Monday, June 15, 2009

Market Cycles Still Headed Down

The S&P 500 along with other major market indices continue to remain at high levels despite definite internal weakness. Although the oscillator continues to fall, the S&P experienced its first down week after advancing four weeks in a row.

After a mighty market run that might have been the result of nothing more than massive government stimuli, the market will eventually crack under the weight of a continued weak economy. Housing prices continue to fall and a recent spike in interest rates is sure to reignite downside pressure in this sector. Don't expect that the banks are off the hook yet. It's been well publicized that a slew of mortgages will be resetting throughout 2010 and 2011. Many of these are negative amortization mortgages. These are mortgages that require a payment less than the what a normal payment would be. The additional amounts not paid are added on to the principal of the mortgage. With housing prices continuing to decline, it's pretty obvious that many holding neg-am mortgages will be walking away.

When the government did the TARP reviews and accompanying stress test, they should have set it up like a bankruptcy. If you and I go bankrupt, we cannot go bankrupt again for seven years. Should have been the same for banks. If you repay the TARP, you will not be eligible for additional government assistance for seven years. In recent months, we have seen a mad scramble to get TARP out of the lives of banks. This urgency seems to have arisen as soon as the government began applying salary caps to those bankers involved. As it should be. If you are owned and/or controlled by the government, you should fall under the government GS/ES pay scale.

With banks headed for more trouble in the future, we should take a look at the big run ups to identify banks that are overvalued and might even collapse should the government permit.

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