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Generational Dynamics Web Log for 22-Feb-07
Global markets skyrocket to all-time highs, while housing keeps tanking

Web Log - February, 2007

Global markets skyrocket to all-time highs, while housing keeps tanking

Another mortgage lender, NovaStar, reveals that it's in trouble.

Mortgage lender NovaStar Financial Inc. announced a $14.4 million loss for the fourth quarter of 2006 on Wednesday. This was expected, but what really spooked the market was the additional unexpected announcement that NovaStar expects to "recognize little, if any, taxable income" for the next four years (though, in follow-up announcement, they point out that hey, we're still going to make some non-taxable income.)

Panicking investors sold off NovaStar, causing the stock to fall 41% in one day.

Index price of ABX-HE-BBB- 06-2 from August to Wednesday, Feb 21 <font face=Arial size=-2>(Source: Markit.com)</font>

Index price of ABX-HE-BBB- 06-2 from August to Wednesday, Feb 21 (Source: Markit.com)

In addition, as shown in the adjoining graphic, the ABX housing mortgage default loan index continues its precipitous collapse.

We've been discussing the collapse of this index in the past. This is a "derivative" index that allows an investor to buy a kind of "insurance" that a mortgage loan will be repaid. The dramatic fall of the index measures the rapidly decreasing faith that investors have that subprime mortgage borrowers will actually repay their mortgage loans. The subprime loans are made to borrowers who payer a higher interest rate because they have poor credit.

The collapse of this index value reflects the continuing bad news of increases in late payments and foreclosures on these loans. The signs indicate that the rate of foreclosures will continue to increase through 2007.

Here's an example to show what this means to real investors: A month ago, you could have purchased an ABX-HE-BBB- 07-1 "insurance policy" on a $10 million subprime mortgage loan for $389,000. Today, the same insurance policy costs $1.1 million.

Meanwhile, the TV financial analysts are still burbling about how great the global financial system is going.

One especially giddy report at 10 am Thursday on CNBC told us that "We're in the middle of a global rally." Stock markets around the world are reaching all-time highs: Mexico and Brazil in Latin America, Germany in Europe, and Japan and Korea in Asia. The reporter chortled that China would also be at an all-time high, but they're closed this week for the new year's celebrations.

Lovely CNBC anchor Rebecca Jarvis points to the Nasdaq all-time high in 2000, to show how today's value is around 50%. <font face=Arial size=-2>(Source: CNBC)</font>

Lovely CNBC anchor Rebecca Jarvis points to the Nasdaq all-time high in 2000, to show how today's value is around 50%. (Source: CNBC)

That was followed by another bubbly report: The Nasdaq index is at at a six-year high!! At 50% of it's all time high in the year 2000!!

It never even occurred to anyone to ask the question: Well, if there was a crash six years ago after an enormously skyrocketing bubble stock market, can't it happen again today? I mean, we keep having stock market rally after stock market rally, not just on Wall Street, but around the world, even though we're seeing a segment of the housing mortgage market collapse before our eyes. It's the same as it was in 2000 ... and in 1929. Isn't it? (22-Feb-07) Permanent Link
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Generational Dynamics Web Log for 22-Feb-07 Global markets skyrocket to all-time highs, while housing keeps tanking

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Generational Dynamics Web Log for 22-Feb-07
Global markets skyrocket to all-time highs, while housing keeps tanking