Are we nearing the tipping point for Real Estate?

.

There's a whirlwind of pertinent news out there right now and it makes me wonder if we are at the tipping point for Real Estate, both in Canada and here in the Village on the Edge of the Rainforest.

The real estate pollyanna's are all agog at the recent sales data which has prompted the British Columbia Real Estate Association to declare that plunging prices in B.C.'s residential real estate market are levelling off.

"The majority of the decline in home prices has already occurred," said association chief economist Cameron Muir, in a report released on Tuesday. "Balanced markets are emerging in Victoria, Vancouver and the Fraser Valley. There's now little downward pressure on home prices in these areas."

Prices have stabilized because of increased demand, with seasonally adjusted home sales raising over the past three months, according to Muir. "First-time buyers were largely absent in the late fall and winter, making it more difficult for move-up buyers to sell their current homes. The chain of ownership is now being oiled."

The chain of ownership is being oiled alright, but is that chain about to fall off the drive shaft?

There have been some interesting posts over on the real estate discussion board 'Real Estate Talks'. One particular contributor, who takes great glee in dissing all bearish viewpoints, has made some interesting observations of late. He has noted several times now that, "My buddies in the business tell me that a lot of seller's are tapped out of equity in the properties that they are selling. Many of the mortgages are very close to the selling prices, ie: no equity left. Although there are a lot of first time buyers purchasing these properties, the Seller's don't have the equity to buy 'up' or buy 'down'. So maybe what we'll see is the prices at the bottom end of the market strong, but quite a weakening in the mid level prices."

And it buyer's fail to move up, Muir's optomism of recovery will fail. And its not just Muir's optomism riding on this.

The federal government has slashed interest rates in a desperate attempt to stave off both a plunging economy and plunging real estate values. That - and a highly manipulative campaign to drive first-time buyers into the market - is what is driving the current sales spurt.

For the government, this is crucial.

We have seen in the United States how much real estate values are interconnected to the financial system. The goverment is desperate to stem the collapse and forestall the decline in hopes that the 'Immaculate Recovery' will occur in the meantime and resuscitate both land values and the economy.

But beyond stemming the collapse, ominous signs of catasophe are looming on the horizon.

Statistics Canada released it's latest survey yesterday and B.C. just recorded the fastest increase in the number of employment insurance beneficiaries since comparable data was first recorded in 1997.

More critically, Economists say the new numbers show a Canadian economy that is shrinking at a pace most Canadians have never experienced with joblessness having become a central element of the downturn.

So what do we have here?

Unemployment is dramatically rising, the economy is shrinking and home sellers (who see the writing on the wall) are dumping real estate holdings at a price the gives them little or no equity after paying off their mortgage just so they can get the debt burden off their back.

Those sellers can see what is coming. And what's coming has been playing out in the financial markets over the past week.

Sales of US Treasuries fell for a fourth consecutive day, pushing 10-year note yields to a six-month high, amid concern record U.S. debt sales will overwhelm investor demand as the economy begins to show signs of stability.

Yields on long-dated U.S. debt are now in nose bleed territory, the return on the benchmark ten-year Treasury now careening quickly toward the once unthinkable "four percent" level as detailed in this report at Bloomberg.

Why is this important? Because yields on Treasury notes are the benchmark which sets the prime rate used for lending by Banks.

Noted investment advisor Marc Faber has been moved by these developments to strongly suggest the U.S. economy is on the cust of entering “hyperinflation” (see the bloomberg story here).

While Faber's views may be a little extreme, there is no doubt we will see much, much higher inflation when the U.S. Federal Reserve embarks on its campaign to normalize interest rates. It must withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, making high inflation is unavoidable.

And high inflation means high interest rates.

That will kill off the first-time entry buyers, eliminate any 'move-up' buyers, and send Real Estate values plummeting downward again.

And that's before all those who currently hold mortgages start having to renew at the dramatically higher mortgage rates.

Anyone care to wager how many of those first-time buyers, who jumped into the market with those all time low rates because it made home ownership affordable, will be able to renew next year at a 5% higher rate?

There is a very ugly nexus forming in the coming months and it is going to take a miracle to avoid it.

The tipping point is very near.

==================

Email: village_whisperer@live.ca

Finance Minister admits economy worse than he thought.

.

Ya gotta love it.

Do you remember in the 2008 Canadian election campaign when our Finance Minister, Jim Flaherty, bellowed that Canada would not run a deficit?

With the election safely secured, the government promptly sang a different tune.

Then, in January 2009, Flaherty conceded what we all knew... the worldwide economic downturn was going to affect Canada after all. The Minister then announced a plan for $84.9 billion in deficits over the next five years, ending 11 straight budget surpluses, as the government tried to stimulate growth with tax measures and spending.

The Jan. 27 budget projected the economy would contract 0.8 percent, down from a December forecast for a contraction of 0.4 percent. The government bases its forecast on a consensus estimate by economists.

So much for consensus.

Yesterday our intrepid Finance Minister said the federal deficit will be “substantially” greater and the economy will shrink more than he forecast in January.

The Bank of Canada anticipates a larger 3% contraction in 2009, which would be the biggest decline since 1933. The central bank has also cut its key lending rate to a record low 0.25 percent.

Canada’s economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the biggest drop on record, the Bank of Canada estimates.

“We’re not in the least surprised,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto. “We have been predicting since March that Canada would run more like a $40 billion deficit in 2009-10. The writings have been on the wall for many months -- the economic assumptions used for the original budget were no longer realistic.”

Canada has gone from a $15 billion surplus in 2006 to a $40 billion deficit in 2009-10!

This represents the most rapid and intense deterioration of national finances in the country’s history, a swing of more than $50 billion in a year.

One thing is clear. The economic 'Immaculate Recovery' had best occur with lightening speed or else our nation is in for a heap o' financial pain.

