Housing, Banking Headed for 'Great Credit Crunch II'

Richard Suttmeier submits: The 10-Year Treasury auction was a success and the 30-Year bond is auctioned today. Gold is consolidating gains to Tuesday’s all time high at $1254.5 and is just below my weekly pivot at $1225.8 this morning. The euro is above this week’s support at 1.1863 and tested Wednesday’s resistance at 1.2067 – An oversold rally to my quarterly pivot at 1.2450 is possible. Crude oil tests Wednesday’s resistance at $74.74 keeping the range-bound trade between $67.15 and $75.72 per barrel in tact. The Power of the Pivots remains for the Dow, S&P 500 and NASDAQ. Mortgage applications continue to decline despite low mortgage rates. Bernanke says “all is well” but fragile and I re-iterate my cautious themes. US Treasury Yields –Tuesday's 10-Year note auction was a success as the US Treasury sold $21 billion at 3.242% with the issue trading below that yield after the auction. The bid to cover was strong at 3.24 times and the Indirect Bid was 40%, at the upper end of my 30% to 40% neutral zone. Yesterday, the US Treasury auctions $13 billion reopening of last month’s 30-Year bond with my quarterly resistance looming at 4.026. Semiannual support lags at 4.543. Chart Courtesy of Thomson / Reuters Comex Gold – has overbought MOJO on its weekly chart, as the precious metal reached an all time high of $1254.4 was set on Tuesday versus monthly resistances at $1265.9 and $1277.4. Semiannual support is $1186.5 with my weekly pivot is $1225.8 and annual support lags at $1115.2.Courtesy of Thomson / Reuters Nymex Crude Oil – shows declining MOJO on its weekly chart with the 200-week simple moving average at $76.73. Today’s support is $71.10 with my annual risky level at $77.05. Oil remains in a trading range between $67.15 and $75.72. Courtesy of Thomson / Reuters The Euro – shows oversold MOJO on its weekly chart despite, as the euro stays above this week’s support at 1.1863. Quarterly and monthly resistances are 1.2450 and 1.2679.Courtesy of Thomson / Reuters Weekly Dow identified the beginning of the second leg of the multi-year bear market when I plotted the 61.8% Fibonacci Retracement of the decline from the October 2007 high to the March 2009 low at 11,246 on April 26th with the high at 11,258. MOJO is declining and weekly closes below the 5-week modified moving average at 10,312 keeps the weekly chart negative. My annual pivot remains 10,379. I still predict Dow 8,500 before Dow 11,500. Choppy trading this week is being caused by the Power of the Pivot. The Dow pivot is 9,986, the S&P 500 pivot is 1061.1 and the NASDAQ pivot is 2215. Courtesy of Thomson / Reuters Mortgage applications declined 12.2% in the week ending June 4th. Applications are down 30.4% year over year to a new thirteen week low, and the Purchase Index is down 35% since the end of April when the home buyer tax credits expired. The 30-Year fixed rate mortgage is 4.81% but the Refinance Index declined 14.3% last week. This mortgage rate is 160 basis points above the yield on the 10-Year Treasury. At the end of March when the Fed stopped buying mortgage-backed securities this spread was 115 basis points. Bernanke says that the European debt crisis is likely to have only a modest impact on the economic recovery in the US. This is the same Bernanke that said that subprime would not spread to the real economy. Remember two years ago he looked for below trend growth in the second half of 2008. The Fed estimates 3.5% growth this year, which will not be strong enough to bring quick relief to the 15 million Americans who are out of work. In 2011 GDP is projected to be 3.5% to 4%. This seems overly optimistic to me given all of the concerns I have been writing about. In typical fashion Bernanke hedged his positive tone by saying that one worry is a potential contagion from the European Debt Crisis, which could crimp lending in the US and around the globe. As these concerns become headline events the stock market has had periodic nosedives. Bernanke is also worried that hiring in the US by private companies could stall. In my opinion these concerns are more likely than the optimistic side of the Chairman’s coin. My Concerns If we look at some historic stock charts, we find that the homebuilders peaked in mid-2005, the community banks peaked at the end of 2006, and the regional banks-- including those considered “too big to fail,” peaked in February 2007. In October 2007, the contagion spread to the broader economy and we entered the current bear market for stocks. Now, we are discussing a different contagion, one that is spreading from Europe as PIIGS nations face debt issues. We also have the clouds of the volcanic eruptions from Iceland making