Yep, All is Fine And Well

Well, the market ended the week quite well. I am on vacation and have not had time to read enough about it to comment too much on the uptick at week's end. From what I did see the bogus EU bank stress tests came out and, as expected, looked pretty good; indeed, probably a bit too good. Obviously, leaving out sovereign debt rigged the tests from the start. All those sovereigns having ratings down-grades this year have most of their existing debt with these banks. Excluding it is a bit of a joke. Moreover, the minute weeks ago that the governments in the EU started talking about releasing the results, we all knew they had to look good on paper. They sure would not release them - or talk about doing so - otherwise. Nonetheless, at least Bloomberg is listing the wonderful EU bank results as a possible reason - at least one of them - why the markets were up today.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=a_AK4xI5SjK4&pos=1

Bloomberg also cites the possible takeover of Genzyme by Sanofi-Aventis SA as a possible reason for a bounce. Rumors have, however, been somewhat rampant for a couple of weeks on Sanofi-Aventis in the market to buy a U.S. company. I guess more firmness to the rumor might lead to some upbeat feelings but I am not sure I would attribute the market climb in any significant respect to this one bit of news. Still, the media needs an excuse to explain our daily, or weekly, bouncing around, and sometimes they seem to be reaching just a bit. What they tend to ignore, on the other hand, is fundamentals. And one of the key fundamentals at the moment continues to be . . .

Housing

I have posted a good bit on housing and will not repeat all of that now. A point I have not mentioned is the proposed tightening of lending standards by the FHA. Lest you have been asleep for two years, the lender of last and only resort for residential mortgages in this country has been the government (roughly translated into us taxpayers). This includes Fannie, Freddie and FHA, who collectively have been ending up with virtually all of the loans being issued. The FHA has been particularly problematic in its lending standards, allowing folks with very low FICO scores, next to no money down, seller-funded down payments and the like. This unfortunately has been supported with the full faith and credit of our government. Home ownership is the "American dream" so we apparently have to support it. And despite the problems this clearly creates, the government seems hell-bent on still getting people to buy homes they cannot afford.

Yet, let's face it, owning a home you cannot afford is not a dream; it is a nightmare. Sure, if property prices are increasing 10-20% a year and you can sell the house for a nice gain once the heat gets too high, it is not a bad deal. Still, this is not the American dream of home ownership - it is gambling. And it is gambling with taxpayer money. Thus, it is good to see that lending standards are likely (eventually) to improve at the FHA.

http://seekingalpha.com/article/216059-federal-housing-administration-we-are-officially-broke?source=dashboard_macro-view

Another impact of this tightening, if it happens, is that one of the few sources of lending to folks with low credit scores is gone. As I note above, overall that is a good thing, but in terms of home sales, it is not helping things. Whether you like it or not, housing is going to take a while to revert to mean and ending loans to folks who cannot afford them is a good step in getting us there more quickly, though there will be short-to-medium term pain.

Don't get me wrong - I am all in favor of people having a home if they can afford one. But I am also all in favor of renting if you cannot afford to buy. I have spent a lot more years of my adult life renting than owning. There is absolutely nothing wrong with renting and it has many advantages; just ask someone who just lost 25-50% of their home value in the past few years. What the government needs to do is simply let common sense rule. Do not lend to folks who cannot afford what they are buying. It seems the FHA is finally understanding this is what needs to be done and that it is for the ultimate good. And I know this may be hard to buy, but ultimately it is better for the construction industry too. The industry built up furiously in what can best be described as a feeding frenzy in various markets - also known as a bubble. Bubble's can be fun while they last but my take is that we are better off without them. The sooner the industry and everyone else involved get used to a normalized level of sales, the better.

That's all I have today as I am on vacation. Okay, I lied as I do have one more little tidbit - seven more banks bit the dust today, bringing us to 103 this year. Chew on that . . .

Disclosures: None.