Traxis Partners - Getting It Wrong.. Consistently - Perfect Contrary Indicators

In the summer of 2008, many of you may not remember this, Cyrille Moulle Bertaux of Traxis Partners came out with a WSJ article telling us that housing had bottomed and he had charts and data and analyses that convinced Traxis that the bottom in housing and the market was near.

Barton Biggs was consistently bullish through S&P 880 and the market bottomed at 666. 

Then in May of this year, we had Barton Biggs on Bloomberg when the S&P was around 1180 telling us that the economic recovery was strong and he saw another 15% upside in the markets.

As more of these bull market gurus fall, all it does is convince me that the entire pay structure for fund managers and Wall Street is skewed and this will be corrected before all is said and done.

Less than 1% of these guys has any skill.  The overwhelming majority are idiots and clueless about the markets and should not be managing money.

The only bigger idiots are the institutions that buy into their pitches and invest with them.

Barton made his name with the bull market of the 80s.  What is it that they say, do not confuse a bull market with brains?

Interestingly, Charles Reinhardt of Morgan Stanley is another uber bull equity whore that was predicting a multi year bull market at precisely the top on the S&P 500 in May.

Wall Street has truly become a wasteland and is being exposed for what it is - a bunch of talent less over paid back stabbers that will do anything to make a buck.

You would do well to ignore ALL advice you receive from investment companies, whether in the U.S. or India.

Investment in stocks NOT a must for a complete and balanced portfolio

The Economic Times reports today

Investment in stocks must for a complete and balanced portfolio
'If you really want your money to grow - stocks is the only way to go'- Haven't you heard this umpteen times. Well, it holds true every time.

As compared to fixed deposits, investments in equity will pay 26.5 per cent higher returns in 5 years. Even for a longer term, investment in stocks pay higher returns even in comparison to real estate and gold. 

Investments in equity WILL? pay 26.5% higher returns in 5 years? Well there you have it... Economic Times India writers know exactly what equity market returns will be in 5 years.  And if they know what equities are going to do, why are they writing newspaper articles, they should be hedge fund managers.

They trot out Infosys and Tata Steels.  Tata Steels share price performance is shown above.  What if you were unfortunate enough to have bought tin 2006 and sold in fear in 2009? You would have a significant loss!

That is the issue that unsuspecting investors in India are learning for themselves.  Stop listening to the mutual fund industry marketing buzz and start being wise investors.

There is a time to buy equities and when that time comes, I will invest agressively.  Today is not that time.
Success in the markets requires patience and waiting for the fat pitch.  Investors entering the market today are likely going to be disappointed as opposed to investing in secure investments.

China & India - No Economic Miracles, Just Purchasing Power DISParity

As I sit here newly arrived in India, I am amazed at how the public is convinced and fully bought into the hype.

Maybe over time I will stand corrected and begin to see the miracle that is India.
But I know what I see now.  I see a preconstruction cycle that I saw play out in the U.S. firsthand.  I see an unending supply of land. 

I see a populace that is hustling.  It's surprising the number of kids here that are desperate to retire in their 30s and 40s.  Maybe that is a sign of prosperity.  More likely, they are hating life and sick and tired of the misery that is called a U.S. multinational (MNC).  These corporations are chewing and spitting out these workers and garnering market share.  Over time Indians will learn the same painful lessons learnt in the U.S.  ... Walmart versus the Mom n Pops, Credit Card misery and teaser interest rate nightmares.

What I also see is that there is a purchasing power disparity.  Everything is cheaper in India, for the most part, except for imported items.  Those trade at global parity give or take a few bucks.  And that more than anything explains the economic miracle that  is India.  This will continue until the disparity disappears.

But already there are cheaper options emerging - the Phillipines, European Eastern Bloc countries like Romania etc.  India has to move up the value chain, is what the experts say.  What exactly does that mean?

More R&D, higher education, more creativity.  And here is where the miracle will run into roadblocks.  India lacks the infrastructure - physical and electronic - to make this a reality.  Yes there are certainly pockets of wizardry.  But the economic product is a sum total of the market.  Color me skeptical.  And possibly wrong.  I will gain more confidence in my views as I get more insight.

