 Subprime
Delivers One-Two Punch
Just Like Hurricane Katrina Did
Susan C. Walker
Elliott
Wave International
Dec 6, 2007
The world is awash in bad news
about the subprime mortgage meltdown, just the same way that
New Orleans was awash in floodwaters from Hurricane Katrina two
summers ago. A few examples:
- The median price for new home
drops 13% since last year, the most in 37 years, according to
a Census Bureau report on November 29. This due in large part
to buyers not being able to get financing now that lenders have
tightened their lending standards in response to the subprime
debacle
- Major Wall Street banks write
off billions of dollars in subprime-backed securities
- Dire forecasts estimate that
the credit crunch caused by the mortgage problems will cause
between $250 billion to $500 billion of losses at banks and brokerages
before it's done
If you want to see how this
kind of news looks on a price chart, consider the chart that
we published in the latest Elliott Wave Financial Forecast.
It shows how confidence in the mortgage market has simply fallen
off a cliff. "The ABX Mortgage Indexes are akin to the eerie
music that starts to play right before the goriest scenes in
a horror movie," write our analysts Steve Hochberg and Pete
Kendall. Even prime-rated mortgages (the top line on the chart)
seem to have been tainted by the cliff-diving exploits of the
subprime and Alt-A mortgage indexes.
Note: Elliott Wave International invites you to read
more about this Mortgage Mutiny chart in a special three-page
excerpt from the November 2007 Elliott Wave Financial Forecast,
called "Transition
to a Fear of Risk."
The continuing repercussions
of the subprime meltdown since two Bear Stearns' hedge funds
imploded in August remind me how closely this situation imitates
the delayed punch of Hurricane Katrina in the summer of 2005.
In fact, I wrote a column for Fox News on that very topic a few
months ago, some of which is worth repeating.
* * * * *
[Excerpted from "Subprime
Storm Mimics Katrina," originally published July 30, 2007]
Wall Street may have reason
to worry about a financial hurricane poised to do the same kind
of damage Hurricane Katrina did - in terms of money and assets
lost - in New Orleans in 2005. Given the latest storm warnings
about subprime mortgages and the Dow's dive last week, it looks
like "Subprime Katrina" might become the financial
storm of the decade.
Wall Street investment bankers
who remember the devastation in New Orleans might want to start
battening down the hatches. In fact, some of them seem to understand
their pending doom as they try to cajole the rest of the world
into thinking that the subprime (otherwise known as low-quality)
mortgage contagion is contained. 'Sure, sure, Bear Stearns got
hit when its subprime hedge funds lost their value, but everyone
else is O.K.,' they say. 'Let's all heave one collective sigh
of relief that we dodged that bullet.'
Does that attitude sound familiar?
It's exactly how the people of New Orleans felt for the 8-10
hours after Hurricane Katrina whipped up the Gulf Coast and dumped
its rain. It was over; they had dodged the bullet. Their beautiful
city that is built below sea level and surrounded by sea walls
and levees was safe. That's where Wall Street is right now -
hoping the levees will hold as investment bankers try to sandbag
the rest of us with lots of placating talk. Well, it turns out
that New Orleans was about as safe as the subprime bonds that
are now below their own "C" level.
Although Wall Street bankers
have been doing one heckuva job, I think it's too soon to breathe
easy, just as it was too soon for those in the Big Easy to breathe
easy. Here's why: Wall Street was warned about the coming hurricane-force
fall-out from subprime mortgages, and it ignored the warnings,
buying up all the securities backed by subprime mortgages that
it could. Now, Wall Street is having trouble selling more debt.
It sounds like it may be too late for many Wall Street denizens
to get out of town - and their positions - before the floodwaters
start rising.
Remember, too, the finger-pointing
and blaming that started as soon as the rest of the nation realized
that the U.S. government was not doing enough to help New Orleans?
The editors of The Elliott Wave Financial Forecast recognize
a similar change in attitudes toward Wall Street:
"The unwinding process
will be sped along by a flood of revelations about illicit hedge
fund and investment banking activities. Just as Enron, Tyco and
a host of other primary beneficiaries of the late 1990s bull
market run became the focus of scandals, hedge funds and the
banks that enabled them are starting to become a focal point
for scrutiny." (The Elliott Wave Financial Forecast,
July 2007)
Then will come the final installment.
Just as the U.S. government was slow to come to grips with the
disaster in New Orleans so that people were left to fend for
themselves, so too will investment bankers and investors have
to fend for themselves. They may find themselves clutching their
worthless paper and wishing someone would bail them out from
the rooftops of their now-worthless homes.
* * * * *
 Now, here we are at the end of November,
and the situation for investors and investment banks has played
out almost exactly as I outlined. Hardly anyone is coming out
smelling like a rose. If anything it's the opposite, as the stench
from quarterly financial filings rises as banks reveal how many
billions in dollars they must write off for their mortgage investments
gone bad. Sadly, the conclusion to my Subprime Katrina column
still holds true: "Heckuva Job Brownie - now known as Helicopter
Ben Bernanke and his Federal Reserve team - won't have any more
luck picking up the pieces on Wall Street than FEMA did in New
Orleans."
written November 29, 2007
Susan C. Walker
Susan C.
Walker
writes for Elliott
Wave International a market forecasting and technical analysis
company. She
has been an associate editor with Inc. magazine, a newspaper
writer and editor, an investor relations executive and a speechwriter
for the Federal Reserve Bank of Atlanta.
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