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How The Fate Of The Equity Market Lies In A $8,000 Tax Credit
It is a curious state of affairs when the continuity of the stock market rally, and in fact the validity of its 60% run up to date, lies in the hands of politicians. Yet this is precisely the case with the housing equivalent of the Cash For Clunkers subsidy in the form of the extended or expanded $8,000 housing credit. The expiration of this freebie in November has spooked numerous pundits into proclaiming that it would be sheer lunacy for the government to not continue its communist ways. In fact, very amusingly, none other than the chief equity market strategist overseeing Federated Investors' $400 billion in AUM is putting his career on the line, assuming a continuation of the massive government subsidy:
“I can’t believe the Congress will be so stupid in
allowing those programs to expire”, said Philip Orlando, who
helps oversee $400 billion as chief equity market strategist at
Federated Investors Inc. in New York. “If the government
suddenly eliminates the stimulus program in the housing market,
that will begin to call into risk the sustainability of the
recovery at some point during 2010. I think that program will be
not only extended, but expanded.”
And there you have a demonstration of what programmed, brain-washed group-think is all about: the fate of American Capitalist Corporate Communism will be determined by an $8,000 stimulus check. The market can only sustain its overbought levels compliments of taxpayers' generous subsidies to those who believe that renting is some form of inhuman cruelty banned by the Geneva convention. But then you still have those hundreds of billions in FHA losses that are yet to be "uncovered."
Rosie summarizes this idiocy best: "Are we supposed to go when the fundamentals deteriorate because Uncle Sam will come to the rescue? We are confused. If state capitalism works, shouldn’t we be investing heavily in Venezuela?" Yet the adage "good news is good news, and bad news is good news" only works when Obama's Moral Hazard doctrine is fully accepted by all market players as the prevailing trading paradigm. It is simply moronic to assume that Congress would be "so stupid" as to let natural supply and demand find their intersection points. If that were to happen, the US economy would crater so fast it would make Usain Bolt seem slower than Art Cashin.
Yet, it may be prudent to not bet it all on black (or green as the case may be) just yet. In a report issued yesterday by Deutsche Bank, analyst Nishu Sood seems to be less certain on the outcome of the stimulus fiasco, and is in fact betting on the "stupid" outcome dreaded by Philip Orlando:
Our view on a tax credit extension differs from that of the market – we don’t think it will be extended in the near-term. While it is always difficult to project political outcomes, the experience of the last few years argues that government acts on housing only when the situation is plainly deteriorating. With the economy and housing apparently on the mend, we think this good news may sap the political momentum needed to extend the tax credit. If, as we expect, housing conditions deteriorate again that might propel a renewal of the purchase tax credit.
So there you have it: up is down, good is bad, etc, etc. We now have the equivalent of a banana economy, let alone republic. Yet this is precisely what nearly 90% of investors are not only OK with, but factor into their "fundamental models."
86% of investors surveyed expect the credit to live on in some form, but most of these investors (61%) expect a simple extension for 6 months. Other possibilities include a 12 month extension (13%) or an extension and expansion of the credit (12%). The credit could be expanded by removing the first-time buyer or income cap restrictions or by simply increasing the amount. Proposed amounts have reached as high as $15,000. Only a small proportion of investors think that the credit will be allowed to expire (11%).
It is very unlikely that Obama learned his lesson with CARS: the adverse impact of that particular subsidy will likely plague automakers for many quarters, precisely at a time when they should have been able to budget and project demand, even if it meant slower growth curves. Now all bets are off, as nobody has any idea what inventory, labor or products to budget. Which is why it is only likely that a CFC 2.0 is not far off in the making. In the meantime, while we would like to believe Mr. Sood, his conviction is based on the assumption that at some point in its tenure, the administration will do what is in the best interest of capitalism, efficient markets, and not the Wall Street oligarchy. Based on empirical evidence, this assumption is flawed at its core.
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8K tax credit, big deal, do a piece on this:
http://www.ny.frb.org/markets/mbs/
As expected (by me), MBS POMOs were still 20B this week, down only slightly from the 25B run rate, despite the Fed saying they are going to slow down. Hardly a slowdown.