==================

Email: village_whisperer@live.ca

Two Economic Clips worth watching.

.
The first is CNBC's "The Call" and discussions of the US Dollar falling to it's lowest levels of the year.

The second is Peter Schiff discussing the last week of the stock market where three significant events occurred simultaneously for the first time: Stock prices fell, bonds fell and the trade weighted US dollar fell.




==================

Email: village_whisperer@live.ca

Sunday Funnies May 24th, 2009

==================

Email: village_whisperer@live.ca

A three dressed up as a nine?

.

If you missed the late updates, there was a total of three bank failures for the list yesterday in the US.

While the US economy may be lagging, much of the postitive economic news lately has been focused on China. Part of the recent optimism in world markets rests on the belief that China’s fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government’s target of 8% this year.

A significant portion of the stock market gains in Canada have been premised on China's revival and their need for commoditites to fuel that growth.

Now it apears red flags are being raised on that optomism.

Concerns are appearing that all may not be as rosy as portrayed by Bejing. Some economists suspect that the Chinese figures overstate the economy’s true growth rate. These same economists are saying that Beijing would report 8% growth regardless of the truth.

Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China’s GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%.

The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; while analysis shows that it actually declined by 1.5%.

China’s growth in the first quarter of this year has led some to conclude that the government is up to the same old tricks. According to official figures, GDP was 6.1% higher than a year earlier. Yet electricity production in the first quarter was 4% lower than it had been a year earlier. In the past, GDP and electricity output have moved broadly together. Given that power statistics are less likely to have been tampered with than politically sensitive GDP figures, is this evidence that the latter have been fiddled?

Then there are government tax revenues. These have fallen by 10% over the past year, compared with a surge of 35% in early 2008, suggesting that incomes and output have tumbled.

Abraham Lincoln famously said you cannot fool all of the people all of the time.

If the revival in China turns out to be less than it appears... can you guess how the Canadian stock market is going to react?

==================

Email: village_whisperer@live.ca

Like sand through the hourglass...

.
UPDATE: Bank Failure #36 - Citizens National Bank, Macomb, Illinois
UPDATE: Bank Failure #35 - Strategic Capital Bank, Champaign , Illinois
BANK FAILURE FRIDAY UPDATE: Bank Failure #34 - BankUnited, Coral Gables, Florida

.

As I said yesterday, in the end it’s all about the economy.

For several weeks now pundits have been agog about the 'green shoots' indicating a recovery may be at hand.

Balderdash.

While it is true that the markets have recovered over 30% from last year’s lows, something just doesn't add up.

First quarter corporate earnings are down over 30% and there is a serious disconnect between stock prices and economic reality - just like in late 2007. Those plunging headlong back into the market seem to think that the 50% sell-off in 2008 was overdone and great bargains are now available.

I believe those investors simply do not understand the economic maelstrom of last October.

As I have said over and over, the crash of 2008 was a once in a multi-generational event borne of systemic problems in the economy.

Economists like Peter Schiff have succinctly identified the issue and we have profiled them on this site. The North American economy must allow dead industries to die and permit the natural restructuring of capital and manpower that will rebuild the economy.

But government is interfering. Like an addled heroin addict who cannot break free of his drug addiction, our governments continue to indulge in the traditional vices of over-borrowing and over-spending. Wherever the private sector attempts to correct its behavior, a bloated federal government overrides its efforts.

Faced with a meltdown of the banking system. World governments injected trillions of dollars into their economies and changed accounting rules to ensure that a systemic banking failure was averted. Though the system has stabilized, investors seem to forget that none of the fundamental problems have been solved. We may have survived the initial catastrophe, but the system remains wrought with faults.

By diverting trillions of borrowed dollars into keeping alive vegetative corporations such as AIG, Chrysler, Big Banks and GM, our governments are preventing new enterprises from access to vital labor and capital resources. We are enshrining inefficiency.

North America needs fundamental restructuring in order to compete in an increasingly competitive marketplace. Meanwhile, profitability in those countries that do the hard work of restructuring can be expected to rise disproportionately as the world economy revives.

The news wires are already a tither about another avalanche of loan defaults and derivative failures that are coming down the pike, sham “stress tests” notwithstanding. The "stress-tests" will prove to be nothing more than a confidence-boosting whitewash of the massive problems confronting the banking industry.

As corporate earnings fail to keep pace with the blistering ascent of stock prices, look for investors to bail on the market as they did in late 2008.

Only this time the damage will be even more severe.

After the crash of 2008, investors fled to the safe havens of the U.S. dollar and U.S. government debt.

It won't happen that way next time.

China, the world’s largest gold producer, has recently doubled its central bank’s gold reserve. China also floated a preliminary idea at the recent G-20 meetings to replace the U.S. dollar with a gold-linked international reserve currency. This idea may soon catch on among creditor nations who value real money but also want the flexibility to undervalue their paper currency for the benefit of exporters.

Russia, in a news story announced yesterday, has moved away from using the US dollar as its basic reserve currency (see story here)

At the beginning of the 20th century, the U.S. dollar became the world’s reserve currency because, at the time, it was “as good as gold.” Now the world’s largest debtor nation will suddenly confront the true weight of its obligations and be forced to significantly lower its standard of living.

We are nearing the crest of some serious (and tumultuous) times. And the markets are starting to sense it.

Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing.

So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

Meanwhile Chinese exports are dropping as the global economy weakens, with overseas shipments declining 23% in April from a year earlier. This leaves China (a nation that has already expressed concern about its U.S. investments) with less to spend on supporting that debt in the future.

This is not going to end well.

And Real Estate will be but one of the massive casualties.

==================

Email: village_whisperer@live.ca

CMHC Data puts damper on Real Estate Industry enthusiasm

.

