Sunday, April 12, 2009

VIX Below 40/Housing Recovery?/Budget Deficits & the Value of Treasuries/ABC & CBS Programs on Gun Show Loophole

The budget deficit hit 192.3 billion in March and has reached 956.8 billion during the first six months of the fiscal year ending in September 2009.  It is hard for me to visualize how treasuries can maintain their current valuations given the vast supply of new issues that have to be floated to pay back maturing securities and to finance this burgeoning deficit.  The treasuries have benefited from a flight to safety, but the fear motivating mindless buying at virtually any yield seems to be abating.  Once that flight to safety trade starts to dry up, I would expect treasuries to start losing some of their premium valuations.  After all, longer term, the interest of governments is to devalue their debt obligations with inflation.  Since about 1940, the purchasing power one dollar has sunk to around 8 cents. Measuring Worth - Purchasing Power of US Dollar As of last Friday, the 3 month Treasury bill was priced to yield .183%, the 5 year at 1.897%, the 10 year at 2.926% and the 30 year at 3.751%.  One benefit of those low rates is that the government is able to arbitrage the difference between its low borrowing cost and the rates charged by it to the banks, typically 5% or 8% plus stock warrants.  

Another piece of encouraging news is that exports rose in February for the time in seven months.  BEA : News Release: U.S. International Trade in Goods and Services

A continuing drag on a recovery is the large supply of vacant homes, estimated to be 1 out of 9 homes.   One article worth reading is from Friday's edition of US Today  There is an interesting chart in that article prepared by Arthur Nelson from the University of Utah that contains state by state estimates of the year when the excess supply will be soaked up and new construction will be necessary to meet demand.  Both Tennessee and California were estimated to need new construction in 2009.  Other areas in the country have so much inventory that is might take another two years to clear it.  Given the tremendous fall in prices and the currently low mortgage rates at below 5% (with the 15 year near 4.5%), housing affordability in many communities in California has to be more in line with median family income.  Every 1% drop in the interest rate reduces the monthly payment by about 10%.   It is difficult to see the justification now for another 20 to 30% decline in home prices forecasted by the pessimists. 

 My only information about California real estate comes from reading news articles, and I have noted several in this post that discuss the tremendous fall in prices.  I noted one story about San Jose where the median housing price had been cut by over 50% since November 2005 .  Prior to the correction in home prices, only 16% of the families could afford the median priced home in San Jose, wheres now the number has risen to about 50%. First Industrial/Immelt's Letter/Double Top in the S & P 500?/Home Prices & Household Income/  I have seen similar statistics for other localities in California. Housing-affordability index gaining in county, nation
The Los Angeles Times recently conducted a study of housing prices and family incomes for Southern California and found that prices had fallen to 2002 levels.  Los Angeles Times Along with the fall in mortgage rates, I have previously expressed an opinion that California real estate prices may have already hit bottom, and this may be one source of the better than expected news from Wells Fargo last week.  In addition to its regular book of mortgage loans, Wells had acquired a large number of  loans from California with its acquisition of Wachovia (Wachovia ran into trouble after acquiring Great Western that had a number of funky mortgage products which blew up)  This would suggest my recent purchases of lottery tickets in smaller California banks with significant real estate exposure may pay off.  I may add a few more.  I am not sufficiently confident in this prediction to risk more than small amounts of capital consistent with lottery ticket type purchases, as shown in the recent 50 share purchase of UCBH at $1.64 rather than 100 shares which after all would have just been $80 more or a 1000 shares which would have no big deal.   FASB Gives Leeway/Buy of 50 UCBH: Lottery Ticket/Winstream/Low Dividend Yields=Low Earnings Growth/Dividends=Most of Stocks Historical Returns

Alan Abelson has a different perspective on the potential recovery in real estate.  He is incapable of seeing the glass half full since he will always struggle to see the glass empty.  It has to be difficult for Alan to be bearish for virtually his entire and very long life, except for a couple of months back in the early 1980s.  In this week Barron's, he relies on a study by Whitney Tilson and Glen Tongue to predict more gloom and doom, like a 50% average fall nationwide in home prices.
He has one interesting statistic in his article.  The mortgages securitized by Wall Street constituted 16% of the mortgages during the bubble years but represent  62% of the delinquencies.  This is consistent with my earlier points about the consequences of divorcing risk and reward so that the ones who originated and packaged those mortgages received generous rewards without bearing the consequences of their irresponsible behavior.  When there is no skin in the game, the financial motivation becomes simply to produce a living human to sign the mortgage papers and to ignore the risk of default, since the loan would be packaged with others and sold to gullible investors who then bore the near certain risk of a high default rate, with triple A rated mortgage pools now rated deep into junk soon after being peddled by the denizens of Wall Street. 

