Bear Mountain Bull

It’s time again for a little BMB R&R, especially with the market behaving as bizarrely as it’s been. Maybe if we stop watching it start to behave a little better…

Posting will be very light and variable over the course of this week, but we’ll put up an open thread each market day for our readers to comment on the day’s market activity or to post any interesting links they might run across.

Check the space below for whatever the latest might be during this ‘off’ time, and please visit the various sites in the ‘Links’ and ‘Regular Stops’ for up-to-date market news and analysis.

BMB will be back in full swing by next weekend.

From Nick Timiraos at the WSJ:

• Nearly 1.2 million foreclosure filings were reported last year, a 42% rise from 2005. That is a rate of one in every 92 U.S. households.
• Colorado, Georgia and Nevada had the nation’s highest foreclosure rates last year, according to RealtyTrac. Among the top 100 metropolitan areas, Detroit, Atlanta and Indianapolis topped the list.
• About 80% of subprime mortgages today are adjustable-rate mortgages, or ARMs, that have been nicknamed “exploding ARMs” because they have low fixed-interest payments in their first few years but then usually adjust to higher interest payments.
• Creative new subprime loans — “piggyback,” “interest-only,” and “no-doc” loans, among others — accounted for 47% of total loans issued last year. At the start of the decade, they were less than 2% of total mortgage loans.
• Borrowers have never been more leveraged. Loan-to-value ratios, the loan amount expressed as a percent of the property value, have grown to 86.5% last year from 78% in 2000.

Pointer from The Big Picture.

Not a huge surprise. Especially to BMB reader Steve who just brought it up this morning.

“Dot-com” market bust coming, Chinese style:

After emptying his savings account, Lu Gang borrowed funds from his mother, relatives and friends. Now he’s planning to mortgage his home.

Where’s all the money going? Into China’s booming stock market.

“Both of my parents think it’s crazy, but I think it is OK,” said the 26-year-old investment company manager, who’s already sunk about $15,000 into stocks since getting in on the action last summer. “If there is opportunity, you have to grasp it.”

***

Many individual investors have reaped handsome profits, but a growing number of them are tapping their credit cards and using their homes as collateral for cash to buy more stock, say bankers and analysts. That has stoked government concerns about excessive speculation.

China prohibits banks from giving consumers home-equity loans to play the stock market. So many people are hocking their homes with pawn shop dealers, who typically front borrowers as much as 60% of the value of their homes — but charge an annual interest rate of 36%.

***

He recalled one client in particular, a man in his 40s who mortgaged his 800-square-foot apartment in Beijing for $40,000. “I told him that he might suffer losses, but he insisted anyway. He was very confident. He said, ‘I have targeted one good stock and I just need the money for one month.’ ”

Such optimism may seem misplaced. Since China’s stock markets opened 16 years ago, they have been plagued by scandals, the government’s high ownership of shares and weak regulation. Investors have seen wild price swings and sudden collapses of fortunes. Just two years ago, the Shanghai index was languishing at 900.

***

“A new generation of investors is appearing in China,” said Zhang Qi, an analyst with Haitong Securities in Shanghai. “They are young people with better knowledge and understanding of the market. They use the Internet to research companies … and they are more confident.”

Still, Zhang said, many of them haven’t experienced losses and may be holding unrealistic expectations. “Everyone wants to make money from the stock market, and they all feel it should be easy this time,” he said.

Update: Charts of the Shanghai 180 A Shares and the Nasdaq in 2000, courtesy of Stocktiming.com (scroll down a bit). Look familiar? We know how this story ends, don’t we?

It looks like bullish sentiment might be getting a little extreme, at least according to the folks at Sentimentrader.com:

You knew that the tremors in the mortgage lending business weren’t going to be ignored by Mr. Fleckenstein. After all, he’s been warning about trouble coming in that area for quite some time now:

It’s almost impossible to look at the set of facts that have presented themselves in the past several years, coupled with today’s problems, and not conclude we’re headed for trouble. (Witness all the ink I have spilled on this subject recently.)

However, that is the conclusion the bulls continue to avoid every single day. Oftentimes, obvious problems unfold in plain sight. Then, sometimes, they get ignored long enough that they’re deemed not to matter, and that therefore, a nearly certain outcome will yield to the highly improbable one.

What the bulls have yet to grasp, even after the aforementioned data points from these two companies (New Century, HSBC), is that problems in the housing ATM financing mechanism (which has let homeowners borrow vast sums against their homes’ inflated values) are getting worse, and that the lending business is changing.

***

Even though stock market participants have been willing to suspend disbelief, we still face the problem of an unwinding real-estate market, its impact on the economy and its impact on the stock market. Of course, the latter would also reinforce the prior two problems.

As I said, all of these problems have been hiding in plain sight. But the fact that folks want to pretend the problems don’t matter — and push out the moment in time when they react — doesn’t change the reality that the risks are extraordinarily high these days. Pretending will only make the dislocation bigger.

The recent collapse in the shares of New Century demonstrates what I expect to happen literally any day now in technology and the tape at large, although predicting when is impossible. Folks should not underestimate the power of the trickle-up in the rot from the housing ATM finance mechanism.