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Richard Suttmeier is the Chief Market Strategist at

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December 23, 2009 – Shaving Points off of GDP

It’s a mixed bag for housing and financials. Existing Home Sales face headwinds. Shaving
Points off GDP, as states run out of unemployment benefits. Tracking the Dow Breakout
The number of homeowners in mortgage default rose for the 6th consecutive quarter in the third
quarter as late prime mortgages more than doubled year over year to 3.6%. This makes it more difficult
for community and regional banks to help struggling borrowers make mortgage modifications.
Meanwhile, US banks that paid lobbyists, or had political connections in Washington were rubber-
stamped to receive TARP funding. Make a political contribution, get TARP bucks even if your bank is
overexposed to C&D and / or CRE loans.
Nearly 3,000 community banks have overexposures to C&D and CRE loans, which is why 165 banks
have failed since the end of 2007. Failures will grow to 500 to 800 by the end of 2012.
Four of the twelve banks who visited with the president on Tuesday are guilty of this SPECULATION.
Existing Home Sales Surged 7.4% in November - So far about two million homebuyers have taken
advantage of the various home buyer tax credits, and there was a rush to beat the original November
30th deadline. This deadline was extended to April 30, 2010 for signed contracts and to June 30, 2010
for closed contracts. Sales are up 44% from a year ago.
Homebuilders rallied on this news, but we will see today from the New Home Sales data whether or not
home buyers are buying new homes. Recently the NAHB Housing Market Index declined to 16, well
below the 50 neutral reading with the trade group complaining that existing home sales were hurting
new home sales because of the depressed prices of foreclosure and short sales by banks. Home
builders have not been able to get new construction and development loans, and as I said yesterday,
small construction companies with five or more employees must provide health care under the Senate
Democrat bill.
Another fact ignored is that some of the existing home sales were double counted as foreclosure
flippers sold to legitimate buyers. The inventory of existing homes was reported to have declined to 3.5
million, but there was no mention of the hidden foreclosure inventory. Banks are holding onto roughly
1.7 million homes waiting for higher prices. This speculation takes capital that could help struggling
homeowners stay in their homes. There will be 3.5 million foreclosures on the way and another 3
million after that.
Meanwhile third quarter GDP was not as strong as expected. The Advanced Reading of two
months ago was up 3.5%, the Preliminary Reading was revised down to 2.8% and the Final Reading,
which came out on Tuesday was just 2.2%, below trend. This is a sign that the economy is far from
emerging from Recession and is no where near ready to create jobs, which should hurt housing and
Business spending fell at a 5.9% rate instead of 4.1%. A deeper than expected slump in commercial
construction and stronger demand for imports overshadowed the growth in exports. Nonresidential
building activity dropped 18.4% rather than the prior estimate of 15.1%. Even consumer spending was
shared to 2.8% from 2.9%, which is 70% of the economy. Excluding inventories GDP growth was just
1.5%. Corporate taxes grew 12.7% instead of 13.4% with deeper cost-cutting mostly from layoffs.
Growth may have evaporated except for the cash for clunkers and the tax credit for home buyers.
States are running out of funds for unemployment benefits - It seems like forty states will run out of
unemployment benefits money within two years and will need $90 billion in loans to keep paying out
benefit checks. This puts pressure on states to raise taxes or downsize payments. Currently twenty-five
states have borrowed from Uncle Sam to cover existing gaps.
The Dow remains poised for a breakout above the down trend that goes back to October 2007.
Ascending Wedge support is 10,211 with the down trend and weekly resistances at 10,475 / 10,490,
and 10,506. This down trend was tested on Tuesdsay.

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Richard Suttmeier
Chief Market Strategist
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website I
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