I suspect that the tremendous fall in prices, coupled with the historically low mortgage rates and the government's loan modification plans, will be the magic elixir to kick start a housing recovery sooner than expected by the optimists, let alone the perma pessimists journalists like Abelson, and hedge fund managers like Tilson who profited from the mortgage meltdown by shorting financial stocks.   

I have invested most of the proceeds raised by selling short term bonds with about one grand left.  Once I am finished with that re-allocation, I am going to go back to my trading rules which will be a serious restraint on further purchases.  The VIX did fall to 36.53 last Friday which is encouraging compared to where it has been but it is not where it needs to be to spur more buying.  The VIX did previously fall below 40 this year during the rally in early January.  For the most part after the Lehman failure, the VIX has been at extremely elevated levels above 40. Between August 2007 when it broke the stable bull market pattern decisively to mid September 2008 it was in an elevated pattern between 20 and 30 with occasional spikes above 30 and a brief movement at below 20 during May which is one reason for requiring 3 months below 20 before re-allocating cash to stocks in my VIX model.    CBOE VOLATILITY INDEX Index Chart - Yahoo! Finance   More stability is needed to confirm the existence of a bull market start than a few weeks.  An unstable VIX pattern, consistent with what I call the Transition Phase to a bear market or a bear market, will have occasional spurts from an elevated VIX level to below 20 which the trader in me would use as an opportunity to sell stocks and buy the double short ETF for the S & P 500, at least in the early phases of the unstable VIX pattern.   We are currently in an unstable pattern and have been since August 2007. Trading and Asset Allocation in Stable and Unstable VIX Pattern

The charts from DShort that I like to look at show that the S & P 500 has now rallied 26.6% off its recent low.  This appears to be stronger than previous bear rallies, a point confirmed by reading Michael Santoli's column in Barron's.

The Tennessee legislature is moving closer to authorizing the carrying of weapons into bars.  One gentleman was quoted saying that he was in favor of even less restrictions, and he was looking forward to carrying a concealed weapon into J. Alexanders, an upscale eatery near my house.  Personally, I do not recall any gunfights at Alexanders but you never know.    I wonder what would happen if a nut with a gun opened fire in a crowded restaurant, pandemonium then breaks out, with the unarmed civilians starting to run here and there, and several of the law abiding citizens take aim at the shooter and each other possibly, mistaking each other as a threat in the chaos.  Possibly, someone might actually hit the nut with gun but I doubt it.  The gun nuts more likely would hit unarmed civilians or each other.   There are not that many Wyatt Earps out there, capable of being slow in a hurry,  who would remain calm in a gunfight, with a steady hand, choosing their target carefully and then  actually hitting the right target with bullets flying everywhere.  ABC recently filmed what a trained marksmen would do in a stressful situation where a gunman enters a classroom and shoots the teacher.  Students start running in every direction.  This is still pretend with no live ammunition or life and death situation unfolding.  Would there be a single hit on the gunman? ABC News  The answer is no but they fired at other students as they came across their field of fire without realizing that they were even in the line of fire.  

While I respect the efforts being made by the young man whose sister was killed at Virginia Tech to show how easy it was to buy weapons at gun shows, no questions asked, I would regard his efforts as futile and a waste of time, just look at the comments to the ABC story.  ABC News  True Believers are not susceptible to reason or facts and are quite simply beyond all hope.  At least 65 House Democrats are opposed to any form of assault weapons ban and the members of the GOP tribe want less restrictions than prevalent now.  

And ad for a recent gun show said "get your guns while you still can",   CBS News
purposely stoking the fear that Obama and the Democrats were going to take away their firearms or "tax" their ammunition which is creating an ammunition shortage.  The same fear was felt by that law abiding young man who answered the doorbell outfitted in body armor and armed with a AK-47  and then proceeded to murder three Pittsburgh police officers.  Personally, I find it interesting to read the comments made about the 60 minutes story this evening.  Generally, and this is a fair summary of the comments that are not entirely illiterate and riddled with cliches, those making comments claim extreme bias by Ms. Stahl, which is to be expected by anyone presenting a disagreeable report to one of the True Believers, and the other main point is that freedom as we know it would cease by requiring background checks at gun shows or banning the sale of AK-47s.  

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