Happy New Year to all....may 2021 be 10,000 times better than 2020

Happy New Year, from the Wise Owl (Big Steve)

WHEN WE DRINK, WE GET DRUNK.

WHEN WE GET DRUNK, WE FALL ASLEEP.

WHEN WE FALL ASLEEP, WE COMMIT NO SIN.

WHEN WE COMMIT NO SIN, WE GO TO HEAVEN.

SO, LET’S ALL GET DRUNK, AND GO TO HEAVEN!

COUNT YOUR BLESSINGS INSTEAD OF YOUR CROSSES.

COUNT YOUR GAINS INSTEAD OF YOUR LOSSES.

COUNT YOUR JOYS INSTEAD OF YOUR WOES.

COUNT YOUR FRIENDS INSTEAD OF YOUR FOES.

COUNT YOUR SMILES INSTEAD OF YOUR TEARS.

COUNT YOUR COURAGE INSTEAD OF YOUR FEARS.

COUNT YOUR FULL TIMES INSTEAD OF YOUR LEAN.

COUNT YOUR KIND DEEDS INSTEAD OF YOUR MEAN.

COUNT YOUR HEALTH INSTEAD OF YOUR WEALTH.

LOVE YOUR NEIGHBOR AS MUCH AS YOURSELF.

ALWAYS REMEMBER TO FORGET

THE TROUBLES THAT PASS AWAY.

BUT NEVER FORGET TO REMEMBER

THE BLESSINGS THAT COME EACH DAY.

TBTF Bankers are above the law, they skate and shareholders and the public get screwed

Bankers have become legalized whores, and I cannot understand why their CEO’s are held in esteem... Far too many times when the "too big to fail" bankers are caught with their hands in the till (or placing the entire global economy on the precipice of collapse, as was the case in 2008), no one (those in charge) were arrested or went to jail and the banks and their shareholders wound up paying a hefty fine and putting the so-called violations of law (criminal activity) behind them as they laughed their asses off. This inevitably leads to jokes about how paying fines is just part of the cost of doing business for the TBTF bankers if you or I committed such larceny

You and I would be doing 15 years to life behind bars...

But it isn't until you aggregate the sums paid over the last 2 decades, which the Financial Times did in a scathing report published this past weekend, pointing out that its very apparent that you can really see just how much these fines (due to illegal activity) actually are becoming a basic cost of doing business for banks and their CEO’s/CFO’s. Over the past 20 years, the (6) largest U.S. banks have paid out nearly $200 billion in fines and penalties (this is monies that belong to the shareholders).  An advocacy group Better Markets found that Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have paid nearly $195 billion, collectively, since 2000. Thet claim the significant upsurge indicates that overall banker’s behavior has significantly deteriorated (becoming more and more criminal), and they have suffered more fines since the Great global financial crisis than prior to it...as they learnt nothing except thet the penalties for their criminal behaviors were a joke and just a part of doing business. 

 here were 85 major legal complaints against banks between 2000 and 2008. Between 2008 and 2012, that number was 110 cases, most of which were mortgage related. But since 2012, the group found that there had been another 204 legal actions. Better Markets chief executive Dennis Kelleher said: They were all major legal actions... It was not like it was a “broken windows” theory post-crash where prosecutors are fining every little violation. If they were held to a real standard of obeying the laws of our Nation, a moral higher standard they all would have been put out of business because the recidivism is really quite shocking. He continued: “It’s absolutely shocking that JPMorgan has now pleaded guilty to three separate criminal charges for egregious years-long criminal conduct.”

Banks and bankers like JP Morgan and Jamie Dimond are repeating past offenses as in October, the bank paid $920 million for direct manipulation of the metals market this comes after the bank admitted AML failings in 2014 and pleaded guilty in 2015 to manipulating the FX markets.

Ø  JP Morgan “Jamie Dimond” was second only to Bank of America in fines and penalties. Bank of America has paid about $91 billion for 86 legal cases since 2000,

Ø  While JP Morgan has paid slightly over $40 billion as a result of 83 cases.

Ø  Goldman Sachs has also entered into massive multi-billion-dollar settlements, most notably for looting Malaysia’s 1MDB development fund.

However, when you compare the fines to the combined $1.3 trillion in net income the banks have earned over the same 20 years, it becomes clear: the their illegal acticost of doing business" in the investment banking world is well worth it. 

