Hope (for the U.S. Housing Market)

Dan, on the newly designed FSX Trader (Fantasy Stock Exchange for Facebook) posted the following link. I recommend you read it. Incidentally, I am ranked 48th / 18,419 ("premium" level) and 785th / 203,232 ("basic" level). If you are on facebook, my portfolio is here.

The financial crisis is worse today than in 1990, and there are many problems ahead (like less consumer spending and business investment), but I believe progress is being made.

http://calculatedrisk.blogspot.com/2008/10/adjustment-process.html

Going Nowhere for 17 Years?

In the July-August edition of the Castlemoore newsletter, Robert “Hap” Sneddon suggested the Dow Jones Industrial Average may currently be in a secular bear market. It began in 2000 and could last 17 years. With the markets failing to recover from extended losses today, the scenario might have be considered. Here is the website if you want to subscribe: www.castlemoore.com



There is growing evidence that the banking malaise is now spreading to the rest of the economy. Previously the problem was contained in housing, automotive, and the financial sector. But since banks are not lending to even healthy small businesses in the U.S., this will clearly impact growth in healthy sectors. In the end, the consumer will also cut back. Take Corning, for example. It warned of weak 3Q earnings, and weak 4Q also. Fewer people will be buying bigger LCD tv's this holiday season.

Banking Credit Illiquidity Now Global

The illiquidity problem taking place in the U.S. has now spread to Europe. Two things now must happen for liquidity to be restored in the banking system at a global level. One: the U.S.will need to take a secondary drastic but convincing step in restoring confidence. Two: European leaders must work together (not independently from one another) to come up with a concerted effort to restore liquidity.

The chances have increased that the EU will have to lower its interest rates. The US will likely do so on Oct 27th. 

Indicators

Two things to monitor in today's markets: volatility (VIX) , and the US dollar. As mentioned in Tech Talk, capitulation has not yet been reached. The VIX spiked over 35, but volumes must be far higher than average over the next trading sessions whilst VIX settles to 35 and below.

Monitor the US Dollar, as the dollar's strength is now leading the price of commodities, namely weaker oil and gold.

Fibonacci @ 38.2% represents the support level for VIX:

USD support is @ 78.87 (not far from the 81.73 close).

Charts from: http://stockcharts.com/charts/gallery.html?$USD

Important note: support prices as outlined on the charts are very speculative. Fundamentals are poor for the global financial markets. For now, price support levels should only be used as a guide.

Toronto Real Estate Prices Finally Fall

National Post announced the housing boom in Toronto is finally over, because average prices have fallen for the first time in 12 years. Here are the figures from TREB (The Toronto Real Estate Board):

• Average prices fell to $393,647 year-over-year in September 2008
• Sales were down 6% from a year ago, and down 11% in Toronto
• Housing "supply" increased 19% year-over-year to 16,236
• Days on the Market increased to 36 days, from 31 (year-over-year)
• 905 sales declined 3% (to 3,878) but average price increased to $352,071 from $351,641
  

Analysis:

• 2007 was a strong year, so the figures illustrating the decline are exaggerated
• A month-over-month comparison is required to get a truer picture of the health of Toronto real estate
• Using averages is too broad: median home sale prices and an analysis

Some counter-figures:

• For Central "C" area month-over-month average prices increased 6.2% from August to September, and median prices increased 12.2%
• For Central "C" area year-over-year (Sep 08 vs Sep 07) average prices declined 7.5%, and median prices declined 2.4%
  

One thing is for certain: the days for bidding wars is long over. I find it hard to perceive buyers over-bidding for homes when the supply has increased.

Risks are increasing that the Toronto housing market will falter further, the longer the U.S. economy struggles. Ontario (and global countries, already facing substantial housing bursts) is not special and therefore not immune to the weak US economy. In short, the U.S. is an important trading partner for this province.

Lower home prices is simply good news for the buyer who is not willing to devote a large pay cheque to paying down monthly mortgage payments.

Raw Material and Commodity Prices Falling. Buy These Stocks

There is a stealth bull market brewing. FSX Players take note. Companies that benefit from lower grain prices, like General Mills, is performing well. In Canada, George Weston rallied back. It's quietly clear that the market is betting the bailout will result in dis-inflation and slower growth. Again, watch the US Dollar, gold and oil prices, and stocks like Potash.

Assessing the U.S. Economy After Any "Bailout"

The $700B bailout is hogging the news headlines and is, quite frankly, a distraction. This plan will not save the housing market nor prevent the likelihood of the U.S. entering a recession. Still, some plan is required to restore confidence in the banking system. The free market cannot function without a frozen banking sector.

Here are some recent figures illustrating economic health in September:

• ISM Manufacturing Index was 43.5 (down from 49.9 in August) - a figure below 50 represents a contraction
• Unemployment benefits +1,000 last week to a seasonally adjusted 497,000, above expectations for a 475,000 increase (highest seen since Sept. 11, 2001)

The wild trading swings over the past week will make any technical analysis less than useful. Volatility reached significant highs, meaning the direction of the stock market is neither in an up- nor down-trend.

On a more positive note, the US dollar is holding previous rallies. This suggests that foreigners are still willing to place their money in US treasuries. Commodity prices (gold and oil) fell significantly, which may have helped propped the USD.

The USD traded above the $78.08 level. This level now represents a support price.


GE represents the health of the US economy. If it is reaching multi-year lows, that cannot be a good sign of strength:


No sector has been safe in the last few massive sell-offs. It is disturbing that the commodities sector did not hold up, nor did gold.

Cash is king, but a rescue plan that causes inflation will cause its value to deteriorate. What does the investor do next? It's best to first monitor the details of rescue plan before making assumptions.

The 3 Views of Analysis

Don Vialoux assesses the market using three things: technical, fundamental, and seasonal analysis. Using seasonality, it is possible to trade based on the time of the year.

In his most recent post here, he wrote the following:

Seasonality in the month of October

During the past 10 Octobers, equity markets around the world have recorded strong gains:

• The S&P 500 Index gained in 8 of the past 10 Octobers for an average return per period of 3.02%. October was the strongest month of the year.
• The TSX Composite Index also gained in 8 of the past 10 Octobers. Average gain per period was 1.47%. October was the third best performing month.
• The Dow Jones Transportation Average gained in 10 of the past 10 Octobers. Average gain per period was 5.12%. October was the strongest month.
• The Russell 2000 Index gained in 7 of the past 10 Octobers. Average gain per period was 2.26%. October was the second strongest month.
• The NASDAQ Composite Index advanced in 8 of the past 10 Octobers. Average gain per period was 6.06%. October was the strongest month of the year.
• The Paris CAC Index advanced in 9 of the past 10 Octobers. Average gain per period was 3.84%. October was the best performing month of the year.
• The Frankfurt DAX Index advanced in 9 of the past 10 periods. Average gain per October was 4.56%. October was the best performing month of the year.
• The London FT Index rose in 7 of the past 10 Octobers. Average gain per period was 3.25%. October was the best performing month of the year.
• The Dow Jones Industrial Average rose in 8 of the past 10 Octobers. Average gain per period was 2.89%. October was the best performing month of the year.

http://www.timingthemarket.ca/techtalk/