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CyclePro Fundamental and Technical Market Analysis ForStock Indexes and Commodities CyclePro U.S. Stock Market Outlook Updated At Irregular Intervals Send comments or questions to [email=cyclepro2@yahoo.com?subject=Stock Market Outlook] Steven J. Williams  [/email] Welcome to CyclePro - Your web resource for Technical, Esoteric Analysis, and Market Forecast Commentary.
IntroductionThe current U.S. stock market appears to be following a similar path as was previously witnessed by U.S. investors in 1929 and 1987, and more recently by investors in the Japan Nikkei in 1990, Hong Kong in 1997, and many others. These were the most famous world stock market "crashes" of the century. We have already witnessed crashes in internet and high-tech industries during 2000, will this year also be added to this prestigious list for a "Crash" in the United States? Will the global economy crash too?
I would rather be prepared and wrong
than to be unprepared but right!
Current Commentary -- Where Are We Now?(Monday April 28, 2008 PM): I came across the data for this chart from the website for U.S. Office of Federal Housing Enterprice Oversight. It shows the current total debt outstanding for U.S. residential mortgages from 1990 through 2007. We are currently right at $12 trillion. This chartline represents the aggregate growth in residences (new homes, condos, etc) combined with home price appreciation, as reflected in total mortgage debt. 
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Click chart to enlarge. The project I have focused on are the three Trump Towers I, II, and III located at 16001, 15901, 15811 Collins Avenue, respectively. Each building has the same floor plan and consist of 271 luxury units per 45 story building. A total of 813 residential units in this project.  While the buildings were under construction, the buzz around the real estate biz was that the 1st building had to be 2/3 sold before breaking ground on the 2nd building, and likewise for the 3rd building. The photo shows that all three buildings were under construction as of spring 2007. So apparently there was a lot of interest in these properties to give the go-ahead to break ground on all three towers.   The updated photos show that building I is complete enough that owners have begun moving in. The building is essentially already functional. Even the valet boys are operating 24/7. Building II has a completed shell exterior, but the insides still need final polish. Building III remains under full construction. Knowing that the housing market is in current chaos and on the brink of a significant downturn, albeit collapse, I decided to check the tax records of the sales & taxes for this project. According to Miami-Dade County tax records, as of 3/28/08, only 19 units have been sold! You read that correctly! Out of the 271 units in Trump Towers I, only 19 have been sold to individuals or investors that have actually put down the cash (or mortgage) for these units. Four units are apparently earmarked for Mr. Trump. The remaining 248 are "owned" by the developers headed up by Dezer Development and The Related Group of Florida (using the names TRG Sunny Isles V Ltd, TRG Sunny Isles VI Ltd, and TRG Sunny Isles VII Ltd for buildings 1, 2, and 3, respectively. Closings were slated to begin in December, 2007. But so far all of the buyers completed their contracts in January or February, 2008. I did not see that any new buyers showed up in March, but perhaps the County is slow in updating the records, or perhaps I am merely jumping the gun. One of the 19 buyers bought a 3 bedroom, 3.5 bath, 2950 ft2 unit for $1.1M. The same unit# is already listed as a re-sale on Zillow.com for $1.3M. With almost 800 similar Trump units available or soon to be available from motivated developers, wanna bet this owner ends up selling for a lot less than their original purchase price? More from South Florida Real Estate An interesting twist is the Miami-Dade condo supply (MLS listings). Condos priced under $250k increased 25% in just one month from January, 2008 to February, 2008. These lower-priced condos account for 41% of all available condo inventory in the area. But for condos priced over $1M inventory actually decreased. If financing is an issue, then those buyers with the big cash may be still buying, and doing it without financing. But it may also be possible that these higher-priced units were simply taken off the market to await for better prices or to rent them out... or, may be reclassified, such as bank foreclosure. Another consideration is that a lot of luxury unit construction is going on right now (like the Trump Towers discussed above), and these have not yet been added to MLS inventory. Condos priced between $1M and $2.5M had inventory (in Miami only) of 1451 in Feb'08 with 27 sales. Condos priced between $2.5M and $5M had inventory of 315 in Feb'08 with 5 sales. If these sales rates continue, this calculates to 4.5 years and 5 year supply, respectively. Condos priced below $1M have previously been selling at a rate of 72 per month. The current inventory (not including projects under construction) is estimated to be a 5 year supply. If one includes new projects (and compounded by difficult-to-get condo mortgage financing), this inventory could swell to 8-9 year supply. As for future projections, the following chart (edited by Miami realtor John Carpa) was found on a Miami R/E blog. This shows how a typical 1 bedroom oceanfront condo price soared from 1999. The inset shows since October, 2007 prices for properties listed over 150 days have been dropping at a steady rate of about $20K per month. His projection line suggests prices will have to drop to pre-2001 levels over the next decade. His peak was $399K ($317/ft2) in 2007 and 2001 was $230K ($183/ft2) -- an expected drop of 42%. 
