How’s the Housing Market Doing? – Depends on What Data You Look At
It’s been over three years since the first signs of trouble began emerging in the U.S. housing and real estate market. Standard & Poor’s just released the latest Case-Shiller Home Price data so where do we stand now? Market pundits have been cheering the percentage price gains in the Case-Shiller Home Price Index for several months and telling bearish investors to forget the past and go right back to the same assumptions that caused the real estate crises in the first place. To support their theory, they simply point to charts like the one below.
Unfortunately, the above chart gives a very skewed picture of what is actually happening to U.S. home prices because we are coming off of such a low base. To account for this statistical anomaly, I prefer to look at what actual prices are doing with the chart below.
Looking at the first chart would leave you to believe that you’re about to “miss” the next boom in real estate but using the second chart for added context will surely give you pause. The U.S. Government began inflating the housing bubble all the way back in the 1980’s with aggressive home-ownership policies spearheaded by Fannie Mae, Ginnie Mae and Freddie Mac. Wall St. helped the bubble along with financial “engineering” and then the Federal Reserve even stepped in to do its’ part after the dot-com crash by lowering rates dramatically for an unprecedentedly long period of time.
All these factors make it very hard to get a real idea of what housing prices should be because the markets have been manipulated so completely. For a best guess, we can look back to where prices bottomed in the 1990’s or we can look at metrics such as income to home price ratios. Unfortunately, no matter what you look at (aside from the housing bulls’ percentage price change chart), things do not look pretty. The 1990’s levels leave us with a long way to fall and inflation-adjusted median income has fallen.
Let’s just hope that I’m wrong and the housing bulls are right…
-MJB
Palm Continues to Suffer (PALM, AAPL, GOOG, RIMM)
Palm Inc. reported earnings after the close today, and what they reported wasn’t pretty. Expectations were for a loss of $.42 per share on revenue of $316.19 mm. Reported numbers were $366 mm, which was actually higher than expectation, and a loss of $.61 per share, which was not. After being up by about 5% during the day on a lot of short covering, the stock tumbled on the news in after hours by over 13%.
Adding to the woes are increasing inventories at the carriers. This is an issue because Palm records sales when the products are shipped to the carriers, not when they are actually sold to consumers. Thus, large stocks of unsold inventory will prevent Palm from recording much in the way of sales until that backlog is cleared. Thus, Palm issued revenue guidance for the upcoming quarter that is half of the $305.77 mm that analysts were expecting.
My Palm article in September hypothesized that the stock (then at 17.40) would drop as consumer adoption of the new operating system would lag. Back then, Palm was shipping over 800,000 units per quarter, that number has since increased to over 900,000 but sell through to customers has decreased to 400,000 units. The stock in after hours dropped to below $5 as the long term survivability of Palm remains in doubt while they try to compete against the mighty Apple, Google and RIMM.
-AH
Disclosure: Long GOOG, no position in any other stock mentioned
As Bullishness Returns to the Market: Can the Rally Continue? (SPY, QQQ, DIA, GOOG)
The S&P 500 is up about 5% since I changed my stance on the stock market from bullish to bearish back on November 19th and all of the fundamental reasons for the change are still intact (although I’m neutral on a technical basis). Recent news has been mixed or negative and not helping the situation is the announcement over the weekend from Chinese Premier Wen Jiabao that the yuan is not overvalued and that there is a chance of a double dip recession in China.
Many of China’s trading partners (including the US) have been upset with China’s handling of their currency during one of the most devastating economic period in recent history (China had been gradually appreciating the yuan but stopped in 2008). Adding to protectionist issues, Google said over the weekend that is 99.9% sure it will be closing it’s China.cn web portal and China made a warning to Google’s Chinese partners that they will be responsible for any search related problems on their own website.
Despite all this negative news flow, investors has been hanging on to hope with the tired lines of “things are getting less worse”. Bulls are still reciting facts about recoveries in past recessions as if the more they repeat them, the more they will apply to the current crises. Unfortunately they do not.
It would seem that people are ignoring fundamentals and the more the stock market rises, the more bullish they will become. The downside to this strategy is that most people who are bullish are already invested. It is almost always short sellers covering their positions that launch the market into it’s final peaks before coming down and this is certainly how it feels to me.
The chart above from Bloomberg gives some good color to the situation. There is no “clear” indication that we are topping out right now but there are definitely more (and better) reasons to be cautious than to be optimistic. The rally over the last month has been strongly moved by short sellers having their stops hit (trust me, I’ve been trying), and I fear that a few months from now we will be looking back at this point in the stock market as a double top and possibly the highs for the year. Be careful everybody.