Also note this great piece in American Banker this morning, again backing up what I have said - NO WAY the Fed will be able to stop agency MBS purchases in March.
Put that 20B of new money a week in your TA equity models.
http://www.americanbanker.com/issues/174_194/fed_moves_will_shape_gses_f...
http://www.youtube.com/watch?v=P36x8rTb3jI
shoot me
Are you within range of 81657?
There is no doubt in my mind that the $8000 tax credit will become quasi-permanent. My unborn kids will probably use the it to buy their first homes sometime in the 2030s.
only by the time 2030 roles around it will be an $8,000,000 tax credit.
Might want to remove the $ denomination by then!
...oh that is really good and so true Lizzy... the 'morphine' dosage that now sustains our 'addiction' must be exponentially increased to cover the increasing 'pain' that we refuse to acknowledge even exists anymore!
Which is how a 16K home became a 1.2m home already. Amazing how this process has taken on the character of preventative prophylaxis. Like giving your kids a band aid before they go out to play, or a 2% compounding rate of inflation before other comps. Chasing the dragon of hopium for sure while the body wastes away.
To put down on an $8 trillion middle class home! Can you say
Weimar?
To put down on an $8 trillion middle class home!
Ghost, you have been all over the MBS FED purchase story from the beginning.
Kudos - so much liquidity and once you are the market who do you sell to offload?
Are you compiling a list of traitors to help the mob distinguish good from bad during the massive upheaval we will be experiencing shortly?
There will be a shorting opportunity of a lifetime after all this liquidity stops. Just waiting in my dirty sandbox for the moment.
Cheers,
Pigpen
The Fed will hold those MBS for ever and ever. Or more likely just quietly write them off ten or twenty years.
At least someone is paying attention. yes, follow the MBS liquidity, it will lead you to riches (or at least preserve your wealth, like I have mine).
Note the composition of the purchases, they are very telling.
http://www.ny.frb.org/markets/mbs/index.html
What is it we keep hearing, that the FHA is writing more and more business? But yet, the Fed overwhelmingly buys FNMAs and Golds (FHLMCs). Why is that? Why do they buy disproportionately more from those two?
Answer: Ginnies have full faith and credit.
So what is going to change between now and March to convince the market to buy more Fannie and Freddie?
Absolutely nothing.
Except....Geithner promises to have a plan out for Fannie and Freddie in February.
Here is the way it is going to play out: anything less than full faith and credit behind agency MBS, and the Fed keeps printing money to buy them, stock market keeps climing (S&P 2000 by 12/2010), and the dollar keeps crashing (gold to 2000).
Any solution (like full faith and credit, and/or rolling Fannie/Freddie into the FHA) which allows the Fed to stop printing money, the stock market starts diving, and dollar starts rising. And I move my Gold money into short equity money.
Exactly, I agree with your prediction. However, oil will be over $200 in that scenario and the real economy and trade will be halted. Not sure the real economy matters to the electronic grand casino aka the stock market.
When liquidity stops IT ALL FALLS DOWN - just hope to be nimble enough to preserve the value of my holdings.
Cheers,
Pigpen
No need to be nimble if its offshore. I did the equivelent of going 'all-in' back in april to several local currencies and exchanges. Basically only use day to day money now in dollars. Two of the countries i put cash into the local exchanges were NZ and Aussie. Those currencies are crossing the 50% appreciation mark since April. So whenthey raise rates, i just smile =) I know the stocks im in are up, but honestly i dont even know how much. But it is nice to be able to sleep at night and watch what this congress/admin/fed do from a distance (financially)
Yes, if I had my wealth in USD I would not be sleeping that well at night.
What will be interesting is when the general public catches on.
For all its paranoia, the book "The Creature From Jekyll Island" had a great chapter on the collapse of the USD, and what it would look like. So far, it is playing out to a T.
One of the predictions it makes is that we will see bank runs - not out of fear of the banks collapsing, but out of fear of owning USD.
I could see that happening.
So Ghost, with the scenario you are envisioning - you don't see Ben raising FF rates to 15%?
Do you think Ben will be allowed to destroy a currency with 300 mm armed people?
I am not sure about that - I always bet on potential chaos leading to correct decisions being made.
