The Correction Has Begun

Well, I think, anyway. It was quite a run we had there in the market - and of course I missed it, so I'm all for the correction. But where will it correct to, and how will we know it's over and the bull market has begun? Don't ask me, I haven't a clue. But the sudden reversal is rather interesting.

As you'll recall, back in early March, Armageddon was but days away, and the economy was in a freefall. Hysterical bloggers were overwrought with apocalyptic visions. But then suddenly it all turned around. Do you remember what it was that did it? Vikram Pandit, Citi's CEO, boasted of strong profits in the first two months of the year, and quickly the other big-bank CEO's chimed in with "us too!".

What's that? everyone thought, these supposedly zombie banks are making money? So everything's A-OK after all. The S&P 500 shot up 6% that day, and it's been one unending string of things-aren't-so-bad-after-all news since then. Hey, retail sales inched up in February! Whoa, only 600,000 jobs lost last month! GM only lost $6 billion last quarter - things are looking up! Then finally last Thursday the official "stress test" results were announced, and whadda ya know, the banks hardly need to raise any capital at all - what crisis?! Indeed, many of the banks managed to fill their capital shortfalls just on Friday alone. Green shoots abound - the Times just couldn't wait to stop all this recession talk and get focused on promoting Obama's healthcare program.

But then suddenly on Monday the financial world was shocked - Shocked! - to find that the banks had negotiated down their capital requirements out of the stress tests' original projections (who knew the world worked this way - surely not anyone involved in buying and selling financial stocks). And now the news everywhere seems unrelievedly bleak. Retail sales in April plummeted - so much for those green shoots. While a few weeks ago we cheered a supposed bottoming in the housing crisis, today we learn that April's foreclosures were at a record pace.

A total of 342,038 properties received a default or auction notice or were seized last month, RealtyTrac Inc. of Irvine, California, said today in a statement. One in 374 households got a filing, the highest monthly rate since the property data service began issuing such reports in 2005.

Could it be that those positive stress test results could have been boosted by par valuations on mortgage portfolios while banks held off on foreclosures? It's like hiding from the bad guys by staying underwater - works great, but sooner or later you have to come up for air. A "foreclosure moratorium" sounds nice for home occupants, but it's also nice for the balance sheets. But it will also start killing your cash flows. So my suspicion is that once the books were closed last quarter, the banks started to dump some of these properties and get some cash out of those assets. And finally, word is starting to filter in that that other "shoe" is about to drop - the commercial mortgage market.

Let the meltdown recommence.