Naked Hedge Fund

This report is the latest release from the Office of the Comptroller of the Currency and Office of Thrift Supervision on the mortgage industry and the stats on the performance. It is a great report that comes out quarterly that lays out all the details of the mortgages out there. A lot of great data tables and charts that show the current performance of mortgages and also the performance of the home retention actions.

The Federal Reserve Bank of New York released a paper about the massive amounts of excess reserves that banks are packing onto their balance sheets. In the post is the link to the PDF:

A study done by First American Core Logic released by CAR (California Association of Realtors):

“Shadow Housing Inventory” Put At 1.7 Million in 3Q According to First American CoreLogic
Summary:

* As of September 2009, First American CoreLogic estimated there was a 1.7‐million‐unit pending supply of residential housing inventory, up from 1.1 million a year earlier. Pending supply, sometimes referred to as “shadow” inventory, estimates real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago.

Charts on post

A lot of happy people out there… or so it seems. The green shoots have bloomed into amazing profits at banks and a 60%+ rally in the market from the dark lows. I’ll admit I’ve been a happy camper as well closing in on a yearly return of 35%+ with only 14 days that trades were made (long/short S&P) is unheard of… well at least for the last fifty years or so. And then Santa Claus came to town to boot. Imagine being invested/locked into a CD for the past year earning a measly 2-3% for the whole year!! yikes.

But even with all of this euphoria surrounding the market you get a sense that there is a ghostly figure hanging around. Why does it feel like history is repeating itself and we are setting up for failure? Maybe its because:

* TARP (Trouble Asset Relief Program) didn’t get rid of any troubled assets and the money is unaccounted for every time senators ask Ben Bernanke or any his gang.
* The banks that were “Too Big to Fail” are now BIGGER.. this was a problem that was supposed to be eliminated, but it has been enhanced with big banks taking over other big banks. (i.e. JP Morgan taking over WAMU)
* Unemployment is at record levels
* Mortgage Defaults are off the charts
* Liquidity is not happening in the marketplace as banks are hoarding
* The US is incurring astronomical amounts of debt at levels that no one ever thought would/could exist

Just some items that come to mind. So with this thought of history repeating in my head I looked back at a post about the mortgage reset chart that we had and looked at that big double peak of resets. I came up with a crazy idea of overlaying a chart of the S&P 500 that spans over the same time period. And since we are in the “eye of the storm” on the resets I added a copy of the same S&P 500 chart and connected it to where we currently are. Its probably a lot easier for you to look at the chart than for me to explain it, but it was pretty interesting. And as a primer keep in mind that this is just a crazy idea with no basis other than the fact that the mortgage resets are happening in a distinct double peak pattern, which could mean a distinct double dip pattern for the stock market. There are a bunch of caveats that go with this as well… that I will get into later.

Here are the headliners from the chart:

* The low on SPY of $52 (currently $112) would be hit around late 2011 early 2012
* Our current market will peak around July/Aug around $120
* Notice how Option Adjustable loans + Alt A loans blow away the subprime totals from the last few years.

Art Cashin, the director of floor operations for UBS, does a nice job in this interview of smoothing out everything that happened this past year and putting it all in perspective.