The New Housing Bubble Just Began

You’re going to be angry after reading this Letter.

Today, I am going to reveal what no other media outlet has, so please read this Letter in its entirety.

A couple of weeks ago, I explained why I believed the stock market rally could end this year and why I believed gold could climb higher.

But last week, the rally didn’t end and gold didn’t climb.

Instead, the stock market moved higher, while gold was smashed back down to the low $1200’s.

So was I wrong?

I don’t think so. In fact, I believe we’re being set up.

Let me tell you why.

Stock Outflows Continue

Two weeks ago, I told you that “stock funds in the United States posted outflows in 15 of 19 weeks and investors are pulling money from global equity funds at their fastest pace since 2011.”

Today, they’re still pulling out.

According to Financial Times:

“…Equity funds suffered their seventh consecutive week of outflows, shedding another $9.2bn for the week ending May 25, taking their total outflows for the year above $100bn, according to data from EPFR.”

It isn’t just the “smart money” selling, retail investors are too.

Via Bank of America:

“Equities continued to experience outflows and lost $3.32bn (-0.1%) last week, their 4th consecutive decline. Year-to-date, equity funds have lost $58.6bn (-0.6%), the largest ever dollar outflow in any 22 week period for the asset class.”

And as I mentioned before in “The Fed’s True Plan,” this shift from stocks is going exactly where it was planned to go: debt.

Via FT:

“Money market funds that invest in government assets also saw big inflows, receiving almost $18bn of new money, according to data from the Investment Company Institute.”

So if investors and the “smart money” are exiting stocks and buying debt instead, how are stocks climbing higher? More importantly, who is buying?

The Corporate Buybacks

When it comes to companies returning capital to their shareholders, the two general methods have been via stock buybacks and dividends.

Dividends show investors that income is healthy, while stock buybacks shrink the total shares outstanding, making the glorified earnings per share look better.

Via How the Fed Influences the Stock Market:

“…When a company issues a share buyback, the amount of outstanding shares in a company decreases. This leads to a higher Earnings Per Share (EPS), which makes the stock look much more attractive. This, of course, leads to higher share prices.”

I have already told you that over the past years, corporate share buybacks have been tremendous.

In fact, over the last five years, the biggest buyer of stocks – by a wide margin – have been corporations themselves, buying trillions of dollars of their own stock.

According to Fact Set:

“The dollar amount spent on share buybacks for the trailing twelve months ending in Q4 (2015) totaled US$568.9 billion.”

If you combine dividends and stock buybacks, corporations paid out nearly $1 trillion last year.

And according to Moody’s, US non-financial companies held a whopping $1.68 trillion in cash at the end of 2015.

That means much of the profits over the last years haven’t gone to investing in infrastructure, growth, or hiring new employees. In fact, much of these profits haven’t even been taxed – meaning they’re not entering the economy.

Via WSJ:

“There’s a funny thing about the estimated $1.7 trillion that American companies say they have indefinitely invested overseas: A lot of it is actually sitting right here at home.

Some companies, including Internet giant Google Inc., software maker Microsoft Corp. and data-storage specialist EMC Corp., keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies’ cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn’t flow back to the U.S. parent company, the U.S. doesn’t tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

In accounting terms, the location of the funds may be just a technicality. But for people on both sides of the contentious debate over corporate-tax reform, the situation highlights what they see as the absurdity of rules that encourage companies to engage in semantic games, legal gymnastics and inefficient corporate-financing methods to shield profits from U.S. taxes.”

With this much cash, there’s still plenty of room for more stock buybacks in the coming years.

But while everyone is piling in on the share buyback euphoria, keep this in mind:

Buybacks hit a record $762 billion in 2007.

The next year, the market crashed.

Had it not been for the continued decline in earnings, share buybacks could have been much higher last year.

Via WSJ:

“…planned future buybacks are the highest for any year’s first 10 months, more even than in 2007.

“If companies execute their plans, we are looking at a record amount being deployed over the next couple of years,” said Birinyi analyst Robert Leiphart.”

There are little signs that earnings will improve much this year. Perhaps the best evidence of that is the slowdown in corporate buybacks.

Via Bloomberg:

“After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes.

Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show.”

So if the largest buyer of stocks over the last five years is slowing down their purchases, and both retail and smart money investors are pulling out, who will come to save the day?

More importantly, who is buying stock and how is the market higher?

I can tell you that the market was manipulated higher, but just saying that would be conjecture.

But here’s what I can tell you: the primary reason for the market’s ascension last week was the result of a supposedly new housing boom taking place.

Housing Bubble 2.0

New homes in the U.S. surged in April to the highest level since the start of 2008 – it was the biggest jump in sales in nearly a quarter century.

Via Bloomberg:

“Purchases of new homes in the U.S. surged in April to the highest level since the start of 2008, pointing to a robust spring selling season for builders, Commerce Department figures showed Tuesday.

Key Points

• Rose 16.6 percent to 619,000 annualized rate (forecast was 523,000)
• Monthly increase was biggest since 1992, while pace was strongest since January 2008
• Median selling price jumped 9.7 percent to a record $321,100
• Number of homes sold but not yet under construction climbed to 209,000, the highest since May 2007.”

This report was more than enough to give the S&P 500 its biggest weekly gain in 2 months.

But where the heck did this surge in home sales come from?

Well, according to the Bloomberg article, it’s because things are getting better:

“The rebound in purchases of new properties, combined with stronger demand for previously owned homes, signals housing is being energized by healthy employment gains and cheap borrowing costs.”

But wait a second, we know that employment and wage growth isn’t really getting better.

This is evidenced by the mass layoffs across all sectors.

Via Challenger Gray:

“The pace of downsizing increased in April, as US-based employers announced workforce reductions totaling 65,141 during the month, according to the latest report released Thursday from global outplacement consultancy Challenger, Gray & Christmas, Inc.

The April figure represents a 35 percent increase over March, when employers announced 48,207 planned layoffs. Last month’s job cuts were 5.8 percent higher than the 61,582 recorded in April 2015.

Employers have announced a total of 250,061 planned job cuts through the first four months of 2016. That is up 24 percent from the 201,796 job cuts tracked during the same period a year ago.

It is the highest January-April total since 2009, when the opening four months of the year saw 695,100 job cuts.”

And when it comes to wage growth, that too may be distorted.

Via Bloomberg:

“The true strength of the American labor market may be disguised.

… Policy makers have identified wages as one of the most disappointing features in a labor-market recovery that has seen the biggest back-to-back annual payroll gains in 16 years, the jobless rate cut in half and a recent surge in the labor force. The data are being distorted by the retirement of highly paid baby boomers just as lower-wage workers re-enter the workforce after being sidelined during the last recession, according to Fed analysts.

… In a recent research paper with Bart Hobijn, an economics professor at Arizona State University, and Benjamin Pyle, a research associate at the San Francisco Fed, she argued that the disproportionate firing of low-wage workers during the 2008-2009 recession propped up aggregate wage measures at the time. Bringing those workers back into the labor force is now a drag on pay growth. It’s amplified by the retirement of those born during the baby boom between 1946 and 1964, who make up more than 20 percent of the American population.”

If interest rates are already low and expected to rise, how is it possible that home sales are so strong? What exactly is fueling this boom?

Let me tell you. You won’t be pleased…