 | | The Daily Reckoning | Monday, January 10, 2011 |
- All "steady and unremarkable" on the stock market front...so far,
- What the man who called the housing bust of '07 is saying now,
- Plus, Bill Bonner with a few words on Food Stamp Nation and plenty more...
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|  | | | | Ignoring the Bumps in the Road | | Why the Bullish Forecasts for 2011 Might Hit a Few Snags | | |  | | Eric Fry | Reporting from Laguna Beach, California...
The Dow Jones Industrial Average did not produce any explosive gains during the first five days of the New Year, but it did produce a "quiet" gain of almost 100 points -continuing a recent trend of steady, if unremarkable, progress.
The Dow has advanced for seven consecutive weeks, but has gained only about 100 points per week during that timeframe. So the recent price action does not feel over-the-top exuberant. Instead, it feels steady, reliable...almost predictable.
Everyone knows the market will go up next week, just like it went up last week...and the week before that. This seeming predictability is simply a different strain of irrational exuberance. When the market seems as soothing as a Corona Beer commercial, the "fear instinct" goes dormant. Investors forget to worry.
But a Corona beer commercial isn't reality. And neither is a tranquil, friendly stock market.
Nevertheless, most Wall Street strategists have been falling all over one another to proclaim their bullish forecasts for 2011. Goldman Sachs strategist, David Kostin, is looking for a 17% rally in the S&P 500 Index this year, while most of his Wall Street counterparts are expecting at least low double-digit gains.
We hope these hopeful prognostications come to fruition. In general, up is much better than down. But it's a long year ahead and the road to gains may not be as direct and "predictable" as the Dow's recent performance might suggest.
The market might encounter a few bumps along the way. In fact, David Rosenberg, economist for Canada's Gluskin Sheff, expects the market to encounter a few bumps very soon. "Signs of excessive exuberance abound," says Rosenberg.
In particular:
- The VIX index, at 17.5x, is back to where it was last April. Remember what happened next.
- Investors Intelligence bullish sentiment is back to where it was at the all-time market highs of October 2007.
- The non-commercial accounts on the CME have recently opened up a considerable net speculative long position in equities, particularly the QQQ's (NASDAQ stocks).
- Market leadership is narrowing, as Bob Farrell has been busy pointing out.
- The number of short-selling positions slid 2.2% in the first half of December on the NYSE; and by 2.8% on the NASDAQ. The bears are running scared.
- As Kelly Evans asserted last week, the AAII investor sentiment poll has been above its historical norm now for 17 weeks running - the longest stretch in six years.
- Since July, margin debt has exploded by 16% to $274 billion, the most since September 2008 when people still thought we were in a soft landing.
- Equity mutual funds and ETF's took in $24 billion in December (TrimTabs data)... The last time we saw retail inflows like this into equities was last March...just ahead of a 17% correction.
Meanwhile, over in the housing market, there are absolutely no signs of excessive exuberance. In fact, there are barely any signs of anything, which is just one of the reasons why the housing market may offer one of the most compelling investment opportunities of 2011. Chris Mayer provides the details in the column below...
| | | | | Why Some People DIDN'T Go Broke In The Bust |
From 2008 until now, some people watched their gains go UP...as high as 448%, 556%, and even 579%...
On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it - and so could you.
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| | |
| | The Daily Reckoning Presents | | Buy a House... Then Buy Another | | |  | | Chris Mayer | Investment ideas are cyclical. They go dormant for a while, then revive, like fashions or cicadas - obeying their own curious rhythms. During the past few years, rare was the investment thinker who said you should buy a house. Housing was in a bubble that was deflating.
But the investment seasons turn. Today some smart investors are once again saying you should a buy house. John Paulson is one of them.
You may know him as the man who turned the greatest trade of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America.
His advice today is very different. "If you don't own a home, buy one," Paulson said. "If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home."
That's a strong endorsement. It sounds similar to the advice another investor gave his audience in 1971, at the dawn of one of America's biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:
Smith: The best investment you can make is a house. That one is easy.
Cavett: A house? We were talking about the stock market. Investments...
Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don't want to give tips on a television show. For most people, the best investment is a house.
Cavett: I already own a house. Now what?
Smith: Buy another one.
It was good advice. In the 1970s, US stocks returned about 5% annually, which failed to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s as inflation heated up:
1972 - $30,000
1973 - $32,900
1974 - $35,800
1975 - $39,000
1976 - $42,200
1977 - $47,900
1978 - $55,500
1979 - $64,200 You can see that housing held up pretty well. And think about the effect of a mortgage on 80% of that house in 1972. That would mean $6,000 in equity, a sum that went up fivefold in eight years. It's hard to find a better inflation fighter than that. Granted, today's market is different, but still.
Apart from this, you might also reflect on the fact that it is quite absurd today to think that anyone can buy an average house for any of these prices - and that, too, is the point. The average price today is $257,500 - even after the great collapse in the last few years.
