Daily Insight: Mortgage Apps, Stimulating Default and EU Under Pressure

U.S. major stock indexes ended essentially flat on Wednesday as the EU sovereign debt story weighed just enough to erase early-session gains. The Dow closed up slightly and the S&P 500 down a smidge. The tech-laden NASDAQ performed the best of the three majors; tech earnings are the most solid of all industries – financials profits are up the most on paper but it’s artificial.

Yesterday’s earnings reports were good for the most part, which offered support to the market. Again though, I can’t help but mention for a second day that multinational companies are reporting weak domestic growth; most of the profit growth is coming from overseas, currency translation and payroll cost-cutting. The financial company reports of the past couple of days showed that their profits are coming from big trading profits, thanks to Dr. Zero. I continue to believe that the banks are going to have a reality problem a couple of quarter out as the home sales reports will show distressed properties are making up a larger percentage of total sales – that percentage has been averaging about 35% and data from various states suggests it’s going over 40%; price declines will follow and that means banks will have to set aside more cash, which cuts into earnings. With 30% of home borrowers either underwater or with less than 5% equity, there is zero room for additional price declines.

On the EU sovereign debt problem, the relevance regarding the Greek financing issue is not that the country defaults on some payments per se, but that other EU countries have similar budget problems. Since the Eurozone is heavily dependent on government spending, the required and austere budget cuts will certainly be seen in their already very weak GDP readings. Further, I suspect that European banks hold large amounts of government debt and as those securities get whacked, so does the capital of those banks – as goes the capital so goes the lending.

The major industry groups were split with five up and five down. Industrials led the gainers and health-care the losers – the shares got hammered relative to the market, down 1.74%.
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Brent Vondera, Senior Analyst
www.acrinv.com