S&P 500 Higher or Lower from Here?

The S&P 500 closed out the week at new all-time highs, but a lot of the stocks that led the way higher in recent weeks suffered big sell-offs today.  The question now is where do we go from here?  Please take part in our Bespoke Market Poll below by letting us know whether you think the S&P 500 will be higher or lower one month from now.  We'll report back with the results on Monday before the open.  Thanks for participating and have a great weekend!

Will the S&P 500 be higher or lower than its current level one month from now?
Free polls from Pollhost.com

Lawler: If New Home Sales report Accurate, Suggests Large Builder Share Down

From housing economist Tom Lawler: Government New Home Sales Report, If Accurate, Suggests Large Builder Share Down; Aggressive Home Price Hikes May Be to Blame

The Commerce Department earlier this week estimated that new SF home sales ran at a seasonally adjusted annual rate of 468,000, up 9.6% from December’s upwardly-revised (to 427,000 from 414,000) pace. Estimated sales for October and November were revised downward slightly, and the estimated sales for the fourth quarter of 2013 were not revised.

While January’s new SF home sales estimate was somewhat higher than I expected, I was even more surprised that last quarter’s sales estimates were not revised downward. Most large publicly-traded home builders reporting on a calendar quarter showed relatively weak net orders last quarter compared to a year earlier, and the nine large builders I regularly track1 had combined net orders that were down 3.8% from a year earlier (not seasonally adjusted, of course.) That contrasts sharply with Census estimates showing an unadjusted YOY increase in sales last quarter of about 15%.

Of course, comparisons of builder results and Census sales estimates are tricky, given (1) the different treatment of cancellations; and (2) differences in the timing of the recognition of contract signings. Nevertheless, the difference results were “unusual,” and over the last two years builder results that varied materially from Census preliminary estimates have been a decent predictor of revisions to Census estimates of SF sales.

If in fact the Census sales estimates are reasonable (further revisions will occur, given its methodology), an implication would be that large builders’ share of the new SF home market declined significantly in the second half of last year. One possible reason is that many of the large publicly-traded builders, facing demand that exceeded their ability to supply new homes (in several instances because of “supply-chain” issues) in the early part of the year, jacked up prices by not just unusually large amounts, but by more than other builders. The combination of higher mortgage rates and these unusually aggressive price hikes not only slowed their sales, but also slowed their sales relative to other builders. Given that the huge price hikes at many large builders pushed margins on closed sales in the second half of last year to the highest levels in seven to eight years, it’s perhaps not “shocking” that other builders weren’t as aggressive.

Given the optimistic sales plans most of these large builders have for 2014 – backed by rapid expansions in their land/lot acquisitions over the last one-to-two years – it seems unlikely that these large publicly-traded builders will be able to hike prices much if at all this year unless they are will to see their share erode further, which seems unlikely.

1 D.R. Horton, Pulte, NVR, Ryland, Beazer, Meritage, Standard Pacific, MDC, and M/I.

Succinct Summations of Week’s Events 2.28.14

Succinct Summations week ending February 28, 2014


1. Core Cap-ex jumped 1.7%, economists were expecting a 0.2% decline.
2. The S&P 500 made new all-time highs, closing above 1850 for the first time ever.
3. U.S. home new home sales grew 9.6% vs expectations of -3.4%, the fastest pace in more than 5 years.
4. Small caps had a win streak of 14/15 days, has never happened before.
5. Dec home prices rose 13.4%, the 10th straight month of double digit gains.
6. Home prices in 2013 saw their biggest annual gain since 2005 (still 21% below the ’06 peak)
7. German business morale beat expectations and rose to its highest level since July 2011
8. January durable goods fell 1%, vs expectations of a 1.7% drop.
9. Japan industrial production had the largest growth since 2011, rising 4% in January.
10. The Dow had its best month since January 2013.
11. U of Mich. Consumer confidence came in at 81.6, up from 81.2 in January.
12. Chicago PMI rose to 59.8 v expectations of 56.4.


1. MBA mortgage application index fell 8.5% last week. (The lowest level since 1995!)
2. Q4 GPD was revised down to an annualized 2.4% pace, from initial estimates of 3.2%.
3. Initial jobless claims rose to 348k, up from 336k last week.
4. Consumer confidence came in at 78.1, below expectations. Numbers were revised down last month.
5. The US Citi surprise economic index closed at -13.4, down from -7.7 last week.
6. The Shanghai index closed down 2.7% on the week.


Thanks, Batman

Stiglitz: Leaving the Euro Painful but Staying in More Painful; Eurozone Breakup Recap

Nobel prize winning economist Joseph E. Stiglitz has come to the right conclusion Leaving the Euro Painful but Staying in More Painful.

