest areas this year, could actually be setting up a new downtrend. The same is true for the Materials Select Sector SPDR (XLB). And tell me that is not a double top in the Industrials Select Sector SPDR (XLI).
This all suggests that 1,325 for the S&P 500 is a chip shot on the downside, and maybe more. I have a feeling that killings are about to me made on the short side.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-18 23:02:122012-04-18 23:02:12Check Out These Interesting Charts
Bill Good is a friend of mine who runs Bill Good Marketing based in Salt Lake City. His is one of the best firms out there that provides data base support for registered investment advisors and high net worth individuals to operate independently. To see his website, please click here at billgood.com.
We were chewing the fat the other day about the long term consequences of the Great Crash of 2008. He told me a fascinating story. After the market finally bounced, he surveyed 150 of his best customers to see how they fared. Almost all had been devastated, losing half or more of their assets and many of their best customers.
But ten did surprisingly well, either breaking even or earning a small profit. It turns out that nine of the ten were apostles of the Dorsey Wright technical model, which in January, 2008 had banned them from investing in any equities whatsoever. He then got them back into stocks in April, 2009, just after the market bottomed. Intrigued, he pressed on.
Bill dove into the Dorsey Wright model himself and quickly became an acolyte. The message was clear. Buy and hold was dead, and only managers with the ability to hold substantial amounts of cash from time to time had any chance of survival. Bill set up a series of seminars about Dorsey Wright to educate clients about the opportunities. He called them ?No More Pies? to highlight the futility of pursuing modern portfolio theory?s preference for dividing up client cash in fixed asset allocations. The problem was that ?none of the above? was never included as a choice.
My interest piqued, I decided to check out Dorsey Wright myself. I spoke to several of his other followers who waxed euphoric about outperformances the system delivered that saved businesses. I investigated the website at dorseywright.com. I spent an hour with an in house analyst getting into the nitty gritty. I then managed to catch Tom Dorsey himself, the remaining creator of this unique discipline.
In the 1970?s, Tom moved from a posting on the aircraft carrier USS Kearsarge off the coast of Vietnam to a brokerage job at Merrill Lynch, and finally to running an options desk at a medium sized firm. He teamed up with Watson Wright in 1986 to create their technical model.
Tom, who is based in Richmond, Virginia, says his goal was to create a tool box that investors can use to track all asset classes worldwide. His 20 man team uses daily point and figure charts to generate relative strength indicators, market relative strength, and peer relative strength to identify the best and worse stocks in the market. The object is to look at the supply and demand for individual stocks, indexes, and mutual funds. These are distilled down a daily service posted on his website that rates asset classes, which he calls his ?playbook,? as well as buy and watch lists for individual stocks.
Tom graciously provided me with his snapshot for Monday, April 16 which I have reproduced below. It divides the S&P 500 into six standard deviations defined by columns, three of expensive stocks on the right and three of cheap stocks on the left. So looking at the table, Altria Group (MO), Lowes (LOW), and Colgate Palmolive (CL) are among the dearest in the market, while Pepco (POM), Goodyear Tire & Rubber (GT), and Apollo group (APOL) are a bargain.
He also offers a family of ETF?s with a combined $2 billion under management that executes on the ideas his system generates. His flagship fund PowerShares DWA Technical Leaders (PDP) is up 5.84% over the past five years, compared to a -6.69% loss for the S&P 500. It was enough of an outperformance to keep many RIA followers in business. He has an emerging markets fund (PIE) and a developed markets fund (PIZ). Tom also constructs custom portfolios for hedge funds and individual clients.
Then Tom really got my attention. Last Thursday, his playbook assigned the US stock market its highest risk rating, which he calls ?Red Zone Defense,? a relatively rare event. As of now, investors should become aggressively defensive, decrease portfolio volatility, raise cash levels, reduce exposure to offensive sectors, tighten stops on longs, sell leaders and laggards on breakdowns, buy protective puts and inverse ETF?s for downside hedges, initiate short positions, and increase non correlated exposure. Calls like this are typically long term. ?Everyone who wants to buy has bought,? he said. I found this intriguing as it came right on the heels of my decision to aggressively ramp up my own short market exposure.