Bond Market Makes It's Presence Felt

As the administration pushes its spending proposals, the bond market has been speaking quite loudly the past few days and just broke through its trading ranges of the past six months.

Technically speaking, we have a clear inverse H&S pattern possibility on a 60 min and a much larger daily scale.

These technical setups equate with fundamentals and it is difficult to say when the vigilantes make life difficult for the various government entities. But this much is clear.  While equity markets can be controlled and manipulated even for a time, the bond market is far bigger than any government entity.

While some are calling for the markets to go higher, and it is highly likely, the preponderance of news today has to be considered negative between the Empire State survey, the PPI, the rise in yields.

Eventually insitutional money will realize that this time really is not different, ie, not different than past credit crises which are usually followed by fiscal crises. 

That being said, the markets will likely break through resistance and head higher anyways I guess.  

Dubai: A Repeat of Miami

Those of you think that this news is a $60 billion check and not a big deal are not thinking this through.

If you have followed Dubai over the years, the only true comparison to what is happening in Dubai is Miami.  Now this may be hard to believe, but the Dubai bubble is going to be actually far worse than Miami.

Investors were convinced that millions in oil money would have to be invested somewhere.  The plans were audacious - the second tallest building in the world, a man made complex in the ocean visible via satellite and numerous skyscrapers, stars being paid huge contracts to be a part of  the story.

What was missing? Demand.  The story that unfolded in Miami, Las Vegas, Arizona and Florida will unfold in Dubai. 

Why? Fundamentally, when massive overbuilding and speculation occurs, as it has in Dubai, the mania is difficult to identify to the participants.  It is only now starting to sink in with the unfortunate real estate speculators that Dubai is a massive bubble.

Expect to see this news lead to a wave of investors walking away from contracts, speculators walking away from projects and follow on impacts.

The Fallacy of Investors

Sadly, it is only a matter of time before we reach similar situations in the U.S.

JAL seeks 40 percent pension payout cut for survival

TOKYO (Reuters) - Japan Airlines Corp (9205.T) asked retirees and employees on Monday to accept an average 40 percent cut to their pension payouts and warned the struggling airline could face bankruptcy if an agreement could not be reached. 

The cuts will impact 17,000 current employees and some 9,000 retirees.

Meanwhile, more speculation in China:

Chinese are just like New Yorkers. They can't stop talking about real estate.  There's one distinctly American habit the Shanghaiese seem to have picked up easily: talking about money, profits, and real estate prices without self-consciousness. 

The fallacy of investors over the ages has been an expectation that the recent past will extrapolate into the future.  However, real estate like all other investments can be a painful asset to hold as it is one of the most leveraged of investments that individual investors can have exposure to.

The parents, in their 50s, are both longtime employees of Shanghai's public bus company—the husband a middle manager, the wife a retired laborer. Their daughter, Yang Gao, a recent graduate of Fudan University, is going to start work at Ernst & Young next month. They were happy to share details of their personal finances. The Gaos were given the opportunity to buy workers' housing elsewhere in Shanghai very cheaply a few decades ago. That apartment, which they still own and rent out, has soared in value.

When taxi cab drivers, bus drivers and the common man start to benefit and get caught in asset bubbles, it is usually in the last stages.  Nasdaq stocks, Florida real estate anyone?

Just to jog memories, New Yorkers - along with their NJ cousins - were amongst the most aggressive investors in Florida and Las Vegas and in my opinion, responsible for the speculative frenzy that drove Florida into stratospheric valuations.   

 

Could It Be This Simple?

From Prechter:

The blue-chip stock indexes appear very close to the start of a decline, if one did not already start today. The structure and strength of the decline will determine whether Primary 2 (circle) is complete or if it still retains upside potential.
Friday night we said, "The subdivisions of the rise would count best with a new high early next week, above Wednesday's high, but we'll see." The market's delivered today, with the Dow and S&P rising above last Wednesday's high in what has the earmarks of a fifth wave, an ending wave, from at least November 2. Today's 10,434.20 Dow high, as well as the 1113.68 S&P high, falls within the time frame and price parameters that we've been discussing throughout all of last week.