Partial Transcript

Question: I want to probe you a bit on that small mistake of the euro. UYou seem to suggest there is nothing that cannot be solved with more European solidarity and I agree with that intellectually. But if you are politically realistic, I don't think it is going to be forthcoming. I don't see large checks being written by German politicians to subsidize for example, the Spanish or Greek unemployed. So if you think about that perspective, and put yourself in the shoes of a 30-year old Spaniard or Greek head of household who has no prospect of employment, would it not be better is countries left the eurozone altogether?

Stiglitz: As I said in my talk the reality is, if the reforms I described were made, Germany would not have to write large checks. It more likely to pay a high cost for not making these reforms.  ... But I think your description of the reality of the way the dialog is going in Germany is absolutely correct. And that is one of the reasons I am a little depressed about the future of Europe. It's going to be a hard row to persuade Germany to make these reforms even if they would cost less. And that leaves Spain and Greece with an important debate, a policy question, what should they do if the reality is there won't be these reforms. To me the real risk is the following: Europe is going to dangle out just enough hope that Spain and Greece and the other periphery countries will say, they are going to come to our assistance. .... But they are going to dangle enough hope that people won't want to leave the euro, but in fact, there will be so little reform there will be literally no time soon the countries will emerge from depression. SAo my advice would be along the lines of what you are hinting at: They should probably face the reality that there is not going to be political reform that will make the euro viable for the periphery ... that internal devaluation won't work, that leaving the euro will be painful, but staying in the euro will be more painful.

Among economists, there is an easier solution, that many people have argued, that Germany should leave. If Germany leaves, the value of the euro will go down, the competitiveness of the southern 
countries would become substantially enhanced. They can design a set of economic policies that work for a large group of countries, and owing money in euros they will be able to repay money in euros. Germany is in a better position to absorb the consequences of a breakup in that fashion.

End Transcript

Better if Germany Leaves

I am in total agreement with the unknown questioner regarding the political reality: Germany will not pony up the cash, nor the banking union and fiscal unions required to make the euro work.

On November 9, 2011 in Breakup Inevitable, but How? I offered the following comments.
Eurozone Breakup Inevitable, But How?

The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.

It would be best for all involved if Germany left the Eurozone and went back to the Deutschmark. Germany would have an immediately credible currency. Should Greece or Spain leave first, those countries might experience hyperinflation or massive inflation.

It's important to remember that Germany suffers regardless. As long as the Eurozone stays intact (it can't and won't over the long haul) German taxpayers have to keep acting bailing out foreign countries, foreign banks, and their own banks.

On the other hand, were Germany to leave, the debts to German banks will not be paid back in Deutschmarks but rather deflated Euros.

On the whole, Germany exiting the Eurozone would be less disruptive, than massive inflation scenarios in Greece, Portugal, and Spain.
Eurozone Math; One Size Fits Germany; Door Number Two

People accuse me of blaming Germany. The blame goes to the architects  of the fatally flawed euro and the politicians who signed up for the mess.

Blame also goes to the ECB. I have written about that on numerous occasions as well. For example, please consider my April 11, 2013 post Eurozone Math; One Size Fits Germany; Door Number Two.
Reader "JB" thinks I am blaming Germany for what is happening. That's not exactly correct, but let's take a look at what "JB" has to say via email.
Hi Mish,

I read your blog daily. We are generally on the same page. We even agree that in all probability the eurozone will break up. However, You cannot blame the Germany, the German government, or the German people for doing the right thing. Germans can accept austerity. The phrase "tightening the belt" is an axiom in the German language. ....
Hello JB, I think you misunderstand my message. I am not biased against Germany, and I am in favor of "austerity".

By "austerity" I mean shrinkage of public sector jobs and pensions, and liberalization of work rules.

I am against tax hikes, especially those imposed on Spain, Greece, and Portugal by the nannycrats in Brussels. What the nannycrats call "austerity" is nothing more than devastating tax hikes coupled with minimal, if any work rule reforms.

My message is primarily a function of math.

Eurozone Math

  • Germany was the primary beneficiary of the ECB's "one size fits Germany" interest rate policy.
  • It is mathematically impossible for every country to be an exporter like Germany
  • It is mathematically impossible for one interest rate to work when there is a multitude of fiscal policies
  • It is mathematically impossible for the euro to survive without a transfer mechanism of some sort from Germany to peripheral Europe, and Germany will not allow any transfer mechanisms
  • It is mathematically impossible within the realm of the euro for Spain to be more like Germany, unless Germany is less like Germany
  • Germany has ruled out everything that could possibly make the eurozone work.

