That’s a little more than those who are drowning right now.

One in five U.S. mortgage-payers is underwater.  That’s over 8 million of us.  In times like this I cross myself and thank God I’m a renter.

Home values plunged a collective $2.4 trillion last year.

California, Texas, Nevada, Virginia and Florida form the primary wastelands.

However, according to First American — who tracks mortgages from California’s ground zero — should housing prices drop another 5%, another 2.2 million will get dragged under the swift current of decline.

That takes the tally up to 10.2 million — no surplus to be found in this “new” program. President Barack Obama proposed $275 billion plan makes use of refinancing or restructuring America’s home loans.

All you need: most recent tax return and two pay stubs…oh, and also an “affidavit of financial hardship.”

About $75 billion (good until 2012) would be used to rescue homeowners by paying lenders to alter troubled mortgages – inducing the lender to reduce borrowers interest rates as low as 2 percent.

The catch: you can only modify once.  And if you bought after Jan. 1, 2009, you’re outta luck.  Also, if you were mad enough to try for property worth over $729,750…call your relatives and hand the keys to the bank.  (If you’re lucky, they’ll want to make a reality TV show about your “hardship.” I hear one of the latest TV pilot shows is an ex-Wall Streeter who has to move back home with mom and dad.)

About 5 million folks fall under the aegis of Fannie or Freddie, and they’ve got until 2010 to rework these rotten loans to temporarily sweeter terms.

Now here’s what’s rotten in the state of Washington D.C. – this currently un-legislated and unfunded plan looks pretty similar to its circa 2005-2006 cousin…the brainchild of one Neel Kashkari, interim head of our Office of Financial Stability. (Yes, created by that first “bailout bill” – code name: Break the Glass.)

This fellow from Akron, Ohio, who advanced in life to Hank Paulson minion, took this hallowed fiscal post on Oct. 6, 2008.  Before that, he was a V.P. of Goldman Sachs in San Francisco, where they nicknamed him “the Borg.”  Then, Kashkari approach Mr. Paulson for that solid government job in 2006 – great timing!  He worked shoulder to shoulder with Hank in bailing out Fannie, Freddie and our perennial problem with the gambling addiction AIG.

In the years between making money for Goldman and overseeing money for Goldman-times-Politics-squared, Mr. Kashkari dabbled in the housing market.  Fat surprise that!

To get to any useful information on his 2006-2008 years in service of our government, one has to sift through all sorts of gush, childhood stories, college professor praise, and even “sexiest man alive” references.

Finally, after typing “Kashkari 2006” into my search engine, I found blogger Angry Bear, corroborating my recollection of forays I conducted just after Paulson tapped this “wet-behind-the-ears” pipsqueak for this interim post.

“HOPE NOW”  — The John the Forerunner of “Making Home Affordable”

Kashkari was the genius behind Bush’s HOPE NOW Alliance in 2007. (Again, it was already far too late to do much).  HOPE NOW looks like Obama’s plan of today, only it “encouraged” mortgage lenders to restructure subprime loans voluntarily. Hank announced it in Oct. 2008 – just after the takeover of Fannie and Freddie.

Like a McDonald’s sign, the HOPE NOW slogan is “Over 1 Million Helped” – when in fact, it just seems that they mailed letters about HOPE NOW to 1 million delinquent homeowners.

Ha!  How many subprime borrowers even live at the address?  I hear story after story of mortgage lenders who convinced folks to take funds for homes they couldn’t afford, then arranging a deal where they could buy a second home!

Ultimately, what HOPE NOW boils down to is a trademarked Hotline: 808-995-HOPE.  The number of calls fielded is what goes into the press release – 1.2 million in 2008 – not the number of workouts.

With today’s new plan, we’re stuck with dollar-for-dollar matching to encourage lenders to notch down their lending rates.  Guess that’s how the government can put its money where its mouth is.

We applaud Kashkari’s immense ability to lobby a mere six years’ work in finance to such a high position, and hope the Senate won’t be asked to confirm him anytime soon.

How About Holding Someone Accountable?

Now, a chum of mine, who worked at Fannie circa early 2000, since retired in disgust.  Why?  Because he saw how pervasive the federally-mandated home ownership tyranny had become.  It sickened him.  Physically… seeing the heads of Fannie conduct their pep-talks and flash pocket-of-the-government comments.  (I’ll warn ya, we’re getting him to write you a “chock-full-of-numbers” shot soon!)

