Posts Tagged Credit Card Debt

Top Ten Signs the Market Could Be “Topping”

Posted by Harley in The Economy on October 3, 2009

By Justin Ford

Let’s get right to it. Drum roll, please…

10.  Irrational Exuberance gives way to Incomprehensible Elation. In the midst of the worst recession since the great depression, on the heels of a 50% stock rally in six months and just before a new major wave of housing foreclosures and a likely commercial real estate bust… Wall Street is selling stocks like there’s no tomorrow. A screen of 5,817 actively screened stocks yields just 154 with a “sell” rating. That’s one out of 38. At the height of the tech boom, it was one out of 29.

9.  The “Invisible Bailout” reaches record levels. This is the bailout no one’s talking about—executives bailing out of their company’s shares! Trim Tabs reports the highest level of insider selling since they began keeping records in 2004, with insiders dumping $105 billion of stock during the rally. That’s 31 times greater than the pace of insider buying. This is almost the exact opposite of Wall Street’s sell-rating ratio. Well, the sharks have to sell to someone, and brokers appear to be lining up the minnows to take the CEO’s shares off their hands.

8.  Ugly is beautiful and bad is good. Excessive credit caused the crisis we’re in but you wouldn’t know it by looking at the stock market. A recent survey of public companies showed those with the worst credit ratings have led the rally—soaring 89% while the S&P 500 rose 53%.

7.  The Rally is long in the tooth. We’ve had greater rallies than the current one but not longer ones—at least not after major crashes. The longest rally during the 1929-32 bear market was 155 days. We are on day 204 of the current rally.

6.  A New Wave of Housing Foreclosures will begin in the 4th quarter. Loan modification plans have been largely ineffective because banks have been stingy and loan servicers don’t have the authority to modify many of their loans. Consequently, many foreclosures that have been postponed until now, will be postponed no longer. They’re going to happen. And there are quite a few of them. Mortgage companies hold 1.2 million loans on which they haven’t received a payment in 90 days, another 1.5 million that are “seriously delinquent,” and 217,000 that haven’t received a payment in over a year. In all, 3 million new foreclosures could come on the market in the next year, further depressing real estate prices. A big chunk of those could happen in the next few months. “We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running,” a Bank of Ame rica spokeswoman told The Wall Street Journal last week.

5.  Dirt-cheap mortgage money may come to an end soon. If you can get a mortgage today, the money is as cheap as it’s ever been—about 5% for a 30-year fixed-rate loan. But that may not last long. The Fed has bought 80% of the Freddie Mac and Fannie Mae mortgages since the crisis began. Private investors still aren’t interested. What’s more, the Fed’s $1.25 trillion program for buying these mortgages is two-thirds done and scheduled to finish at the end of the year. If the government doesn’t incur more debt to buy this debt, rates will rise and put a further kibosh on the decimated housing market. And all these housing woes don’t even count the considerable trouble brewing in the commercial real estate sector…

4.  The Crisis in Commercial Real Estate is just beginning. Delinquencies on commercial real estate loans recently rose above 3%. That’s more than six times the level of a year ago, but it’s likely only the beginning. Double-digit unemployment and a chastened consumer’s are causing office and retail vacancy rates to rise and rents to plummet. Making matters worse, most lenders finance commercial properties with balloon loans. These are typically due in full after just five, seven or ten years, and loose-money loans originated in ’05 and ’06 are now coming due. Yet since values are falling many commercial property owners will not be able to refinance. The problem is widespread too since commercial real estate loans are usually the bread and butter of local banks. Only ten major banks made up the bulk of the housing lending market. Yet, according to The Wall Street Journal, more than 3, 000 banks and savings institutions have more than 300% of their risk-based capital in commercial real-estate loans. And almost $100 billion of their loans coming due in the next three years may have difficulty getting new financing.

3.  The Consumer isn’t coming to the rescue, as hoped. Consumption is the biggest component of the U.S. economy—but getting smaller. Unemployment is at 10% by official figures (over 20% according to Shadow Stats); there are six job hunters for every job opening and 52% of job hunters say they’re exhausting benefits before they find that next job. Credit card delinquencies are up 60% and 7.6% of all U.S. households were late on their mortgage last month!

2.  October is a scary month. OK, there’s nothing very scientific about this one, but October is the month for Halloween and major market crashes. Past Octobers have seen intra-month plunges of 41% in 1929; 39% in 1987; and 29% last year. As we enter month seven of a record rally, this odd piece of history may replay yet again.

