Perhaps you've heard this argument:
Corporate cost cuts have swelled profits beyond analyst
expectations! And profits are what drive the market
higher!Well, sure. But eventually, the top line has to
grow, too -- and that could be one heckuva problem.
What goes up must come down?
First off, it's true: As of a few weeks ago, more than
70% of S&P 500 companies that had reported second-quarter
earnings beat their estimates -- surpassing the 61% average.
Nice. But there
issuch thing as a future, and the next several
quarters could see a nasty transition, as companies go from
beating the Street to pounding the pavement in search of
business.
Here are a few reasons why consumers and the housing
market shouldn't expect green shoots just yet:
Deutsche Bank (NYSE: DB) analysts, the
percentage of negative equity mortgages may escalate to 48%
by 2011, versus 26% as of March. Negative equity is a big
deal. In fact, a recent study by economist Stan Liebowitz
found that it trumps unemployment, poor credit, loan
resets, and other factors in precipitating foreclosure
activity. While only 12% of homes in Liebowitz' research
sample had negative equity, they accounted for 47% of all
foreclosures.
Remember interest-only home loans? They're coming home
to roost, as their reset monthly payments increase by as
much as 75%. And that's trouble with a capital "T" for all
you folks in River City. The value of active interest-only
home loans sits at roughly $900 billion, according to First
American CoreLogic, or nearly 9% of total outstanding
mortgage debt. By year-end 2011, more than half of those
loans will have reset. To heck with
The Music Man, Fools -- I hear Billy Joel singing
something about movin' out.
Finally, the Federal Housing Administration (FHA) --
whose presence in the mortgage market has swelled since
2006 -- is insuring 3.5%-down loans. With help from the
soon-to-expire $8,000 tax credit for new homeowners,
potential buyers can snatch up a $228,000 home with
essentially no out-of-pocket contribution. In light of
rising FHA delinquency rates, economic commentator Barry
Ritholtz likens the phenomenon to "drinking yourself
sober."
Just a party pooper?
Look, the market as a whole might not be
wildly overvalued, and individual companies may soon see
better days --
Caterpillar (NYSE: CAT) and
Nucor (NYSE: NUE), for instance, could enjoy
a net benefit from global stimulus, even as private projects
remain on hold. Alternatively, shares of
Petrobas (NYSE: PBR) and
Transocean (NYSE: RIG) still look like decent
buys on possible future oil
supply constraints.Â
But all those who have piled into shares of
Fannie Mae (NYSE: FNM),
Freddie Mac (NYSE: FRE), and other
speculative names, on the expectation that housing and
consumer spending won't see another dip, should think twice.
Remember, things look up and up and up -- until they
don't.
Other Foolish takes on the big picture:
Should You Sell Everything Now?
This Rally Is Ridiculous
Should You Be Worried About the Upcoming Correction?
This article was originally published as
Get Out While You Canon
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