CHMC lastest forecast, released on Tuesday, indicates British Columbia's real estate markets have reached a point where it is difficult to predict if they'll go down any further or begin a recovery -- or even when either might occur.

So much for the rosy expectations of the Industry the last few weeks.

Province-wide, the forecast calls for a 43-per-cent decline in housing starts compared with 2008. It estimates that builders will start work on 19,725 new housing units this year, with a 10-per-cent uptick to 21,000 new units in 2010 -- a far cry from the 34,321 built in 2008.

On home resales, the federal housing agency expects 2009 MLS-recorded sales to fall almost 16 per cent to 58,100 units before climbing again to 67,750 in 2010. Average prices are expected to hit $403,700 this year, an 11-per-cent dip, and increase a marginal 0.7 per cent in 2010.

In Metro Vancouver, the expectation is for housing starts to decline almost 44 per cent to 11,000 new units in 2009, then edge up slightly to 11,500 in 2010.

Metro housing resales are expected to drop almost 13 per cent this year to 22,000 transactions, then rise almost 14 per cent to 25,000 in 2010. Metro prices are expected to sink 13 per cent to $516,000 in 2009 and a further 2.3 per cent to $504,000 in 2010.

Meanwhile Tsur Somerville, director of the centre for urban economics and real estate at the University of B.C.'s Sauder School of Business, believes there are a lot of mixed signals in the economic data. "Canadian housing sales are up, but U.S. housing starts are down," Somerville said in an interview. "Stock markets are up, but retail sales are down. There are lots of different things [going on]."

Somerville added Canada's mortgage rates, currently at extremely low levels, also throw a wrench into forecasts. He said one model used to calculate home values suggests that, with mortgage rates where they are, "housing is affordable in Vancouver, and prices could rise." But with B.C.'s weaker economic conditions, he doesn't believe that will happen.

Economic forecasting, Somerville said, works better when conditions are in some kind of equilibrium, and doesn't do as well trying to figure out when things will change.

"Right now you're trying to figure out when a complex world economy is [going to turn] around, how fast it's turning around, and where it's turning around," he added. "It's just a very, very difficult environment to turn around."

In his most recent quarterly report, Rudy Nielsen, president of the research firm Landcor Data Corp., noted that the recent trend of rising sales over the past few months could be signalling that the downturn is near its bottom and represents "a light at the end of the tunnel."

Or, Nielsen said, the blip in sales "could be a grizzly bear with a flashlight. It's tough to guess right now where the hell we're heading."

I guess that's 'data-speak' for sitting on the fence.

In the end it's all about the economy, both in Canada and the United States.

Are the fundamentals there for recovery? Or are the 'green shoots' actually the yellow weeds of a bear market trap?

You all know my thoughts on that one.

==================

Email: village_whisperer@live.ca

Sunday Funnies - May 17, 2009

.
(click on image to enlarge)

==================

Email: village_whisperer@live.ca

Psst... Wanna buy a used car dealership?

.

The automaker crisis is about to hit the rest of Canada as the impact of the GM/Chrysler debacle spreads beyond the Ontario border with the slashing of the vast dealer networks of both companies.

General Motors of Canada Ltd. is poised to cut almost half its Canadian dealerships and force 310 businesses to close.

This is a bitter pill for the dealerships. Downturns in the auto sector in the past have always hit assembly centres such as Oshawa and Windsor. Dealers would see their sales shrink, but they have never had to face closings and thousands of job losses.

Welcome to the new reality. What's worse is that dealers don't know yet who will get the axe.

Marc Comeau, GM Canada's vice-president of sales and marketing, told Canadian dealers yesterday that their number will be reduced to 395 from 705 and those who are being cut will be informed during the new few weeks.

Meanwhile Chrysler Corp. said it would dump 789 of its dealers by early June.

In the United States, dealers who sell less than 35 cars a year were among those notified in the first round of cuts.

One imagines there is significant angst in dealerships across the country this weekend.

==================

Email: village_whisperer@live.ca

Another warning about the market and... it's BFF.

.

Robert Prechter is a longtime technical analyst who forecast the 1987 stock market crash and authored a book in 2002 ("Conquer the Crash") in which he warned of the dangers of a U.S. debt bubble and deflationary depression.

His take on the current stock market? He predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Prechter is now the chief executive at research company Elliott Wave International in Gainesville, Georgia. In an interview this week with Reuters, Pretcher said he also believes Oil and U.S. Treasury bonds are locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that's akin to the Great Depression.

"It's not the start of a new bull market.Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932.It's a very rare event."

Prechter says The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries. He believes that next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets.

Curiously, however, Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.

Bank Failure Friday

Prime Minister Harper said two months ago that, "there won't be a recovery until the U.S. financial system is repaired." So we watch the US banking developments with keen interest. As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, prompting Friday to be renamed 'Bank Failure Friday' by many economic blogs. Currently the carnage is up to 33 failures in 2009.

Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

==================

Email: village_whisperer@live.ca

There must be a pony around here...

.

Ahh... the credo of the eternal optomist as adopted to the real estate industry. You could walk into a house and be up to your knees in manure and a real estate agent would cheerfully tell you... "Gee, this place must come with a pony."

Once again the Real Estate pollyanna's shill about the return of good times, the underlying message the same as always... Don't be left out, you better buy now!

The latest is the Real Estate Board of Greater Vancouver telling us that the Greater Vancouver housing market "has entered a more moderate and balanced state," with sales and benchmark prices both up in April compared to March.

And don't kid yourself, the local real estate community is doing everything it can to whore values higher.

The industy is eagerly pointing at 3% mortgages and homes being up to 15% more affordable than they use to be. The carrot is dangled furiously at people who wanted to buy in the past, but could not. "Now," the pollyanna's proclaim, "they can."

As we have documented here in the past month the crucial first-time buyers are being relentlessly prodded into action.