 

Stock ideas 12-30-2020

 MRNA Coming back to solid LONG-Side tradable support   JMHO

Moderna finalizes an agreement with Recipharm for aseptic drug manufacturing and fill-finish for COVID-19 vaccine supply outside the US

Moderna and Recipharm, a contract development and manufacturing organization, have reached an agreement to support formulation and fill-finish a part of the Moderna COVID-19 Vaccine supply outside of the US. The activity will be performed in Recipharm's drug product manufacturing facility located in France.

Subject to regulatory approval of the vaccine in relevant countries outside of the US, it is anticipated that supply will commence in early 2021.

Some NEW Wise Owl Thoughts

If 2020 was dominated by the huge human costs of Covid-19, the years ahead will be all about the nasty and dismal economic aftermath, including the massive Tsunami wave of US debt and corporate debt. 

During 2019, the assclowns spending fools in Congress suspended the debt ceiling until after the 2020 presidential election (bless them). While they sought to avoid a repeat of the 2011 and 2013 debt crises during an election year, new spending contributed to King Trump’s new military rearmament push. Now the new

Congress must decide the future of the debt ceiling by the summer 2021.

By the end of this year Covid 19 cases worldwide could be heading into the 80-100 million. As a result of utter mismanagement, and we could easily exceed 20 million. While this nasty pandemic continues to spread and the health system becomes more overwhelmed, the King-Trump White House has taken upon themselves record amount of debt at a record pace.

Remember that during his campaign, King Trump pledged to eliminate our national debt completely in 8 years. At the time, total public debt was closing in on $19.7 trillion. In the past 4 years, it has rocketed to more than $27.7 trillion, a staggering $8 trillion.

Of course, all major economies have taken record amounts of debt during this nasty global pandemic. But the United States is not like other economies. First, it has more Covid-19 cases relative to all other major economies. The US remains the world anchor economy. The, US dollar dominates international transactions. As a result, massive excessive US debt will have a disproportionate nasty economic global spillover.

 

Due to the lecherous enabling manipulative FED, depressing interest to near “0” screwing over savers and others as a share of GDP, the cost of servicing US debt has deteriorated since 2000, even as federal the amount of debt has ballooned. The incessant manipulative environment of low-interest rates has made it far easier that it should be to service and pay down the massive debt loads. Nevertheless, the likely policy stance of the Biden administration whether implicit or explicit, will likely be predicated on unsustainable debt-taking in the future.

According to the recent projections by the nonpartisan Congressional Budget Office, federal debt held by the public will surpass its historical high of 106% of GDP in 2023 and will continue to climb thereafter. By 2050, debt as a percentage of GDP (a vastly undervalues matrix) will amount to close to 200% of the GDP. Despite peaceful conditions, it is already at the level is seen during World War II; by 2050, it could be twice as high

Worse yet, our debt is likely to increase far faster than most so-called gurus anticipated (JMHO). Current projections do not include the actual costs of the pandemic stimulus packages, for one. 

Deficits will more than double from an average of 4.8% of GDP from 2010-19 to excess of 10.9% through 2041-50 adding to more debt. As a result, net spending for interest will account for much of the massive increase in total deficits in the past two decades. In the CBO’s projections, growth in outlays will continue and accelerate to outpace growth in revenues, resulting in larger and larger unsustainable budget deficits over the long run...measured as a share of GDP, net spending for interest could increase 4x to 5x over the last 2-decades of the projection period.

The New Biden administration has promised to be tough on China, Russia, and several other countries, which could translate to rising defense and security costs which, in turn, would further amplify our ballooning a massive wave of debt, twin deficits and real interest rates. Remember what history has taught us repeatedly that when great powers fail to balance their wealth and their economic base with their military power and strategic commitments, they risk vast overextension. In the coming decades, that will likely become a US risk.

 

---

 All my technicals and interpretation of the fundamentals point towards a full-blown mania in the U.S. stock market. The SPX-500 trades near or above record valuations across virtually every metric. Retail traders are speculating in a manner not seen since the massive “Greenspam” fueled Dot-Com bubble. Welcome my friends to the greatest FED show on earth, the newest central-banker great stock market mania of 2020.

Meanwhile, the general investing retail crowd is partying like its 1999 donning massive rose-colored glasses on in both the stock and especially the massively growing option derivative markets. Historically, when these two combinations meet it does not end well for herd-chasing newbie investors.

