Why Shorting the Market Makes Sense Above 980 23 comments
-
Font Size:
-
Print
- TweetThis
It wasn't that long ago when Bear Sterns had gone down, market enthusiasts were still careless, commodity prices were peaking with oil trading near $140/barrel, investors were listening Goldman Sachs making $200/barrel predictions and everyone thought that state of denial was the best course of action. It was only last year around the same time. Markets perhaps are getting into that same mode of operation again. But reality will hit sooner than later.
Most of my channels have indicated to me that U.S. banks are not disclosing their actual state of affairs. It should not be very surprising to many - if that weren't the case then Congress wouldn't force FASB to change its rule within a month's notice. Geithner wouldn't be so worried to visit China and offer them a special treasury yield of around 4% without local investors getting even a whiff of it. But then, who cares as long as music is going.
No matter how much the Fed and Treasury try to hide the problem under the rug, it will surface again. Only this time it might have become bigger due to an all-in situation of the U.S. government and central bank. Here is the simple math: with a reasonable 5% interest on 30yr fixed rate mortgage, $100,000 requires a payment of around $700. Add on to it the property taxes and insurance etc, and a $100,000 home will cost around $1000/month. Considering that the average price of a home is still around $160,000, a minimum cost of owning a home for an average Joe is $1500/month.
Now the other side of the equation: most U.S. households work on a $10/hr wages. That gives a monthly average salary before taxes of $1600/month. So unless the government just pays everyone's mortgage for the next thirty years, I just don't see how an average person can afford homes at these prices. And on top of that, our highly qualified Federal reserve officials are trying to prop-up the housing market so that house prices stay artificially inflated. They just don't seem to understand the negative correlation and dynamics going on. The only way to help this market is to increase the average salary, but that is something beyond the control of the federal government if they want to keep domestic industry competitive.
So where is the problem and how to solve it? The problem is housing prices themselves. House prices are high because of the amenities these houses offer and the expectations of people that they take for granted. For example, dishwashers are not even heard of in most Eastern nations but in the U.S. they are a basic cultural feature. Not that anything is wrong with it, but it's the lifestyle that Americans have come to expect and take for granted irrespective of their earning power. And this is the problem of calibrating expectations in a global economy. I believe that this process has just begun and is nowhere close to the end. So this systematic adjustment will take at least few years and stocks will reflect substantially reduced earning power and completely changed business environment. I don't think going long at this point is a great strategy for coming months and even years until we can clearly see how the economy is shaping. In fact buying short SPX ETFs SDS or shorting the index itself are good strategies at any level above 980 in the near future.
I don't think oil will reach $80 by year-end as suggested by Goldman Sachs. Two reasons: economic indicators don't support that level, and oil is negatively correlated with economic progress. Higher oil prices will hurt whatever nascent recovery economists are expecting and it will be totally killed if oil moves above $70/barrel again. So the trade is to short USO if oil reaches the $72-$75 range. Remember that credit markets didn't destroy General Motors (GM). It was brought down by $140/barrel oil. But somehow, investors have very short memories. It was not even a year ago. And that was what accelerated this economic downturn. So I can only sympathize with short-sighted investors who will get hurt by "irrational exuberance". Though some companies and commodities are great investments at current levels, the art is to identify them. I don't think oil and banks currently fall into that category.
Disclosure: No position in bank shares or USO
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 23 comments:
Are you claiming that the average salary for a US household is about $10/hr? This seems unusually low. I was under the idea that the average US household is populated by more than one working person, which brings the salary of at least one working person to less than the minimum wage, assuming your logic. Please clarify.
There is more and more talk by Israel of attacking Iran's nuclear installations. Were that to happen, do you think oil would not go above 80? I suspect Israel's rhetoric, and the posibility of war is a factor in the rising price of oil.
Median annual household income in the U.S. in 2007 was roughly $50k (wikipedia: household incomes in the U.S.) which translates into $24/hour or $4,200 per month. Your $10/hour value translates to $20k per year.
Housing values are going to be crippled going forward not so much due to slow income growth (although that will be a factor), but rather due to demographic changes (slower population growth in the U.S.) and huge increases in long term interest rates due to monetary inflation. We are beginning to see this play out now.
On Jun 05 09:11 AM Steve in Greensboro wrote:
> Thanks, GD, for the interesting article. I was 100% with you in
> the first paragraphs (about the camoflaged weakness in U.S. banks),
> but you lost me with the numerical example.
