Mortgage bear hug

  • October 9, 2006
  • Peter Navarro

Last week, my speculation was that the bulls would run — and
run they did. All three major U.S. averages rose more than a percent while the
Dow closed at record highs. The only bummer of the week can on Friday as the
jobs report — my big market mover prediction for last week — came in soft as a
ripe mango and put a bit of doubt in the bulls’ minds.

I remain bullish in the short term until proven otherwise, mindful that bullish
falling inflation and oil and commodity prices are competing with bearish
slowing growth for the hearts and minds of the market. But at this time of year,
risk-to-reward favors the long side.

That said, let’s look at two things — one short term and one long term — that
could maul the bulls. Short term, and as my big market mover of the week, there
is the beginning of earnings season. Those who follow this column know well that
it will not be how much the corporations have earned but rather what their
guidance will be. Any pattern of lowered guidance that begins to emerge will be
very bearish.

Longer term, I’d like to relate a conversation I had with a buddy who makes his
living selling mortgages to the “Joe Sixpack” heart of America — his words, not
mind. He’s on the phone 12 hours a day, hawking his wares all over the country
so he’s a pretty good pulse on Americana. What he told me was a bit
bone-chilling.

First, with the fall in housing prices, more and more people are hitting zero or
negative equity in their homes. If rates rise further, more and more of these
folks will walk away from their over-leveraged castles.

Second, and here’s the scary part, a lot of people now find themselves trapped
in adjustable rate mortgages, unable to refinance. The reason is diabolical.
With the fall in housing prices, they no longer have the equity and
loan-to-value ratio to qualify for a new mortgage. So they are stuck in the ARMS
of the bond market, and if interest rates do take off, these folks are going to
take the worst whopping of their financial lives.

Lastly, the house as an ATM trend continues. But, my friend tells me, people are
taking out smaller and smaller amounts because that’s all the equity that is
left. Desperate to get cash to fuel their fantasies — or simply feed their
families — these folks are likewise nearing the end of the dangerous rope.

This Week’s Market Movers

Besides earnings data, there’s not a lot of economic reports likely to move the
markets. Monday will be exceptionally quiet as Columbus Day shuts down the bond
market. Thursday could provide some sparks with the trade data while retail
sales come in on Friday.

Portfolio Shorts and Longs

My stock of the week is FortuNet
(
FNET |
Quote |
Chart |
News |
PowerRating). It’s a weird wireless gaming
play. Basically, the company makes wireless gaming machines for casinos, and the
company was recently granted a license to operate in Nevada. The stock is a
recent IPO and its price took a hit last month on lowered guidance, but its
technicals are very strong and the potential market seems vast. Bon chance!

Peter Navarro is a business professor at the
University of California and the author of the best-selling investment book

“If It’s Raining in Brazil, Buy Starbucks” and the business shelf bestseller

The Well-Timed Strategy.” His latest book is “The
Coming China Wars.”