The pollyanna's hook their prey and trumpet that the Federal government will let them raid $25,000 from their RRSPs, tax-free, to buy a home. The Feds will also donate $750 to help them close. Then real estate industry creates media releases about young buyers rushing into the market in this, perhaps the best (and last) time, to buy into the market.

Even the mighty CKNW, the radio station that bills itself as "BC's News Leader and the station you turn to in an emergency", has turned to pimping for the real estate industry. Surely you have heard the sickening PSA's that tell everyone that 'now is the time to buy'.

For shame. It's peer pressure at it's manipulative best.

And what about the real news? The economic winds are not blowing kindly.

The public service abounds with rumours of slumping revenues, pending cuts in spending, and a much bigger-than-budgeted deficit.

Watch for a new provincial budget on the heels of the BC Liberal election majority that cuts services, raises taxes and slashes funding to municipalities.

What is it they say? Shite rolls down hill? Municipalities will, in turn, cut services and raise - wait for it - property taxes. And the hikes will be significant.

All of this comes on the heels of yesterdays news that bankruptcies in B.C. are soaring and that heavy job losses are taking their toll on individual residents. B.C. has the dark distinction of having posted Canada's third-largest increase in consumer bankruptcies, behind Alberta's 99.8-per-cent increase and Newfoundland's 88.9-per-cent rise.

Mark my words, if the economy does not perform the Immaculate Resuscitation investors in the stock market are being hoodwinked into believing, all those being sucked into buying now are going to be very, very bitter.

Maybe they can console themselves as they hunt around their new house looking for the pony.

==================

Email: village_whisperer@live.ca

Tug O' War

.

There's nothing like a good 'ole fashion Tug-O-War to get the competitve juices flowing, is there?

Yesterday we profiled Meredith Whitney, a former stock analyst at the investment bank Oppenheimer & Co. Inc, an insider who became one of Wall Street’s first bears when credit markets started to freeze in 2007. Early this week, after government evaluations of their financial health, she said banks are “grossly overvalued” and that "at a core basis, I would not own these stocks. Their business models are not going to come back."

Enter Bill Miller, fund manager of Legg Mason's Value Trust mutual fund. Miller is famous for having beat the Standard & Poor’s 500 Index for a record 15 straight years (before stumbling in 2006) and he proudly proclaims that financial companies are his favorite investment for the rest of the decade.

Now there's bravado for you! And if there is something investors love, it's confidence.

Miller is a self-titled 'value investor', someone who seeks the cheapest companies relative to earnings or assets. Last week he said, “financials have the biggest potential to outperform” and boldly named his favorite picks as San Francisco-based Wells Fargo & Co., Capital One Financial Corp., and New York-based American Express Co.

And faithful readers know how much the Whisperer has been picking on Wells Fargo of late.

So it is with great interest that we will watch the great Bill Miller and his stock market advice because, make no mistake, it is at stark odds with what the Whisperer has been saying.

Miller’s says his bets hinge on U.S. home prices stabilizing this year and an economy that performs better than projections from the Federal Reserve. Whisperer believes both will do the opposite.

To his credit, in the first three months of 2009, Miller bought about 3.77 million shares of Wells Fargo (who, btw, is the largest U.S. mortgage originator) and almost quadrupled his position in credit-card company Capital One, according to data compiled by Bloomberg and Legg Mason’s Web site. Miller also increased his stake in American Express, the biggest U.S. credit-card company by purchases, by about 22 percent.

With a maasive wave of foreclosures yet to come and a tsunami of credit card write-downs in the offing, what does Miller see that Whisperer does not?

Perhaps a lot.

Miller can currently boast tremendous success with his investments. Since March 31st Wells Fargo has gained 70%, Capital One 96%, and American Express 77%.

But as we saw in yesterday's post when we profiled Whitney, there is significant concern bank stocks will decline because the gains aren’t matched by improvements in their businesses.

“The underlying core earnings power of these banks is negligible,” cited Whitney, who quit Oppenheimer in February to start her own firm, Meredith Whitney Advisory Group LLC in New York. U.S. banks will likely return to “negative earnings” after posting first-quarter profits and the largest companies must sell assets after expanding at an unsustainable pace in the past two decades.

Furthermore home prices are likely to be down 50 percent from peak levels, which makes gains unlikely and a recovery in consumer spending (which accounts for 70 percent of the U.S. economy) may be undermined as banks and card companies slash $2.7 trillion in credit lines by the end of 2010.

It's a classic battle of viewpoints. What makes it so compelling is that the viewpoints are such polar opposites. And the impact from the winner will affect stock markets and real estate worldwide.

We do indeed live in interesting times.

==================

Email: village_whisperer@live.ca

Insider issues warning about US banks and their stock

.

As you already know, Whisperer has been critical of US Banks like Wells Fargo. Their stunning turnarounds in profits have been a large factor in the current market rally that continues to gather steam.

Enter Meredith Whitney, a former analyst at the investment bank Oppenheimer & Co. Inc.

Whitney, who has her own firm now, is renowned for calling out the problems with banks' toxic assets before the issue became widespread. What's her take on the great bill of health given to banks by the recent stress tests?

Whitney thinks Banks are overvalued and the government enabled them to have better first quarter earnings than they should. "At a core basis, I would not own these stocks," she said on CNBC. "Their business models are not going to come back."

Whitney also said that consumer spending is still going to remain slow. "There's a massive retraction in consumer liquidity," said Whitney. "Credit contraction is happening at an accelerated pace. Consumer spending is going to be less than people expect going forward."

Whitney also issued an ominous warning for stock market investors when she said that the rules of trading have changed because of the government's role. "For investors, you invest on what you know to be the rules of the game," said Whitney. "But with the government involved, no rules apply."

Whitney said the changing rules create a big problem for investors going forward. "The biggest danger here is having the retail investor shut out for a period of time because they don't know who to trust on market values."

