Tuesday, March 31, After Market Close

The indicator data just posted at 6:00 PM EST.

The CPC and the Williams%R spiked downward into bullish positions, but I expect them to go into bearish at tomorrow morning's open. The futures market shows the S&P down by 9.10 points after the close (6:15 PM EST) to 785.70; and the Dow down by 78 to 7,484. The 15-min and 30-min Stochastics suggest the market should decline tomorrow.

I think a turn-around into a bearish direction has been pretty well established by the indicators and by the comparatively extreme overbought market conditions, but experts report a bearish market turn-around with the S&P falling to 766.20 at some point tomorrow will provide final confirmation.

I expect this bearish market turn-around to last for one, maybe two weeks. After that, many experts think the market will rally for one to three months thereafter, but I think a lot will depend on first quarter earnings announcements due out in a couple weeks. If earnings annoucements are poor like in January and February, it's quite possible the market could continue to decline.

I want to keep reminding you, a mark-to-market announcement (MTM) is likely to be made between April 2 and April 9, but more likely closer to April 9. If the annonucement is highly favorable to the banks, then this will be a game changer and the market could rally strong for a week to the point of extreme exhaustion from its current overbought state. A favorable MTM announcement could take the S&P to 900.

I will have some pre-market open comments tomorrow.

Using a 15 Fair Value P/E Ratio, Then the S&P Should be Valued at 225

Here's a graph from an article by Brian Bloom.

For the quarter ending December 31, 2008, we had the first quarter in American history having negative earning per share for the S&P. Even after taking out the financials, the S&P earmings per share were still neative by over $2 per share.

Based on rolling 12 months historical earnings – adjusted for Generally Accepted Accounting Principles – the Price/Earnings ratio of the Standard and Poor 500 Industrial Index in the USA was 54.51 as at March 27th 2009.

In simple English, if the S&P Index was to adjust to an historically overpriced level of 20X P/E ratios (the level of red line), it would need to fall by 63% from its current level.

Can underlying earnings in the coming year be “ramped” by the trillions of dollars being rammed into the economy? Well, anything is possible, but the earnings need to more than double across the board in the coming twelve months for the market to merely hold its ground.

When the current market bounce is exhausted, the Primary Bear Trend is more likely than not to resume with a vengeance – given that it will be patently obvious to a blind man that the authorities will have thrown everything but the kitchen sink at the economic downturn; and failed to arrest it.

Tuesday, March 31 Pre-Market Close Update

The market has rallied most of the day as we expected due to the end of quarter portfolio adjustments. The rally has been stronger than anticiapted with the bears putting up little fight.

The rally has affected the VIX and the CPC, which have now spiked down into bullish positions. But 30-min and 15-minute Stochastics are heavily overbought short-term and tomorrow will start a new quarter. It is likely the market will decline significantly tomorrow, but it might be prudent to wait until after 10:30 to 11:00 AM EST to see what direction the market is headed before going short. The problem is there might be a big drop overnight and you would miss any overnight decline in prices.

Everything favors a market correction to the downside at this juncture, but there are no gurantees. I will post tomorrow before market open and during the day if there are any significant developments.

After Close Update:

Wow! The bears did rnumber on the bulls prior to the close.

The VIX ticked back up into a bearish position, but the CPC is still slightly bullish. However, new data will come in after 6:00 PM EST, so I will update sometime thereafter to see if the signals have changed.

Both the 15-min and 30-min Stochastics say the market should drop tomorrow at open and during the day. The futures market points to an even to down market at open tomorrow, but this might change significantly. A price decline below 766.20 on the S&P (the March 20 low) would be final confirmation we have a bear market turn-around.

Monday, March 30, After-Market Close

Today's drop in stock prices produced sells in all of indicators suggesting the market has turned bearish. This market turn-around should last for a week or two with 775; then 750 on the S&P being the initial target price drops. We begin company quarterly earnings reports after the first couple weeks of April, which will determine market direction after that.

As mentioned before, another thing to look for is the mark-to-market announcement likely to be made between April 2 and April 9, more likely closer to April 9. If the annonucement is favorable to the banks, then this will be a game changer and the market could rally strong for a week or so to the point of exhaustion from its current extreme overbought state. A favorable MTM announcement could take the S&P to 900.

Once again, as tomorrow marks the end of the quarter, I expect the bulls to make a good showing and might rally. Both 30-min and 15-min Stochastics suggest the market should rise tomorrow. I expect the market to drop on Wednesday, April 1 when the new quarter begins. Therefore, for conservative investors, the best time to enter the market short might be right before the market closes tomorrow.

