An amazing day for inflation, and welcome to the 70's! The bond market sold off for pretty much the 2nd largest time in history; the 1st time was 1/23/2008, my birthday.
Effectively, we're seeing heavy inflation. The government is now not going to even report the key economic indicators because it has gotten so bad. Stick your investments into commodities, I say...
I'm going to paste an article from M. Ramsey King Securities, Inc. He offers great insight into what is going on.
The King Report
M. Ramsey King Securities, Inc.
Tuesday February 19, 2008 – Issue 3816 “Independent View of the News”
The FT: US banks borrow $50bn via new Fed facility US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks…The use of the Fed’s Term Auction Facility…saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. http://us.ft.com/ftgateway/superpage.ft?news_id=fto021820081549448926
The supra-inflationary aspects of the revelations that the Fed is pouring enormous amounts of capital into the US financial system and England’s nationalization of Northern Rock have equity markets and commodity markets rallying and bonds declining sharply. Numerous investors and traders believe that horrible news is good news for stocks because the Fed and
other central banks will be forced to pump even more credit into the system. This linear thinking has been inculcated in investor and traders’ psyche over the past two decades. However, those were decades without a global inflationary threat, let alone a global food and energy inflation threat.
Few people, or less, know the magnitude of the problems in the financial system. The NY Times’ Gretchen Morgenson gives some insight into the scope of just one aspect of the mess.
Credit default swaps…insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.
The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity…
But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up. http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&th&emc=th&oref=slogin
If you’re not concerned, you’re not ‘doing your work.’
Who has the most CDS exposure? Ms. Morgenson: JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.
What fallout might occur? Ms. Morgenson: …when Delphi…filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered…
The Times: The cost of the Northern Rock crisis has reached the equivalent of £3,500 for every taxpayer as experts warned that the nationalisation rescue of the bank was bound to fail.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml
The Third World bailout of leading financial instructions continues. Qatar plans to invest $15B in Credit Suisse over the next year.
Good thing inflation remains ‘well anchored’ according to Bernanke. The FT: Prices for top-quality spring wheat have jumped by 90 per cent in the past month and a half, boosted by a scramble by corporate consumers to secure scarce grain and speculative buying by investors. A surge on Friday in prices for wheat used in bread to an all-time high of $19.88 a bushel – the highest yet paid for any wheat contract and a three-fold increase from a year ago – prompted the US baking industry to call for wheat exports to be curtailed. http://www.ft.com/cms/s/0/bab47e26-dd85-11dc-ad7e-0000779fd2ac.html
China’s inflation surged 7.1%y/y in January, the highest reading in 11 years. Snowstorms were a factor.
The WSJ: Three Asian steelmakers agreed with a leading provider of iron ore on a 65% price increase for iron-ore shipments, reflecting a desire to lock in supplies before they get even more expensive and confidence they will be able to pass the price increase on to their own customers.
Japan's Nippon Steel Corp. and JFE Steel Corp. as well as Posco of South Korea have agreed to pay Brazil's Companhia Vale do Rio Doce , or Vale, 65% more for iron ore to be shipped from April 1. Other global steelmakers, including leading Chinese companies, appear close to accepting a similar increase in iron ore prices for fiscal 2008-09. http://online.wsj.com/article/SB120331883691774781.html?mod=hpp_us_whats_news
Three major food companies, Campbell, J.M. Smucker and Hormel Foods, report costs rose faster than sales in the prior quarter ended in October. AC Nielsen found eight U.S. branded-food companies, including Campbell, raised prices by more than 2%, on average, in the 12 weeks ended Jan. 26.
The NY Times’ Floyd Norris echoes our contention that retail sales data is inflate by the soaring cost of food and energy: Over all, Americans are spending about 13 percent more on food and energy now than a year ago. http://www.nytimes.com/2008/02/16/business/16charts.html?_r=1&oref=slogin
We learned from ‘The Big Picture’ web site that:
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov/) will be discontinued effective March 1, 2008.
Economic Indicators.gov is brought to you by the Economics and Statistics Administration
at the U.S. Department of Commerce. Our mission is to provide timely access to the daily
releases of key economic indicators from the Bureau of Economic Analysis and the U.S.
Census Bureau. http://www.economicindicators.gov/
Barry Ritholtz: First we heard the bullshit about the costs of reporting M3 -- just before that aspect of money supply went sky high. Now this.