Day after day more warnings come out about the health of this market rally and how it is not based on solid fundamentals.

The Whisperer encourages you to take heed.

==================

Email: village_whisperer@live.ca

Sunday Funnies May 10th, 2009

.

(Click on image to enlarge)

==================

Email: village_whisperer@live.ca

April Job Loss Numbers

.

So did you catch April's job numbers from Stats Can?

After most economists and observers were predicting another 53,000 jobs lost, Stats Can reported the following stunning job GAINS!

"Employment grew by 36,000 in April, the result of an increase in self-employment. Despite this increase, overall employment has fallen by 321,000 since the peak in October 2008. The unemployment rate was unchanged at 8.0% in April, remaining at its highest level in seven years, with the growth in employment coinciding with an increase in the labour force."

On the strength of this news the TSX jumped over 270 points and the Canadian dollar surged ahead over a cent and a half.

What great news for the economy, right?

Well... not so fast. You know how all those statistical survey's say they are accurate to within 2 or 3 points four out of five times? And the fifth time they are way, way off?

Whisperer will bet you that this is one of those surveys: way, way off.

Here's why.

First of all, everyone - and I mean everyone - was floored by these results. Secondly, things get awfuly fishy when you examine those results a little closer.

"Statistics Canada said 35,900 positions were added during the month, driven by an increase in self-employment... The biggest employment gains were in Quebec, up 22,000, and British Columbia, up 17,000."

17,000 jobs gained in British Columbia??? BC, the province which has been recording closure after closure, gained 17,000 jobs? What manner of new math is this?

"Quebec's employment increase of 22,000 in April was accompanied by a slight rise in the unemployment rate to 8.4%, the result of more people in the labour force. Since last October, employment in Quebec has declined 0.8%, less than the 1.9% drop at the national level."

"In British Columbia, employment rose by 17,000 in April. The unemployment rate remained at 7.4%, as there were more people in the labour force. Despite April's gains, employment has declined by 52,000 (-2.2%) since October 2008."

Wait a minute and hold the phone, here! Quebec's unemployment rate went up? BC's rate of unemployment did not change? So how is there an increase in jobs???

Explore the data a little further and you discover that most of the jobs were 'created' in the self employed sector, 9 out of 10 jobs created. And the people that filled these jobs were phantom workers (those workers who were previously not counted as unemployed).

And how do they get these numbers? Well, on page 53 of the report it says, "the statistics contained in this report are based on information obtained through a sample survey of 53,000 representative households across the country."

So they phoned up 53,000 homes (presumeably 5,000 in BC and 5,000 in Quebec) and they find that the same number of people are out of work in BC and more people are out of work in Quebec than last month... but 36,000 jobs were gained across the country because a whole bunch of people said they were now working for themselves at home.

Marvelous.

And what are they doing? Collecting pop cans for the deposit?

Trade is still down -23% year over year (YOY). Manufacturing is doing better, but it is still down -6% YOY and only comprises 7% of the employment. If you look at Table 6-1, page 50, both employment participation and employment rates are down for the lower mainland.

And the same number of people who were unemployed in BC in March are still unemployed. And in Quebec, even more people are unemployed. Yet the 36,000 job gain came from these two provinces.

Marvelous.

Clearly this is that 1/5 survey that is skewed and non-representative of reality.

Funny how it comes at a time when politicians are desperate to nuture and protect what they see are precious 'green shoots' of improvement in the economy.

And the 15-second soundbyte on the news is all it takes for the market to zoom upward.

Now you know why markets collapse they way they do, months down the road, when investors suddenly 'discover' stock gains aren't really based on sound fundamentals after all.

==================

Email: village_whisperer@live.ca

Bank Failure Friday, More Inflation fears and Hockey Trivia

.
UPDATE: Bank Failure #33: Westsound Bank, Bremerton, Washington.

UPDATE: No failures yet, but FDIC so busy they will open temporary East Coast Satellite Office to help close banks.

.

Well... it's the day after the results for the infamous US Bank Stress Tests has been released. Will it also be Bank Failure Friday as well?

As faithful readers know, bank failures in the US always seemed to be delayed until late on Friday afternoons, and there have been so many regular failures week after week that Friday has jokingly come to be called 'Bank Failure Friday' in many economic blogs.

2009 is off to a record breaking year with 32 failures so far. Updates in red/blue at the top of this post as they come in from the FDIC (click on blue portion to see press release from FDIC).

--------------------------------------

INFLATION FEARS

Bond market watchers are all a tither. Check out this chart (click on image to enlarge)

This is the intraday chart on the long bond futures. For those who follow such things, this is one nasty chart. The dramatic line going straight down represents the drop in demand for US bonds. As a resuIt the yield (interest rate paid on those bonds) had to spike upward in order to sell the bonds. The US government just sold $14 billion of long bonds at a whopping 4.288% yield. That was far above pre-auction forecasts for a yield of 4.192%, according to Bloomberg.

This prompted China to issue its clearest warning to date about worldwide inflation.

"As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies' devaluation risks may rise," the People's Central Bank of China said in its quarterly report.. The bank fears a "big consolidation" in the bond markets, clearly anxious that interest yields will surge as western states try to exit their QE experiment.

Simon Derrick, currency chief at the Bank of New York Mellon, said the report is the latest sign that China is losing patience with the US and aims to diversify part its $1.95 trillion (£1.3 trillion) foreign reserves away from US Treasuries and other dollar securities.

This has a tremendous potential to impact our economy and the real estate market so we will explore this in the coming week.

--------------------------------------

HOCKEY TRIVIA

Meanwhile the Village on the Edge of the Rainforest Canucks let one slip away from them last night. Series is tied 2-2 instead of the Canucks being up 3-1.

Therefore two hockey trivia questions for you today in symmetry with the 2-2 series deadlock.

