Is the 6-month Stock Market Rally About to End?

Published on Global Research.ca, by Bob Chapman, 2009-10-01.

… In July, Americans cut outstanding credit by almost $22 billion. This brings us back to the stupidity of the G-20 announcing that savings must increase and at the same time consumption as well. They must think we are dumb. This is the biggest cutback in credit usage in over 66 years. Economists projected a reduction of $4 billion just to show you how wrong they continue to be.

Cash for Clunkers may have increased borrowing and consumption in the third quarter, but we ask in January what will GDP look like? Will the government falsify the statistics again? Of course, they will. 

In July, Americans cut outstanding credit by almost $22 billion. This brings us back to the stupidity of the G-20 announcing that savings must increase and at the same time consumption as well. They must think we are dumb. This is the biggest cutback in credit usage in over 66 years. Economists projected a reduction of $4 billion just to show you how wrong they continue to be.

Cash for Clunkers may have increased borrowing and consumption in the third quarter, but we ask in January what will GDP look like? Will the government falsify the statistics again? Of course, they will …

… At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. (See nearby table.) Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages.  Its cash reserve ratio has fallen by more than two-thirds in three years.

The reason for this financial deterioration is that FHA is underwriting record numbers of high-risk mortgages. Between 2006 and the end of next year, FHA’s insurance portfolio will have expanded to $1 trillion from $410 billion. Today nearly one in four new mortgages carries an FHA guarantee, up from one in 50 in 2006. Through FHA, the Veterans Administration, Fannie Mae and Freddie Mac, taxpayers now guarantee repayment on more than 80% of all U.S. mortgages. Sources familiar with a new draft    HUD report on FHA’s worsening balance sheet tell us that the default rates have risen most rapidly on the most recent loans, i.e., those initiated or refinanced in 2008 and 2009.

All of this means the FHA is making a trillion-dollar housing gamble with taxpayer money as the table stakes.

The dollar is dead – long live the renminbi.

A total of ~$686 billion in new mortgages were issued in 2009 (through August)…It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.

The discovery that Countrywide Financial Corp. recorded phone conversations with borrowers in a controversial mortgage program that included public officials — and that those recordings have been destroyed — has prompted new congressional calls for more information about the program.

Rep. Darrell Issa of California, the ranking Republican on the House Oversight and Government Reform Committee, is trying to subpoena the remaining records of Countrywide’s VIP loan program. So far, the committee’s chairman, New York Democratic Rep. Edolphus Towns, has turned down that request.  [It’s the corruption, stupid!  Revolucion!]

Among the prominent VIP program borrowers were two Democratic senators, Chris Dodd of Connecticut and Kent Conrad of North Dakota…Alphonso Jackson, who had been a Housing and Urban Development secretary under President George W. Bush, also received two loans through the VIP Program.

State tax revenues in the second quarter plunged 17% from a year earlier as rising unemployment and reduced spending hurt sales- and income-tax collections, according to Census Bureau figures released Tuesday.

The decline was the sharpest since at least the 1960s. The biggest drop among major revenue sources was in state income taxes, which were down 28% from a year ago. Sales-tax revenues fell 9%. About two- thirds of state revenues are derived from sales and income taxes. The numbers aren’t adjusted for inflation or changes in tax rates.

One other technical oddity bears consideration. Jason Goepfert, of Sundial Capital has apparently noted that the S&P and Nasdaq have risen for five straight months from the March lows. Amazingly, NYSE monthly volume has declined consecutively over those five months.  We are told that Mr. Goepfert’s work indicates that there has never been that kind of divergence for longer than two months.  The rubber band certainly looks stretched.

A measure of U.S. business activity unexpectedly shrank in September, indicating companies are likely to limit spending and production.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 46.1, worse than the lowest estimate of economists surveyed by Bloomberg News, from 50 in August. Readings below 50 signal contraction.

Near-record excess capacity and gains in spending induced almost solely by government stimulus programs are likely to prevent companies from ramping up assembly lines. The manufacturing recovery may be uneven as federal assistance begins to wind down.

Conditions are still very sobering, said Ellen Zentner, a senior macro economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. There’s always a payback period on the other side for government stimulus.
(full long text).

(Bob Chapman is a frequent contributor to Global Research. Global Research Articles by Bob Chapman).

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