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Wednesday, April 25, 2012

Apple continues to push the markets around

The Dow, which opened higher by about 100 points off of the open this morning, is only up about 45 points at the moment, or by about 0.35%, while the S&P 500 is higher by 14 points, or about 1%, and the NASDAQ is up about 60 points, or 2%.  Apple, which is a large component of the NASDAQ (very tech-heavy), and of the S&P 500, is distorting the overall market performance because it has become such a large weighting in these two indexes.  Something will need to be adjusted within the formulas used to calculate these indexes, unless Apple falls pretty dramatically, because we are not getting a true sense of what the overall market is doing anymore.  Broad market indexes like the S&P 500, which holds 500 different stocks, and the NASDAQ Composite, which has around 3,000 stocks in it, are intended as a gauge of the entire stock market, and by extension, the entire U.S. economy.  Apple is the tail wagging the dog, so something will need to be done to adjust these indexes; otherwise people will start calculating them ex-Apple.

Apple reverses on strong earnings

Apple is up over 10% in premarket trading after blowout earnings and strong revenue gains.  The stock should open around $615 per share, still below the high of $644, but definitely a powerful reversal of the recent downtrend.  One key thing I noticed in the report was that iPod sales were pretty weak.  While the ipod is an older product line, I think it is instructive to see how sales, even of Apple's exceptional products, eventually fade.  The point is that they need to continue to release new, revolutionary products like the iPhone and iPad to sustain the lofty prices we are witnessing for the stock.  I just don't see anything in the pipeline that meets that criteria, and I don't think Tim Cook, the current CEO, can replace Steve Jobs in terms of developing these types of new products.  So, in the long-run, I am not convinced that Apple can keep advancing.  If I owned the stock, I would see every share I owned today.  

Tuesday, April 24, 2012

Apple is broken!

Apple has broken its 50-day moving average and is down 13.5% from its recent, all-time high of $644.

The 100-day moving average is around $500 per share, and the 200-day is at about $450 per share.  As can be seen in the chart above, Apple went parabolic - rising at an increasing rate, and then rolled over and is now in full correction mode.  There is no real support on the chart before about $400 per share, so it has a long way to fall.

Don't be fooled! Home prices are not cheap and are not at a bottom!

Today's Case-Shiller 20 City Home Price Index release showed prices for houses dropped to the lowest level in almost a decade, dropping 0.8% from January, and 3.5% from February of 2011 to February of 2012.  Even more telling, of the 20 cities in the index, 16 were down and only 3 were up (1 was flat).  Keep in mind that prices continue to drop despite the lowest interest rate environment ever!  The 30-year fixed-rate mortgage is at an incredible 4.28% right now!

I looked back at the data for median home prices for California overall and for Santa Barbara County to compare where we were at the bottom of the last real estate implosion (1993 - 1996) and where we are today.  I also looked at comparisons with the peak of the current bubble, in 2007.  Here are the results:

For California overall:

Low (Feb. 1997):     $167,790     30-year FRM:     7.84%
Peak (May 2007):    $594,530     30-year FRM:     6.39%
Current (Mar 2012): $291,080     30-year FRM:     4.28%

For Santa Barbara County:

Low (Dec. 1994):     $169,939     30-year FRM:     9.35%
Peak (July 2007):      $878,124     30-year FRM:     6.85%
Current (Mar 2012): $405,380     30-year FRM:     4.28%

For California overall:

Median home prices are up 73.5% from the low of the last cycle (from February of 1997), and are down 51% from the recent peak (may 2007).

For Santa Barbara County:

Median home prices are up 138.5% from the low of the last cycle (from December of 1994), and are down 54% from the recent peak (July 2007).

What's my point?

The point is that, despite the massive declines we have already witnessed, real estate prices are still artificially high due to the historically low interest rate environment.  More to the point, because rates cannot stay this low forever (or for very much longer), we still have a lot of risk to the downside for real estate prices from current levels, despite the declines we have already seen.

While I do not expect interest rates to rise dramatically in a short period of time (that would crush the economy), I do expect them to rise over time, back to 7.5% to 8% area for the 30-year fixed-rate mortgage.  If this occurs over the coming 3-year period, (which is what I expect), the rising rate environment will put continuous pressure on real estate prices that will, at a minimum, prevent prices from increasing by any sizable amount.  That is the best case scenario!  It is much more likely to push prices down even further; substantially further for markets like Santa Barbara.

Here is what I expect to see:

For Santa Barbara, I see prices declining by at least another 30% from current levels, which would place us in the $280,000 area for the county, for median home prices (my target median home prices for Santa Barbara County is $250,000).  Keep in mind that the median home price bounces around quite a bit for Santa Barbara County, because we are relatively small, so sometimes we don't get that many sales.  A good example of this is the change from February to March - $345,000 in February, and $405,380 in March (I assure you that prices didn't jump by 17.5% from February to March).

Keep in mind that Santa Barbara County has the north county, which tends to have lower-priced properties, and the south county, which includes Santa Barbara (city) and Montecito.

One can argue about statistics and what they really mean "'til the cows come home," but at the end of the day, the trends are clearly showing declining prices.  Further, one cannot argue that rising interest rates are not going to have a negative impact on housing prices.  The only valid point of contention will be the degree to which rising rates impact prices.

Apple teetering on its 50-day MA

Apple is down another 11 points, or by 2% right off of the open this morning, and is sitting right on its 50-day moving average.  If (when) it cracks the 50-day, the stock should fall with more pace as the correction gathers steam.  Watch for Apple to continue to lead tech and the markets lower throughout this correction phase.

Monday, April 23, 2012

Head and Shoulders Pattern Now More Defined

The S&P 500 has been developing a head and shoulders pattern, which I mentioned in a post last week. After the past several trading sessions, the pattern has now become more defined:

You can now clearly see the left should (from about February 20th through March 5th), the head (from about march 12th through April 9th), and the right shoulder, which started to develop around April 9th, and is still developing.  Keep an eye on the 1,358 level, which we could easily crack as early as tomorrow, but I suspect will be violated within a week (the low today was 1,358.79).  Head and shoulders patterns can be very powerful - what this pattern usually means is that, once the right shoulder forms, a technical break-down (in this case through 1,358), should mean a significant decline for stocks.

Let's not forget about the NASDAQ!  Remember that last week I also mentioned that it was forming a head and shoulders pattern, and on Friday that the index closed a hair above 3,000.  We cracked 3,000 today with a 30 point drop, and the head and shoulders pattern for this index is also forming nicely, although it is not quite as well-defined as that of the S&P 500:

In this chart (above) one can see the left shoulder from also about February 20th through about March 5th - same as the S&P 500, the head formed from about March 5th through April 9th (again the same as the S&P 500), and the right shoulder from about April 9th through this past Friday.  The key difference here is that after today's trading, the NASDAQ Composite has already broken down!  You can see the gap down from today's action, and the steep decline.  The 2,900 level is the next support for this index, but I strongly suspect we will fall right through that level.

Keep in mind also that markets do not typically go straight up or straight down.  With some good earnings reports we could easily see stocks bounce more than a few times along the way to lower levels.  However, a correction is clearly underway; the only question is: How low will we go?

The Arlington Tavern Enters Santa Barbara’s Restaurant Scene with a Plan - Published in Noozhawk on Monday, April 23, 2012

Friday, April 20, 2012

NASDAQ suffers third weekly loss in a row

Despite the overall positive tone of the markets this week, the NASDAQ Composite index closed lower for the third week in a row with a 7point loss today.  Apple contributed, losing 10% in the past 10 trading sessions.  The NASDAQ closed a hair above the critical 3,000 level:

Some of you may notice the same head and shoulders patterns forming that is already well developed for the S&P 500.  If we break 3,000 next week, we could certainly see more downside in the near-term, especially if selling continues in Apple.  Those so bullish previously on Apple cannot point to the overall market to place blame, but rather must acknowledge and accept that Apple is dropping because investors are losing confidence in the stock as an investment, at least from current, very lofty levels.

Apple off 10% from high; approaching 50-day moving average

Keep a close eye on Apple... the stock has now corrected more than 10% from it's recent all-time high of $644 to the current $576, or by more than 10%.  The 50-day moving average is around $558, and we are getting pretty close to that level.

Stocks overall are up today, even though Apple is down by almost 2% today so far.  However, we are off of the day's highs, and could easily close lower today.  Also keep an eye on the Dow... we broke below 13,000 earlier this week, then reversed above it, only to close once again below 13,000 yesterday.  We are at 13,037 currently, and if we slide to a close below 13,000 today, investors and particularly technicians may question the market's ability to resist a correction in the short-run.

Thursday, April 12, 2012

Possible "head and shoulders" pattern could signal further stock declines

The S&P 500 appears to be forming a classic head and shoulders pattern, which simply means that if you look at the chart, the shape that the chart is forming resembles a left shoulder, higher head, and then a right shoulder:

If the chart tops before reaching the recent highs and turns negative again, we will have a right shoulder.  Typically, and head and shoulders pattern signals further declines for stocks, which is exactly what I expect to see.  However, should stocks continue to advance, pushing past the recent highs, the head and shoulders pattern will not form, and we could see even higher levels for stocks.  This is certainly a possibility, but I believe the probability is with lower stock prices in the near-term.  We shall see!

Wednesday, April 11, 2012

Today's bounce a critical test

Stocks are rebounding so far this morning, after yesterday's 214 point drop on the Dow - the worst day for 2012 to-date.  Ten minutes into the trading session, we are up a little over 100 points on the Dow.  Today's bounce will be a critical test of the correction that began only a few trading session ago - if stocks can print a positive result today, the downtrend could potentially be broken, giving investors confidence to come back into the market.  However, if this bounce fails, and stocks end the session lower, the downtrend will be confirmed and investors will likely look for the exits in increasing numbers.

Monday, April 9, 2012

Median home prices in Santa Barbara County down 61% from the peak

Yes, you read the title correctly, the median home price in Santa Barbara County has fallen from a high in July of 2007 of $878,124 to the current (February 2012) $345,000, or by 61%.  Those who refuse to believe the obvious will argue that the median price for the county includes the north county, which has experienced a much more severe drop in prices that the south county, which includes the city of Santa Barbara.  True enough, but the peak median home price in July of 2007 also included the north county!  Detractors may also argue that because we are a smaller area, the number of home sales can skew the results.  True again.  However, we have to look at the long-term trend, and looking at the decline in median home prices, it is more than clear that prices have been absolutely pummeled from the 2007 peak until now.  Further, it is clear that we are not experiencing a bottoming process.  We are still declining, despite some fairly significant fluctuations on a month-to-month basis.

I do not think we have seen the bottom yet, specifically because the economy has not really recovered significantly, and most importantly, because interest rates are still historically very low.  When (not if) rates go back up, prices will be forced down further to reflect affordability and the continuing unwillingness of banks to lend.  Rates in the 7%+ range will force prices down at least another 20% from current levels.  We won't see rates climb back to that level for at least another 18 to 24 months, so we will not see a bottom in real estate prices until sometime after rates move up and then flatten out.  Real estate cycles take many years to play out, and we are still in the early stages of the boom to bust cycle.  I expect the bottom to happen in 2014, to take a year or two to form, and then a slow recovery for prices should commence, probably starting in 2016 or 2017.  

Those Looking for a Fed Bailout via QE3 Are Facing Disappointment - Published in Noozhawk on Monday, April 9, 2012

Saturday, April 7, 2012

Those looking for a Fed bailout via QE3 will be disappointed

Much has been discussed regarding a third round of quantitative easing, or QE3, where the Fed would borrow and then use the proceeds to buy long-term bonds, driving rates down, bond prices higher, and in the process flood the economy with even more cash.  Many (incorrectly) assume that the previous two rounds of quantitative easing have been undertaken as a direct response (by the Fed) to weak stock market performance.  In fact, both previous rounds - QE 1and QE 2 - have taken place immediately following significant drops in stock market levels.  However and very importantly, Fed action with regard to QE has not been the direct result of stock market declines, but rather the economic turmoil that caused stock market declines.  This is a very important distinction, because, if we are trying to predict when and if the Fed with conduct a third round of QE, it would be incorrect and even dangerous to assume that if the stock market corrects to a certain level or percentage decline, that the Fed will step-in to address that correction with more QE.

The old adage - correlation does not equal causation is a critical and accurate description of the Fed's previous QE operations.  In other words, the Fed did not conduct QE because stocks corrected, but because of the economic factors that caused stocks to correct; namely the financial market collapse and disruptions of late 2008/early 2009, and double-digit unemployment and negative GDP growth coupled with real estate market foreclosures and other severe economic problems that we saw at the end of 2010.  Falling stock prices did not motivate the Fed to conduct QE!

Now that the economy is showing signs of sustainable improvement, I do not believe that, should we see a correction in equities begin, that the Fed will automatically step-in with more QE.  In fact, the minutes from the most recent Fed meeting specifically indicate that the Fed is not planning to conduct Q3, at least anytime soon, and only if the economy contracts significantly.  Any belief to the contrary is nothing more than wishful thinking of overly optimistic market pundits searching for any justification to keep stocks moving higher regardless of the current obviously over bought market.

Investors would be wise to avoid falling into this mindset and accept the fact that stocks have rallied to unsustainable levels, at least in the short-term, and are therefore due for a pull-back.  Expectations of a Fed bailout to sustain the current, long-standing stock market rally naively assume that the Fed somehow cares about whether stock investors make short-term paper profits.  I assure you that they do not.  The Fed is concerned with long-term, structural and fundamental trends in unemployment and GDP growth.  The day-to-day, week-to-week, and month-to-month gyrations in stocks are of very little concern to the Fed, and they are certainly not going to borrow additional billions of dollars more just to prevent stock investors from giving back paper gains they have attained over the past 6 months.

Keep in mind that if market pundits are at a point where they need to grasp at straws, meaning depending on the Fed for QE3, to bail them out as their only chance of sustaining the current stock market rally, instead of valuations, earnings, economic growth, etc., anyone long stocks should be very concerned!  I personally like stocks for the long-term, and feel that they are the most attractive investment vehicle, in comparison to real estate, bonds, commodities, etc.  However, I feel very strongly that stocks are overdue for a significant correction, which is why I am holding very large cash positions at present.  This coming week marks the beginning of earnings season, which looks to disappoint.

We have had consistent earnings outperformance since the fourth quarter of 2008, which has contributed to the strength and longevity of the current stock market rally.  For the first quarter since the end of 2008, we will have a weaker, disappointing quarter where companies overall show slowing growth and many disappoint in terms of earnings projections.  This, coupled with the weak jobs report for March - only 120,000 jobs added; far less than the 200,000+ expected, should result in continued selling pressure on stocks.  A correction, therefore is not only likely, it is a healthy component of any bull-market rally, and should come as no surprise to any seasoned investor.  No market goes straight up or straight down, and the more investors try to fight the natural course of market dynamics, the more losses they will suffer.  Savvy investors will understand that corrections are a natural and necessary part of any long-term advance for stocks, and will embrace this process.

Friday, April 6, 2012

Futures down hard after jobs data

U.S. stock futures are down dramatically after the Commerce Department reported that only 120,000 jobs were added in March, well below the expected 200,000+, and the smallest increase in 5 months.  Today is a trading holiday for Good Friday, so traders and investors will have to wait until Monday to react to this news.  We also have earnings season for the first quarter kicking off on April 10th with Alcoa's report.  Earnings look to be weaker than previous quarters, and I expect a negative reaction from stocks, unless we see consistent surprises to the upside throughout earnings season.  I remain cautious and have substantial cash positions waiting for a pull-back.  I like stocks in general and want to re-enter the market, but only at lower levels.  I will look to phase back into stocks as the market corrects, working through the technical support levels to select the most appropriate time to buy.