2010 Has the Look and Feel of 2007

Richard Suttmeier submits: Back in March 2007, I predicted Recession in 2008 / 2009, with GDP at the end of 2009 below that of 2008 for the first time since 1948-1949. This proved correct as current dollar GDP declined 1.3% in 2009. I also predicted that the stock market would enter a bear market in 2007 and from its October 2007 high of 14,198 declined 54.4% to 6,470 at the beginning of March 2009, when I predicted a 40% to 50% rally. The Dow is up 4.8% year to date and up 69.8% from the year ago low, so the rally has been larger than I expected. Even so, the Dow is still 23% below 14,198. I based my predictions on ValuEngine metrics and data from the FDIC Quarterly Banking Profile, which to me is the single most important leading indicator for the US economy.

• In March 2007, I saw that data from the FDIC was clearly starting to deteriorate. This was after the peak in home builders in July 2005, Community Banks in December 2006, and Regional Banks in February 2007. This weakness continues to surface quarter after quarter.
• In October 2007, all eleven sectors were overvalued according to ValuEngine. Today, all eleven sectors are overvalued.

The Housing Market Remains Weak – After some improvement in the second half of 2009, home prices will decline again in the second half of 2010, as tax incentives sunset, and foreclosures rise on difficulty with mortgage mitigations from the numerous government-sponsored programs. Bad Consumer and Real Estate Loans Are Still Rising – Subprime loans were viewed as isolated in 2007, but obviously the problems spread to the broader mortgage market and dragged down the economy. Defaults and foreclosures continue to rise in 2010 with four million possible by year’s end, up from 2.8 million in 2009. Many bad loans were pushed off balance sheet, and FASB rules now state that mark-to-market account has returned. The FDIC is allowing insured institutions until the end of 2012 to accomplish this. Our regulators are playing Kick the Can. The “too big to fail” banks have gotten bigger and will likely get hit by the Wall Street “greed tax”, which is supported by regulators in Great Britain and in Euroland. The smaller community and regional banks still have some suffering to do as they wind down exposures to C&D and CRE loans, with tougher guidelines looming around the corner. In sum, housing and banking stocks have been out-performing so far in 2010, but this mojo is for short-term traders only. Investors should be paring back positions on strength. Housing Sector Index ((HGX)) is up 9.6% year to date, but down 61.7% since its July 2005 high. The short term uptrend continues given weekly closes above my monthly pivot at $109.85. The upside is to the 200-week simple moving average at $144.64. (Click to enlarge) The America’s Community Bankers’ Index ((ABAQ)) is up 16.4% year to date, but is down 45.3% from their December 2006 highs. The short term uptrend continues given weekly closes above my monthly pivot at $156.80. The upside is to my annual resistance at $197.07 and to the 200-week simple moving average at $220.32. (Click to enlarge) The Regional Bankers Index ((BKX)) is up 28.9% year to date, but is down 54.6% from their February 2007 highs. The short term uptrend continues given weekly closes above my monthly pivot at $53.31. The upside is to my annual resistance at $73.12 and to the 200-week simple moving average at $76.30. My semiannual support is $40.76. (Click to enlarge) All of the “smart” testimonies recently from CEO’s, Directors, Fed Speakers and others in the regulatory community are from those who did not see “The Great Credit Crunch” in the making. The testimonies in Congress and various speeches have the theme that “The Great Credit Crunch” has been resolved. I disagree! I am one of the few independent strategists that saw it coming, warned about recession and the bear market for stocks well in advance. “The Great Credit Crunch” will continue right through 2012 and into 2013 if not longer. It will be tough to unwind all of those bad loans and there are many unknown time bombs ticking in $213.6 trillion in unregulated notional amount of derivative contracts. The can is being kicked down the road, and there appears to be a cliff at the end of the road. Disclosure: No positionsComplete Story »