It's been months since I posted Lance Lewis' thoughts. His missive tonight is excellent.
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And The Mortgage Defaults Begin…
Asia was a mixed bag overnight, with Japan off just a touch and Hong Kong up nearly half a percent. Europe was flat this morning, and the US futures were also flat.
We opened flat in the S&Ps and immediately began to rally as if people expected Heli-Ben to give them the wink and nod in his speech from Jackson Hole.
When the headlines from Gentle Ben’s speech hit the wires about 30 minutes after the open, pretty much everybody was disappointed to discover that Heli-Ben made no comments about monetary policy or the economy. I guess he learned his lesson about showing too many of his cards after his experience with Maria Barta-bimbo on Heehaw.
The rally in the S&Ps immediately flamed out, and we plummeted back to a marginal new low for the day that was just shy of Thursday’s lows.
From there, we then began a slow saw higher that pretty much put everybody to sleep. After trying to rally all day long but failing to retake the morning’s highs, the bulls finally gave up in the final thirty minutes, and we plunged back to the middle of the day’s trading range for the close. Volume was pathetic and could have been one of the lightest sessions of the year for all I know (1.1 bil on the NYSE and 1.3 bil on the NASDAQ). Breadth was barely positive on both exchanges.
The chips were mixed and mostly up or down less a percent, although INTC was a star performer for whatever reason and popped 2 percent. The equips were also mixed and mostly up or down a percent. The SOX fell just a hair.
The rest of tech was pretty evenly mixed and unremarkable.
The financials were mostly lower. The BKX and XBD both fell a percent. MER fell half a percent, and GS fell a percent. Both made new lows for the week today as well, and given that the brokers often lead the rest of the market, it’s another sign that time is running out for the rally. The derivative king fell a touch. BAC fell a percent, and C fell a touch. GE was flat.
GM fell 2 percent. AIG rose a touch. ABK rose a touch, and MBI fell a touch. The subprime lenders and mortgage lenders were crushed across the board after HRB said it was going to take a $61.3 million charge, or 19 cents per share, for losses related to rising delinquencies by subprime mortgage customers. Ready for this shocker? Apparently, many of its subprime mortgage customers are already falling behind on loan payments. Truly shocking isn’t it? HRB plunged 9 percent.
As you might expect, the news from HRB appeared to turn on some light bulbs in anything related to credit card and mortgage lending. Subprime lenders COF and ACF were both busted. ACF fell 3 percent and back to its recent low for the year, while COF fell 2 percent to another new 52-week low.
Among the mortgage lenders, NEW, NDE, and AHM all fell 5 percent. DSL and CFC both fell 3 percent. In the mortgage insurance area, PMI fell 2 percent, while MTG and RDN both fell nearly 3 percent. Recall that we’ve been looking for signs that the mortgage default tsunami was beginning to come into shore, and I’d say today’s news confirms that it’s already here, at least for the most vulnerable of borrowers in the subprime area. FRE was flat, while FNM fell a percent.
The retailers were mixed, with the RTH ending virtually flat. Both TGT and BBY fell a hair.
The homies were mixed and mostly up or down a percent or so. BLDR fell over a percent.
Crude oil rose 15 cents to $72.51 on fears that Tropical Storm Ernesto might become a hurricane over the weekend and threaten Gulf oil production. Natural gas popped about 5 percent for the same reason. The XOI rose a hair, while the XNG and OSX both rose over a percent. The XLB rose just a touch. The JOC (Journal of Commerce Industrial Commodity Price Index) collapsed nearly 4 percent and could be confirming that trouble is coming for many GDP sensitive commodities like copper and other base metals as the economy rolls over. The CRB rose just a hair.
The base metals were mostly lower, with copper falling another percent.
Gold opened up a couple bucks this morning in the US and proceeded to rally to as high as $633.50 but then fell back to as low as $628.50 after Heli-Ben apparently didn’t say what the gold bulls wanted hear I guess. For the close, the metal bounced back up to near the middle of the day’s trading range to end up $2.30 to $630.80. Silver rose half a percent.
The HUI rose a percent and back to just shy of its July and August highs.
The juniors were more mixed. CBJ, MFN, and MRB all fell over a percent, while CGR and NSU both rose nearly 5 percent. GSS bested them all and posted a 6 percent pop to a new high for the week and the move since its June lows.
