Commercial Real Estate

Although roughly half the size of the residential housing market, the commercial real estate market is still twice the size of the total U.S. stock market, so its problems are too large to ignore. They include:

Lower Prices. The commercial real estate market didn’t top until late 2007, about a year and a half AFTER the top in residential real estate prices. But, since the top, prices are now down close to the same percentage, as the chart shows. During May and June commercial real estate prices have fallen 16%!

Financing Trouble. Almost 40% of the financing for retail, industrial and office space flowed through the securitization market. The securitization market has largely been shut down, effectively turning off liquidity for purchases and refinancing. As a result, in the first quarter of 2009 the delinquency rate on commercial properties rose 43%, and sales volume in the US fell 83% year-over-year in the second quarter of 2009.

Rising Supply. General Growth Properties, the second-largest shopping mall owner in the country, became the first large-scale bankruptcy in April. Vacancy rates are at a 20-year high, which is putting additional downward pressure on prices and rents.

Many loans that lenders hold on commercial property are classified as “whole loans,” so it behooves the banks to keep them out of foreclosure. A “whole loan” is carried on the banks’ books at par until it actually enters the foreclosure process. But, because the prices of properties have fallen so far, the underlying collateral is now likely to be less than the banks’ exposure should the loans sour. As a result, banks are attempting to delay foreclosures by modifying commercial real estate loans through interest rate reductions. Unlike the residential market, commercial properties have multiple tenants, so there’s at least some cash flow coming in. This cash flow is one reason banks are willing to modify troubled commercial loans. This stalling suggests that there are significant unrecognized commercial real estate losses currently hidden on banks’ balance sheets.

Bank Assets

The above chart is Treasury Holdings as a percentage of US Chartered Bank Assets since 1952.

"Today, banks hold federal agency securities, backed mostly by mortgages, mortgage-backed securities, plain old mortgages they financed themselves, and a few business loan contracts."

Deflation Has Been Averted?

Deflation indicators:
"Are the sources of credit (banks) lending more, and are the receivers of credit (consumers) taking on more debt? "

FHA Delinquency and Default Rate

Off the wire this morning:

FDIC Deposit fund had negative $8.2B balance in Q3

FDIC is broke. Bankrupt!


Let see the follow table:Will FHA be the next broken government agency? If you see my last post about Home Values projection chart, you probably know what the anwser would be.

116 Years History of Home Values

If we go back to 110, there will be another 21% drop from current 140 level. If we over shoot down to 90 level, there will be 35.7% decrease in next 5 to 10 years.

Prechter Goes All-In - 200% Leveraged Short

Prechter Recommended 200% leveraged short in his today's 2 page Interim EWT Report:

"Today's excitement fits into the time/price grid published on Thursday. This morning the Dow reached 10,495.60, precisely the level at which wave (Y) = (W) on an intraday basis"

"Today is the day on which the entire rally from March has lasted half as long as the preceding decline"

"After 8 months of rally and a 52% retracement, I believe I have seen enough to recommend that traders move to 200% short."

He also warned the risk on this trade as well in his report.

It seems a little bit aggressive to me. He might be too early again, but he is winning this bet so far today. You have to give him enormous credit for sticking with his analysis despite the slings and arrows of outraged unfortunates.

Riding The Waves

Time magazine article: Riding the Waves of Irrational Behavior

http://www.time.com/time/magazine/article/0,9171,1940667,00.html

"Prechter, a soft-spoken, thoughtful, engaging 60-year-old, believes that the bull market of the past eight months that pushed the Dow past 10,000 will inevitably give way to a crash that will drag prices well below the level of early March. He believes this because theories of market behavior put to paper by a guy who died in 1948 tell him so. Yet he makes it all sound perfectly plausible."

That guy is "Ralph Nelson Elliott, an accountant who, while bedridden in the 1930s, charted stock-price movements and found intricate patterns based on the Fibonacci number sequence (in which, after 0 and 1, each number is the sum of the previous two: 1, 2, 3, 5, 8, 13, etc.). The Fibonacci series, like pi, appears frequently in nature."

"Prechter republished Elliott's books and in 1979 went into the forecasting business for himself at what he dubbed the Elliott Wave Institute. In 1981 he moved his operation to Gainesville, Ga., an hour north of Atlanta, and he's been there ever since. His accurate forecasts of a stock-market boom in the 1980s and a crash in the autumn of 1987 made him, for a time, one of the most influential Wall Street gurus. After the market started its 1990s bull run, though, Prechter seemed to lose his touch. In 1995 his book At the Crest of the Tidal Wave predicted the onset of a ‘great bear market.’ The bear arrived, but not for five years. In 2002's Conquer the Crash he predicted the onset of a ‘deflationary depression.’ Again, he was years early."

