Perhaps you've heard this argument: Corporate cost cuts have swelled profits beyond analyst expectations! And profits are what drive the market higher! Well, sure. But eventually, the top line has to grow, too -- and that could be one heckuva problem.
What goes up must come down?
First off, it's true: As of a few weeks ago, more than 70% of S&P 500 companies that had reported second-quarter earnings beat their estimates -- surpassing the 61% average. Nice. But there is such thing as a future, and the next several quarters could see a nasty transition, as companies go from beating the Street to pounding the pavement in search of business.
Here are a few reasons why consumers and the housing market shouldn't expect green shoots just yet:
- According to Deutsche Bank
(NYSE:DB)analysts, the percentage of negative equity mortgages may escalate to 48% by 2011, versus 26% as of March. Negative equity is a big deal. In fact, a recent study by economist Stan Liebowitz found that it trumps unemployment, poor credit, loan resets, and other factors in precipitating foreclosure activity. While only 12% of homes in Liebowitz' research sample had negative equity, they accounted for 47% of all foreclosures.
- Remember interest-only home loans? They're coming home to roost, as their reset monthly payments increase by as much as 75%. And that's trouble with a capital "T" for all you folks in River City. The value of active interest-only home loans sits at roughly $900 billion, according to First American CoreLogic, or nearly 9% of total outstanding mortgage debt. By year-end 2011, more than half of those loans will have reset. To heck with The Music Man, Fools -- I hear Billy Joel singing something about movin' out.
- Finally, the Federal Housing Administration (FHA) -- whose presence in the mortgage market has swelled since 2006 -- is insuring 3.5%-down loans. With help from the soon-to-expire $8,000 tax credit for new homeowners, potential buyers can snatch up a $228,000 home with essentially no out-of-pocket contribution. In light of rising FHA delinquency rates, economic commentator Barry Ritholtz likens the phenomenon to "drinking yourself sober."
Just a party pooper?
Look, the market as a whole might not be wildly overvalued, and individual companies may soon see better days -- Caterpillar
But all those who have piled into shares of Fannie Mae
Other Foolish takes on the big picture: