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September 13, 2006

ARMed to the Teeth

An interesting article appeared on CNN Money today describing how home foreclosures swelled in August, particularly in the previously hot areas of Florida and California. The data, published by RealtyTrac, showed that nationwide foreclosures spiked by 24% compared to July and 53% compared to last August. In California, the number of foreclosures is up 160% from last year! The blame for the increase lies in the re-pricing of monthly payments associated with ARMs.

What should scare homeowners and traders alike is that we are only just beginning to feel the affects of the 'adjustment' factor of adjustable-rate mortgages. There are a half trillion dollars worth of ARMs set to adjust higher for the remainder of 2006 and four times that amount in 2007. It is hard to imagine a scenario where both the consumer and the banks that lent to them do not come under serious pressure over the next 12 months. I continue to stalk companies like New Century Financial and Novastar, both of which have a portfolio of sub-prime mortgages, as well as Washington Mutual, which has heavy exposure in California.

Nevertheless, the world remains rosy in the eyes of Wall Street. Not too surprisingly, equities saw some follow-thru to yesterday's powerful move, though unlike yesterday, the gains did not appear effortless. While conditions now seem to be overbought enough for the bears to make a stand, I would be quite surprised if the bulls did not make a run for the year's S&P 500 high, which lies a little more than a half percent away.

Tomorrow morning we hear from the Census Bureau regarding August retail sales. Given the polar feelings between the bull and bear camps over the state of the economy, any deviation from expectations will likely result in a strong market reaction. I have no useful opinion about what may be published but am immensely curious about how the market will react to whatever it is. I have believed for some time stocks are ready to go down, but need a catalyst to commence selling. Could tomorrow's retail sales provide the spark? Probably not by itself, unless it is especially dismal, but it could either set the tone for some other factor to tip the scales, or drive equities higher so we get better prices for our eventual shorts.

Disclosure: None


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