March 30, Tuesday Afternoon Update 2:30 PM EST

While the market is trending down as expected, it must be kept in mind that Tuesday, March 31 marks the end of the quarter with financial institutions interested in keeping stocks high at month end. I will be tightening up stops at about 2:50 PM EST in case the bulls make a large rally and take away most of the day's gains. You can get back in at the 3:50 PM before the market closes if stopped out.

Because of the quarter end, I expect the bulls to make a good showing tomorrow, though the market will likely go sideways and rallys will be sold. I expect the market to drop precipitously on Wednesday, April 1 when the new quarter begins when not hindered by quarter end influences.

Monday, March 30 Pre-Market Open Comments

What to look for on Monday's trading based on some expert opinions I've read.

If S&P drops below 791 at any time on Monday, then it's likely game over for bulls and a market correction is in place. If S&P rises on Monday but the high is lower than 833, then it’s likely game over again for bulls.

If S&P drops on Monday but the low is higher than 791, then it’s likely game over for bears and a rally will likely continue as long as the S&P is up more than 60 points within 2 days. So it looks like the bears have more of an upper hand as up 60 points for S&P within 2 days should prove the more difficult task, albiet not impossible.

Another thing to look for is the mark-to-market announcement likely to be made between April 2 and April 9, more likely closer to April 9. If the annonucement is favorable to the banks, then this will be a game changer and the market could rally strong for a week to the point of exhaustion from its current extreme overbought state. A favorable MTM announcement could take the S&P to 900.

10:30 AM EST UPDATE:

All indicators have turned bearish except the BPSPX, which we won't have data until after market close. The S&P just broke down below 790, the VIX spiked up. This appears to be a good entry point for shorting.

The nine most terrifying words 'I'm from the government and I'm here to help"

Here's an analysis of our ecomomic situation from Ty Andros. The highpoints of his article are:

(1) The TIC’s data (treasury flow of foreign funds data) revealed that foreign buyers of US treasuries and agency bonds have just gone negative to the tune of approximately $149 BILLION signaling the growing rejection of US debt offerings.

(2) The spending excesses of the current Congress and administration in Washington DC are dwarfing any seen in the recent past. The federal government’s share of the GDP is poised to explode from approximately 21% to over 28% in less than a year.

(3) Incomes and tax receipts are plummeting, so the percentage of the deficits should rise, RELENTLESSLY. Of course, this does not include states and municipalities who are RAISING taxes and fees in draconian proportions to fund budgets created during the credit bubble; a double whammy to the incomes of the private sector. Growth WILL NOT resume in the US under these conditions. The thought that the US can grow 3% next year while government takes an additional 10% of GDP is wishful thinking and media spin for the masses.

(4) Next year, the stimulus bill increases the size of government agencies by an incredible 80% and adds the new spending to the BASELINE budgets.

Our lives are about to descend into hell and become tortured by overpaid, “brain dead” bureaucrats with virtually unlimited budgets to impose their wills and absurd ideas about what is best for you as defined by government. Do you really believe they can come up with useful things to be done with these gargantuan increases in their size? So the size of government is set to INCREASE in the United States by 88% in one year. This is capital destruction and misallocation of resources on an epic scale.

These government agencies will descend like locusts on their respective parts of the private sector and the result will be the same: barren fields and destroyed economic harvests. As former President Ronald Reagan once quipped “The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'” We are all about to get a lesson in the meaning of his comment.

March 27, Friday After Market Close

Most of the indicators look poised to indicate a market turn-around to the bearish side. On the top graph, both the CPC and CPCE are in a spiked up position, but are waiting for the VIX to spike up for confirmation of a turn-around.

If the stocks go down on Monday, most of the indicators look ready to signal an enter short and exit long position. But as previously explained, the financial institutional managers have a vested interest in keeping the S&P as high as possible through Tuesday as their bonuses are often predicated on quarter-end results. The market will revert back to dynamics unaffected by this influence on Wednesday, April 1.

The market is short-term heavily over-bought and normally requires a correction should it decide to move higher. It is my opinion the correction should take us down to 750ish range for the S&P.

The 15-min Stochastics suggests stock prices should decline in the morning on Monday after market open. The 30-min Stochastics is indecisive, but is near a bottom suggesting stock could rise overall on Monday.

Is a Major US Dollar Devaluation Imminent?