In today's weekend report, I will dive into each of my premises as to why in greater detail, using both hard data and anecdotal reports. All signs point towards a mania on parity with the Great Dot-Com bubble. That leaves extraordinarily little long-term upside, and significant downside risks in today's overheated stock market.

Perhaps the most ironclad law of financial markets says that valuation is providence. While valuations cannot tell you what prices will do next month or even next year, they do a good job of providing information for the long-run return expectations for longer-term buy and hold investors.

One of the most reliable valuation metrics for gauging future returns is the CAPE (cyclically adjusted price to earnings) ratio. This ratio compares stock prices against their average earnings over a trailing 10-year timeframe, also its adjusted for inflation. Historically, the CAPE ratio provides an extremely accurate indicator of future returns:

Thus, when the CAPE ratio is high, you can expect significantly lower future returns over the next 10-year time horizon and vice versa. That is bad news for anyone long the broader market today, given that the SPX-500 CAPE ratio now exceeds the peak reached in 1929 just before the Great Depression ensued.

 

But wait, did not I say the most expensive stock market ever and the chart indicates that the Dot-Com Mania was distinctively higher...well, it all depends on which valuation metric you choose. Yes, it is true that the CAPE ratio was briefly higher at the peak of the Dot Com bubble but there is just one problem: what if the definition of real “earnings” changes over time? That's precisely what's happened in recent years, given an massive epidemic of fake engineered (through stock buybacks)!  As far-far-too many firms are addicted to making creative accounting modifications that increase operating profits known as EBITDA (due to self-serving greedy CEO’s and CFO’s) and investors are again turning a blind eye...as I have repeatedly pontificated about!

In months/years past a growing proportion of reported profits have been blatantly engineered and manufactured by adjusting away very real costs of doing business and using stock buybacks fueled by debt. We saw a similar ploy in the final years of the Dot-Com bubble, in the form of earnings restatements (I use to cringe when I saw such). As the herd of locoweed feeding investors were led to believe in 1998 into the 2000 period that profits were rising, but when future revisions were considered, they had in fact been lackluster at best or falling.

One way to avoid falling prey to such a trap involves simply valuing stocks on sales instead of earnings. The reasoning is of course logical and straightforward: it is much more difficult to massage revenues than it is for earnings (trust me). Using the basic price to sales ratio, the SPX-500 today trades at its richest valuation ever - even exceeding the Great Dot-Com bubble peak!

The CNBC hyping bullish cheerleaders argue that the market is a forward-looking mechanism, and the data points presented so far are all backward and present conditions looking.

So, let us consider the forward earnings outlook. Coming into this year, the FactSet consensus analyst estimate pegged 2021 SPX-500 profits at $196.70. Today, the same analysts forecast 2021 earnings of just $169.20, per the latest FactSet data. 

Meanwhile, the S&P 500 is up more than 10% YTD despite the forward earnings outlook dropping by 14%. If the market were rationally pricing in future earnings at a constant multiple, you would expect prices to be roughly 25-30% lower. And even then, we would still be at the high end of the historical valuation spectrum. Of course, I have talked about lofty valuations as a reason for caution since at least 2018... and yet, the market continues marching ever higher. But the key difference between 2020 and the past few years of stretched valuations is the sea change in market sentiment and overall speculative fervor has become rampant 

For the prior several years, the market has been missing one key element needed to mark a potential euphoric top: the “cabbie” indicator. You know it is time to sell when cabbies give you stock tips that cannot lose and are perceived to only rise into the stratosphere (when this happens this bull market is over). As market manias do not die due to massive overvaluation; they only die when speculators can no longer find another willing bag holder “greater-fool” to buy at ever-higher prices. When every marginal speculator has ventured into the shark-infested pool and is basically fully committed to this one-directional FED manipulative market. When you can no longer walk down the street without getting a stock tip, it is an obvious sign that the supply of new locoweed infested/induced herd of speculators is running extremely low as everyone is already in the game (believing no one can lose).

