Be careful of bottom picking stocks that are affected by the subprime mess.
As we begin the New Year, remember that much of the fallout from the subprime debacle is scheduled to happen this year. The FDIC estimates that about 1.7 million ARM-type mortgage loans worth $367 billion are scheduled to reset during 2008 and 2009, increasing payments and likely leading to higher foreclosures, bankruptcies and housing-related economic woes.
The Bush Administration, Federal Reserve and major mortgage lenders teamed up together to develop a way to help those who cannot afford the higher payments scheduled for 2008. However, it's not clear that this plan will make much of a dent, and we all know about the law of unintended consequences that may pop up long after the bailout is history.
The FDIC predicts that the subprime bailout will also benefit investors who bought investments secured by subprime mortgages. However, it doesn't seem to do much about the related problem of institutional investors that cannot accurately value these investments because of the uncertainty of eventual repayment. In fact, one expert said that, "Modifying loans too aggressively may harm mortgage-bond investors more than it helps them..." I guess we'll just have to wait and see what happens.
As for the continued effects of the subprime mortgage debacle on the stock markets, the efficient market folks would have us believe that much of this news has already been priced into the market. However, just watch what happens as bad news about subprime loans hits the airwaves, even though the news may consist only of the confirmation of what was predicted to occur. As a result, I expect the subprime debacle to trigger just as much emotional trading in 2008 as it did in 2007.