Tom thinks we may have put in a top for this year for stocks. The best that can be said is that stocks may churn for a while around here before a more pronounced move down. If we haven?t, then we could see a secondary wave that generates a marginal new high that will be followed by a much larger collapse, which he calls a ?kiss of death? sell off. My guess is that we will see something like that sometime next year.
So I had to follow up with how he saw other major asset classes. He was definitely negative on Pulte Homes (PHM). Boeing (BA) he thought might undergo some short term weakness before resuming a long term uptrend. Gold (GLD) is fully valued here and could hit a long term trend line at $1,520. He is a bull on oil (USO). Copper (CU) is looking weak for the foreseeable future. The Euro (FXE) is certainly a short here, as is the Japanese yen (FXY). Our only difference was in Treasury bonds (TLT) where he sees the long term bull market continuing, but with 30 year yields (TYX) only making it down from the current 3.15% to 2.82%. This is where you often see the technicals and the fundamentals clash.
Whenever I find a technical system that almost perfectly matches my own fundamental calls, I get extremely interested. Getting a confirmation of your own views using a totally different methodology is as close as a gold standard as you can get in this business. It is what scientists refer to as a ?double blind? experiment. At $450 a month, the Dorsey Wright technical model is no bargain. But you get what you pay for. I will certainly be paying more attention to it in the future.
Dorsey Wright S&P 500 Individual Stock Analyses
for April 16
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/dorsey.jpg1024742DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-17 23:03:442012-04-17 23:03:44Checking Out the Dorsey Wright Technical Model
All eyes are now focused on Spain, where last week?s failed bond auction took yields back over 6% for ten year paper, and the pain is clearly not confined to the plain. But longer term focused analysts are wondering if France is really the next big over ripe piece of fruit to fall in Europe. Is France really a PIIG in sheep?s clothing?
The structural economic data are not good. Public debt is now at a nosebleed 90% and rocketing. Public spending soaks up 56% of GDP, more than any other Eurozone country.? Banks are severely undercapitalized. The unemployment rate has been stuck over 7% for more than 30 years. Nor has the country had a balanced budget for three decades. Exports are feeble compared to robust Germany. When was the last time you bought a Renault, a Hermes scarf for your significant other, or an Yves Saint Laurent suit for yourself?
The presidential election, which will be held in two rounds on April 22 and May 6 is not giving investors any cause for comfort. The embattled incumbent, Nicolas Sarkozy, wants to ramp up protectionism, soak French tax exiles, restrict immigration, and withdraw from Europe?s passport free Schengen zone.
Socialist Fran?ois Hollande, who is now ahead in some polls, wants a larger government, to hire 60,000 teachers, cut the retirement age from 62 to 60, and raise the maximum tax rate to 75%. Communist Jean-Luc M?lenchon is picking up support and insists that France should withdraw from NATO, instantly raise the minimum wage by 20%, and raise the top tax rate to 100%.
Please excuse me if I sound like I am stupide, an imb?cile, or a b?te, but aren?t all of these proposals guaranteed to send French deficits soaring, requiring them to dramatically increase their international borrowing? Don?t you think the LTRO has its hands full enough bailing out Portugal, Italy, Ireland, Greece, and Spain? This would be hugely equity negative.
Is it possible that the candidates are willing to sacrifice the French stock market in order to get elected? That has already been the case in the bond market, where investors have been fleeing en masse, sending yields spiking once more. Perhaps this is in response to Moody?s yanking of the country?s AAA status earlier this year.
This all sets up the land of Gitanes and Gauloises chain smokers as an enticing short for global fund managers. The easy play for US based investors is the France iShares ETF (EWQ), which you can sell short on margin, or buy puts. Wait for a rally to get a decent entry point.
For those amphibian readers who wish to debate my long term outlook for Gaul further and perhaps throw some stale croissants and some overage camembert at me, please buy a ticket to my July 17 Paris strategy luncheon by clicking here. Hopefully, you will be over your Bastille Day hangovers by then.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/Gitanes.jpg164215DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-16 23:13:282012-04-16 23:13:28Is France the Next PIIG?
The market hung on tenterhooks all last week, waiting for the Chinese Q1 GDP figure. As recently as Thursday, rumors swept the market that the number could be as high as 9%, well above the consensus figure of 8.4%, taking the Dow up a red hot 181 points. When the flash hit in the afternoon Beijing time confirming 8.1% the equity futures flipped into sell mode. By the time the crying was over on Wall Street, virtually all of the day?s previous gains had been wiped out.
