I came out to the kitchen this morning and my wife said, "The mover just called. He says we can move Friday if we want to because there was a lady scheduled to move, but her loan fell through at the last minute. [Our real estate agent] says that's been happening right and left..."
Can you imagine? You've got the mover lined up. You're three days away from moving... and the loan is declined at the last minute. And this is happening all over the country.
I imagine a bunch of the deals made in April will fall through, since most of the people who bought houses were only doing it to try to get the free money the government was throwing at them. The National Association of Realtors reports a 6% jump in pending home sales for the month of April, due to the April 30 expiration of El Presidente Obamista's home-buyer tax credit. The NAR reports a 7.6% surge in April existing home sales, one of the strongest gains ever recorded.
I expect housing sales will remain cyclically strong throughout the warmer months, tax credit or not. But overall, I can't see how housing prices will recover much when buyers are few and fewer still are those who can finish the deal. I sure hope everything goes well for us. We sign today, close tomorrow, and move Saturday.
Signs of a short-term bottom?
In April, individual investors sold stocks and bought bonds and bond funds. That's what the American Association of Individual Investors (AAII) says. The AAII allocation survey says bonds and bond funds accounted for 25.5% of individual investor portfolios, its highest level since the survey began in 1990. The historical average bond/bond fund allocation is 15%. The historical average stock allocation is 60%. That number fell to 50.9% in April.
AAII says the last two major bear market bottoms saw individual investors' stock allocation fall to 42%. That's not too far south of where we are right now. With investors so bearish right now, it could be a good time to buy or do nothing than to sell or go short.
Selling stocks when you think the economy is headed off a cliff is human nature. But buying bonds when inflation is inevitable? Sure, bond returns are steadier and safer than stocks. But they're also more likely to get destroyed by inflation. If stocks deflate, bond investors will feel smart. When inflation arrives, bond investors will feel... well... less smart.
We wrote it, did you short it?
Unfortunately for Barnes and Noble shareholders, the company's website and its e-book business aren't nearly big enough to replace the continuing same-store sales (roughly 5% per quarter) figures at its bookstores, which make up the vast majority of its business. Quarterly revenues at the bookstores are more than $1 billion, while quarterly online sales are less than $250 million. Shorting Barnes & Noble is, in our view, a one-way bet. There's no way it can compete against instant, costless, digital distribution of books over a wireless network. Nor can it compete on a technological basis with either Amazon or Apple. Bookstores are finished. And so is Barnes and Noble. – May 2010, Stansberry's Investment Advisory
Barnes and Noble fell more than 9% yesterday. Investment Advisory readers are already sitting on a nice gain with this short sale.
Two of Porter's other shorts, hard-drive makers Western Digital (WDC) and Seagate Technologies (STX), were also destroyed yesterday. They fell 4% and 6%, respectively. Readers are now up 22% and 30% on these shorts in three months.
There are now eight short sales in the Investment Advisory portfolio. As Porter explained last Friday, he believes each of these companies is either 1) A fraud, 2) Incapable of servicing their debts, or 3) Completely obsolete. Shorting these stocks is the perfect way to hedge your portfolio in this choppy market. He says they're all "sure things." To sign up for Stansberry's Investment Advisory and see what Porter's shorting next, click here...
Warren Buffett testified today before the Financial Crisis Inquiry Committee hearing on the ratings agencies. Buffett was asked why he failed to recognize the bubble. He danced around the question a little and finally said, "I blew it." Buffett said when homebuilders started trying to sell their businesses to him, he "should have figured out what [he] didn't figure out."
Buffett also said Fannie and Freddie were serving Wall Street and trying to live up to a congressional mandate to make houses more affordable. Buffett said that was a hard position to be in. I think that's as close as Buffett will come to telling the world Fannie and Freddie were riddled with huge conflicts and maybe housing affordability is something individual buyers should be left to determine for themselves.
Sitting next to Buffett was Ray McDaniel, Moody's CEO. McDaniel was asked about Moody's performance on ratings associated with housing. He said his regret is "significant and deep." Ultimately, McDaniel says the securities failed because housing prices fell. In other words, the CEO of the biggest ratings agency around still won't take responsibility for his firm assigning triple-A ratings to junk securities.
Of the Moody's ratings model, Buffett said, "It looks like they tweaked their model when they should have gone at it with a meat axe."
