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Registered Investment Adviser Caleb Lawrence

 

Another volatile day for the major averages as they enter the final hour with small gains on generally positive data.

Economically significant new home sales hit a 7-month high in February on a 6.1% gain to 592,000 units annualized, month’s supply slipped to 5.4 while the median price fell for a 2nd month down 6.2% to $294,700. On a regional basis all but the Northeast advanced, the Midwest was particularly strong. This report is at odds with rising interest rates that have negatively impacted both existing home sales and future sales expectations.

The Kansas City Fed regional index hit a nearly 15-year high in March becoming the latest in a string of regional Fed surveys to show very strong manufacturing and industrial activity that so far has failed to be confirmed by the national indexes that continue to show at best weak growth.

It’s said that history does not repeat but it often rhymes. In 2007, sub-prime mortgage debt hit 1.3 trillion following an explosion in its popularity, by 2009 half of the loans were underwater and mortgage default and delinquency rates peaked at 11.5% in 2010. Fast forward to 2016 and student loans following an explosion in their popularity hit 1.3 trillion last year. Default rates are climbing rapidly and we recently found out they were much higher than reported previously and now stand at 11.2%. Given that there isn’t much in the way of collateral behind them they share more than a few similarities with sub-prime. Add rapidly deteriorating loan quality for auto and commercial real estate loans, near record levels of margin debt and very high levels of corporate debt much of it high yield or junk, and the similarities with 2007 becoming disconcerting as the only thing missing is the match.

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