Financial, Real Estate, Stock Markets Trends and Current Affairs

Tuesday trading update from Eurocalypse...

The SP500 daily chart has the same pattern than CAC.a squeeze could lead us to 1240 but I don't see it really pushing any further out and I see the market being more heavy than Europe because we didn't sell off as hard.

sp500

Contrary to the CAC points (see Eurocalypse Trading Update 8/16/2011 - French Markets and The Inevitable Pan-European Real Estate Collapse), we didnt visit 2010 lows which are my target, so lets not talk about July 2009 lows just yet. The option set up and trading illustration given to subscribers last week still stands as the preferred method for those who trade optionable ETFs to best position themselves. All paying subscribers should download SPY option strategies in violent down moves for retail investors. We will review larger contract futures strategies for professional and institutional investors in the near future.

Fixed Income

While we believed that it's both rational and worthwhile to play the long US notes, Bunds (or Swap rates) as a positive carry trade to leverage the continuing debacle of western economies, these are profit taking levels for those momentum players and flight to quality traders, and perhaps even levels to cautiously try the short side. No, the strategy is not driven by the explosion of the ponzi that US debt or german debt, but simply an over extension of a trend. UST notes monthly charts shows we are in resistance zone.

On bunds, the German debt, there is still this joker that it is suddenly rerated as bad as PIIGS if Merkel gives in to support Italy and Spain (which she has shown she is thus far refusing to do in by refusing Eurobonds)...The short term mo-mo players are not looking at things this way. There is also this matter of the CRE rollovers that will either smash French and German banks, tank pan-European real estate, or the most likely option - both.

Things to watch

I think the stock market can tank in the short term only if the PIIGS crisis resumes abruptly. Is it possible ? Well of course, it is, but I think we'd see serious signs in the debt markets before the stock market reacts, as usual. I read that 22bn of PIIGS debt were bought last week, the fastest pace ever,
and a very significant amount. All the guys who sold, probably bought Bunds instead (they are bond funds, ALMs so if they sell an investment, they should
buy something else with the proceeds...). If ECB activity subsides, Bunds naturally lose some of their bid. and then the bid on PIIGS will be tested as Bunds' yield rise from here. Then the market could well call the ECB bluff and see how big their virtuo-synthetic inkjet powered pockets really are (from a political point of view, of course - they can literally print forever up until inflation scares them back - reference The Bull Argument For Europe Is Credible, Except For The Circular Argument: You Can't Solve Debt Problems With More Debt!!!). If these balls are not as deep as their virtual pockets, then....

Reggie's note:

Of interest, if we're correct in our fixed income outlook, that Pan-European CRE crash may well have ample company stateside. See my rant on over optimism in this space on CNBC: Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate.

As excerpted:

Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.^[1] The rate is calculated in a simple fashion as follows:

Without going into a CRE class, when interest rates go up, cap rates generally go up as well and the value (or cost to purchase) of the property goes down in sympathy unless the rise in interest rates is offset by a commensurate or greater rise in net operating income. Now, either everybody believes that unemployment is going to drop towards zero  in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget Austerity: Goldman Sees Danger in US Budget Cuts - CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) ---- or cap rates are about to skyrocket. I'll let you decide!

As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down??? Let's ask Portugal or any of the other PIIGS group. I have shown, very meticulously, how Portugal can not only afford the path that they are on (record high interest rates) but the losses that will come when they restructure (default) - for all to see. I have done the same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010). Be sure to carefully and very thoroughly peruse the spreadsheet below to see the many scenarios present that show the NPV of investor losses due to haircuts and restructurings...

I have went through what is inevitable in the US from a fundamental perspective right here in New Amsterdam, just a tad bit before I brought the message across the pond to old Amsterdam.

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Remember, unlike many, I have asserted since 2007: It's a Real Estate Depression!!!