it difficult to schedule trips to and from Europe. At home, we have been suffering from the Gulf of Mexico oil spill--which is already hurting the coasts of Mississippi, Louisiana, Alabama, and Florida, and may lead to canceled beach vacations throughout the southeast, decimated local fishing industries, and far more widespread economic effects. We also have stalled community construction, empty office buildings, and strip malls sparsely rented. State and local governments are hurt by defaults in real estate taxes or lower real estate taxes as property values decrease. This results in state and local budget cuts that effect schools, public libraries, services and health care. As bad as these local crises appear to be, do not let them mask the fact that “The Great Credit Crunch” that began with the deflation of the housing bubble in mid-2006 is still hurting homeowners across our country. As a result, almost every Friday--”Bank Failure Friday,” community banks continue to fall like dominoes. The FDIC is hard-pressed to even keep up with its growing non-list of problem banks--which according to the latest data grew to 775 in the first quarter of 2010. Community Banks are key to the economic recovery and the ever-growing list of Problem Banks maintained by the FDIC indicates that the recovery is not a sure thing. Community Banks are failing because of overexposures to C&D and CRE loans-- negotiated mostly between 2004 and 2006. As these loans enter default, banks fail. This further disrupts the economic recovery. The economy on Main Street is driven by small businesses, the housing market, and local construction. This is the engine of job growth in the private sector. Without job growth on Main Street, we will see a double-dip recession and consumer spending-- which is 70% of the economy, will decrease. These small businesses need capital, but with 34.3% of the FDIC's insured institutions overexposed to C&D and / or CRE loans they are unlikely to get it. More than 50% of all community banks have funded 80% or more of their real estate commitments. This is a big reason for the lack of lending and hence job growth on Main Street USA. Small businesses with established lines of credit with a bank that fails have to begin again with a new bank in order to establish critical funding. I still predict a renewed housing market slump—set off this time by the expiration of the home buyer tax credits. The slump in housing will again hurt banks. I also continue to predict that the sizable real-estate loan exposures at community banks will fuel a steady flow of bank failures--which will reach the 500 to 800 range by 2012 into 2013. The Housing Market and Banking System are thus headed for a second leg of the “The Great Credit Crunch”. Foreclosed homes become OREO at banks, who sell at lower prices, which reduces appraised values in the community. This causes cities, counties and states to lose tax revenue resulting in budget cuts, and the trend is that municipal workers are having workweeks cut to four days from five, which brings additional households into mortgage distress. The Beige Book – The Gossip Columns from the Twelve Fed Districts

• Economic activity continued to improve since the last report across all twelve Federal Reserve Districts, although many Districts described the pace of growth as "modest."
• Consumer spending and tourism activity generally increased. Business spending also rose, on net, with employment and capital spending edging up but inventory investment slowing.
• Non-financial services, manufacturing, and transportation continued to gradually improve.
• Residential real estate activity in many Districts was buoyed by the April deadline for the homebuyer tax credit.
• Commercial real estate remained weak, although some Districts reported an increase in leasing.
• Financial activity was little changed on balance, although a few Districts noted a modest increase in lending.
• Prices of final goods and services were largely stable as higher input costs were not being passed along to customers and wage pressures continued to be minimal.

Real Estate and Construction – Overall there was an increase in home sales and construction before April 30th when the homebuyer tax credits expired. Since then housing and construction slowed in May. Tight credit conditions and the elevated inventories of homes for sale and the foreclosed properties on the books of banks is holding back residential development. Commercial real estate activity remains weak with office, industrial and retail vacancy rates drifting higher. The elevated inventory of existing properties for sale or rent continues to drag nonresidential construction. Disclosure: No PositionsComplete Story »