Cheers,
Pigpen
If anyone else were in charge of the Fed (like Volcker, or even Summers), I would bet we would see an announcement tomorrow of a 25bps hike in o/n rates. Nothing major, just something symbolic to defend the dollar by scaring people out of the dollar carry trade.
With Bernanke, I don't know. remember, this clown did not see the subprime crisis coming. He is arrogant to a fault.
Its just another way to keep housing prices up so banks don't go bankrupt. We should have done the right thing and let the banks go BK, and let the housing prices come down.
+1 House prices are going down some more, eventually! The U.S. Govt can delay the inevitable, but they can't stop it.
Mr. Sood would do well to reconcile "the experience of the last few years" with the experience of the last year in particular. One might expect an altered attitude on direct hand-outs from Washington from the majority.
That's the most compelling case I've seen to get your money the fuck out of Federated. How that asshat got be Chief Equity Market Strategist without any sense of economics is beyond me.
Thinking that debt is debt is passe.. The current debt and costs of future promises made is already unpayable. Bankruptcy is no longer frowned upon because we already exist in a "debt holiday" - you no longer have to think of your children or grandchildren - everything has already been stolen from them. This can only end two ways - the repudiation of all debt, the debasement of the currency OR and this may be the way it will go for some time - move all debt to the balance sheet of the Fed and ask NO questions.
TD,
In several of your articles you mention Cash For Clunkers and the demand brought forward. Everyone is missing the fact that basically the federal government bought a brand new fleet of vehicles as soon as the stimulous package was approved. Most of those deliveries have started to occur. There are used government vehicles going to auction that are older than 5 years with less than 8000 miles on them. If a commercial fleet manager in the United States allowed that low of a usage of a company asset, they would be fired. So also everyone needs to take into consideration that the federal government purchases of vehicles, also brought demand forward on the premise of filling the lack of nationwide fleet orders. Those commercial fleets are not ordering cars, nor are they budgeting for orders. Like the rental companies they are holding onto fleet, reducing staff and fleet. Rencently here in the midwest a large rental car company bought several hundred vehicles at auction, (fleet sale), and put used vehicles into service. The 2010 auto industry is screwed. That the fleet/transport report from the ground.
Back in 07 when trying to value companies on the Shanghai market and find something in the fundamentals explaining their moves I could only conclude what any worthwhile China analyst had already told me. Chinese stocks moved very little on fundamental news but rose n fell according to how much favor they curried with the government. Negative cashflows be damned if they had access to infinite liquidity via state banks or better yet were in a subsidized industry.
It breaks my heart every day as someone who really is passionate about financial markets to see that equity analysis for the US in 09 is the same as for Shanghai in 07. I am angry and bitter that our economy will most likely collapse without an extension of this tax credit (understanding it is only a forestalling measure). But if that extension is passed please believe this guy will be taking out his Government Largess for Dummies handbook and buying financials and homebulilders the next day.
Banana republics suck ass.
just heard that nanci palosi wants to extend this ....
Simply amazing what has happened over the past 2 years. There must be more at stake than simply a depression for the powers-that-be to be pumping so desperately.
I suspect that if they were to stop, massive fraud above and beyond the known and suspected mortgage and corporate variety would surface.
Does anyone else remember Donald Rumsfeld's news conference one day before 9/11 where he announced that the Pentagon couldn't account for $2.1 Trillion dollars? I never did hear much more about that after the auditing department suffered a direct hit by that 757 at the Pentagon.
And Catherine Austin-Fitts (www.solari.com) former Asst. Secretary for HUD from 1989-90 has some interesting things to say about HUD and fraud which falls on deaf ears.
Do you think maybe the Fed is buying up some of that fraud before it is exposed? They did the same thing with the S&L crisis.
Time to look beyond the headlines.
it wasn't a 757 that hit it... it was a tomahawk cruise missile.
So what is the symbol for the Venezuela 3x ETF?
A bill that contains an expanded version of the existing credit will pass. The budget on this will be $40billion. That is chump change these days. Couple that with high octane credit from FHA however and you get a $500 billion bang for your buck. That is too good for D.C. to pass on.
The fat cats are pushing hard for this to happen. The new debt will all be bought by Bernanke, so who cares?
I was thinking the whole time reading this article about your piece on the tax credit. It is truly amazing that a little bit of common sense and some basic arithmetic can so thoroughlly explain these programs and the long-term futility of it all.
Hell of a thing isn't it Steak?
I never thought I'd live to see the day when the financial press and Wall Street were begging the US government for communism. The funny thing is that they are so pre-conditioned, so programmed that they don't even know that they are doing it.
Mission Accomplished.
Communism?
I keep reading that here. The government is become Communist, handing out social services to the working class.
WTF are you jarheads talking about?
Giving away money to banks is Communist... exactly how? Giving away money to corporations, or inflating the cost of fuel, or overlooking fraud in real estate. How is any of this part of a grand Communist takeover?
This is looting. The FED is run by bankers for bankers. They are printing money for themselves to use, to get rich trading equities and on the forex, to buy gold. Not a thin dime will make its way into the hands of anyone in the other 98 percentile of society. CfC was a give-away to the auto industry, hardly any of that will create jobs for real workers who can produce value.
Nothing the gov has done to date is Communistic, or even Socialistic. It is Capitalistic -- the movement of capital -- and as ever those who can stand in the flow of the dollar will reap it.
cougar
It's Fascism. We covered this lesson yesterday.
I might buy that one.
Mussolini was just ahead of his time.
cougar
It is looting, plain and simple.
The desire for unlimited wealth is a madness with the bankers.
uncle sham screwing tax-evaders once again! screw the credit; just write us a freakin' check!
wonder who will stil buy except fools. This is a sign of desperation.
Along the lines of this topic:
Note Peter Schiff's description of what the muppets at Fannie & Freddie are currently doing with loan origination et al...
<http://www.youtube.com/watch?v=m2UAlBUZtQ4&feature=player_embedded>
-JRBD
I expanded on this lunacy here
http://www.fundmymutualfund.com/2009/10/home-builders-surge-on-floating-...
p.s. yesterday we find out used car prices surge to all time high in September. I wonder why - duh! Taking 750K cars out of circulation did the trick.
True enough. But I don't think the idea was ever to increase used-car sales, or to increase the value of anything used. I would call that an epic fail.
Welcome to "garage sale America". We're one big thrift store now. Next you turn around, it will be chic to drive a clunker, and anyone in a new car will be viewed with suspicion as "one of those rich Johnnies".
cougar
Correct - that was not the point. It was an after affect. I mean, why should we care about the bottom third of the country who get hurt when used car prices jump and they have to pay more for their transportation? Worker ants don't matter.
The Housing Tax Credit: NAHB Projections and more
Calculated Risk 7 October 2009
From the [National Association of Home Builders] NAHB:
Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales ...
The NAHB has also been arguing to expand the tax credit from $8,000 to $15,000. But using $8,000 per home buyer - and estimating 5 million home sales over the next year - the total cost of the tax credit would be $40 billion.
According to the NAHB this would result in 383,000 additional home sales. Dividing $40 billion by 383 thousand gives $104,400 per additional home sold!
That is higher than my original estimate that an extension of the tax credit would cost about $100 thousand per additional home sold.
Note: If the NAHB meant $15,000 per home buyer, the cost would be $75 billion - or $157 thousand per additional home sold.
And this doesn't included the costs of the unintended consequences.
# The tax credit is simply motivating some renters to become homeowners (not reducing the overall number of excess housing units). This is pushing up the vacancy rent, pushing down rents and leading to more commercial real estate (CRE) defaults and foreclosures - and will lead to more losses for lenders. The additional defaults associated with lower rents will probably be higher than the cost of the tax credit. From the WSJ: Fed Frets About Commercial Real Estate
[Fed economist] Mr. Conway's presentation painted a bleak picture of the sliding real-estate values and enormous debt that will need to be refinanced in the next few years. Vacancy rates in the apartment, retail and warehouse sectors already have exceeded those seen during the real-estate collapse of the early 1990s, Mr. Conway noted. His report also predicted that commercial real-estate losses would reach roughly 45% next year. Valuing real estate has always been tricky for banks, and the problem is particularly acute now because sales activity is practically nonexistent.
