Monday, April 21, 2008

Mortgage Problems in Our Backyard

Top Line: The best way to describe it is to say that the market is struggling to go up. Days like Friday, when GOOG provided some good fodder for traders, make the move look effortless. On other days, the market just can't make much progress. Such is the nature of countertrend moves and we just have to be patient.

Tonight's comments include our outlook on Treasury bonds, gold, and the stock market. First up is the T-bond market. For the last several months T-bonds have been sought after as a flight to safety dominated trading. More recently the Fed has been trading these safe bonds for less desirable mortgage backed securities in order to encourage lending. Has this worked? We don't think it has and neither does the government which is trying to get more involved in the mortgage market, too. For now, our position is that T-bonds have put in a top which will lead to a bit higher rates there. The intent is that corporate bonds and mortgage securities will be more sought after, at least for a while. If we get a large enough selloff in T-bonds there may be an opportunity there later.

Next up is gold and other precious metals and mining stocks. We still consider this sector to be in the beginning of a larger correction for commodities in general. We look at gold as being the quintessential (we like this word) commodity which describes the entire commodity world in a nutshell. Yes, oil is higher every day and it doesn't seem to be following gold but these things don't always top together. We see a drop in gold and an ultimate drop in oil and gas.

Last, is our favorite, the stock market. With the stock market suffering the ill effects of the drop from October to March, the current countertrend rally looks weak. Stocks seem to struggle most days but overall we have seen a large price move when looking at the March lows until now. It just doesn't Feel like a very good move. Part of that comes from the up spike we had from the lows that didn't make it look like a lot when measured from the close. Plus, the Dow didn't confirm the NASDAQ March low. Our position is that we want to get ready for the end of this up countertrend rally. The clues will be when we don't hear any bearish comments meaning the fear will have disappeared. That's when we'll try to get short again.

Tuesday brings us news on existing home sales. While it doesn't matter what they are, the market perceives the that the worst is behind us. One of the two large newspapers in town, the Star Tribune, has a three part series on a county that had a lot of real estate speculation a couple of years ago that has now come to roost. Sunday's article described the overall situation and today's (Monday's) article was about how speculators bought properties, several who were not in a good position to buy, and Tuesday's article is about how the communities had built roads, water and sewer, and schools in response to the home building. [sarcasm coming] But, Greenspan had no hand in causing any problems. Yicks.

Sorry, we got distracted there with a bolt from Greenspan's past. If you do happen to go look at one of those articles, you should be able to see Tuesday's article, too. It isn't up tonight or we would include the link here. [Here is the third part in the series on Wright County.]

The article on Monday described a family who met a couple of men at Perkins, one of the local eating establisments, to discuss a real estate venture over a good steak. The men laid out the plans for this family to purchase a $300,000 home that would provide rental income and provide 8% return for what they thought was guaranteed for life or at least long enough to make a few bucks. To sweeten the deal, the men said that for every house they purchased they would give the family $5,000 so "How many would you like?" The deal is $24K of appreciation, rental income that would pay the mortgage, and $5,000 Per house. How could this possibly be a bad deal? "I'll take four." Four, you say, well in that case we'll have to apply for four mortgages at different mortgage brokers at the same time so they won't know we're trying to buy four houses. And all four mortgages were granted...Wow.

Ok, the mortgage problem is not ours but it is sort of in our backyard.

FSI: 88.59 (an up day even after Friday's 13%+ move)

No comments: