Trends I'm Watching

Year-To-Date Performance for Asset Classes

Trend: 2007 investment performance through March 22 has has been choppy.

The Capital Spectator provides a summary of investment performance for 2006 and YTD 2007 in ASSET CLASS REVIEW. Excepts below.

Link: The Capital Spectator: ASSET CLASS REVIEW

...here's a quick look at how the latest market profile stacks up across the broad asset classes. What's striking these days is the fact that the red ink is starting to pile up when measured by recent history. As our table below shows, the biggest loser over the past month has been REITs, which shed 5%. Even so, REITs are still up by that amount and more for the year. The asset class has been second to none in resiliency in the 21st century. No one knows if REITs can weather the storm one more time, but it's clear that if economic and real estate risks linger, the group may be vulnerable.

The Wilshire 5000 moved up for the week ending 3/23/2007

Trend: The Wilshire 5000* gained 502 points (+3.6%) for the week. The 10-day SMA is moving up towards the 30, 60, and 90-day SMAs. Between July 31, 2006 and March 2, 2007, the 10-day SMA had been above the 30-day SMA, tracking the significant bull run.

We track the the movement of the Wilshire 5000 because the market as a whole has a significant influence of the movement of individual stock prices.

The Wilshire 5000 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

The Wilshire 5000 moved down slightly for the week ending 3/16/2007

Trend: The Wilshire 5000 lost 159 points (-1.1%) for the week. The 10-day SMA has crossed under the 30, 60, and 90-day SMAs. (The 10-day SMA had been above the 30-day SMA since early August 2006, tracking the significant bull run.) The 30-day SMA is starting to decline.

We track the the movement of the Wilshire 5000 because the market as a whole has a significant influence of the movement of individual stock prices.

The Wilshire 5000 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

The Wilshire 5000 moved up slightly for the week ending 3/9/2007

Trend: The Wilshire 5000 gained 53 points (+0.4%) for the week. The 10-day SMA crossed under the 30, 60, and 90-day SMAs. (The 10-day SMA had been above the 30-day SMA since early August 2006, tracking the significant bull run.)

We track the the movement of the Wilshire 5000 because the market as a whole has a significant influence of the movement of individual stock prices.

The Wilshire 5000 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

Mortgages, Housing, and Consumer Spending

Trend: The impact of the subprime mortgage malaise may be larger than anticipated.

John Mauldin's Thoughts From The Frontline at InvestorsInsight continues to track developments in the mortgage/house arena and the possible implications.

Link: InvestorsInsight : Thoughts From The Frontline.

I have been highlighting the problems in the subprime space for a long time. As I wrote months ago, this is going to be a major scandal. It is the main (and almost only) reason that I think we are going to have a recession in the US.

Last week www.lenderimplode.com listed 28 subprime mortgage firms that were shut down or taken over. The count is now 34. Yesterday the third largest lender of subprime mortgages, New Century, stopped accepting new loan applications. The shares were once at $50. Now they are under $4 and falling. The Financial Times reports that they cannot meet their margin calls from their lenders.

The lower end of the housing market is going to find a dearth of buyers, as they will not get financing and a lot of homes are coming back onto the market. It is going to be very hard to get a floating-rate mortgage turned into a fixed-rate mortgage, and consumers are going to see their payments soar. Foreclosures area at an all-time high and rising. Cue the congressional hearings, stage left.

A special advisory committee of the Federal Reserve warned Thursday of a rise in the number of foreclosures, as new guidelines were issued. Subprime mortgages, about 20% of the total market, were 50% of the foreclosures last year. That is set to rise this year.

As the problem spreads, it is going to hit home values and that is going to limit the amount of money that can be borrowed by consumers as Mortgage Equity Withdrawals. It is not just a problem with subprime mortgages, it is starting to hit the prime mortgage world.

In short, consumer spending is going to take a hit. How much? No one knows, but this is a problem that is not in the index of leading economic indicators. Will it be enough to send the US into a mild recession? I still think so. We will see.

The Wilshire 5000 moved down 4.5% for the week ending 3/2/2007

Trend: The Wilshire 5000 lost 670 points (-4.5%) for the week. The 10-day SMA is about to cross under the 30-day SMA. The 10-day SMA has been above the 30-day SMA since early August 2006, tracking the significant bull run.

We track the the movement of the Wilshire 5000 because the market as a whole has a significant influence of the movement of individual stock prices.

The Wilshire 5000 one-year chart below includes the 10, 30, 60, and 90-day simple moving averages.

*The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes more than 7,000 of the 10,000-plus securities that are publicly traded in the United States. All publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a near-perfect measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

China Starts a Correction

Trend: The Chinese government is letting the air out of its over-inflated stock market.

John Mauldin's Outside the Box at InvestorsInsight features Stratfor President George Friedman, who explains what took place in China and how this was an "engineered drop." Excerpts below.

Link: InvestorsInsight : John Mauldin's Outside the Box.

First, the Chinese believe their exchanges are massively overvalued (hence the engineered crash). They will do this again, and are not (yet) particularly concerned with the international consequences. China planned to dampen its own stock market, not the world's markets. Along with the rest of the world, Beijing did not expect the contagion effect to be so extreme. Yet, for now at least, China's own exchanges are its primary concern, and it will act according to that belief.

Second, everyone else now is going to chew on the fact that Beijing did this intentionally. They will either agree with the Chinese that the exchanges are overvalued and that additional measures are needed, or they will be terrified that Beijing did this intentionally and not care about the reasons. Whether what is sold is a domestic Chinese firm or a foreign firm invested in China does not matter much. Neither does it matter if the stock is on an exchange in China or abroad. Either way, the reaction will be the same: Sell.

Third, trading in 800 of the 1,400 stocks on the Shanghai exchange was suspended during the sudden drops Feb. 27; they have a lot farther to fall, even without any engineered drops caused by panicky selling.

Considering the flaws on which the Chinese system is based, this certainly will not be the last engineered drop. In theory, the move will make foreign investors far more cautious before diving into the Chinese system....