Tuesday, August 29, 2006

Fingers of Instability

A reader of this blog (Old Soldier) was kind enough to forward me a fascinating article by John Maudlin called Fingers of Instability. It'll take you a little while to read it, but I highly, highly recommend it. It's fascinating.

Extracted from the Comments section - - some other interesting tidbits about the housing bubble and the credit which made it possible:

  • 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000;
  • 43% of first-time home buyers in 2005 put no money down;
  • 15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity);
  • 10% of all home owners with mortgages have no equity in their homes (zero equity);
  • $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.


Anonymous said...

This market is a joke....

Can any bull give me a reason why stock multiples should be increasing....for weeks on end??? Given the current slowdown/low growth...there is not one reason for this nonsense.

I hate to say it MANIPULATED. Markets are easily controlled when there is low volume. Its annoying...I hope the bulls get their .... handed to them in the fall..... then I will become a bull.

Anonymous said...

Ok, Tim. Thanks for that link. Amazing stuff.

The guy had my attention once I took a look at that first chart. Simply incredible correlation there. Unfortunately, it seems to imply that we may have to wait another year before we see the markets fall.

To the last poster: We've already given plenty of reasons why the market is holding up. The simplest reason being that there are NO OTHER BETTER ALTERNATIVES for investments.

Personally, more than 50% of my investment monies are in fixed-income vehicles right now. The rest are in balanced, managed, long-term retirement portfolios. Even if the markets take a 10-20% hit, I won't be hurt too badly. And if that does happen, I can simply swing my fixed-income money over into stocks, because they should be nicely-priced at a 20% discount to today's prices.

Anyways, I guess the lesson is to stay diversified. Sure, when I've taken out some short positions with my trading money, I hate to see the market go up. But then again, with over 40% of my long-term investments in long positions, I really don't care a whole lot either way.

Just make sure you position yourself for safety regardless of market direction. These markets aren't at bargain prices, that's for damn sure. So, limit your risk and make sure the bulk of your money is working FOR you, not AGAINST you.


Anonymous said...

Oops, ignore my first comment. I didn't realize that the graph overlays were already shifted by 12 months.

So, great, it means that we're poised to drop very soon. I guess that's good news, in a way. If it does happen, it would mean that our rational thought process here is actually correct.

Good luck, and preserve your capital at all costs.


darcy said...

Great stuff in the Mauldin article,

another graet site for news and articles by other authors is


THe Hube said...

There are at least two very good reasons for the market to be up today. It is the end of the month and there is no volume this week.

Don't know about anyone else, but I can't wit for normal market conditions to return next week.

Anonymous said...

The key to being a succesful BEAR in THIS market is seems to be finding the a "sector" that has priced in several years of explosive profits and the price of the stocks in that sector overshot reality by a wide margin.The homebuilder stocks have done this in a huge way with their prices down 50,60 % off their 52 week highs.Looking at the Mortgage Lender stocks(EX: CFC; WM: WFC ;LEND;DSL ;NEW ;),to mention a few,look like they could fall much harder,even if the DJIA does not fall right now. I have some OEX Oct. 610 puts I'm taking a good hit on,but not quite ready to capitulate and go long.Probably the wrong way to think right now but I'm still a stubborn bear looking for an alternative short play. Good luck to all !


~ Nona said...

Tim, terrific article. Thank you!

Darcy, thanks for article collection. Already read one re: gold that was of keen interest to me. I'll be back to read lots more.

~ Nona

Anonymous said...

did you all ENJOY all of the negative notes of interest today ... CC and the FED NOTES ... ONLY TO SEE THE MARKET JACKED UP !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

WTF !!!!!!!!!!!!!!!!!!!!!!!!!

Anonymous said...

Somebody beat me to the punch! I was going to tell you about that article. I am a big Maudlin fan. If you do not want to read the entire article, read these 5 bullet points from the article:

Then there was an interesting, if somewhat disturbing, bit of analysis in Barron's this last week on housing. Lon Witter argues that there has not been a housing bubble but a lending bubble. Look at this data:

* 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000;
* 43% of first-time home buyers in 2005 put no money down;
* 15.2% of 2005 buyers owe at least 10% more than their home is worth (negative equity);
* 10% of all home owners with mortgages have no equity in their homes (zero equity);
* $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.


Michael said...

By the reaction of bond traders, I'm guessing that the mkt is speculating on a rate cute sometime after the first of the year.

ST looks like TLT can hit 89-90.