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Click chart to enlarge. (Sunday March 23, 2008 PM): A quick note... apparently Bear Stearns derivative portfolio notional value was 13.4 Trillion as of last weekend. J.P.Morgan's was $83.9 Trillion as of Q3'2007. Taking on Bear Stearns derivative portfolio means JPM could now sport a portfolio in excess of $97 Trillion (however, I am sure JPM & BSC have a portion of inter-counterparty trades that will essentially net out when the portfolios are combined). Nonetheless, anything over 1 trillion is a huge number, but anything approaching 100 trillion is so large that should never be allowed to be concentrated with one company. If it was JP Morgan that was about to go belly up last weekend instead of BSC, who would have been able to step up to help bail them out? The Bernanke script suggests it would have been almost entirely upon the Fed... which translates to you and me... and our children, and their children. Do the math: experts claim that average derivative trading portfolios are really "at risk" for about 2% of the notional value. 2% of $100 trillion is $2 trillion. If that ends up being JPM's loss in this, then we as individuals will end up paying for it by amortizing this loss over many years of US budget deficts. If Bernanke chooses to print his way out of any bailout, then the inflationary tax will be a permanent scar and reminder of this foolishness. Bear Stearns was not too big to fail, but JP Morgan is. The precident has been established. We should all be very worried. (Saturday March 22, 2008 AM): The following was a posting I made to several chart forums late last week. I had hoped to have time to embelish a bit with charts and article links, etc. But yesterday I noticed that a lot of mainstream online articles are already discussing the same scenario -- so my "enlightenment" it seems was already well disseminated. So I decided instead to take the weekend off and enjoy Easter Holiday with family & friends. For readers that are still not too clear about what is happening right now with the sharp selling of gold & silver and the abrupt rise in US Dollar, perhaps my tome will help in that explanation. I am calling it: The Great Unwinding I woke up at 3:30am this morning with an epiphany moment. You know that feeling you get when you are putting together a complicated jigsaw puzzle, you got a lot done, but you go for a while with nothing new added... and then someone walks by and goes, "oh, here, this one fits right there..." and then walks away... ok, that feeling right there, that's what hit me once I realized a lot of the pieces of the financial markets had been there all along, I recognized them individually for what they were, I thought I had understood it, but apparently I had not yet put the whole picture together... and then wham! It was suddenly crystal clear. I think Denninger's posting last night may have been the trigger and my subconscious must have been churning over it as I slept. It is all about the hedge funds and financial houses that have essentially treated their trading strategy as though it were a hedge fund. Companies like Bear Stearn & Lehman are excellent examples. I'll toss all of them into the same bucket of "hedge fund". The hedge funds have no rules, some are long some are short, but they all use massive leverage to achieve big results. And, they are into everything, every commodity, precious metals, wheat, oil, shorting the Dollar, anything with a momentum that they can ride on. During 2004-2006 it was not uncommon for mortgage-backed hedge funds to pay out dividends in excess of 50% per year. The only way that can be achieved is through tremendous leverage. We know for example, that Carlyle was leveraged 32:1 (which is probably modest compared to other hedge funds) despite the fact that they believed their investments were AAA and fully guaranteed by US government... hey, this was practically free money! Now the great unwinding is taking place. The leverage that worked so well when things were going their way, now works with opposite intensity as things contract. As such, hedge funds are getting margin calls -- not just little annoying ones, but big "oh shit" ones. To make