Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.

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January 7, 2010 – Housing and Financial Sectors to lead Economic Swoon

The problems in Commercial Real Estate intensify, and related comments from the Fed Minutes.
I continue my theme that “Main Street woes will trump Wall Street hype” in 2010. Key levels for
the US Capital Markets remain in place.
The Swoon in Commercial Real Estate continues as vacancies at strip malls across the country
reached and 18-year high in the fourth quarter, which is a vacancy rate or 10.6%. This deterioration is
worse than in the 1988 to 1992 CRE slump. High unemployment and inconsistent consumer spending
will continue this troubling trend through 2011 and into 2012.
The Fed Minutes from the December 15 – 16 FOMC meeting reflects this concern. “Conditions in
the commercial real estate (CRE) sector were still deteriorating. Bank credit had contracted further, and
with many banks facing continuing loan losses, tight bank credit could continue to weigh on the
spending of some households and businesses.”
One of my predictions for 2010 is that, “Loan Defaults and Foreclosures will continue to rise.”
The Fed agrees with the following statement in their minutes: “Bank loans continued to contract sharply
in all categories, reflecting lack of demand, deterioration in potential borrowers' credit quality,
uncertainty about the economic outlook, and banks' concerns about their own capital positions. With
rising levels of nonperforming loans expected to be a continuing source of stress, and with many
regional and small banks vulnerable to the deteriorating performance of CRE loans, bank lending terms
and standards were seen as likely to remain tight.”
The Mortgage Bankers Association reports that vacancy and delinquencies are increasing across all
commercial property categories. Vacancies among apartments increased to 8.4% from 6.5% in the third
quarter, even with rental rates down 6.0%. Office properties jumped to 19.4% from 16.0%, while retail
vacancies swelled to 18.6% from 12.9% with rents declining 8% to 9%.
As a result of this loan deterioration, 6.1% of Commercial Mortgage Backed Securities are behind by 30
days or more in December, up 500% year over year. The unpaid balance is $38 billion up 440% year
over year. Because of this community and regional banks have tightened lending standards on
commercial loans and are reluctant to refinance maturing construction and development loans.
In sum, my theme is that “Main Street woes will trump Wall Street hype” in 2010. A return of
economic weakness will be led by another round of deterioration in the housing market followed by
cascading bad loans in the banking system. As loans and foreclosures continue to rise, home prices
will resume a decline, the FDIC will close 150 to 200 banks, as the FDIC List of Problem Banks
exceeds 700. As a result The FDIC will have to tap its $500 billion line of credit and Fannie Mae and
Freddie Mac drain taxpayer money for an unlimited amount.
Home Builders had 235,000 new homes for sale nationwide at the end of November, the lowest
inventory level since April 1971. At the same time Fannie and Freddie have 113,408 foreclosed homes
(72,275 Fannie and 41,133 Freddie), which is significant sales competition.
Why didn’t we help homeowners early in the crisis? The complaint was "moral hazard" and now
those making that complaint face foreclosure. Investors in the mortgage-backed securities should have
taken a mandated haircut on both principal and interest. If we did it in Feb 2008, "The Great Credit
Crunch" could have ended with a 3% funds rate by the Fed, not this ridiculous zero percent rate.
In the US Capital Markets all key levels remain in place: The 10-Year yield is between 3.868 and
3.675. Gold is between my annual pivot at $1115.2 and monthly resistance at $1166.7. Crude oil is
above my annual support at $77.05. The dollar index is below $80.23. The Dow is between my annual
pivot at 10,379 and monthly resistance at 10,977.
The Emerging Markets Index Fund (EEM) is up 3.9% in the first three days of 2010 setting a new 52-
week high, but it’s below my annual resistance at $44.99, where profits should be taken.
The China 25 Fund (FXI) is up 5.5% in the first three days of 2010 ending Wednesday pennies above
my annual pivot at $44.53, which is the first level at which to book profits. Subscribers to the Weekly
ValuEngine ETF Report can also use this level at the location at which to set up a short position.
Send me your comments and questions to Rsuttmeier@Gmail.com. For more information on our
products and services visit www.ValuEngine.com
That’s today’s Four in Four. Have a great day.

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Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
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“I Hold No Positions in the Stocks I Cover.”