Jim Willie Ph.D. is a well-placed statistical analyst in market research and retail forecasting. Since I first started reading his articles in early 2007, which was before our current economic crisis was a blip on the radar screen, he accurately predicted the severity of our current financial crisis many months in advance and how the events would unfold. In his latest article, he speaks about what one of his trusted colleagues:

This message was just received by a trusted colleague. This summer could be very bloody, in terms of global retribution against the United States, its debt peddlers. The gloves could finally come off. The person has global connections, decades of gold and banker experience, connections with the Euro Central Bank, numerous commercial contacts in Russia, China, and Arab world, and lives with several feet in several ponds, fluent in a few key languages. He is involved in many meetings of international importance, and lately has had the advantage of being involved with both bilateral barter arrangements created by Russia (with China, with Germany). He has a strong reliability record, with advanced notice often provided in a valuable manner. Here is a quote from this morning, which was in response to some queries about continued US Treasury Bond support, recently difficulty with UK Gilt bond auctions, and general monetary debauchery by major nations like US, UK, and Switzerland.

He wrote: “However, come the end of May/June/July 2009, the United States will be put through the meat grinder once and for all. You have no idea how pissed off the creditor nations are with the unmitigated arrogance and delusional bulxxhit coming out of Washington DC / Wall Street. I have never heard people be so furious and vocal on how the US needs to be dealt with from here on forward, as demonstrated during an early morning conference call we had with Europeans, including Russians and Asians. (The emphasis is all his) All on the call are heavy-duty decision makers.” A time of reckoning comes for the US, and my opinion is that what lies directly ahead is a dark place with more economic hardship and far less liberty. Be prepared with ownership of gold & silver bullion, bars, and coins. If not, a likely outcome is more destruction of personal finances, savings, and pension holdings, along with job cuts.

We're now monetizing debt, which is something only "banana republics" do - - right??? The Treasury's auction of 5-year bonds ran into problems Wednesday for the first time causing the market to drop several hundred points before the PPT jumped in and bumped it back up. This should be a warning to all that the US dollar has serious problems. If a new international currency comes into play; e.g., the "drawing rights" as set up by the IMF, the billions of US dollars circulated in other nations will be repatriated to the US. There is no effective mechanism to take all of this money out of circulation once in. We will likely have to monetize a couple trillion dollars more of debt just in 2009 as we attempt to roll over our past deficits and the new proposed spending.

Jim Willie's article follows the lead of several European "think tanks" like LEAP/E2020 who reported a major US dollar devaluation will take place no later than September 2009. They predict a 90% devaluation, which if true, would create hardships and suffering in the US at levels we have experienced in our history, maybe excepting major wars.

Though there will be rumblings, any devaluation would be very swift where one goes to the bank the morning and finds them on holiday (i.e., a banker's term for "closed until further notice"). When they do open up, your money is devalued.

As the US is primarily an import nation, we will find goods imported from other counties soar in price after a major devaluation. Using the 90% devaluation number byLEAP/E2020 and others; it would mean the lawnmower you want to buy now for $150 would cost $1,500 then, or that $40 dinner with your wife might cost $400, or a gallon of gas would cost $30.

Hopefully it won't be that bad, but even with a 50% devaluation, the hardships would be immense. Also, the US is a net importer of food, so food shortages would take place. With $10+ for a gallon gasoline, fertilizers and shipping would raise the costs for food grown domestically. In a major devaluation, incomes will rise some, but no where to the extent of the devaluation. The value of pension plans and savings would decline or be wiped out.

Everybody should have at least 20% of their net worth in gold and silver bullion and 20% in foreign currencies (I like the Yen and the Swiss Franc). The popular GLD and SLV stock ETF that trade in gold and silver are good for stock speculation, but will go belly up in any real crisis. There's been several reports of impropriety related to where their gold/silver holdings are actually located. They are owned by JP Morgan and HSBC who themselves are insolvent.

A good alternative is the Central Fund of Canada (CEF), which have audited and insured gold/silver bullion on hand. The value of their stock rises with the value of their precious metal holdings plus a premium typically ranging from 6% to 10%. My Roth account is entirely vested in CEF.

This post is not meant to spook anybody, but the writings on the wall. You can choose to believe our leaders when they say monetizing debt is a good thing to keep interest rates down, or spending trillions to bail out the banks is a good thing, or spending a trillion for stimu-less will make us better off'; or you can take positive actions to get your financial house into order. There's nobody looking out for you except yourself. When the next big shoe drops - - and it will, you don't want to be under it.

March 26, Thursday After Market Close

The only change in the indicators from yesterday to today is the VIX spiked down into a bullish position. The CPC and CPCE spiked up hard saying market sentiment is strongly supporting a trend turn-around.

Tuesday, March 31 marks the end of the quarter for most hedge funds, banks and other financial institutions. They have a vested interest in keeping stock prices high until then as financial executive bonuses are often based on stock price closings at quarter end. From the market market action, it appears they will keep the S&P above 800 until Wednesday of next week and maybe even take it higher in the interim.