Euro Architects and Politicians to Blame

I do not blame Germany. I blame all the architects of the euro. I also blame all the politicians making matters worse by trying to force their will on the markets. In that sense, I do blame Merkel, but I also blame Hollande, Sarkozy, Trichet, Draghi, and everyone else involved in this mess, past or present.

One Size Fits Germany (Until it Doesn't)

The math of the matter is Germany benefited from the Euro and from the ECB's "one size fits Germany" interest rate policy more than any other country.

As a direct result of the unstable eurozone treaty, sovereign interest rate imbalances, Target II imbalance, and trade imbalances are out of control. Germany and the other European creditor countries are owed money that cannot be paid back.

Door Number Two

The eurozone cannot work as is, and Germany is going to pay the price in one of two ways.

  1. Germany Forgives Loans to European Debtor Nations
  2. The debtor nations exit the eurozone and default

German taxpayers do not want to bail out the rest of Europe. And if I was a German taxpayer I would have the same stance. Without assigning blame to Germany, the math is what it is: unsustainable.

Pick your poison. Is it door number one or door number two? Odds overwhelmingly favor door number two.

Even diehard supporters of the eurozone now see it cannot work. For example, please see Eurointelligence Founder Wolfgang Münchau, Once a Staunch Euro Supporter, Now Welcomes the Anti-Euro Party "Alternative for Germany".

Soros On Board

George Soros is still a eurozone supporter, but he understands it cannot work without eurobonds. I do not believe the eurozone can work with eurobonds as I expect tensions will be high. Soros' second-best alternative is for Germany to exit the eurozone.

That has been my #1 idea for a long time. I explained it recently in Illusions of Stabilization.
Failed Experiment

The Eurozone is a failed experiment. Structural flaws were too great initially, and they have increased over the years. No currency union in history has ever survived unless there was also a fiscal union. Current politics says it cannot happen, on meaningful terms.

Breakup Inevitable, But How?

A breakup is inevitable, just as it has been from the beginning. The key is to manage a breakup in the least destructive manner.

Breakup Options

Option 1: If Germany (and the northern states) left the eurozone, the Deutschmark (and respective currencies) would immediately be credible. The downside to Germany (and the northern states) is debts to German banks would not be paid back in Deutschmarks but rather deflated (but not worthless) Euros.

Option 2: The second option is a piecemeal, destructive breakup. Should Greece and Spain leave first, those countries might experience a complete loss of faith in currency resulting in hyperinflation. The Northern states would be paid back in worthless notes, if they were paid back at all.

Germany Suffers Regardless

Note that Germany and the Northern creditor nations suffer regardless. Either they keep ponying up bailout money, there is a managed breakup, or a piecemeal destructive breakup. It would be best for all involved if Germany left the eurozone and went back to the Deutschmark.

There are no other options, and no other choices. Meanwhile, imbalances grow and German taxpayers keep funneling tax dollars to the Southern states to keep them afloat.
Merkel Not a Savior

Many Germans view Merkel as a hero for her tough stance on Cyprus.

However, Merkel is neither a savior nor a hero. Her stance is always one of political necessity. Every step of the crisis she has made politically expedient decisions such as caving in to Sarkozy and providing funds for Greece but not for Cyprus.

Sentiment in Germany in favor of holding the eurozone together is strong provided German taxpayers do not have to pony up another dime. The irony is Germany was the main beneficiary of the ECB's "one size fits Germany" interest rate policy that destroyed Spain and peripheral Europe.

Sentiment Does Not Change the Math

Sentiment does not change the eurozone math, but it does impact the way the eurozone breaks apart.

Expect a piecemeal, destructive breakup.

Some will blame Germany. I blame a mathematically unworkable treaty that was flawed from the beginning. I also blame all the politicians who supported the idea even though it was fatally flawed.
Late to the Party

Those just now coming to the conclusion the euro cannot possibly work are late to the party.  Yet, many, if not most, still have not figured this out.

