Archives for General Analysis & Commentary category
6
Mar
Posted in General Analysis & Commentary by Bob English |
Accelerated/Decelerated Midas (ADM) Fan ™ / Accelerated/Decelerated VWAP (ADV) Fan ™
Most have at least heard of VWAP, or volume weighted average price. It is a measure of the average price paid over a period of time, and can be implemented a number of ways. Often, the calculation is reset daily, though in the MIDAS Method that was created by Paul Levine it is launched from important reference points in time and allowed to continue (called a Midas curve).
The original formula is simple. For each price bar, the following is applied:
PV = PV + (Price * Volume)
CumeVolume = CumeVolume + Volume
VWAP = PV / CumeVolume
where Priceis usually (High + Low + Close) / 3. Coles and Hawkins of MIDAS Market Analysis have also discovered it is permissible to use just the High in a downtrend, and the Low in an uptrend, which will cause the Midas curve to follow price a bit more closely. They will reveal additional insights and modifications in their upcoming book.
For now, we have modified the formula to accelerate or decelerate the curve above/below the main Midas curve by incrementally increasing/decreasing each new bar’s contribution as follows:
PV = PV + (Price * Volume * Factor * Count)
CumeVolume = CumeVolume + Volume
VWAP = PV / CumeVolume
Count = Count + 1
By including a range of values for Factor, such as 1.00005, 1.000010, 1.000015, …, 1.000100, we can establish an entire Accelerated/Decelerated Midas support and resistance fan (ADM Fan). One could think of it loosely as a volume-based Gann fan. While this works with time charts, it has empirically been found to work best with volume charts, wherein each bar represents a fixed number of shares/contracts. A good rule of thumb for the Factor range is that the minimum should be within an order of magnitude of 1 / ContractsPerBar, which depends on how the chart is set up. The maximum can be three orders of magnitude (x 1000) higher and will depend on the steepness of the trend. It is usually not necessary to curve-fit the increment and range as long as the launch point is correctly chosen.
Above shows the ES with an ADM Fan launched from 11:56 am EDT on February 25, 2010. We chose this time, and not the time corresponding with the actual low, because it was from here that the market launched higher. The blue line is the original Midas/VWAP curve, which captured price early. As price displaced from the Midas curve, Accelerated Midas curves took over and became both support and resistance. None of the Decelerated Midas curves was reached. However, for a good example of what this looks like, we will show the ADM Fan launched from the actual aforementioned low at 9:45 am the same day.
Above, the third Decelerated Midas curve captured the 11:56 am retest of the low, which was the launching point for the ADM Fan in the first chart. This Fan also captured highs and lows fairly well.
Because the ADM formula weights bars increasingly more as time progresses, the fan, as its name implies, spreads out. By decreasing the increment amount by which the Factor is increased, we can generate more support and resistance lines that become relevant over time.
Below shows an even lower Factor increment amount that produces yet more levels, along with a new ADM Fan launched on the overnight low of March 4, 2010. When confluence occurs in curves from different launch times, support/resistance is more powerful.
It would be easy for a chart to get cluttered (if it is not already), so selection of launch points is of great importance and an area of current development. In general, important highs and lows work well, but sometimes it is best to launch, not from the actual low, but the point at which price takes off (as demonstrated earlier). Launch points from areas that are important support and resistance levels based on other methods also work well.
Below is another example, where an ADM Fan is launched in the EuroFX futures contract near the 4:20 am low on March 2, 2010, which was a new yearly low.
Below shows a reduced Factor increment that in turn produces a greater number of relevant support and resistance levels.
Reverse Midas ™ / Reverse VWAP ™
The indicator at the bottom of the above picture is Reverse Midas/VWAP, and is calculated as its name implies. For each given bar, iterate backwards, calculating VWAP until zero is reached. Buyers or sellers at this bar were at break even when the subsequent bar from which the backwards iteration began was reached. Once the first equilibrium/breakeven point is reached, we continue to iterate backwards until the next is encountered, and repeat the procedure for a total of 5 (arbitrarily chosen) times. The volume levels between the points are then plotted below price. Also important (not shown), is the maximum average profit and loss achieved over these intervals, which is akin to the Active Boundaries ™ method described by Pascal Willain in his book Value in Time.