"If you have a 7% mortgage and your house is worth half a million dollars," Adam Smith writes, "you may gripe about shoes and lamb chops and tuitions like everybody else, but your heart isn't in it." Your heart won't be in it because you'll be in fine fettle with your house.
Of course, you can do a lot better than 7% today. For the first time, the rate on 30-year mortgages slipped below that on the 30-year Treasury bond. You can get a 30-year mortgage at little more than 4% today.
Factoring in mortgage rates, housing affordability is back to where it was in September 1996. Then mortgage rates were 8% and the average price of a home was $171,600. As Murray Stahl writes: "One can actually buy a home for a monthly payment that is not very many dollars different from the monthly payment one would have needed in September 1996, when rates were significantly higher."
Adjusted for inflation, Stahl points out that the payment for an average-priced home today is about 30% lower than it was 14 years ago.
The advice of Paulson and Smith starts to make sense now, doesn't it?
Essentially, real estate is a way to buy now and pay later. And the case for housing extends to other property types, too. Owners of quality real estate are getting deals on mortgages that we are unlikely to see for a generation.
In my investment letter, Capital Crisis, I haven't recommended a real estate stock since 2006. That may soon change. I've spent quite a bit of time looking over blue chip real estate stocks. Real estate, after a long absence from the menu, is back on.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: As mentioned in these pages before, Chris turned in a stellar year for his readers again in 2010. In fact, with an average gain per recommendation now at almost 26%, he's making quite a habit of it. If you're interested in starting out the New Year with a risk-free trial to Capital Crisis, click here.
| | | | | Inflation...Oil Shocks...Economic Turmoil...It's Back To The 1970s...! |
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| | | | | | Bill Bonner | | A Long Winter for the Unemployed | | |  | | Bill Bonner | Reckoning from Paris, France...
It was snowing when we left Baltimore. Bad weather...
The weather has been odd this year. Florida had its coldest spell ever this year.
Freeways in Southern California were closed because of the snow.
Forecasters are predicting the coldest January in many years.
And Cancun, Mexico hit record lows just when the experts were there debating how to cure global warming.
Here in Paris it is raining...temperature about 45 degrees. Very typical for this time of year.
The first business week of the year was calm. Traders and investors were getting back to their desks, reading the papers, and trying to get a grip on what was going on. No one wanted to panic until he had chance to figure out what to panic about. Except for a big drop in gold early in the week, nothing much happened...
Investors seemed mostly optimistic. Most believed that a slow recovery really was on the way. But the actual reports were mixed and perplexing.
For example, last Thursday, the employment figures were reported as both a triumph and a setback.
This from AP:
WASHINGTON (AP) - The nation's economy added 103,000 jobs in December and the unemployment rate dropped to 9.4 percent last month, its lowest level in 19 months. That sure sounds like good news. But Bloomberg gave the story a different spin:
US Economy Adds 103,000 Jobs, Fewer Than Forecast
Jan. 7 (Bloomberg) - Employers in the US added fewer jobs than forecast in December and the unemployment rate dropped, partly reflecting a shrinking workforce, a sign the labor-market recovery will take time to develop. Hmmm... Not so good after all. It turned out that private employers added 103,000 jobs last month, while the government cut 10,000. But that wasn't why the unemployment rate fell. The fine print in the AP story gives the real reason.
...the job growth fell short of expectations based on a strengthening economy. And the drop in unemployment was partly because people stopped looking for work. What's the real story? What's really going on? The employment numbers are fishy. Last year, for example, a total of about 1.1 million new jobs were created. That sounds nice, until you realize that the economy needs to add about 120,000 jobs per month - or 1.4 million - just to stay even with population growth.
Right now, there are 130 million people with jobs. According to the feds, there are 15 million more who would like to have jobs but can't find work. That puts the total workforce at 145 million.
But wait; ten years ago the portion of the population that wanted to be employed was just over 50%. That would be about 160 million today. What happened? Do fewer people want to work today? Or are there actually fewer jobs, and more people unemployed, than the official figures tell us?
Based on these numbers, the real tally of the jobless is probably about 30 million, or about 18.7%.
The Great Correction continues...
And more thoughts...
Now, here's some bad news. As far as we could tell, the Obama team only had one good man on it...former Fed chief and DR hero Paul Volcker. But word came last week that Volcker is out as head of the president's economic advisory committee.
Dear Readers are reminded that Volcker saved the day back in 1979. He pledged to cut inflation. He kept his word. It wasn't easy. He put interest rates up over 15%...at a time when the CPI was running at 13%. And Ronald Reagan backed him up.
If you're going to get control of inflation you can't trail the CPI. You have to get ahead of it. Which is why Bernanke's pledge is such nonsense. He says that as inflation rates go up, he'll put up the key Fed lending rate to 2%. He's already increased the monetary base to 3 times what it was under Volcker. He's committed to raising it another 33% by the end of June, bringing it to 4 times its 1980s level. When all that latent inflation becomes real inflation we'll see prices rise more than just 2% per year. We'll see them fly.
