Are we the only ones getting tired of the "What inning?" question? When we think baseball, it is better to enjoy the early success of Chicago's two teams, especially the suddenly slick-fielding White Sox.
For several months financial television asked everyone about recession chances. Prior training or experience not required -- all opinions welcome.
The question du jour is now, "Which inning of the mortgage crisis are we in?"
John Hussman's Answer
The widely-read and respected John Hussman complains as follows:
One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence. Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to “look across the valley” on the belief that most of the writedowns are behind us.
Hussman's own approach is to take a schedule of resets and integrate the curve to show a cumulative effect. From this, he concludes that we are still in the early innings, with each inning lasting three months. The worst is yet to come, etc. Check out the entire article.
The Hussman analysis makes two serious errors. First, he uses data from nearly a year ago. This is assuming that ARM resets are a stationary target. In fact, many mortgage holders have already refinanced.
- Only 11% of those with mortgages have adjustable rates; 18 months ago, the figure was 22%. This suggests that there has already been a lot of refinancing.
- Among homeowners with adjustable-rate mortgages, those who are worried about making their payments after an increase is 36%, exactly what it was in the prior survey.
We are hesitant to mix two different methods of measurement and two different time periods, but surely there has been some change since the stale chart cited in the Hussman article. If he is going to use some fancy analysis to impress and frighten the average reader, at least he could update the data.
The second Hussman error is quite common. He is focused on the problem while completely ignoring any solutions. The loosening of restrictions on Fannie and Freddie (including the conforming loan cap and the overall portfolio cap) will help to encourage refinancing that was difficult a few months ago.
Jordan Kahn at In the Money, one of our featured sites, writes as follows:
I think the news from Freddie Mac (FRE) today was pretty significant, although it received little attention.
In the press release, Freddie said it will buy jumbo mortgages in high-cost regions from Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C) and Washington Mutual (WM). The government-sponsored enterprise expects to finance between $10 billion and $15 billion in new jumbo mortgages in 2008.
He points out that the old caps were ridiculous in some areas, a theme we have also argued. Jordan calls it "big news" which will help us get closer to a bottom in housing.
[Jordan sat in the hot seat today, covering for Doug Kass on his daily investing blog, The Edge. Doug is doing a lecture at the Harvard Business School! We hope that the Wharton man gets the appropriate respect from the Harvard crew. Meanwhile, Jordan did his usual great job as a substitute.]
Ironically, John Hussman did exactly what he accused others of doing. The evidence he adduces for his answer to the "innings question" is no more plausible than anyone else's.
Our own answer? We do not know. Neither does anyone else. It is going to depend upon the ability of people to refinance, where fixed rates go, how quickly Fannie and Freddie and the FHA provide help, and whether a foreclosure assistance bill passes Congress and gets signed by the President.
We do not know the answers to those questions, but at least we know what to look for.
As we regularly do on Thursday, we are showing an update on our TCA-ETF sector model rankings. The overall result for the third cycle, begun on January 25th, is about even, roughly the same as the S&P 500 and a bit ahead of the NASDAQ. There are two interesting things to observe.
First, the strongest sectors remain the "weak dollar" plays. Second, the overwhelming majority of sectors are in the "buy" range.
Interested readers can get a report via email on participating in our weekly trading program for individual investors.