Often, as a trend progresses, equilibrium points will build and be revealed as clusters by the indicator, which will eventually tend to stop the move. When the clusters disappear, there are fewer traders fighting price and a new trend can emerge. A similar phenomenon occurs when there is a cluster reached of extreme average profit/loss. Again, this is not shown, but will be demonstrated in future posts as we further elaborate on these concepts. Also to be explored is the importance of certain volume levels that emerge repeatedly over time from these calculations, which can be relevant to other parts of the Midas Method, such as with Top/Bottom Finder curves.
3
Mar
Posted in General Analysis & Commentary by Bob English |
Well, it took a bit longer than we thought, but the US Dollar Index has broken major support. Two downside targets are highlighted below that each contain long term pivot and Fibonacci support. With the ES close to entering the 1127 to 1147 range from January, any further downside in the Dollar would help equities power through resistance.
Click for larger image.
Below updates a previous chart we posted that breaks up the day into time segments (all times EDT) and plots net points for each period. Since the January 2010 highs, the first hour is where most of the losses have occurred, even during the most recent upswing. Since the February low, each other period in the rest of the trading day has been net profitable, though the closing hour the least so. The 1:30 to 3:00 pm time of day has been the most profitable intraday period for longs since the 2009 rally began.
Click for larger image.
Looking farther back to 2001, we can see glean some interesting information. The first hour of trading was consistently profitable beginning late 2003 during the last bull market. It posted its high in July 2007, three months before equities actually topped. It also bottomed concurrently with the markets in March 2009. Similar to 2003, it was unable to trend up for most of 2010, but took off late in the year. As previously noted, it has since retreated and we believe will need to start turning profitable if the January highs are to be taken out.
Click for very large image.
The only other time period that was consistently profitable during the 2003 to 2007 bull run was the overnight gap. If it were to break its current trend line, that would be a very bearish sign. What also emerges is that, contrary to popular believe, a profitable closing hour is not necessary to sustain a bull market, but may be necessary to start one. The closing hour’s high was put in January 2004 and trended down thereafter. The closing hour’s high in the current 2009 rally was established in September. It may well be that smart money now trades at the open.
Accordingly, if we start seeing overnight gap-ups and profitable first hours, things may have turned around for equities. If not, we’ll probably see lower prices in March.
23
Feb
Posted in General Analysis & Commentary by Bob English |
On the heels of the surprise discount window rate hike late last week, and on the eve of Bernanke’s Congressional testimony, speculation abounds as to the when and where of the next round of tightening. We need look no further than the US Treasury press room, as it has announced today a revival of sorts for its Supplementary Financing Program (SFP).
Remember the SFP? It’s back, though it really never went away. Originally created in September, 2008 to provide a pool of funds that could be drawn upon by the Fed in emergencies without adding to excess reserves (before the Fed had the power to pay interest on excess reserves), the SFP hit its peak amount in November, 2008 at $558.9 billion. Thereafter, it was quickly drawn down to about $200 billion by February 2009, where it remained until Treasury ran into debt ceiling issues in September and announced it would be wound down to $15 billion. In fact, by January 6, 2010, only $5 billion remained.
Today, Treasury announced as follows:
February 23, 2010
TG-560
Treasury Issues Debt Management Guidance on the
Supplementary Financing Program
WASHINGTON –The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):
“Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.
This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.”
###
We speculated after the September 2009 wind down announcement that it (1) would provide another $185 in liquidity for risk markets as the cash management bills that financed the program were not rolled over and returned to primary dealers, and (2) would increase demand for short term bills. Since the process will now be reversed, it is reasonable now to believe the outcomes will be reversed as well. Indeed, as Zero Hedge noted in a similar story earlier, demand is already disappearing from indirects in short term bill auctions.
With the brunt of the $200 billion cash management bill sales expected to be picked up primary dealers, this will have the same effect as adding up to $200 billion to bank nonborrowed excess reserves (NBER) on deposit with the Fed. As bank NBER is just north of $1 trillion, a 20% increase over eight weeks in the amount of non-borrowed money locked up at the Fed is material. At a time when Agency and Agency MBS are drawing to a close, and with M2 money supply flat, this de facto tightening move is a bit alarming.
Further, using the 13 week T-Bill rate of 0.1% as a proxy for the shorter duration 56 day (8 week) bill, it yields less than half the 0.25% paid by the Fed on excess reserves. Accordingly, even if existing excess reserves are used to finance the SFP, resulting in a net wash in money locked up at the Fed, the marginal profit provided by this carry trade and so needed by the large banks will be materially diminished. Under the same net wash scenario, this move could also be a precurser (test run?) for the term deposit facility proposed by the Fed.