Of course, since this Fed is like a freaking weathervane re "data dependent", bonds could spin back down if Friday's job report is too hot. Think I'll sell my bonds and go flat on Thursday.


Tim Knight said...

It pisses me off to see the market go up on news the economy is failing too. But you can't argue with the price action.

I've looked and looked for stuff to BUY. But, I swear, out of 250 charts, there are maybe 2 that look bullish.

I simply cannot buy into a market whose charts look like this. It has nothing to do with philosophy. Bullish charts simply are NOT there.

Anonymous said...

sad day

stockshaker said...

Yes, TK, I definately agree. Despite the action (did anyone notice the substantial pickup of volume when the markets starting rallying...Im sure 90% of you did!), but I can't find good graphs that are primed for further gains, actually a lot of them look ready to fall...

Sanjay pointed out some nice setups flirting with 52week highs. But from my own stock scans - I can't find any other decent bullish-ready stocks (makes sense considering whats happened so far), and that means everything is already starting a new cycle, and if you've missed it so far, its pretty much gambling if you want to catch any type of movement right now.

Which leaves me scratching my head, because (1) how high can this market go, and (2) are the put plays too early, as everyone (myself included), was thinking that LAST WEEK was when we'll see some type of consoliation, but the consolidation didn't really happen - did it?

I don't know if the bears will have their day in teh next month, but when fundamentals start weighing things down, then the bears will have their day.

Now, the housing sector downfall. Wow. If I can count the number of times my cab driver and I have had that conversation. I think the downfall is already very well-known, and I think thats why we're seeing the bullish move as of late in teh housing sector (I am looking at price action, not fundamental statistcal speaking).

I know some buddies who were trying to cash into the housing sector meltdown, and still are waiting for the payday, because since they've bought it (about a month ago), the main stocks have been sideways, and going up since then.

Personally, I think that sector is gold mine waiting to be dug up, fundamentally speaking.

But I've been watching many-a-graphs in the housing sector, some of the big-wigs. And if you, for example, look at TOL, looks like its setting up for a bullish trend (short term, nonetheless). Despite spinning tops, 26 support level looks like its being breached. If there is a nice big bodyied candlestick, with volume, to hold at this support, a call would be nice idea...

When is a pretty good question - when will it all start catching up?

the article linked to Tim's blog shows a nice correlation between the markets and the housing sector. But, even that shows a little bit of a lag between the two...

Tahts why, EVEN THOUGH ITS FRUSTERATING, I am not surprised that we are not seeing the fall in the markets despite the recent bearish news in the housing sector.

Will we see it happen, of course, we will see things start to fall.


not right now, at least.

Anonymous said...

I'm with the first poster...This market is a joke. Another miraculous end of day recovery! Buy! Buy! will soon be Bye-Bye!

stockshaker said...

and honestly, this recent price action reminds me A LOT of what happens after a correction... Take a look May05, and Nov05 on the SPX, when the price broke out of multimonth downtrends, the consequent rally was non-sensical, and irrational.

And thats what I feel looking at the markets right now, non-sensical, and irrational.

And thats why I fell that we just had a bit of a correction.

Again price will prove me wrong (as I think a bear market will finally catch up with reality), but right now price is showing a new bullish rally, and thus just shows what we've had so far was just that, a correction...

From one bear to another, I'm sorry to tell you the sky is no longer blue. Everything that we've expected to happen may not happen for sometime.

Anonymous said...

One word on the recent low volume... if anyone watches CNBC during the day (this week I had the chance to watch some updates both yesterday and today), you'll notice that the trading floor is virtually EMPTY. Honestly, I've never seen such a huge amount of empty space on the NYSE trading floor.

I guess when they say that traders have gone on vacation, they really mean it. It's like a ghost town down there.


Anonymous said...

September ES held 1307.5 today. Stopped the s&p right on it's track.
Getting very close to my 1309-1312 area. No need to front run by going short now.

The Trader II

Anonymous said...

agree with trader II. 1310 or roughly 0.5% from current levels is what im looking for to enter in to short positions. I still feel MACD and volume are not supporting this up move in the weekly chart. Stochastics in the moon in weekly. At 1310, every bull will be shouting "breakout", bullish sentiment will rise with weak bears covering.


Anonymous said...

