More Bad News - Market Goes Up, Up and Up

google earnings reportOur current market conditions remind me much of how the market was trading in the beginning of March, but reversed. At that time, we knew the market was oversold and that a rally was due. However, day after day we continued in negative trading until finally we received a spark to ignite the rally. Now, over 1500 points later, I believe we are experiencing those same trading trends, but on the opposite side.

Fundamentally, numbers are right in line with my expectations. We actually saw a worse than expected new housing starts number, which was surprising, especially considering all the recent talk of the residential marketing bottoming and last month's "portrayed" rebounding numbers. It is clear that indeed we have more problems left in the housing market and, personally, I don't even see the decline getting much better at this point.

Another factor needing to be considered is the spike in foreclosure filings for residential properties. Due to the recent termination of the moratorium that was put on foreclosures by Fannie and Freddie and other banks, there was a 17% spike in REO activity from February to March. The year over year difference for March is an increase of 46% in foreclosures from the same month last year, a new record high. In my mind this is good news, because finally the banks are foreclosing, as it can push the market along and hopefully get us closer to establishing a bottom eventually. However, having over 803,000 houses (last quarter) now filed for foreclosure that will be hitting the market and with much, much more to come, this is bound to put a bigger dent in the already huge dent in home values. Remember, these will be bank owned properties that will most likely be priced to sell. This news only boggles my mind more of how Goldman Sachs had the nerve to show forth so much support in the real estate sector.

Another problem hitting real estate today was the filing of Chapter 11 by General Growth Properties (GGP), one of the largest shopping mall REITS. We have been predicting the collapse of the commercial REITS since early last year and are now reaching the beginning of what should be a long road of problems in the commercial sector. No doubt the scourge of vacancies from dying retailers destroyed GGP's income forcing them to file. Also, like many others, they were far too over-leveraged to be able to even cut their losses and move on. I hope banks have moved on from their residential problems and are ready for the commercial side, because they're coming.

Despite all this turmoil, especially in the real estate sector, we see another rather strong day of trading in the market. Not only that, but we see another slaughtering for SRS. If you flip on CNBC, all you can hear is the regurgitation of analysts saying "we all expected bad numbers...But the worst is over." This blind optimism may be due to a mandatory assignment from their parent company (GE), as to keep the market up for their earnings tomorrow, who knows? So how long is everyone expecting bad numbers and at what point does the duration and severity of these numbers have to reach before it is bad enough to to be very bad? I know Wall Street is considered a "forward looking" vehicle, compared to rest of the economy, but the early bottom calling game is a fool's game. After a vicious rally like we have seen the past 6 weeks, it is tough to reverse confidence and sentiment. However, just as there was a spark that ignited this current rally, beware of the spark that ignites the bomb. A failed bank stress test or GM bankruptcy could most definitely be that spark.

A reduction in jobless aid filings during last week, was another "indicator" for some that indeed we may be seeing strength in the employment sector. However, most of these genius analysts forgot to consider the huge outlier of the holiday week, which many families across the country spend on vacation. Come on guys! So, we'll see if this "strengthening" number can hold into next week.

Speculative trading only lasts for so long. I have actually been able to capitalize on the recent extension to the rally. I was able to cash out of most of my Apple options today at a $12.50 price, which ended up turning a very strong profit for me and pretty much almost eliminated my losses from my early rounds of SRS and FAZ. I kept some in case of a rally tomorrow, due to the possibility of strong Google, GE, or Citi numbers, but I am very happy for that as I had considered the options worthless at one point. Google did report better than expected earnings, as we expected, but due to a "hazy forecast" of next quarter, there has been mixed after hours trading.

Another reason I don't mind the continuing rally, is that even though I am not making much on the long side, the shorts are just getting at better prices. Sure it's been a painful few weeks for those that jumped in early, which I have tried to avoid that and have done pretty good thus far, minus my light round a couple weeks ago. The preservation of capital is and has been crucial for me so that I may take advantage of when the time is right. With SRS being in the 20's and FAZ being under 10, I am feeling really good about my chances for strong gains in the future.

I will continue to let these bank earnings shake out and most likely won't make a move until after BAC reports. I think we will begin to see this market make a turn, depending of course on no more huge surprises confusing people into buying. This rally is good for the models and for my expectations. Unfortunately, the fulfillment of those models should lead to some more severe market problems in the near future. Take advantage of TradeKing's great trade prices. With increasing trade volume, you want to get the best deal you can find per trade. Happy Trading.

4 comments:

  1. 5U Says:

    Goldman and the media are trying to paint SPG as the JPM of REITS

    It is also the largest component of IYR/URE/SRS

    It's the mother of all short squeezes and CNBC goes gaga over it

  2. Dan Kim Says:

    Nouriel explains that actual macro data for 2009 are already worse than the more adverse scenario in the stress tests. The actual macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 aand even worse than those for the more adverse stressed scenario for 2009. Check out: Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded by Nouriel Roubini

    It has been reported that the IMF will soon publish new revised estimates of credit losses of $4 trillion; of this estimate $3.1 trillion is losses on loans and assets originated by US financial institutions while $0.9 trillion are losses by European and Asian institutions. Since the RGE estimate is for loans and securities originated by US institution the appropriate comparison is between the $3.6 trillion estimate by RGE and the $3.1 trillion of the IMF. So at this point the IMF estimates and those of RGE are converging towards a very similar figure. Read: According to press reports the IMF may allegedly be increasing its estimate of global bank losses to $4 trillion, a figure consistent with estimates by a variety of independent bank analysts by Nouriel Roubini

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