For anyone who doubts the intent of these actions, we need only revisit the original press release by Treasury:
September 17, 2008
Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.
As the Fed now has myriad tools to offset the reserve impact of liquidity initiatives and is unlikely to restart such initiatives in the near term, this is purely and simply a reserve draining mechanism that will at best erode bank profits and, at worst, shrink an already precariously perched money supply. We will analyze Fed statistics over the coming weeks and update as to which is the more likely scenario.
It’s important not to become too bearish in the short term on long term news, especially on a net down day in equities. For those that subscribe to our daily reports, this does not affect our view that the US Dollar is topping this week and due for a modest 38% to 50% correction of the recent up leg. A concurrent equities rally would still accompany, but we are now less confident in its ultimate potential.
Only this morning we wrote:
…[W]e have a quiet news week and the markets are sensitive to unscheduled news. Overnight, equities are up on some bullish rumors regarding a Greek bailout. Some have compared the situation to the Dubai events in late November that led to a quick selloff and rebound in world equities. However, this situation is not to be taken lightly, as a Greek default would be three times as large as the Lehman bankruptcy, and could quickly devolve into another global crisis of confidence. Accordingly, the markets are at the whim of the ECB. If it bails out Greece, there will probably be a large short covering rally. If it lets Greece default, there will probably be another selloff. And, if it does nothing and Greece muddles through for the time being, there will probably be a series of minor rallies that lead to larger selloffs. The moves generated by the first two scenarios will be very swift, so swing traders will need to be prepared to react just as quickly…
When news broke at about 11:30 am EDT that there was an agreement in principal for a bailout, equities rallied and the US Dollar fell, as expected. However, a mere hour later, after the ES had rallied 19 points to 1077, Germany countered by saying it was not a done deal and there would be significant strings attached. Accordingly, there is still much uncertainty in the markets. For now, what likely would have devolved into a return to the 1040’s has been averted. In the end, we believe a bailout with nominal strings attached (to save face) is very likely, but the intervening journey in the markets will be volatile as the details are filled in over the coming days and weeks.
The 1080 to 1083 is the first critical resistance level that swing shorts will need to defend. There is a historical tendency to clear important resistance levels overnight, evidenced by the fact that the gap accounted for fully 32% of the rally in the S&P 500 that began in March 2009. Combined with the current news being generated overseas, if this area is to be exceeded, US traders should be prepared to wake up to a market that has already cleared it rather than experience it intraday.
There will be plenty of opportunities during trading hours, however, and a savvy daytrader can capitalize on these movements by correctly reading market signals, regardless of knowing the actual news that’s driving the markets. A simple five minute candle chart with volume of the ES warned that the rumor would lead to a sustained rally when it closed nearly at its highs (within a tick) on high volume. Ideally, volume would have been at least 100,000 (actual about 91,000), but the 8 point range that convincingly broke the downward trendline was sufficient to generate follow through short covering. Also important was that the ES looked like it was headed for trouble and sentiment was very negative following the failure just above the previous day’s high. The entry can be made on a stop basis one tick beyond the big range bar, with a two point stop loss.
In general, the larger the wick or shadow of a big range candle, the less likely a continuation of the move is. This so-called indecision area is just that–it conveys doubt and will encourage profit taking and counter trend traders, which will tend to halt the move. This is why a short based on the big-down 12:45 pm candle was not a good candidate for a continuation move (besides the fact that the stop sell entry signal was not triggered). The two point shadow at the bottom was enough to make a material retracement to the 50%-61.8% fib box likely.
The flipside to potential entries is that, in this environment, exit stops placed on day trades are crucial because it is easy to get caught on the wrong side when surprise news is announced. Indeed, a long entered on the above basis would have given up 100% profits on the 12:45 pm bar. Accordingly, on steep moves, a simple trendline break can be a profit taking cue, as can a move that exceeds an interim pivot bar on the 5 minute chart.
Moves like today do not occur frequently, but when they do, often follow a predictable pattern. We should see more in the coming weeks, so be prepared.
For a daily battle plan and intraday updates, register free at our site.
The 114.18 high volume level has now been reached. In the chart below it does not appear to be a high volume level because the area between 111.15 to 114.18 has recently been filled in. The next target is 116.17; however, a drop back to 111.15 is possible if SPY stalls here.
Click for larger image.
We have compiled the following long term charts that show points accumulated overnight (just ahead of) the Employment Situation report, then during the day session on the day of the report, and the combination of the two.
Above is Feb 94 to Dec 09, and below is a zoom in of Sep 08 to Dec 09.
For 2009, Jul 09, Oct 09 and Nov 09 were negative gap days. The day sessions were positive Aug 09 to Nov 09, but negative Dec 09. What’s interesting in the longer term chart is that day sessions were positive in SPY throughout must of the late nineties bull run, but were not so during the subsequent bull run. Perhaps that’s indicative of the jobless recovery. SPY bottomed in Oct 02 on a higher low in the day session. After that, there was a rally in day sessions, but then there was a resumption in the down trend until Oct 08, that lasted even during the bull market into Oct 07.
Meanwhile, the gap stayed mostly flat and resumed its uptrend in early 2005. Further, during the entire recent down leg, the worst drawdown in the gap was 2.34 SPY points, with most of the losses to SPY overall coming during the day session. Accordingly, holding overnight ahead of the report (at least since mid-2003) appears to be more profitable than holding during the day. It should be noted that there are outliers where SPY has gapped down ~1.50 points and it is not uncommon to have ~1.0 point gap downs, so caution should always be exercised when holding into the report.
With markets always in flux, it is important to not only be aware of sector rotation, but of time rotation. As we have demonstrated previously, trends emerge as to which time of day is best to be long or short. In light of a recent Bespoke Investment Group study regarding bullish Mondays (htBilly), we have expanded their work to consider both the overnight gap and day sessions for each day of the week…
Mondays have been clearly bullish since September, 2009, with weekend holders of long positions not being punished since the last week of September. This suggests that traders may have become complacent and that the next down gap could be a bellweather of a material correction.
Tuesdays have been a mixed bag since September, offering no clear edge.
Wednesday has had a slight bullish edge since November, when the gap and day sessions are considered.
Thursday days have been bearish since late October.
The last two Fridays of December were holidays and the one previous was flat. Prior to that there was a strong surge overnight ahead of December’s Employment Situation report, but then it was dangerous to hold longs from Thursday to Friday morning since late September. However, Friday days have largely been kind to longs since November except for on the December Employment report.
As we pointed out in our morning trading report, Employment Situation Fridays have been turning points in 2009. They have either sparked rallies or been used by institutions to sell into, marking interim tops. As we are now at highs, longs should take heed…
Click for larger image.
5
Jan
Posted in General Analysis & Commentary, Guest Post by Wall St. Cheat Sheet |
This is a guest post by Damien Hoffman of Wall St. Cheat Sheet
Rahul Sood has entrepreneurial cells ripping through his veins. He is most well known for founding luxury computer company VooDooPC in 1991 and selling it to Hewlett-Packard (HPQ) in 2006. Most recently, Rahul has merged his entrepreneurial prowess with his passion for investing. The result is a fantastic investing and trading resource called Bulls On Wall Street.
Bulls On Wall Street uses the popular Twitter platform to crowd-source investing and trading ideas. According to the Bulls engineers, approximately 10,000 people use the $$ and $ tags to discuss stocks on Twitter (the active users are in the range of 2500-7500, depending on how “active” is defined). Rahul’s mission is to build a premium community for the growing number of investors seeking to benefit from social media.
Rahul and I sat down to discuss his incredibly inspiring career path, his exciting new company Bulls On Wall Street, and his secrets to entrepreneurial success …
Damien Hoffman: Rahul, how did Bulls On Wall Street get started?
Rahul: I use Twitter a great deal to research customer feedback, complaints, response to products, etc. I noticed there were a large number of “traders” using Twitter as a way to communicate what stocks they were trading. I wrote a blog on the background of this phenomenon, but the bottom line is after viewing the stream I realized most of the communication was useless commentary — it wasn’t enough for an avid investor.
So, I started an experiment with a few friends. We wanted to take the concept further as there are only a few people who actually provide actionable data that one could choose to follow or not. We envisioned an engine that would show the user who the most influential and effective traders are so they could choose who they want to follow. It also aggregates all of the trading data on Twitter and combines it with research to see what could come out of it.