This new development implies (by parallel comparison to M3) that the economy is actually far, far worse than previously believed. The reason citizens should never let their government stop reporting ANY information is that they get to liking it. http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html
The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 in January. This is the lowest reading since 1992 – the last full blown recession.
This apparent paradox really is really logical. Detroit metro sales of homes jumped 15% y/y in January. Foreclosures jumped 45.5%. http://www.detnews.com/apps/pbcs.dll/article?AID=/20080215/BIZ/802150373
When severe financial problems appear, it invites scrutiny by regulators that were remiss in their duties. And once the financial problems translate into economic duress, the populace becomes irate. And then politicians and regulators are forced to do the job that they had neglected. And then financial crimes and malfeasance are discovered, reported and prosecuted.
The WSJ (weekend): Democrats' Attacks On Business Heat Up As the Democratic presidential contest moves to the distressed industrial Midwest, Hillary Clinton and Barack Obama have ratcheted up their antitrade, anticorporate rhetoric. http://online.wsj.com/article/SB120312350441273057.html?mod=hpp_us_whats_news
The Telegraph: Germany was gripped by a growing tax scandal on Friday as state prosecutors disclosed that they were investigating "several hundred" people for suspected tax evasion…Klaus Zumwinkel, chief executive of Deutsche Post, parent company of DHL, resigned yesterday, a day after police searched his home and office. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/16/cndeut116.xml
The Times (UK): Alistair Darling has criticised the huge bonuses being awarded to City executives during a period of economic uncertainty. The Chancellor said that boards should apply the “next-door neighbour test” to judge whether payouts would be regarded as excessive by the average man in the street. “People get fed up if they see others getting great big bonuses and they can’t actually see what they did. It can be extremely frustrating. http://business.timesonline.co.uk/tol/business/money/tax/article3378951.ece
The dollar had its biggest weekly loss this year versus the euro – blame Ben’s dovish braying.
Over the holiday weekend monoline rescue negotiations continued – no word yet.
The WSJ: On Friday, FGIC Corp., holding company for the nation's third-largest bond insurer, told the New York State Insurance Department that in effect it wants to split up the business. The idea would be to create a new company to insure safe municipal bonds and for the existing one to keep responsibility for riskier debt securities already insured, such as those tied to the housing market.
The move may help regulators protect investors who have municipal bonds insured by the firm. But it could also force banks who are large holders of the other securities to take significant losses. Some banks that have been talking with FGIC in recent weeks to bolster the firm were taken aback by the announcement and could yet try to block it, say Wall Street executives.
http://online.wsj.com/article/SB120308290353671507.html?mod=hpp_us_whats_news
There are no painless solutions to the monoline and most other financial problems. Someone must suffer. It’s just a question of whom and how much. And you can be sure US taxpayers will be hit somehow. The Times (UK): Citigroup shuts London fund to withdrawals Citigroup has moved to stop investors withdrawing their money from one of its London-based hedge funds after panic selling that saw investors try to pull out more than 30 per cent of the fund's $500 million (£254.3 million) assets.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3373670.ece
The NY Times: For Edward S. Lampert, it appears the bloom is off the rose at Citigroup. The billionaire investor disclosed on Thursday that he has sold off more than 30 percent of his holdings in the struggling financial giant… http://dealbook.blogs.nytimes.com/2008/02/15/lampert-begins-parting-with-citi/
Platinum is up $50 in overnight trading and now trades above $2113/ounce. We are extremely grateful that inflation remains well anchored.
Today – SPHs are up 14 handles in overnight trading as traders and investors are delighted with the ugly news that appeared over the holiday weekend. If stocks get too jiggy in the morning, we’d look for a reversal in the afternoon. The Nikkei ran to a 166 point gain in its first 16 minutes of trading last night and proceeded to give up 90 points of the gain to end the first session.
Expected economic data: NAHB Housing Market Index 19…Minneapolis Fed Prez Stern speaks on the US economy in MN…After the close HPQ reports earning and guidance…CPI tomorrow – it appears bonds believe it will be worse than the consensus, and well anchored, 0.3% (Core 0.2%).
The NY Post: OBAMA 'ROBBED' IN NY Barack Obama's primary-night results were strikingly
underrecorded in several districts around the city - in some cases leaving him with zero votes when, in fact, he had pulled in hundreds, the Board of Elections said yesterday.
