Friday, April 17, 2009

CA to lead ES lower

Are the Credit Markets starting to smoke Crack as well?
Credit markets are beginning to show signs of improvement. The CDS counter-party index plunged 5% yesterday, LQD and JNK are both rising, so the stock market isnt the only one pricing in better outcomes this year this suggests that maybe its incorrect to be bearish and perhaps I need to cover short positions in banks/brokers, REITs, airlines, life insurers, levered utilities,etc

There is however one problem that the market simply doesnt know. CA is 35% of the foreclosure count and 45% of the dollar foreclosure figures(this data might have changed since 2008) nationwide. The Notices of Default(NOD) are simply soaring according ForeclosureRadar(reached a new record last month). NOD are a leading indicator for foreclosures down the road(they are the first step in that process), they were depressed for months as the government demanded moratoriums and other silly tools to 'fix' the problem. So we pretty much know that CA will be hit with a big supply jam down the road and Case-Shiller will keep nosediving(It collapsed at a 33% annualized rate in Jan, I would not be surprised if other US bubble markets were having high NODs as well). Unless decades of econometric evidence all the sudden break down there is simply little reason to expect the economy to 'pickup' in the 2nd half as asset markets lead by housing(and soon to follow stock and credit markets) keep diving

More home price declines will lead to the wealth effect on consumer spending, the capex effect on the corporate sector and the balance sheet effect of the banking sector and that simply wont sustain economic recovery in the 2nd half. Risk markets seem to be pricing in some kind of recovery in the 2nd half(consensus of economists is that the recession will end in September), however this looming CA foreclosure crisis should hit the banks hard and drive asset prices lower

Why I assume this data is not currently priced in by the securities markets? Because of the crazy reactions markets have on the slightest upticks in housing data, furthermore data disseminated by foreclosure radar doesnt seem to be widely followed, when dozens of Goldman traders glued to bloomberg terminals start to jam or crash ES futures or the CDS counterparty risk index swaps based on CA NODs then I might be inclined to listen to market signals more closely. You almost cant find anyone who follow these numbers, yet they love to pay attention to existing home sales upticks when those upticks tend to be generated by higher foreclosure sales

At this point however I'm inclined to agree that the post Lehman depression seems to be over and thats as bullish I'm willing to go

Sources:
Foreclosureradar.com
Mr. Mortgage new secret(not public yet) blog about the looming CA crisis
CA Foreclosures about to Soar

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