Posts Tagged ‘foreclosure’

All is OK when it comes to the stock market. Wall Street is urging you to jump in with both feet and get fully invested. The market is going to the moon. Foreclosure mess? Not a problem says the street. Unemployment? We are already use to it and not a problem. Just name the problem and you get the same answer. I guess to be fair the same could be said for anyone holding the same position as I. At some point, however, the risk tips the scale.

I would look at jumping into this market as the opportunity to run down the prosperity with your neighbor who has been making big bucks in the market. Just have one question when it comes to running after your neighbor. What if you are running down a road that eventually leads to a steep drop-off?

OK, candidly, I have not been right on this current advance at all. However, something could be occurring right now that is characteristic of how most big advances end. In the world of managed money and technical analysis it is called a “blow-off” top.

A “blow-off top” is defined as a rapid increase in price of the stock market that precedes a steep drop in price. It doesn’t always have to precede a change in direction. However, in many cases it does.

Playing blackjack, poker, etc., offers a great example of what this looks like. You get a hot-hand at the blackjack or poker table and feel like you are invincible. You are winning hand after hand. Then you start to lose a hand or two and then the trend reverses. After you know it, you have given back all that you won. The house always wins.

I think that the same applies to the market in this type of environment. Without a Plan B, (what you use when Plan A doesn’t work) most investors make money and then give it back.

Let’s look back to 2007 as a good example. Starting on 8/15/07, the market started a real nice bullish market rally (it went up). This ended October 9th, which marked a top in the stock market that, I believe, will be the highest level this stock market will see for many years to come. It went up 11% in 55 days.

Fast forward to today (as of the day this was written) – On 08/31/10, the market started a real nice bullish market rally. Thus far, it has been 53 days and the market has gone up 13%. This is not unusual by any means to see the market have such a big rally that should precede a pretty substantial market drop.

What do I mean by substantial market drop? I would say that a minimum from where we sit today would be a 26% to a 40% decline in value. Although that doesn’t even seem possible at this juncture there is plenty of evidence that would suggest that it is more than possible.

At the risk of sounding like a broken record, watch your risk levels.

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So do you think that we are still in a recession? According to the agency that dates the starting and ending of recessions, it has been over for a long time. The National Bureau of Economic Research stated today that the recession that began in December 2007 actually ended June 2009. It has been referred to as the Great Recession because it is the longest recession (18 months) since the Great Depression (43 months).

So great! The NBER states we are out of the woods. Let me ask you a question – Is the recession over in your world? Do you feel better off than you did over a year ago? Keep this in mind when it comes to economic numbers – numbers can be manipulated and interpreted in many different ways. It is very easy to misrepresent with numbers – just remember what the government does with the unemployment report each month as a case in point.

Statistically you could say we are not in a recession. However, ask the people who have been laid off, facing or faced foreclosure, dealing with over-indebtedness, etc. if the recession is over in their lives. Statistics say one thing and reality says another. At the end of the day, I don’t think that the Great Recession of 2007 is going to get the press it deserves.

However, these favorable statistics do make for good political sound bites.

    State of the Stock Market

I would state that this is an important week for the stock market. The market has bounced back nicely in September and is at a 4 month high. Further, it has also risen past some key levels. However, it also has done so on very light volume which is not the sign of a healthy market. If the market starts a significant decline from these levels, I would not automatically assume it is just a pullback. I would take it seriously.

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If I were a banker, I would dread Friday’s.  It is the day of the week that the federal regulators walk in and shut banks down.  This past Friday there were 4 more banks in Texas, California, Illinois, and Florida bringing the total bank closures for 2010 up to 20.  This is on the heals of 140 being closed in 2009, 25 in 2008, and 3 in 2007.

The troubling part of this whole process is that last year banks were able to push the problems aside as the Government allowed them in short to hide these bad loans on their books through an accounting adjustment.  In other words, all of those toxic bank killing loans are on the books and have not been dealt with. 

It gets better.  The FDIC gets to pick up the tab each week through the FDIC insurance fund.  Currently, the fund has $21 billion left.  They estimate $100 billion of losses will have to be covered over the next 3 years.  Oh, don’t worry – they have a credit line that can be tapped up to $500 billion dollars through the Treasury. 

