The recent rally brought the Volatility Index (VIX) down to a low of 11.6. It had been as high as 24 in June. It seems to me that there is a good shot that volatility will go higher in the fall, so I bought some calls on the VIX. Basically I couldn’t stand sitting through this rally without doing something, so I’ll probably regret this.

How many red flags of oncoming recession do we need before anyone pays attention?:

Well I should have had the courage of my convictions on the TLT calls. It was a profitable trade, but would have been much more so if I had held through the PPI and CPI reports. And it would have made me feel better while my puts were getting murdered the last three days. Let your profits run.

At some point, the market is going to figure out that these soft reports are due to a rapidly weakening US economy. Housing starts were weak, the Mortgage Bankers’ Association showed purchase mortgages falling again this week, although refis were up as desperate housewives lined up at the ATM, rushing for money before it runs out. The yield curve is solidly inverted and the prospects for recession are excellent.

U.S. home-builders’ confidence collapsed in August, falling to the lowest level since February 1991. The NAHB/Wells Fargo housing market index dropped by seven points to 32 in August, from 67 one year ago and a peak at 72 in June 2005. All three components of the home-builders’ index fell. Current sales index fell to 36 from 43, the expected sales index dropped to 40 from 46 and the traffic of potential buyers’ index fell to 21 from 27. It’s the fastest decline in the 21-year history of the index, which has had a fairly good record of predicting the number of new homes started.

“Two factors are coloring builders’ perceptions of the market right now — rising sales cancellations and substantial growth in inventories of both new and existing homes,” said David Seiders, chief economist for the home builders’ industry group. “These factors are largely the result of an increasing number of potential buyers adopting a ‘wait and see’ attitude because of uncertainty about where the housing market is headed. Speculators are fleeing the market”, he said.

Of course, this resulted in a jamming of the home-builders’ stocks. Presumably on the theory that things can’t get worse. Right.

The big rally and jam today, especially in the tech stocks, is probably the 58th. “Fed is done” rally, justified by the weak PPI this morning. However, it is clear that this is really one more straw in the wind showing that the economy is rolling over. Deflation is not bullish for the market.

Desperation is setting in, as Gary Watts, one of the leading real estate bulls issues his “Mid-Year Economic Outlook”, advising collusion between real estate agents to conceal the true state of the market. The behavior that he recommends is certainly unethical and may well be fraudulent:

B. Listing Agent Advice

1. Price Reductions: Please do not put a “price reduced” banner on your listings, and if you have one up, please take it down. It “falsely” advertises to the neighborhood that prices in the area are going down. What is more true is that sellers are lowering their expectations and becoming realistic.

   Plus: For we who show property, it does not instill confidence in our potential buyers.

2. Sold Signs: When the listing goes into escrow, please put an “in escrow” or “sold” banner on the sign! The days of a panicked buyer, desperately looking on their own for a home, are long gone. Once again, we are advertising to the neighborhood the wrong information.

   Plus: Imagine how potential buyers feel seeing all those for sale signs. Do you really think you’re helping them enter the market?

3. Signs: If you have a listing where there are other (or many) for sale signs nearby, I would recommend that you call the other agents and see how many of them will remove their signs from their listings. At the very worst, rotate your signs until one (or more) of the listings sell, then make sure it has a sold sign on it!