Losers take turn

Well we all know winners take turn, losers take turn too.

During the second half of the year no doubt in US financials and homebuilders were the losers. By that time tech were still strong. Now since 2008 tech followed, dropped more than financials and homebuilders now. Look at today's action. QQQQ started positively, many former high-flyers like GOOG, BIDU or FSLR started well in the morning. Only to see all of them turned red later. AAPL even turned red faster than anybody. Fortunately QQQQ's volume is not that high, so I'm not surprise that QQQQ can go up a bit to test its 50-day EMA. But insofar, it looked like it couldn't even get pass the 20-day EMA.

We all heard about the tax cut, we all saw the interest rate cut, now we see the freeze of foreclosure. That probably could slow down the bust of the problem, but will that solve the long-term problem I doubt.

I don't have exact numbers with me, but I still want to make a guess. It maybe way off so you can just read for fun and don't take it seriously.

Imagine many Americans actually use their home as ATM, it means when their house value decrease they have to pay the banks to maintain their homeowner position. Just that you buy stock on margin and now you get margin calls. Either you deposit cash into your account and maintain the margin or your position will be sold. US is a $15 trillion economy. We always hear that individual consumptions make up 2/3 of US economy. Now this 2/3 is in danger because some people keep spending their unrealized capital gain on their houses without enough cash to maintain the margin.

Banks decided not to force foreclosure. Well sounds okay. But at the end they still need to collect some cash from the homeowner in order to keep their houses. So these people have to save money from now on to pay the margin to a certain level that the banks feel comfortable. Since many people need to squeeze cash from somewhere, the first thing they need to do is to spend less, which hit the whole economy.

Some people have stocks with them probably. So in order to squeeze cash, some of them may decide to sell some stocks to raise cash. After all, a living place is more important than your Google stocks right at this moment.

So what could happen? Banks are delaying their losses. Those suppose-to-be foreclosures are in the meantime, unrealized loss. By the time these people squeeze out enough money to put up the margin, the economy slides by a lot already. Consumer staples and utilities can hold better, but not any other sectors as all kinds of demand will slow down. Banks will then be flood of money that they couldn't loan out, until bank clients with strong credit quality started to initiate loans again.

So I think. How long US economy will stay down really depends on how many people on US land have good credit quality, and how long do other people need to build or rebuild their credit quality to a level that banks are willing to loan money to them again.