Who has his name on the Stanley Cup the most times AS A PLAYER (11 times)? Click here for the answer.

Now... who has his name on the Stanley Cup the most times (10 as a player, 7 as a club executive, total 17 times)? Click here for the answer.

==================

Email: village_whisperer@live.ca

TD said 'buy now', Scotiabank says 'prices still to fall further'

.

Yesterday we read TD Canada Trust's sales promotion disguised as a real estate market assessment.

Today Scotiabank offered a bit of a different take on the R/E Market.

The Vancouver Sun reported the story in an article titled "B.C. housing prices still under pressure to fall, Scotia Economics says".

While acknowledging that BC real estate sales have lifted from last fall's dismal lows, Scotiabank stressed that "market oversupply and deteriorating economic conditions will still pressure prices downward."

March and April saw "pretty strong sales volumes" across the country, said Adrienne Warren, a senior economist with Scotia Economics, the Bank of Nova Scotia's economic-research division. However, "prices are not really firming up [in B.C.] as we've seen in some other parts of the country. There is still a bit of correction going on in a lot of western markets: Vancouver, Calgary and Edmonton, where they are still working through some overshooting of prices and excess supply."

That, she added, will mean "a little more downward pressure on prices."

Warren still offers a few optomistic assesments for a market turnaround, which is fine. That is the sort of honest assessment that the public needs from the banks 'economic advisors'.

Not the TD-style sales marketing spewed out on behalf of the mortgage department.

==================

Email: village_whisperer@live.ca

Sound Advice... Or Sales Propogranda?

.

One of the biggest criticisms observers have of the real estate market is when sales hucksterism is dressed up as sound advice.

As posted here on March 28, 2009, the CMHC Housing Analysis that had been released that week showed the number of completed (yet unsold) condo units in the Vancouver market has shot up to 2,391. The year before, in March 2008, the total was a lowly 1,384. More importantly it noted that there are 25,907 units under construction and due to come onto the market as the year moves along.

Granted, a large number of those units will have been 'pre-sold'. But it is clear that there will be a huge glut of inventory flooding the market this year. The real-estate-without-land market is massively overbuilt.

Logically that will continue to push prices down, won't it?

Not if you shill mortgages for a living.

On Monday TD Canada Trust released it's most recent "analysis" on the state of the market. Reading the hilights, it is hard to equate the word 'analysis' with what looks more like condo-hype advertising copy.

In a press release trumpeting the 2009 TD Canada Trust Condo Poll, TD gushes that "the perceptions of the condo market have improved significantly over 2008 with 44% of urban Canadians believing the current conditions have improved for buying a condo as an investment (versus 21% in 2008). Why? Respondents say it is a buyer's market and condo prices are declining. If they can't afford to buy one on their own, 43% are willing to consider a joint purchase with a friend or relative to make the condo purchase possible."

I wonder how they came to these conclusions?

It was exactly one year ago that the market was at it's absolute peak. Since then values have been steadily dropping.

Question: Do you think conditions have improved for buying a condo today, as an investment, as opposed to last year?

Kind of a no brainer answer, isn't it. Of course they have improved! Would you or I buy a condo today? Not a freaking chance.

You or I wouldn't buy because an already over-saturated market is about to be flooded with a massive amount of additional inventory. Perhaps that's why the TD Canada Trust poll only went from 21% in 2008 to 44% today. Even with such a jury-rigged question, only 44% of respondents would answer 'yes' to that loaded question.

The 'official' press release is filled with additional gems like, "while 44% of survey respondents believe the current conditions for buying an investment condo are better than a year ago, versus just 21% agreeing with that statement in 2008, the amount Canadians are willing to spend has remained consistent."

These kinds of weak surveys allow the mortgage division of Banks to leverage the 'good news' to shill their products under the guise of a news story.

After presenting a ream of similar contrived nuggets, Joan Dal Bianco - TD Canada Trust's vice-president of real estate secured lending - then gives the classic real estate sales pitch hook. "This is a good time to explore a condo purchase given that mortgage rates are very attractive right now and many condos have dropped significantly in price."

Uh-huh.

As a sales pamphlet, it is great advertising.

Dressed up a news and investment advice, it comes across as attempting to manipulate the herd mentality that created the housing bubble in the first place.

And that's what rankles.

=====================

Email: village_whisperer@live.ca

More on Wells Fargo, yesterday's market rally and an update on a previous post

.

Faithful readers know that I have beaten up on Wells Fargo in the past because of it's dramatic financial balance sheet turnaround.

Critics have raised concerns that the stunning improvement in their financial situation has more to do with bookkeeping manoeuvres than the fundamental improvements.

Enter the infamous 'stress tests' of the 19 largest financial firms in the US. These 'tests' are a centerpiece of the Obama administration's plan to stabilize the banks. Some critics have decried the process as weak and ineffective, an artificial attempt to instill confidence in America's financial system.

Regulators have said they will not allow any of the 19 firms to fail because it would be too dangerous for the rest of the financial system. Wells Fargo holds billions of dollars in mortgage, construction and credit card loans.

And based on the results of their 'supposedly sound' quartly balance sheet released last month, Fargo stock has almost doubled in value.

Which make the latest leaked results of the 'stress tests' even more disturbing.

Wells Fargo is one of several banks that regulators will force to hold larger buffers to protect them against possible future losses, according to two people familiar with the matter who spoke on condition of anonymity because of the sensitivity of the process.

Apparently regulators have told Wells Fargo to shore up its finances after the stress tests showed the bank would have trouble surviving a deeper recession.

What happened to the outstanding quarterly results that had Wells Fargo on an excellent financial footing?

-------------------------------

In the Markets yesterday...

Yesterday, at about 11:05am, the Canadian Business News Network declared that different conditions were driving the market upward for the day. The BNN host stated that "gains appear to be driven by investors who are jumping into the market for fear of missing out on the rally".

