Many Great Intraday Setups

• October 31, 2001
• Dave Floyd

The steady grind down continued yesterday.  There were many great
intraday setups, as well as position-oriented shorts that paid off
nicely.  Today’s action will undoubtedly be tied to the GDP report which
was just released.  I won’t get into all the details, but volatility should
be evident allowing for profitable intraday entries.  Pay close attention
to technical levels on the futures for entry and exit points.

I want to turn the attention of this article to a story I read in the
Wall
Street Journal yesterday. The article can be read online by
registering for a free two-week trial (www.wsj.com).  Bear in mind it is a story that may
have ramifications based purely on fundamentals, but I found it quite sobering,
given some of the other macro forces being exerted currently.

The theme of the article is essentially how lenders, primarily mortgage-related, are
taking more of an active role in what is referred to in the industry
as “Loan Modification Programs.”  In essence it boils down to the
following: A lender will “re-package” a loan in danger of default, add
the unpaid principle and interest back to the loan balance and re-start the
meter, in this case, another 30-year loan.  While many will argue the
merits and shortcomings of the practice, I believe it has grave
implications. 

“But some economists believe the programs will do little more than put
borrowers into deeper holes, postponing the inevitable. Others contend that
lenders are pushing loan modification in part to hide unwise lending decisions
made during the late 1990s, when underwriting standards were eased to allow more
marginal borrowers to qualify for loans. While those efforts helped boost the
nation’s homeownership rate to a record 68%, some economists and mortgage
experts believe bankers are more exposed to borrowers with weak credit histories
than in prior periods.

“What (banks) are doing is basically moving a delinquent item to a
performing item in a manner that belies the real condition of their earning
assets, and that’s a really dangerous precedent.”

What’s more, the programs could make it harder for economists and regulators
to gauge the health of the mortgage market at a critical juncture, warned a
report released this summer by securities research firm Graham Fisher of New
York. Since lenders aren’t required to publicly report which loans are
undergoing modifications, “it may be months (after the fact) before we know
if (credit) problems are worse or intensifying,” says Keith Gumbinger, a
mortgage market analyst at HSH Associates in Butler, N.J.

I
did not have time to look into the investment / shorting strategies which may
apply to this scenario, but it goes without saying that we may find several
lenders dropping a bomb on Wall Street in the months to come, if this strategy
backfires. I take no pleasure in reporting this, I simply offer it so that
you may gain an edge.

Key Technical Numbers: (futures)

As always, feel free to send me your comments and questions.

Dave