There are a few lessons to learn here for the aspiring trader. Never believe rumors, especially when they are supposed to originate from governments on the other side of the world. They are almost never true. They often originate from someone trying to unload an unfavorable position. Whoever dumped their portfolio of US stocks Thursday afternoon at the close did exceedingly well.
The second is that all is not well with the global economy. I heard China experts speculating that this quarter might be the bottom of the Middle Kingdom?s slowdown. But they are China experts to the extent that the probably ate in a Chinese restaurant once and watched one Bruce Lee movie. So much of what you hear about China in this country is nothing more than guesswork and I never pay attention to it.
I have a somewhat different take. There is no sign whatsoever that China?s growth recession is ending. Sure, domestic loan growth this month rose from ?700 billion to ?1 trillion, but much of that increase is due to carry over demand from the lunar New Year holiday of the previous month.
The biggest problem is that China?s main export customers are in distress. Its biggest, Europe, is in a serious recession and we have no idea how long that will last. The weakness of the Euro certainly says longer. Japan is falling off a cliff. Demand from a weak, 2% a year growing US is recovering, but is a shadow of what it once was. You can see that is the rapidly improving American trade surplus, which dropped from an eye popping $51 billion to $46 billion last month.
Think of the Chinese economy as a battleship. It is not going to turn on a dime. To complicate matters, China is only at the opening stages of a serious real estate bust. You can count on low end housing starts to plunge from 15 million to 5 million this year as the air comes out of the real estate bubble. That why copper has been so dead this year.
Two small easings of reserve requirements since November are not going to halt this slowdown. In fact, I think that Q2 could be even slower than the last. This is a big reason what I am looking for a prolonged ?RISK OFF? scenario over the summer.
Perhaps my old friend, Steven Roach, the former chairman of Morgan Stanley Asian and now in retirement as a Yale professor, put the best lipstick on this pig. The 8.1% report is down only 3.2% from the peak 11.3% growth rate. The 2008 crash saw the growth rate fall 8.2% from the top. We are a long way from that, thankfully.
There is a far more important message in the quarterly figure. This is not a temporary slowdown; it is a permanent one. There is never going to be a return to a continuous, white hot 11% GDP growth rate of the past. Recent years have seen the Middle Kingdom lose many of its competitive advantages.
Runaway wage inflation is rapidly eroding the country?s cost advantage. Oil over $100 a barrel is probably hurting China more than any other country. Remember, much of America?s infrastructure was built at $1 a barrel. This is why ?onshoring? will become the new economic trend of the decade (click here for ?Onshoring: The New Global Trend?).
But, as I never tire of pointing out in my meetings with the Chinese government, slowing the country down to a steady 8% rate is a good thing. This is a more sustainable and achievable rate that the country can live with. It reduces the volatility of the economy, not just for China, but for the world as a whole. Still, I often get back concerns about the country?s ?bicycle? economy that has to move forward quickly or risk falling over. These are leaders well aware that their country has a history of retirement in front of a firing squad instead of at at country club.
The whole affair also shows how important foreign developments have become for US financial markets. Look at the news flow driving markets these days and it all about China and Europe, with 5 minutes left over to wonder about whether Ben Bernanke is going to bring us QE3. That?s why you have to pay attention to someone like me who has been playing the game for 40 years and has pipelines straight into the key foreign ministries.
I think there is going to be a great buy in China sometime this year. Right when traders are jumping out of windows, managers are rending their hair, Merrill Lynch puts out a call to sell everything, and the Dow is down 2,000 pints? you want to back up the truck and load up on Chinese stocks.
This excursion should include international names like Caterpillar (CAT), Freeport McMoRan (FCX), BHP Billiton (BHP), and Rio Tinto (RIO), as well as domestic ones like China Mobile (CHL), China Telecom (CHA), and Baidu (BIDU). These are the companies that will far outperform everyone else in any sustainable Chinese recovery. You will also want to pick up some ETF?s like (FXI) and (CAF). But that time is definitely not now.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/china-bicycle-3.jpg350247DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-15 23:04:142012-04-15 23:04:14China GDP Data Sends Bulls Fleeing
A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war for one of the Bay Area?s premier hotties. Suffice to say, she has a sports stadium named after her.
