Is Reality Beginning to set in? UPDATED!

Update 2:49: A huge banking bomb was just dropped on Wall St. This is huge folks. The SEC has had enough. This is why you are seeing a big selloff this afternoon:

May 7 (Bloomberg) -- The U.S. Securities and Exchange Commission will require Wall Street investment banks to disclose their capital and liquidity levels, after speculation about a cash shortage at Bear Stearns Cos. triggered a run on the firm, SEC Chairman Christopher Cox said.
The disclosures will be ``in terms that the market can readily understand and digest,'' Cox said today during a speech in Washington. The SEC will require the disclosures ``later this year,'' he said.

Back to the original Post:

Stocks are slumping today as the bad news continues to come in waves. Home sales slumped again in March. This sent the home builders down. Finally these suckers went down instead of up on bad news. Bloomberg and home sales here.

"The index of pending home resales fell 1 percent to 83, following a 2.8 percent drop in February that was larger than previously reported, the National Association of Realtors said today in Washington. The decline matched the median forecast of economists surveyed by Bloomberg News."

Now keep in mind March sales are supposed to rise dramatically during the spring season.

The Fed to start raising rates?

Thomas Hoenig from the Fed thinks so. From Bloomberg:

May 6 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said today ``serious'' inflation pressures may compel the central bank to raise interest rates.
``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig said in the prepared text of a speech in Denver. Consumers are gaining an ``inflation psychology to an extent that I have not seen since the 1970s and early 1980s.''

``A sharp slowdown in growth has put the economy at the brink of a recession while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,'' Hoenig said to the Economic Club of Colorado. He isn't a voting member of the Federal Open Market Committee this year."

I think the builders may have dropped more on this news versus the pending home sales drop. This is the toughest talk I have seen to date on raising rates. Any significant rise in interest rates will destroy housing prices. I think as oil goes to the moon the Fed is realizing they are starting to lose control of the economy and inflation.

The consumer is on the ropes and we all know they are 70% of the economy. I was at Outback Steakhouse for dinner last night and it was a ghost town. The bartenders told me its been like this for a few weeks.

Declining Tax Revenue forces town into Bankruptcy

The housing slump is starting to slide into other parts of the economy. Vallejo California was the first BK victim as a result of declining home prices that have lowered tax revenues. From Bloomberg:

"May 7 (Bloomberg) -- Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy."


We are near a tipping point in the economy folks. I continue to hear chatter that the Countrywide deal is not gonna make it. It seems many feel this company is worthless. Time will tell.

The banks are really starting to pull back on lending. Bloomberg reported that the banks are reducing home equity loans:

"May 6 (Bloomberg) -- Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers.

Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide

``It's really putting borrowers in a panic,'' said Kratzer, president of feedisclosure.com in North Palm Beach, Florida. The amount of credit frozen nationally may be $6 billion, based on an assumption that the 600,000 borrowers each had $10,000 available, he said."

My take:


The lack of HELOCS is going to put a hurting on the economy. This was a key driver for the consumer to spend like drunken sailors.

The fact that the housing slump shows no sign of slowing is starting to scare investors. Reality is starting to set in folks. This was the first day in awhile where bad news pushed stocks lower. When cities are going bankrupt it can send a chill down your spine. This isn't supposed to happen.

The debt bubble is starting to leak and there is no way to stop it once it bursts. The banks are shutting down the lending spigot and rates look to be moving higher. This is going to be a knockout blow for the consumer.

Expect a serious recession when reality begins to set in as the consumer hits the canvas..