Monday, August 24, 2009

A Market With Problems

There is a large body of thought that says the current stock rally is denial mixed with some greater-fool theory signifying nothing. We could just be in the eye of the storm with our big rally with a second and more deadly side to hit soon. My own market forecast back in early '08, when many were saying the January dive was the bottom, was for much more bear with new lows. For '09, I've been saying a big rally through the middle part of the year following the leader groups north, but then maybe some more ugliness toward year end. Well, we're starting to get into the twilight zone now.

There are three big problems greeting the market to the end of the year. First is the great twin peaks of real estate loan resets: (click to enlarge charts)

This problem has been much written about and it raises the horror of a son-of-subprime mess battering a much weakened consumer with forced, dramatic raises in their house payments from the starter and teaser rates. Late 2009 is the lull between these two punches. In December '08 60 Minutes ran this story on the second wave soon to hit. Add to this the even larger commercial real estate loan mess, which typically runs about a year behind residential in a downturn, and you have most of the real estate train wreck ahead. The commercial part is just now getting cranked up. This past quarter's 18% drop in property values is the biggest since they began tracking 25 years ago. Real Capital Analytics says that 2 trillion of the 3.5 trillion market bought or refinanced in the last 5 years is upside down already! That's most of it. Just refinance? Deutsche Bank says 65% or more of these loans won't qualify.

The second big problem for the market's year end is the geopolitical situation with Israel and Iran, which may be coming to a head as we go into 2010. See my previous post on that. This may be what Art Cashin has been talking about the last couple weeks with his "esoteric" things. Esoteric means "relating to knowledge that is restricted to a small group". He has built a network over his 40 years on the floor that does esoteric pretty well. He is going to be guest hosting Squawk Box tomorrow morning - maybe he'll explain some of this esoteric stuff. That's just what the market needs - a nuclear conflagration in the Middle East.

The third big problem as we go into next year is high oil - with or without the nuclear conflagration. In case the previous two big problems don't croak the economy and we get a return to normal, guess what? The oil won't be there. Not affordable oil as we have been spoiled by for decades. See my post on the missing barrels. I don't thing we'll get very far into the vibrant growth recovery desperately needed by the real estate mess before we will have about the same oil supply problem that started to show itself before the collapse.

This market reminds me of that old Hee Haw refrain:

Gloom, despair, and agony on me
Deep, dark depression, excessive misery
If it weren't for bad luck, I'd have no luck at all
Gloom, despair, and agony on me

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