Now, I’m all for buying a chunk of good land, planting a garden, and having a home of one’s own.  But I don’t have my own house yet.  Because the kind of house my income affords is in a neighborhood I can’t walk unmolested in.  Facts of life.  I swallowed them.

I use my credit card for what I can pay off at the end of the month.  And I resist the urge to “hope for better times” and shoulder a nice, hearty “American Dream” mortgage.  Now if only about 5 million or so (giving cushion for those surprised by lost jobs, etc.) had been as grown up as me.

I presume the same toxic shenanigans my friend describes at Fannie were happening over at Countrywide…and we know how that one blew!

So let’s play a little round of “Where Are They Now?” before Gary pours our parting shot.

See What Countrywide’s Iago Does Today: PennyMac

Fannie, Freddie, AIG, are just like blokes foisting a tin cup in our faces… And they’ve got just as many sob stories up their sleeves as you find in the savvy street bum – the one you know is faking it.

Here’s how it runs:

“Got here on the bus, see.  And I went to the hospital here (flashes ubiquitous pink or orange plastic bracelet).  I’m trying to get back to the hospital, and I need some money for the bus.

“(We wait another minute to point out that said hospital is only 10 blocks down the street)  Now is when he trots out the wife or child in the background, hanging in the shadows on the street corner.  “Me and insert name, we’ve just come all the way up from West Virginia…”)”

Here’s someone who’s not holding out the cup – because he’s working the system instead – and better than an welfare check recipient we know of. Stanford Kurland.  And he now stands to mint millions from this home mortgage mess.

Don’t know him? Mr. Kurland played Iago to Mr. Mozilo over at Countrywide Financial.  His bag of tricks?

With the more than $200 million he netted from selling his Countrywide stock, and hundreds of millions raised from private equity giants like Blackrock, he’s buying up the delinquent home mortgages that the government was forced to takeover from the likes of Fannie and Freddie – we’re talking for pennies on the dollar here.

So how’s that for private enterprise making lemonade from lemons? I see it as reprocessing lemonade to shape something that looks, tastes, and smells like a lemon – but ain’t.

He’s got this nice, glass-walled boardroom in L.A. for an outfit called PennyMac.

Yes, PennyMac.  The irony of the name makes my stomach lurch.

Can we say nothing about their abusive lending processes that gave some trash-compactor firm like PennyMac a raison d’être in the first place?  And I can’t help but want to stalk Mr. Kurland when I fly out to West next week and ask him about the proliferation of low-rate “teaser” loans at Countrywide starting back in 2003.

But he’ll blame Mozilo, of course, and say it all went to pot in 2006.  Yes, yes, businesses regulate themselves – when those disgusted by bad business practice defect to create new businesses.

How’s that for “growth?”

Of course our government will abet Stanford and friends’ modus operandi.  What choice does it have?

I leave you with this lovely quote from Depression-hardened investor Leon Levy:

“Business people who often sound like libertarians when markets are going up suddenly sound like socialists and beg for bailouts and protection from governments when the economy heads south.”

Regards,
Samantha Buker

March 5, 2009

Making Home Affordable: The Kickoff Begins was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Such rates should not be government guaranteed but they are. Money will always flock to the highest guaranteed returns.

Washington Mutual, Corus Bank, Bank United, Countrywide Financial and others are all attracting capital because of FDIC insurance. Can they make it up by lending it out higher? Perhaps, but only by taking on additional risk. Would those banks attract as much capital without FDIC insurance? Hardly.

It was excessive risk that got WaMu, Citigroup, Merrill Lynch, Bear Stearns, Countrywide and others into trouble in the first place.

If this financing scheme fails, the taxpayer will be left holding the bag. Does this ring a bell? It should because that is what happened in the S&L Crisis.

S&L Crisis Revisited

Wikipedia has this take on the Savings and Loan Crisis:

“The Savings and Loan crisis of the 1980/1990s was the failures of savings and loan association in the United States. Over 1,000 savings and loan institutions failed in ‘the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.’ The ultimate cost of the crisis is estimated to have totaled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government.