Unofficial primary results gave Obama no votes in nearly 80 districts, including Harlem's 94th and other historically black areas - but many of those initial tallies proved to be wildly off the mark, the board said. In some districts getting a recount, the senator from Illinois is even closer to defeating Hillar Clinton. Initial results in the 94th, for example, showed a 141-0 sweep for Hillary Clinton, but the recount changed the tally to 261-136...Brooklyn City Councilman Charles Barron called the understated figures "outrageous." http://www.nypost.com/seven/02162008/news/regionalnews/obama_robbed_in_ny_97932.htm
NY Mayor Bloomberg, just last week, said the US is starting to resemble a Third World Country.
The NY Times: Kosovo Declares Its Independence From Serbia The province of Kosovo declared independence from Serbia on Sunday, sending tens of thousands of ethnic Albanians streaming through the streets to celebrate what they hoped was the end of a long and bloody struggle for national selfdetermination.. What will Putin do? http://www.nytimes.com/2008/02/18/world/europe/18kosovo.html_r=1&th&emc=th&oref=slogin
CNN: A central passage in the stump speech Barack Obama has been giving in recent days -- aimed at convincing voters that his campaign is not just about lofty rhetoric -- is adapted from Massachusetts Gov. Deval Patrick, Obama's campaign acknowledged over the weekend.
http://www.cnn.com/2008/POLITICS/02/18/obama.patrick/
And we swear that we have heard these key parts of his stump speech elsewhere: ‘I am the light, the way the truth’ or very similar verbiage – and we’re not talking about Oprah!
The Boston Globe: So what did Michelle Obama think of the United States before her husband decided he wanted to run the place? “For the first time in my adult life, I am proud of my country,” she told a Milwaukee crowd today, “because it feels like hope is making a comeback.” (Obama’s Achilles Heel?)
http://www.boston.com/news/politics/politicalintelligence/2008/02/pride_in_the_na.html
Tuesday, February 19, 2008
Tuesday, February 5, 2008
ISM Index Non-Manufacturing numbers
The Institute for Supply Management today came out with numbers that sent stocks plummeting and bonds soaring in the AM. This may be great news for home loan interest rates, but bad news for your stock portfolio.
Essentially, the ISM Index came in at 41.9 in January,from 54.4 the previous month. What does this mean?
The Institute for Supply Management's non-manufacturing index reflects almost 90 percent of the US economy. This is the lowest since October 2001. A reading over 50 signals expansion, but under 50, it signals recession.
"This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.'' (see here)
Numbers came in today at 41.9, signaling a recession. You can actually see the reaction in Asia as the Nikkei stock market is down 557 so far, coming in at 13,187 currently. The ISM shows us that we are gearing towards less growth, with that looming 'R' word on the horizon.
What will the Fed do? Another rate cut? (They only have so many of those) What about beefing up the stimulus package?(Free money....right?)
Consumers are now having to tighten their belts and actually pay as they go...what a concept! We'll see if this has a long-term effect; the consumer entitlement mentality in America is too well-ingrained to be ironed out after an economic hiccup. However, those with cash are going to find some sweet deals (think big, really big). Just hop on craigslist, and type in 'foreclosure' and see what pops up.
Cheers!
Essentially, the ISM Index came in at 41.9 in January,from 54.4 the previous month. What does this mean?
The Institute for Supply Management's non-manufacturing index reflects almost 90 percent of the US economy. This is the lowest since October 2001. A reading over 50 signals expansion, but under 50, it signals recession.
"This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.'' (see here)
Numbers came in today at 41.9, signaling a recession. You can actually see the reaction in Asia as the Nikkei stock market is down 557 so far, coming in at 13,187 currently. The ISM shows us that we are gearing towards less growth, with that looming 'R' word on the horizon.
What will the Fed do? Another rate cut? (They only have so many of those) What about beefing up the stimulus package?(Free money....right?)
Consumers are now having to tighten their belts and actually pay as they go...what a concept! We'll see if this has a long-term effect; the consumer entitlement mentality in America is too well-ingrained to be ironed out after an economic hiccup. However, those with cash are going to find some sweet deals (think big, really big). Just hop on craigslist, and type in 'foreclosure' and see what pops up.
Cheers!
Monday, January 28, 2008
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!
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!
Wednesday, January 23, 2008
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.
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.
Friday, December 28, 2007
Will Brazil's economy continue apace?
The current market crunch is largely due to investor confidence. It's not like the investors don't have the money. They do, they're just unwilling to invest in several sectors, these investments are largely in commercial paper and mortgage-backed securities.
As many investors continue look abroad, the eye falls on Brazil and its potential.
