The Credit Crunch Is Far From Over

From the WSJ:

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

That's 7.1% of loans that are delinquent. That's shocking. And downright scary.

Nearly one in three of the banks analyzed -- or 2,182 -- had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn't mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Actually, it's obvious these ratios weren't a red flag to regulators. Why? Because 1/3 of banks are in this position. Regulators were obviously not paying attention to anything that was happening.

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

To all you jackasses who are recommending that people go long financials right now, does the above paragraph change your opinion somewhat? We're looking at additional writedowns of up to $165 billion. Is that an environment where stocks increase or decrease guys?

During the housing boom, many small and regional banks doubled down on construction loans because they were largely shut out of the home mortgage market dominated by large originators. But now the banks' difficulties are threatening to sharply shrink the home-building industry. Credit Suisse analyst Dan Oppenheim estimates that as many as 50% of the closely held builders won't survive because of the tightening lending environment and housing downturn.

In an effort to prove they are just as stupid and blind to risk as the big guys, the little guys went running into an area of growth that was stimulated by record low interest rates, never really thinking that borrowers would have to pay back loans.

Some community banks are bristling under the regulatory pressure. "The federal government is being too reactionary," says Damian Kassab, chief executive of Michigan-based Warren Bank, which reported that 47% of its construction loans are delinquent. "They want to see it done as quickly as possible. I say 'can't we just relax, take a deep breath and work with the borrowers.'"

That's right -- because they banks have done such a good job of handling this themselves.

Auto Sales Drop Hard

Let's start this with a long-term look at oil.



Oil broke into a strong rally in 2004. It has been rallying ever since. In addition, the idea of peak oil has been around for at least 5 years that I know of and probably a lot longer. Finally, China and India have been growing at high rates for some time, indicating that demand for oil would be increasing as those two countries increased their overall standard of living. Bottom line: a spike in fuel prices is hardly surprising.

From Marketwatch:

Dearborn, Mich.-based Ford said that total sales, including sales of its Volvo brand, fell 28.1% to 174,091 cars and trucks from 242,029 last June. Retail SUV sales dropped 40% through the first half of the year, compared with the same period in 2007.

.....

Truck sales fell 35.6% to 101,981, with the flagship F-Series, the onetime industry sales leader, posting a 40.5% decline amid record-high gas prices and a persistent housing slump. Smaller passenger cars from Toyota and Honda now own the top spots.

"Consumer fundamentals and consumer confidence deteriorated as the first half unfolded," said Jim Farley, head of Ford's marketing and communications division. "The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty."

.....

Like Ford, Chrysler LLC reported a steeper-than-expected decline, down 36% to 117,457 vehicles from 183,347 in June 2007.

June sales reflect a continued contraction of the market for its pickup trucks and sports utility vehicles, on which Chrysler depends more heavily than everybody else. Still, it was Chrysler's cars that paced the slump, falling 49% to 29,858 vehicles while trucks slid 30% to 87,599.

.....

GM reported an 18.2% decline in light vehicle sales to 262,329 cars and trucks from 320,668 in June 2007. Sales of cars slid 21.1% while trucks declined 16%. GM also was a tad more optimistic than its crosstown rival Ford with its assessment of the coming months.

"We continue to believe that there will be some strength in the economy in the second half of the year," sales analyst Mike DiGiovanni said in a conference call. "However, we're not naive enough to think this isn't a challenging time."

So, we've learned that in a rising oil environment, consumers don't like trucks. US car makers love trucks. That's one of the main problems they're dealing with right now.

Let's see what the charts say about these companies:



Ford consolidated in 2004 and then dropped hard at the beginning of 2005. The stock found a floor in the $9 area, then dropped again into the middle of 2006. Remember -- this is when the US economy was growing. Ford again consolidated from 2006-2007 and then fell at the end of last year. The stock tried to rally in the second quarter of 2008 but fell back.



GM declined from the beginning of 2004 to the beginning of 2006. Again, this was when the US economy was growing so the stock price should have been increasing. The stock rallied through 2006 and consolidated in 2007. However, the bottom fell out at the end of 2007 and the stock has been dropping ever since.



Toyota has been rallying since the second quarter of 2003. They hit a high at the beginning of 2007 and have been falling since. Over the last few months the stock has moved through the long-term upward sloping trend line, indicating a long-term reversal is at hand. However, the stock rose when the economy was growing unlike the US companies.



Like Toyota, Honda rose from mid-2003 until the beginning of 2007. The stock fell from the beginning of 2007 to the beginning of 2008 but has since risen. Maybe that's because they build fuel efficient cars and do it well?

The charts indicate that traders are less than enamored with US car companies and are completely enthralled with Japanese companies. There's a reason for that. One set of companies planned for high oil prices and one didn't.

Wednesday Commodities Round-Up

Let's take a look at a few charts from the commodity sector to see what they are saying.



On the overall CRB chart, notice the following:

-- Prices are above all the SMAs

-- Prices have broken resistance levels and continued to move higher

-- All the SMAs are rising

-- The shorter SMAs are above the longer SMAs

Short version: this is a very bullish chart



I use Gold as a proxy for inflation expectations. What's interesting about this chart is Gold has now broken out of a triangle consolidation pattern and is moving higher. Also note the 10 and 20 day SMA have turned up and moved through the 50 day SMA. This is still an early and developing situation so it could reverse pretty quickly, but it could also be the beginning of a new bull run in gold.



Agricultural prices have spiked since the beginning of June in reaction to the situation in the US Midwest. However, also notice the chart could be forming a double top. Peak prices from the June rally are very close to the peak prices of the rally that ended in early March. As with Gold's situation, we'll have to keep an eye on this chart to see how it plays out.

