How Long Will the Good Times Last?

As I have said that stocks should rally towards April, it had arrived quite a bit later than I expected, but arrived nevertheless. The question is how long will it last, and how far will it go?

My original tentative sell-out date was about the third week of April, and it’s almost here. Since the stock markets started to rally later than I have expected, I’m willing to stay out partially into May and possibly beyond. I believe the counter rally will continue to be very bumpy, with violent pullbacks and also dramatic rises. However, this is a COUNTER RALLY. What I meant by that is that I believe that there will be new lows probably within three years (at least on the gold-price adjusted basis).

It's probably safer in my opinion to pull out maybe one fifth of your stake before the third week of April. Frankly, I don’t think one would miss out too much even if the counter rally continues beyond May. S&P 500 most likely will not exceed 1000 by too much. That’s some 15% left out, but would be better than another 30% to 40% cut in the event of new low.

On a sector basis however, oil and especially natural gas sectors, and also high-tech and possibly retail will rally further than general stock market. Therefore, it begets one to possibly stay on but with extremely watchful eyes. Trade if you must, since the rally won’t do much for buy-and-hold investors.

The absolute pull-out date I believe may be in mid-October. It’s really too far to project in this volatile market. However, the further out that one goes, the more danger of facing a cliff. Most people believe that the cliff was behind us. However, I think with option ARMs 5-year initial teaser rates expiring this year and the next, coupled with rising unemployment rate, what FASB and banks cannot do even after changing mark-to-market rules, is going to be rising prime mortgage defaults.

Eventually, one cannot hide from the real losses. Since stock markets look forward, I believe that the drop may start at the beginning of the teaser rates expiring in the fourth quarter of 2009, rather than at the end near about late 2011. Note that the first massive wave of subprime mortgage hit throughout the year of 2007, but stock market fell in the third quarter of 2007. Again, I assume that stock market participants may be slightly smarter this time around, and begin to sell in drove earlier. The only positive factor that works in favor of this market is that it had dropped very far very fast last round. Therefore, maybe the next cliff-drop will be “less painful”.

For the new/upgrade home buyers, patience will be required. I’ve said many times that the first real bottom for NOT arrive for home prices until 2012. Beyond 2012, home prices probably will just limp up and down slowly along the bottom. Since in all human history, a financial bubble would never come back in fashion after 20 years of its burst, you can totally forget about real estate investing with a negative or cashflow breakeven basis (accounting for tax gains) until year 2006/2007 + 20 years, which will be about 2027. (No, I’m not kidding, and I hope you would listen to me on this for your benefit.) In the unlikely event that the USA goes into very high inflation (8+% annualized), there is a chance that buying home will give you some return through leverage of mortgages.

However, more than likely, in such event, hot money will rush into other inflation-fighting assets, rather than homes, especially I believe that long term interest rates will sky-rocket under such circumstances, sapping any potential demands from investing in real estate for inflation protection.

It’s easier to predict for a slow-moving train wreck (real estate) than a fast-throttling train with low and foggy visibility (stock markets). Let’s us take a step at a time slowly at this dangerous time. I beg your pardon, but the worst is ahead of us, not behind. It’s sad to see that first Black American president may get sacked totally by the worst ever credit bubble, which may in turn, prevent the next Black president to come for quite a number of decades to come. I truly hope that I’m wrong on my dire predictions, but one needs to take actions based on the facts, not based on the hopes.

Best luck.

Comments

[Gtarras:]

Expect Citi and Bof A blow away analysts this and following quarters the same way Wells Fargo did today..

Apr 09 02:41 PM

[Chris B:]

The thing is, companies like WFC and BAC are refinancing these loans into 15-30 year fixed mortgages like crazy right now, so many of these resets will never have a chance to occur. Politically imposed demand for these loans from Freddie and Fannie is keeping such refi's available. Obama even took the trouble to remind everybody that this is a great time to refi.

I'd say the government's goal is pretty transparent - to make sure everybody is sitting on refinanced 15-30 year loans in 2010-2011 instead of resetting option ARM's. By pushing interest rates down to near 4% and maintaining loan availability through treasury actions, they've created a self-interest incentive and window of opportunity for the holders of these loans to refi en masse.

In any case, Obama is right on one thing: Now is a great time to get a home loan. In 3-5 years inflation will return and you'll be earning 7% on treasuries or 8% in bank CD's using the home equity you extracted at 4.5% in 2009! That 4.5% interest you're paying will be less than the rate of inflation = you win. Worst case scenario you lower your expenses.

