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Shaving Points Off GDP


The economy is far from emerging from the recession.

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

The number of homeowners in mortgage default rose
for the sixth consecutive quarter in the third quarter as late prime mortgages more than doubled year-over-year to 3.6%. This makes it more difficult for community and regional banks to help struggling borrowers make mortgage modifications.

Meanwhile, US banks that paid lobbyists or had political connections in Washington were rubber-stamped to receive TARP funding. Make a political contribution, get TARP bucks even if your bank is overexposed to C&D and/or CRE loans.

Nearly 3,000 community banks have overexposures to C&D and CRE loans, which is why 165 banks have failed since the end of 2007. Failures will grow to 500 to 800 by the end of 2012.

Four of the 12 banks who visited with the president on Tuesday are guilty of this speculation.

Existing home sales surged 7.4% in November -- so far about two million homebuyers have taken advantage of the various homebuyer tax credits, and there was a rush to beat the original November 30 deadline. This deadline was extended to April 30, 2010, for signed contracts and to June 30, 2010, for closed contracts. Sales are up 44% from a year ago.

Homebuilders rallied on this news, but we'll see today from the new home sales data whether or not homebuyers are buying new homes. Recently the NAHB Housing Market Index declined to 16, well below the 50 neutral reading, with the trade group complaining that existing home sales were hurting new home sales because of the depressed prices of foreclosure and short sales by banks. Homebuilders haven't been able to get new construction and development loans, and as I said yesterday, small construction companies with five or more employees must provide health care under the Senate Democrat bill.

Another fact ignored is that some of the existing home sales were double counted as foreclosure flippers sold to legitimate buyers. The inventory of existing homes was reported to have declined to 3.5 million, but there was no mention of the hidden foreclosure inventory. Banks are holding onto roughly 1.7 million homes waiting for higher prices. This speculation takes capital that could help struggling homeowners stay in their homes. There will be 3.5 million foreclosures on the way and another 3 million after that.

Meanwhile third-quarter GDP wasn't as strong as expected. The Advanced Reading of two months ago was up 3.5%, the Preliminary Reading was revised down to 2.8%, and the Final Reading, which came out on Tuesday, was just 2.2%, below trend. This is a sign that the economy is far from emerging from recession and is nowhere near ready to create jobs, which should hurt housing and banking.

Business spending fell at a 5.9% rate instead of 4.1%. A deeper-than-expected slump in commercial construction and stronger demand for imports overshadowed the growth in exports. Nonresidential building activity dropped 18.4% rather than the prior estimate of 15.1%. Even consumer spending was shared to 2.8% from 2.9%, which is 70% of the economy. Excluding inventories GDP growth was just 1.5%. Corporate taxes grew 12.7% instead of 13.4% with deeper cost-cutting mostly from layoffs. Growth may have evaporated except for the cash for clunkers and the tax credit for homebuyers.

States are running out of funds for unemployment benefits -- it seems like 40 states will run out of unemployment benefits money within two years and will need $90 billion in loans to keep paying out benefit checks. This puts pressure on states to raise taxes or downsize payments. Currently 25 states have borrowed from Uncle Sam to cover existing gaps.

The Dow remains poised for a breakout above the down trend that goes back to October 2007. Ascending Wedge support is 10,211 with the down trend and weekly resistances at 10,475/10,490, and 10,506. This down trend was tested on Tuesday.

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No positions in stocks mentioned.

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