I fixed my hat.

Now I have something too weak for New Year's Eve.  As we have been expecting (and I know, even a broken clock…), there's mounting selling pressure on our indexes and we're certainly not going to get too excited about a minor pullback in a single day but it does make us feel better about getting a bit more bearish, even in the face of this run-up to 20,000.

The trading is very light-volume and meaningless and will only get more so into the holiday weekend.  US markets are closed on Monday, London closed Friday, Japan is Monday and Tuesday, etc – so not many people around to trade at all, which can lead to erratic (well, more than usual) trading all around.  

Oil Futures (/CL) have clawed back to where we liked them short yesterday ($54) with inventories coming in at 11 am this morning – this will be fun.  Obviously, our Silver (/SI) longs are off to a good start and our Trade of the Year idea for Silver Wheaton (SLW) is already off to the races (see yesterday's morning post).

Our best call of the day was a short play on the Nikkei (/NKD), which I've mentioned before and was our first-morning trade yesterday with a short at 19,500 when the Nikkei was still up at 19,400.  

At the close of the Webinar, we took a long position on the Russell Futures (/TF), playing for a bounce at $50 per point per contract from the 1,360 line (2 contracts). So that's where we are this morning, done with /NKD, back in /CL shorts and playing for a bounce off yesterday's 20-point drop in the Russell to 1,364 (weak) or 1,368 (strong), where it might be tempting to short it again if that fails.  

Something's gotta give as the market is priced to perfection for 2017 already.  As noted by Paul Brodsky: "US investors are anticipating a cyclical shift towards economic expansion via new tax incentives, business de-regulation and Keynesian government spending that promise to increase output, demand and asset prices."  In the chart below, you can see how Fed has completely disconnected the market from economic activity – it's only an afterthought when Central Banks are pouring roughly $3Tn annually into the economy to keep it from collapsing.  

This is not the chart of a truly healthy economy but, then again, we haven't had a truly healthy economy since the 90s, when the internet boom gave us productivity, jobs and real wealth creation – the kind created by providing products and services that enhanced other people's lives and increased corporate profitability, creating the proverbial growing pie. Since that time, we've basically been trying to fake it with bubble after bubble being blown (dot.com, housing, oil). Currently, we are in the death throes of a FREE MONEY bubble and, like the man says, when it pops – you're screwed!  

I used that image often in 2006 – 2008 to warn people that the housing market was going to collapse and I'm not worried about that happening again but I am concerned about a housing correction as rates rise. As we discussed in yesterday's Webinar, property taxes are out of control in many places and that makes mortgages more expensive, to begin with.  

If a couple is able to put $50,000 together to buy a $250,000 home, their $200,000 mortgage will be $1,300 a month at 6%. At 6% their mortgage jumps to $1,550 – up 19% on a 2% rise in rates. People don't buy a home, they buy a mortgage so let's say house prices have to come down 5% for every 0.5% the Fed raises rates. We're already seeing signs of this in the luxury market. In NYC, for example, Co-Ops priced over $4M have seen a 25% drop in sales and the time to sell has doubled – indicating a lot more pressure to drop prices waits in the wings. Already the average contract is closing 6% under the ask.

These are only early warning signs – we don't want to read too much into them. Still, when the market is at record highs, you kind of expect things to be getting better, not worse, in real estate.