And the number one reason the market could be topping…

1.  The number one Predictor of Collapsing Share Prices just issued its first sell signal in 226 days. The predictor is The Credit Crunch Short Indicator. It consists of four criteria that appear very rarely together in any one stock. The first identifies a company that is going through a credit crunch. The second and third confirm the situation is getting worse. The fourth indicates the credit problems are beginning to show up in the share price.

The one problem with the indicator is that it is extremely selective. It doesn’t tell you when to short an index or a mutual fund or ETF. And it doesn’t try to catch all falling stocks. It only targets the ones that are the “weakest links” financially.

But when it triggers, it has proven to be very accurate. And when it doesn’t find easy pickings, it’s as silent as a church mouse. In fact, during the recent bull market rally the Credit Crunch Short Indicator didn’t issue a single sell signal in over seven months. After averaging over two a month covering nearly a three-year period, it went dead silent. Until last week.

Then, like a reliable old boiler kicking on again the first cold day of winter, it revved up and spit out a brand new sell signal. Two months ago, during the height of the rally there were none. But now seven are “knocking on the door” with three criteria for shorting confirmed and only a few points away from a possible 4th criterion and another “sell signal.”

The point is that when the most selective indicator we’ve ever seen begins to issue sell signals, it is another good reason to keep an eye on the exits and take action to protect your capital and possibly even make significant profits in the next market correction.

In itself, a 50%+ rally in just over six months should be enough to give even the most bullish investors pause. But combined with other unpleasant news on the horizon and the sudden “talkativeness” of one of the market’s most selective indicators… it all leads me to believe it’s time to take some defensive action.

What’s that mean?

  • Buy gold if you haven’t already. If a market correction turns into a panic even for a little while, you could see gold and silver rise smartly. And if it’s a dull steady decline, gold tends to hold when paper assets fold.
  • Set stop losses on your long positions. It could be 20% or 25%. They could be market stops or mental stops (which makes you responsible for placing the sell order when the shares drop 25% from their high). Either way, pay attention to your stocks, especially in broad market declines and stick to your strategy for protecting gains and preserving capital.
  • Look for opportunities to make money on the short side, profiting from falling share prices by targeting the most financially vulnerable companies, waiting for technical price confirmation before placing your trade, and again—having a stop loss in place.

They say an ounce of prevention is worth a pound of cure. It’s time to take a few ounces.

Sincerely,

Justin Ford

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U.S. Credit Card Trap

Posted by Harley in The Economy on August 18, 2009

by Jennifer Barry, GlobalAssetStrategist.com | August 13, 2009

With U.S. household net worth down US$14 trillion since the peak in 2007, Congress has belatedly started to act concerned about the financial condition of the American consumer. In May, legislators passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act to great fanfare. The law does end some of the worst abuses, prohibiting an increase in interest rates if a customer is late paying a different company, disallowing most retroactive rate hikes, and banning fees if the bank neglects to credit a payment.

However, if you have revolving balances on your credit cards, this is no time to relax. The law does not take effect until February 2010, giving credit card issuers a window to jack up fees and interest rates. It also fails to set an upper limit on these charges at the federal level. As financial institutions can incorporate in states without legal limits, major credit issuers can continue to charge any rate they wish as long as they disclose it. This permits banks to borrow from the Federal Reserve at a fraction above 0%, paying ridiculously low yields on deposits, while charging their credit card customers many times that percentage. For example, Wells Fargo is currently paying a laughable 0.05% on savings accounts in my area, with a $300 minimum balance.

The newest proposal debated in Congress is the formation of a Consumer Financial Protection Agency, which would allegedly protect the public from unscrupulous lenders. Politicians claim that fraud and risky financial behavior “fell through the cracks” in the regulatory system, even though many of these same individuals advocated for fewer controls a decade ago. Why should citizens believe that the same bureaucrats who failed to stop Bernie Madoff’s Ponzi scheme will act in their best interest?

It’s naïve to expect the U.S. government to take aggressive action against financial institutions, as both political parties receive ample campaign contributions from banks like Goldman Sachs. After all, Congress voted to make punitive changes to the bankruptcy laws in 2005, parroting the industry propaganda that many borrowers ran up their credit cards and then declared bankruptcy in order to avoid repaying their debts. In contrast, Elizabeth Warren’s data shows that 90% of bankruptcies are caused by family breakup from death or divorce, job loss, or health problems, not conspicuous consumption. The real gamers of the system were not borrowers, but the banks themselves.

The law, written by card issuer MBNA, made it more difficult and expensive to discharge debt, and limited the assets that could be protected from collection by unsecured creditors like – you guessed it – credit card companies. Sheltered by legislators, underwriting standards dropped on all sorts of consumer loans after the passage of this law. The banks were able to continue their pyramid scheme of packaging poor quality debt as AAA rated securities, selling it to trusting investors, and using that capital to make even more bad loans. Ratings agencies like Standard & Poors were complicit in the scheme, using the banks’ own models to evaluate these derivatives.

When this house of cards finally came tumbling down, it wasn’t the consumers who were helped, but rather the banks who cynically gambled with shareholders’ capital. Legislators allowed institutions to get “too big to fail” by eliminating protections like the Glass-Steagal Act in 1999, then threw trillions of dollars at these same banks when they later became insolvent. As Allan Sloan puts it, Wall Street’s attitude is “heads I win, tails I get bailed out.” Even sadder, the American taxpayer is still vulnerable to further “rescues,” as the mega-banks have not been chopped into manageable pieces, and they are still permitted to takeover their smaller insolvent rivals.

In reality, there is no need to create additional agencies or new burdensome regulation. There are plenty of laws against cheating and stealing on the books, just a lack of enforcement. For example, the FBI could have prosecuted financial crimes but much of the agency was diverted to fighting terrorism after 9/11. The CFTC pretends it doesn’t see the obvious manipulation in the precious metal markets, while the SEC has resisted prosecuting naked short sellers.

While Congress intervenes overtly in the credit markets, the Federal Reserve is acting as a debt pusher behind the scenes through the Term Asset-Backed Securities Loan Facility, or TALF. As this initiative is administered by the Fed, it lacks even minimal Congressional oversight. When the credit markets froze last year, the Federal Reserve designed this program to give loans to investors who want to buy consumer debt instruments. The Fed’s intervention increases the moral hazard in the economy by creating an artificial market for these derivatives. If lenders did not have a market for consumer debt, they would have to cut credit lines and close accounts. This would force fiscal austerity even in people reluctant to slash discretionary spending. However, beneficiaries like Cabela’s, a sporting goods company, are now marketing additional credit to customers, backstopped by Federal Reserve guarantees.

Chairman Ben Bernanke claims that TALF and similar bailouts are “emergency programs” that will be terminated soon, but their influence is already warping the business environment. Subsidies choose winners and losers, swamping any competitive advantages. Large corporations have an advantage over smaller companies, as they can afford to fill out the paperwork and lobby for access to bailouts. This crushes new innovative businesses, dampening job creation.

Despite the Federal Reserve’s disastrous stewardship, Congress plans to convert it into a “super-regulator,” giving it even more control over the U.S. economy. The Fed already has few checks on its power, as it is a private entity, not part of the government as many believe. In addition to driving monetary policy, it would gain “sweeping new authority to regulate any company whose failure could endanger the U.S. economy and markets.” This change would “sidestep most jurisdictional disputes” and centralize the economy under the direction of an unelected non-governmental body run by the banks.

The Democratic leadership intends to push this through Congress quickly, in what I think is a reaction to Dr. Ron Paul’s successful Audit the Federal Reserve campaign. He already has enough co-sponsors to pass his bill in the House of Representatives if it were allowed to come to a vote, but party leaders have blocked it. If the Fed gets to captain the economy, it can refuse to account for its actions as a matter of national security.

For years, the American people have passively allowed the banks to rake in obscene profits on the backs of the taxpayer. Finally, we are seeing some grassroots resistance to this blatant favoritism, with “tea party” protests and angry constituents confronting their representatives at formerly placid town hall meetings.

Unfortunately, this awakening is too late to prevent the destruction of the U.S. dollar. The debt bubble has already burst, and the attempts by the Fed to reflate it have created an enormous burden on the U.S. taxpayer. Since I first detailed the bailouts last October, obligations have ballooned from approximately US$2 trillion to an incredible $23.7 trillion according to Neil Barofsky, the special inspector general of the Troubled Asset Relief Program (TARP).

Don’t expect any government agency to protect you from the coming hyperinflationary depression in the U.S. Now is the time to reduce your debt, sell off unwanted assets, and live below your means. During times like these, paper assets have historically performed poorly, so move your savings into hard assets like the precious metals instead.

Copyright © 2009 Jennifer Barry
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Jennifer Barry Dallas, TX USA | Email | Website

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