Don’t forget, a massive foreclosure problem still lingers as we start a huge wave of adjustable rate mortgages re-setting over the next 3 years.  In 2009, we were in the calm of the storm as the first wave of adjustable rate mortgages which were sub-prime based were finishing up with their adjustments.  This next wave which represents Alt-A and Prime mortgages is much bigger.  In addition, the fun is just getting started in the commercial space where corporations are having to refinance debt on commercial properties and are having no luck because no one is lending money. 

John Mauldin writes this week in his www.frontlinethoughts.com newsletter “Bank loans are being written off at staggering rates. Over 700 banks (I think that is the figure I saw) are officially on watch by the FDIC, with more banks being closed each week.  There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off.”

He goes on to write that in January, “Foreclosures rang up at 4300 and Notice-of-Defaults at 5100 per day nationally.”

Think through with me what this could look like.  This last Friday’s 4 bank closures cost the FDIC approximately $1 billion.  That’s an average of $250 million per bank.  If we continue at this pace, we could be looking at 100 more bank closures this year.  That could be as much as $25 billion.  That would deplete all of the FDIC money and force the FDIC to borrow from the Treasury before year end. 

This can’t have a happy ending. 

This week the Sovereign Debt Problem will be front and center as Greece attempts to borrow money through a bond offering.  As I wrote last week, this could be a real problem in the event that Greece defaults.  Also this week we have the unemployment numbers that will be released.  It is a critical number each month.  Watch the risk!

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“Worst of the housing recession is now behind us” declares one economist.  New home sales rose last month at the fastest clip in more than 8 years.  There is a good reason why home sales are increasing but there is another reason not to get too giddy over this economic data. 

First, prices are falling to the levels where people are motivated to buy and sellers are motivated to dump properties.  Second, the Government has made a sweet deal with the federal tax credits good until the end of this year.  There is a huge fly in the ointment.  Prices are continuing to fall. In addition, there is a tremendous number of homes for sale or supply on the market.  This supply will keep prices low.  People are only looking for bargains. Plus, banks have thousands of homes on their books that they have yet to send to auction. 

In order to say we have bottomed, there is one area that has to get better.  The foreclosure crisis has to start to bottom out.  Here was the latest from Realtytrac who keeps up with the foreclosure crisis.

“RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its Q2 2008 U.S. Foreclosure Market Report™, which shows foreclosure filings were reported on 739,714 U.S. properties during the second quarter, a nearly 14 percent increase from the previous quarter and a 121 percent increase from the second quarter of 2007. The report also shows that one in every 171 U.S. households received a foreclosure filing during the quarter.”

Let’s backtrack for a second and look at what created these foreclosures.  It all comes down to the adjustable rate mortgage.  Starting in 2007, adjustable rate mortgages starting coming due for 100,000’s of subprime homeowners, causing the beginning of the foreclosure crisis.  Those peaked in the first quarter of 2008.  Through 2008 and into 2009, those adjustable rate mortgages subsided. 

However, now all of the other types of adjustable rate mortgages will start coming due and this cycle will not peak until 2012.  It is a much bigger cycle.  To assume that the housing market has bottomed would be to assume that there will not be a problem with all of these ARM’s that will reset over the next 2 to 3 years.  It is a big assumption. 

This is pretty typical.  The minute the data starts to be positive, economists declare the worst is behind us.  I would describe right now as a period that is in between 2 crises.  Unfortunately, I think that the second wave of crisis might be worse than the first.  Round two involves more housing foreclosure and the upcoming crisis in commercial properties.

Follow up from Last Week

I wrote about the similarity between the first major stock market rebound in 1929 and today.  If you have not read last week’s post, go back and read it so this makes sense.  We are now tracking almost identically in time (146 days) and gain (46% rise).  It will be interesting to see what happens from here.

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My boys have a book called the Bear Snores On.  It is a story about a bear that sleeps through a party that his animal friends had in the bear’s cave while he was sleeping.  The bear continued to sleep despite all of the noise going on around him.

Each page of the story would tell the activities of the party occurring while the bear slept.  The page would then end with “the bear snores on.”  Then all of the sudden the mouse sneezes and the bear wakes up.  Obviously, the bear wasn’t too happy. 

The last few weeks have reminded me of that story.  As the stock market continues to go up, the bear market seems as if it is going to continue to stay asleep in the cave.  The data that has come out lately has been anything but encouraging when it comes to a sustainable recovering economy and stock market.

Before I go further, most people would argue that the news is always worse when we are the bottom.  I don’t disagree.  The problem is that I don’t think that we are at the bottom.

