Just a Breather or a Change in Direction

People are wondering if today's pronounced global downturn in stocks was a sign of things to come or just a breather from a very, very fast run-up after March 9. Everyone is wondering and no one knows for sure. One thing for sure in my book, in time the fundamentals win out. I call it the two plus two principle. You can convince a lot of people for a while that the answer to this equation is 5 or 3, perhaps even 6 or 2, but in time, the fundamentals win out and you have reversion to 2, otherwise known as mean. Now the markets are never going to have it right. They are like a broken clock that is right twice a day. They hit the right number on the way up and then again on the way down but rarely are where they should be in relation to fundamentals. And now, the fundamentals are saying the market is too high, at least those I follow. Why, you might ask? Let's look at a few fundamentals that I believe cannot be ignored.

Foreclosure Tidal Wave on the Way!

I wrote a bit about Option Adjustable Rate Mortgages last week, but it mostly was in passing. I noted a lot of these that were written over the past few years are resetting and that spells foreclosure trouble. Indeed, many contend that this will make the subprime foreclosures look small fry.

Lest you not believe me, I highly recommend going to this post, which has a lot of nice data and charts showing it all in wonderful detail. Between underwater homeowners and Option ARMs resetting at a increasing pace, foreclosure activity is rising, not falling, and can be expected to go through the roof. This is not good for homeowners, banks or anyone else.

http://www.economicpopulist.org/content/coming-foreclosure-wave

For a similar discussion, I recommend Mike.

http://globaleconomicanalysis.blogspot.com/2009/08/brace-for-wave-of-foreclosures-dam-is.html

And here are some stats on how the delinquecy rates on residential and commercial mortgages soared in Q2.

http://www.calculatedriskblog.com/2009/08/fed-delinquency-rates-surged-in-q2-2009.html

Not good, not good at all.

Consumer, Consumer, Where Art Thou?

Record levels of consumer debt and low savings coupled with a destruction of trillions of dollars of household net worth does not spell economic recovery for a country 70% dependent on consumer spending for GDP. I would summarize more but this is an excellent post with some good charts so I recommend you read it in full.

http://www.nakedcapitalism.com/2009/08/weak-consumer-spending-will-last-for.html

Job Market Actually Not Improving

Some press lately on how job losses are slowing. That stat is a tad misleading. When you have six million less jobs to start with, you have a smaller pool to fire. Losses are in fact continuing and those who have lost jobs are having a very hard time finding new ones. And since job losses typically continue for many months even after a recession ends, this situation is not likely to be corrected any time soon. We need to get to where jobs are added, not lost, each month. As this linked post notes, the picture continues to be rather grim on the job front.

http://suddendebt.blogspot.com/2009/08/jailhouse-diet.html

Eerie Correlation

I noted yesterday that the correlation between a major market bounce during the Great Depression and the bounce since March bears a .8 correlation, which is quite significant. Last Friday and today that eerie correlation continues. Coincidence? Look at the four bears chart here and decide for yourself.

http://www.calculatedriskblog.com/2009/08/report-guaranty-bid-deadline-tomorrow.html

And as noted in the link, more financial institutions are in the FDIC's sights.

Disclosures: None