Wheee, what a day!
Boy did we need that. On the whole, because we were well covered, we didn't make a lot of money BUT the value of our long-term holdings improved, which boosts the value of the rents we can collect in May. In a choppy market (and this is still a choppy market) that is very, very important.
If we get a confirmed rally, we have plenty of cash to get more bullish. Our Long-Term Virtual Portfolio did, in fact, gain 10% and that's where the bulk of our positions are with the Short-Term Virtual Portfolio carrying 1/2 as many positions in value. Each of those virtual portfolios, of course, dwarf our smaller virtual portfolios, which have been fairly flat for the week so far. Let's keep in mind that all we've done so far is get back to last Thursday's highs (before GE's miss) and 12,600 has held firm for this entire year since we fell below it in January. We need a break over 12,750 that holds to start getting more aggressive and I'll feel better about it once we get past GOOG, C and expirations on Friday.
I hate to throw a wet blanket on a 250-point rally but it's my job to tell you when I think we're too low AND when I think we're too high and I do not like a rally with oil at all-time highs (sucking money out of consumer's hands) and the dollar at all-time lows (eroding the spending power of the dollars they have left). If you think you need a cold splash of water, watch this video (thank Yev!) on the California foreclosure situation where foreclosures are outpacing sales by more than 3 to 1!
I encourage you to play with Foreclosureradar.com, which has great data on California and gives you a feel for the situation. As I said in yesterday's post where we solved the housing crisis – this is all fixable with a pen-stroke but, without that pen-stroke, it's still going to be a disaster! We got bullish expecting the G7 to act but, so far, there is much talk but no action – we can't let ourselves get talked into buying equities, we need to see a really good reason before we go running with the bulls.
Still, so far so good with earnings, we just need to avoid the land mines and it should be smooth sailing as the housing/mortgage sector do finally bottom. We knew since last year that ARM resets would peak at this point and now we are at the top. As Mr. Mortgage says, it's a total disaster but (see chart) he's right there on the ground and can't see the forest through the trees. From our global sky view, we can see that this point (Q1 '08) is the beginning of the end of the mortgage shock.
Obviously things will not magically get better as all those poor people who have already been hit with resets and all those people yet to come but we can see that the defaults etc. that are the symptoms of the disease have been hitting us after the fact and that this is not an unsolvable, never-ending problem. ARMs were a fad and a mistake and they are over. Housing prices will normalize (maybe another 10-15% down) and we will move on. I'm not expecting much improvement in housing until next Spring but that would be OK if commodities would calm down, which they are not.
It used to be that a slowdown in housing would collapse commodities very quickly as houses are made of stuff. Autos are also made of stuff and global production of autos is off as is global use of fuel and even Q4 demand for gold was off 17% vs. Q4 '06 but that didn't stop gold from selling for 33% more in late '07. Commodities are in a massive speculative bubble with NO underlying fundamental demand driven by nothing more than a flood of money chasing derivative contracts, having nothing at all to do with product demand.
To be sure, 20% of the price hikes we see can be blamed on the collapse of the US dollar and 13% can be attributed global inflation so let's say 33% since Jan '06 would be fair. The overall CRB is, in fact up 33% but there are bubbles in oil (up 90%) and gold (up 90%) and copper (up 100%) that have grown in price as trading vehicles, with "hot" money moving the prices regardless of underlying demand.
How long can this continue? As with any bubble, it's hard to tell the top. We tried to peg $110 as a limit to oil and I stand by my March 11th statement that there simply isn't enough money in the world to support these prices. No matter how hard speculatiors want to push a commodity bubble there are certain fundamental physics to capital. We can see that all the money has NOT been sucked away from IBM or INTC or APPLE and we can see competition for capital heating up in the agriculture pits so, unless everyone on earth is getting a huge raise this summer – something is going to pop.
