Market Comments

The markets were relatively calm this past week, with a few individual movers on different days. The Dow decided to take a quick dip of 101.97 points on Thursday, just to make sure the traders were paying attention. For the week, however, it was down +59 points.

In the process, two Wall Street darlings were taken behind the shed for a good shellacking: google and amazon both got whacked pretty good. The utilities got whacked for a 2.4% decline. The semi-conductors were hit the worst – down 4%.

Gold (our favorite yellow metal) was up just below $10 ounce, yet the Hui was only up about 2%. Could this portend a correction is coming? We will simply say that the gold market is extended and needs a bit of a rest. We continue to sell into strength.

What catches our eye the most, however, is the action in the real estate sector, which has been less than stellar to put it mildly. Many believe that real estate, using the debt and mortgage markets as proxies, has been the glue holding the economy and financial markets together.

We would tend to agree, with the caveat that the real estate/debt market does not hold together because of any true underlying strength, but because of deceptive illusion and delusion that portrays DEBT as WEALTH. The day of realization and reckoning will not be pretty.

Adding to the building pressure on the real estate and debt markets was the news that wages are rising at a 3.3% y/o/y rate, while productivity is declining. If such activity continues it will only add to the growing pressures. The much talked about inverted yield curve is beginning to rear its ugly head, with the spread between the 2 year and 10 year expanding to 7 bps.

Below are charts of two of the major homebuilders in the country. As the direction of their charts show – they have been having a rough time of it. Couple this with the recent weakness in real estate listings, sales, average price per house, and increased length of time on the market prior to sales – and it appears that the real estate market may very well have peaked.

If this is the case, which it appears to be, look not only for problems in the real estate sector, but also in consumer spending, which is the major underpinning of the economy (70%).

 

TOLL BROTHERS

Chart Courtesy of StockCharts.com

 

COMSTOCK HOMEBUILDING

 
Chart Courtesy of StockCharts.com

 

The real estate market is connected at the hip to long-term interest rates. If the long-term interest rates begin to rise, it will severely hurt the real estate market, as well as those markets dependent on real estate.

Any increase in interest rates will immediately be felt in the variable rate mortgage market. Many new homeowners are already stretched to the limit, and any rise in their real estate interest payments will be the straw that breaks the camel’s back. I wish it was not true, but unfortunately, it is.

The mortgage companies are already feeling the pain, and rates have not budged that much as of yet. Perhaps they have been victims of selling on the rumor and buying on the news. Whatever the reason, most mortgage company charts look like countrywide’s chart below.

 

COUNTRYWIDE FINANCIAL CORP.

Chart Courtesy of StockCharts.com

 

The Iran issue appears to be slowly defusing for the moment, we hope it continues to do so. We believe it will. There is nothing to be gained by either side if any type of nuclear warfare took place.

We still do not recommend any buys at this point in time. We continue to sell into any strength in the precious metal stocks. Gold appears to be extended and a correction would not be a surprise.

The action after the decline will be important, specifically how the physical acts compared to the stocks. If there is any divergence of one from the other that will portend that further downside action is in the cards. We are still waiting for further weakness in the energy sector before adding positions.