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Monday, March 05, 2007

Tornado On The Street

See update at bottom.

Okay, that's a metaphorical tornado, but not so if you are involved. Asia and Europe took another step down last night and we are set to follow.

I am waiting for Fannie to file its financials with great interest. New Century looks to be dead. Over the weekend Fremont got out of the consumer subprime business. The significance of Fremont is that the depositories have been considered less vulnerable because of their ability to get money to lend from their own deposits. So much for that brilliant theory.... The FDIC shut that part of their operations down with a C&D.

Fannie and Freddie aren't buying subprime unqualified (ability to make payment after reset) paper any more, which should logically mean that no one else wants it either. If anyone else is still buying this, sell their stock. The significance of that is not that subprime is over, but that subprime will return to being written the way it used to be - with due consideration for the probability that the borrower can make payments over at least three years without having to sell or refinance.

Alt-A in bubble areas (higher scores, incredibly witless lending practices) is due to go the way of subprime - loans will still be made, but as reality returns they will be made based on qualifying the borrowers' real ability to repay the loan. These two changes will knock out a great deal of purchasing in the high-priced areas, which will push their housing values down very quickly compared to historical norms. Historically, what we would have expected would be that housing prices would drop a little at first in nominal terms, and then just gain nominally below the rate of inflation for five to seven years. Now that is an impossible outcome.

I warned you about the equities and I see no real bottom for months to come. I expect a steep, steep selloff and that the Dow will end the year near to 11,200 than to 12,200. I wouldn't mind being wrong on that at all.

This week we get pending home sales for January, which is now utterly useless for prediction purposes, ISM Services, which is very important, consumer credit which is important but ignored by the markets, and employment on Friday, which is important.

Update: ISM Services below consensus at 54.3. General picture, to me, is slowing. Backlog of orders dropped again and inventory sentiment is "too high". Interesting comment:
"Discretionary consumer business contracting overall, growing in highly differentiated and personalized offerings." (Accommodation & Food Services)
That's not very positive. Employment is still growing, but not as fast as January. With manufacturing slow-ish and housing contracting sharply, we would need to see real life in this sector.

What do you think of FHLB? (from a bond buyer's perspective)...do they seem to be well-insulated against all this, or not?
And I'm still getting "BUY NOW! BEFORE PRICES CAN GO UP! UP! UP! DON'T BE LEFT BEHIND!" real-estate flyers shoved under my front door almost every day.

(Though the first bank repos are starting to show up a couple blocks down the street.)

The Headless Unicorn Guy
This morning on HBB Ben had an interesting quote from a banker in Mass. to the effect that '2/3 of the foreclosures in Mass. in 3Q 06 were subprime'. Kinda follows that 1/3 weren't.
We ain't seen the bottom by a long shot.

ed in texas
David - they are not insulated and they have no government guarantee. Generally the state tax advantage gives them an edge. I think they are exposed to the general market but I don't expect much of a problem. However, they are callable.

FWIW, and I have no crystal ball, I believe that Asians will become nervous about their own economies and that T-bills will benefit.

I think today's valiant rear-guard action will fail to stop the slide ultimately. If you are an Asian looking for a safe haven, T-bills look pretty good around about now.
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