>
> Median annual household income in the U.S. in 2007 was roughly $50k
> (wikipedia: household incomes in the U.S.) which translates into
> $24/hour or $4,200 per month. Your $10/hour value translates to
> $20k per year.
>
> Housing values are going to be crippled going forward not so much
> due to slow income growth (although that will be a factor), but rather
> due to demographic changes (slower population growth in the U.S.)
> and huge increases in long term interest rates due to monetary inflation.
> We are beginning to see this play out now.
It ceased being competitive before most of the readers of this column were out of short pants.
I actually agree with you that the numbers are wrong and your are closer to the truth, but wikipedia is not a reliable source. Its a repository for everyones opinions on topics and the "correct" info is based on majority rules.
A friend of mine calls it "an encyclopediia by idiots, for idiots"
Come to think of it, it's a lot like the comments section of seekingalpha ;-)
On Jun 05 09:11 AM Steve in Greensboro wrote:
> Thanks, GD, for the interesting article. I was 100% with you in the
> first paragraphs (about the camoflaged weakness in U.S. banks), but
> you lost me with the numerical example.
>
> Median annual household income in the U.S. in 2007 was roughly $50k
> (wikipedia: household incomes in the U.S.) which translates into
> $24/hour or $4,200 per month. Your $10/hour value translates to $20k
> per year.
>
> Housing values are going to be crippled going forward not so much
> due to slow income growth (although that will be a factor), but rather
> due to demographic changes (slower population growth in the U.S.)
> and huge increases in long term interest rates due to monetary inflation.
> We are beginning to see this play out now.
For families making $3000 per month this is very do-able. The hard part might be saving up the $24,000 which is just $500/month for 4years, or a gift from the grand parents.
On Jun 05 11:22 PM MrZack888 wrote:
> how much you wanna bet oil will hit 90 by end of this year?
On Jun 05 11:22 PM MrZack888 wrote:
> how much you wanna bet oil will hit 90 by end of this year?
You argue that high oil prices dampen economic activity which in turn will stem bullish oil. That makes sense if the cause of the initial rise is caused by economic activity. But, if the rise is primarily due to inflation, then the prices are only limited by inflationary expectations and excess liquidity. Those could drive the price of oil much higher than 72-75 (think over 100). Further, since there's obviously a good deal of money on the sidelines right now, and people continue to think commodities and particularly energy commodities are safe bets--not to mention inflation heding plays--you might not see the price of oil come down until the rest of the economy comes with it. I'd look for a brief pull-back between 60-80 and then continued sailing into the 120s by next fall. If the world economy is still standing by January, I don't think oil will have gone below 100, and I think it will stay there for months.
www.bls.gov/eag/eag.us...
So his conclusion is right although the argument is deficient.
Housing prices have to fall at least $150K from $169K in Q109 just to reach the upper ceiling of the affordability range. That's the optimistic scenario. That's an 11% decline in a world of rosy scenarios.
A more plausible scenario given the tighter lending standards is that housing prices must fall from $169K to $140K. That implies a further 21% decline.
On Jun 05 08:49 AM metricon wrote:
> "Now the other side of the equation: most U.S. households work on
> a $10/hr wages. That gives a monthly average salary before taxes
> of $1600/month. So unless the government just pays everyone's mortgage
> for the next thirty years, I just don't see how an average person
> can afford homes at these prices."
>
> Are you claiming that the average salary for a US household is about
> $10/hr? This seems unusually low. I was under the idea that the
> average US household is populated by more than one working person,
> which brings the salary of at least one working person to less than
> the minimum wage, assuming your logic. Please clarify.
Well, let's see. Iran. Israel. N Korea. Opec. Hurricane season. Summer driving season.
Well, I'd say that the chances of an 'event' pushing oil near $100 prior to year end aren't too shabby....
But it's all about the dollar. Check out this great video from Adam Hewison's site "How Low Can The Dollar Go" > tinyurl.com/kn73da
stock-market-club.blog...
this comes to around $42000/year. now, if you add the number of non-working people to the denominator, you will get a smaller average. if you add the salaried and tips, etc, you will get a larger average. the whole point of the article, though, is that people can't afford to buy homes with wages at the current level. since wages are not going up, any time soon, we will have to rely on oprah to buy nevada, florida and california. now that i think of it, if she would just recommend that her followers start buying houses, again, she could kick start the economy.
On Jun 06 06:05 PM Northstar10000 wrote:
> Nonsense to all who believe that average wages are much above 10
> per hour. Medium wages are being confused with mean wages. Sorry
> 10 is very close to the average, the medium wage average is close
> to 16.