Why I’m So Bearish Going into 2011

Wednesday, I wrote how I was immediate-term bullish on the stock market. My three main reasons for being bullish: corporate earnings for the third quarter would surprise on the upside; a cloud of investor pessimism still prevails over the market; and stocks are simply attractive compared to U.S. Treasuries that offer little to no return and that may be our next bubble to burst.

But, in the short term, for 2011, I’m negative: bearish on the stock market and economy.

I have great concern towards the U.S. dollar, am concerned about its possible collapse (which would push domestic interest rates up, sending the stock market down), and see the weight of the U.S. housing market putting additional pressure on the economy.

The National Bureau of Economic Research said earlier this week that the worst U.S. recession since the Great Depression ended in June of 2009. I agree with this. But the U.S. economy is still so fragile, so very delicate; we could lapse back into recession if the cards are not played right.

We need to understand that home construction and the residential real estate market are the backbone of our economy. As I have mentioned before, the price of homes in the U.S. fell 15% during the Great Depression. From its peak in 2005, the price of homes have fallen in America a devastating 28% — almost double the decline rate experienced during the Great Depression.

U.S. rates for 30-year mortgages have sunk like a stone to 4.32% this week, the lowest rate since 1971, according to Freddie Mac. Yet, housing prices continue to fall, because there is no demand for homes and there is too much inventory coming onto the market.

The average price of a U.S. home fell 3.3% in July of this year from July 2009. Another 95,364 U.S. homes were foreclosed upon by banks last month according to RealtyTrac.

I don’t have any specific statistics to quote, but I believe that U.S. banks have plenty more bad housing loans on their books to eventually deal with and clear out. The banks have been taking homes back (foreclosing) so much that they have actually slowed down the foreclosure process, because they do not know what to do with all the homes they have already repossessed.

GMAC Mortgage, ranked fourth among U.S. home-loan originators, announced this week that it was stopping foreclosures in 23 states. I can sense other mortgage companies have slowed down their foreclosure process as they deal with their presented bloated inventory of empty, foreclosed homes.

Predictions have banks foreclosing on a total of two million homes by the end of next year. Some seven million homes in the U.S. are now sitting empty, have been foreclosed on, or have been walked away from by their owners who are in the foreclosure process.

One in almost four homes in the U.S. with mortgages on them is worth less than its mortgage. This is national crisis of epic portions never before witnessed in U.S. history.

Our economy cannot get better until the housing crisis is corrected, and this could take years. I’m concerned that a second round of bank “loan cleansing” via foreclosures in 2011, coupled with the weakening U.S. dollar, will place a heavy burden on an already fragile economy. Hence why I’m bearish going into 2011.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up 2.2% for 2010. I continue to believe that we are in a bear market rally that started in March of 2009 and that stocks will move higher in the immediate term.

What He Said:

“The U.S. brought interest rates down in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would cause havoc with the banking system.