Pete Kendall's Socio Times: A Socionomic Commentary

March 14, 2007
The stock sell-off in the subprime mortgage sector turned into a full-fledged contagion yesterday, as the pending collapse of mortgage originators drove the Dow Jones industrial average down more than 242 points. Few stocks were left unscathed as reports of spiking mortgage delinquencies across the lending sector sparked renewed fears of recession.

The Dow fell 242.66 points to close at 12,075.96 - the second-worst decline of the year. The Nasdaq composite index tumbled 51.72 points to close at 2,350.57. The S&P 500 sank 28.65 points to 1377.95.

Shares of all 88 financial companies in the S&P 500 index took a hit, erasing $13 billion in value and led by mortgage powerhouses Lehman Brothers and Bear Stearns.

The subprime mortgage funeral march is proving very damaging to the bottom lines of some of the biggest investors in the financial world.

Accredited Home Lenders yesterday announced that it will explore "various strategic options" after lenders demanded $190 million to cover potential losses from bad loans.
NY Post

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A Subprime Blaze: Sometimes a Fire Sale Is Just a Fire
Category: NEWS
By: Pete Kendall, March 14, 2007
Since the subprime industry’s unfolding debacle is leading the decline in stocks, as well as the bursting debt bubble, there is much to learn from it. First and foremost is how important it is to ignore those who continue to suggest that the trouble is over or contained.
The Elliott Wave Financial Forecast, March 2, 2007

We don’t generally comment on the day-to-day market action here; that’s what the Short Term Update is for; but the “subprime tsunami” bears comment. While we’re hearing more voices of concern about the mortgage industry and the potential of broadening ramifications within the larger debt markets and the economy, there’s still some very conspicuous signs of complacency. Exhibit A is the U.S. Secretary of the Treasury who is his clearly staking a claim to a lead role in a phenomenon that was known as the "revival chorus" in 1929. After the crash, the book Rainbow's End notes that administration officials, industrial leaders, bankers and utility leaders sang the praises of an imminent return to the prosperity. Here's a similar tune from the latest issue of The Wall Street Journal:
Paulson Downplays Subprime Fallout
Treasury Secretary Henry Paulson downplayed the potential broader economic fallout from the current subprime lending turmoil.

“You need to look at the underlying economy. We’ve got in my judgment a healthy economy,” Paulson said. “The fundamental question is, has that market bottomed out? I’m optimistic that it has, I don’t know for sure.”

According today’s Journal, bargain hunting Wall Street firms continue to act on the same hunch (see discussion of dip buying interest in subprime and other areas on Friday). Paulson’s old firm, Goldman Sachs, for instance, reportedly sees the “growing turmoil in the market for risky home loans as an opportunity. Goldman is looking at pushing deeper into the business, ramping up its own subprime-lending operation and pondering the purchase of another.”

We’ll stand by our statement at the top of this page and that of March 2005. Given that we were virtually alone in making these bearish pronouncements, it’s interesting that Paulson now says “the distress of the subprime mortgage market is something that should have been anticipated given the housing correction.” Actually it’s the other way around. The collapse of the housing market could have been anticipated with help of a decline in the subprime area. In fact, The Elliott Wave Financial Forecast did just that. In the first half of 2005, EWFF identified a clear five-wave descent in the EWI Suprime Lenders Index and stated, “The potential for a serious unraveling of the market is confirmed by the [this index], which combines the stocks of four major suprime lenders. These clean five wave patterns portend a fall to much lower levels.” 

Since we also stated at the time that the subprime firms “are on the the front-edge of the credit and housing bubble,” we certainly agree that the crumbling subprime sector is an important element of the unfolding bear market and its accompanying deflation. But it is wrong to say it is the cause of the decline as so many headlines now assert. The sell-off and initial signs of a faltering economy are no more caused by the failure of subprime lenders and loans than winter results from the first snowfall.  As The Elliott Wave Financial Forecast has been saying for the last two years, subprime’s demise simply signals the start of a new economic season. And as EWFF also noted in recent weeks, the slow but relentless onset is a sure sign that it will be a long, hard one.

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Subprime fallout, Ameriquest cuts 3,000 jobs. Company cites very challenging non-prime market for extreme move.They are starting to fire people.
Posted by: Eugene Fina
March 14, 2007 01:50 PM

Wall Street investment banks will maintain that damage from the subprime lending debacle remains well contained as a result of their hedging strategies. The truth is that they have no other course of action but to exude confidence until they actually figure out who owes what to whom. The financial engineering that supposedly protects them from mortgage debt default is so convoluted and interleaved that it will take something resembling a meltdown to really know who is left holding the bags.
Posted by: Sheldon M. Rubin
March 14, 2007 01:50 PM

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