Known for its vast resources, Brazil is only starting to get into its stride. Let's take a look at some figures.
The Bovespa index .BVSP has gained 43.5% this year alone. The Brazilian stock market comprises about 70% of the total investing done in all of Latin America. You can read about the Bovespa's history here.
Latin American mutual funds have been top performers, posting gains of 48-52% for the last 5 years, per annum. While the fund BlackRock Latin America I (MALTX) has a year-to-date return of 45.63%, the initial investment required is 2MM. However, for the rest of us,
the BlackRock Latin America A (MDLTX) fund has posted a year-to-date of 45.33%. The great news is that the initial investment is $1,000....this is more to my taste. (You'll notice both these funds have the same fund manager).
Let's take a look at the future resources Brazil has. They are the world's trendsetter for sugar-cane derived ethanol, used for biofuels. Read what one newsgroup says here. And, if that weren't enough, they have discovered what may be one of the worlds largest oil reserves. The Brasilian oil company, Petrobras, has discovered an oil reserve that would rival Venezuela and Saudi Arabia. You can find what the BBC News reports here. Apparently, Brazil isn't a member of OPEC....yet.
Lastly, the currency....is it for real? (this is the extent of my humour) The Brasilian REAL has posted gains of 20.8% year-to-date against the US Dollar. You can expect the demand for this currency to grow as Brazil's natural resource grow as well. People want to be associated with a country that has potential. The Real is here.
So, we have the following.
1. A Roaring Stock Market up 43.5% on the year
2. Latin American Mutual Funds performing 48-52% on average each year for the past 5 years
3. Strong in the Boifuels industry and if that tanks....we've got some serious oil here, folks
4. The currency is being gobbled up, and is up 20.8% year to date
Given these four factors, I'd say it's definitely a good investment strategy. However, someone should study a more developed country that's similar, and see what stage of that country's development Brazil would analogously be in...that might add some wisdom to this article.
I do believe one thing. As the credit market continues to feel the crunch, and as Central Banks across the world seek to add liquidity, we don't see this kind of news coming from Brazil. Sure, they're creating liquidity, but not as much (it would appear) as other central banks. Given this, they're a good investment.
As many investors continue look abroad, the eye falls on Brazil and its potential.
Known for its vast resources, Brazil is only starting to get into its stride. Let's take a look at some figures.
The Bovespa index .BVSP has gained 43.5% this year alone. The Brazilian stock market comprises about 70% of the total investing done in all of Latin America. You can read about the Bovespa's history here.
Latin American mutual funds have been top performers, posting gains of 48-52% for the last 5 years, per annum. While the fund BlackRock Latin America I (MALTX) has a year-to-date return of 45.63%, the initial investment required is 2MM. However, for the rest of us,
the BlackRock Latin America A (MDLTX) fund has posted a year-to-date of 45.33%. The great news is that the initial investment is $1,000....this is more to my taste. (You'll notice both these funds have the same fund manager).
Let's take a look at the future resources Brazil has. They are the world's trendsetter for sugar-cane derived ethanol, used for biofuels. Read what one newsgroup says here. And, if that weren't enough, they have discovered what may be one of the worlds largest oil reserves. The Brasilian oil company, Petrobras, has discovered an oil reserve that would rival Venezuela and Saudi Arabia. You can find what the BBC News reports here. Apparently, Brazil isn't a member of OPEC....yet.
Lastly, the currency....is it for real? (this is the extent of my humour) The Brasilian REAL has posted gains of 20.8% year-to-date against the US Dollar. You can expect the demand for this currency to grow as Brazil's natural resource grow as well. People want to be associated with a country that has potential. The Real is here.
So, we have the following.
1. A Roaring Stock Market up 43.5% on the year
2. Latin American Mutual Funds performing 48-52% on average each year for the past 5 years
3. Strong in the Boifuels industry and if that tanks....we've got some serious oil here, folks
4. The currency is being gobbled up, and is up 20.8% year to date
Given these four factors, I'd say it's definitely a good investment strategy. However, someone should study a more developed country that's similar, and see what stage of that country's development Brazil would analogously be in...that might add some wisdom to this article.
I do believe one thing. As the credit market continues to feel the crunch, and as Central Banks across the world seek to add liquidity, we don't see this kind of news coming from Brazil. Sure, they're creating liquidity, but not as much (it would appear) as other central banks. Given this, they're a good investment.
Thursday, December 20, 2007
Amendment to my comment yesterday on: Senate Bill 2452...