Unless there is some major bad news event in the mean time, I expect normal market forces to resume after March 31. As most of the stock market indicators are in an extremely over-bought condition, a major drop in stock prices could come Wednesday next week when the new quarter begins.

The 15-min Stochastics says stock prices should rise in the morning after market open with 30-min Stochastics indicating prices should drop in the afternoon.

March 25, Wednesday Morning Pre-Market Open Update

I've been thinking about the next leg down, which should start soon. The decline will probably be just enough to convince traders that we are still in a bear market and a retest of the low is actually going to happen. This might suggest a correction as far down as 7,000 to 7,400 on the Dow. This would be just enough to get the short traders sucked in before the next stealth bull rally takes off.

If some of the analysts are right, the next upleg could take the Dow to 9000, maybe 9500 before the rug is pulled out from underneath and we go on to test the lows again. I personally don't see it getting that high as I can't see anthing that will stop the bad news from drip, drip, dripping on us. It would take some pretty good earnings reports in April to take the Dow that high.

But first things first. Today will show whether the current rally has anything left in it. If the market doesn't go up today, it should mark the start of the next leg down. The bulls were absolutely anemic yesterday and I don't know where they expect to find any new inspiration. Timmy's shot all his ammunition for the moment and I don't think we'll find much more inspiration from him for a while. Maybe the Asian market will perk up and give the market new life.

As a side note, today marks the first day the Feds begin monetizing debt. If things do in fact turn out real bad for the US dollar in the future, this very day might be looked back on in infamy as the beginning of its end.

Can the Treasury's Ponzi Scheme Lift the Stock Market

As said by Gary Dorsch about the stock market reaction to Turbo Tim's bailout plan:

How should investors react to the latest 20% recovery in the S&P-500 Index from its lowest levels set just two weeks ago? There have been several powerful rallies over the course of this 17-month old bear market, such as last October, when the Dow Industrials mounted a 1900-point rally in 48-hours, and a second 1,500-point rally after France, Germany, Italy, Spain, Holland, Austria and the United States joined forces to launch a $4-trillion bank bail-out, the biggest in history, with guarantees and fresh capital in a “shock and awe” blitz to halt the market meltdown.

Both rallies and many others since then were nothing more than Bull-traps. Stunning one-day rallies of 500-points or more in the Dow Industrials tend to be the signature of bear market rallies, in which the PPT (federal government Plunge Protection Team) engineers vicious short squeezes. Typically, it’s an ominous sign when a powerful 500-point+ rally simply stalls out the next day, then fizzles-out, and begins to turn lower. It means the retail investor hasn’t been duped by Wall Street pros, - who are anxious to book a quick profit.

Tuesday After Market Close, March 24

The market dropped today as the stochastics said they would. Trading volume was light with the bulls in an overbought condition.

The CPC and CPCE spiked up this morning, but went to a mild slope down after close. If the market declines at close tomorrow, I expect we would get a trend change confirmation with the market ready to start a new down leg. The VIX is already in an up position indicating a bearish trend change. Once all three of the indicators point up at close, then we will have an enter short position.

I speculate the next down leg should take the Dow to about 7,000 or below and the S&P to 745 or below.

The daily stochasics are at a top and ready to head down. Once it does, a new down leg will begin, but it's guidance for Wednesday is indecisive. Both the 30-min and 15-min stochastics indicate the market should drop during the morning hours of trading. If the daily stochastics turns down over its moving average as a result, which it might, then I would suspect tomorrow will end up being a down day.

Tuesday, March 24 - Pre-Market Open Commentary

The market's rally yesterday was a cheer for the plan to save our banks, but the plan will come at a great cost. It will take money out of the private sector needed for growth and business investment and give it to the banks. The tax payer will eventually have to pay for the bail outs. And doing it this way means there is no need to go through Congress for a bailout, which is yet another end-around our constitution. Our leaders intend to inflate our way out of his mess, which will lower our standard of living and make our savings worth less. Hopefully people will come to their senses and realize Timmy's bailout plan is not good for this country. It guarantees a stock market crash of biblical proportions later this year. That's all I'm going to say about this for now.

Yesterday surprised most everyone. The market was strong with the Dow rallying 6.84% and the S&P rallying 7.8%. It was one of the biggest all time advances in stock history. The advance was powerful with about half the rally coming from short traders covering their positions.

The Asian markets are up between 1% an 3.5% this morning, but the European market markets are more timid with a range between -1% to +0.5%. The Dow and S&P futures this morning are are showing a little less than 1% loss at the open.

The market is extremely overbought short-term using both 15-min, 30-min, and daily stochoastics. Though the shorter term indicators say the market should decline today, there might be some upside rally left for a day or two, but it is nearing a top. I expect the market to begin a leg down this week or early next week if for no other reason than a correction is badly needed. I anticipate any upside action today to be relatively minor if it occurs.

