Recovery Discounted

With the S&P 500 up 40% off the lows, there's a huge recovery priced into the market.

Housing start numbers tell a different story. There's no sign of a bottom in housing. There's still a 10-month supply of housing (not counting foreclosures, which are the market in many areas of the country), sellers of foreclosed houses at Ventura County courthouse auctions are accepting about 20% below Zillow prices.

Since foreclosure sales are now the market in southern California, those prices, in my opinion, are more real than the published prices.

The credit card companies have tripled or quadrupled off the lows. Their actions tell a different story. Capital One is refusing to extend new credit to anyone who lives in Florida, even with an 800 FICO score. Amex is laying off another 4,000 people. Other credit card companies are refusing people accounts, "because they don't carry a balance." Of course not. With a 7-8% cost of funding for Amex, anyone who pays off their card is costing Amex 7-8%. Ouch!

And on top of this, we need to remember that the banks aren't fixed. By the Fed's own admission, the adverse scenario causes $599 billion in losses to the nations largest 19 banks. The WSJ calculates that smaller banks need another $200 billion, meaning that they are in even worse shape.

U.S. gasoline demand is now falling for the second year in a row. This tells me that the consumer is tapped out.

Government tax revenues are plunging much faster than forecast. This will put lots of pressure on Treasuries. The Fed now finds itself on the slippery slope of declining Treasury values. If the economy recovers, they're worthless because the yield is so low. If the economy doesn't, then tax revenues and overseas buying will reduce demand. The only thing that Treasuries have going for them is that if the equity markets drop again, that will give Treasuries a flight-to-safety boost. That's where I want to short them.