Apr 09 03:04 PM

[BigJake:]

Chris B,

Thanks for that comment. That is the first analysis of government actions of late that make the case for a recovery for the consumer. Well done! but... what does that mean for 2009-2010-2011 before inflation returns and we see those nice interest rates? more crash and burn, muddle through, or "Tminus 3-2-1 LIFTOFF?"

Apr 09 05:04 PM

[CJJ:]

Make choices based on the facts. I love when bloggers say their opinion editorial is FACT and other stuff is not fact. Its just mind boggling. These people truly think what they write is written in stone.

Maybe the key change is that people have to stop looking at buying a home as a temporary stop on the way to riches and a bigger home. Guess what for 10-20 years this became TRUE. This wasn't a mirage, it was actually occurring. It is no longer happening.

So even if it takes 20 years for a house to be a "winning" investment, who cares, morgates are 30 years in most cases. So actually, this argument is to buy now. I agree there will be a better time in the next few years, but right now you can lock in the lowest 30 yr rate in history.

People need to realize buying a house is NOT an investment. Sorry, that's the thing I haven't seen people realize yet. They will.

Disclosure: I'm a renter(FACT) and am against buying currently due to expected 20-30% price decline before bottom and worries about job security(OPINION)

Apr 09 07:20 PM

[HelluvaEngi...:]

How are people refinancing when 30%+ of them are underwater and have no savings?


On Apr 09 03:04 PM Chris B wrote:

> The thing is, companies like WFC and BAC are refinancing these loans
> into 15-30 year fixed mortgages like crazy right now, so many of
> these resets will never have a chance to occur. Politically imposed
> demand for these loans from Freddie and Fannie is keeping such refi's
> available. Obama even took the trouble to remind everybody that
> this is a great time to refi.
>
> I'd say the government's goal is pretty transparent - to make sure
> everybody is sitting on refinanced 15-30 year loans in 2010-2011
> instead of resetting option ARM's. By pushing interest rates down
> to near 4% and maintaining loan availability through treasury actions,
> they've created a self-interest incentive and window of opportunity
> for the holders of these loans to refi en masse.
>
> In any case, Obama is right on one thing: Now is a great time to
> get a home loan. In 3-5 years inflation will return and you'll be
> earning 7% on treasuries or 8% in bank CD's using the home equity
> you extracted at 4.5% in 2009! That 4.5% interest you're paying
> will be less than the rate of inflation = you win. Worst case scenario
> you lower your expenses.
>

Apr 10 09:00 AM

[Chris B:]

On Apr 10 09:00 AM HelluvaEngineer wrote:

> How are people refinancing when 30%+ of them are underwater and have
> no savings?
----------------------...
Answer: Some of those 30% won't be doing the refinancing. Their homes will end up sold (through realtors or foreclosures) to the people who are in a position to take advantage of these loans. The net effect will still be refinancing of the properties.

Also, 95% of those 30% still have jobs and are focused on saving money through deferring purchases like cars, lattes, vacations, and other splurges. In a year or two, these simple changes could put thousands into their bank accounts. I suspect that much of the 0% to 4% increase in the savings rate occurred among these homeowners.

Finally, the property bubble was mostly a coastal phenomenon (plus a few cities like Chicago, Vegas, and Phoenix). Homeowners and buyers in places like Indiana, Texas, and Kansas will lock in low payments on properties in markets that were never bubbles to begin with. The aggregate economic effects of their savings will largely offset the losses of those who lost money on the coasts.

Apr 10 09:55 AM

[TexasBill:]

ChrisB etal,

You are dreaming if you think this is a one way elevator to the roof. Right now the Fed is forcing all the savers in the country to subsidize housing by imposing lower interest rates. What do you think will happen when the Fed starts to allow interest rates to go back to "normal" (or inflation kicks in and stomps on the interest rate accelerator)? Hint: look at what happened the last time the Fed started raising rates after holding them down after 9/11. Future home buyers won't be able to pay you as much for your house as they can now because the interest portion of their payment will be much higher.

With all of the incentives to purchase and all of the refinancings to take advantage of the lower rates going on currently, the Fed is setting a trap (IMO); if interest rates go up, as I expect they will, don't be surprised when people can't sell their house for what they paid or refinanced it for today.

Apr 10 03:19 PM