The bids soared to $11,000, $12,000, $13,000. After all, it was for a good cause. But when it hit $13,200, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $13,200. I said ?no thanks.? $12,000, $11,000, $10,000? I passed.
The current altitude of the stock market reminds me of that evening. The higher it goes, the more people love it, until they don?t. As the bidding becomes more frenzied, not an hour passes without another technical report hitting my inbox screaming that the market is overbought, high risk, and cruising for a bruising.
When I did the research for my webinar this week, I had to struggle to find a single positive economic data point over the previous two weeks. The only one I found was the weekly jobless claims, which fell 5,000. Well guess what? This morning jobless claims rose by 13,000. That was the last fundamental economic point the bulls could hang their hats on.
If the current rally fails in the next few days, it could set up the head and shoulders top needed to drive managers more aggressively to the sell side.? After all, they have to be seeing the same thing I am, that the economy runs off a cliff at the end of the year.
For a more sobering view of the market, take a look at the two charts below for the Dow Average. If we don?t clear the old support at 13,000 in the next few days, which is now resistance, we may have the makings of a serious head and shoulders top setting up. The fact that this is happening in the run up to May makes them even more interesting.
Who was the hottie in question, you may ask? She shall remain nameless, since she is now happily married to a tech titan and with kids, and gentlemen don?t talk. Suffice it to say, she has a San Francisco Bay Area sports stadium named after her. I?ll let you figure it out.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/300px-Stanfordstadium.jpg225300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-12 23:04:462012-04-12 23:04:46Bidding Up the Market
I am getting a lot of emails about how to come out of the $450-$480 Apple bull call spread, which I advised readers to go into on March 2. Now that we are deep in the money, what is the best way to take a profit?
Well, the first thing for me is to say congratulations. My expectation that Apple stock would continue grinding up has paid off handsomely. The entire position expires next week, on April 20. So the best thing to do here is nothing. You are so far in the money that you are almost certain to expire at the maximum profit point.
So just leave it alone. You don?t have to do anything. The $450 and $480 calls will cancel out each other, and your broker should post a cash credit to your account the following Monday, thus freeing up the margin requirement.
If you try to come out here the execution costs could unnecessarily eat up a chunk of your profit. Since there are two call options involved, that means paying a double trading spread. There is no need for you to pay for a bigger yacht for your broker this early in the year.
The only reason to come out earlier is that you think Apple might fall $150 in the next seven trading days. Given that the Justice Department announced an antitrust action against the company this morning an only knocked the stock down $10, I think this is unlikely.
Your net profit on this position should be $1,855, or? $1.86% for the notional $100,000 portfolio. I include my calculations below. Well done.
Execution
March $450 call cost?????... $97.60
March $480 call premium earned?-$70.25
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-11 23:02:332012-04-11 23:02:33Taking profits on Apple
The prospect of a runaway printing press at the Federal Reserve has been the overwhelming factor driving risk assets in 2012.? Being the sober, cautious guy that you all know me to be, I did not join the party. I tell people this is because if I lose all my money I am too old to start over again as an entry level trader at Morgan Stanley.
There is the additional complication that they probably wouldn?t touch me with a ten foot poll anyway. I never was much of an organization man, and in any case the firm has changed beyond all recognition from the small, white shoed, private partnership I knew during the early 1980?s.
Not that I am a party pooper. In fact, I believe that the prospect of further quantitative easing is a complete. The LTRO, Europe?s own quantitative easing, also known as QE3 through the backdoor, with a foreign accent and without a green card, never made over to the US. It poured into European sovereign debt instead, then yielding 8% to 15% for investment grade paper. On my advice, the Chinese government lapped it up.
You can see this clear as day by looking at the chart below prepared by the Federal Reserve of St. Louis, which tabulates a broad, adjusted monetary base. It has been flat as a pancake since QE2 ended on June 30, 2011. That is the day the $75 billion a month in government bond buying abruptly ended. It also was the day that the meteoric assent by the broader money supply came to a screeching halt.
