Market Report: Plummeting as the Dow Surges
It was 2001 when Fannie Mae announced that the U.S. housing market should continue its strong performance through 2001 as the economy rebounded and long-term interest rates stayed low. New home sales, at the time, were expected to climb to a record 889,000 units in 2001, beating the record for new home sales of 885,000 units set in 1998. Sales of existing homes had just risen in May, to a bigger-than-expected gain that pointed to ongoing strength in the housing market. It was one of the bright spots in the sluggish U.S. economy.
Six years later, mortgages were the one area of subprime where we saw something that looked like a recession. Lennar, KB Home, and DR Horton didn’t see the bottom that the likes of Hank Paulson was calling for. Home sales and prices were pulling back, and delinquencies and loan defaults continued to spike.
We also knew that 2.2 million borrowers could, at the time, lose their homes and up to $164 billion of wealth in the process. The writing was on the wall for further downside. We called for New Century to head to bankruptcy, which it did. We called for subprime and Alt-A loans to stumble, and they did.
Nowadays, Cramer is whining that the Fed won’t do anything. But how can it? Cut rates, and the dollar falls further, and inflationary pressures go through the roof. As long as consumer spending isn’t affected, and as long as the Fed perceives that the economy is okay, we won’t see rate cuts. Still, the market believes the Fed will step in and save the day, sending the Dow up more than 150-plus on the day.
But even as the market soars on rate-cut hopes, the banks, the lenders and the homebuilders are taking it on the chin, tumbling to historic lows. Bear Stearns (BSC), for one, for the first time in about two years, pulled under $100 from an all-time 2007 high of about $165.
Centex (CTX) is retesting 2003 lows and, at current pace, could easily retest 2003 lows of about $20. IndyMac, where CEO Mike Perry just stated that the private secondary mortgage market is not functioning, is about to retest 2003 lows of about $15, and could very well retest 2000 lows of $10 at current pace. And PMI’s falling knife has already pierced through $35 support and is headed to 2003 support at $25.
When the Fed fails to step in and bail out housing, we’re anticipating a stellar downward move. In fact, when all is said and done, we could easily see Dow 12,400 by Nov. 1, 2007.
Ian