Kenny had a similar observation.  The five wave structure seems too easy.  Markets are rarely this easy and that is the one thing that concerns me about this count.  In hindsight we will see where the trap possibly was and the structure will reveal itself.

Elliott wave aside, the technical conditions and fundamentals are ripe for a reversal as well which is why I continue to be exposed to the short side, reasons discussed and listed in my previous post.

But because of the multiple traps that have been laid by the bulls I continue to be cautious in terms of my exposure and am ready to engage the bulls with plenty of ammunition to spare should they spring a surprise.

Moment of Truth - This time is no different

Conditions are in place across various indicators for a drop.  It does not matter where I look, the direction points down for me.

• Technical Stochastic indicators such as the RSI are demonstrating huge divergences on multiple longer term timeframes.  Eventually this situation resolves itself, in this case, downard.
• We have reached major fibonacci retraces on time and price that signify that this rally has met all anticipated targets and we are due to begin Wave C.
• On a positive note, the market has now pierced a major trendline that has defined this market and it will be critical to see if this is a breakout or a fakeout.
• New Highs have not confirmed this recent rally.  The number of new highs is significantly lower than the prior high.
• Volume is not confirming the rally across a variety of time frames, particularly on the daily.
  
• The advance decline line is showing a large divergence
• We are wedging yet again which has been a decent indicator
  

 Fundamentally, the news disappointed again this morning with the miss on Industrial Production.

I am anticipating a possible final 5th wave surge higher, but 5th waves can truncate as well.  Timing wise, this could be coinciding with a disappointing Thanksgiving sales season.  We'll see how the spin masters spin it.

What are Financials, Goldman Sachs, IBM Telling Us?

As the market zooms to new highs, leaders such as Goldman and IBM have failed to make new highs and Financials are telling a whole other story.

Financials Down, Russell Underperforming Dow, Dollar Down, Oil Down?

Financials are a good leading indicator and are negative for the day.

Russell is underperforming, the money is hiding in the large caps, believing the dollar weakness is going to help international earnings.  But the dollar could easily be poised for a snapback rally over the short term if market weakness is headed our way.

What's interesting is that oil is down and the dollar is down.  Usually the reverse relationship has been working. Will be something to watch going forward to see if this is the first sign of a breakdown in the U.S. dollar linkages to all asset classes.

Edit: Entered a very small Short Position in Financials

The Psychology of Investing & the Road Less Traveled

The news is relatively benign.  The ISM looks good.  The market held up well today despite a horrible unemployment number.  The economy could pick up steam as further stimulus makes its way through the system.

These are some of the thoughts going through the mind of most institutional and retail investors.  See, if you invest with an institution, there is a portfolio manager managing your money.  I used to be a portfolio manager at a large institution no longer in existence.  No it wasn't Bear Stearns.  I walked away from the rat race many years back.

The portfolio manager in his heart of hearts knows we are screwed.  But it is heresy to have a divergent view in an organization.  Particularly if you are a mutual fund manager, how can you not be bullish now?

I recently attended  a Deutsche Bank institutional conference.  Amazing how bullish the crowd was and the one hedge fund manager that was bearish was apologetically so.

These are the sentiments that tops are made from.  There was 2% bullishness at the bottom in March.  There was 92% bullishness recently.  The majority of investors are wrong at the turns.  Success in investing requires taking the road less travelled.

What's Ailing the Financials

Wondering what's been ailing the Financials?

First we had Citibank Raising Credit Card Interest Rates to 29.99% for Good Credit Customers
Sound desperate, right? It sounds like a gamble to me.  They're basically giving consumers two choices, pay a loan shark / mafia interest rate or default.  Think about what that does to consumer spending, foreclosures and default rates.  Citibank despite receiving billions in bailouts has decided to throw a hail mary and hope that enough cash strapped consumers will have no choice but to pay the huge interest rates giving the bank a chance at surviving.

Then Wells Fargo with this nugget Wells Fargo Modifying Option ARMs into Interest Only

To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country's worst-hit regions, along with a rise in consumers' income, will eventually combine to cover the bank's billions in underwater Pick-A-Pay debt.

