Housing and Banking Signaling Double Dip

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.


Record-Breaking Delinquencies and Foreclosures

The Federal Reserve was worried about the fragile recovery in the housing market with the homebuyer tax credits expiring April 30. We saw mortgage applications drop 27.1% for purchases last week, which is a clear sign of this dilemma.

More than 10% of homeowners have missed at least one mortgage payment in the first quarter of 2010, which is a record high and up from 9.1% from a year earlier. Of these, about 8% of all homeowners with a mortgage, estimated to be 4.3 million homes, have missed at least three months of mortgage payments or are in foreclosure.

Mortgage modifications have put many homeowners in “mortgage limbo” waiting for help -- and then they don't get any. And since they don't make monthly payments while they negotiate, when trail modifications aren't offered, the homes go into foreclosure or the short-sale status. This is why I forecast another wave down for home prices in the second half of 2010.

What prompted my prediction in March 2007 that we would be in recession in 2008/2009 with a bear market for stocks being confirmed for stocks by the end of 2007? Weak housing and problems in the banking system! Back then I stated that you cannot have a bull market in stocks with a bear market in financials. Housing stocks had peaked in July 2005, community banks peaked at the end of 2006, and regional banks peaked in February 2007. The broader market didn't peak until October 2007, as that’s when the contagion finally hit home.

This year the pattern is slightly different, as all markets peaked around the same time. The Regional Banking Index (BKX) peaked first on April 21 given the uncertainty of financial regulations. The ABA NASDAQ Community Bank Index (ABAQ) and the Housing Sector Index (HGX) peaked with the broader markets on April 26. The major averages fell into the red year to date, but housing and financials remain in the green.

The US ban on short-selling of bank stocks was a total ban set in the week of September 20, 2008. This graph is the ABAQ. Our ban was on all shorting, not just naked short selling. Note that one week spike higher as shorts were forced to cover. I favor a ban on naked shorting of all stocks, and the elimination of CDOs and credit default swaps --those that Warren Buffet called “financial weapons of mass destruction."



Headlines From the FDIC Quarterly Banking Profile for First Quarter 2010:
 

• The FDIC tried to put a positive spin on the report, citing improved net income of $18 billion.
  
  
• The FDIC cited that loss provisions declined but remained above $50 billion.
  
  
• They said that asset quality deterioration continues to moderate.

My Headlines Cut Out the Cheerleading:
 

• The number of problem banks rose to 775 from 702 with problem assets within these banks up to $431.2 billion from $407.8 billion.
  
  
• The Deposit Insurance Fund (DIF) remains in arrears by $20.7 billion despite the pre-funded bank assessments. Including $15.333 billion assessments for 2010, I show the DIF currently in arrears by $28.5 billion.
  
  
• There were 41 bank failures in the first quarter versus 21 in the first quarter of 2009. There are already another 31 bank failures in the first half or the second quarter.
  
  
  
• One to four Family Residential Mortgages -- declined $28.9 billion in the first quarter or 1.5% sequentially versus 0.6% in the fourth quarter of 2009. The losses accelerated to 7.7% from 6.3% year over year.
  
  
• Construction & Development Loans -- declined another $33.1 billion in the first quarter or 7.3% sequentially versus 8.4% in the fourth quarter of 2009. Even so, the year over year decline increased to 26.2% from 23.6% last quarter.
  
  
• The Notional Amount of Derivative Contracts -- increased 5.5% year over year to $218 trillion.
  
  
• Reserves for Losses -- increased 15.1% sequentially to $262.9 billion up 35.3% year over year versus a 3.2% sequential gain last quarter and 30.8% year over year.
  
  
• Noncurrent Loans -- increased 4.4% sequentially to $409.3 billion, which is a modest deceleration, but is still up 40.2% year over year.
  
  
• Other Real Estate Owned -- increased to a record $46.3 billion in the first quarter up 12.2% sequentially and 55.6% year over year.
  

Risk Aversion Watch:
 

• The yield on the 10-Year is below my quarterly pivot at 3.467, which signals “flight to quality” demand. Traded to 3.192 on Thursday versus its 52-week low of 3.104 from October 2, 2009.
  
  
• Comex Gold is in correction mode and tested $1166 this morning with my semiannual pivot at $1186.5. Longs are simply deleveraging.
  
  
• Nymex Crude Oil traded below $68 per barrel on Wednesday. Oil is extremely oversold with Memorial Day and hurricane season around the corner.
  
  
• The euro dipped to 1.2147 on Wednesday then rebounded above my quarterly pivot at 1.2450 as the currency remains extremely oversold. Weekly resistance is 1.2711.
  
  
• Everyone in the financial media is saying that stocks are oversold and just experiencing a “typical” 10% correction.
  
  
• I say we began the second leg of a multi-year bear market with the April 26 highs.
  
  
• The Dow is below its 200-day simple moving average at 10,258 with my annual pivot at 10,379. A weekly close below 10,379 would be another fortification of the bear market.
  
  
• The S&P 500 is below its 200-day simple moving average at 1103 with annual support at 1014.
  
  
• The NASDAQ is below my semiannual and annual pivots at 2258 and 2250, and the 200-day simple moving average at 2221.
  
  
• The Dow Transports is below my annual pivot at 4324 but above its 200-day at 4088.
  
  
• The Russell 2000 is below my semiannual pivot at 673.50 but above its 200-day at 627.92.
  
  
• The SOX is below my semiannual pivot at 358.89 and on the cusp of its 200-day at 337.58.