What an odd day. Or was it?
It starts with
Citigroup and
Wachovia announcing earnings.
Citigroup reports earnings
ten percent below last year's numbers, and slightly above "estimates" (which of course had been radically lowered)
What's more interesting, they reported a total charge (in two components) of
one billion dollars for credit impairment related to.... mortgages.
We also got retail sales, which are up, but what's being ignored here is that a relatively early Easter and the confluence of Orthodox and Western dates (rare) drove most sales into
March this year, so it
should be up. Backing that out (last year Easter was April 16
th and 23rd for Western and Orthodox, respectively) it's less impressive - although that the consumer is spending at all here frankly amazes me.
Speaking of the consumer,
was the consumer spending?
Sharper Image says no - they have delayed their 10K and stated that sales were down 24%
YOY and a few days ago said their March same-store sales were down 29%. Ouch. Those guys are a high-end retailer (toys); if they're stuff is not selling well this is a fairly big warning flag..... I won't go too far out on a limb with them however - they've had problems of late with restatements and such. I guess we'll just have to wait and see when the 10K is actually filed.
Nonetheless, the entire mortgage sector - Countrywide,
AHM,
IndyMac, Freddie and others - rally
strongly. Six percent or more for most of them. On..... what?
Then later we get the
Homebuilder Sentiment number. And it is, to be blunt,
awful. It came in at 33, which is well below the "50" mark that denotes a "neutral" outlook. In fact, 33 is the lowest level of 2007! If there's anything to that number
there is no spring selling season for homes - its over before it began!This does nothing to dampen anything.
Of course Citibank makes most of its money doing things other than loaning people money to buy houses.
Wachovia does too - they've got a booming capital markets (read: trading) group and have made several acquisitions of late as well (including my bank, which used to be South Trust, so I'm a current
Wachovia customer.)
So we get a big rally today - up about 1% on all three major indices on.... what?
Has anything really changed? Has the consumer suddenly found himself a new wallet full of fresh credit cards? Has the housing bubble been re-inflated, with house values going up 20% year-over-year?
Uh, no. In fact, quite to the opposite. Here's what
Bloomberg had to say today - which of course got absolutely
zero press on
CNBC.....
"April 16 (Bloomberg) -- The number of U.S. homes entering foreclosure in the first quarter doubled from a year earlier as property prices stagnated and owners struggled to refinance mortgages.
.......
Owners of 168,829 homes in the first three months of 2007 received notice that lenders had filed for foreclosure due to failure to pay loans or liens, Foreclosures.com said today in a statement. That compares with 83,154 homes in the same period of 2006......
.........
``A lot of folks have been borrowing and borrowing and borrowing to stay out of trouble,'' Foreclosures.com President Alexis McGee said in an interview. ``Now that there are less borrowers in the marketplace, where are they going to go? Unless lenders step up and offer money to these people, they'll be locked out.''
Riverside County, California, had a 172 percent rise in the number of homes entering the foreclosure process in the first quarter, the biggest increase of any county in the U.S., the company said. "
Maybe you can find some good news in here. I can't.
So what do we have here? To take a Greenspan phrase, in my opinion,
"irrational exuberance." How else do you describe an economy that is comprised of:
- 70% consumer spending
- Consumers have a net negative savings rate
- Consumers' source of replacement for those funds - the Household Equity ATM machine - has a big fat CLOSED! sign on it
- Jobs are increasing tilting towards "Would you like fries with that?" Indeed, for the last three months "business and professional" jobs have been big losers in the monthly report.
- Inflation-adjusted income has decreased for all but the top 5% of wage-earners in every year since 2003.
- Household debt as a percentage of GDP continues to increase and has been at record highs for the last three years, with no sign of slowing down.
- Margin debt is at record highs.
Now look at people like Cramer. He is, right now, on Mad Money saying that we are "in the middle of re-evaluating stock valuations" and "the market is about to move strongly higher." Multiple expansions eh? Again? Cramer is saying "the pain of subprime is not as hideous as as we thought, and Freemont and Accredited will be able to bail themselves out", and "the second bottom is being made now" and..... "the cheapness of all stocks" and "re-evaluation of all stocks that are going to go higher."