Our Ruthless Banking Elite and Timmy's Plan

The more I think about it, the angrier I get.

In my prior post yesterday, I explained how the “Troubled Loan Program” portion of Turbo Timmy's plan is a scam. It’s a thinly disguised bank bailout at the greatest possible potential future cost to the taxpayers. Encouraging private investors to buy up the bank's troubled loans using 33:1 leveraged ratios with this program means the system will be gamed. And doing it this way means there is no need to go through Congress for a bailout, which is yet another end-around our constitution.

Then it occured to me, what if the banks themselves do the gaming. They could use surrogate companies, or bribes to friendly hege funds, or other types of strawmen to buy up their "troubled loans" at high prices. If these "troubled loan" purchases later showed no chance of making a profit, the strawmen would default on their non-recourse government loans used to make the purchase leaving the taxpayers to completely foot the bill. As a matter of fact, the price paid for the troubled loans, though no doubt they will be above maket value, will be of secondary importance to getting the toxic loans off the bank's books and into taxpayers hands.

Heck, with the 33:1 leverage offered by Geithner's plan, all they lose is the 3% down payment, but the price the buyers pay for this toxic garbage might be 50% above market. And the high prices paid by the strawmen will have plausible deniability as each troubled loan portfolio will have different risk parameters. Valuations opinions will vary widely given the existing uncertainty in the real estate market.

And for that matter, the "Toxic Backed Securities" portion of Timmy's plan is just as equally suspect as it provides non-recourse loans for purchasing the toxic assets, but leverage is only 5:1. Both portions of the Timmy's plan are a matter of heads I win and make a profit, or tails the taxpayers lose.

Never... and I mean never underestimate the ruthlessness of the American banking elite. And this is more true now than ever as they literally fight for their survival. They have bankrupted countries for profits and celebrated in some cases. This is about their survival and I look forward to documenting some of the their most popular international ruses at a later date.

Another point, is anybody really under the illusion that Geithner failed to pay income taxes because he made an honest mistake... or is it because he’s a crook? We're talking about tens of thousands of dollars here... it's not like he accidently deducted a couple personal expenses. In fact, he was specifically reimbursed in cash for his social security expenses; though he never declared he owed any on his income taxes. He can't be that stupid.

Also, please don't confuse your local banker with this group, whom I know many and are generally a great bunch of guys. Most have no clue about our banking elite's shenanigans until I enlighten them. I'm talking about the big bank executives who run America's financial system.

I will leave you with a few quotes from famous people as food for thought:

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance." - James Madison

"Give me control of a nation's money and I care not who makes it's laws." - Mayer Amschel Bauer Rothschild"

From now on, depressions will be scientifically created." - Congressman Charles A. Lindbergh Sr. , 1913"

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford

"This [Federal Reserve Act] establishes the most gigantic trust on Earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." - Charles A. Lindbergh, Sr. , 1913

"The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency." - Henry Cabot Lodge Sr., 1913

"Some people think the Federal Reserve Banks are the United States government's institutions. They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers." - Congressional Record 12595-12603 - Louis T. McFadden, Chairman of the Committee on Banking and Currency, June 10, 1932

Monday, March 23 After Market Close Comments

Wow, what a day. The S&P blew right through the 800 resistance line and the 40-day moving average and didn't blink. It stopped at a minor resistance line at 825. The next major resistance line is 875.

The CPC and the CPCE shifted to a bullish setup this morning. The VIX shifted to bullish after close. With the shift, the downturn on Thursday and Friday now gives all appearances of being a market correction. With the correction upward for all three of these indicators, it made the dashed vertical sell line on the graph for yesterday a perfect head-fake. The chart shows this has happened two other times in the past six month where all three indicators quickly turned around, which are indicated by the red circles above October 19 and November 5±. However, this head fake was the most perfectly executed of the three and occured during a bullish market sentiment turn-around time period. Even then, the October 19 head-fake didn't really include the VIX, which went horizontal, and the November 5 head-fake can be easily indentified as a market correction.

Like this head-fake, the October 19 occurred during a big news event. I should also point out that the CPC and the CPCE can continue heading down with market sentiment getting more bullish even as the market keeps heading higher. What I try to do is identify the market turn-arounds, which at this point there doesn't seem to be one. With this strong of a move up today, I have to think there will be some bullish follow-through tomorrow.

I will have some additional thoughts and analysis in my premarket opening comments on Tuesday morning.

The March Housing Report and a Look at Our Real Estate Problem

The existing home sales report came this morning and was better than expected showing a rise in the average price of homes sold.

