Half of American mortgage holders to be underwater by 2011

Interesting report out from Karen Weaver, Deutsche Bank, arguing that the percentage of owners with negative equity would double by 2011. Most of the information should be familiar to the readers.

The next leg? The percentage of conforming borrowers with negative equity is expected to go up by more than 250%. Karen predicts 41% conforming borrowers to have negative equity in 2011 compared to 16% in the first quarter. The numbers for prime jumbo go to 46% from 29% currently.

Read more here, or watch the CNBC interview by clicking on the image below.



Just a note that CNBC incorrectly highlights that half of American homeowners would be underwater in 2011. Bubblevision for a change decides to be uber bearish! It’s not half of American homeowners, but half of American mortgage holders who would be underwater. This is of course all dependent on job losses. If job losses do not peak at 10% but keep heading up, this thing is going to get a lot worse. Which is why jobs are a leading indicator in this whole thing.




Negative equity. Underwater mortgages. Drowning homeowners. Maybe time for a few swimming lessons!





Source:

FT Alphaville
Deutsche Bank on those drowning US homeowners
http://ftalphaville.ft.com/blog/2009/08/06/65536/deutsche-bank-on-those-drowning-us-homeowners/

CNBC
Drowning in Debt
http://www.cnbc.com/id/15840232?video=1206971011&play=1

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Market commentary by Citigroup’s chief strategist.

I saw this interesting interview of Tobias Levkovich on CNBC last week. He shared some good points:

• Market Valuations: His price target is 1550(S&P 500), based on valuations, sentiment, and implied earnings growth. Predicts flattish earnings(~$86) in 2008 and 2009 for S&P500. Energy and materials will underperform in 2009 (because of declines in the commodities sector). This would be offset by outperformance in the financials and the consumer discretionary. Refused to discuss specific valuations. Valuations need to be discussed based on risk premiums, historical context, and bond yields; and not in a vacuum. Pointed out that homebuilders looked deceptively cheap in 2005.
  
  
• Commodities: Cyclical conditions will effect the commodity trade severely. To put it simply, commodity prices do go down in a recession. (Note: I discuss this in my post here). A similar thing happened during the inflationary 1970s recession. Agriculture, fertilizers and the chemicals look like the dot-coms.
  
  
• Savings rate: This is going to get worse in the next 5-10 years because of demographics. Retiring baby boomers would be using their savings. (This would be worldwide.) Not really a problem because wealth is growing enormously. Implication: Savings rate isn't a useful metric anymore. This could potentially have negative implications for the markets?
  


• Elections: Current year would be the first time since 1928 that sitting President or VP isn't up for reelection. So the administration doesn't have the motivation for election year stimulus that normally happens. Conclusion: Historically, election years have been good for the stock markets. May not be true this year.



• Asia: Asian companies have really low return on equities (ROEs), even though asset turnover is at a 16 year high. Whenever this turnover goes low, the ROEs will collapse. Don't want to be there when that happens. Not sure where this data point came from, but this is interesting if true. (Note: To understand the DuPont ROE breakdown, refer to this entry)
  


• Real estate: Real Estate bubble and appreciation are far worse outside the US. So you cannot point to the US selectively. I agree. Except the problems in the US are not just about house price appreciation, but caused primarily due to negligent and fraudulent lending practices.



• Post-elections: Critical issue for the post election year is this: are we moving towards more protectionism? Will we abrogate on tax treaties? What about tariffs/ protection quotas? Could be very devastating for markets. Asserts that taxes will go up across the board regardless of who gets elected. This is because they will look to fix AMT before they extend the Bush tax cuts.



• Markets: He talked of a W shaped pattern in the markets. Things will get worse before they get better. The worsening credit conditions effect the economy with a 9 month lag. Hence mid-year to year end, we'll still have problems and will see a slowdown in the industrial side of the economy. Earning estimates for the year end are still too high. Note that there has been some chatter about a double-dip recession. See this and this. Double dip is essentially a W pattern.



• Industrial sector: Talked about an industrial sector slowdown. Even though people talk of resilience in the US exports and the BRICs, two thirds of the “international” for US companies is in Europe. This could hence slow down.

Disclosure: None.

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42.

While this may not be the answer to Life, the Universe and Everything, it comes close.

Written by some famous people, this article basically nails it. If you were looking for ONE article, which discusses and summarizes the current credit crisis/ subprime mess, this is it:

http://www.brandeis.edu/global/

rosenberg_institute/usmpf_2008.pdf

Curiouser and curiouser..

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Subprime collateral damage.

Wow. The whole article by Stephen Roach is very thought-provoking. The only caveat is that consumer slowdown in the US has been predicted unsuccessfully for the past few years. Never bet against the American consumer. But the consumer only has to slow down once to disprove this notion. The absence of a black swan does not preclude it's existence.

Will it happen? I think so. $100 crude might just do the trick.

From John Mauldin:

As always, the cycle of risk and greed went to excess. Just as dot-com was the canary in the coalmine seven years ago, subprime was the warning shot this time. Denial in both cases has eerie similarities - as do the spillovers that inevitably occur when major asset bubbles pop. When the dot-com bubble burst in early 2000, the optimists said not to worry - after all, Internet stocks accounted for only about 6% of total US equity market capitalization at the end of 1999. Unfortunately, the broad S&P 500 index tumbled some 49% over the ensuing two and a half years and an over-extended Corporate America led the US and global economy into recession. Similarly, today's optimists are preaching the same gospel: Why worry, they say, if subprime is only about 14% of total US securitized mortgage debt? Yet the unwinding of the far broader credit cycle, to say nothing of the extraordinary freezing up of key short-term financing markets, gives good reason to worry - especially for over-extended American consumers and a still US-centric global economy.

How all this plays out in the global economy in the years immediately ahead is anyone's guess. I have long framed the tensions shaping the outlook in the context of "global rebalancing" - the need of a lopsided world economy to wean itself from a US-centric growth dynamic. A partial rebalancing now appears to be at hand - likely to be led by the coming consolidation of the American consumer. That is painful but good news for those of us who have long worried about the destabilizing risks of a massive US current account deficit. But a more complete global rebalancing is a shared responsibility - one that must also be accompanied by an increase in domestic demand from surplus-saving economies elsewhere in the world. To the extent that doesn't happen - and, as underscored above, that remains my view - then a asymmetrical rebalancing dominated by slowdown in US consumer demand should take a meaningful toll on global growth.

It is high time for monetary authorities to adopt new procedures - namely, taking the state of asset markets into explicit consideration when framing policy options. Like it or not, we now live in an asset-dependent world. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.

I never thought about collateral damage from subprime. Subprime related losses are estimated to be upwards of $240 billion, excluding any collateral.

Inflation targetting by the Fed, is probably worth another post.

Valuations in emerging markets have reached an interesting crossroads. Economist came out with an article which suggested that 2008 for emerging markets might be like 1999 for tech stocks. You can make a fortune off a bubble. I would like to believe that markets like Taiwan, Singapore and India will one day resemble a bubble valuation (with PEs in excess of 50s). At a PE of around 25 with operating earnings growth of 30%, we have some ways to get there.

Enjoy the party while the music is loud.

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