...
More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.
# Motivating some renters to become homeowners has increased demand at the low end and pushed up house prices (more demand). However when the tax credit eventually ends (it will someday), the price-to-rent ratio will equalize, applying downward pressure on home prices.
# Many of the additional sales in 2009 were to buyers who used the tax credit as their downpayment. These were marginal buyers who haven't proven the ability to manage their finances and save for a down payment. The default rates will probably be higher for these buyers than for other buyers.
# The housing tax credit raises the risk of deflation. Falling rents will probably already push core CPI close to zero in 2010. An extension of the housing tax credit will probably push rents down further (as those 383,000 additional home buyers move from renting to owning), and that will probably mean core CPI will be negative in 2010. Not only will this impact any program adjusted by CPI (like Social Security), but this could lead to a deflationary mentality for consumers - with consumers holding off purchases waiting for lower prices.
Anyone analyzing the tax credit should call the economists at the BLS and ask about how falling rents will impact owners' equivalent rent and CPI. Then call the economists at the Federal Reserve and ask how CPI deflation will impact consumer behavior and monetary policy. Welcome to the Fed's nightmare.
[http://www.calculatedriskblog.com/2009/10/housing-tax-credit-nahb-projec...]
The $8,000 is of little or no concern
The 3% down is the problem.
If $8k is what it takes to get the buyer and seller to agree on the price, by having "us" essentially pay for the closing costs, that's one thing.
If the buyer then ends up defaulting on the loan because a 3% FHA equity stake proves too much to bear in the face of large hikes in taxes would impede their ability to live the lifestyle they have become accustomed to, then divorce is likely and the $8,000 loss will be the least of our problems.
I laugh and laugh when I see that the health care tax will start in 2011 but coverage for the great unwashed will not be effective until well after the 2012 presidential elections! In the meantime, the nursing professions (among others) are going to get mad props, much better than a lousy $8,000.
Odds of credit being extended has to be at least 80%, with a 60%+ chance of it being increased and/or expanded beyond first-time buyers...
"only by the time 2030 roles around it will be an $8,000,000 tax credit."
You are giving money too much credit to imply that it would still be in use in 21 years with the upcoming scorched earth changes campaign to be waged by the planet in retaliation to the resource depletion campaign by homo sapien not to mention the simultaneous entry into the Mayen space time predicted "Dark Rift" area of space that is made up of higher magnetic energy that will ripple through the earth's environment.
Only the Ferengei will still be using money at that time and the caloric intake regulator crowd will laugh them off this mortal coil.
The Powers that be can print money out of thin air but they cannot print us slaves another planet ala The hitchhiker's guide after the resource depletion campaign that is the worship of the Golden Calf, err, I mean Bull market has left us Armageddon out of here.
fUny1.blogspot.com
"In its own eyes, selfishness never errs but is always erred against.
In its own heart, selfishness is hurt but never the one that hurts.
In the fullness of its pride, selfishness is an empty vessel.
Selfishness anoints itself savior of itself at the expense of everything other than itself which is suicidal in a closed system."
very maurice blanchot of you.
cheers
Both auto and home sales now will tank, as enlightened consumers wait for the next federal subsidy, making it a self-fulfilling prophecy.
Both Cars for Clunkers 2.0 and Home Buyer Credit 2.0 are a done deal.
When the home buyer credit gets to $50k, I've got a deal with my neighbor: we will each buy the other's house, then lease it them back to one another, and pocket the 50 large.
Sweet...
lol
This country is severely messed up. I was pissed when FEMA would no longer supply hurricane ice. Why all the love for housing? Hurricane ice is more important than housing subsidies.
Did I mention that FHA is going to implode?
Just after the mid terms....
Get your terms straight. There is no such thing as,"American Capitalist Corporate Communism". FASCISM; THE NAME IS FASCISM. Communism was an honest attempt to reform finance radically, which failed. FASCISM on the other hand is a new name for an ancient evil. Americans are so brainwashed into associating capitalism-good & communism-bad that most cannot separate things out. Welfare for the rich is FASCISM; THE NAME IS FASCISM.