Hmmm...

'Green shoots' that are nothing more than signs the economy is doing less worse, instead of getting better & impulse stock buying because investors fear they are missing out on the rally.

Perhaps you recall yesterday's post about the three stages of a bear market trap?

Don't look now, but I think the canary in that cage over there is dead.
-------------------------------
Update Post

You will recall that on Saturday April 25, 2009 I made the following post titled "Deja Vu - all over again". On that day the phrase that pays was 'corporate-style subprime loans'.

I cautioned that the next big financial disaster looming on the horizon in the United States was commerical mortgages structured just like the subprime housing loans.

Today the Miami Hearld published a story sounding a warning over this exact issue. Quoting the article, "Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won't be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the nation's housing market.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks."

Hmmm... make that TWO dead canary's in that cage.

==================

Email: village_whisperer@live.ca

Three Stages of a Bear Market Rally

.

Seven weeks ago the DOW fell below 7,000. Since then the DOW has soared to over 8200 and the S&P 500 has climbed about 30% in the steepest rally in more than 70 years.

The bulls are off and running.

But is it a bull run or is it a Bear Market Trap?

Hedge fund manager, philanthropist, philosopher, billionaire George Soros has been quite vocal about his suspicions in the sustainability of this rally. Soros said:

“It’s a bear-market rally because we have not yet turned the economy around. This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

Your dutiful scribe believes there are just too many problems to work through and an unwillingness to accept the inevitable solutions to gamble in the current market. I have bailed just like I did last August.

But be forewarned. Despite my apprehensions, it’s looking much more likely we’ll see more upside in the short-term than the start of a downturn.

Why? Because we haven’t run through all of the phases of a bear market rally.

Bear market rallies are unique events. They come when they’re least expected and can last a few days, weeks, or months. There’s no telling exactly when they will end. But if you pay attention to the life-cycle of past market movements, you can get a good idea of when this one is going to end. Here, then, are the 3 stages of a Bear Market Rally...

Stage 1: “It’s all over”

The first stage of a bear market rally starts when the markets react to bad news as if it was good news. Whether it’s because bad news isn’t as good as bad as expected or it’s one of those “Green Shoots” (what a stupid slogan) which provide a glimmer of light perceived to be the end of the tunnel.

This happens when everyone thinks it will never turn around. It’s when many investors throw in the towel and proclaim “it’s all over.” We hit that point in early March. Since then the markets have been so beat up in such a short period of time that any bit of good news can get things rolling higher again.

Stage 2: Popular Declaration of Bear Market Rally

This is the stage where most commentators admit we’re in a bear market rally. The upswing has just been too strong and has lasted so much longer than initially anticipated by most, it’s obvious to everyone.

There are no fundamental drivers and the fundamentals matter very little in this stage. Dividend yields, P/E’s, growth, and forward estimates aren’t focused on very much. The prevailing “thesis” is much more important than the underlying fundamental situation.

Today that 'thesis' is that stimulus spending will be great news for infrastructure stocks. Reality tells you that fundamentally many of these companies are still very, very weak - yet their stock takes off like a rocket.

Most everyone goes on to warn this is a bear market rally and advise against buying too much of anything now.

Stage 3: “All clear! Get in before it’s too late.”

This is the final stage. It’s when the bear market has been forgotten by most. Stocks move up, but the big upswings have disappeared.

This is when the very real risk of “panic buying” sets in. This is a result of the big money fearing 1) it has missed all the chances to buy low, 2) their performance will suffer, and 3) customers will take their money elsewhere.

To make up for lost time, they buy very aggressively. Many of them think short-term and want to deliver the numbers to keep pace with the competition in the money management industry. This is an extremely profitable stage for those who went against the grain and bought during the earlier stages of the rally.

Yet when the big money runs out of cash to buy shares, watch out, the end of a bear market rally is near.

So where are we?

It looks like we’re in Stage 2. There are just too many non-believers out there right now, too much money on the sidelines yet to come back into the market, and there has been no build up of false confidence which precedes most market declines.

There are still a lot of problems. Commercial real estate debt, deflation (and the debasing of currencies to prevent it), rising unemployment, and increasing and changing regulation to consistently change the rules and keep entrepreneurs and investors from tackling new opportunities.

But if we are only in Stage 2, is there still not money to be made in timing the market?

Perhaps. But as the markets have shown, a bear market rally is not something to bet against.

An old Wall Street saying is that "a rising tide lifts all boats".

And it's so true. Just look at the current market, dear reader.

The most beaten up of those boats (think banks, homebuilders, commercial real estate, etc.) which were steadily sinking five weeks ago, have not only been rising with all the other boats, they have been rising the fastest.

This market tide is rising astonishingly quickly and all boats are being lifted.

But when those beaten up boats sink, they will sink directly to the bottom.

Beware, dear reader. Beware.

-------------------------------------------

Postscript

After making this post I came across an article by Bud Conrad, a regular lecturer for the American Association of Individual Investors. Mr. Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University.

He cites data from a study called “The Aftermath of Financial Crises” by Carmen M. Reinhart of University of Maryland and Kenneth S. Rogoff of Harvard University and then makes the following conclusion:

"Given that we are currently in a deflationary phase, it is easy to dismiss the case for inflation – and many do. We think that is a mistake. Even a summary tabulation of the unprecedented increases in government debt at this relatively early stage in the crisis make a compelling case for higher inflation, if for no other reason than that it shows clear intent on the part of the government to spend 'whatever it takes' to offset the deflationary forces now stalking the land.

This research paints a dismal story of years of economic stagnation to come. In my view, the trend is now firmly established for dollar debasement, a debasement that will eventually overwhelm the deflationary pressures from collapsing asset values. Therefore, don’t listen to the happy faces on CNBC spouting off, for the umpteenth time since this crisis began, that now is the time to jump back in and buy stocks. It isn’t.

