March 2007

We are still in correction mode, which will take another 2-3 weeks to reach the bottom.

SP500 chart

I assume S&P500 will bottom at 1370 by mid-April and starts climbing again. The 90 points it will need to add to reach the top of 1470 will take about 3 month of throwing money into that hole.

3 months from mid-April is July. What kind of mood the market will have in July?

We know that a lot of fresh ARM resets will hit the fan in April-July period. The first splash of that will hit the investor face in mid-June, when May housing data will be released. It won’t be pretty.

Looking at all this I say no, we are not going to make it.

I think the market topped at S&P 500 1,459.68 at February 20, 2007 – and it will be another 5 years before we see that level again. Good buy.


Dollar fell vs. Yen in the last 24 hours, and especially in the last 2 hours, after miss in durable goods. Has to be watched closely, again.

This old article was recommended at Calculated Risk:

Home equity — not stock ownership or other investments — is now “the anchor of household wealth,” according to the 2003 State of the Nation’s Housing report, released this week from Harvard University’s Joint Center for Housing Studies.


Home prices “fall when so many people must sell their homes at the same time that demand is soft.” Yet “even during national or regional recessions, most metropolitan areas do not experience severe job losses or housing price declines.”

And you can use leverage:

Add in the leverage used by most buyers to acquire homes and the potential for serious losses in recessions becomes even less likely. For example, if a buyer put down $10,000 (10 percent) to acquire a $100,000 house with a $90,000 mortgage, the buyer’s leverage ratio is 10 to 1. It would take a 10 percent decline in home values for the buyer to lose the full $10,000 investment.

Don’t be late, because

For the long term, the outlook continues to be positive for home buying and property values. The aging, pre-retirement baby boomers represent the richest generation ever, and they are set to fuel the trade-up and second-home markets for more than a decade to come. Their “echo boomer” children, now entering their prime, first-time purchase years, should do the same for more moderate-cost sectors of the housing marketplace.

And once the baby boomers start passing along a portion of their wealth to their children, a multitrillion-dollar intergenerational capital transfer of unprecedented magnitude, look for still another major stimulus to sales and home values, provided there is no change in federal tax policy.

I’m in!

In today article Mish posted the questions to understand the supply and demand at real estate market. And I added one more, marked with italics:

Understanding Demand – 3 Questions

  1. Who wants a house that does not have one?
  2. Who wants a house that can afford one?
  3. Who does not have a house and is willing to pay substantially more than rental prices for one?

Understanding Supply – 3 Questions

  1. How many have a house they can not afford?
  2. How many have a house they soon will not be able to afford?
  3. How many plan to downsize even if they can afford their current house?

For the aging boomers the question #3 is the right one to ask. Traditionally, the people who saved a lot of equity in their home prior to retirement, usually downsize and exctract the big chunk of money from their home. Subsequently, the proceeding of this downsize is either invested into conservative retirement funds or just gambled out on stock market

I have all the reasons to believe that the number of people desiring to downsize will far outnumber those who plan to move upscale. Connect the dots

After new home sales came bad (as I predicted last week), homebuilders stocks (XHB) went back below 200-day average and have all the reasons to stay there. This group is weak enough to drag the rest of the market. It’s only a beginnig of 5-th week of market correction.

Let wait another 3 weeks before we start talking about the bottom. Why? Bacause we have “construction spending” report March 30, ISM indexes in early April and “retail sales” report April 16 – all those numbers will come bad enough to prevent market from rebounding, dragging it down on every report.

The past week events:

  • I was impressed by Easy Ben gang. This time they came with a statement pretty hawkish on inflation, but managed to please the bulls as well with dovish rate bias. The most important for them is to not unwind the carry trade now – and carry trade is alive and kicking
  • KB Home posted better than expected 84% profit drop. And that is one of the best builders
  • There are early indications that consumers are scaling back sharply in March. If confirmed, it will be a huge bump
  • Existing home sales were pretty good, but this is a weather skewed trailing indicator
  • Japan posted its first increase in property prices in 16 years. Carry trade will not collapse, but it will slowly decline

What to watch next week:

  • Corporate junk bond market deterioration is the next milestone of my recession call. The junk bond index is yielding 8.18% now, about 25bp above the level of just two weeks ago. I’m looking for this index to drift by another 5bp every week
  • I’m also watching the CDX.NA.HY credit default swap index. It fell back to late December levels and I don’t expect it to recover
  • New home sales will come below consensus
  • Construction spending will be down
  • Watch any news related to retailers – there is a concern that consumer is slowing down

I’m arguing with macroblog about about this picture:

Interest rates

He said:

What’s the story here? That the long string of federal funds rate cuts beginning in January 2001 caused the decline in long-term interest rates — including mortgage rates — that commenced a full half-year (at least) before the first move by the FOMC? That low levels of short-term interest rates have kept long-term rates well below their pre-recession peaks? Then what to make of the fact that rates at the longer end of the yield curve have barely budged in the face of a 425 basis point rise in the funds rate target? Maybe it’s “long and variable lags”? Should we then be expecting that big jump in long-term rates any day now? I guess it’s still a conundrum. But maybe, then, we should be a little circumspect about the finger pointing?

My answer is:

Absolutely not!

The long-term rates are trending down until they go under 1%, like Japan is today.

It somehow happened that Japan managed to be 15 years ahead of the rest of developed world. We are all going into long deflationary period. Japan is waiting us there.

Maybe Japan will be the first of us to jump out of sub-1% zone? It could be. First in – first out…

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