This is just too confusing, i think today is the day i gave up. I traded both long and short sides of the market today. But I really messed up at the end of the trading day. I went long QLD at an even 70 only to see it STUCK so i sold it and put more of a position into QID, and guess what happened, WE RALLLLLIED. YEP, we rallied. What was behind this rally I have no clue. All I keep hearing about is new highs on the SPX and how the DOW will eventually break out to all time highs. For the bears this news is getting a little outdated. Seems by now its a given fact "that it HAS TO HAPPEN". There are just too many cheerleaders expecting it to happen. I think next week when everyone is back they will rally the markets to new highs. The rally will most likely come quick. My other opinion is that the rally may last all of september but I think the real selling will come in OCT/NOV. I just dont see a catalyst to sustain the rally any higher than 12,000. I dont understand how this market brushes everything off. The housing market is in a downward move, it is collapsing. AJ posted a nice comment on all those housing figures that are just incredible. I dont know how any bull can ignore those figures and put money to work on the long side at multi year highs on the DOW.


Trader 2006

Anonymous said...

Denver thanks for that list

I was short NEW in my fake portfolio. I think its back to the low 30's. However it does pay a big DIV so shorting that could be difficult.

Trader 2006

Anonymous said...

How can anyone be so bullish on this economy. The housing market is what fueled this economy for the last 5 years. Where will people borrow now to buy those fancy bags and shoes, nice cars, great vacations and new 72" plasma tvs.

Many of them chose to refinance into hybrid ARMs that lenders were aggressively pushing. ARMs, which featured a low introductory interest rate that resets upward after a set period of time, were easier to qualify for than traditional fixed-rate loans.

ARMs are now starting to fall by the wayside as the difference in interest rates narrows. The average rate on a 30-year fixed rate loan in May was 6.60 percent compared to 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate.

This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the MBA. Monthly payments will leap too, many beyond what homeowners can afford.

Trader 2006

Anonymous said...

$1,000,000,000,000.....markets will brush this one off too and most likely mover to 20,000 by the end of 2007...pathetic

That number will jump to approximately $1 trillion in 2007

Trader 2006

Anonymous said...

Nice article on Foreclosures. Only going to get worse. They talk about a SOFT landing hahah, Its not going to be a soft landing. Cnbc thinks so and most of the talking heads also think that. Pretty Pathetic to think its going to be a soft landing. I think a Recession is near.....

Foreclosures: Down, But Not Much Longer
The good news is that foreclosures were down in the second quarter. The bad news: they will get worse by the end of the year

Those easy mortgage chickens are coming home to roost.

This fall the adjustable-rate mortgages (ARMs) that millions of Americans took out during the recent housing boom will be reset, and many homeowners will see their monthly mortgage payments shoot up by as much as 20%. According to the Mortgage Bankers Assn., of all mortgages financed in 2005, 36% were ARMs—the highest ever.

This is a matter of concern because ARMs are typically initially made at a lower rate and then increase after a fixed period of time, usually 1, 3, 5, 7, or 10 years, after which the rate will more closely reflect current rates. As interest rates increase, mortgage payments increase. Between $400 billion and $500 billion in ARMs are due to be reset by the end of 2006. The following year will be even more dramatic, when more than $1.5 trillion will be reset.

For many Americans, this is scary news, if hardly unexpected. Everyone who took out an ARM or another equally appealing low-rate mortgage over the past few years to buy a house, at times beyond their means, knew that someday their payments could balloon. Those home buyers may have thought they would be able to flip their houses quickly and avoid the rise in their mortgage payments. But now, many of them are finding themselves stuck in a house they may soon no longer be able to afford, and, as the real estate market peters out, there's little they can do about it.

Trader 2006

Matthew said...

this market is BS...maybe when volume picks up we will go down.

north of 49 said...

Nice article, so then a bear might see good value in Dec 08 or 09 SPX 600 Puts?

Waiting for Dow 100,000

Anonymous said...

Bears will love this article at
all about the coming nasty housing slump and the recession to follow.

Anonymous said...

Anyone hear of Peter Schiff, he is predicting a HUGE drop in the housing industry. I have seen him on cnbc and bloomberg, agree 101% of what he has to say. This guy is saying what no other person has the courage to say.

great article, what ever i can find i will post.


Trader 2006

Anonymous said...

Anonymous said...
Bears will love this article at
all about the coming nasty housing slump and the recession to follow.

8:58 PM

i read the same thing you did, got it from elitetrader.

More articles the better.

Market headed down.

Trader 2006

Leisa said...


The above link is to Der Invest Informant. It is a free, interesting market read with a European twist. Additionally, there is a guest area with interesting contributors.