Remember that it was common knowledge that stocks were grossly overvalued for several years before the peak of the Dot-Com bubble in March of 2000 (I issued my world-class SHORT / SELL alert [I was early by 3+ months the day after Thanksgiving of 1999) even Fed-head Greenspam famously called out the stock market's “irrational exuberance” in 1996...but we were not constantly hearing about our so called neighbors or their kids getting rich on the latest Dot-Com IPO, or your co-workers quitting their jobs to become day traders....fast forward to 1999, and all of these things were now happening.  I remember reading a TIME article referencing that Barton Biggs, an analyst at Morgan Stanley Dean Witter, confirming wherein he laments the story he sent to clients about his plumber, who is so busy trading he will not come to his house to fix a leaking pipe. He also spoke about the guy “cabbie” leafing through Barron's for that day's stock trade. It was an epidemic, which was extremely alarming to me. And as I have mentioned that was the “cabbie” indicator I often relief upon flashing bright RED in 1999, and that is exactly what is been missing from the current bull market monster rally until now.

But before you can fully appreciate the speculative fervor I am speaking about here as we close out 2020, it helps to first step back and consider the massive driving forces that are propelling the markets here. And once again, we can draw lessons from the Greenspam massive liquidity pumping into Y-2K that fueled the Dot-Com era. 

Also, remember before the internet, trading stocks meant physically calling your stockbroker and paying hundreds of dollars for each transaction. If you wanted live stock quotes, you had to pay thousands of dollars, or call up your broker to manually check prices one stock at a time. These barriers effectively prevented an entire class of Americans from speculating in the market. But everything changed with the rise of the “Al Gore” internet in the 1990s. For the first time, the vast majority of average Americans could monitor their favorite stocks and trade instantly with the click of a button. Online trading also helped as they dramatically reduced overall brokerage commissions from around $70 per trade in the early 1990s down to around $14.99 by 1999 so my slippage dropped considerable. The combination of vast lower transaction costs and greater ease of access unleashed a record “speculative” boom in retail participation in the markets by “cabbies, stay-at-home-moms, and others”. By 1999, almost 10.5 million Americans were now trading stocks online. These new retail traders and the FED provided the critical fuel for inflating the Dot-Com bubble, and of course, we all know how that story ended...

Now fast forward to 2013, a mere 4-years after the great TBTF banker led Great-Recession a new hyped incessantly new bull market was emerging just as the Millennial generation began entering the workforce. We saw that significant progress was made lowering trading fees, but investors were still paying $4.99 to $9.99 per transaction. Then a market disruption came in April of 2013, when a service called Robinhood launched its zero-commission mobile trading platform, with no minimum deposits required (they just allowed others who paid a fee to see order flow and step in ahead of their clients) Interestingly Robinhood also offered the unique ability to instantly trade even as deposited funds were supposedly being processed. So a psychological instant gratification system was built into the platform, including the highly gamified trading interface, which many describe as addictive and encouraging of speculative behavior (how could that happen by chance 😊) within a mere five years, Robinhood had amassed over 3 million users, or roughly the size of E-trade. This parabolic rise forced a competitive industry into making a simple choice: follow Robinhood's lead, or risk losing even more market share. The industry relented in October 2019, when Schwab matched Robinhood's zero commission fee structure and within mere weeks, Fidelity, TD Ameritrade and E-Trade all followed Schwab’s lead. Then bang almost overnight, free stock trading went from a niche product to industry standard.

The result: by late 2019, practically all remaining cost barriers to stock market speculation had been erased. For the first time ever, anyone with a few dollars and a smartphone could download an app and begin instantly trading stocks, options, and even cryptocurrencies. And they believed it to be child’s play. That was some of the fuel along with the FED’s free-flowing liquidity that sat waiting for a spark... and it was a short wait for the spark...as when King-Trumps and the various governors started their lockdowns in response to the Covid-19 pandemic which started in March 2020, millions of newly unemployed Americans found themselves without a job, a government $1,200 stimulus check and extremely generous unemployment benefits ($600 a week over and above state benefits) and few if any solid options for leaving the house and to be in potential harm’s way of Covid-19. As far too many found themselves out of a job without benefits, and extremely limited options for replacing that lost income. And the government was handing out bailout checks to any firm that wanted one whether they needed it or not, and the FED was backstopping reckless debt issuance... It was the perfect force 5-hurricane storm that unleashed a record flood of new money, and importantly retail money into the stock markets and it was aided by the hyping financial media who projected Dow 50,000 and Nasdog 40,000 and the SPX-500 should rise to 6,000 and I am not just talking about a Robinhood phenomenon. Every major brokerage firm reported record new account openings in the first quarter of 2020:

Basically, the Covid-19 pandemic produced the “cabbie” moment that transformed a bull market into an outright raging incessant mania.