Now anyone that understands option arm mortgages knows that a majority of these buyers make the minimum payment.  Normally the difference between the minimum payment and the interest only payment is substantial and my guesstimate is an increase at minimum of roughly 30-40% over the existing negative amortizing payment.

We think this only incents homebuyers to walk away from their homes and enter strategic defaults.  What in heaven's sake would compel Wells to make this type of a drastic move?

Let me guess, they're thinking that the economy is recovering and consumers should be able to make the interest only payment.  Or could it be that by converting to interest only mortgages, it stops the balance from rising thereby helping Wells earnings?  Not an expert on financial earnings.  But whatever the reasons, the end result is more foreclosures.

Add in to the mosaic, John Mack is looking to leave, Jaime Dimon is looking to leave and BAC's CEO just announced his retirement.  The picture isn't pretty.  The CEOs are bailing out, seeing no future potential for hundreds of billions in bonuses.

Sure, the recovery is going to be strong.  I can hear the printing presses already running into overdrive.  Only a matter of time before the Treasury Bailouts are back.

Market at Price, Time & Moving Average Resistances, But Pattern Not Yet There

Markets are now in an interesting setup.  We are approaching the 38% time retrace on the move down at the same time that unemployment is due.  Further, the market's progress today was halted at the 50% retrace.

Fundamentally a significant amount of optimistic expectations about the jobs report are embedded in the market.  Any disappointment would see a selloff.  On the other hand, given the optimistic move the past few days, a better than expected number would see a small rally and a sell the news type of event. 

This is not a projection, I don't make short term daily market forecasts, leave that to the traders.

But this does offer a juicy setup.  We're at an 50% retrace on the up move, a 38% time retrace, and also butting up the under side of the uptrend line.

Further, we are approaching the 20 day moving average.   And if the market manages to get past all this resistance, we have the mother of all trend lines sitting in the 1080s that repelled the market recently.

Edit: 4pm: Pattern is now nearing completion and we are in the last stages of the rally in my opinion.

Rising Productivity, Euro Sales, Falling Wages - Consumer Is Getting Squeezed

Three pieces of news out today and while we all know the take that the media will take on these is wildly optimistic, bringing buyers into the market, my take is all three are actually a commentary on a European/U.S. consumer that is being squeezed at work, spending less, feeling less confident and making less money.  None of these are good signs for the bulls.

Some sobering data about the recovery:  Retail sales post surprise fall
As the recovery gets underway, the key component - the consumer - is missing.  This is primarily the result of the policies pursued both sides of the Atlantic - namely preserving the status quo structure, implementing policies that only benefit the few while increasing the debt burdens of the many.

LONDON -- Retail sales in the 16 countries that use the euro fell for the third straight month in September, indicating that, with unemployment on the rise, consumer spending has yet to provide a support for growth.

The European Union's statistics agency Eurostat said Thursday that sales volumes in the euro zone fell by 0.7% in September from August and declined 3.6% from September 2008. The decline was unexpected, with economists surveyed by Dow Jones Newswires last week estimating that sales grew 0.1% on a month-to-month basis.

The August data were revised to show a 0.1% fall on the month, having previously recorded a 0.2% drop.

Consumer confidence has rebounded from its collapse early in the year, but rising unemployment will likely be a drag on spending for many months to come.  Sales of food and drink fell 0.9% on the month and 2.3% on the year, while nonfood sales declined 0.6% on the month and 4.1% on the year. In the 27 EU member countries, sales fell 0.4% on the month and fell 2.5% on the year.

Productivity Surge Signals Job Growth to Follow was the headline.  

The Labor Department said on Thursday that productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs.

Isn't this a different way of saying that there is no topline growth in the economy and companies are squeezing profits by cutting costs.

Meanwhile, deflationary pressures continue to filter through wages.

Unit labor costs fell 5.2 percent last quarter after declining 6.1 percent the previous period. Analysts had forecast a drop of only 4 percent.

Hey Floridians, Las Vegans, Californians.... Sound Familiar?