John said...

I really wonder how all these bears would do managing real money.

Assume you are an advisor, knowing you will be getting $1 billion inflow over the next year. You must earn at the actuarial rate of 9% to meet your liabilities that begin in 10 to 15 years.

What do you do...sell all stock and buy 5% Treasuries? Ha!! Maybe buy gold and other commodities...and incur a volatility risk 4 times that of the S&P with no income...I don't think so.

You have no choice...you must own stocks. This is not 1979 when you could fund your liabilities just by buying long treasuries. You must be more creative. That's why the explosion in derivatives and program trading...people are trying to gain return without incurring a substantial volatility premium.

I'm not saying the market will go up, but you bears must also admit that there are structural supports that will prevent it from falling very far.

Even if over a three year period you buy stocks and with dividends and gains you only average 6%, you are ahead of bonds witha lot less risk than commodities.

Be careful and good luck


Anonymous said...

John, you're exactly right. That's kind of what I said a couple of days ago. There just aren't any other GOOD investment alternatives out there beyond stocks.

And some sectors aren't horribly overvalued, either. The money is slowly flowing into those sectors, along with some of the more beaten-down ones, too. I definitely don't expect the markets to skyrocket, but I don't see them falling like a rock, either. As long as the liquidity is there to float the markets, they just won't sell off. And the liquidity is coming from a number of sources. The only thing that the higher interest rates have done around the world is to reduce some of the "fast money speculators" in the markets. But the steady inflows from retirement accounts and such will could the markets up for quite a while.

Yes, the economy is slowing, maybe even dramatically. But until investors find somewhere BETTER to put their money, it will stay in stocks.


Anonymous said...

Everyone is headed to stocks because real estate is looking pathetic now. ITs JUST AN EXCUSE TO BUY STOCKS. Back in 1999-2000 when everyone lost money in stocks they ran to real estate now that real estate is on the verge of a huge collapse they are making stocks look like the place to put money. Pretty sad.

By the way anyone see COST warning this morning, anyone suprised. All the retailers will be feeling it soon, COST is a great company. Wonder how WMT and TGT will hold up the next 6-12 months.

Anonymous said...

Yes, we all saw the warning. And there will be plenty of other warnings and downward guidances in the near future.

But that still won't affect the broad market. No matter how many warnings are given by individual companies, it doesn't change the fact that there just isn't any better place for the big boys to invest.

If you don't like the Costco warning and think other retailers will follow, then don't buy into the retail sector. Buy health care, biopharma, and large cap value stocks with dividends. Even utilities could do well in the next 6 months or so. I'm looking into some of them now, although they're pretty highly valued already.


Anonymous said...

By the way, ESLR is holding up nicely. I mentioned before that it could get as high as the $11 range before dropping again. Look at the trading channel in the downtrend. It's beautiful.

There has been no news that would account for ESLR's rise from $8 to $10. I think it ran up 10% on Monday alone. It's getting poised for another breakdown.


darcy said...

Yes, the economy is slowing, maybe even dramatically. But until investors find somewhere BETTER to put their money, it will stay in stocks.

As someone who has seen recessions

re: Alberta Canada 1980-83

I don't believe that it will be a question of where to put my money

Typical investors will start to sell their toys first. then they will sell their investments next in order to avoid losing their homes, their biggest investment.
All those other investments will be liquidated " at any cost " before losing? their homes ( as if they owned it anyway )

when we see the whites of their eyes will be a good time to buy

just some thoughts

darcy said...

Today is the day

market up to 11467

then it will fall in ERNESTO

i think

just wanna be on record haha

Anonymous said...

Hey John:

Don't knock Tbills, especially if you've been able to capture a significant part of the move off the 2003 lows. Did you know the S&P 500 has underperformed the total return on lowly 3-month Treasury bills for what is now more than 8 years, earning average annual total returns of just 3.2% since early-1998? Check it out!

Also, regarding your statement that stocks are undervalued, I'd recommend that you read the John Hussman article entitled "S&P 500 Fair Value Below 800?". Food for thought.

I can understand your bullishness. Hell, even though my charts don't look good to me, I can imagine that irrational exuberance could take the averages up another 10% or so. But the way I see it, if your long this market you are playing with fire.

That said, best of luck to you.


Sanjay Sola said...

construction stocks are doing well today off the GDP report. BOOM is moving on volume.