-MJB
Disclosure: Net-long the stock market with over 35% assets in cash
Where Are We in the Unemployment Trend? – Historical Perspective
“This time it’s different…”
Very often, the people who utter those words end up feeling quite stupid and having less money in their brokerage/IRA accounts than before. Usually it is because that when you go along with conventional wisdom and group think, you wind up in a very crowded trade with little room left to run. Today however, the conventional wisdom is that this time it’s not different and that we will proceed to have a strong jobless recovery. The jobless recovery phenomena may have worked in past recessions but A.) There are only so many times you can have a “jobless recovery” before it’s not an actual recovery as evidenced by the continued drop in real productivity and income per capita and B.) This is by no means a normal recession.
Take a look at the chart below, I hope it offers some valuable perspective and context (note that the data doesn’t even include numbers from 2008 and 2009) . This time, things may very well be different…
-MJB
Want to Buy Apple Without Chasing? – Some Possible Entry Points (AAPL, SPY, QQQ)
Since blowing out earnings expectations on January 24, Apple, Inc. (AAPL) has been on a tear, bringing the S&P 500 (SPY) and NASDAQ (QQQ) along for the ride. From the pre-earnings closing price of $420.50 on January 24th, to today’s intra-day high of $526.29, Apple had gained a stunning 25% in just 16 trading days.
Unfortunately, this quick run up has made it hard to begin a long position in the stock because of the complete lack of pullbacks other than the 50% long Fibonacci extension at $445 that traded during the first day after earnings (shown Here on a 90 day, hourly chart). The other issue with Apple’s recent move up past the $500 milestone is that it has attracted an enormous amount of momentum-oriented investors who have seen the move up that has already happened, and are now chasing high’s in hopes of catching some of the move. I can’t predict when the momentum will run out, but I can be reasonably sure that the momentum investors will dump the shares as quickly as they bought them once the upward trend begins to fade. Whether you are a value investor or technically-based trader, Price matters and that is why it is so important to remain calm, disciplined and patient when buying into even the highest quality of stocks.
The charts below show Apple’s 20 Year Weekly chart (logarithmic), 3 Year Daily chart (linear) and 90 Day Hourly chart and I will discuss potential entry points for each time frame. I also want to be clear before beginning that just because the safest entry points are below where Apple is currently trading, I am not at all recommending a short position and I personally would never consider it due to the high quality and debatable undervalued nature of the stock. If Apple is in trouble, the S&P 500 would likely also be in trouble and I’d much rather short SPY or by an inverse ETF.
AAPL 20 Year Weekly Chart (Logarithmic):
(Click for Larger Image)
You can see from this chart that Apple has sold off every time it ran into this resistance line going all the way back to 1994. This time might be different but it certainly warrants caution. So let’s take a look at some potentially safer entry points for longer time frame investors Here which zooms in to a 3 Year Weekly chart. The safest play would be to wait for Apple to sell off down to the purple 50 week Simple Moving Average (SMA) which is currently at ~$379 and rising at a decent clip. For slightly move aggressive individuals, buying the 50% long at the green horizontal line at $445 or previous highs at $425 could work well and also coincide with the white 10 week SMA.
AAPL 3 Year Daily Chart (Linear):
(Click for Larger Image)
This chart demonstrates Apple’s tendency to have fast run ups, and then periods of prolonged consolidation (highlighted in grey) which offer long term investors the chance to buy on dips. Meanwhile the red declining trend lines have routinely served as a good signal to shorter term technical traders that a breakout was taking place. These breakouts have lasted between 2 and 5 months with the average duration being 2.7 months long. This most recent rally is approaching the average duration right now and has completely broken out of its 3 year rising channel that it had been trading in (shown Here). Given these indications that the stock is possibly overextended, it would be prudent to wait for a retracement into one of the 50% Fibonacci levels shown in the chart above (notice that the $445 support level is visible on both the weekly and daily charts).
AAPL 90 Day Hourly Chart:
(Click for Larger Image)
For short term technical traders, there are only really two other levels to pay attention to aside from the daily support levels (Shown by the red and dotted horizontal lines that start at the beginning of 2012). The first (and most aggressive) entry is an extension long setup (an extension long is a Fibonacci drawn from a previous high to a new high after a significant thrusting move, as opposed to a traditional Fibonacci which is drawn from lows to high) at $490. This extension originates from the previous high set after the post-earnings gap up to the intra-day high that we hit today at $526. The next long setup is down at $479 and is just a few points away from the daily support level which could give it an extra boost. This second extension has is just the continuation of the original gap up extension long that traded the day after earnings at the $445 level.
In summary, potential buying areas on Apple are as follows (from least to most aggressive):
Weekly Entries:
50 Week SMA, $445, $425
Daily Entries:
$476, $445
Aggressive Entries:
$490, $479
Disclosure:
I am long shares of Apple, however, I did close out 1/3 of my position today to lock in profits at $498.33.