It is not my intent to bring back past wounds or pour salt on them, but you have to read this to believe it...

Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month

In case you haven't figured out where, this is Now, in Singapore
New heights for Singapore property 

http://www.atimes.com/atimes/Southeast_Asia/KK04Ae01.html

Gold Target 1250 to 1300

A classic inverse head and shoulders pattern projects the Gold price to 1250 to 1300.  Strong technical support, strong central banker emerging interest, strong public sentiment, strong Chinese demand.  Good luck to the two major institutions that are rumored to be short this currency.

Investors Business Daily Sentiment - Bearish

Another respectable indicator moves over to the dark side.

Investors Business Daily’s Big Picture market tracker has been a remarkably prescient indicator over the course of the last year.  Following this indicator kept investors out of the major losses last year and got you back in the market early enough to capture the majority of the gains off the March bottom. 
They’ve been bullish throughout the massive rally and just changed their outlook to negative for the first time since the rally began.   They note the high volume of the recent sell-off, loss of leadership, and high number of distribution days as the reasons for their move to a bearish stance. They now recommend avoiding new stock purchases altogether until the market begins to exhibit some signs of strength

 Source: PragCap

Breaking Down the Bull Argument from David Dreman

This Month in Forbes by David Dreman :

Is Recession Normal? No
David Dreman, 11.16.09, 12:00 AM ET

Let's look more closely at the bear case. While it's true the market has had an enormous rally since early March, it is important to remember that it had fallen more precipitously than at any time since the Great Depression. The financial sector of the S&P 500, for example, fell 83% between June 1, 2007 and Mar. 6, 2009. This sector's decline was steeper than the overall market's decline between September 1929 and the 1932 low. So yes, this rally is strong and sharp, but remember that it comes off the worst stock market drop since the 1930s. It still hasn't really come close to recovering the ground it has lost. The Financial Select Sector SPDR Fund (XLF) is trading at 60% below its 2007 high.
So please don't judge the current rally in the context of typical market cycles. Remember, about a year ago our global financial markets were in a state of panic. If you check market history, you will see that the rallies following such panic attacks tend to be sharper and swifter.

As I point out in one of my previous posts, we agree that rallies are sharp and vicious off severe selloffs.  No arguments there.  But neither has the case for a new bull market been made yet by Mr. Dreman.

And please don't fixate on trailing price/earnings ratios. Multiples are inflated because earnings are depressed. It's that simple. We are in a severe recession, and hundreds of companies have ailing income statements.

Stock market investors aim to see around corners, and they should be doing that now. Corporate earnings will be down sharply this year (particularly if you include writeoffs), but they will rebound over the next three years. I can't tell you how quickly the recovery in earnings will come, but I am sure it will come. Go back to that market of 1932, when the Dow Jones industrial average bottomed out at 41.22. The Dow almost tripled within the next three years, even though it took earnings almost five years to catch up to where they were before the crash. In short, it's normal for stocks to rebound ahead of earnings.

Mr. Dreman is comparing the current cycle against the Depression.  Fine.  It took the market three years to bottom and during that time there was in fact a 50% rally.  But the market fell another 80% after that.  Further, the market did not get back to the levels of that initial 50% rally of roughly 300 on the Dow until 1954!  That is 22 years later Mr. Dreman.  Not a convincing argument that we are to look blindly into the abyss and trust that earnings will recover, debts will be repaid, valuations will catch up to the market.

I'd be more inclined to be receptive if the market exhibited characteristics of a bottom.  The market was overvalued compared to historical metrics at bottoms on Price / Sales, Price / Earnings, Dividend Yield.  Bottoms are also usually accompanied by hatred, revulsion.  Markets tend to die a slow death and then are born anew when no one is watching.  Granted we got revulsion from a section of the market, but market participants were frothing at the bottom. That by definition is not a true bottom.  I am not convinced by a long short.

The bears have a different view. They think the economic malaise will last for years or even decades, as in post-1989 Japan. Get used to a new normal in our economy, they say, one in which growth is sluggish or nonexistent for a whole generation. I say rubbish.

