Not out of the woods yet (Part II of II)

Continued from part I. At the time of writing the S&P is now up 33% from its March 9th lows and essentially even year to date, up 0.56%.

Housing

We are nowhere near the end of housing foreclosures. Mortgage rate resets, which are tied closely to foreclosure rates, are set up to spike mid-way through 2010 and peak in July 2011 at a higher point than we saw in 2008. Notice from the chart how we are currently in a valley or in the ‘eye of the storm’ as some people have said in term of rate resets. Not much is being done to address this problem of coming foreclosures. Residential real estate should continue to be a drag on bank earnings. See chart below.

Mortgage Resets

Trading Volume

While I am no expert in technical analysis trading volume seems to point toward this not being the start of a bull market. William Hester, at Hussman Funds, shows that historically trading volume during the first five weeks of a new bull   is significantly higher than the preceding 5 weeks. Trading volume during the current 5 week rally is actually down about 10% from the preceding 5 week level. See charts here.

Advertisements

2 responses to “Not out of the woods yet (Part II of II)

  1. Ben Weintraub May 19, 2009 at 8:24 pm

    Good article.

    Why the huge drop predicted in 2012? Does it have to do with the lack of ARMs written over the last year or so?

    From your analysis, are you predicting the financial situation will be as bad or worse than 2007 through now?

    • seekingdelta May 19, 2009 at 8:55 pm

      Thanks.

      You are correct. Due to more stringent underwriting guidelines significantly less ARM were being originated post-2008.

      It’s hard to imagine things will get much worse but I don’t see the economy rapidly bouncing back; a V-shaped recovery that some think is right around the corner. Another round of housing foreclosures should be a continued drag on financial sector earnings; this chart doesn’t even capture any commercial real estate or personal credit (auto / credit card loans) that will be moving to default. Furthermore, some are saying the recovery will be led by the consumer. With 5.7 million U.S. jobs lost since the start (December 2007) of the recession this is hard to imagine. Solely looking at the above chart it seems that we are in “the eye of the storm” and not that the storm has completely passed. I see a prolonged recovery and not one that will happen overnight.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: