Is it just me, or do I see negative news about the economy everywhere I look? Here’s just a sampling of the news reported over the past couple of days:
— General Motors Corp. says it may take a charge of up to $1 billion to cover mortgages made by its home-lending unit as loans go bad. The news isn’t good for GM, which has already lost about $13 billion over the past two years.
— The U.S. Commerce Department reports U.S. factory orders fell 5.6% in February, representing the steepest drop in six years. Businesses are not spending.
— The Federal Reserve reports the delinquency rate on banks’ residential real estate loans jumped in the last quarter to the highest level since 2002. People are simply having a harder time making their payments.
Negative economic news is being churned out at an alarming rate. And last week’s market meltdown was a strong reality check for Wall Street and Bay Street: Yes, the brokers themselves might be the next casualty of the quickly eroding U.S. economy.
As prudent investors, we need to face the facts: The people selling stocks want the markets rising, not falling. While most brokers were quick last week to tell their clients that we were due for a stock market correction, I have yet to see a broker tell the truth: The housing and lending market is under immense pressure; the U.S. economy is going down the drain quickly; and big-cap and regular blue-chip stocks are the last place you want to be today.
Unfortunately, brokers don’t make money if they tell their clients the stock market is a bad place to invest their money right now. The “unfortunate” part is for us investors, not the brokers. In my opinion, we have already entered the contraction period of this economic cycle. The economic environment around us will only get worse; the general stock market will decline.
Whom do I feel the most sorry for? The three million Americans with poor ratings that bought homes over the past couple of years with adjustable mortgages (also known as ARMs).
ARMs readjusting to higher interest rate levels coupled with tighter lending requirements equals: Not a good situation for the millions of Americans who were swayed into buying homes with little or no money down. In fact, it’s a situation destined to only get worse.