Two very bad omens for our sharemarket: Gottliebsen

Two American dreams were once again shattered last night. When the Dow index of US shares is trading above 10,000 there is a general view in the US that all is well with the world. The Dow last night closed below 10,000 – the first time since February, when it broke the level for a day, and before that since November 2009.

And a second shattering came as the rotten core in the US housing dream resurfaced with one in seven US home mortgages in trouble. This has implications for the entire US banking system.

In terms of the Dow, the big rises in Europe last night sent the Dow surging up but the combination of the festering euro doubts, and the problems at home dragged leading American shares back. A Dow closing below 10,000 will trigger a series of bearish market signals and it was inevitable that it fall after the dramatic declaration by Richard Russell, author Dow Theory Letters, urging his subscribers to “get out of stocks”.

Ground breaking mortgage research by Morgan Stanley reveals the inner depth of the American housing problem. Morgan Stanley says that the shadow inventory of US homes with delinquent mortgages yet to move through the foreclosure process would take 47 months to clear at the current sales rate in the market.

Credit availability remains ‘negative’ and the desire of Americans to form households is ‘neutral’ and some 7.5 million first mortgage borrowers fell behind on their mortgage as of March 2010 or about 15% of the 51 million total borrowers. House prices in parts of California are still 50% below their peak.

More than 10% of all mortgage borrowers are seriously delinquent, according to the report. This situation must be eating into the confidence of Americans and represents an incredible shattering of the American dream.

The American government has delayed the foreclosure process by a series of Acts, but because big US banks are more interested in funding market speculation than funding houses and businesses, the delay has merely put off the problem, even though US housing starts are now picking up.

Many believe the shadow inventory represents the foreclosed inventory that has yet to reach the market. And Morgan Stanley put the total number of homes in the shadow inventory at 8 million at the end of March 31. Worse still, it says: “Given the sheer number of potential homes for sale and the weak pace at which demand is trending, the bottom of the housing market may last another 3-4 years, during which annual appreciation may reach only as high as inflation or income growth, meaning real asset values will remain unchanged or lower throughout this period.”

The American sharemarket and the real situation in the US housing are starting to come into line This is not good news for our sharemarket.

This article first appeared on Business Spectator.