“A taxpayer funded government bailout related to mortgages during the Savings and Loan crisis may have created a moral hazard and acted as encouragement to lenders to make similar higher risk loans during the 2007 subprime mortgage financial crisis.

“The background

“Savings and loan institutions (also known as S&Ls or thrifts) have existed since the 1800s. They originally served as community-based institutions for savings and mortgages. In the United States, S&Ls were tightly regulated until the late 1970s. For example, there was a ceiling on the interest rates they could offer to depositors.

“In the 1970s, many banks, but particularly S&Ls, were experiencing a significant outflow of low-rate deposits, as interest rates were driven up by the high inflation rate of the late 1970s and as depositors moved their money to the new high-interest money-market funds. At the same time, the institutions had much of their money tied up in long-term mortgage loans that were written at fixed interest rates, and with market rates rising, were worth far less than face value. That is, in order to sell a 5% mortgage to pay requests from depositors for their funds in a market asking 10%, a savings and loan would have to discount their asking price on the mortgage. This meant that the value of these loans, which were the institution’s assets, was less than the deposits used to make them and the savings and loan’s net worth was being eroded.

“Under financial institution regulation which had its roots in the Depression era, federally chartered S&Ls were only allowed to make a narrowly limited range of loan types. Late in the administration of President Jimmy Carter caps were lifted on rates and the amounts insured per account to $100,000. In addition to raising the amounts covered by insurance the amount of the accounts that would be repaid was increased from 70% to 100%. Increasing FSLIC coverage also permitted managers to take more risk to try to work their way out of insolvency so that the government would not have to take over an institution. When Jimmy Carter left office in January 1981, 3,300 out of 3,800 S&Ls lost money that year. In 1982 the combined tangible net capital of this industry was $4 billion. The chartering of federally-regulated S&Ls accelerated rapidly with the Garn-St Germain Depository Institutions Act of 1982, which was designed to make S&Ls more competitive and more solvent. S&Ls could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards. They were also allowed to take an ownership position in the real estate and other projects to which they made loans and they began to rely on brokered funds to a considerable extent. This was a departure from their original mission of providing savings and mortgages.

“Imprudent real estate lending

“In an effort to take advantage of the real estate boom…many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the FDIC and the Resolution Trust Corporation, stated: ‘The banking problems of the 80s and 90s came primarily, but not exclusively, from unsound real estate lending.’

“Keeping insolvent S&Ls open

“Whereas insolvent banks in the United States were typically detected and shut down quickly by bank regulators, Congress sought to change regulatory rules so S&Ls would not have some acknowledge insolvency and the FHLBB would not have to close them down.”

Public Policy Causes of the S&L Crisis

While Wikipedia has many of the facts correct, pointing the blame at deregulation is missing the boat. In the Concise Encyclopedia of Economics, Bert Ely gets it right. Ely lists in his article 15 reasons but the first one really says it all:

“Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis because deposit insurance was actuarially unsound from its inception. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for years. No sound insurance program would have done that. Federal deposit insurance is unsound primarily because it charges every S&L the same flat-rate premium for every dollar of deposits, thus ignoring the riskiness of individual S&Ls. In effect, the drunk drivers of the S&L world pay no more for their deposit insurance than do their sober siblings.

“Borrowing short to lend long was the financial structure that federal policy effectively forced S&Ls to follow after the Great Depression. S&Ls used short-term passbook savings to fund long-term, fixed-rate home mortgages. Although the long-term, fixed-rate mortgage may have been an admirable public policy objective, the federal government picked the wrong horse, the S&L industry, to do this type of lending since S&Ls always have funded themselves primarily with short-term deposits. The dangers inherent in this ‘maturity mismatching’ became evident every time short-term interest rates rose.”

History Rhymes

This time it was banks taking riskier and riskier lending positions. The underlying belief was that property values always go up so there was no risk. That belief was blown out of the water.

WaMu is heavily into Pay Option ARMs. An accounting absurdity let WaMu (and others) record negative amortization from those ARMs as earnings. The investment community cheered what should have been an enormous red flag. The Pay Option ARM problem went ignored for months as the following chart shows:

The chart shows that Pay Option ARM problems finally caught up with Washington Mutual in July 2007. In spectacular fashion, there was an asymmetrical unwind of the credit bubble at WaMu and many other financial companies.

Now Washington Mutual is attempting to sure up its balance sheet by attracting capital at above market rates.

Watch Corus Bankshares

Corus Bank is another one to watch. According to its business model, as posted on Yahoo! Finance:

“Corus Bankshares, Inc. operates as the holding company for Corus Bank, N.A. that offers consumer and corporate banking products and services. The bank’s deposit products include checking, savings, money market, and time deposit accounts. Its loan portfolio primarily comprises commercial real estate loans, including condominium construction and condominium conversion loans; commercial loans; and residential real estate loans.

“The bank focuses its lending activities in various metropolitan areas in Florida and California, as well as in Las Vegas, New York City, and the Washington, D.C. Corus Bank focuses it lending in many of the major collapsing real estate bubbles in the country. Were it not for FDIC insurance would anyone want to take a risk on Corus Bank’s CDs?”

Woes at Bank United

BankUnited is another bank in trouble over Pay Option ARMs. According to Yahoo

“BankUnited, whose $15 billion in assets makes it the largest bank based in Florida, reported large increases in provisions for possible loan losses on its monthly option adjustable-rate mortgages in 2007. The bank’s non-current ratio has been rising for those loans, which permit borrowers to defer some monthly interest payments and thus increase their loan balances.”

If you would like to see the complete list of companies with problems, take a look at High Yield CD Rates. They all will mention FDIC insurance. Without it, who would invest with these companies?

FDIC is a moral hazard that caused the S&L crisis. Perhaps we are in for a repeat performance.

Regards,
Mike Shedlock
January 9, 2008

P.S.: The economic landscape of 2007 was marked by the burst of the housing bubble. A New Year brings new possibilities, but that is not necessarily good news when it comes to our housing markets. We’ve seen and heard the bubble burst; now is when we could actually be seeing the worst.

Similarities Between SL and the Housing Crisis was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Between the years of 1998-2002, numbers in baseball reached and surpassed historical levels. The incredible boom in the power and longevity of players raised suspicions of doping and cheating and finally prompted a comprehensive and independent investigation. The increase in homeruns during this period was so swift and large that something sinister had to be going on.

The same can now be said for the mortgage lending practices that plagued our economy for the first half of this decade. Interest rates hit basement levels as housing prices skyrocketed between 2002-2005. During this housing bull, mortgage lenders began to realize that they could be cashing in on a large piece of the housing pie. Adjustable rate mortgages were being passed around like “B-12” shots in a locker room. But the lenders were not hiding in the shadows. This was going on right in front of us. Just as we saw marginal players begin to sock 50 homeruns in a season, so too have we seen single mortgage brokers pocket as much as $750,000 in a single year by relaxing their lending practices and preying on uneducated borrowers.

In baseball, we have seen a great deal of blame for this mess being passed around, and for good reason. Players who knowingly took performance-enhancing drugs to boost their production deserve to be punished. Teams who allowed their players to participate in this form of cheating deserved to be scorned. The commissioner of baseball who allowed this problem to persist under his watch deserves to be criticized. And fans who shielded their eyes from the truth that was painfully obvious for so many years deserve what they got.

The parallels between the actors in both these scandals are many. Too many mortgage brokers took advantage of loose lending practices with their eyes on fat bonuses and inflated commissions. The CEOs of big lending houses allowed this to go on as they collected their huge salaries. Borrowers too blinded by the ease and availability of cheap money took what they could get and entered into agreements that they simply could not afford. And the chairman of the Federal Reserve sat idly by as the bubble grew so large that it could no longer be contained.

Baseball has finally done the right thing. By hiring Sen. Mitchell, Commissioner Bud Selig has now shown the public that not only is he aware of a problem, but he is also interested in a solution. He has allowed the names of some of his most revered and marketable stars to be printed in a laundry list of cheaters for everyone to see. He has shown a willingness to single out the perpetrators and has even assigned a share of blame to himself. We have the names — all 85 of them — and now we know who’s done us wrong.

So who are we going to blame for the subprime mortgages?

President Bush has decided to step in and offer a plan to help those who have been hurt by this fiasco. He is offering relief to borrowers who find themselves threatened by resetting interest rates. Many homeowners signed on with cheap adjustable-rate mortgages that will soon be much more expensive than they had been. The reason this subprime lending has become such a mess is that while rates are increasing for these borrowers, the prices of their houses are falling.

The president has proposed a freeze on rate increases in order to protect borrowers who are unable to manage the coming reset. What this move does is bail out any low-credit individual who made the faulty decision to purchase a house out of their price range. Unfortunately, this is not new legislation, nor is it a government mandate. The president is merely suggesting that, for the good of the economy, lenders help out the poor souls who will soon be unable to afford their dream house.

This is quite similar to how Commissioner Selig originally handled the steroids crisis in baseball. While steroids have been considered illegal in the game since the 1970s, baseball had never specifically tested for their use until 2002. Players were told not to take them, but neither the league nor the teams ever actively investigated their use or punished any offenders. The players were left to police themselves, and the situation quickly got out of hand.

Baseball has now learned the error in its apathy. Congress has hinted at taking steps toward fixing the situation, but that seems to be out of its jurisdiction. Baseball recognized what it had to do and decided to take action. Major League Baseball paid the $20 million tab for this investigation and is now living with the results. Marquee players, including Roger Clemens and Miguel Tejada, have had their names and reputations sullied. Fans can now have improved confidence that the epidemic of cheating should largely be over. When will we be able to say the same thing about mortgage lending?

As long as mortgage company CEOs continue to take their million-dollar golden parachutes on the way down, the problem of shady lending practices may persist indefinitely. The president can urge freezes to help people who are suffering now, but someone is going to have to pick up the tab for all the unpaid debt. Perhaps we should follow baseball’s lead and begin to publicly out those who have done their customers and our economy wrong. Perhaps we need a list of names to show everyone exactly who is at fault.

History will remember the “steroids era,” just as it will the subprime housing crisis of 2007. Baseball appears to have learned from its own mistakes. Only time will tell if mortgage brokers can change their ways and avoid repeating the irresponsible behavior that has gotten them into this. Just like fans, borrowers will now have to be cynical and incredulous going forward. Whether it’s homeruns or houses, ‘roids or rates, if something seems too good to be true, it probably is.

Until next time,
Jamie Ellis

December 21, 2007

Setting the Records Straight was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Greenspan on the Housing Bubble

Greenspan is blaming the decline of the Soviet Union and the end of the Cold War for worldwide housing bubbles:

“It was a geopolitical switch in which market capitalism very quietly overtook central planning, and that created substantial booms throughout the world …creating an excess of savings, which drove down long-term interest rates virtually everywhere. And virtually everywhere, it sprouted a housing bubble.”

In essence, he wants us to believe that housing skyrocketed 10-plus years after the fall of the Soviet Union in some sort of delayed reaction, and that it was just by coincidence that this happened after the Fed slashed rates to 1%. Clearly, Greenspan is attempting to absolve himself of his role in the housing bubble.

It gets more interesting:

“Central banks gradually began to lose the power of affecting longer-term rates, as we demonstrated rather conclusively in 2004, when we raised short-term rates very rapidly and ended up with no increase whatsoever in long-term rates, and indeed, it stayed that way in 2005 as we continued to tighten.”

Greenspan has selective memory. The Fed did not raise rates rapidly, as this testimony of Chairman Alan Greenspan on July 20, 2004, shows:

“In May, the FOMC believed that policy accommodation needed to be removed and that removal could be accomplished at a pace that is likely to be measured. At our meeting last month, the FOMC raised the target federal funds rate from 1% to 1.25%, and the discount rate was raised commensurately. Policymakers reiterated that, based on our current outlook, the removal of accommodation would likely proceed at a measured pace.”

And Greenspan kept the “measured” pace at a quarter point per meeting for 17 consecutive meetings. It was perfectly measured, and certainly not the “very rapid rise” he talked about in the Fox interview:

“What that demonstrated pretty much around the world is that central banks no longer have the capacity to significantly impact longer-term rates, and it’s the longer-term rates that create bubbles.”

The rebuttal to this nonsense is that by lowering interest rates to 1%, all sorts of speculative lending took place based on the spread between banks’ ability to borrow at 1% and lend at a higher multiple. It is highly unlikely the market would have lowered short-term rates to 1% or kept them there for long if it did. Greenspan either is being disingenuous or is a complete fool to put forth this set of arguments on the housing bubble.

Greenspan on the Central Bank and Gold

Fox: “So why do we need a central bank?”