In a nutshell, the platform is a community effort — a “Gathering of Minds” of investors and traders. There are multiple moving pieces. Currently it’s designed for active traders, but in the future there will be resources for people with day jobs that don’t have time to manage their portfolios. In addition, our educational resource Bulls University is starting to take shape. Bulls University is designed for people who want to learn various types of trading, including swing, technical, fundamental, options, long term investing etc.
Damien: I notice you don’t have a Recommended List of people to follow. How do your community members know which investors/traders are worth watching?
Rahul: There is a system in place that helps you pinpoint the best investors thereby avoiding those bad investments that many of us have been caught holding. Ultimately, the system automatically decides who the cream is and let’s them rise to the top via a complex algorithm. It’s called the Bulls Influence-O-Meter.
Damien: Very interesting. Sounds like a great way to eliminate politics and other behind the scenes biases. Speaking of biases, why did you remain anonymous while launching Bulls?
Rahul: Good question. I started Bulls as a personal experiment to see if my theory of crowd sourcing for research and answers would work. I remember telling a billionaire friend about the idea and he didn’t like it. His biggest concern was the potential for pumpers to push their own agenda on others. My goal was to mitigate this risk as much as possible.
After taking my friend’s feedback into consideration, we wanted to ensure that risks of “pump and dumps” could be eliminated, technical analysis was sound, and fundamental research was accurate. We succeeded. It wasn’t hard because Twitter is fully exposed. Even though most people have handles, it’s very easy to spot the winners and latch on to them. You see, it’s not about randomly following traders into their trades — it’s about gathering the data from the top rated traders, and passing that data to the best of the best to evaluate and disseminate the information before taking a position!
Now of course not every investment is a winner. However, with proper risk management I was up over 400% overall in a 3 month period on a very part-time basis. So, the founding group decided it was time to launch a public beta.
We found some of the best traders on Twitter. There are only a handful of truly talented traders on Twitter who provide actionable data. We have the best group — no question about it. You can search the history of each one and look at all the testimonials. It’s amazing.
So to answer your question, the reason I stayed anonymous is I didn’t want people who follow me personally — on Facebook, Twitter, and my blog — to blindly jump in unless I was sure that it was as good as I thought it was.
Damien: One of the most famous criticisms of public market gurus is “If they are so good, why are they spending time telling others about their secrets?” Can you explain why you and your talented team are interested in sharing their knowledge and trading ideas?
Rahul: You’re 110% correct. Most investors keep their secrets, which doesn’t help the retail investor. The goal of Bulls is to empower the retail investor — to turn the sheep into wolves and expose the sharks. This is my way of paying it forward and helping others succeed. I am a firm believer that what goes around comes around. That is why we participated and helped to create the Bulls community.
Damien: What are some “pay it forward” ideas you are invested in now?
Rahul: I rarely find good small caps in North America that I like, but I enjoy many of the small caps in China. I invest in anything from organic food, coal, textiles, oil, green energy, and emerging technologies. I also invest in big cap companies on our side of the pond. I have found one American small cap that I love – it’s called Syntroleum (SYNM). Amazing company with one of the best management teams I’ve seen. I like the fact that they’re turning chicken fat into clean green diesel. They will have a plant online in 2010 that will produce 75,000,000 gallons a year of this fine fatty gas. The cool part is they’re 50% partnered with Tyson Foods, which is awesome for a small cap company, and Tyson has plenty of chicken fat to unload.
Damien: Rahul, you are the CTO of a business development group at Hewlett-Packard. How do you have time to research prospective investments?
Rahul: I work from home. I spend most of my time researching new companies, new technologies, etc. It doesn’t take much for me to do research using the Bulls platform and Twitter. Investing in companies, private or public, is something I’ve always done. As an entrepreneur, I’m afraid it’s in my blood.
I am a very public person and involved in social media. I get people complimenting and complaining to me all the time. Now that my Bulls identity is public, people will understand why I always tell traders to run out and buy 2 HP 30″ displays for their workstations!
Damien: That’s an awesome convergence of your daily work flow. However, I’ve noticed a lot of new day traders who are attempting to trade full-time. Obviously, the loss of jobs coupled with high intra-day volatility has attracted a new wave of wanna-be day traders. Has the number of people day trading receded now that markets have calmed and intraday trading is not as simple as shorting anything that moves?
Rahul: There is a significant trend of retail investors who fired their brokers after the crash of 2008 and they’re trying to take control of their own finances. The number of discount brokerage accounts that were opened in the last year were much higher than normal.
