Wednesday, December 19, 2007

Volatility Remains, Stocks Struggle

[Editor's note: The Update is going to be taking a break over the next few days and will publish only on the days that give us a reason to write. The market is in a place that does allow for that possibility so if you see a day that has a dramatic move please come here to view the Update. The Update will return on January 1st for your reading pleasure on January 2nd. We'll see you on the other side.]

Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.

In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.

On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...

Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...

With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.

Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.

The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.

We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.

FSI: 102.16


Anonymous said...

Why should the government bail out all those who had it really good for awhile, paying zero percent financing, at the expense of those who have been paying 6%. Those people were paying rent with the upside of selling it at huge gains. Unluckily it didn't happen, so why should they get a break now?

Glenn said...

We may have led our readers to believe that subprime was at a very low rate, near zero. That was not our intention. There are those who got into Prime ARM's that were paying low rates like 1% but most subprime was paid at much higher rates.

For subprime, the arm rates were/are more like 6% to 10%. Then the rate would go up in 2 or 3 maybe more years. The reset rate would possibly be 5% higher than the initial rate. There are many reasons why subprime loans were used. Some of them were for speculators/investors who didn't want to document their loans. They just called their mortgage broker and said "I'll pay whatever the going rate is" because of the "guaranteed" return on the house that was going to be flipped in less than 2 years anyway.

But, your point is still appropriate. We don't believe the contract should be shredded because the poor homeowner didn't think about what the possibilities were.

We do want to point out that the government is not bailing out the homeowners. The government is encouraging the mortgage servicers to allow for adjustments to be made in the agreements. The entity that invested in the mortgage security is the one that has to "write down" the value of their mortgage holdings because of the possibility of lower payments being made. The government is trying to convince these investors that it is better to get a reduced amount of payments rather than a default which would cost much more.

The other point the government is trying to make is that homeowners should stay in their houses. They are worried about the consequences of people leaving their houses because of the pressure it would put on the values of houses generally. There is a small pool of buyers now anyway and they don't want the supply of homes to increase when the demand is dropping so quickly. The economy will suffer, and they know it.

This measure is not going to work because these people can not afford their homes. We are trying to imagine a scenario that allows the world to go merrily along without paying any consequences for the credit abuses. We can't.

Thanks for the comment.


How about that, no post but a nice comment for Thursday. Have a great holiday.