(click on picture to enlarge)
If you check time stamp (9:42 am PST on May 21, 2008) at the bottom of my last blog, and the predicted price range for a peak in the crude market in the opening paragraph, "a quick spike towards $135-$138 or a little higher is possible", you can see a BULLSEYE within 24 hours. Later on the 21st, and again on the 22nd, crude jumped to $135 momentarily, before reversing sharply. Since then, we have seen selling on good news for that market; a sign that there are just no more speculators at these levels, and that the big money is taking profits, likely now betting to the downside. My targets of $100 for sure, and $80 likely this year still stand. This means that gas prices of $4+ per gallon are not likely to hold for long, and $2.75 to $3.25 per gallon should be seen by Thanksgiving at the latest, even if another rumor driven spike takes crude to recent or above. There are unsubstantiated rumors that the US and or Israel is preparing for an attack on Iran circulating across trading floors this week. These are the kinds of rumors that happen after the top occurs, that are designed to bounce crude to allow "big guys" caught in losing trades to get out. The little bounces that occur are usually quickly erased, and further losses follow. To add fuel to the fire of this mania, predictions of $200 oil are surfacing. Interesting that this always happens at or near peaks of dramatic proportion. Examples are the calls for 30k and 40k Dow when the index just crested 14,000, calls for $2000 gold when it crested $1000, Nasdaq 10k eight years ago when it just crested 5k (still not having seen 3k since), calls for google at 1000 when it just crested 700 (remember it fell to 400 in March), and the list goes on.
Oil falling will help gold drop back toward the 600-700 range, and 1.30 +/- .30 in the Euro in the next 12-18 months. Planning European vacations for the first half of 2009 will likely allow the best bang for the Buck for the last couple years.
There is now a line in the sand, that if crossed, will burst the dam of optimism and what little sense of security most of us have left, and it's Dow 12,000. On the long term chart of the Dow above, I've placed a light blue line from the Dow low in 1974, and drawn it through the 2002 low. If you could see the entire picture in log-scale, you would see that is has been the "inflection line" for the past 35 years, including the recent January and March lows of 2008. Currently, this line passes through 12,000 for the month of June. A break of that line, in this case, Dow 12,000, will be the first break of a 35 year support line. Usually when this happens, the institutions wait for prices to get back just under or to the line again, and then sell like there is no tomorrow. So, consider this THE risk level of your portfolio, since under 12,000 will be likely bring in waterfall-like selling. Where is the Dow likely to fall to if 12k breaks? Let's just say that a reasonable target is the panic low of late 2002 around 7,500 +/- 300 points. This would also come very close to the trendline drawn from the 1987 low up through the inflection low in 1990, which is in the 6000-7000 range through the end of 2010. This gives two target surrounding 6,800 +/- 500 points (the average between the two technical analysis methods just mentioned).
What about everyone saying that the economy and lending sector is on the mend? Well, today, the banking index, BKX, will close at a lower low than in January, March, and April, or in other words, a new low for the year, and at levels not seen since 2003. Apparently, the banking system problems ARE NOT over, says the market, who is ALWAYS right!
In fact, today, after I have been suggesting it was coming for 6 months, WAMU replaced Kerry Killinger as Chairman of the Board. He is remaining as the CEO for now, but not for long in my humble opinion. At a price under $9, WAMU could be the buy of the sector, especially if Kerry's CEO days come to an end quickly. Having fallen from $48 in 2007 (a loss of $39 per share), what is the risk of buying at $9? Well, about 80% less than it was at $48. I'd buy under $9 and again under $5, and sell if it gets to $21.
This week, the Mortgage Bankers Association's first quarter report showed that a record 2.5% of all home loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That's up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007. The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007. The number of homeowners behind on their mortgage payments also hit a record high. Nearly 3 million home loans are now at least one payment past due, while about 737,000 are at least three months past due but not yet in foreclosure. This marks the sixth straight quarter in which a record percentage of loans went into foreclosure. The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans. Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns. California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have about 368,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.7% of all of the loans in these states are now in foreclosure. The other two states that are ground zero for the crisis - Michigan and Ohio - have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector.
Last week, the government reported that 47 out of our 50 United States have more than 20% increases in foreclosures than the same time last year. Even Seattle and Portland are experiencing a slowdown in home sales, due to a lack of price decreases and stricter lending parameters. Many Governors are proposing that people walking away from their defaulted mortgages be safe from negative credit history reporting. Did we actually elect those idiots? Let's make sure we don't re-elect them in November. Imagine letting those that don't pay their bills get off free of charge? What message does that send to those that do pay their debts? What about the children?
Remember my comment on May 9 regarding municipal bonds and how they are a safety trap? Well, Vallejo, CA just filed for bankruptsy, defaulting on their muni bonds. They are trying to get the court to let them out of obligations and contracts that they say have forced them into the largest municipal default in California's history. The example this could set could lead to widespread city, county, and possibly state default in the coming years. Again, this is NOT the time to buy or hold muni bonds. It's a mine field and little guys like us cannot possibly determine the true risk of ANY municipality. So, don't kid yourself into thinking you can or your stock broker can, let alone your bond fund manager. As I write, muni bond insurers MBIA and Ambak have been placed on the review list at Moody's Bond Rating. Apparently, there is question whether they'll be able to withstand a massive municipal bond default scenario. You read it here first...
Fed Chairman Bernanke said today that the current housing decline has erased more family net worth and faster than the housing recession of the 1980's. If you "need" a new house to live in (by no means the right time to buy for investment purposes), this is a reasonable time to be looking. If you have the credit rating, you can get a great rate on a 30 year fixed mortgage, and in most cities in the country, you can get houses at 20%-50% below the prices they sold at in 2006. If you are in a market that is only 5%-15% off the highs, there is likely room for prices to fall further, but ANYTIME you can buy with a 40% discount to the recent highs, it pays to do so, since historically, that has been a good correction point. Don't talk yourself out of looking and making low ball offers though, as even in Seattle, you can find plenty of values at dramatically discounted prices. And realtors will not tell you about them, nor help you hardball negotiate. Remember, they want the commission, so any transaction is good for them. It's a rare market where buyers have the power, rather than the normal sellers market. So use it to your advantage, and make sure you really want to live there. This is NOT a flipping market, since most people can no longer qualify for housing prices above 500k. Make sure you don't get caught in the year over year "sales numbers" that, in some areas, show April '08 sales are up 25% to 45% over April '07. Remember, those cities have been in the toilet for two years, and 3 sales this April vs. 2 sales in '07 represents a 50% increase in home sales. Expect the numbers to misleading for many months/years to come, and make sure you know the actual number of sales, rather than just the percentage increase.
Speaking of great opportunity...if you don't care how "green" your car is, you can really find values in late model, used SUV's. There are reports that you can find 2007 gas guzzling vehicles at 50% of their new car prices, as people panic out of their exuberant car purchases. This explains why GM is trading at the lowest price since 1982. Normally, it takes about 4 years for a car to fall to half price, at least at the upper end of the price spectrum. So, if you can grab that discount after only a year of usage, with warranties intact, you can afford to burn twice the milage for a long, long time, and still not eat up the difference you saved on the great price.
If you like to trade the leaders of the current, keep your eyes on the "four horsemen" of the current apocolypse: GOOG, AAPL, RIMM, AMZN. The fate of these four will determine the Nasdaq's path. Each of these horsemen have rocketed in the past years and months, but are showing signs of weakening momentum, and waning institutional interest. They are all on my "lighten up" list below, with specific target zones.
Popular stocks to lighten up on at current prices or higher are: CSCO above 25 (but buy near 18), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy near 18), YHOO above 27 (but buy under 18), SNDK above 30 (but buy near 15), RIMM above 131 (but buy under 80), AAPL above 180 (but buy near 100), BA above 82 (but buy under 50...any close under 70 will activate a head/shoulder top, with 40 as the target), GOOG above 560 (but buy under 350), DELL above 23 (but buy under 15) to name a few.
Interesting stocks to add to gently (if you have to): GE from 30 could test 36, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far) could test 60-75, AMGN from 40 (touched 45 so far) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 7-10 could test 18-23, BAC from 27-32 could test 42, C below 20 could test 40 in coming 12 months, and MSFT from 24-27 could test 31 by year end. More to follow in coming months as prices decline.For what it's worth,
Ken