But there's a lot in the report to be concerned about. The inventory of 9.7 months of unsold homes remained unchanged. But more importantly, the data shows the prices are rising because the sales are now including greater numbers of more expensive middle class homes as short sales and REOs. With 45% of all the home sales being problem properties; this increased monetary distress for the middle class is not a good omen. With the loss of the middle these class homes comes greater losses for credit cards and car loans; and a general reduction in spending. Analysts say this report is not nearly as good as it outwardly appears.

Our declining real estate market will continue well beyond 2012. The Monthly Mortgage Reset graph to the left shows large numbers of mortgage price resets that will take place well into 2012. This has been a big cause of the real estate market downturn to date. But if mortgage interest rates can stay below 6% until 2012; then the resets may not be as severe a portion of the real estate problem. I just don't see the Fed being able to keep interest rates down in an inflationary environment for more than one to two years; let alone for five years.

The home delinquency and foreclosure rates will continue relatively unabated for many years, but it will be driven more by job and income losses rather than a changes in payments. Also, there's the increasing problem with "jingle mail," where homeowners who are underwater with their morgages walk away from their homes rather than continue to pay off a devaluing investment (they send their keys in the mail to the bank - thus jingle mail).

Zillow reported 15% of all homes in the United States have negative equity; i.e., they owe more than their home is worth. For those who purchased a home in the past five years, 30% owe more than their home is worth. And with home prices expected to fall further this year and next, the number of "underwater" mortgages will increase signficantly. Christopher Thornberg of Beacon Economics reports the underwater phenomenon will be very bad in 2009.

In the real estate market, a six month supply of home listings is a stable inventory. When the inventory of homes rises higher than seven months, home prices will begin declining as it becomes a buyers market. Even in the situation where the inventory is in the process of declining from ten months to eight months, home prices will continue to decline. Only when homes reach a price level where they will sell in seven months or less will prices then stabilize.

RealtyTrac reported foreclosure-related filings on 2.3 million U.S. properties in 2008, an 87 percent jump from the year before, with 861,664 homes making it through the entire process to become REOs. As many of these homes were still in the process of foreclosure, or delayed foreclosure due to moratoriums on foreclosure activity by some lending institutions, it is likely the total number of actual foreclosures from the 2008 filings might reach upward to 1.5 million to 2 million homes.

The biggest problem associated with these foreclosures is that 75%± of all the properties foreclosed upon (REO) since this crisis began are still owned by the banks. Banks have been forced to bid on their own properties at the foreclosure auctions in the amount of their loan principal to prevent further deleveraging. When these foreclosures hit the market, the price of real estate will further plummet.

As of January 2009, the total FDIC insured REOs new home sales was 309,000 units (seasonally adjusted to an annual rate), and 4,912,000 for used homes; or 5,221,000 total annual home sales both new and used. The total number of homes with foreclosure filings since the third quarter 2007 was 3,900,000 dwellings. Of these, it is estimated 3 million units have or will become REO's. About 75% of all foreclosed properties since the financial crisis began in the third quarter 2007 are still held by banks and lending institutions as REO's, which is about 1.5 million dwellings. This number will likely grow to 3 million REOs owned by lending institutions in 2009. This estimate may be conservative as more homeowners lose their jobs or walk away from their underwater mortgages.

The 11-month inventory of homes in January was about 4,800,000 million homes. If the 3 million REOs anticipated for 2009 and prior years are placed on the market, the total home sales inventory would rise to about an 18-month supply. Or based on the newest numbers of unsold inventory at 9.7 months, it would equal a 16.7 month supply of home listings.

These homes will eventually hit the market, unless they are demolished, which has been given serious consideration as a solution by several economists. At what price would a home sell if all of these homes were listed for sale within two years? As ridiculous as it might sound, assuming a stable inflation rate, it is entirely conceivable home prices would fall to early 1990 prices whereby a home currently priced at $400,000 that was $600,000 a couple of years ago might have to sell for $200,000 or less; and a home currently priced at $200,000 might sell at $125,000.

This is the dire situation facing the real estate industry, the banking industry, and our economy. And I don't believe Turbo Tim's new plan is able to solve this problem. Though the federal government will provide guarantees, placing a large inventory of REOs into a declining real estate market is not economically feasible; and in fact would be a foolish thing to do.

Given that REOs will not let up until at least 2011, the private investor's Geithner hopes to purchase these homes will have a holding time of 5 years to sell; otherwise, a quick introduction of these homes into the real estate sales market will create a glut, which will cause home prices to plummet further. If private investors held onto these homes for an average of 3 years before selling them to maintain some semblance of market stability; using an annual acceptable return of say 25% (though 30% is more realistic), then home prices would need to be discounted by about 95% for the three years holding time if purchased at an unleveraged price. Using 5:1 leverage, or a 20% down payment as Geithner's plan proposes, the home purchases would require an instant 20%± discount to the price paid by private investors. And this does not include the costs associated with property management, upkeep, property taxes and other carrying costs. The point is, there are all kinds of problems with Geithner's plan, which the market will soon figure out.