Be extremely skeptical when you hear some pundit pronouncing that this piece of short-term good news or another is an 'all clear' signal. Until we start seeing a systematic improvement in the economic fundamentals – for example, an upward movement in consumer confidence – the only signal the economy will be hearing is that of a runaway train coming straight at it."

==================

Email: village_whisperer@live.ca

Sunday Funnies

(Click on images to enlarge)

==================

Email: village_whisperer@live.ca

The DOW/Gold Ratio

.

Brewski's, friends and the hockey game, not many better ways to spend a Friday night. And speaking of hockey, the Detroit Red Wings are looking awfully strong to repeat as Stanley Cup Champions, aren't they?

Discussion turned to the economy and your faithful scribe was relentlessly needled about his bearish outlook. April has been a month to remember (the DOW was up 7.3% and the S&P posted its biggest monthly gains since March 2000) and stocks of note like Teck Cominco have gone from $3.45 on March 9th to close yesterday at $13.99.

But the Whisperer continues to piss on the wheels of the optomism bandwagon.

Let's face it, during the last two months has any aspect of the economy actually improved?

Yes, consumer confidence has gone up a bit (probably because the stock market has bounced a bit) but every other measure of the economy is weak. The fact of the matter is that the manufacturing sector is still contracting and just because it is not contracting at the same rate that it was, its hardly grounds to say we are in a turnaround.

Remember... one of the surest things in the investing world is a rally after a major downturn. Typically, prices recover 20-50% of the previous decline. Then, the market crashes again.

With that theme in mind, I bring you the above DOW vs. Gold chart (click on the image to enlarge) from Agora Financial of Maryland. Take a moment and look at it.

This chart represents the Dow-Gold ratio, which tells you the number of ounces of gold it would take to buy the Dow Jones industrial average.

Currently it would take 9 ounces of gold to buy the DOW, a 9:1 ratio.

By comparision, at the height of the tech bubble in 1999, it took 44 ounces of gold to buy the DOW, a 44:1 ratio.

The interesting thing is, after every big 'bubble', the DOW/Gold ratio has always corrected to just about 1:1. In 1980 for example, when the Dow sat around 800, gold was $800 an ounce. The ratio - 1:1.

We are currently on the backend of a downslide from the highest disparity in the history of the DOW. We have moved from a 44:1 ratio to a where we currently sit at 9:1.

Since that ratio has always corrected itself to that 1:1 or 2:1 ratio, we are - in all likelihood - in the process of seeing the ratio corrected once again.

IF the historic ratio does come back to this 1:1 or 2:1 ratio, one of several things has to happen. (a) the DOW is going to crash hard, (b) Gold is going to spike dramatically, or (c) a combination of (a) & (b).

Some analysts are speculating we are probably going to see the number 5,000... meaning the DOW is going to crash to 5000 (from the current 8212, almost half it's current value) and gold is going to rise to $5,000/ounce (a 1:1 ratio).

[Note: a drop like this in the DOW would be entirely consistent with what the DOW did after the 1929 crash. It has been 19 months since the market started to crash. It was exactly at this point in 1932 - 19 months after the crash of 1929 - that the DOW crashed after a similar rise to the one we are currently experiencing. The similarity is almost spooky.]

Even if the market doesn't crash (let's say DOW stays at 8,000) and the DOW vs. Gold ratio only drops to 2:1, that would put the price of gold at $4,000 an ounce to achieve that 2:1 ratio.

About the only thing that would punch gold up to the $4,000/oz level would be a precipitous drop in the value of the American dollar.

And if the value of gold does not rise, then the DOW would have to crash to about 2000 (and gold stays at $1,000). That would also produce a 2:1 ratio.

Perhaps the DOW vs Gold ratio will not even out for a few more years, there is no guarentee that now is the time for the 1:1 ratio.

But given the absolute lack of valid fundamentals in the economy, I simply can't see anything but a stock market that is in the midsts of a bear market rally trap. And I am personally inclined to believe we are going to be seeing a combination of the DOW crashing and gold rising.

If thats the case, there's a whole lotta economic hurt on the horizon.

==================

Email: village_whisperer@live.ca

Bank Failure Friday & Hockey Trivia

.
UPDATE: Bank Failure #32 - America West Bank, Layton, Utah
UPDATE: Bank Failure #31 - Citizens Community Bank, Ridgewood, New Jersey
UPDATE: Bank Failure #30 - Silverton Bank, National Association, Atlanta, Georgia
.

Well... another week, another Bank Failure Friday. Updates in red/blue at the top as they come in from the FDIC (click on blue portion to see press release from FDIC).

While we wait, I have another hockey trivia tidbit to stump friends and collegues while watching our beloved Village on the Edge of the Rainforest Canucks take on the Chicago Black Hawks in round 2 of the playoffs.

As you already know, Lord Stanley of Preston (then Governor General of the Dominion of Canada) donated a trophy in 1892 to be awarded to the Dominion's champion hockey team.

The Dominion Hockey Challenge Cup (aka the 'Stanley Cup') is now awarded each year to the NHL champion, the best men's hockey team in the world.

But did you know that another Governor General donated a trophy to be awarded to the Canadian national women's hockey champion each year?

Today's trivia question... The Stanley Cup is the trophy that was donated by the Governor General of Canada to the best mens hockey team. What is the name of the trophy, also donated by a Governor General, awarded to the best women's hockey team in Canada?

Answer: In 2006 the Clarkson Cup (pictured above) was donated by Governor General Adrienne Clarkson to be awarded to the National Canadian Women's Hockey Champion.

Most people know the men's championship trophy. Few know the women's championship trophy. Should be good for a pint or two over the weekend.

Cheers!

==================

Email: village_whisperer@live.ca