What's up with the Economy?

Well friends, it looks like the battle is underway!

Our beloved federal government is throwing more cash at the recession that most have admitted is either upon us or looming around the corner. Jim Juback, at MSN Money says, "Don't count on a 'normal' recession" citing that recessions post-1983 lasted shorter and were less protracted than 'normal recessions' between 1959 - 1983. He argues for a 12 month long recession with at least a 2% decline in real GDP. What does this mean? Basically, there's -2% expansion for 4 quarters....simply put. (see Jubak's Journal Don't count on a 'normal' recession 1/25/2008)

In a recent issue of Businessweek, Europe reports a housing slump in Britain, and forecasts of a 5.5% profit drop for European companies. It reads, "The subprime crisis has clobbered Europe's financial sector, with banks such as Switzerland's UBS and Britain's Barclays and Royal Bank of Scotland taking huge writedowns in recent months..." (BusinessWeek Behing Market Turmoil, Europe is Weakening 1/24/2008) Essentially, the author says that you can look to the European Central Bank (the Fed's cousin) to start lowering interest rates soon, in order to stave off Euro-style recession.

These are weird times, we've never really seen such interconnectedness among international markets fraught with such issues. For instance, take Ambac Financial and MBIA. These two companies are "AAA" rated bond insurer companies. What does this mean? Basically, these investments are the safest investments possible on the market: hence the triple A rating. A bond insurer is a company that insures public works projects (roads, schools, etc.) against default. Ultimately, if these bond insurance companies are not bailed out, you will see a severe shakeup on the domestic front. There will be fewer government, tax-funded projects. (This can be a good thing depending upon your political viewpoint).

And, beyond all this, you have the housing slump, slouching even further. Even though we are technically not a 'declining market' according to Fannie Mae (nation's largest home mortgage underwriter) it has now come to the Pacific Northwest and the resilient Charlotte, North Carolina. The correction is fully underway now, and in the words of one realtor in Arizona, "For now, people trying to sell homes 'don't seem to have a prayer' in competing with lenders offering foreclosed homes and builders dumping excess inventory". (The Wall Street Journal Housing Slump Starts to Hit Stronger Cities 1/24/2008) The article goes on to report that prices in Seattle will fall further due to all the condominium building downtown (just look out your downtown window and check out all the cranes). Suffice it to say, it's a buyer's market folks! I hope you have your cash on hand! I'm counseling clients to sell only if they have to, and get ready to buy a steal of a deal either at the auction block or through a short-sale 3-9 months from now.

You will also notice that many homebuilder's ratings have been further cut. D.R. Horton has been junk status since November 2007. Meritage, Hovnavian, and M/I Homes have been cut as of 1/17/2008 to junk (that means non-investment) status.


What does all this information mean?

This means that it's a great time to have cash. It's a buyer's market out there, and it can only get better. Long-term investors should be pumping money into good mutual funds, with an allowance for commodities as hedges against inflation. It's a great time to get a 'deal' on a house, and if they don't accept your price....don't buy it! Interest rates are forced low by the Fed's actions, which means you can carry that mortgage at a low rate, in the 5's for a 30 year fixed!

Ultimately, be patient. The economy's not going to totally collapse. We've had this coming a long time, just look at our spending habits as Americans. Be patient, keep investing and diversifying for protection. The stimulus package will likely be shrugged off within a quarter of being implemented, which will likely send commodities soaring.

Pay your mortgage down. Don't sell. Be happy where you are. Work hard and save and we'll see what happens!

1-23-2008 Historic Day for Interest Rates!!!

Well, what a birthday present. I awoke this morning to see the Dow Jones tanking down to mid-11,000's levels. While that was bad for investors, it was great for interest rates. For instance, interest rates were all the way down to 5% on a 30 year fixed at the lowest point in the day.

Great birthday present right?!?

HA!

If that was all that happened, sure...

At 11am, it all started. That's because it was 2pm Eastern Time, and lenders were starting to reprice their interest rates. The Dow Jones rallied hugely, and ultimately the lender repriced their loans 4 times in 1 single day! (I've never seen that before). This means that if you had 5% on a 30 year fixed this morning, well, after the repricing settled, you were now looking at 5.75% on a 30 year fixed.

This day will go down as a hair-pulling, crazy day. I hope these markets will cool down sometime so we get some normalcy here. Volatility is great, but it sure takes years off your life.