8 replies to this topic

[arbman]

I must say Mark's scenario is gaining traction among the money managers for a final fake blow off.

I will applaud him if it really happens. Today I look and my chin hits the floor due to the euphoria among the money managers. There is almost an unconditional acceptance that we will run toward 1200. Now, there are times you have to fade the euphoria, but there are times you have to step aside in order not to be run over by the euphoric crowd.

There are enough fundamental reasons, my fundamental reason is that Fed has enough room to devalue USD to new lows for 1 or 2 more months. So, we are probably in a pause zone and we will still momentarily see 1050 zone, but that may be the extent of this pause.

Having said these all, the real problem with the prime mortgages is about to begin, this is very likely to be the eye of the hurricane that started in 2007. Take a look at this report;

Bigger crisis ahead.

These are not the times to get euphoric that multi-year bull market is ahead, I still do not think it is absolutely not the case with the unemployment slowing but still rising and I still do think that we will plunge right back into another recession before a good jobs recovery. However, I have no intention to get run over by an euphoric crowd at the end of the year either.

This is my warning, it is about time to decline and take out the 1040 gap to the downside and stay there until the November expiration. Only after then, you may conclude that the top is in, otherwise do not be emotional with the deflationary background forces. However, I think if we do run higher this winter, it will mark the 104 month highs...

Best of luck.

[arbman]

Pay attention to the eye of the hurricane at page 18 on the above report...

[milbank]

Pay attention to the eye of the hurricane at page 18 on the above report...

I have probably posted the two Credit Suisse versions of that same mortgage reset chart over a dozen times over the last few years. If there was ever a roadmap to Hell, that chart is it. This time around the foreclosure rate is going to be much worse. When those option ARMs reset, there is going to be no fight to keep them. Those folks are going to just walk away. The glut of empty homes is going to be massive.

Edited by milbank, 23 October 2009 - 01:14 PM.

[arbman]

Are these the mortgages that have negative equity and could not be refinanced so far? I wonder how accurate after the refinancing wave this spring/summer...

Page 18...

Edited by arbman, 23 October 2009 - 01:19 PM.

[arbman]

Disclosure; I am nearly fully short in the discretionary portfolio with average price of 1087 on SPX basis (Dec contracts). I expect to see 1040-1050 zone early next week where I will cover and do nothing until early November unless we break down with huge volume...

[milbank]

Are these the mortgages that have negative equity and could not be refinanced so far? I wonder how accurate after the refinancing wave this spring/summer...

Yes. The Alt-A or Option Loans were loans that gave the borrower the option of paying interest only or partial interest for the term of the loan. The term can run from 3, 5 to 7 years. It was the darling of the mortgage lenders who would give this type of loan to anyone who was breathing. The "NINJA", No Income No Job, loan. The lenders would get the commission on the sale and then immediately sell the mortgage to the ibanks, make money on that sale and have it off their hands. Virtually free money to the mortgage lenders who, are most if not all, out of business now. Most who took on these kinds of loans were betting all or nothing that the house would appreciate in value and could then be sold at a profit over the interest or partial interest paid or when time to refi, the game was that they could cash out the appreciation to pay down the original price. They were also the basis of the Carlton Sheets Seminar hustle. Those folks buying a dozen homes with no money down and very little overhead until they sold it to a greater fool for more money or rented out the home and then sold when it appreciated enough in value.

Edited by milbank, 23 October 2009 - 08:36 PM.

[VidKid]

Both the ratio of NonPerf Loans/Total Loans –and- Com Net Loan Charge-Off ratio peak after the official recession has ended. Also, a precipitous decline in ROA since 2008 is evident. A healthy Consumer Spending has to emerge before bank ratios improve. -VK

[milbank]

One correction on my post before this one. Alt-A is not what I was describing above. The above description was of the Option ARMs. Alt-A's are loans for borrowers who's FICO does not meet the criteria for a prime mortgage. It's the next step down but, still better than a sub-prime mortgage.

[arbman]

Microsoft marked the last top in July 2007, now we need to drop below the 1040 gap to mean anything to the downside. We must probably see an expiration below 1040 in November too, so probably we need to see much lower before a significant bounce. What are the chances of these happening? I think less than 50-50 for the short term, but more likely if we get a weak Nov-Dec period into spring months...