WIRE has an impressive chart, IMO. looks like the volume is picking up there too.

so housing is not the only thing. construction is doing well regardless of housing.

the market sees all. go with what you see, not what you think.

Anonymous said...


where r u? don't try it too hard..its not going down

Anonymous said...

TK . . .
I have been looking for buying opportunites as well (found virtually NONE). The couple I have entered quickly swung so volatility is not in my favor either. I can't be bullish (does not make any sense) and all my put plays have been doing poorly. Lot of $$$ sitting on the side since the market is behaving odd.

Good luck trading! Keep up the great work!

Anonymous said...

WTF is going on with AMZN, all the retailers are going down and AMZN just heads higher. A month back I saw atleast 20 articles which said how AMZN was a good short. Looks like the ONLY GOAL of the MARKET is to SCREW the people

Anonymous said...

hahaha this market is just too damn funny, expect 6 yr highs but soon after the huge selloff in october.

Anonymous said...

Looks like it's time to start scalping in on some puts. No sell signal yet, but getting oh so close!

The Trader II

Anonymous said...

7:47 wow
you read my mind,

i noticed that too, AMZN, how the FUC$ is that stock moving higher, wait on that lame ass buyback. Pathetic if you ask me. Stock had a terrible QU sold off to around 25, now back up over $30, im sure they will take it to $38-42 range for the xmas season. PATHETICCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC

Anonymous said...

Clearly the market wants to make new highs, or at least retest the old ones. Every single time the markets look like they're softening up a bit, they just turn right around and spike higher. Literally, you can see the markets just go vertical all in unison.

For what reason, I have no idea.

Maybe because everyone expects an autumn decline, it will just not oblige us.

Anonymous said...

Some things to think about. The brokers are not participating in this rally. GS, LEH, BSC, CME, etc.

I'm a strong believer of the 4 year cycle low. All the indicators are showing a top being build now. If you like, i think the risk and reward is on the short trade. I have started buying December 105 dia puts today. Will really jump at it when my indicators flash sell.
Lots of luck fellas.

The Trader II

Anonymous said...

Yes, the market always does the unexpected. I started out studying fundamentals, and found that they didn't matter. Then I started relying on technicals, and found them unreliable. I became a student of market pyschology, but it psyched me out. So it seems there is really no good way to understand the market. Patience, discipline, risk and money management all help. But it is often frustrating. The main thing is to avoid being misled by your biases.

Anonymous said...

Wow, to the poster at 8:14 AM, you hit the nail right on the head. Fundies are just about worthless in these markets. Technicals are nice, but if the action is choppy you end up just getting stopped out for loss after loss after loss. Market psychology seems to be your best bet, but that can change very quickly, so it's hard to predict.

I sometimes wonder if the old "modern portfolio theory" is the only way to go. Diversify, minimize risks, and buy heavily into steady companies that pay dividends. Go overweight in certain sectors according to the economic cycle -- tech and materials in early bull, energy at the peak of bull, health care and pharma at the start of the bear, consumer staples in middle bear, and financials and utilities at the end of the bear cycle.

Anyways, that seems to be just about right these days, except tech really seems to be catching a second wind lately. I think it's just because it's been terribly oversold. Eventually it will soften up again once the bear takes hold.

I've completely stepped back from this market. I got burned quite a bit on this last run... the distribution days have been nearly nonexistent, so my shorts have all lost money. Not much, mind you, but just enough to piss me off.

Trader II, when you see those sell signals, be sure to pass them along. I'm sure everyone here would appreciate it.


Anonymous said...

I picked up December DIA puts this morning and it's look'n very good right now. I'll keep you folks updated. We are getting very close.

The Trader II

Anonymous said...


It's trying that 134 area once again.

I think oil and oil service stocks will be a buy but it will be awhile till they bottom out.



I cut my position sizes based on the choppy action.

I think this "rally" could last a bit longer, maybe till Sept 8 which would be 6 trading days into the month. Get more of the newbies' 401 K monies. LOL.

Michael said...

Gold is interesting as well. Gaps up at the open about everyday, then reverses to close below the open and sometimes previous day.

IGE got stopped out.


Anonymous said...

looks like the market is setting up for an HUGE rally in the afternoon.

DOW 100,000 here we come :-)

Anonymous said...

Love this from marketwatch; "Financial stocks rallied in late morning trading wednesday as investors seemed to shake off concerns about the housing market, interest rates, and the economy."

Yeah, just shake it off, big deal, who cares?! Ignorance is bliss I guess.