At the Ira Sohn Investment Conference last week, hedge-fund manager David Einhorn said he's still short Moody's. Einhorn is short more than Moody's. By being long a large quantity of physical gold, he's short the U.S. dollar, too. Einhorn commented on the absurdity of banks holding sovereign debt instruments with zero capital:
We should have learned by now that every credit – no matter how unthinkable its failure would be – has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with triple-A rated CDOs, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior – leading to an even larger crisis.
I remember hearing that the rating agencies would never downgrade MBIA or Fannie Mae. Mr. Geithner may learn that never is a long time. The next crisis might very well rhyme with the last. Greenlight continues to hold short positions in the common stock of the rating agencies, Moody's and McGraw Hill (owners of S&P).
That's how a sophisticated investor tells the world that U.S. Treasuries carry more risk than anyone thinks. They'll create a much worse crisis than subprime mortgages ever could... And Treasury Secretary Tim Geithner is clueless about all of it.
New highs: none.
In the mailbag... more readers reacted to deadbeat homeowners and what they "deserve." Send your e-mail to feedback@stansberryresearch.com.
"Where do I start? I have been a mortgage banker since 1989. I was one of the ones who tried to act responsibly so did not make a ton of money during the crazy times. There are more of us than you think, but it is so much easier to blame those evil mortgage brokers than the Barney Franks who decided 70% home ownership was a birthright. Us lowly originators starting talking about where we were headed in 2003. No one asked us but only complete idiots couldn't see where it would go. The products were coming out so fast that you couldn't keep up. Towards the end, we were getting products that allowed stated income/stated assets for people with a 580 credit score. What do you think the default rate is on those?
"The best part is that the same people who willingly took these loans are now blaming everyone but themselves because they can't pay the mortgage. Nothing is anyone's fault or responsibility. Guess who will be paying their mortgage for years to come? You and me... Please keep raging at the machine." – Paid-up subscriber Bob
"David Preefer laments about the 'country I grew up in' and then lectures 'Obama does understand that a redistribution of wealth is imperative if this country is to have a future.' I'm not sure what country David grew up in...
"When I was growing up in the 1950s and 1960s, my parents certainly weren't in the income redistribution business. If I wanted something, including my subsequent college education, I worked for it: cutting grass, weeding gardens, raking leaves, babysitting, collecting and then selling glass jugs to get the 5 cents deposit back. Later, it became working in grocery stores (two employers at the same time), stocking at night, then attending classes at the University of Wisconsin during the daytime. And I graduated in four years (BS in physics).
"There was no income redistribution for me at that time in this country.
"And now, I'm 61 years old, own my own financial advisory firm, and still no income redistribution for me. I work hard for every darn penny I can earn. I already page huge gobs of taxes in every conceivable form and have zero interest in 'redistributing' it against my will. It's financial tyranny and no different then what King George tried to do 235 years ago. Perhaps OBAMA! and David Preefer should re-read their US history – and especially the ending part." – Paid-up subscriber Gene
"To the paid-up subscriber, David Preefer, I would direct him to the article in the New York Times yesterday. Here is the opening sentences...
ST. PETERSBURG, Fla. — For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.
Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
'Instead of the house dragging us down, it's become a life raft,' said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. 'It's really been a blessing.'
"Are you kidding me? I faithfully pay my mortgage every month, sacrificing to make ends meet, but these people are living a life I can only dream of? Dinners out, boating weekends, and gambling excursions, while living mortgage free? And now you want to take some of my pay and redistribute it to people like this? Not while I have a pulse, buddy." – Paid-up subscriber Mark Tobino
Ferris comment: You and me, both, Mark (especially with this new mortgage payment I've got coming). The brave new world of Komrade Obama keeps certain lines from movies rattling around in my head. The one that's really stuck in there lately is from Clint Eastwood, in his film Unforgiven. He's talking to a young gun who just killed a man for the first time. The kid is drinking heavily to avoid the pain of what he's done. He's justifying it every way he can, saying, "that f**** deserved it." Eastwood, slow and steady as can be, says, "Deserve's got nuthin' to do with it."
That's the world we seem to live in today. The man who hired me into this business almost 14 years ago says people don't get what they expect, only what they deserve. But I've seen little evidence to support that statement. Liars and thieves are elevated to the highest echelons of society and industry. Deadbeats live the life of luxury. Know-nothing weasels are given great power and the most competent among us are saddled with the greatest burdens. It's all turned upside down...
So Mr. Preefer is certainly dead wrong and has failed to learn much. But he's more in tune with the zeitgeist. He understands what Clint Eastwood's character and the other career criminals in the film understood. These days, "deserve's got nuthin' to do with it."
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 2, 2010