The great global investor John Templeton (1912--2008) said that the four most dangerous words in investing are "This time it's different." In more than 30 years of managing money I have witnessed many a shift in market sentiment. It lurches from irrational exuberance (as with tech stocks a decade ago) to irrational gloom (bank stocks in March). I just don't accept today's gloomy view.

In fact Mr. Dreman you're the one asking for blind faith and telling us this time is different, that the market can avoid historical characteristics of stock market bottoms, that we can issue mountains of debt to work off a debt crisis, that there is a fundamental loss of moral hazard, that the consumer is tapped, that Japan is in a debt and demographic crisis and will not assist in this recovery, ditto U.K.

Finally you Mr. Dreman are another child of the bubble in U.S. prosperity of the past 30 years and your automatic assumption, similar to Washington Politicians, is that the U.S. will revive because it has always done so in the past 30 years.

I would point you to this weeks Barrons article on the Depression.  Everyone underestimated the depth of the correction because there hadn't been a severe correction in over 20 years.  Ignore history at your own peril, Mr. Dreman.

History Lesson From the 'Twenties

Courtesy Barrons

 

Most of the article blames the government for policy mistakes.  Fair enough, policy mistakes were made.  But at a fundamental level, it was the misguided, misinformed opinion of the politicians - probably in connection with big corporations - that they are more potent than the business cycle and possess the tools to create immediate, ongoing prosperity. 

In many ways, the approach we are taking today reminds me of the same sort of thinking, that QE, bailing out the banks, creating huge amounts of debt will leave us better off.  Somehow, history suggests that this time will not be any different.  My core principle "you cannot fight your way out of a debt crisis by issuing more debt".

 

EIGHTY YEARS AGO THIS WEEK, THE U.S. economy took its first step into the abyss. Variety magazine headlined it as "Wall Street Lays an Egg." Barron's headlined with "Severe Liquidation on Thursday Stemmed by Banking Support; Subsequent Rally Followed by Orderly Decline at End of Week."

The severe liquidation of Black Thursday, Oct. 24, 1929, continued into the next week. By the issue of Monday, Nov. 4, Barron's was reporting "one of the most cyclonic breaks in the history of Wall Street." From the peak of Sept. 3, when the Dow Jones Industrial Average reached 381.17, the decline totaled 151.1 points on Nov. 4. "In barely seven weeks, the price gains of more than a year were swept away."

In neither Variety nor Barron's was there any apprehension that the Great Depression would follow the stock market.

In November 1929, Hoover took an active role in protecting the economy. He met with industrialists and union leaders and pushed them into a deal: Industry would not cut wages. Unions would not strike. If there wasn't enough work, jobs would be shared rather than prompting layoffs.

Hoover believed high wages were the key to prosperity. For employers, he created policies that allowed firms to cooperate in order to avoid "cut-throat competition" for labor.

On the labor side, Hoover signed the Davis-Bacon Act forcing local governments to pay union wages on public works and the Norris-LaGuardia Act outlawing injunctions against strikes and picketing.

Hoover's policies did what they were supposed to do: By late 1931, real hourly earnings in manufacturing had increased by more than 10% (adjusted for deflation of prices). Yet manufacturing hours worked had declined by more than 40%, even more than total output, which fell about 20%. By the end of 1931, the general unemployment rate was 15.9%, and it would get still worse for two more years.

Ohanian calculates that under Hoover's wage-support program, which trickled down from large businesses to small, the prevailing industrial wage rate was as much as 40% higher than the wages job-seekers would accept. Too many workers chased too few jobs that paid too much, and the result was men lined up around city blocks to apply for jobs.

The Hoover policy was more cooperative and voluntary than the mandates of the New Deal's National Industrial Recovery Act, but they were the same anticompetitive, price-fixing policies.

While generations of Americans have blamed Hoover for relying on the free market instead of government intervention, some of the workers' misery in the Great Depression should be attributed to Hoover's mistaken high-wage policy.

Are You A Child of the Bubble?

