1. Technical Breakdown The S&P 500 is riding a four-day losing streak. And while we have seen these corrections turn around before during this massive bear market rally that started last March, the difference this time is that the uptrend line from the lows has been violated across a fairly broad front, including the S&P 500, Nasdaq and the Russell 2000. When trend lines get violated, and when this happens on high volume, it usually, though not always, signals something big.
2. Valuation In terms of valuation, we said yesterday that the P/E ratio on the S&P 500 on a normalized 10-year basis is 22x and the long-turn norm is 16x. Just to go back to the norm, let alone compress to a level commensurate with an unusually high level of economic and financial uncertainty, would suggest that we would see the S&P correct down towards 860.
3. Fannie Mae: Delinquencies Increase Sharply in August
Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.45% in August, up from 4.17% in July - and up from 1.57% in August 2008.
We are back in the bubble years offering zero down payment homes, 125% LTV loans to unsuspecting first time home buyers. Yet another case of trying to create a bubble to solve our problems.
4. Courtesy ZeroHedge - CRE Crash & Implied Lack of Fed Support Will Hurt Bank Balance Sheets
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts."
The Fed seems to now be encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."
The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.
As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.
5. And out of the Economist, America’s debt crisis will be chronic, not acute
AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University.
The Treasury’s ravenous borrowing needs also leave lots of opportunities for something to go wrong. In the past two years the portion of its debt maturing in less than a year has jumped from 30% to over 40%, the most since the early 1980s
In the fiscal year that ended on September 30th the Treasury held an auction on average more than once a day to finance nearly $7 trillion of new and maturing debt. A failure to raise as much money at an auction as planned—as occurred in Britain earlier this year—could send a shudder through global financial markets. “Other countries can afford a failed auction; we can’t,” says Lou Crandall, chief economist at Wrightson ICAP, a financial-research firm. “What do you do when there is a confidence shock to your flight-to-safety asset?”
6. Number of Vacant Homes Rising Again
The US Census Bureau has released its Third Quarter report on Residential Vacancies and Homeownership. As can be seen from the attached chart, the number of vacant homes in Q3 has started increasing once again after posting moderate improvements over the prior two quarters, and is now at 18.8 million units, rising from 18.4 million in the prior year. With new home sales surprising to the downside, look for this number to continue increasing into the fourth quarter. Notable is that the rental vacancy rate stood at an all time high of 11.1%. As James Lockhart, former director of the FHFA which he singlehandedly managed to destroy said: "We are bumping along the bottom of the housing market. There is the potential for another swing down." Don't tell that to the GDP numbers.
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