We have some serious real esate problems, which will be with us for many many years, at least through 2012 and perhaps 2015. Real estate values will never again in our lifetimes rise to those prices experienced in 2006 in real dollars as an artifically created bubble. But they might in inflated nominal dollars within the next couple of years when mass inflation takes over.

Monday, March 23, Pre-Market Open Comments

Last Thurday was a tame day for the market. Traded volume was light giving apperances of a temporary market correction in a long string of up days. But Friday 's volume was strong, the type of decline day needed to mark a market trend turn-around.

The markets are euphoric with Turbo Tim's plan. At this time, Dow futures are up 146 and the S&P 16. Asian markets are up between 2% and 5%, and the European markets are up 1% to 2.5%.

There should be some good up volume today as bulls finally have something to cheer about. The market is oversold short-term coming out of Friday, so this should be an up day most all the way. We could see a couple consecutive rally days here, but intermediate term, the market is over-bought and the overall outlook for this week is down.

I will post if there are any significant developments during the day.

11:45 AM EST Update:

The S&P is hovering right at 800. If we close above here today, then we might be off to the races. The next stops up are 830; then 875. Might be time to go long.

I'll have to do more market anlaysis after close to see if a continuing rally is viable. From my perspective, I still think the market will decline this week before continuing a rally (if it does). A bigger correction is needed than the two down days last week, but stranger things have happened.

Turbo Tim Geithner to the rescue!!!! NOT!

Well, it’s a fine mess your getting us into now!

Just to provide a quick synopsis, the government plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road. The plan focuses on (1) toxic backed mortgage securities, which is the toxic bad debt held by the banks; and (2) troubled loans on bank books in the process of going bad.

For those who don’t want to read this entire post, the following three paragraphs sum up my opinion of Turbo Tax Tim’s plan.

The “Toxic Bad Debt Program” is okay, but it won’t set the world on fire. As a professional real estate consultant, let me assure there are too many problems in the real estate industry that are unsolvable given our current paradigm. The only way to make this portion of the plan work is to give the private sector an assurance real estate prices will go up in the future - - and the only way this can happen is by future mass inflation. If this portion of the plan works, it will be the market voting that mass inflation is imminent.

As much as I hate to say it, the “Troubled Loan Program” portion of the program is entirely a scam. It just plain stinks all over itself. It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. Tim Geithner is scamming the system for his banking cronies. With up to 33:1 leverage ratios offered by this program, it will be gamed. The prices paid to banks for their troubled loans will be set by the most unethical of unethical investors gaming the system. And we taxpayers will be obligated to pay top dollar as determined by these gamers when real estate values go south.

What Geithner is saying is the banks are willing to assume the bad debts already on the books, but they don’t want any responsibility for future bad debts coming down the line. Really, it’s that simple. They want to shift the responsibility and risk to the taxpayers.

The Toxic Bad Debt Program:

To target the toxic debt held by the banks, the government will create several investment funds with the Treasury, who will co-invest by contributing $1 for every $1 of private sector money invested. At this time, the plan does not specify how the profits and losses from any investment will be divided between the private investors and the taxpayers.

If one subscribes to free market intervention, then what is there not to like? It could take a lot of toxic assets off the bank books to stabilize them. But, the only way to get the private sector to invest is if they are reasonably assured real estate prices will go up. Given the current economic paradigm, there are too many problems in the real estate industry that are unsolvable. Thus, investors must be assured of future MASS INFLATION to make this portion of the plan to work. But then again, maybe I give the hedge funds and private equity firms too much credit.

Yes, there is a way to solve this problem, but it doesn’t involve continuous feeding of the big derivative black hole. The total value of home all mortgages in the US is about $10 trillion dollars. The total amount of money committed to cleaning up this toxic mess is about $12 trillion dollars with about $5 trillion already spent (not exactly sure as it goes higher each week).

If that $5 trillion were rebated back to taxpayers with the caveat at least half of the money be used to pay off debt, the financial crisis would be solved. The banks would be recapitalized, citizens would have less debt, and life could go on its merry way. But our overlords are shortsighted and too beholden to the banking elitists. This will be the subject of some later posts.