The implications of this for the stock market are not good. It means that the entire rally in global equities from the October lows has been faith based. As I never tire of telling my guests at my strategy luncheons, faith based actions are religions, not investment strategies, and the church down the street can do a far better job at this than I can. Take away that faith, turn traders back into the mercenary agnostics that they really are, and all of a sudden stocks look very expensive.
Listeners to my biweekly strategy webinars already know that we have a 4% GDP stock market and a 2% GDP economy. We also have PE multiple for stocks expanding just when analysis are chopping forecasts as fast as they can. Outside of Apple and Google, who is really going to announce a blowout Q1, 2012, with China and Europe in a race to see who can get into recession the fastest, the source of 50% of S&P 500 earnings?
Now that I have had my say, I?m taking the rest of the afternoon off. There is a major storm approaching the US west coast and with luck, I can surf some 50 foot waves at the nearby Mavericks, dodging jagged rocks along the way. Like I said, I was always a sober, cautious guy.
As we continue flirting with a final top in equities for the year, I am stepping up my search for the best ways to participate on the downside. At the very top of the list are the homebuilders, one of the top performing sectors since the October, 2011 bottom. The performance of individual names has been absolutely blistering, with Pulte Homes (PHM) clocking a 245% move to the upside, beating the (SPX) by 210%.
You do not need to engage in any sophisticated financial analysis to see how expensive this group is. Spend a day visiting open houses put on by the big companies, like Pulte Homes (PHM), KB Homes (KBH), Ryland Group (RYL), Toll Brothers (TOL), and Lennar (LEN), as I did yesterday. Then scan the real estate pages of your hometown newspaper with a calculator in hand. You will quickly find that new homes are selling for double the cost of existing homes on a dollar per square foot basis.
This is a lot to pay for that black granite kitchen counter, built in vacuum system, flashy gas barbeque in the back yard, and solar panels on the roof. You may also notice that the homes are shoehorned so tightly on to their plots that you will become too familiar with the intimate details of the lives of your prospective neighbors. In fact, new homes are trading at the biggest premium over used in history.
I am loathe to bet against those lucky ones selling to the 1%, or anyone who earns close to them, whose wealth and spending power are expanding exponentially as I write this. That knocks out Lennar (LEN) and Toll Brothers (TOL). I am very happy to short stocks of companies saddled with selling on an increasingly impoverished 99%.
That trains my sites over to Pulte Homes (PHM) and KB Homes (KBH), the old Kaufman & Broad. (KBH) has already fallen 38% off of a poor earnings report. At least Eli Broad had the decency to give away most of his money after selling out at the market top. The Los Angeles art world is all the richer for it. That leaves Pulte (PHM) as the next overripe piece of fruit to fall.
I know that many of you have been getting calls from real estate brokers insisting that the bottom is in and prices are on their way up. I get the same calls from stock brokers too. Here are the reasons for you to let those calls go straight to voicemail.
There is still a huge demographic headwind, as 80 million baby boomers
try to sell houses to 65 million Gen Xer?s, who earn half as much money. Don?t plan on selling your home to your kids, especially if they are still living rent free in the basement. There are six million homes currently late on their payments, in default, or in foreclosure, and an additional shadow inventory of 15 million units. Access to credit is still severely impaired to everyone, except, you guessed it, the 1%.
Fannie Mae and Freddie Mac, which supply 95% of all the home mortgages in the US, are still in receivership, and are in desperate need of $100 billion in new capital each. Good luck getting that out of Washington, which is likely to be gridlocked for at least another five years, and maybe more.
The home mortgage deduction is a big target in any revamp of the tax system, which would immediately yield $250 billion in new revenues for the government. How do you think that will impact home process?
There are undeniable signs of life in best prime markets, where the pent up demand can be substantial. Here in the San Francisco Bay area you are seeing bidding wars for anything that is commuting distance from Apple, Google, and Facebook, or the rest of the booming tech world. Real estate is more local now than it ever has been.
The best case scenario for home prices is that we continue bumping along a bottom for as long as ten more years, when the demographic picture shifts from a huge headwind to a major tailwind. The worst case is that this is just another bear market rally and that we have another 20% on the downside.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/house-2.jpg281400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-09 23:03:272012-04-09 23:03:27Looking for Shorting Opportunities Among the Homebuilders
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