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View Full Version : The Running (Away) of the Bulls



EJ
05-10-07, 04:19 PM
http://www.itulip.com/images/bullsrunaway.jpgStocks Retreat After Weak Retail Sales (http://biz.yahoo.com/ap/070510/wall_street.html?.v=36)
May 10, 2007 (Madlen Read, AP Business Writer)

Stocks Decline After Disappointing Retail Reports, Widening Trade Deficit

NEW YORK (AP) -- Wall Street retreated sharply Thursday, slicing more than 100 points off the Dow Jones industrials after weak sales at many of the nation's major retailers heightened concerns about consumer spending.

Companies including Wal-Mart Stores Inc., J.C. Penney Co. and Federated Department Stores Inc. said business fell in April, hurt by rising gasoline prices. Though many retailer stocks fared decently Thursday, the reports raised worries that retail sales data from the Commerce Department Friday will suggest that the economy is slower than previously thought.

AntiSpin: Retailers disappoint but don't blame the weather? What next? Honest reporting of inflation and unemployment data? Call today The Running (Away) of the Bulls. If you are a bull, you can blame today's market action on long term bear Richard Russell who just threw in the towel to join you. Just kidding. No, the cause is the lag time between the housing price declines and a reduction in consumer spending. Time's up! And time to pull out the iTulip January 2005 housing bubble correction prediction to see where we're at in the housing bubble collapse process. We called a housing top in June 2005 (http://www.itulip.com/forums/showthread.php?t=606), so by our own estimates we're now just about two years into it. The prediction says that after two years, we enter Step C: Consumers take a long vacation.


http://www.itulip.com/homeequityextraction.jpg


Step C: After prices have declined for two years, large numbers of buyers who purchased near the top of the market will begin to feel the psychological effects of being underwater on their mortgage. They will be less inclined to borrow money, or to spend money fixing up their home, as home improvement value increases will be swallowed up by general market price declines. There will still be profits to be made by those who bought very early in the previous boom cycle, but fewer people will have this option.

As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.
The next two steps, taking us out five years from June 2005:
Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.

Step E: Five years into the downturn, rising unemployment will begin to more seriously affect the market, as indicated in Chart 1. As unemployment rises, homeowners will leave housing bust regions to move to areas where there are more jobs. Many houses will be sold at a loss, or even abandoned, as the market price falls below the loan value. Given the choice between paying cash out of pocket to sell their home or leaving the keys with the bank, many home owners will make the latter choice.

iTulip, Housing Correction, January 2005 (http://www.itulip.com/housingbubblecorrection.htm)
Our Recession 2007 (http://www.itulip.com/forums/showthread.php?t=550) series predicts a US recession in Q4 2007, which will be reported in Q1 2008.

When does the stock market start to price it in, you ask? Now? Maybe, but probably not–for some reason the markets are no longer taking the usual six to nine month forward view. The markets as a forward discounting mechanism are broken. We saw this during the stock market bubble, too. We have our theories, such as distortions of interest rate signals created by price insensitve foreign central banks, but don't know exactly why future earnings are no longer discounted by the markets.

The economic impact of the collapsing housing bubble has been hitting stocks more or less at the time they happen. Consider home builder Toll Brothers. When we called the top in June 2005, Toll Bros. was at its peak. As the housing market declined, so did housing stocks. Not six or nine months before, but at about the same time.


http://www.itulip.com/images/tol.gif

Compare Toll Brothers to...



http://www.itulip.com/images/HPI.gif

...the National Housing Price Index.


Same deal with the stock market generally. If the recession does not occur until the fall as we expect, stocks may hold up through the summer, unless there's an accident, say, in the derivatives market, or in the Strait of Hormuz–which has been an accident waiting to happen for almost a year.