I am quite certain that the recent boom in retail trading has been turbocharged by the elimination of retail commissions. Interesting that for far too many Americans the stock market has become an economic lifeline for replacing lost income during the Covid-19 pandemic. It is not just the younger generations catching day trade fever. A Wall Street Journal reporter recently described how the pandemic turned her parents into day traders:

During my four years writing about financial markets for The Wall Street Journal, my parents and I almost never discussed stock trading... When I returned to Iowa to visit them in August, it was all they wanted to talk about. I hope that you get the picture. For the first time in this very long in the tooth long bull market, the “cabbie” indicator is flashing red. We are now at that point in my opinion in this highly manipulated bull market when novice investors are aggressively speculating in some of the market's riskiest plays; and for the most part they are playing a game that's unwinnable as they speculate on short-term stock price movements. Sure, some will succeed but 90% of those who try will fail. Unless it's different this time, when any amateur can suddenly become a “master” successful day trader overnight, it's almost certainly an indicator of a massive type of mania. If only 10% of day traders succeed in the stock market, you can probably cut that number in half to 5% in the options market the deep end of the riskiest cesspool pool, where retail traders have recently piled into in mass. Once upon a time, the options market was originally designed to provide institutional investors the opportunity to hedge portfolio risk. It also provides the opportunity for speculators to make leveraged bets on stock prices. However, the odds are heavily stacked against the options speculator, for many reasons as the speculative option buyer is always fighting both time and the spread between the underlying stock price and the option strike price. But during a mania, the pay-off in call options can be huge as we have seen of late. So do to the GREED emotion we have seen that this upside potential has attracted the same speculative fervor among retail traders that we are seeing in the stock market. In many ways, this record call buying activity adds more fuel to the melt-up in the underlying stock market.

My premise is simple: it is not different this time. When the price momentum ultimately reverses, and it will there is major downside risks 30-50% in today's stock market. I advise that you all exercise extreme caution is advised.

 

 

---

 

Has this giddy market front run all the stimulus, is the best outcome already priced in?

Is all the so-called good news already baked into stock prices?

I believe it is and then some!

Interestingly the major U.S. stock market indexes have reached record highs at the same time that Covid-19 cases and deaths in America have hit new records peak for deaths, and cases. Financial markets, of course, focus on the future (6-9 months out) rather than the present, and they are predicting vastly better days ahead in 2021, especially now that the vaccine will end the pandemic (if it works). One vaccine began to be administered this past week and, a second was approved Friday, bringing more hope for an end to the pandemic by mid-year in 2021. But they cannot immediately stop the massive rising toll of death and illness that threatens to outstrip the capacity of many hospitals in the U.S. to treat patients.

So-called market gurus being pranced about daily on CNBC are forecasting equity returns around 10% to 17% for 2021!

Strange....that these predictions of further advances from the fresh highs this past week in the major indexes DOW the SPX-500 and Nasdog, plus the previously lagging Russell-2000 index of small-capitalization stocks indicated extreme optimism and extreme optimism for 2021. Especially given how far these indexes have come from their lows in March, a gain of 63% for the Dow to 86% for the technology heavy Nasdog to over 100% for the Russell 2000.

Interest rates will remain low in the long term, money flowing into stocks will ensure that they trade up on ever higher multiples (almost all dips being bought immediately) and to generate returns playing the LONG side of the market I have had to take increasing risk, and this risk feels like a massive “bull” trap!

Interestingly professional fund managers responding to Bank of America’s latest survey appear to be all in. Cash holdings were down to a mere 4%, the lowest level of the year and the first time the respondents were so underweight cash since May 2013. Hopes for the Covid-19 vaccines led them into crowing into so-called “reopening trades” in consumer and commodity names. As for “crowded trades,” investing in technology stocks remained the biggest crowed trade in the Bank of America’s latest survey, followed by shorting the dollar and buying Bitcoin.

While the money-handling so-called pros have been moving out on the risk, spectrum to produce returns (and preserve their employment), the amateurs have gone full-tilt into trading especially in options they have been purchasing shares directly, as opposed to taking diversified positions in exchange-traded funds. Since the market’s liftoff in the spring, small options trader’s market activity has dwarfed that of large ones, options activity has skewed heavily to bullish call options over bearish puts since then. This massive structural shift in individual’s feverish trading chase indicates that “there is more than excessive optimism in the markets”.

