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Registered Investment Adviser Caleb Lawrence

 Another slow day on the street with small gains for the major averages with an hour to go. New Home sales missed expectations in June with a .8% gain to 610,000 units annualized matching the previous month after it was revised lower. Month’s supply increased to 5.4, 6 is considered normal. The median price fell 5.1% to $310,800, a 4th decline in the last 6-months. That said the Case/Schiller home price index hit a new all-time record high in May eclipsing the previous record high set in 2006.

Reckless sub-prime lending using the now infamous NINJA loan an acronym for No Income, No Job or Assets was instrumental in fueling the inevitable boom that precipitated the 2007-2009 financial crisis along with a devil may care attitude by the regulators that allowed fraud to reach epidemic proportions. Fast forward to the present and reckless lending and borrowing is again in full swing. The public face of this is of course student and auto loans, the latter riddled with sub-prime paper, although the same could be said about student loans based on delinquency rates and a lack of collateral backing the loans. Lesser known is the covenant lite leveraged and unleveraged commercial loan category, the leveraged variety alone stands at nearly a trillion Dollars outstanding as of last quarter. In a nutshell these frequently high-yield or junk bond issues have limited ability to reclaim principal in the event of default, aka covenant lite. Given the corporate penchant of leveraged debt funded share buy backs that have goosed the markets in the last several years. A toxic mix of near record valuations, questionable collateral value, and limited opportunities for bond holders to recover principal in the event of default will almost certainly prove one of the cornerstones of the next credit crisis.


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