"In other words, he's wrong a lot. But so are conventional economic forecasters, especially at the market turning points that can have the biggest impact on investors' portfolios. This is because, Prechter argues, standard economic models of financial markets depict prices as reflections — imperfect, perhaps, but still reflections — of true value. He believes instead that "waves of social mood are the driving factor" of both market moves and, to a certain extent, economic reality. He calls this approach socionomics, and he's doing what he can — his Georgia operation now includes a socionomics institute — to push it onto academic curriculums."

This Time Is Different ?

"THIS TIME IS DIFFERENT"
http://www.amazon.com/This-Time-Differen...

Chapter 14 - The Aftermath of Financial Crisis, is the most important to a stock trader; for it attempts to create benchmarks for the aftermath of the present crisis based upon past historical examples. Although other banking crisis are given coverage, particular emphasis is placed upon what the authors consider “The Big Five”...

1) Spain 1977
2) Norway 1987
3) Finland 1991
4) Sweden 1991
5) Japan 1992

The take away isn't very pleasant. On average, housing has declined in price for 6 years by 35.5%. Stocks declined for 3.4 years by 55.9%. Unemployment increased by 7 percent taking 4.8 years to bottom.

Note: the US started at 4% unemployment, so don't be surprised to see 11%. As we know, that is only the “official” rate.

GDP drops of 9.3% in 1.9 years. Public debt increases 86% mainly due to higher expenditures and lower tax income, and not due to bank bail-out costs.

So, if the start of the crisis is 2007; unemployment should bottom in 2012, and housing in 2013. Although, the vast majority of the pain has already been felt; except for the debt which will likely continue to soar.

That being said, the current crisis is not average. It is somewhere between “The Big Five” and “The Great Depression.” Maybe attempting to compare it to an average anything is wrong-headed. After all, Japan is one of the five and it has failed to conform to the average.

Deflation vs. Inflation

Charts from: www.dshort.com


The October 2009 Consumer Price Index for Urban Consumers (CPI-U) is 216.177. The annualized inflation rate computed from this number is -0.18%, which marks the eighth consecutive month of deflation.

Why does Fed so desperately want inflation? Because our economy can not recover in deflation. But even with so much stimulus money we put into the market, we just can not boost the CPI up enough.

There is no inflation yet, and we are still in the deflation nightmare. Investors have been told to buy gold to fight inflation. If there is no inflation, why do we fight it? And if we are in inflation, why only gold price made new high? Platinum, Silver, Copper, and agricultural products are still below last year's high, and oil and the CRB index are still below their highs of October 21.

We may see a little improvement in next few months, but the overall economy has a long way to come out of the deflation.

S&P500 P/E Ratio

TTM P/E ratio = 47.6
P/E10 ratio = 20.4

Again: "A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. "

Previous post: S&P500 P/E Ratio October 7, 2009

Gold Bull

Gold made a new all time high today. Gold bull percentage has been at, or above 90% for the last 10 straight days, and today this reading reached 97% extreme.

Here is an example as one blogger said: "I called my dad to wish him happy birthday last night. He asked me if I knew how to 'short the dollar'. I asked him why he wanted to short the dollar? He said that CNBC says it's the easiest trade out there......"

Market Wave, Price and Timing - 11/13/2009

Cobra summarizes all the wave count, price retracement and time in his SPX weekly chart:

Market Wave: 11/13/2009

T-bone's Expanding Ending Diagonal count on SPX:

Here is the internal structure:

Expanding ending diagonal is rare and I can not remember we have any examples on Dow at any degree larger than daily level, at least from Prechter's book. But it seems to be a valid count for now. $VIX seems to have similar expanding triangle pattern as well.

Wave 5 of C in first chart could be truncated already, or it is going to make a new higher high around 1121 level.

From price wise:
1121 on SPX would be 50% retrace from the entire decline from October 2007.
10334 is the equivalent point on Dow.

Time relationship on Dow:
The entire decline from October 2007 to March 2009 takes 512 days.
50% retrace the time duration: 0.5 * 512 = 256
256 days from March 6 low would be November 17, next Tuesday !!

Time relationship between wave (W) and (Y):
If wave (Y) in time = 1.618 * wave (W) in time, the date to end the wave (Y) would be November 15, this weekend !!

Next week could be interesting ......

India Market Wave Count

Wave Chart from EWI:

"The October 25 Asian-Pacific Short Term Update presented the following close-up of India's Nifty Index (on the LEFT hand-side) and raised the urgency of its analysis with this message:

"India looks especially vulnerable to the downside. This market has had a good run higher and now shows signs of momentum loss. With five waves completed at multiple degrees, it's time to step off the bull train in India, if not time to outright explore bearish opportunities."

Now, the right-hand side of the above picture shows the massive selling that has taken place in the Nifty since."