The Troubled Loan Program:

To target troubled loans, the government will create a Disposition Finance Program (DFP) working with the FDIC to act as co-investor. The banks will “package” their troubled loans for sale. Since the loans are by definition troubled, a large portion will go to foreclosure. The DFP will contribute up to 80% of the financing with private investors putting up 20% or more; i.e., 5:1 leverage. The FDIC would guarantee against losses on bad assets the banks want to sell up to $500 billion.

However, the NY Times implies the program has even greater leverage. To provide further enticement for private investors to buy these “packages,” the DFP will provide no recourse loans back to private investors up to 85% of the value of the “package.” The remaining 15% will come from government and the private investors. The DFP would put up as much as 80% of this 15% with private investors putting up the remaining 20% of the 15%. If you crunch the numbers, private investors could be contributing as little 3% of the total purchase price of the “package.” That’s a 33:1 leverage ratio.

A lot of investors are willing to spend $3 to buy a $100 “package.” That’s super leverage. The downside is private investors can only lose their original $3, but if the “package” doubles in value down the road, they could make big money. The specifics on how the profits would be divvied up are not yet available.

The problem is, with this type of leverage, the system can be gamed. As the Market Ticker explains:

Quote - - Let's say I'm "Frobozz Bank" and have $100 billion of this trash (a lot!) on my balance sheet. Its mostly performing (for now) on a cash-flow basis, but I know what the deterioration in on-time payment flow looks like, and as a consequence I know in advance that eventually this paper is going to be worth much less than my "internal" marks (that I'm reporting every quarter on Level 3.)

So here comes Treasury. They offer 20:1 leverage (I put up 5%) and the "private parties" bid for the assets, with their maximum loss being capped at their contribution (that is, if there's more than a 5% loss the taxpayer eats it.)

Aha! Now if I can be the "private party" I can overpay on purpose, capping my losses at 5% of whatever I "buy" from myself! I am thus able to transfer the other 95% of the risk onto the taxpayer and I escape with a 5% penalty off the purchase price!

That, if it happens, is an enormous scam and Treasury and the FDIC must absolutely guarantee that it not occur. If it does, we the taxpayers are going to be violated to an insane degree while the true "risk money" (and there's a lot of it out there) won't go anywhere near this program, because they, being unwilling to overpay, will simply lose the bidding contests.

So in order to prevent intentional overpayment you must as a matter of policy (and even law) enforce strict separation of the funds that are doing the buying from anyone that has an interest in the sellers, and make clear that if you catch anyone cheating extremely severe sanctions - like 100 years with Bubba - will be the consequence.

If you do not the process will get gamed and the taxpayers will lose. --End Quote

What this means is if private investors do in fact overpay for these “packages,” which they will because of high leverage, it will obligate taxpayers to pay money over and above what the assets are worth down the road if these “packages” go more than 3% south in value.

To put it mildly, this plan absolutely stinks! It’s a thinly disguised bank bailout - - another one - - at the greatest possible potential future cost to the taxpayers. High leverage helped get us into this mess, now they want to mess up the mess.

How much this plan will cost taxpayers will depend on the most unethical of the private investors. The more unethical the investor, the higher they will pay for the “packages” to game the system. If real estate prices head south; there’s no question taxpayers will pay far more for these troubled loans than they’re worth. It’s a profitable no-lose deal for the banks. They will get top dollar for their crap and once these troubled loans are off their books, they’re gone. They don’t have to worry about them again. The banking gods will be laughing all the way to the bank.

This plan actually has me wishing for mass inflation so real estate prices go up to get taxpayers off the hook. Matter of fact, I wonder if there’s a way I could invest $10,000 in this - - heck, I’m willing to pay top dollar and I could make big $$$$$$.

History Never Exactly Repeats, But It Rhymes a Lot

The graphs to the right are fairly self explanatory, but I will provide additional analysis when time allows. Illustrated are three graphs, one for the current market, one for the market crash of 2002 (an optomistic scenerio), and one for the Great Depression (a pessimistic scenerio).

The Great Depression graph has two wave counts, one in red and one in blue, depending on perception. I'm inclined to go with the red wave count as being more representative if in fact that scenerio is currently unfolding. The vertical lines A and B in the two graphs represent where we are now when compared to the historical 2002 market crash and the Great Depression.

What pulled us out of the 2002 market crash was the real estate bubble. This might explain why our leaders are now recklessly printing money and throwing everything against the wall to see what sticks in their attempt to create another bubble, and by using inflation.

These graphs also explain why we are at a critical juncture in our economic situation. Using history as a guide, it appears we're now at the point where the market either goes up or down big-time in the next few weeks. History never exactly repeats, but as the graphs illustrate, it sure ryhmes a lot.

Where will the market go from here? Ask yourself, how confident to you feel about the future? Will things change for the better in the next few weeks? In the end, the market will decide this for us.

To be continued - -