Hmmmm.... why do I still hear echoes from 1999, when we were wondering how you could possibly justify a multiple of 30 when profits were growing at 15% a year. How you could justify a price of anything when there were no earnings at all - and no realistic expectations that there ever would be?
Here we go again, banging the table - but intentionally ignoring the consumer - the fundamentals that underlie the market. AGAIN. Just like in 1999.
In my opinion, we are running on air here. To make the bullish case for not only stock prices but the economy over the next 12 months, you have to find some way the Consumer keeps spending at levels which support economic growth. You have to find a way to replace not only the GDP contribution of all the houses which won't be built,
but also all the money that would be paid to the craftsmen who would build those houses, from roofers to framers to painters.If you can't find the money, you can't have the economy. In the end, it really does, ultimately, come down to the money. You've either got a way to find the money or you don't. Game - set - match.
And - its not just me. Look at Gold and Copper. They were up
big today.
Hmmmm.....
To me - this feels like a "blow-off" top. A market that moves higher on company-specific news that is really not all that great, but the headline sounds good. The reaction is immediate, irrational, and most importantly, contrary information that is worse than the headline
and more broad-based for the economy that shows up just hours later
is completely ignored by the market.So what's next?
On technicals, the S&P broke through the February highs by about eight points. The
Nasdaq filled the gap. The Dow is right up near the top of the channel from the recent lows.
So looking at the technicals, the market looks good - especially the S&P500. The other two aren't nearly so bullish; the S&
Ps strength was almost entirely on the back of the financials.
But from the aspect of the fundamentals,
has anything changed, and as a consequence, should a fundamental outlook on the market be adjusted in light of today's market action?The S&P is trading at roughly 15x earnings. The expected earnings growth rate is in the single digits. This is clearly overvalued.
The consumer problem, as noted above, has no
visible forward resolution. That's negative.
Housing is not only "not bottoming out",
essentially everyone, even the National Association of Realtors, now says that housing sales will
decrease and
so will median prices. The latter has
never happened since the Depression! While down sales are bad, flat to lower prices are worse, because they slam the door on refinancing and debt conversion. This one-two punch is going to hurt, and we've not even begun to see the impact from it. Oh, and lest you take the
NAR too seriously, let me ask a question - would you ask a
CAR DEALER if its a good time to buy a new car and expect an honest answer? '
Nuff said.
Finally, the Bush Tax Cuts
are going to expire unless something major happens in the next election - like a total Republican blowout in Congress and the Presidency. To be blunt, as much as I hate the concept of
"tax and spend Democrats", it is
extremely unlikely that we will see a Republican "clean sweep." As such it is a near-certainty that in 2010 - just
three short years from now - tax rates are going to go up. This helps the economy...... how?
And let's remember -
the market looks forward, not back.Friday, recognizing that the markets may pull something like what they DID do today, I purchased inexpensive April
CALLs against my short position on Countrywide. Today that paid off handsomely - I was able to close half the position, pay all the premium plus pocket a profit (which goes against the basis of the short) and thus give myself a very nice situation.
If the market comes to its' senses before the end of the week, I've got a short with an effective cost basis above the current price. I make plenty of money.
If it doesn't, the
CALLs protect me against a loss in the short; they will cancel the short position leaving me "out and green" on the trade. I make some money.
There is currently no set of circumstances on that trade that
costs me money.
In addition, I put a new short on today in the
homebuilding sector today on their AM Pop.
There are times that strong, irrational moves provide you with profit opportunity where you would otherwise have to guess. This is one of them.
If this trend continues some of my short-term options (Aprils) will expire worthless. That's
ok; final-month plays are always speculative and you're not always right about timing.
But this "Bull Run", if it continues, will give me the ability to buy more cheap
CALLs on the
VIX for May, and so long as it continues, the bets on the market rolling over will continue to get cheaper and cheaper as more and more Bulls roar and insist that everything is just fine. All the while they're refusing to answer to the salient issue of the day - where's the consumer going to find money to refill their wallets with?
I remain convinced - unless someone uncovers a way for the consumer to keep spending - that we're looking for significant, perhaps even dramatically, lower prices in the US Equities markets in the coming months.
While I have both short and long positions, neither are being taken now without defined risk and, where appropriate, hedges and tight stops.
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