The following was CNN Money headline for its market wrap.I am and has been extremely wearly about the extremely stong turbulance beneath it all. Can a strong market simply mask all the woes underneath?
Today's FSO write-up, Frank Barbera has another wonderful piece: Oh, What a Tangled Web We Weave
Some of the issues mentioned were certainly worth highlighting once again:
- In our view, it is this disproportionate dependence on Construction and Real Estate activity that now threatens the broader economy as interest rates have increased dramatically in recent years. Within the Real Estate industry, it is the ultra-sensitive “Option ARMS,” and “Interest Only Loans,” “No Credit Check Loans,” and “Piggy Back” loans that have been a recent product of “Creative Finance,” i.e., The Great Credit Bubble, that are now starting to go sour. These loans, made to clients that in many cases did not have the necessary credit, are known as Sub-Prime Loans, wherein the delinquency rates are now climbing at an alarming pace. Just last week, HSBC Corp, one of the world's largest banks announced that it was raising its provision for bad loans 20% higher than the market was expecting due to “Foreclosures that have shown a higher severity" than expected at the banks Household Finance unit. In a conference call, Chief Executive Michael Geoghegan said, "The major impact was taking into account adjustable mortgage resets," and “The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in the more recent loans." Back in December HSBC noted that the main risk in the near term was in personal lending in the United States, where increases in short-term interest rates are hitting people with adjustable-rate mortgages with the bank also noting that its underlying revenue growth had slowed despite an improvement in third-quarter profit. The slowdown was largely attributable to a weaker performance in HSBC's investment banking arm.
And Mr.Barbera continues by mentioning the following issue.
- More bad news also came from Irvine (Calif.)-based lender New Century Financial (NEW). New Century, the second-largest subprime mortgage originator in the U.S., announced it would restate results for the first three quarters of 2006 to correct for “accounting errors” related to loan repurchase losses, sending the stock down 30% on Feb. 8. Even more recently, we have seen the following from Reuters just yesterday, suggesting that even non-sub prime delinquencies may be on the rise.
NEW YORK, Feb 12 (Reuters) - Countrywide Financial Corp. <CFC.N> and New Century Financial Corp. <NEW.N> led shares of U.S. mortgage lenders down for a third trading day as a new report suggested that even U.S. homeowners with good credit may be defaulting more often. The report by Moody's Investors Service about "prime" loans came amid mounting concern about "subprime" borrowers, who have weaker credit histories. Investors worry that as home price appreciation slows, people will have more difficulty refinancing adjustable-rate loans as rates reset higher. Shares of Countrywide, the largest U.S. mortgage lender, fell 3.4 percent, while New Century, the No. 2 subprime lender, dropped 5.5 percent. Also declining was Accredited Home Lenders Holding Co. <LEND.O>, a subprime lender whose shares declined 5.1 percent.
Most of the focus has been on subprime loans, and analysts said the risks of holding subprime-related debt are rising. Early this month, Friedman Billings Ramsey & Co. said the default rate on sub-prime loans that were packaged into bonds reached their highest level this decade. Last Wednesday, in a report titled "Inferno," Credit Suisse analysts said the 60-day delinquency rate for second-quarter loans that were six months old had doubled from a year earlier to 5.7 percent.
In my article entitled, “The Great Credit Bubble: What Could Go Wrong?” dated January 30th, I specifically highlighted Accredited Home Lenders, New Century Financial and Fremont General as these three stocks appeared to be in big technical trouble. On the next page, I show the chart of New Century “before” and “after,” with the decline actually unfolding faster than I expected. Ugly! – what more can you say?
And Mr.Barbera then highlights China and Mexico.
- In addition to the investment banks, change always tends to develop on the outer periphery, in the credit markets, at the lowest quality of debt, the most marginal borrower. Where the “sea of liquidity” is concerned, the Emerging Markets, ripe with high-beta, represent the equity front where nervous capital is most likely to begin an organized retreat. In the current instance, these markets are also of paramount concern, as the chart configurations also herald what could be a very major peak. Of course, no economy has been hotter in recent years than China, And in the final closing moments of 2006, we saw Chinese share prices move almost ‘straight up.’ Looking back, this kind of near vertical movement over an extended period of months (as was seen in the second half of 2006), strongly suggests a ‘blow-off’ top, an argument which gained more traction with the nearly 10% decline in the opening sessions of 2007.
- Above: the Chinese stock market over the last several years, traced out a potential blow off top amid rampant speculation in the final days of 2006. On the bottom chart, we see that Wave V equaled the net gain of Waves One thru Three, at the peak seen earlier this year.
- In addition to the highly volatile and unstable trading pattern seen in China, markets like Brazil and Mexico appear over-extended and toppy. In the case of Brazil’s Bovespa Index, we saw momentum register an important peak back on February 6th of 2006 with the Bovespa at 32,847.61. Since then, prices succumbed to 21.75% decline which bottomed last June, with the second half rally in global equity markets lifting the Bovespa to new all time highs in early December. However, even as the Bovespa attempted to breakout to new highs in December, MACD was making lower highs then had previously been seen at the February 2006 peak. Over the last few weeks, the Bovespa has pushed to new highs once again, this time with a momentum profile that is threatening to go negative. This kind of extreme bearish divergence is often a signal that prices are topping out.
- In the case of the Mexican IPC, the market has gained 69.32% SINCE LAST JUNE, annualized; that’s a rate of appreciation north of 138%. In addition, the Mexican Bolsa is also more than 25% above its 200 day average, another “red flag” indicating an overheated market likely to reverse lower. Finally, I also maintain an indicator known as the “Days Up per 50” which in the case of the Mexican Bolsa tells us that the market has now been up 38 of the last 50 days, and it has been holding that level for the better part of two weeks. How much risk does this represent? In my view, it strongly suggests that the capital markets are now living on borrowed time, and that the Emerging Markets are ready to begin rolling over in earnest in the days just ahead. For an over-leveraged financial speculator community including untold hedge funds, this chart should spell ‘trouble ahead’ for anyone who has been in the markets any length of time.
- Above: the Mexican IPC Index - sporting a potential fifth wave advance in its terminal stages with prices moving up at a near vertical rate of ascent. Anyone feeling really lucky?
- Above: the Percent above the 200 day average for the IPC Bolsa Index. When the indicator is above 25% the market has been seriously over-extended and in relative proximity to major shake outs. Below: we see the IPC Index and the “Days Up Per 50” indicator, telling us that again we have seen a one sided directional market moving straight up. Over the last 50 days, the Mexican Bolsa has been up 38 out of 50 days. Can you say “accident waiting to happen?” Nothing can maintain this rate of ascent indefinitely, leading us to wonder what lies on the other side of this parabolic curve?
How?
I am not calling for an immediate doomsday. At this very moment of time, Mr.Market simply wants to move higher and higher and markets simply do not collapse overnight.
However, this issue currently cannot be denied. I for one, would note for the serious turbulance underneath it all.
Acknowledge and do not discount this issue at all would be my advice.
Put it this way, if the markets were to collapse, are you ready?