Greenspan: “Well, the question is a very interesting one. We have, at this particular stage, a fiat money, which is essentially money printed by a government, and it’s usually the central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or currency board or something of that nature, because unless you do that, all of history suggests that inflation will take hold with very deleterious effects on economic activity…There are numbers of us, myself included, who strongly believe that we did very well in the 1870-1914 period with an international gold standard.”

Fox: “We did well without the Federal Reserve. People forget that.”

Yes, they do. And that last paragraph was one of the few things Greenspan has ever said that made any sense.

Regards,
Mish

Novmeber 19, 2007

Every Which Way But Me was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

First is the rising credit card borrowing trends being seen in the wake of the subprime mortgage collapse. Homeowners, fearful of foreclosures, are continuing to borrow from credit card companies while payment defaults are much higher than last year. According to MSNBC, credit card companies have had to write off payments as uncollectible in the first half of 2007 30% more than last year and delinquencies are expected to rise in the next six to 12 months.

Many think that problems will be avoided as long as employment holds up, so let’s explore the idea that jobs may be the next shoe to drop…

Temporary employment leads and the implications appear unpromising now that the year-over-year change in temporary employment has gone negative. This is bad enough, but one must also consider soaring mass layoffs.

Layoffs began rising dramatically in August, and the financial sector was responsible for nearly half the cuts.  Many mortgage and subprime lenders could not stand up to the pressure of the housing market and were forced into bankruptcy.  This was highlighted by the collapse of Home Mortgage Investment Corp. who fired nearly its entire workforce.

Commercial real estate may be the next shoe to drop and in our opinion, we think it’s going to get crushed. It is overbuilt, over-loved, and due for a collapse. If Ben Bernanke thinks he as a problem now, watch what happens when commercial real estate blows up. Fannie Mae and Freddie Mac might be able to keep people in their houses in lieu of foreclosure by renegotiating terms down and down again (for a while, anyway, but certainly not forever), but bank funding of unneeded strip malls is another thing, indeed.

Other shoes to consider would be a derivatives blowup, a massive unwinding of the carry trade, homebuilder bankruptcies, or a collapse of the U.S. dollar. But so many shoes are in the air and falling that it’s going to be difficult to say precisely which shoe hits the ground first. That’s what happens when it rains shoes…

With all of these shoes starting to drop, it’s time to short short transports. Here’s why…

First, housing has clearly stalled and shows no sign of recovery. With mammoth numbers of adjustable rate mortgages resetting between now and March 2008, things can, and likely will, get much worse. Shipping material for new construction will continue to weaken. Also, shipping needs, to furnish new homes, will continue to weaken as well.

Next, commercial real estate is poised to fall. Deals are collapsing as people who can get out, are getting out. The rate of increase of building new stores, as well as the merchandise required to fill those stores, will fall. That clearly means reduced shipping demand.

And, a weakening job market means less consumer demand. Falling consumer demand means fewer items need to be shipped. Due to this falling demand, truckers can no longer pass on rising fuel costs. One leading shipping company recently cut fuel surcharges 25%, despite crude prices near all-time highs. Don’t be fooled, these price cuts are not done out of the goodness of their hearts. There is a reduced demand for shipping.

Coming out of the 2001 recession, shipments increased until 2005. They began leveling off, and then declined throughout 2006 and so far through 2007. It’s no coincidence that this more or less mirrors the topping of the real estate cycle.

Supply Chain Digest is also reporting that inbound container volume growth has slowed dramatically at U.S. ports over the past year, with May 2007 traffic down 0.2% from a year earlier. This confirms the slowdown we are seeing in truck tonnage, and also suggests the consumer-led economy is slowing.

As the market continues to open its eyes to the effects housing is having on the broader economy, we are seeing important sectors of stocks break down from their bull trend. Now we have seen the transportation stocks follow suit. Over the past year, the Dow transports had rallied themselves into a wedge pattern that usually results in a significant top.

During the market sell-off from the July high, the transports broke down out of their wedge and have consolidated. Breakdowns like this one usually result in a swift move that retraces the entire wedge pattern, which would be more than a 25% decline from here.

Smart investors should recognize this trend and plan accordingly.

Regards,
Mish

October 11, 2007

The Next Shoe to Drop? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.