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US Economic Themes for 2011, Part 1


What investors should expect from the housing industry and how that will affect the overall economy next year. Plus much more.

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.

This is Part 1 of a two-part series. Read about six more economic themes later this week.

1. Home Prices will resume a decline that began in mid-2006.
We had the homebuyer tax credits expire in mid-2010, and government-sponsored mortgage modifications provided limited help. In 2011 we face continued foreclosure issues including questionable documentation, and banks have a record high Other Real Estate Owned (OREO). OREO is up to $53.2 billion at the end of the third quarter, up 338.2% since the end of 2007. Depressed home sales are being sold at a 30% to 35% discount, which reduces property appraisals at the county level. Homebuilders will have to compete with these lower prices and we need a mortgage modification program for all Americans, not just those at risk of losing their homes. QE2 is not working and US Treasury yields are higher, causing mortgage rates to rise. "The Great Credit Crunch" began with housing, and that foundation needs repair before Main Street can recover with sustainable job creation.

See also, Ending the Main Street Recession

2. Community Banks still have $1.43 trillion in commercial real estate loans that require resolution. The FDIC's List of Problem Banks rose to 860 in the third quarter of 2010, which is 11.1% of all insured institutions. My analysis shows 2,485, or 32%, of all banks are overexposed to Commercial Real Estate loans and 3,938, or 50.7%, of all banks with real estate loan pipelines are 80% to 100% funded. This stress needs to be addressed before jobs can be created on Main Street as housing and construction drive local economies. "The Great Credit Crunch" won't end without a program to remove toxic real estate loans from the books of community banks around the country.

3. The Banking System is supposed to de-lever risk, but it hasn't. When I look at the Notional Amount of Derivative Contracts I cringe at the fact that this risk category has grown $71.6 trillion since the end of 2007; that's an increase of 43.5% to $236.4 trillion at the end of the third quarter in an environment where banks should be de-leveraging not adding to this risk where financial time bombs are ticking.

4. Fannie Mae and Freddie Mac will continue to drain taxpayer money as the Treasury provides unlimited lines of credit through 2012. The cost currently is about $150 billion, by far the largest of any government bailouts. We need to unwind the activities of these GSEs and beef up Ginnie Mae as the go-to government agency that backs new mortgage issuance.

5. Because of the housing market depression and stress in the banking system the Unemployment Rate will stay above 9% for all of 2011.

Tracking the US Capital Markets --
US stocks are overvalued fundamentally and overbought technically on both daily and weekly charts. The snowstorm causes stocks to drift lower and higher.

  • The major equity averages are below this week's risky levels as the year draws to a close at: 11,629 Dow, 1269.4 SPX, 2682 Nasdaq, 5215 Dow Transports, and 808.57 Russell 2000.

  • Fifteen of 16 sectors are overvalued according to ValuEngine with only 37.9% of all stocks undervalued. At 35% the stock market tends to find a top. Only 17.4% of all stocks are undervalued by 20% or more.

The Yield on the 10-Year Note (3.345) --
Tested this week's value level at 3.494 with today's risky level at 3.306.

Comex Gold ($1384.2) --
The 50-day at $1372.1 held at the low on Monday with this week's risky level at $1401.2.

Nymex Crude Oil ($90.79) -- Reached a new high for the year at $91.88, shy of this week's risky level at $93.28. Support is the 21-day simple moving average at $88.24.

The Euro (1.3163) -- My weekly value level is 1.2906 with 200-day simple moving average at 1.3087 and quarterly pivot at 1.3318, which goes away at the end of the year.

The Dow Industrial Average (11,555) --
Remains extremely overbought on both daily and weekly charts. The 21-day simple moving average is 11,384 with a daily pivot at 11,569 and this week's risky level at 11,629.
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