As we’ve discussed before, the period of August through September is when the news flow is going to turn extremely positive for GSS as we get closer to the BIOX plant finally being commissioned and annual production nearly doubling as a result. As a result of this news flow, I would expect GSS to likely outperform the rest of the gold shares during this period, regardless of what the price of gold does.
The gold shares continue to outperform the metal, and that’s generally a bullish sign for the shares. We may have to wait until September when volume returns to the stock market, but the shares are still set to break out and run to new highs in my opinion.
Next Friday we’ll get the August unemployment report. Given that each of the last 3 reports have been progressively weaker and that the economy has continued to slow during August, next Friday’s report could be the final economic data point that we need to confirm in the gold market’s mind that the Fed is indeed out of the picture and done, which should then allow the metal to begin to rally in anticipation of what typically comes 6 months after the Fed stops raising interest rates…. which is of course an easing.
The Fed’s only weapon to fight economic and financial problems is to cut interest rates (which spurs more credit growth) and in essence “print money” through permanent liquidity injections into the banking system. The only problem is that the Fed cannot control where all of that excess money and credit goes. Given that people have now been burned in both stock and real estate bubbles within the last 6 years, it’s not going to go into either one of those assets in my view.
Instead, given the stagflationary environment that we’re already slipping into, my bet is that a large part of that liquidity is going to go into gold, especially given that gold’s bull market was in no small part begun by the Fed’s easings in 2000-2003 and the corresponding dollar weakness that they triggered. In other words, the trend is already in place, and more liquidity on top of the excess liquidity environment that we’re already in is only going to make conditions even more bullish for the yellow metal. The ease with which one can now buy gold via the GLD ETF also make the metal more attractive than ever before.
Remember, the biggest fortunes have been made not by attacking the demise of the bubble that was coming apart over the past 10 years. The biggest fortunes were created by anticipating what the Fed’s response to the crisis would be (which of course was to print money) and then correctly anticipating where that excess liquidity would go.
In 1998, the excess liquidity primarily went into tech stocks. In 2001, it went into residential real estate, although commodities and gold also benefited as well. When the Fed unleashes the printing press to try and cushion the housing bubble’s implosion, where will the excess liquidity go this time? That’s the question to be asked today, and I think a strong case can be made that much of that liquidity will go into gold given we’re already in a somewhat stagflation environment and have a chronically a weak dollar.
Speaking of which, the US dollar index rose a freckle. The yen fell nearly a percent and back to just shy of its July lows after we learned overnight that July consumer prices failed to rise as much as expected, which then generated doubts about the BOJ continuing to tighten. The euro was off just a freckle and continues to flop around between 1.27 and 1.29 (spot). Obviously Heli-Ben’s speech was a nonevent for the dollar as well. Like with gold, next week’s unemployment report could be key in ending the current stalemate between the bulls and bears in the currency market.
Treasuries rose a touch, with the yield on the 10yr slipping to 4.779% and another marginal new low for the move since the July peak. The 2/10 inversion was nearly unchanged at –8 bps.
The 10yr junk spread to treasuries narrowed 4 bps to 326 bps over treasuries.
Stocks continue to gyrate around and basically go nowhere. With only a week to go until the Labor Day holiday, the bulls are quickly running out of time for a rally in my opinion. The bad news from the real world is already trickling in (NSM, HRB, etc), and we’re not even into September yet.
For me, the big news of the week was not so much the horrific housing data but rather today’s news of rising mortgage delinquencies at HRB. More than anything else, this is the sort of financial distress that the Fed really pays close attention to, and is why I continue to believe that the Fed is much closer to easing for the first time than it is to another tightening.
This sort of financial distress is only going to grow as the housing bubble continues to implode in the coming months and the overindebted consumer is forced to default on mortgages and credit cards. Home prices are already falling in many US cities, but it’s going to get even more interesting when they begin to fall nationwide.
Will an aggressive easing by the Fed halt the housing bubble collapse and prevent a consumer-led recession? It obviously didn’t prevent the tech bubble from collapsing, even though the housing bubble that resulted from the Fed’s actions did cushion that implosion somewhat. So, I think the clear answer to that question is “no”. Unfortunately, this time, the Fed has no asset bubble to inflate in order to offset the drag on the economy that the previous asset bubble’s implosion is going to cause.
In fact, the only asset classes that appear to be set to benefit from the printing presses being run full out this time are gold and potentially commodities in general as well, which is actually going to do more harm than good to an economy in which 70 percent of GDP is a result of consumer spending. But they’ll still run the presses. After all, it’s all they know how to do… |