those calls, hedge funds have no choice but to sell off their inventory to generate the necessary cash. If the funds were run by saavy traders, they would already be out of the riskiest stuff to minimize losses and the only things remaining would be the big gainers, like: Dollar shorts, oil longs, silver longs, etc. However, not all of the funds were managed by great traders, they were managed by mediocre or worse, because what many are still holding are the most toxic of mortgage-backed securities, highly leveraged. Not willing to sell the biggest losers, they instead are selling their few winners... throwing the baby out with the bathwater along the way. Timing wise, this all appears to be happening since this past weekend... the fit has hit the shan. Since hedge funds can trade virtually anything, it is difficult to say exactly how things will work out. But I expect a contraction toward the center. In other words, the biggest recent gainers will be sold, and the biggest recent shorts will be bought. Many hedge funds will end up negating each other -- if their timing is similar they will simply net each other out and the market will not see too much of it -- but if their timing is disjoint, then we are likely to see huge volatility swings back & forth during this great unwinding. This explains why gold & silver have taken such a huge hit this week. Even great mining stocks, such as Goldcorp (GG) getting knocked for over -20% (this mornings low was -$10 from its recent high of $46.30). I see the Bear Stearns episode as a proxy for all hedge fund-like enterprises. Of the 7000+ hedge funds around today, perhaps only 700 will still be around 2-3 years from now. This is just the beginning, folks. A lot of what happened to Nasdaq in 2000-2001 will be repeated here because in the late 1990's traders were bidding up NDX stocks using margin accounts employing similar albeit less extreme leverage as today's hedge funds. This leverage created air pockets in the stock charts as the prices rose. Then when prices fell, they imploded much faster as prices fell through those no-support zones. Some have measured the Nasdaq drop as a loss of several $trillion in market capitalization value... but that value never really existed anyway because so much of the run-up was driven by marginning leverage. The same should apply with anything the hedge funds played with in momentum-driven rallies (or short runs). As they unwind, the price drops should be just as impressive as the rallies were. The loss in market capitalization will be just as impressive except hedge fund unwinding will unload hugely leveraged strategies resulting in market cap losses of tens of $Trillions. In my opinion, gold has a great outlook. However, in light of my view of hedge funds selling whatever they can, I think we could see low-$800's before we see $1000 again... and if that does not hold then the low-$700's. Silver may pull back to mid $15's. If this happens, back up the Loomis and load up. But between now and then it could get quite painful for many PM investor portfolios. Long term precious metal investors should not fret too much as this will appear as a temporary blip in the charts. 2008 will be the transition year as the hedge fund unwinding influence resolves itself and a new base is established for gold & silver. This will be where more individual investors will start buying gold & silver. I personally do not think we will see $2000 gold this calendar year, but I do think we will see $1000 again after the great unwinding has unwound, late this year. I also think silver will be the better long term investment over gold as the gold/silver ratio is likely to narrow from 53:1 to 20:1 over the next 3-4 years. Both gold & silver will do well, I just think silver gets the nod for best percentage gainer. (Friday February 8, 2008 PM): Many analysts have suspected that commerial property was next in line to be hit with the contagion of credit contraction. Now we have definitive evidence that it may be about to get hit hard. Karl Denninger mentioned it in his technical video, but to really see the comparison between credit grades I created the following chart: 
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