I just received word from Alexandra, who works in the Banking division at Senator Dodd's office [D-CT] that, yes, YSP can be collected on "prime or near-prime loans" and that points and fees can be financed into these 'non-high cost mortgages'.
This is good news. Why? This is good news because the S 2452 Bill is basically eradicating subprime mortgages. Honestly, I have no problem with that. My only fear is that this will also eradicate, if passed in its current form, any legitimate Stated Income loans for self-employed borrowers or any Investment loans for investors.
So, ultimately, I must confess that I am not entirely opposed to such a bill. However, I think the market and 'reasonable regulation' should decide. Who knows....maybe this is reasonable regulation?
I would like to state that the mortgage broker will not be eliminated as a result of this bill. Why did I not understand this yesterday? Well, I read the bill in its entirety, and the legaleese got me. However, I did blog a bit prematurely on it.
Thanks for your patience!
This is good news. Why? This is good news because the S 2452 Bill is basically eradicating subprime mortgages. Honestly, I have no problem with that. My only fear is that this will also eradicate, if passed in its current form, any legitimate Stated Income loans for self-employed borrowers or any Investment loans for investors.
So, ultimately, I must confess that I am not entirely opposed to such a bill. However, I think the market and 'reasonable regulation' should decide. Who knows....maybe this is reasonable regulation?
I would like to state that the mortgage broker will not be eliminated as a result of this bill. Why did I not understand this yesterday? Well, I read the bill in its entirety, and the legaleese got me. However, I did blog a bit prematurely on it.
Thanks for your patience!
Wednesday, December 19, 2007
Senate Bill 2452, The Dissolution of Yield Spread Premiums....The Mortgage Broker Extinction?
Just recently, Senator Christopher Dodd [D-CT]sponsored a bill to amend the Truth in Lending Act, "providing protection to consumers". Let's see if it really does just that.
I want to focus on the two main parts of this bill, that I believe (and others) will eliminate the role of the mortgage broker. If this happens, we will revert to a bank-only industry dominated by the big banks (due to the elimination of 205 banks this year here).
Title I, Section 102, subsection (c), part (m) states, "No Yield Spread Premiums" and goes on to labour the fact that no mortgage loan originator can receive any YSP (Yield Spread Premium) from the bank they broker the loan to.
What does this mean? Well, the broker buys the interest rate at a wholesale price (typically 0.5% less than retail banks), and they increase the interest rate to earn a commission from the bank and lower the borrower's closing costs. For example, if I get a 30 year fixed interest rate at 6% and sell it to you, the consumer, at 6.25%, then that typically means I will get 0.75% of the loan amount. If the loan amount is $300,000, that means I will get $2250. This can reduce your closing costs by $2250. *As a sidenote, easy loans with high credit and down payment normally experience of about 0.75% YSP and 0.75% Mortgage Broker Fee with maybe a $300-500 processing fee from the broker as well. More difficult loans get charged anywhere from 2% to 3% total, these would be 100% financing loans or FHA loans with poor-average credit. Don't believe me? Take a look at your former HUD-1 Settlement Statement.
Effectively, then, the elimination of Yield Spread Premium will make the mortgage broker a discounted interest rate provider. While providing interest rates 0.5%+ less than retail banks, they will charge all fees upfront, thus increasing costs to the borrower.
Section 102, subsection (c), part (o) states "Restriction on Financing Points and Fees" and goes on to practically state that the mortgage broker's fee (including processing fee and any other fee) cannot be financed into the loan. This means that the borrower would need to pay for this out of pocket.
So, the mortgage broker cannot be paid YSP by the bank, and the fee cannot be financed into the loan amount. This, I predict, would effectively eliminate the role of the mortgage broker.
Why? Aren't Yield Spread Premiums not beneficial to the consumer?
Let's take a look...
By going to a bank, you'll typically find lower closing costs, but a higher interest rate. By going to a good, honest broker, you'll find lower interest rate with higher closing costs. Which is more important? Well, if my interest rate is 0.25% lower because I'm using a broker, but my fees are $3,000 higher on my $300,000 loan...that means that after 48 months I will start saving $750/year because of my mortgage broker.
But, you say, the average American only keeps their home for 36 months before upgrading or relocating!?!
Ok, I'll take that argument. That argument, right there, proves why mortgage brokers need to be allowed to receive Yield Spread Premium--to keep the borrower's out-of-pocket costs low. (I'm not saying it's wise to move around so often, though!)
