market

How critical are falling housing prices? can anything else do well while housing prices are falling? Key to loan losses is the loan to value ratio -- that's because we are suffering a severity issue not a frequency problem. huh? Frequency refers to people not being able to pay their loans because of something like unemployment -- in a downturn it happens frequently and the bank's losses are relatively small because of the value of the collateral (home).

Severity refers to big losses that happen when the home value has dropped and the owner is far enough under water that they mail in the keys so to speak. After foreclosure costs, the banker will often suffer 25% loan losses -- small number of big losses rather than lots of small losses. The more home prices fall the more owners are under water and the more severity losses the system will have to absorb. Now the WSJ is saying commercial property is experiencing falling values.

Losses have put pressure on bank/broker balance sheets and that is why you saw the auction rate securites fail -- the brokers don't have the capacity to own those securities when they are struggling for capital. But does all this have to hurt ILMN's sales or FLIR's or LH's or TECH's or UEPS's or CLB's or MCF's or anything else non-financial?

depends on how strong the wealth effect is from housing and how strong the offset from overseas growth is in my mind. Have no idea. I have said in the past not to own financials and that I would rather own DFR than most of the banks -- that turned out to be faulty thinking (leverage is a killer). I still am wary of any financials because home prices are still falling. That said, I am nervously long all those other securities and thinking about others. The market has been in a tight range for the last month or so -- between about 1320 and 1400 on the S&P 500. The dip from 1320 to 1270 at the lows was largely Soc Gen induced.

Where do we head from here? New lows or back higher? I'm focused on putting the money into secular growth stories that can do well even in poor economies. That's based on valuation and the strength of the secular cycle. That's why I'm buying BLUD -- recession resistant, relatively attractive valuation with a good secular story. TSRA -- gotten crushed on the whim of an administrative law judge -- long term they win so its a matter of how much to risk and how patient I am for the recovery. I still believe strongly in that story and will likely add some to it.

I am intrigued by AAPL and CREE on the tech side -- but its a tough call for them in this economy. AAPL is too big now not to be influenced by cyclical forces. RIMM isn't cheap enough yet in comparison -- what happens as AAPL comes out with their enterprise strategy - -won't that impact RIMM's PE? CREE -- how much competition will they face in the illumination market? is their new found capital spending discipline sustainable?

I did sell some ILMN today to buy more BLUD -- that's just taking some profits and redeploying them into something with potentially better risk reward. I have had too many round trips to not want to take some gains off the table like ILMN. Love the story but its one expensive stock unless they are able to really beat the numbers. Last year yes, this year -- not so sure.