The markets this year were unpredictable, but if one were patient and focused on individual company fundamentals rather than trying to be Nostradamus they probably did very well. I expect this trend to continue. People are starting to trade stocks at a much younger age, and the tools available to us now are like nothing we’ve ever seen in our lifetimes. Do you remember what it was like in 1993? My goodness man. Brokers, promoters, and telephones. I can’t believe how far we’ve come.
Damien: The industry has made some incredible evolutions. For those who are interested in stepping into the future, but may not know how, can you please explain what steps someone should take to get started at Bulls On Wall Street?
Rahul: Sure.
1) Go to www.bullsonwallstreet.com and view the intro video to get an idea of how things work.
2) Login with your Twitter account.
3) Make sure you follow @bullsonwallst from Twitter to ensure that your tweets appear on our stream when you use the “$$”, “$” in front of a stock symbol, or #bows tags in your tweets.
4) Visit the Premium page and click on some of the videos on the bottom left.
5) Watch the stream for a few days and choose who to follow.
The site is still in beta. So, I would recommend people get a feel for it first. You may want to follow @copperstl, @kunal00, @urban_ryno, @stockgod to start. Visit the Bullpen, our community forum, and ask questions. I would also recommend reading through all the blogs! @copperstl is probably your best bet to follow as a beginner, get connected with her and she can put you on the right path.
In the remainder of my interview with Rahul, we learn how Rahul built VooDooPC and sold it to HP, and Rahul shares his top secrets to success. Those topics plus my acclaimed collection of exclusive interviews (with tons of bonus material) can be found in my upcoming book release: Interviews with the Brightest Minds on Wall Street. To make a free reservation for your copy from our first printing, simply click here and enter your information in the right sidebar.
17
Dec
Posted in General Analysis & Commentary, Guest Post by Wall St. Cheat Sheet |
Exclusive Interview: A Brief Update on Housing and Consumer Credit
David Proman is a Fixed Income Portfolio Manager for a boutique Investment Fund. Yesterday I caught up with him to get a brief update on housing and consumer credit …
Damien Hoffman: David, housing seems to be stabilizing and consumer credit is continuing to deleverage. Can you give us an update from your professional view?
David: I am scared to see there is virtually no non-government mortgage funding going on today. Non-agency loans now account for around only 1.5% of mortgages being originated. This means that unless a bank can turn around and sell a loan to Fannie or Freddie the day the loan is made, the bank will not make the loan. The banks cannot afford any more risk on their balance sheets.
This country will not experience any kind of real growth until we find a way to spur the private credit markets again. Securitization of mortgages, credit cards, small business loans, and just about any other type of debt, created an incredible expansion of credit over the last decade. Unfortunately, greed took its place and leverage ruined the game for everyone.
Now we are back to square one and taxpayers are carrying the burden. It is extremely painful to withstand the massive de-leveraging, but the government is doing as good a job as possible to ease the pain. The big question is how do we transition back to private lending?
Stricter lending guidelines will need to be set and enforced. Investors need to regain faith in lending money/buying loans. The only way that can happen is if lending is truly safe again. Lenders/investors will need to know that their rights are protected and they don’t need to fear hasty foreclosure proceedings, servicers not doing their jobs, cram downs, and the erosion of contract law in America. To achieve success, a high standard of servicing will need to be set in place and enforced, foreclosure procedures and time lines must be created, and a much more efficient and trustworthy loan underwriting process must be established.
In addition, demand for housing must catch up to supply. This could take a long time — especially in areas like California, Nevada, Arizona and South Florida. Until this happens, a very large quantity of housing values will still be below the loans held against them. High LTV (loan-to-value) ratios are eliminating any chances for refinancing and in turn creating a slew of homeowners that are just walking away from their obligations. Many people have little to no equity in their homes.
As it stands, the big banks are hoarding government money and finding any way to screw customers. Interest rates on credit cards are soaring even though the banks can borrow money pretty much free of cost. This country needs to fight back and form a habit of saving money. Consumption is great for the growth of the economy, but only hurts if it is bankrupting citizens. For credit to work, it needs to be provided in a way that is not egregious.
In short, consumer credit cannot truly be restored until the housing crisis is fixed. This could take many years. In the meantime, we need to get back to basics. Save money, invest wisely, and figure out different ways to create organic growth from new ideas and technology.
Read more at Wall St. Cheat Sheet