Many investors – as well those in charge - have grown up without knowing or experiencing anything but a bull market in the U.S.  Since the 1950s America has been dominant and the expectation is that this dominance will continue.  As a result our leaders have made and continue to make choices that assume the continuation of trends of the past years.  Sadly, this is a reason why this recession and its consequences will last with us for a long time.

Let’s review some of the economic challenges that still lie ahead of us.

Option ARMs are a disaster – 30 day + delinquincies are reaching close to 50% of all outstanding option ARMs.  The St. Louis Fed has stated that they were concerned about Option Arm and Alt-A loan delinquency rates. Delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms.

The thing about these products is that the minimum payment is at times less than half what a fully amortizing normal payment would be and the borrowers that chose these did so in the past few years and are now sitting on negative equity.  Loan modifications are not feasible in almost any scenario and the incentive is to walk away.  Housing has not bottomed by a long shot.

Sentiment Is Dipping .. came out of Gallup yesterday


Sentiment about the economy is starting to backslide, after a brief tip up.

Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had "pretty much hit bottom," down from 35% last month.

64% said the rise of the Dow Jones Industrial Average didn't have much impact on their views of the economy. Just 42% said the economy will get better in the next 12 months, down from 47% in September. In contrast, 22% said things would get worse, up from 20%.

Bottom line, consumers are not feeling more confident about the recovery because they have not participated in the recovery.  The recovery has been driven by stimulus money which is finding its way into the banks and bonuses.  Does a 30%+ jump in Hamptons sales tell you where the money is headed?  It also explains why New York city has held up relatively well compared to the rest of the country.  But New York and Wall Street are not the economy.

We Just Had the 3rd lowest sales for September since the Census Bureau started tracking sales in 1963

Calculated Risk reports on New Home Sales.  The Census Bureau reports New Home Sales in September were at a seasonally adjusted annual rate (SAAR) of 402 thousand. This is a decrease from the revised rate of 417 thousand in August (revised from 429 thousand).

Even uber-bearish housing analyst Mark Hanson was taken aback by the shortfall in home sales this morning. Even he thought that the remaining homebuyer tax credit, plus all the other stimulus out there, would produce a rise in new home sales.

But no. September was the worst month since 1981.

Permanent Bailouts for the Top 20 Banks?

Paul Volcker and senior Harvard economist Jeffrey Miron both testified to Congress this week that the government is trying to make bailouts for the giant banks permanent.

Writing Wednesday in The Hill, Congressman Brad Sherman pointed out that :

In my opinion, Geithner’s proposal is “TARP on steroids.” Section 1204 of the proposal [the proposal being the "Resolution Authority for Large, Interconnected Financial Companies Act of 2009"] allows the executive branch to use taxpayer money to make loans to, or invest in, the largest financial institutions to avoid a systemic risk to the economy.

TARP was limited to two years, and to a maximum of $700 billion. Section 1204 is unlimited in dollar amount and is a permanent grant of power to the executive branch.

When I asked Geithner whether he would accept a $1 trillion limit on the new bailout authority (if the executive branch wanted to spend more, it would have to come back to Congress), he rejected a $1 trillion limit, insisting that the executive branch be able to respond without coming back to Congress.

That is a huge gravy train to the top 20 [financial institutions] because it allows them to borrow money at a lower rate. Think of what this does to moral hazard.

A sustainable recovery with 530,000 weekly claims?

That’s what we seem to be expecting based on the huge uptick in equities since March. While stock markets have long since moved it up a gear, the employment market is stuck in neutral. The latest seasonally-adjusted jobless claims numbers came in at 530,000. The widely-followed four week average is still 526,250 and is not coming down.

Global Economies Are Not Doing Any Better – Greece Downgraded

Last week, Fitch downgraded Greece's foreign and local currency ratings from A to A- due to a ballooning deficit that has spiraled out of control.

Now, Moody's is also considering a cut for Greece. It's an understandable move, considering that Greece's increasing deficit is already 12.5% of its GDP.

Moody's: "The deterioration of the fiscal position raises serious questions about the sustainability of Greek public finances and the problem will be compounded by a less favourable global economic environment going forward," says Arnaud Marès, a Senior Vice President in Moody's Sovereign Risk Group.