Housing Ills May Cause More Trouble for Stock Market

AP

Barry James, president and portfolio manager of James Advantage Funds, told CNBC’s “Power Lunch” that the subprime mortgage sector will continue to roil the stock market despite Wednesday’s rally.

“When a bubble bursts, you typically get one down leg, then a rebound followed by a worse down leg,” James said Thursday. “I think we’re setting up for that worse down leg in the housing market.”

He said the trouble is spreading to the “Alt-A” sector of the mortgage market -- the territory between sub-prime and prime -- and delinquencies are rising. Still, the market rallied.

“I think (the rally) is fairly natural,” James said. “We’ve had a pretty good correction in the market and we’ve got a lot of volatility. I think this is a natural rebound. We’ve seen some bearishness build up – about the most in the last six or seven months. I don’t know that we’re through this corrective phase, but nonetheless (Wednesday’s rally is) a positive development.”

David Reilly, director of portfolio strategy at Rydex Investments, said adjustable mortgages valued an estimated $900 billion and scheduled to reset this year and 2008.

“The $64,000 question is: Whether what’s going on in housing tips the economy into recession or simply slows it down,” Reilly said. “For now, we’re still in the ‘slow it down camp.’ The numbers look big, bad and wooly in an absolute sense, but relative to the size of the mortgage market, they’re not that big.”