Making Money Alert
Figuring out the Foreclosure Fiasco
10/20/2010
The latest fiscal mess confronting us is the new foreclosure fiasco. As you likely already know, news that many of the nation’s biggest lenders had made some major errors of oversight in processing foreclosure documents has thrown a big monkey wrench in the entire banking machine.
Mistakes -- if I may be so kind as to call them -- such as false affidavits, improper shortcuts, and so-called “robosigners,” i.e., bank officials who signed off on so many foreclosures that they couldn’t possibly have reviewed all the details, have caused the nation’s biggest lenders to suspend all foreclosures temporarily. This isn’t just some localized mortgage broker issue. This issue materially affects the likes of Bank of America, J.P. Morgan and Wells Fargo.
This whole paperwork mess is really telling, and what it represents to me is the flipside of all of those “ninja” loans -- no income, no job -- that got approved a few years ago when lenders were willing to give sizeable loans to anyone who had a warm body and a legible signature. Back then, there was virtually no due diligence on the part of mortgage brokers and banks about the lending wherewithal amongst homebuyers. This, as we found out with the banking crisis, was because there was no one truly accountable in the end. The banks knew that they could bundle up the loans and sell them to Fannie Mae and Freddie Mac, so why bother worrying about it?
Well, now that same mindset seems to have taken hold when it comes to foreclosures. There have been numerous examples of people erroneously being foreclosed on, and a couple of cases where people already had paid off their home loans in full -- and still someone came out to change the locks on their homes! I don’t know about you, but if this happened to me, I’d be inclined to take some physical steps to prevent that lock from going on my door.
Now, the real issue here, as I see it, is the damage that this whole foreclosure mess is going to do to the value of financial stocks. So far, the banking sector has not participated in the wider market rally. As you can see by the chart here of the Financials Select SPDR (XLF), this sector actually trades below its long-term, 200-day moving average.
The sector has been a decided laggard, and it’s actually holding back the gains on the S&P 500 Index due to the fact that the broad-based market measure is comprised of about 16% financial stocks. If we really are going to see a sustained move higher in the markets, we will have to see financial stocks such as Bank of America, J.P. Morgan and Wells Fargo resolve their foreclosure fiascos.
Another, perhaps even more widespread, negative consequence here is that the temporary pausing of foreclosures will mean yet another delay in the return to health of our housing market. Right now, more than one million properties in the United States are undergoing foreclosure, according to tracking firm RealtyTrac. Ratings agency Moody’s estimates that the number of foreclosures currently under review for possible bank shenanigans is approximately 250,000.
This number of delayed foreclosures would reduce the total supply of homes for sale, and likely depress sales by about 8%, according to Moody’s. The reduced supply of homes might cause home prices to rise, but everyone would be fully aware that it only would be a temporary blip. This likely would mean more pain for an already ailing housing market -- pain that our economy definitely doesn’t need.
It Looks Like a One-Day Glitch
On Tuesday, stocks got knocked for a loop after Wall Street woke up to the first interest rate hike in China since 2007. The People’s Bank of China, that nation’s central bank, only lifted the cost of capital on one-year loans by a quarter percentage point, but the rate hike was enough to put a damper on stocks in the United States, in China and in many emerging markets.
Stocks rebounded nicely in Wednesday’s trading, with the major averages all moving decidedly higher. So, it appears as though the widespread selling bias present on Tuesday was just a one-day market glitch.
Now, as you can see by the chart below of the S&P 500 Index, stocks continue trading well above both their short-term, 50-day moving averages, as well as their long-term, 200-day moving averages. The chart also clearly shows the huge bullish hike since the end of August.
I think that Tuesday’s sell-off, albeit very brief, shows how the market is really jittery and ultra-sensitive to any hint of bad news that could derail the current uptrend. This certainly happened in Apple shares, as the company reported another stellar earnings quarter, only to be rewarded with a sharp sell-off the next trading day. It seems as though the company’s iPad sales were slightly below the so-called “whisper number,” and that caused the stock to fall.
I guess it’s no surprise that stocks are ready to sell off at any hint of bad news, and considering the tremendous surge we’ve seen over the past eight-plus weeks, I think we should expect to see more reactionary profit taking. So, if you have positions in the market right now that have sizeable unrealized gains, make sure you protect those gains by using stop-loss orders.
If you don’t have any exposure to stocks here, then I recommend waiting for a more substantial pullback in stocks to begin establishing new positions. There’s a lot of overbought risk out there in stocks, and you don’t want to buy into what potentially could be a sharp correction.
ETF Talk: Technology Offers a Smart Investment
Technology stocks have been rising sharply recently and they appear to have momentum to climb even further. Innovation is one of the reasons why this sector has the potential for a continued ascent, even while other sectors may pull back after sharp recent gains. An exchange-traded fund (ETF) that I want to bring to your attention as a possible buy is the iShares Dow Jones U.S. Technology Sector Index Fund (IYW).
This fund is designed to let you play the technology field and to avoid having to put too much importance on any one tech stock’s fortunes, such as Apple’s continued climb, Yahoo’s growth strategy or Google’s latest surge.
Specifically, IYW seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the largest public companies in the technology sector of the U.S. market, as represented by the Dow Jones U.S. Technology Index. The fund’s top ten daily holdings as of October 19, 2010, were: Apple, Inc., 13.63%; Microsoft Corp., 9.48%; Intl Business Machines Corp., 8.68%; Google, Inc., 7.19%; Cisco Systems, Inc., 6.44%; Oracle Corp., 5.52%; Hewlett-Packard Co., 4.19%; Intel, 4.15%; Qualcomm, Inc., 3.54%; and EMC Corp., 2.11%. Its top two sectors for investing on the same date were technology hardware, 55.71%, and software & computer services, 44.25%.
Last Friday, the technology sector zoomed as the rest of the market basically was flat. An impressive rally by technology stocks that day was led by gains of 10.9% for Google, 2.7% for Apple and 4.5% for Amazon.com.
Apple’s stock price topped $300 for the first time ever last week and it announced strong third-quarter earnings on Monday. It also is considered by certain Wall Street technology analysts to have the coolest products available for purchase during the upcoming holiday-selling season. The company sold 14.1 million units of its iPhone 4 in the third quarter to top analyst estimates, while sales for its iPad and iPod products slipped a bit below analyst forecasts. A big challenge for Apple going forward is trying to keep up with Wall Street’s lofty sales projections for the company.
Yahoo Inc., after reporting another quarter of modest revenue growth, held an earnings call yesterday that did nothing to douse speculation that it could be a takeover candidate. Indeed, Chief Executive Carol Bartz sidestepped questions about private-equity firms discussing a possible buyout of the Internet media company. Nonetheless, the speculation that Yahoo could be an acquisition target seems to be giving its stock price a lift. The stock rose 2% today alone.
One of the beauties of an ETF is that it allows an investor to purchase one fund and gain exposure to an entire sector. It is a great way for investors to hedge their bets, and to avoid taking a big hit if a single company suddenly faces bad news.
Even though technology has been on a run and is up year to date, many of these stocks still are well below their 2007 highs by double-digit percentages. As a result, they could be expected to rise further in the weeks and months ahead. A heavily depreciating U.S. dollar also is causing U.S. technology exports to become less expensive for foreigners to buy. The weak dollar certainly will help U.S. technology exports in the fourth quarter of 2010. Clearly, there is much to like about the U.S. technology sector right now.
If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.
Thoughts on "The Big Picture"
On Saturday, Oct. 10, I did what was, in my opinion, one of the best radio shows that I have ever done. The title of the show was “The Big Picture.” The one-hour broadcast let us take a step back from the day-to-day machinations of the market and focused on some of the overriding issues facing both the U.S. and global economies. We also looked at the challenges and dangers ahead for the financial markets, and we examined the current and past political climates that led to our nation’s fiscal mess.
During the show, I even talk about the new film “Wall Street: Money Never Sleeps,” which if you haven’t seen already, I strongly recommend. The film does a great job of depicting the collusion between the big boys on Wall Street and the government during the 2008 financial meltdown. The film is largely accurate, even down to the then-Treasury Secretary Hank Paulson look-alike.
The big-picture issues discussed in last Saturday’s show include the whole financial mess perpetrated by the real estate meltdown, and how a similar breakdown in the bond market, and with state and federal budgets, could spark another major wave of fiscal pain.
I strongly encourage you to listen to a replay of this show, as it will really give you a sense of what I think are the challenges and opportunities going forward. To listen to any of my past broadcasts, all you have to do is go to my radio show archive.
Profound Proverbs
“The plans of the diligent lead surely to plenty, but those of everyone who is hasty, surely to poverty.”
-- Proverbs 21:5
This verse from Proverbs (New King James Version) extols the virtue of hard work and its connection with material gain. It also warns that if you are careless with your decisions, it could end up costing you plenty. Words to live by, wouldn’t you agree?
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.
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