If Senate Bill 2452 is enacted under its current form, we will see a recurrence of the big banking industries controlling mortgage lending practice. We will, in short, see a monopolization. It's plain and simple logic to those who understand that 2+2=4, that, the fewer people participating in a business, the less the competition. If you have less competition, you will have higher fees ultimately.
Banks make a Yield Spread Premium, it's just called "Service Release Premium". Think there's really a No Fee Mortgage? See this. Remember, you can't get anything for free. Ultimately, with less competition, the banks will charge more Service Release Premium, which means higher interest rates.
What is the solution?
The solution is less federal government interference, with state goverments regulating both bankers and brokers. Both thriving retail and wholesale lending businesses should be allowed to enjoy free competition with eachother and amongst themselves. It should never be only brokers nor should it be only bankers. Let the consumer educate themselves, shop around, and decide who has the best loan scenario. It should be up to you how to get your own loan.
Vote Ron Paul!
I want to focus on the two main parts of this bill, that I believe (and others) will eliminate the role of the mortgage broker. If this happens, we will revert to a bank-only industry dominated by the big banks (due to the elimination of 205 banks this year here).
Title I, Section 102, subsection (c), part (m) states, "No Yield Spread Premiums" and goes on to labour the fact that no mortgage loan originator can receive any YSP (Yield Spread Premium) from the bank they broker the loan to.
What does this mean? Well, the broker buys the interest rate at a wholesale price (typically 0.5% less than retail banks), and they increase the interest rate to earn a commission from the bank and lower the borrower's closing costs. For example, if I get a 30 year fixed interest rate at 6% and sell it to you, the consumer, at 6.25%, then that typically means I will get 0.75% of the loan amount. If the loan amount is $300,000, that means I will get $2250. This can reduce your closing costs by $2250. *As a sidenote, easy loans with high credit and down payment normally experience of about 0.75% YSP and 0.75% Mortgage Broker Fee with maybe a $300-500 processing fee from the broker as well. More difficult loans get charged anywhere from 2% to 3% total, these would be 100% financing loans or FHA loans with poor-average credit. Don't believe me? Take a look at your former HUD-1 Settlement Statement.
Effectively, then, the elimination of Yield Spread Premium will make the mortgage broker a discounted interest rate provider. While providing interest rates 0.5%+ less than retail banks, they will charge all fees upfront, thus increasing costs to the borrower.
Section 102, subsection (c), part (o) states "Restriction on Financing Points and Fees" and goes on to practically state that the mortgage broker's fee (including processing fee and any other fee) cannot be financed into the loan. This means that the borrower would need to pay for this out of pocket.
So, the mortgage broker cannot be paid YSP by the bank, and the fee cannot be financed into the loan amount. This, I predict, would effectively eliminate the role of the mortgage broker.
Why? Aren't Yield Spread Premiums not beneficial to the consumer?
Let's take a look...
By going to a bank, you'll typically find lower closing costs, but a higher interest rate. By going to a good, honest broker, you'll find lower interest rate with higher closing costs. Which is more important? Well, if my interest rate is 0.25% lower because I'm using a broker, but my fees are $3,000 higher on my $300,000 loan...that means that after 48 months I will start saving $750/year because of my mortgage broker.
But, you say, the average American only keeps their home for 36 months before upgrading or relocating!?!
Ok, I'll take that argument. That argument, right there, proves why mortgage brokers need to be allowed to receive Yield Spread Premium--to keep the borrower's out-of-pocket costs low. (I'm not saying it's wise to move around so often, though!)
If Senate Bill 2452 is enacted under its current form, we will see a recurrence of the big banking industries controlling mortgage lending practice. We will, in short, see a monopolization. It's plain and simple logic to those who understand that 2+2=4, that, the fewer people participating in a business, the less the competition. If you have less competition, you will have higher fees ultimately.
Banks make a Yield Spread Premium, it's just called "Service Release Premium". Think there's really a No Fee Mortgage? See this. Remember, you can't get anything for free. Ultimately, with less competition, the banks will charge more Service Release Premium, which means higher interest rates.
What is the solution?
The solution is less federal government interference, with state goverments regulating both bankers and brokers. Both thriving retail and wholesale lending businesses should be allowed to enjoy free competition with eachother and amongst themselves. It should never be only brokers nor should it be only bankers. Let the consumer educate themselves, shop around, and decide who has the best loan scenario. It should be up to you how to get your own loan.
Vote Ron Paul!
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