What we won't see is Ben Bernanke getting ahead of them by putting rates up even more than inflation. It won't happen. Because it goes completely against the grain of Ben Bernanke's theories.
The US is in a Great Correction. He thinks it needs stimulus, not austerity. When inflation rates finally begin to go up, he'll dither. He won't want to put up interest rates at all. At first, he'll hope that it is just a fluke. He'll delay. He'll hesitate. He'll stall. At first, the rise of inflation will be confused with a growing economy. Prices will move up. Consumers will spend money just to get rid of it. Businessmen will think they have more demand on their hands. They may even hire more workers. Stocks may go up.
Bernanke won't want to nip this "recovery" in the bud. "Growth" - even with inflation - is better than no growth, he will reason.
Then, when CPI is really getting up some real speed...and the inflation rate is headed towards 10%...he'll realize that it is too late. The only way to get ahead of it would be to "pull a Volcker"...and bring the whole economy down around him - like Volcker did.
But Volcker was still dealing with an essentially healthy economy. It could survive the fall. Today, the economy is much heavier...and more fragile. Debt levels are three times what they were back then. Stocks are high, with a long way to fall too. And unemployment - as we saw above - is already about 12%, with mortgage rates still near 50-year lows. Imagine what would happen with the prime rate above 10%. Who would hire anyone? How could the US finance its deficits? What would it do to the US economy?
We don't know...but we'll guess that Sherman did less damage to Atlanta.
Inflation will run wild...
*** State of Zombies
How bad is unemployment? Maybe these figures from Insider Monkey will help. Dear Readers will note that they give away the most bread in the same city where they have the most circuses:
In 2006, there were 26.5 million people who received food stamps. In 2007, there were 26.2 million people in the program. So, the "normal" level of food stamp participation was around 26 million people. Things changed in 2008. The number of participants increased by 1.9 million. We were still in a recession during the first half of 2009. Food stamp participants increased by another 5.2 million people that year. There were then a total 33.4 million people receiving food stamps. The recession officially ended by July 2009, and one would expect the worsening to stop. But millions more who weren't officially "poor" in 2009 became poor in 2010. When Republicans were trying to extend Bush tax cuts for the rich by keeping social programs hostage, 6.8 million more joined the ranks of food stamp participants. Now, there are more than 40 million people receiving food stamps, though to remove the stigma they don't call it the "food stamp program" anymore. Now, they use debit cards to distribute the handouts and they call it the Supplemental Nutrition Assistance Program (SNAP). Oh Snap!
Today, there are 14 million more people who try to get by using food stamps than there were in 2007. These are in addition to the usual suspects who have been using food stamps for years. These people aren't your "average" food stamp participants - these are hardworking Americans who fell on hard times. Insider Monkey, your source for free insider trading data, compiled the list of states that are falling harder than the rest. Here is the list of top ten states with the highest food stamp participation rates:
10. Maine: 17.28 out of 100 receive food stamps
9. New Mexico: 17.33 out of 100 receive food stamps
8. Kentucky: 17.9 out of 100 receive food stamps
7. Michigan: 18 out 100 receive food stamps
6. Louisiana: 18.2 out of 100 receive food stamps
5. Oregon: 18.4 out of 100 receive food stamps
4. West Virginia: 18.41 out of 100 receive food stamps
3. Tennessee: 19.3 out of 100 receive food stamps
2. Mississippi: 19.4 out of 100 receive food stamps
1. District of Columbia: 19.7 out of 100 receive food stamps Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
| | |  |  |  | Official US Debt Tough to Calculate
The US ratio of debt to GDP is very much in the range of all the mature economies – between 60% and 80% of GDP; not at Japanese levels either, yet. But wait. In the US, unlike say, France, state and local governments have their own debts, independent of the national government. How deep in the hole are the state and local governments? Truth is, nobody knows.
The World Goes Crazy
On the Worthlessness of Japanese Government Debt | Mistakes With Minimum Wage
As if China does not have enough problems with inflation as it is, being 5.1% overall and with 11.7% inflation in food prices, now, astonishingly, Bloomberg reports that "Beijing will raise the minimum wage by 20.8% in 2011, becoming the latest local government to lift pay in a country where inflation is running at the fastest clip in more than two years."
A Day in the Life of the National Debt
Verbosity is the Soul of Financial Fury | US Dollar Rallies on Unemployment Data
The Jobs Jamboree on Friday didn't turn out to be as robust as the "experts" forecast, as jobs created totaled 103,000 far less than the 170,000 that was forecast... But the media and the White House chose not to focus on that less than stellar result... Instead, they chose to focus on the unemployment rate...
BLS Unemployment Report Doesn't Add Up
Mistakes With Minimum Wage | |
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