2010 Has the Look and Feel of 2007

• In March 2007, I saw that data from the FDIC was clearly starting to deteriorate. This was after the peak in home builders in July 2005, community banks in December 2006, and regional banks in February 2007. This weakness continues to surface quarter after quarter.
  
  
• In October 2007, all 11 sectors were overvalued according to ValuEngine. Today, all 11 sectors are overvalued.

The Housing Market remains weak -- After some improvement in the second half of 2009, home prices will decline again in the second half of 2010, as tax incentives sunset, and foreclosures rise on difficulty with mortgage mitigations from the numerous government-sponsored programs.

Bad Consumer and Real Estate Loans are still rising -- Subprime loans were viewed as isolated in 2007, but obviously the problems spread to the broader mortgage market and dragged down the economy. Defaults and foreclosures continue to rise in 2010 with four million possible by year’s end, up from 2.8 million in 2009. Many bad loans were pushed off balance sheet, and FASB rules now state that mark-to-market account has returned. The FDIC is allowing insured institutions until the end of 2012 to accomplish this. Our regulators are playing Kick the Can.

The “too big to fail” banks have gotten bigger and will likely get hit by the Wall Street “greed tax”, which is supported by regulators in Great Britain and in Euroland.

The smaller community and regional banks still have some suffering to do as they wind down exposures to C&D and CRE loans, with tougher guidelines looming around the corner.

In sum, housing and banking stocks have been outperforming so far in 2010, but this MOJO is for short-term traders only. Investors should be paring back positions on strength.

Housing Sector Index (HGX) is up 9.6% year to date, but down 61.7% since its July 2005 high. The short-term uptrend continues given weekly closes above my monthly pivot at $109.85. The upside is to the 200-week simple moving average at $144.64.


Source: Thomson / Reuters

The America’s Community Bankers’ Index (ABAQ) is up 16.4% year to date, but is down 45.3% from its December 2006 highs. The short-term uptrend continues given weekly closes above my monthly pivot at $156.80. The upside is to my annual resistance at $197.07 and to the 200-week simple moving average at $220.32.


Source: Thomson / Reuters

The Regional Bankers Index (BKX) is up 28.9% year to date, but is down 54.6% from its February 2007 highs. The short-term uptrend continues given weekly closes above my monthly pivot at $53.31. The upside is to my annual resistance at $73.12 and to the 200-week simple moving average at $76.30. My semiannual support is $40.76.


Source: Thomson / Reuters

All of the “smart” testimonies recently from CEOs, directors, Fed speakers, and others in the regulatory community are from those who didn't see “The Great Credit Crunch” in the making. The testimonies in Congress and various speeches have the theme that “The Great Credit Crunch” has been resolved. I disagree! I'm one of the few independent strategists who saw it coming, and warned about recession and the bear market for stocks well in advance.

Next week the ValuEngine monthly FDIC report will compare key asset categories on an annual basis since the end of 2001. There you can find out why “The Great Credit Crunch” will continue right through 2012 and into 2013, if not longer. It will be tough to unwind all of those bad loans and there are many unknown time bombs ticking in $213.6 trillion in unregulated notional amount of derivative contracts. The can is being kicked down the road, and there appears to be a cliff at the end of the road.