Every Thursday, the American Association of Individual Investors releases the results of Investor Sentiment Survey.  It asks members about the prospects for stocks over the next six months, whether they’re bullish, bearish, or neutral.  As with most sentiment surveys, these investors are most bullish at market peaks, most bearish at market bottoms.  To them, rising prices mean falling risks, while falling prices mean rising risks.

This week there was a surprising drop in bullishness–and a corresponding increase in bearishness–among the members, as can be seen in the chart below.  The top panel shows the percentage of respondents who said they were bullish, a mere 22%.  That’s as low as the bears have been since the March bottom.  In the past, such readings marked good times to buy the S & P 500, although, as can be seen, the readings didn’t always mark the bottom (witness 2008 readings), but a bottom.  (more…)

Remember how, in the scary movie, our protaganist missed the claw hammer to the back of the head only to meet up with Scary Guy while fleeing out the front door?

Such it might be with residential real estate.  No, the problem isn’t with subprime mortgages.  That problem is largely behind us, although the ripples are still being felt, and are likely to continue to be felt in the form of rising foreclosures, vacancies, and the like.  Nope.  The problem is in the other mortgage types, namely what’s known as Alt-A and Option Adjustable Rate Mortgages, or Option ARM.  An Alt-A mortgage is a better quality mortgage than a subprime mortgage, but isn’t as good as a prime mortgage. 

An Option ARM is a mortgage that offers borrowers a few payment options, like interest only, principal and interest, or a minimum rate.  Trouble is, with an Option ARM, making a minimum payment can result in negative amortization, a situation where what’s owed is more than the mortgage amount.  Compound that with a contracting real estate market and the problem worsens.  Compound that with what our own intrepid Steve McElhoe (aka Big Mac) contends was done with the funds not tied up in making traditional principal and interest payments, speculate in Florida real estate, and the result is like some metaphor I can’t think of. (more…)