Here's one way it might go, extending our prediction of where housing permits are headed.


http://www.itulip.com/images/housingpermitsfuture.gif


We are working up some analysis to characterize this recession in the manner of the 2001 Recession (http://www.itulip.com/recession2001.htm). Stay tuned!

iTulip Select: The inside scoop (http://www.itulip.com/forums/showthread.php?t=1032).
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flow5
05-10-07, 04:40 PM
Ouch! I'll remember not to miss your posts.

Christoph von Gamm
05-10-07, 05:36 PM
again here: even though I do repeat myself... the credit bulle has popped. (http://www.interenterprise.eu/2007/05/are-we-in-credit-bubble.html)

Mega
05-10-07, 06:21 PM
They say a drowning man will cultch at straws, its almost funny now watching the "Bloomberg Berks" trying to explain WHY they got it so wrong!
Mike/Liverpool

bill
05-10-07, 07:01 PM
EJ in the Strait of Hormuz–which has been an accident waiting to happen for almost a year.



With the economy slipping into a recession you can bet on a instant replay of 02-03 when the markets started to tank the Bush administration cooks up a plan to go to war. It will be a replay with a different reason entering a war with Iran (completely destroying Iran ’s oil Infrastructure, so you can ramp up Iraq ’s oil production to keep price controls, a subject for another day) later this year. What else could create immediate temporary jobs as the housing market collapse and stock market tanks? What other short term choice does this administration have to keep a economy going? How many military reserves will get called over the summer for active duty and their jobs to be replaced with the person out of work right now. This is a temporary economy solution until you get the next bubble started.
I still think we will see $100.00 oil shock (I have been in shock ever since it hit $50.00) if this war starts. When and if it does you can bet the Alternative Energy Industries (next bubble) will kick into high gear. All the politicians will be using Alt. Energy in their 08 campaign platforms amplifying it for fast track legislation, already getting a boost from Global Warming (carbon tax revenue), energy reform policy will create a new industry for a new bubble.

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jk
05-10-07, 09:23 PM
the stock market no longer discounts the future because it has become a price discovery market, like the commodities markets. it is valuing stocks as current assets with the prospect for capital gains or losses - this is especially made clear by the rise of the lbo-private equity boom. it is no more, and no less, forward looking than the wheat market which keeps an eye on inventories and plantings and the long range weather forecast in order to guess at future supply and demand for the commodity. stock as a commodity is very different than stock as a part ownership of an ongoing business.

grapejelly
05-10-07, 10:27 PM
the stock market no longer discounts the future because it has become a price discovery market, like the commodities markets. it is valuing stocks as current assets with the prospect for capital gains or losses - this is especially made clear by the rise of the lbo-private equity boom. it is no more, and no less, forward looking than the wheat market which keeps an eye on inventories and plantings and the long range weather forecast in order to guess at future supply and demand for the commodity. stock as a commodity is very different than stock as a part ownership of an ongoing business.

It could just be that the present market is in a mania phase, a double top from 2000 in terms of the herd instinct.

A mania with widespread passive public participation in some quarters (US 401(k) investors), competitive "afraid they'll miss out" speculators (private equity) and "must invest now" (Chinese individual speculators.) All fueled by unReal interest rates and extremely lax lending standards and global currency "wars".

I have a feeling it has a lot further to go but we might be hitting a bump in the road any moment now.

wayne
05-10-07, 10:40 PM
One of the things that struck me in reviewing the chart of the DJIA in the 20s (http://averages.dowjones.com/mdsidx/index.cfm?event=showavgDecades&decade=1920) was how closely the action from 1921-1927 mirrors the DJIA action these past six years. The other striking thing was the way the market in the 20s treaded water through the 1923-24 recession and actually rose more than 30% through the 1926-27 recession. (Granted, there were dips foretelling these recessions, but both dips were inconsequential with a vengeance.)

Mike Shedlock had what struck me as the best description of stock-market pricing in the current environment, as share prices surf along a seemingly endless rising tide of liquidity . He said the market doesn't discount anything - it simply reflects current investor attitudes toward risk.