Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Housing Market

The housing market is comprised of buyers and sellers of homes. Information on the housing market encompasses the supply and demand for homes as well as the inventory level of unsold homes. In markets around the country and different nations, you will have a natural progression of demand and supply. In some markets, there are new citizens moving to the city creating demand and, unless there is enough supply to match this demand, prices will rise. Income levels and mortgage rates also play a role in determining how many transactions occur in any given housing market.

Setting Up for the Slaughter

By for Profit Confidential

Stock Market Valuations Touching Historical ExtremesInvestors poured $4.3 billion into the SPDR S&P 500 (NYSE/SPY) last week, an exchange-traded fund (ETF) that tracks the S&P 500. For the week, ETFs tracking U.S. equities witnessed the most inflows in the last four weeks. (Source: Reuters, July 17, 2014.)

And as investors continue to inject vast sums of money into the stocks, stock valuations are at historical extremes. When I want to see how expensive the stock market is getting, I look at the S&P 500 Shiller P/E multiple (the value of stocks compared to what they earn adjusted for inflation)…and it’s screaming overvalued.

In July, the S&P 500 Shiller P/E stood at 25.96. That means that for every $1.00 a company makes, investors are willing to pay $25.96. The stock market has reached this P/E valuation (25.96) only seven percent of the time since 1881.

The number suggests the stock market is overvalued by 57%, according to its historical average of 16.55. (Source: Yale University web site, last accessed July 18, 2014.) The last time the S&P 500 Shiller P/E was above the current level was in October of 2007—just before one of the worst market sell-offs in history.

But this isn’t the only indicator suggesting the stock market is overvalued.

Another indicator of stock market valuation I look at is called the market capitalization-to-GDP multiple. Very simply put, this indicator is a gauge of the value of the stock market compared to the overall economy. It has been a good predictor of where key stock indices will head.

At the end of the first quarter of this year, the Wilshire 5000 Full Cap Price Index … Read More

Why Higher Interest Rates Will Become a Necessity

By for Profit Confidential

A Weak Economy Masked By an Artificial Stock Market RallyLet’s start with the U.S. housing market. Has the recovery for it ended or just stalled?

My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.

I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.

In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)

JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)

And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)

So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.

But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.

We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 18,000. (Source: USA Today, July 15, 2014.) … Read More

Three Housing Market Indicators Yell “Trouble Ahead”

By for Profit Confidential

Next Shoe May Be Dropping the U.S. Housing MarketThe U.S. housing market is in trouble again, and as crazy as it sounds, it won’t surprise me to see home prices decline soon.

Here are three reasons why:

Existing-home sales have been declining since July of last year. The annual rate of existing-home sales in July of 2013 was 5.38 million. In April of this year, this rate fell to 4.65 million. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 22, 2014.)

Mortgage originations in the U.S. housing market have been falling consistently, as illustrated by this chart:

Mortgage Originations, U.S. Housing Market

Quarter

Mortgage Originations

Q3 2013

$549 Billion

Q4 2013

$452 Billion

Q1 2014

$332 Billion

Data source: Federal Reserve Bank of New York web site,
last accessed May 22, 2014

Between the third quarter of 2013 and the first quarter of 2014, mortgage originations in the U.S. economy declined by 40%. Mortgage originations at U.S. banks in the first quarter of 2014 were the lowest since the third quarter of 2011!

Then there is the National Association of Home Builders/Wells Fargo Housing Index (HMI). This index tracks the confidence of homebuilders in the U.S. housing market. It’s telling us that the recovery talk is based on nothing but false hope. The HMI dropped to its lowest level in 12 months in May of this year. (Source: National Association of Home Builders, May 15, 2014.)

Dear reader, I know I have had a bearish stance on the U.S. housing market for some time now. Those concerns are starting to materialize in the marketplace. Don’t buy into what the mainstream says, that all is … Read More

2014: Year the Frail U.S. Housing Market Recovery Reverses?

By for Profit Confidential

What the Collapse in Homeownership Is Telling Us About the Housing MarketLooking at the current state of the U.S. housing market, one could say, “It’s the perfect time to buy a home.” Mortgage rates are historically low. Home prices are still down significantly from their peaks in 2006. But unfortunately, potential homeowners are not coming into the housing market.

The reality of the U.S. housing market is that it never recovered. It’s still sick at heart. Low mortgage rates and low home prices definitely provided some support; but now, as the Federal Reserve is pulling back on quantitative easing and mortgage rates are rising, we see home buyers running away.

The biggest bump we saw in housing was in 2012, when institutional investors came in and bought billions of dollars worth of empty homes in bulk. This gave the mainstream a hope that there was going to be a recovery in the housing market.

But as I have been writing since last year, investors buying houses to rent them will not create a healthy housing market recovery.

In fact, in the first quarter of 2014, the homeownership rate in the U.S. declined to its lowest levels in almost two decades, falling to 64.8%. (Source: U.S. Census Bureau, April 29, 2014.)

New-home sales are declining at a very ridiculous rate, further strengthening my argument that home buyers are just tapped out. The chart below is of new-home sales in the U.S. going back to 2005.

Houses Sold - New One Family Chart

Chart courtesy of www.StockCharts.com

Back in 2005, the annual rate of new homes sold in the U.S. housing market was about 1.2 million. In March of this year, this rate was just 384,000. And in 2014, … Read More

When the Cows Go Out for Slaughter a Second Time

By for Profit Confidential

When the Cows Go Out for Slaughter a Second TimeDid you see this story in the Wall Street Journal last Friday?

“Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago… Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March… That is the highest percentage since March 2008…” (Source: Wall Street Journal, May 2, 2014.)

You read that right. With stocks at a record-high (and valuations stretched), retirees are pouring back into stocks. Are they getting ready to get slaughtered again? I believe so.

If you are a long-term reader of Profit Confidential, you know my take: the “bear” has done a masterful job at convincing investors the economy has recovered and the stock market is a safe place to invest again. Meanwhile, nothing could be further from the truth.

We are living the slowest post-recession recovery on record. And that recovery has been manipulated by the tampering of the Federal Reserve. You see, the Federal Reserve played a key role in driving the key stock indices higher. In 2009, in the midst of a financial crisis, the central bank started printing money and buying bonds. This resulted in lower bond yields. Those who had money in bonds, who had essentially paid nothing, moved into stocks.

And those record-low interest rates enabled companies in the key stock indices to borrow money and issue new equity, using the money to buy their own stock, thus pushing up per-share corporate earnings.

The end result? 2013 was a banner year for stocks on the key stock indices. But as 2014 came around, we began … Read More

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The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

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