Mike "Mish" Shedlock

‚The Real Reason Nobody Reads Academics‘

Appreciate the mention:

The Real Reason Nobody Reads Academics, by Ezra Klein: New York Times columnist Nicholas Kristof recently ignited a bit of a firestorm with a column asking why academics are irrelevant to public debates. I’d turn the question around: Why aren’t journalists better at taking advantage of academic expertise?
The most efficient arrangement would have academics communicate directly with the public. Thankfully for journalists, they don’t. ... It would be a disaster for our profession if academics became good at communicating what they know.
The relationship between academics and journalists should be a happy symbiosis. The two sides are perfectly designed, in strengths and weaknesses, to support each other. ...
The good news is the chasm is closing. Academics have increasingly turned to the blogosphere, opening a window on academic conversations that were formerly out of view. In political science, for instance, the Monkey Cage is a minor miracle. In economics, Mark Thoma at the Economist’s View is tireless in tracking discussion across the profession.
Still, it would be better if academics didn’t have to blog, or know a blogger, to get their work in front of interested audiences. That would require a new model for disseminating academic work -- one that gets beyond the samizdat system used for working papers on the one hand, and the rigid journal publication system on the other. If academia was easier to keep up with, I think a lot of academics would be surprised to learn how many journalists care about their work, and I think a lot of journalists would be happy to find how much academic research can do for their stories.

Liveblogging World War II: February 28, 1944

From World War II Today: Primo Levi: Survival in Auschwitz:

We had soon learned that the guests of the Lager are divided into three categories: the criminals, the politicals and the Jews. All are clothed in stripes, all are Haftlinge [detainees], but the criminals wear a green triangle next to the number sewn on the jacket; the politicals wear a red triangle; and the Jews, who form the large majority, wear the Jewish star, red and yellow.

World War II Today

SS men exist but are few and outside the camp, and are seen relatively infrequently. Our effective masters in practice are the green triangles, who have a free hand over us, as well as those of the other two categories who are ready to help them – and they are not few.

And we have learnt other things, more or less quickly, according to our intelligence: to reply “Jawohl,” never to ask questions, always to pretend to understand.

We have learnt the value of food; now we also diligently scrape the bottom of the bowl after the ration and we hold it under our chins when we eat bread so as not to lose the crumbs. We, too, know that it is not the same thing to be given a ladleful of soup from the top or from the bottom of the vat, and we are already able to judge, according to the capacity of the various vats, what is the most suitable place to try and reach in the queue when we line up.

We have learnt that everything is useful: the wire to tie up our shoes, the rags to wrap around our feet, waste paper to (illegally) pad out our jacket against the cold. We have learnt, on the other hand, that everything can be stolen, in fact is automatically stolen as soon as attention is relaxed; and to avoid this, we had to learn the art of sleeping with our head on a bundle made up of our jacket and containing all our belongings, from the bowl to the shoes.

We already know in good part the rules of the camp, which are incredibly complicated. The prohibitions are innumerable: to approach nearer to the barbed wire than two yards; to sleep with one’s jacket, or without one’s pants, or with one’s cap on one’s head; to use certain washrooms or latrines which are “nur fir Kapos” or “nur fir Reichsdeutsche”; not to go for the shower on the prescribed day, or to go there on a day not prescribed; to leave the hut with one’s jacket unbuttoned, or with the collar raised; to carry paper or straw under one’s clothes against the cold; to wash except stripped to the waist.

The rites to be carried out were infinite and senseless: every morning one had to make the “bed” perfectly flat and smooth; smear one’s muddy and repellent wooden shoes with the appropriate machine grease; scrape the mudstains off one’s clothes (paint, grease and rust-stains were, however, permitted); in the evening one had to undergo the control for lice and the control of washing one’s feet; on Saturday, have one’s beard and hair shaved, mend or have mended one’s rags; on Sunday, undergo the general control for skin diseases and the control of buttons on one’s jacket, which had to be five.

S&P 1500 Most Heavily Shorted Stocks

Earlier today we sent out our updated look at short interest trends for the S&P 1500 as well as each sector and industry group.  Below we wanted to provide a look at the stocks in the S&P 1500 with the highest short interest as a percentage of float.  The list of stocks below shows every stock in the S&P 1500 that has more than 25% of its free floating shares sold short.  As is usually the case most of the stocks listed are small caps.  In fact, the only non small cap stocks on the list are JC Penney (JCP), Cliffs Natural (CLF), Gamestop (GME), and KB Home (KBH).  Looking at sector representation, Consumer Discretionary dominates with a third (9) of the stocks on the listed coming from that sector, and is followed by Technology with five stocks.  Behind those two sectors, no other sector has more than three stocks on the list.

In our recent updates on short interest we have highlighted the fact that short-sellers just haven't been able to win whether the market was up or down.  When the market was rallying, the most heavily shorted stocks rallied more, and when the market pulled back in late January, the most heavily shorted stocks held up better than the overall market.  Based on the performance of the most heavily shorted stocks, February proved to be just as tough for the short-sellers.  As shown in the table below, during the month of February (through 3PM Friday) the most heavily shorted stocks in the S&P 1500 were up an average of 5.51%, which is 170 basis points better than the 3.81% return of the S&P 1500.

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