The bull vs. bear debate continues as the market drops through the morning. This week, Milton Ezrati, Tom Sowanick and Charles Biderman weigh in…plus a calendar of the week’s most important stats.


DEBT DELINQUENTS, From Milton Ezrati, Partner and Senior Economist and Market Strategist, Lord Abbett

A new look at loan delinquencies and defaults shows a deteriorating situation both among households and commercial borrowers, though little in the data can justify the hysteria still attached to the situation. In many cases, recent figures, though hardly strong, are also far from unprecedented. In other cases, the pace of deterioration clearly has slowed. To be sure, the rise in delinquencies and defaults will continue until the employment situation stabilizes, likely later this year. Still, the pattern in these data, especially the slowing pace of deterioration, typically signals the early signs of a stabilization.

Residential real estate justifiably holds pride of place in the public’s mind as the center of trouble and as the worst place for loans. According to the Federal Reserve Board (the Fed), overall loan charge-offs in this area reached 1.58 percent of the total outstanding during fourth quarter 2008 (the most recent period for which complete data are available), up from 1.46 percent during the prior quarter and 0.44 percent in 2007. The Fed also reported that delinquencies—that is, loans that are 30 or more days behind in their payments—stood at 6.29 percent of all residential mortgage loans during fourth quarter 2008, up from 5.22 percent in the quarter before and 3.00 percent in 2007. Less complete data through February show a further modest deterioration, with delinquencies climbing to 7.0 percent of all loans, but with defaults holding about where they were in the fourth quarter.

These figures show a mix of very different experiences between prime and subprime mortgages. The vast bulk of the overall default figure reflects the deep trouble in the subprime area. Prime mortgage defaults, though rising, remain negligible, as usual, even in hard times. On delinquencies, two-thirds of the overall figure reflects the experience with subprime, which, though only 10 percent of mortgages outstanding, is suffering delinquencies at 40 percent of loans outstanding.

Whatever the mix, there can be no denying that the climb in defaults has proceeded uninterrupted, from a remarkable low of 0.06 percent of all such loans at the end of 2005 to the present, and that the default and delinquency rates now stand higher than at any time since the Fed began to compile such data in the early 1990s. Still, there is also a noteworthy slowing. In early 2008, the default rate more than doubled, from 0.44 percent to 1.18 percent, but in the following two quarters, it increased only by a third. The incomplete data for the first quarter of 2009 indicate that the slowdown has continued.


IT’S NICE TO SEE EARNINGS THE OLD FASHIONED WAY, From Tom Sowanick, Chief Investment Strategist, Clearbrook Financial

The gains in the equity and credit markets have been pretty impressive since the bottom in early March. The majority of these gains have been earned the “old fashioned way,” without the use of leverage. In addition, these gains have been so broad based that calling the current rally a “dead cat bounce” does a disservice to the 61% of global equity markets that have produced positive returns on a year-to-date basis. Moreover, 34 out of 84 global equity markets (over 40%) have produced double digit gains since the start of the year. Global equity markets are truly enjoying a bull market run and doing so without the use of leverage.

This should be a year of healing for financial markets and also a year where investors focus more on fundamental value and less on returns that cannot be justified by economic fundamentals. We all know that the Treasury and the Fed are undertaking massive expansionary policies that should act as a tail wind as we approach the end of the second half of this year. We maintain our view that global economic stimulus packages are designed to promote asset inflation.  

Staying with one strategy too long has proven disastrous in the past and will likely continue in the future. For now, we believe that investors should look to reduce cash positions in favor of extending maturities in the credit markets. Similarly, large cap household name equities should be pared back and investors may want to consider small cap value and financial stocks. Financial stocks have left the emergency room and are now in recovery. The proper prescriptions of increased capital and federal liquidity injections should be sufficient to restore financials to health, though slowly, which should also prove beneficial to long-term investors.

We believe that a robust economic and investment environment will likely emerge by the end of 2009 or early 2010.


MOMENTUM CHASING IS NOT A BULL MARKET, From Charles Biderman, CEO, TrimTabs Investment Research

With corporate America a big net seller and retail investors only modest net buyers, the rally has to have been driven by institutional investors. Many hedge funds had a horrible year in 2008, and we think they have been using whatever buying power they have to try to redeem themselves. The result has been a dash for trash in which investors with no regard for value have gunned the shares of lower-quality companies. Since March 9, Fifth Third Bancorp is up 511%, Huntington Bancshares is up 381%, Krispy Kreme Doughnuts is up 251%, Martha Stewart Living is up 125%, and P.F. Chang’s China Bistro is up 79%. Even financial firms undertaking massive capital increases and shareholder dilution have been rocketing higher. Last week, Bank of America shot up 62%, Simon Property Group rose 14%, and Wells Fargo popped 44%. In some ways, it feels like early 2000 all over again. As a result of the momentum chasing, the S&P 500 now yields less than 2.4% and trades at 26.3 times 2010 reported earnings. Do the bulls really think a secular bull market is starting at these valuations?

Pension fund rebalancing is likely the other main factor pushing stock prices higher. The S&P 500 fell 11.7% in Q1 2009 after dropping 38.5% in 2008.  We think it is reasonable to assume that pension funds began to shift from fixed income into equities starting in early April, although we have been unable to find hard numbers on overall pension fund activity.

The rally is unlikely to get any support from companies and insiders anytime soon because the U.S. economy is a disaster. Consumers are being slammed by a one-two punch of declining incomes and soaring unemployment. Income tax withholdings dropped an adjusted 4.7% y-o-y in the past two weeks, which is no improvement at all from the growth rates we have measured recently. And we estimate that the economy lost 550,000 jobs in April and 2.7 million jobs in the first four months of 2009. We hope the bulls have enjoyed the rally. When institutions run out of dry powder, corporate share selling is going to swamp this market, and stock prices are going to drop like a stone.