The Weather Report

There's a storm brewing.

Next week, Morgan Stanley and Goldman will be the first of the financials to post fourth-quarter earnings. And it will not be pretty.

Big banks' problem assets mushroomed to more than $600 billion in the third quarter, a 15.5% quarter-on-quarter increase. And the change in direction of the TARP (which was passed after the third quarter ended) means the value of those assets is sharply lower this quarter. For some financials that report monthly, we saw massive losses in October. So the fourth-quarter results for the firms whose fiscal year ended last month should be particularly bleak. And that will bring fresh concerns in the markets.

The other front that's building is a new wave of foreclosures. I've talked before about option ARMs, and how the resets have accelerated due to the negative amortization caps being reached. We'll see those build in earnest beginning in the first quarter, with the peak coming in late 2009 to early 2010. By early next year, banks will own more than one million properties nationwide. The foreclosure sales will depress home prices further, more borrowers will find themselves upside down, and the "jingle mail" will continue, in an ugly death spiral.

Also, historically, the single biggest factor driving mortgage defaults is loss of a job. With joblessness poised to reach the highest level in decades next year, that also bodes ill for foreclosures.

The good news is that if you're in the market for a house in a year or two, it'll be the best buyer's market in US history. And - with Nevada leading the nation in foreclosure filings for a full two years now - those trips to Vegas are going to be much cheaper.

See? I don't just spread doom and gloom. There's a silver lining to every dark cloud.