Last week we wrote about a few of the dynamics that could affect stocks in the coming weeks and how we do not know the true extent of their stats. We watched another equity roller coaster week and listened closely to the news and the commentary on those news events. What jumped out at us is the assuredness many commentators, both bullish and bearish, have regarding their take. Considering the source is always important. For instance have you ever met a Realtor that tells you that it is not a good time to buy real estate? When the market swooned from 2000-03 so did the ratings for CNBC and we have noticed they tend to put a positive spin as much as possible on the market views. We thought it might be instructive to share some of these dynamics that depending on how they play out collectively could have an impact on stocks. Remember these are our thoughts and only our opinion.
1. What is the real number of sub-prime mortgages in the system and how significant is the looming resets on adjustable rate mortgages?
2. Will lenders re-finance these loans rather than foreclose on the mortgage holders?
3. How much did the consumer actually fund their lifestyle with home equity withdrawals and are they now tapped out?
4. Eliminating these sub-prime players from the real estate market and potentially adding their foreclosed homes to inventory is probably not good for the real estate market?
5. How much did the real estate market truly play in the economic recovery of the last few years?
6. How much of these sub-prime loans are buried in AAA paper sold to domestic and foreign institutions and can they be effectively valued?
7. How much leverage have these institutions used in their portfolios and how will margin calls affect the markets?
8. Has a similar issue occurred in the corporate, private equity, and municipal bond arena’s?
9. Will the liquidity the Fed injects solve or exacerbate the current credit problem?
10. What happens to the dollar and our markets if foreigners decide to unload their U.S. assets?
These scenarios playing out poorly are what most Bears are basing their gloom upon. The Bulls have the resilient global economies (although the economy always looks good at the top, remember 2000) and liquidity to hang their hat on. Another factor not mentioned much lately is that it is rare for a financial debacle to unfold in the midst of a Presidential campaign. Take away the performance of the economy and the stock market and the Republicans could struggle even more than they did in the 2006 mid-year elections. This is a good time to put your financial advisor to the test and ask him/her what she thinks about these issues. If you get an answer that we are familiar with, “Stay the course” it might be wise to ask others for their input. What a surprise, huh?
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