Elevated Optimism

Chart from EWI:

Spring 2009: "Dow 5,000? A Bearish Possibility?" (Wall Street Journal) "The bear market is tightening its grip. No one is taking a back seat approach. Everyone is selling. We're collapsing in on ourselves." (New York Times) "I don't want to sound like the grim reaper, but it's possible that one of the [major] averages could come down by another 50% drop from here. This is a slow-drip, slow-death decline." (LA Times) "It's going to continue its easiest path, and that path it sees is down. That's where we're stuck right now andwho's going to get out in front of it?" (AP)

November 2009: "Government Policies saved the big banks from imploding..." (Forbes) "We have a lot of room to run. The advance [in stocks] shows that the recession is over. I don't know how you could wish for better circumstances." (Bloomberg) "Dow Above 10,000: The milestone caps a stunning 53% comeback for the Dow since early March. It's almost like an announcement that the bear market is over." (AP) "Today's market rose in spite of the unemployment numbers. It's a sign that the Bull Market Is Back." (CNBC)

February 23, 2009 Short Term Update:

"If one is aggressively bearish the stock market, having a planned out exit strategy now is not only prudent, but necessary in light of some of the sentiment readings we see."

Namely, a 3% reading in the Daily Sentiment Index, the lowest level in the 22-year history of weekly figures.

February 23 Elliott Wave Theorist:

"Ideally, the S&P should continue down into the 600's. When it's finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than later."

February 27 Short Term Update:

"The turn will come on or near March 10, 2009. Anywhere in this period may mark a turn, which will obviously be a market low."

The S&P bottomed two weeks later at 666.79 on March 9.

April 2009 Elliott Wave Theorist:

The rally "could carry the Dow as high as 10,000. Regardless of its extent, it should regenerate substantial feelings of optimism... the government will be taking credit for successfully bailing out the economy, and investors will be convinced that the bear market is behind us. Be prepared for this environment."

Institutions vs. Retailers

According to the Commitments of Traders report:
(1) Look at the red rectangle, see how retailers kept buying on the last year’s sharp sell off while sold too soon once indeed the rally came.

(2) Look at the green rectangle, how there was a sudden buying surge from the institutions when the market pulled back sharply in July.

(1) Recently, tt looks like institutions are selling while retailers are buying, see the two red lines.

Wave [ii] Retracement - 11/06/2009

[Edit: Dan's blog regarding wave 2 retracement]
An updated wave 2 retrace theory
SPX wave 2 retracement

In EW Theory, wave 2 will retrace 61.8% of wave 1. Dan calculated this retracement percentage numbers for all the six minute [ii] waves starting from 2007 October.

Here are the numbers:
[ii] of 1 of (1) = .726

[ii] of 3 of (1) = .737

[ii] of 5 of (1) = .581

[ii] of 1 of (3) = .652

[ii] of 3 of (3) = .741

[ii] of 5 of (3) = .668

"All had very deep retraces past 61.8%. In fact, the numbers generated kind of proves that Fibonacci retrace 'targets' are much overrated. The average retrace was .654. If you discard the quirky 5 of (1) of P1, the average of the remaining 5 is actually .70."

"So what does this mean? It means that so far, the Wilshire 5000 has only retraced 56.4%, which is still way below average."

If S&P500 topped at 1101 on October 21 and we are in minute wave [ii] retracement to minute wave [i] decline from 1101 to 1029, the target for wave [ii] would be 1073 to 1080 level.

In above chart you can also see:
(1) Volume has been decreasing for past 5 trading sessions during minute wave [ii] retracement
Target for wave [iii] if minute wave [ii] ends at 1075:
wave [iii] target = 1075 - 1.618 * wave [1] decline
= 1075 - 1.618 * (1101 - 1029) = 959

(2) 8-day decline vs. 5-day retracement: another pair of Fibonacci ratio

(3) Head and Shoulder pattern if minute wave [ii] tops at 1073 to 1080 level.
Target for this HS pattern = 1025 - (1101-1025) = 949

So we will see the target zone at 950 to 960 if this wave structure and Head and Shoulder pattern unfold in next few weeks.

Liquidity Flows 11/04/2009

Fed. Liquidity and Foreign Liquidity Inflows from www.stocktiming.com:

If liquidity breaks below the July low, the blue line in the chart, we will have another indicator that the top is in.

Dollar Story (8): New Record High Volume

Look at the tremendous volume today on daily UUP chart. Similar situation happened when dollar bottomed at $22.64 one year ago.


If we count wave [ii] as an expanded flat a-b-c wave correction, wave c is 1.618 of wave a in length and wave [ii] retraces exactly 0.618 of wave [i]. If the count is correct, next major move will be a powerful third-wave rally.

The alternative count would label wave [i] at $22.81 high, and we are in first wave a leg correction of wave [ii].

Gold made a new high to $1063 yesterday and carried the gold bulls to 91%, fueled by the news that India's Central Bank bought 200 metric tons gold from IMF. However silver failed to confirm gold's push.

To play on the dollar, gold and silver, I would rather short silver or go long on UUP than directly short gold. Why? I think Chinese will buy the left 300 metric tons of gold sooner or later.

Institutional Money Flows 11/02/2009

Institutional Buying and Selling Trending from www.stocktiming.com: