CHESSNOID

The market seems agitated today.  It is options expiration and the shorts need to cover. Whatever that means. Lol.  Last night, when I checked the market futures the numbers indicated we would have an upside opening. That lasted for about 15 minutes before it reversed courses and went into a free fall of about 2 1/2%.  Of course, these swings seem more common place as of late.

There are 2 news worthy items that came out that seemed to spook investors or convert buyers into sellers.  The first one was in regards to the housing crisis.  Yes, even after the fraud bailout of almost a trillion dollars has been passed, this problem still persists and won’t go away.

Bloomberg: Single-Family Home Starts in U.S. Fall to 26-Year Low

The National Association of Home Builders/Wells Fargo index of builder confidence decreased in October to its lowest since 1985, the Washington-based association said yesterday.

Combined sales of new and existing homes have fallen 36 percent from their peaks in mid-2005. Home construction has declined 64 percent from a peak in January 2006. The supply of unsold homes on the market remains above 10 months’ worth of sales, signaling homebuilding is likely to continue falling.

Home prices in major cities are down an average of 20 percent from mid-2006, after nearly doubling in the prior six years, according to the S&P/Case Shiller index of 20 metropolitan areas.

Prices Drop

Falling prices are contributing to the jump in foreclosures as Americans, trying to refinance adjustable-rate loans, find out they owe more than their homes are worth. The drop in prices also means owners can’t tap home equity for extra cash, one reason behind the slowdown in consumer spending.

Homebuilders are still reeling. Lennar Corp., the second- largest U.S. homebuilder, on Sept. 23 reported its sixth straight quarterly loss as potential buyers struggled to get mortgages and rising foreclosures increased the supply of homes on the market.

“The weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards,” Chief Executive Officer Stuart Miller said in a statement.

The news about the declining housing market has been consistent every month. I keep hearing different media people saying the bottom has come, is near, will happen this quarter, next quarter, blah, blah, blah. They are all wrong and don’t take into account the second wave of defaults on the horizon that will spike up the foreclosure numbers into new record territory.

The 2nd piece of news that came out that seemed to really hurt the market is from a professor who predicted the downturn in 2006. He now looks like a financial Nostradamus. He put out his opinion and even though it is extremely gloomy, I have to agree with his assessment. I hope I am wrong but he seems to be spot on about the long term trends.

Bloomberg: Roubini Sees Worst Recession in 40 Years, Stock Drop

Oct. 14 (Bloomberg) — Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, driving the stock market lower after it rallied the most in seven decades yesterday.

“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

The economist said the recession will last 18 to 24 months, pushing unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

“This will be the first round of recapitalization of the banks,” Roubini said. “The government has to decide to intervene much more directly in the provision of credit and the management of these companies.”

The Standard & Poor’s 500 Index rallied the most since 1933 yesterday, rising 12 percent, on the government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. The S&P 500, which has fallen 36 percent since its October 2007 record, dropped 0.5 percent today.

`Really Tanking’

“The stock market is going to stop rallying soon enough when they see the economy is really tanking,” Roubini added.

I think the market had to pause and give his opinion some weight. What he says makes sense. I can see housing prices fall another at least 15% more, possibly even more is high foreclosure states like California where incomes don’t support the prices.  The bubble here was big and even though it has burst, the balloon is still deflating. As far as employment, I have read different bloggers explaining that the job numbers that come out now are worse because certain numbers are not taken into consideration. We could already have that 9% unemployment figure. As far as stock market rallies are concerned, we will continue to have them throughout the recession, because the feeling of investors in the marketplace fluctuate.

On the other end of the spectrum, we have the richest man in the world pushing stocks.  He actually made his money in stocks and is considered to be the best stock picker.

Bloomberg: Buffett: I’m buying stocks

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” said Buffett. “And most certainly, fear is now widespread, gripping even seasoned investors.”

Stock prices have been volatile, to say the least. Consider what happened this week alone: The Dow Jones gained 976 points on Monday; fell 76 points on Tuesday; dropped 733 points on Wednesday and then gained 401 points Thursday. But Buffett says the future is much brighter for stocks.

“Fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” wrote Buffett. “Most major companies will be setting new profit records 5, 10 and 20 years from now.”

He is probably right, but the difference between him and most people is that he has a big capital base to sit on. Even though he probably has lost the most money ever, 40-50% of his portfolio, his psychology isn’t the same as a person who opens up his quarterly 401k statement and sees his or her life savings substantially reduced in one quarterly swoop.
If you only have $50,000 save up fall down to $35,000, then you think about how long it will take you to save up another $15,000. That is very discouraging. I think if you are still in the market and have these paper losses but time on your side, then your best strategy is to continue dollar cost averaging because Buffett’s right in the long term. I know easier said than done.