With the benefit of zero-commission trading, it is now easy and cost less to trade, and the Covid-19 induced stay at home factor, have contributed mightily to 2020’s trading frenzy! So long as our markets continue to be boosted by extremely accommodative FED monetary policies and expectations of massive-massive fiscal measures, the dips are likely to be bought with vigor. The FEB this past week stated that they will continue their near-zero-rate policies and their securities purchases of at least $120 billion a month until it is satisfied that full employment is reached, and that inflation has topped its 2% target, making up for past blunders.

Depressed fixed income yields around the globe, with more than $18 trillion in bonds trading at negative yields, undergird all asset prices, including those of stocks.

Fed-head Powell, when asked about equity valuations at his press conference allowed that price/earnings multiples were on the high side, but added that the equity risk premium was not out of line, given low Treasury yields. As such this suggests that the extremely optimistic outlook for next year is already discounted in current stock prices.   The FED’s rate repression has not eliminated credit risk, but has invited massive and I mean massive borrowing at historically low rates,

 Bank’s recent survey of investors found what could be called possibly “the biggest consensus in history,” favoring U.S. equities, followed closely by emerging-market stocks. The 3-biggest risks respondents see are the virus mutating into a nasty strain that vaccines cannot stop; serious side effects emerging, as already seen in a few; and a substantial number of people refusing to take a vaccine. That does not imply widespread worries that the Covid-19 vaccines will fail. But it suggests that the markets already have largely discounted their success and the much-anticipated massive 2^nd half recovery.

 

Housing market is not as healthy as hyped, very vulnerable

 A terrible contagion no one is addressing  JMHO

As you are aware from my various writings the housing industry plays a critical role in the U.S. economy by contributing 15%-18% to GDP every year and homeownership accounts for a quarter of American household net worth. So, when so-called analysts and experts start hinting at a “housing crisis” it should spark concern, uncertainty, and maybe even some fear.  There is no single economic definition of a housing crisis.  Utter the phrase “subprime mortgage crisis” or “2008 housing market crash” to any old-time real estate agent, or what was unfortunate homeowner caught in the cesspool or economist/investor who lived and worked through that challenging time, and you’re likely to receive a trembling type response. The trouble began when banks started to greatly relax their lending criteria (with consent from regulators and the FED) and handing out subprime loans to borrowers who would not have qualified under ordinary circumstances. No down payment, the banks saw no problem as back them many lenders required little to no upfront cash to finance a home. Sub-par to no credit, again there were blinders on as there were no conceived contagions as banks across the country had managed to significantly ease their credit requirements to make it possible for more un-worthy folks to secure loans that they should not have gotten nor could they afford...thereafter buoyed by the sudden ability to get home loans like they were practically “free”, buyers flooded the market. Amid the growing demand, house prices continued their steady rocket ride (like they have been again in 2017 through 2020). Far too many borrowers took on high-risk loans, counting on being able to refinance later due to pent up new-found equity. But when house prices dropped like a rock more than 18% in the fall of 2008 and interest rates started to rise, many homeowners found themselves stuck in vastly unsustainable mortgages, sometimes owing significantly more than the value of their homes (many 25-40% more). When demand crashed due to folk’s inability to meet their mortgage obligations, the pendulum swung the other way, and there was way too much supply chasing too little demand. During 2008, 3.1 million foreclosures were filed, the equivalent of one out of every 54 homes and homeowners lost over $3.73 trillion in home equity.

We now have a Covid-19 pandemic rental housing crisis; as with the onset of the Covid-19, 20.5 million folks suddenly lost their jobs and unemployment skyrocketed 3.5% in Feb. 2020 to 14.7% in April 2020 a far greater rise than the 8.8 million jobs lost in the aftermath of the Great Recession. The abrupt and extreme severe recession prompted me and many others to believe that there could be another housing crash similar to 2008!

However, for the time being, the housing market held strong post-pandemic as the 2008 style housing crash has yet to materialize in 2020 it will likely be a 2021 event as through the CARES Act, the government issued forbearance plans allowing mortgage holders to pause or reduce mortgage payments for a limited period of time. So far, this has prevented a glut of mortgage defaults and foreclosures. Improvements in the jobs market since April (unemployment sits at 6.9% as of Oct. 2020) have helped the situation somewhat for homeowners to get back on track with their mortgage.

A lack of new construction, low mortgage interest rates, and a surge of pandemic home purchases have depressed supply near record lows. As a result, the median sale price of existing homes skyrocketed over 15% in October, according to the National Association of Realtors.

The rental market has not fared as well as owned housing post-pandemic, and that is especially true for cities with economies centered on oil and energy and major metro areas with a heavy concentration of professional and technical workers. Where the asking price for rent is declining sharply, landlords are struggling to cover their mortgage, and where the cost of rent is increasing, unemployed renters are finding it hard to make ends meet. Experts estimate that over the next several months, 30-40 million Americans could be at risk of eviction.

The pandemic is causing grave concern, particularly in the apartment market, as apartment dwellers are quite disproportionately hit with job loss and rent payment troubles. This contagion will fester down throughout the apartment market complex. Many apartments are now owned by mega REITs and conglomerates and this will inevitably result in availability and affordability issues in the months ahead.

Perhaps the most basic form of a housing crisis boils down to people not being able to afford the available homes and apartments, a situation that has plagued the country for far too many years. In 1970, the average household income in the U.S. was $8,730 and the average home price was $17,000. To qualify for this loan, a buyer would need a down payment of about $5,238, or about 60% of their annual gross income. Today, the average U.S. household income is $64,400 per year, or about $5,700 per month. However, the average home price in the U.S. has rocketed to about $387,000 as of the 3^rd quarter of 2020. In this scenario, a 20% down payment would exceed the entire annual household income. This situation is even worse among first-time buyers, and builders report record low numbers of first-time buyers in the pipeline.

With 2020 now almost over, we can calculate how many times the benchmark 30-year fixed mortgage has hit record lows this past year. And according to the latest weekly update from Freddie Mac which showed that the 30-year FRM dropped another 1 basis point to a fresh-all time low 2.66%, we can now declare that in 2020 the 30-year mortgage hit a record low on 16 weekly occasions...a record. The chart below depicts all you need to know, showing the 30-year mortgage yield plunging by half from 5.0% in late 2018 to its current level just above 2.50%

This massive plunge in borrowing costs has fuel a new housing bubble in my opinion that has helped boost the economy during the pandemic. Lower rates, combined with an exodus from big cities to ride out the pandemic, have pushed buyers into the market. Current owners have also been able to save money by refinancing their loans. The latest housing data suggested weakness dead ahead: new-home sales tumbled to a five-month low in November, dropping 11% in a sign the market is cooling off as coronavirus cases surge, while existing homes were also down last month, slipping for the first time in six months. That came as the median selling price jumped 14.6%, the 4^th straight month of double-digit increases.

I find it remarkably interesting and very economically unfriendly that homeownership is unaffordable for the average wage earner in 75% of counties surveyed across the U.S. That is according to a report from Attom Data Solutions, which studied more than 400 counties covering about 200 million folks. The most cost-burdened areas were on the east and west coasts, including the top five. Eighteen of the top 25 priciest markets were in New York or California.

To be able to afford a median-priced home in New York County (Manhattan) a person had to earn $341,401 a year, according to the report. That made it the costliest county in the nation.

A big driver of housing unaffordability is wage growth lagging behind home price appreciation. The report found that home price appreciation outpaced average weekly wage growth in the 3^rd quarter in two-thirds of the counties. Home prices are still rising and are projected to continue to grow. Attom basically determines home affordability by calculating the percentage of average wages needed to make monthly house payments on a median-priced home, with a 30-year fixed-rate mortgage and a 3% down payment. Virus pandemic concerns are still quite valid and may show up in the coming months, which could hurt prices as well as affordability. That remains a significant potential cloud hanging over the market.

Harvard University’s State of the Nation’s Housing 2020 report, arrives at an exceptional time for the U.S. Four key findings from the report are particularly relevant.

Persistent unaffordability

·        The coronavirus pandemic came as the U.S. was facing crisis-level housing affordability issues, especially for low-income households.

·        In 2019, 37.1 million households were “housing cost-burdened,” spending 33% or more of their income on housing.

·        Interesting of all households nationwide close to 18 million in total were “severely cost-burdened,” spending 50% or more of their income on housing.

Renters were more cost-burdened than homeowners, with 46% of renters cost-burdened compared to 21% of homeowners. Also, 24% of renters and 9% of homeowners were severely cost-burdened. In total, though, homeowners made up 40% of all households with severe housing cost burdens, given the larger number of homeowners in the overall population.

Cost burdens were greatest among lower-income households. For households earning less than $30,000, 81% of renters and 64% of homeowners were cost-burdened. This includes 57% of renters and 43% of homeowners with severe cost burdens. For those earning between $30,000 and $45,000, 57% of renters and 36% of homeowners were cost-burdened, including 15% of renters and 13% of homeowners with severe cost burdens.

High housing cost burdens were driven by persistently high housing costs relative to income. In 2019, the median sales price of existing single-family homes rose faster than the median household income for an eighth straight year. It is highly likely that when cost burden data for 2020 is available next year, it will likely show greater unaffordability still in the homeownership market. Despite the spike in unemployment in 2020, home prices were up 5.7% in September year over year according to the S&P CoreLogic Case-Shiller Home Price Index.

The economic fallout of the pandemic, combined with ongoing housing unaffordability put millions of renters and homeowners at risk of losing their homes in 2020. Despite various policy protections for renters and homeowners enacted during the crisis (they screwed landlords), housing security remains fragile for far too many Americans heading into 2021.

According to some dismal data from the Census Bureau’s Household Pulse Survey in late September, 36% of all homeowners lost employment income between March and the end of September. Among homeowners, income loss was most common for those earning less than $25,000 (44%), Hispanic homeowners (49%) and Black homeowners (41%).  Homeowners of color earning between $25,000 and $50,000 were also disproportionately behind on mortgage payments.

Supply shortages, down payment barriers and tighter credit continued to pose challenges for renters seeking to achieve their dream of homeownership. The report highlights Freddie Mac’s 2019 Profile of Today’s Renter and Homeowner survey, which found that 41% of respondents considered their inability to afford monthly mortgage payments a “major obstacle” to becoming a homeowner. The same survey found nearly half of current renters believed lack of enough money for upfront costs, like the down payment, would be a major obstacle to buying a home. Meanwhile, lending standards tightened considerably during the past six years. As evidence, the report cites the Mortgage Bankers Association’s Mortgage Credit Availability Index, which declined by 34% from February to September 2020, reaching its lowest level since 2014.

Greater caution from lenders following the pandemic, and depleted savings due to job cutbacks and reduced income overall pose major ongoing barriers to homeownership heading into 2021.

 

 

New DEBT as far as the eye can see, has our government no shame?

King Trump today:  New DEBT as far as the eye can see...King Trump on Sunday night signed into law the $1.4 trillion fiscal 2021 appropriations and the $900 billion Covid-19 relief deal Congress approved last week, after criticizing the measure and signaling he might not sign it for days. The House will vote today to raise stimulus checks to $2000, but it is not likely to get 60 votes needed to pass the Senate (which means the stimulus checks remain at $600 and the rest of the bill remains the same) “As President I am demanding many rescissions under the Impoundment Control Act of 1974. The Act provides that, "whenever the President determines that all or part of any budget authority will not be required to carry out the full objectives or scope of programs for which it is provided, or that such budget authority should be rescinded for fiscal policy or other reasons (including termination of authorized projects or activities for which budget authority has been provided), the President shall transmit to both Houses of Congress a special message" describing the amount to be reserved, the relevant accounts, the reasons for the rescission, and the economic effects of the rescission. 2 U.S.C. § 683.”  The bill will remain law regardless of what Congress decides to do with President Trump's request for rescissions.

 Stimulus bill includes:

• Extension of all pandemic unemployment insurance programs by $300/week per person.
• $600/person stimulus checks (which change depending on income).
• $284 billion to Small Business Administration and Payroll Support Program extended through March 31, 2021.
• $27 bln for airlines and other transportation (potential related stocks: UAL, AAL, DAL, LUV, JBLU, SAVE, HA).
• $15 bln for live event places.
• $84 bln for schools.
• Additional money for vaccine distribution, and testing. No money for state and local governments. No liability protection.
• The bill includes new Fed language: "rescinds more than $429 billion in unused CARES Act funds; definitively ends the CARES Act lending facilities by December 31, 2020; stop these facilities from being restarted, and forbids them from being duplicated without Congressional approval."