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Financial Time Bombs Keep Ticking


The Dubai debt issue is just one of them.

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

As I continue to dig deeper into the FDIC Quarterly Banking Profile, there are many ticking time bombs as many loan categories continue to deteriorate and no one knows the risks embedded in the $206.4 trillion in notional amount of derivative contracts. This is a new high for this category and is up 16.5% year over year. How many more $60 to $80 billion Dubai Bombs are there, and which US banks are exposed?

On Thanksgiving, investors around the world sold riskier assets, as the dollar stabilized and equities sold off. The situation stabilized over the weekend as the United Arab Emirates central bank provides additional liquidity to banks and branches to the Dubai area.

The dollar carry trade may still be alive, but losing members, as copper and crude oil lag. Most notably is the fact that crude oil has had a lower high in each of the last six weeks. Equities are weakening in a totem pole from the SOX as weakest at the bottom to the Dow as strongest at the top.

Now there's a report that finally agrees with my theme first presented in April 2006. The inspectors general of the US Treasury and Federal Reserve have criticized these banking regulators for being too slow to react to risky lending and should have been on top of the growing overexposures of the commercial real estate loans. Bank examiners looked the other way instead of following their own regulation with regard to exposures to C&D and CRE loans The FDIC has seized 124 banks so far in 2009 -- the most since 1992 -- leaving the Deposit Insurance Fund with an $8.2 billion deficit at the end of the third quarter and an estimated $10.4 billion at the end of November.

Hotel owners are falling behind on commercial real estate loans.

Hotel operators are offering sweet deals to entice travelers, but occupancy rates are falling anyway. Sources say that hotel loans are falling into delinquency faster than any other type of commercial real estate debt. Exacerbating the problem is that new hotels started during the real estate boom are flooding the market. In October, 8.7% of hotel loans are delinquent, up from 1.5% year over year.

More help to prevent foreclosures.

The Obama administration appears ready to increase pressures on mortgage companies to do more to help homeowners prevent foreclosures to keep residents in their homes. The Mortgage Bankers Association says that 14% of homeowners with mortgages were either delinquent or in foreclosure at the end of September, a record level for the ninth straight quarter.

The Congressional Oversight Panel reported last month that foreclosures are threatening families who took out conventional, fixed-rate mortgages with down payments of 10% to 20% on homes that would have been within their means in a normal market. The Home Affordable Modification Program targeted the housing crisis as it was in the beginning, but now the problem has spread to prime mortgages as the unemployment rate rises.

Fannie Mae (FNM)

Fannie Mae, with its growing loan problems and with conservatorship scheduled by law to begin to unwind in 2010, makes any new program tougher to administer. Fannie has responded by tightening lending standards requiring a 620 credit score or better with a 45% maximum of total debt to income.

My theme continues that "The Great Credit Crunch" continues and is intensifying!

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No positions in stocks mentioned.

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