Today's Markets

Companies that rely on gas guzzlers had big sales drops.

Moody's fired the head of the their structured finance department.

OPEC blames a weak dollar and speculators for high oil prices.

Sugar hits a three months high.

The ISM Manufacturing index rose a bit.



A very volatile day. Notice the following:

-- Prices fluctuated heavily between bull and bear twice

-- Notice the market broke through two levels of resistance

-- Also note the 200 minute SMA provided some resistance at first

-- The market closed near a daily high

-- Remember that in the big picture the averages are looking at a possible bear market, so anytime we see these huge drops we'll probably see some buying



-- Like the SPYs, we have a lot of volatility

-- Notice the gap up with about an hour or so left in the day

-- Prices broke through three levels of resistance in the last 2-3 hours of trading.



A lot of up down up action. However, notice that prices never got above the 200 minute moving average.

Financials Are Nowhere Near Bottom

From the WSJ:

In a reversal, Wachovia Corp. said Monday it would stop making option adjustable-rate mortgages, which were why the bank bought Golden West Financial Corp. but is now stuck with more than $120 billion of the rapidly souring loans.

Wachovia also said it will let option-ARM borrowers escape prepayment penalties, but loan balances likely have swelled too big for many of these borrowers to refinance.

The changes effectively mean the dismantling of the core product of Golden West, the Oakland, Calif., thrift Wachovia bought for $25 billion two years ago. Option ARMs give customers multiple payment choices, including a minimum payment that may not be enough to cover the interest due. Borrowers who elect the minimum payment on a regular basis can see their loan balance grow.

.....

More than 18% of the option ARMs originated in 2005 and 2006 are already at least 60 days past due, says Barclays Capital, which looked at loans that were packaged into securities. The vast majority of these borrowers have yet to see their monthly payments recast so they begin making payments of principal and full interest, at which point payments can increase by 60% or more.

Here's a chart of Wachovia Stock:



Notice the following on Wachovia's chart:

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

Wachovia isn't the only company having trouble:

Legg Mason Inc. agreed to contribute $240 million to support three of a unit's money-market funds. That follows $400 million in agreements in March.

The move marks the company's latest step in trying to stabilize its cash funds and shield investors from any losses in the underlying assets. And it is the most recent sign the credit crunch continues to roil financial markets.

Notice the following on Legg Mason's chart:

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

Anyone that is saying "buy financials" right now is an idiot. This sector has a long time to go before anyone should think about going long.

Is A Bear Market Forming? Pt II

From today's WSJ:

Investors acknowledged the grim reality beginning in mid-May. That is when the Dow Jones Industrial Average began its march downward, ending the quarter (including Monday's slim 3.50-point gain) with an overall loss of 912.88 points, or 7.4%, at 11350.01 -- and perilously close to the 20% decline from a recent high that is considered the start of a bear market.

It was the third straight quarterly decline and the worst second quarter since 2002.

In each of the final two trading sessions of the quarter, the Dow industrials tipped into bear-market territory during the day but closed just shy of the mark. The Dow industrials have fallen 19.9% from their October 2007 record, so any coming session with a loss could mark the official "bear" for stocks.

The worst-performing stocks reflected the credit crisis and its implications for consumer spending. Financials led the way down as banks big and small took write-downs and reported disappointing earnings. Dow component American International Group Inc. was off about 39% in the quarter, and Bank of America Corp. fell 37%. The Dow Jones Wilshire Bank Index fell nearly 26%.

But the biggest loser among the Dow industrials for the quarter was auto maker General Motors Corp., which dropped about 40%. Of 30 Dow components, 24 ended the quarter in the red. The few bright spots included Exxon Mobil Corp. and Chevron Corp., which rose as crude-oil prices soared 38% to more than $140 a barrel.

Let's look at some of the specific sectors and stocks mentioned in the article



With the XLFs, notice the following:

-- The index is down 44.8% in the last year

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower



For the regional bank ETF, notice the following

-- The index is down 42.5% in the last year

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower



-- The stock is down 62.2% in the last year

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower



-- The stock is down 69.7% in the last year

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower

All of these charts are bear market charts. These are terrible charts unless you are shorting the market.

I highlighted some of these points and added others in this article from yesterday.

Treasury Tuesdays

Treasury's are not the best market to be in right now:

U.S. Treasuries headed for their biggest quarterly loss in four years because of speculation the Fed will push borrowing costs higher later in 2008 to keep inflation in check.

Let's look at the 6 month charts to get a better picture of that is happening.







The short, medium and long end of the curve have all been dropping for a few months. The question is why? There are several reasons. First, all three parts of the curve rose in a big way in reaction to the credit crunch that started last summer. So the sell-off is simply a matter of profit taking. Secondly, the equity markets started rallying in mid-March. This rally competed with the Treasury market for funds and attention and won. Third, inflation started to become more and more prevalent:

Conflicting stories about inflation and growth will buffet markets this week and beyond, keeping bonds tied to ranges, with intraday swings, unless the credit crisis or the economy take a large turn for the worse. That would force central banks to shift their attention away from inflation back to growth -- an unlikely prospect this week, with the European Central Bank set to raise rates at its meeting Thursday.

Also remember this part of the Fed's statement:

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

So - why are all three Treasury sectors rallying right now -- and why have they broken through upper resistance? My feeling is the market thinks two things. First, there is a safe haven bid in the Treasury market from the recent market turmoil. Secondly, the Fed said they would probably act but didn't. The lack of action led traders to buy the market now.