The latest foreclosure information shows home foreclosures are still occurring at a rapid pace.  According to data, a record 12 percent of homeowners with a mortgage were behind on their payments in the first quarter.  A concern that I discussed weeks ago was the type of borrowers that were going into foreclosure.  Borrowers with good credit make up a larger percentage of these foreclosures…and the bear snores on.

Last week we also saw something very concerning occur.  In order to get out of this mess, one key ingredient will be lower interest rates.  Rising interest rates in an economy mixed with debt is not a good sign.  Rising interest rates would also indicate that the Federal Reserve manipulations with the credit markets are not working.  This would leave the economy very vulnerable. 

So, how do you know that this is occurring?  You watch the government bond markets.  The consumer interest rates fluctuate based on what is happening in the government bond markets.  Probably the best interest rate is the 10 year government bond rate.  As interest rates go up, bond prices go down.  In order for the Government to borrow enough money to get out of this mess, we need lower interest rates.

However, the opposite is occurring.  Foreign countries are stating that interest rates must be higher.  They want to higher interest rates on their money that is being loaned to the US Government.  Thus, you are seeing a rise in interest rates.  We saw this occur last week when interest rates really spiked upwards in one day’s time.  Following that one day, interest rates began to fall again.  However, this morning we are seeing a repeat of last week and watching as the stock market continues to go up at the same time.

And the bear snores on…

I suspect that we are looking at a situation where this bear market is not going to be asleep much longer.  My indicators are still showing that tremendous risk is being ignored.  This was no different than in October 2007 when the market was hitting new highs.

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Today offers us a good example of what happens when the illusion of confidence is broken.  Let’s start with the headlines this morning:

Stocks Sink as Retail Sales Slide

You mean to tell me that people aren’t buying things?  I am shocked!!  I thought that everything was recovering and OK.  

Then there was this headline –  U.S. Foreclosure Filings Hit Record for Second Straight Month

You mean that President Obama’s programs aren’t fixing the foreclosure problem?

Of course, as I write the stock market has a decline of -1.78% for the early morning.  Investors act surprised because of the creation of false hope that is propagated by Wall Street, the media, and the politicians.  This is also why I believe that we will continue to see this bear market for a longer timeframe than most expect.  This is a game of confidence.  The establishment wants everyone to think that there is no risk and we are on our way to recovery.  Call me skeptical – I just cannot imagine that a country that is still stuck in a financial crisis is all of the sudden recovering from problems that were created over decades. 

The real danger occurs when the establishment cannot even build false hope anymore. 

As far as price levels go, watch the S&P 500 today if we decline down to 875.  That will be a key price level for the stock market to stay above if there are any hopes of this current bear market rally staying alive.

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The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable. 





I have been writing over the past few days about what Wall Street is not really paying attention to right now.  I made the same argument back in late 2006 and early 2007 that there was a category 5 financial storm brewing and Wall Street is ignoring the risk.  Well, there is still yet another category 5 storm brewing. 

The storm consists of many components.  Yesterday, I wrote about unemployment.  Today, the root of the whole financial crisis could potentially be raising its ugly head again.  Now, I want to keep this very general so that you can see the risk. This is a discussion that can even get over my head at times. 

Let’s start at the beginning, where all of this started.  The mortgage industry became greedy and gave mortgages to millions of people who could not really afford them.  Upfront, these mortgages seemed affordable.  However, something very horrible happened and the interest rate and the payments changed.  The mortgage “re-set.” It changed in such a way that people could not afford to keep their homes.  They couldn’t refinance and the home went into foreclosure.

The foreclosure crisis is causing all of the problems.  So, in order to get past the credit crisis, we need to get past the foreclosure problem.  Well, unfortunately, between the second half of 2007 and 2008, hundreds of billions of dollars worth of these mortgages were re-set, causing countless numbers of people to lose their homes.  Then we had a slowdown in the number of re-sets. At this time, the re-sets are starting back up again.  Take a look at this chart:


You can see all of the green at the beginning of the chart.  That is the escalating number of mortgages that re-set.  Then you can see it died down again.  Well, different types of mortgages are facing re-sets.  Unfortunately, it appears to be a larger problem.  Look at how high that graph spikes!

The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable.

I don’t think we are out of the woods yet.  The determining factor is the foreclosure situation and it appears that we still have a ways to go. The good news is that we might get a fairly long period of time where things start to look better.  For those mortgages that go into foreclosure, it will take 6 months or so to work themselves into the system.

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