Consolidate your payday loans….

I find it interesting that my comment that people are broke due to the cheques is partially true:

http://biz.yahoo.com/ap/070313/late_mortgages.html?.v=6

March 9, 2007

The Worst is far from Over!

With today’s relatively benign jobs report coming in close to the consensus forecast and with the stock market comfortably above Monday’s low, most on Wall Street are breathing a sigh of relief. The popular position is that last week’s turmoil was simply a speed bump on the road to greater prosperity, and that a recession and a bear market are low probability events. As you may imagine, I beg to differ.

Despite the rebound, the technical and psychological damage to the stock market is major, and the odds that the carnage is over are slim. A more likely scenario is that the bear market rally that began for U.S. stocks in October of 2002 has ended, and a new leg down in this long-term bear market has begun. As for the likelihood of recession, not only does it seem to be highly probable, but it is more of an outright certainty. With the construction industry shedding 62,000 jobs last month (the most in sixteen years), it is clear that housing is already in recession! The major question is when the overall recession will begin: the second half of ‘07 or early ‘08?

The current train wreck unfolding in the sub-prime lending sector provides a good preview as to what will happen to the entire credit-financed bubble economy when the funding dries up. Contrary to the self-serving rhetoric of Wall Street and housing industry shills, the entire mortgage sector is not insulated from sub- prime. In fact, sub-prime is just the tip of the credit iceberg. Beneath the surface lie similar problems in Alt-A and prime loans, where borrowers also relied on adjustable rate mortgages to purchase over-priced homes that they could not otherwise afford.

With the sub-prime market drying up, most first-time home buyers will be unable to buy. Without those ‘starter-home” buyers, the trade-up buyers (most of whom have the ability to make down-payments and are therefore considered “prime borrowers”) will be unable to sell their existing homes, and hence unable to trade up. This brings down the entire house of cards. Home prices must collapse, affecting all homeowners, regardless of their credit ratings.

How can anyone ignore last week’s announcement by Freddie Mac that they would no longer buy loans where there is a “high likelihood” that borrowers cannot meet their monthly payments and which are “highly vulnerable to foreclosure.” Talk about closing the barn door after the horse! This is tantamount to an admission that Freddie Mac formerly bought loans knowing full well that they would likely end in default!

When asked on CNBC why the agency had waited so long to impose tougher standards, the head of Freddie Mac explained that when home prices were rising, Freddie Mac did not think it wise to prevent sub-prime borrowers from profiting from the boom. In other words, since people were making piles of money by making bad bets on real estate prices, Freddie Mac did not want to turn down the action. So even though they knew speculative buyers were lying about their incomes and assets in order to purchase houses they could not afford, Freddie Mac did not want to rain on everyone’s parade. So instead of acting responsibly, they simply kept the party going, held their noses, and bought the loans anyway. Unbelievable!!!

Since 70% plus of the U.S. economy is based on consumer spending, how can we possibly avoid a recession if the credit well funding much of it runs dry? Since home equity has been the principal asset collateralizing that credit, how can consumers keep borrowing and spending when housing prices fall? I heard one commentator on CNBC claim that the U.S. economy was in great shape except for housing. To me that’s like a doctor telling a patient that he is in great health, except for the javelin sticking out of his chest. If housing is going down, there is no way on earth the entire economy does not get caught in its undertow.

Sam: Ok, if the market breaks through a Feb high why not a bullish signal? You are right, why not? Let’s say that we break the Feb high a year from now, is that a time to sell? No then I would say hey no problem. In fact I would be saying, cool, the market is in good shape to move forward.

But if the market rebounds in say a month or two, then I am concerned. Think about this, the market does a pullback and rebound within a quarter. This is a technical pullback and indicates a bunch of trading and selling without any fundamental merit. Not good.

Compare it to a marathon race or Tour D’France biker. If you were watching a runner or biker that was charging ahead, dropped back again, and then charged ahead again you would say, “oh they are going to burn themselves out.” The dangerous runner or biker is the one that needles, surges ahead, drops slightly back, stays back, needles, and surges ahead again. What it means is that they are pushing the envelope, but retracting long enough to gather steam.

I use technical analysis (using scientific method) and macro-economics to develop my indicators. My problem right now is that the pullback was not deep enough. The macro-economics say that we are in a mild recession. It’s a recession that we should not be worried about, and actually greet. It’s one of those times where we pull our belts tighter, but keep on doing the things that we do.

If you look at the technical analysis we are in a situation where I have found one of two things can happen.

1) We have a push for an extended period of time. This is in fact a great scenerio because afterwards the surge is quite good.

2) We have a rebound, and we break new highs. Though those new highs come at a price in that about a year or so later we crash. And we crash for about two or so years.

Right now I believing variant 1 because I do see people tightening their belts and slowing down slightly. Though what I don’t see are the traders slowing down.

For example, remember the reduced unemployment of 4.5%? Look closer, not many media articles talking it, but the reduced unemployment was not due to jobs. The reduced unemployment was due people dropping out of the market not looking anymore. Oddly this fact seems to have been ignored by most folks. I feel the reason is because they are not looking for this information and thus do not want to be bothered.

http://www.marketwatch.com/news/story/us-feb-payrolls-up-97000/story.aspx?guid=%7B6E0A7CCE%2DE59E%2D4CC1%2D9384%2D35887AB68FB8%7D

Does this mean that I would not trade? Far from it. This is a traders market, and I know traders are making oodles of money. Though traders and investors have two different goals, and this is where you have to be darn careful.

Traders have no problem pulling down a stock by 5 to 10% because they will have their strategies. You might even sell when traders pulled the stock down, and that is a mistake since there is nothing wrong with the market. Right now I would not sell. The moment has passed and you stick it through. Remember my Feb 02 blog entry where I said to lock into profit? That would have been an appropriate time.

As an investor you don’t want to be caught in the cross-fire. You want to be on the sidelines with your money intact, ready to jump in once the traders have managed to decimate each other.

So this is why I don’t trust the market. I could easily see another instance when traders decide to short the market and pull it down. Do you want to be in that cross fire? Or would you rather be invested in high yield bonds or treasuries that will give you guarentteed money without any hassles whatsoever?

BTW do realize that I am an extremely conservative investor/trader. I do have a habit of jumping our earlier (eg witness I could have held on to my funds for one more month). Though as a my wife says, “At least you don’t loose money, and nobody can time for the tops or bottoms.” It means I might miss money. It’s all about the risk that you are willing to take.

This could be luck and a gamble that has paid off, and we all know that nobody can predict what is going to happen to the market. However, I am in agreement with Christian and think that after this next run up, we could see a large and nasty correction.

Right now we are stagnating, but I am betting that as soon as the money begins flowing again, the market will resume its surge. I am still invested, but I am going to head for the door in the next 3 to 6 months.