The Bear Is Only Resting

After the recent carnage, the markets staged a little comeback, with all indices posting gains for the week. While the bulls are claiming that this market is simply unsinkable, I believe it has hit an iceberg and is eventually going to sink.

Clearly, the fundamentals are deteriorating. The economy is fading fast, but that hasn't surfaced yet in the month-to-month data. Warnings can be found beneath the tip of the iceberg, in the beige book, the FDIC's quarterly banking profile and the downward revisions to fourth-quarter GDP.

In the latest beige book report, several districts noted some slowing in economic activity for the first time in this economic cycle, and almost all districts reported that housing markets remained weak. The real estate market continues to be an increasing drag on the economy, and homebuilding CEOs are painting a bleak picture of their business.

Financial Fundamentals

I've previously discussed the stress in the banking system, but let's revisit it with some perspective.

Here are some statistics from the recent FDIC quarterly banking profile:

• Residential construction and development loans are at $565 billion, up 25.6% year over year, with demand for new homes down at least 30%.
• Its "other real estate" category is up 48.4% year over year. This is where loan collateral such as land gets hidden.
• Loans and leases that are 30 to 89 days past due posted a 14.3% sequential rise and a 22.6% year-over-year increase.
• Noncurrent loans and leases rose 8.0% sequentially and 13.6% year over year.
• Net operating income at FDIC-insured institutions fell 9.4% sequentially in the fourth quarter and declined 11.6% in the second half of the year.

Now, the latest data on new-home sales came in below a 1 million annual rate. So let's do a little simple math with these figures. If we take that $565 billion in residential construction and development loans and divide that by $220,000 per house, we get 2.5 million. (That number may be as high as 3 million or more, as $565 billion could represent a dispersed amount as low as 60%.)

That tells me that the banks have funded another 2.5 million to 3 million new homes that are either under construction, partly funded or have funded plans. If funded homes are not complete, the regional banks will be left holding the bag.

Trouble in the Technicals

The daily and weekly charts for the Dow Jones Industrial Average have deteriorating technical profiles as well.

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At time of publication, Suttmeier had no positions in any of the stocks mentioned in this column.

Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.