CapitalMultiplier: Bearish In 2008!

Eight Reasons To Be Bearish In 2008!

By CapitalMultiplier | 13 January 2008

We predicted "the U.S. housing bubble will burst" in 2005 when just about everybody on Wall Street and the mainstream media were predicting continued growth and blue skies ahead for the housing market. Also, ever since our June 30, 2007 market commentary— a full six-and-half months ago(!)— we have been warning that the U.S. mortgage debt crisis will lead to "Hundreds of Billions of Dollars in losses for global financial institutions". Similarly, in our June 9, 2007 commentary we described the U.K. housing market as "one of the biggest housing bubbles of all time" and predicted the start of a decline in British home prices (again at a time when hardly anyone on Wall Street was even thinking about the U.K. housing market!)

Clearly, we have now made at least three of the most spectacularly successful market calls of this decade as seen from the following reports:

1) Bill Gross of bond giant PIMCO warned that the continuing housing slump and weakening U.S. economy could lead to a surge in corporate debt defaults this year causing a further $250 BILLION in losses to global financial institutions exposed to risky credit derivatives and that could push the U.S. economy into recession,

2) KB Homes, one of the biggest U.S. homebuilders, shocked Wall Street on Tuesday by announcing a bigger-than-expected loss of $772 million in the latest quarter. Also, the company's CEO, Jeff Mezger warned that 2008 will be another "tough year" for the housing industry,

3) According to the latest report from the National Association of Realtors, its seasonally adjusted index of pending sales for existing homes fell 2.6% in November [[actual sales for November is likely to be considerably less: normxxx]] indicating continued weakening in the housing market,

4) Countrywide Financial (CFC), the biggest U.S. mortgage lender announced that it's mortgage loan delinquency rate surged 39% on a year-over-year basis accompanied by a 45% plunge in new mortgage ending. That sent CFC shares plunging to their lowest level in more than 10 years and prompted market speculation regarding a possible bankruptcy filing by the beleaguered lender. Instead, CFC announced it will be taken over by Bank of America for $4 Billion. That's a massive mark-down considering that the company had a market value of $24 Billion last year!,

5) Bond insurer, MBIA Inc. announced that it will book $4 Billion in losses due to credit derivatives, slash its dividend and issue $1 Billion in bonds in a desperate attempt to try and maintain its AAA rating,

6) Bear Stearns and Co. announced it will be shutting down another one of its hedge funds (Bear Stearns Asset-Backed Securities fund) as the fund suffered more than $300 million in losses in 2007,

7) The Federal Reserve reported that consumer borrowing jumped at a 7.4% annualized rate in November driven primarily by a 11.3% surge in credit card debt. Total consumer credit has now reached a record $2.51 Trillion providing further evidence that millions of American households are having to resort to credit card borrowings to finance current consumption as slumping home prices and record high energy and food prices continue to take a heavy toll on household budgets across the nation,

8) Capital One Financial, one of the biggest U.S. credit card issuers missed Wall Street earnings estimates by a wide margin due to growing delinquencies by borrowers and the company raised its forecast for loan delinquencies in 2008 to $5.9 Billion,

9) Similarly, American Express Co., also one of the biggest U.S. credit card issuers announced it will take a $440 million charge in the fourth quarter due to growing levels of delinquencies, and

10) Appraisal values for U.K. commercial property fell at a record rate in November accompanied by a sharp plunge in transaction volumes indicating that weakness in the British housing market is spreading to the commercial property market as well. That will lead to further big losses for British banks!

We see no reason to change our cautious stance at the present time so we will simply point out eight great reasons why we believe it makes sense to be bearish on global stock markets in 2008:

1) The U.S. housing bust is likely to intensify over the next few months as rising unemployment and ARM rate resets lead to further sharp declines in home prices and another surge in foreclosures,

2) The U.K. housing bust has just begun (and Ireland is likely to be next),

3) The housing bust in Spain has just begun,

4) The Canadian economy is likely to slow down this year due to the strong Loonie and economic weakness in the U.S. (its largest trading partner),

5) Japan is already in a bear market most likely indicating that the world's second largest economy is headed for a recession. The strength of the Japanese Yen could hit Japanese exporters especially hard,

6) The Taiwanese stock market is a few points away from entering an "official" bear market,

7) Manufacturing growth is falling in India despite Wall Street's frantic efforts to "artificially" prop up the bubble in that part of the world (keeping the bubbles in India and China going is an indispensable pre-requisite for the "Emerging Markets Story"), and

8) Consumer price inflation in China is running at it's highest level in 10 years making further monetary tightening by the Bank of China extremely likely this year.

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Normxxx    
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