The Fed has dropped their rates to ROCK BOTTOM

Yesterday the Fed finished their final Federal Reserve Open Market Committee meeting of the year and stunned markets with an unprecedented drop in key interest rates. They opted to reduce the Fed Funds Rate to a range for the first time in target setting history as opposed to a definite value. They also dropped them to their lowest point in history, between 0 and .25%

Well, I think it’s safe to say that they can’t go any lower with federal interest rates.

So, what happens when your first weapon to fight economic weakness runs out of ammo? You grab another weapon! And this one is called quantitative easing. Translation: print money until our problems go away.

The idea is simple: if banks are so loaded with cash that they are busting at the seams, they will HAVE to start lending, helping to finish the housing crisis and effectively restarting the economy. The only drawback is that this is the kind of open floodgate that is really hard to close once the economy is moving again. Too much money floating around will devalue our currency and bring the threat of runaway inflation back into view.

But that’s for us to worry about in a few years. For the purposes of right now, I say “Gentlemen, get your printing presses ready!”

Mortgage rates dropped on the news of easy money, bringing your 30 year fixed rate down to 4.5% (4.70% APR).

One thing that I feel is important to point out is that house prices will stabilize before the housing crisis ends. I see a lot of talking heads on television saying that we can expect this crisis to extend into late ‘09 or even ‘10, citing a steadily increasing foreclosure rate and increase loan delinquency as the leading indicators. Okay, I’m not going to argue that a lot of homeowners are still in trouble. But this market is currently priced with consideration for current and future housing fallout.

Basically, if there was an end in sight for foreclosures, house prices would already be a lot higher than they are now. Realtors aren’t stupid. They’re pricing homes on the market right now by guessing where the market is going to be in 3-6 months.

There’s a ton of opportunity out there, folks. An absolute ton.

In other news, Bernie Madoff of Madoff Securities managed to scare the already timid financial markets by scamming his investors out of over 50 billion dollars. The SEC (the people that our tax dollars pay to catch scam artists) never had a clue about the fraud until Madoff’s own kids turned him in. That’s some fine policing there, SEC.

Maybe Bernie should look into becoming a magician. He clearly has a knack for making things disappear.

The stars have aligned...

This newsletter is brought to you by the number

5.25%

5.482% APR

This is our 30 year fixed rate right now. Rates have gotten ridiculously low. The lowest we’ve seen in 3+ years, in fact. So what happened to make rates drop so suddenly, you ask? The government stepped in last week and said they would buy upwards of 500 billion dollars in mortgage-backed secu­rities and would invest 100 billion in Fannie Mae and Freddie Mac. Essentially, they are putting the full faith and credit of the United State of America behind that asset class, making it a significantly safer bet for investors to invest in.

And invest they did. By the truckload.

The result for mortgage consumers is lowered rates. Most analysts don’t see this set of circumstances perpetuating itself for very long. The depressed economy, accelerating job losses, violent and consis­tent upheavals in the stock markets and an all-pervading sense of fear has made these rates possible.

It is a quadruple witching hour for real estate: seasonal lows in home prices, attractive mortgage rates, the recession just became official (news which can shove asset prices lower), and the housing bubble has already deflated. It is rare that this magnitude of opportunity can coincide in one moment. Anyone who is looking to buy a primary residence should call me to discuss their options. Anyone looking to invest in real estate should call me to discuss an entrance strategy for the next 6-12 months. Anyone with an adjustable loan or a fixed interest rate of 6 or above should call me to look at refinancing. For those of you who are still on the fence about homeownership, now would be a good time to do some soul-searching on how much sweeter you really think the deal can get.

Just when we think we've hit rock bottom, someone hands us a jackhammer...

You know, I kinda figured I wasn’t the only guy who was peeved at Hank Paulson’s sudden decision to re-allocate the Troubled Asset Relief Program (lovingly known as the 700 billion dollar TARP). This week, Congress ran circles around Hank and Ben Bernanke and let the flaming arrows fly. As we expect, the fiery rhetoric accomplished dang-near nothing but satisfying the collective minds of the constituents that our loving Congressmen and Congresswomen represent.

Chalk another one up to big talk and no action. Go Washington!

But all of that got swept under the rug as our latest end-of-the-world-as-we-know-it crisis finally hit home: the union-belabored, fundamentally flawed US auto industry. CEOs of the Big 3 (Chrysler, Ford, and General Motors) came a-jingling their tin cups looking for a modest handout of 25 billion dollars in taxpayer money to bail them out. Congress had a field day pointing out that these CEOs arrived on private jets and were begging for working capital. Rather hypocritical of them.

Nancy Pelosi is requiring a written plan showing how the 25 billion will be used to make these healthier, more viable businesses before they disperse one red cent. My guess is that the automakers could spit on a piece of paper, hand it in, and get the money. Too many jobs are at stake for this to be the ’line in the sand’ that our government will draw.

And the future tax hikes keep racking up. My grandkids are going to hate us.

All of this news caused an 872 point decline in the Dow Jones Industrial Average in two days. Yet another stock market crash causes investors to flee for safer investments, like bonds and mortgage-backed securities. Since Fannie Mae and Freddie Mac mortgage securities aren’t governmentally guaranteed (yet), investors are a tad more cautious about that investment class. So, while we have seen Treasury bond rates come screaming down (meaning a ton of people are buying them), we have¬n’t seen as pronounced a move in mortgage bond trading.

So, the translation of all that is as long as the stock market is suffering huge losses, mortgage rates will stay attractive.

You guys know me by now. Well, some of you do. I don’t constantly hammer you with sales-speak to get you to buy when the buying isn’t good. I try to provide the facts.

Well, the fact is we are staring at the perfect storm for real estate buying. Rates are being held down by one financial crisis after another. Inflation has turned temporarily negative. Home sellers are entering the real estate slow season AND are about to put a whole lot of debt on charge cards that will come home to roost in January AND are psychologically wanting to have a clean start to 2009. All of this implies that sellers can be negotiated down very readily over the course of the next 2 months.

Are we at rock bottom? God only knows. But there is a fine line between timing the markets and just being greedy. The opportunity floating around right this very second is enormous. Jump on it.

Mortgage rates are good simply because everything else is so stinkin' bad

The game has changed yet again, folks. Hank Paulson has had a change of heart in his planned allocation of the 700 billion dollar bailout. Instead of purchasing what he described as “shaky and illiquid” mortgage-backed securities, they are going to directly buy more equity (stock) in banks. So, as opposed to buying assets that are most likely undervalued, they are buying stock in companies that are actively de-levering their portfolios and will likely drop in value. Also, to prevent other credit markets from unwinding, some of the 700 billion is being considered to backstop auto, credit card, and student loans.

Dang college kids and their hacky sacks.

I’m not gonna lie: this ticks me off in a big way. This is the ‘throw dirt over the toxic waste and hope it goes away’ policy versus the ‘actually get rid of the toxic waste’ plan. It will not fix the mortgage market in any appreciable way, but will bolster stock prices and, by proxy, Wall Street and all the retirement funds that rely on Wall Street. Unless a drastic restructuring of our securitization and banking industries accompanies this taxpayer-funded stock purchase, the actions will only delay the inevitable unraveling of a fundamentally broken finance system.

What we’re rapidly heading for is the “lend and hold” method of mortgage lending where banks actually hold in their own fund any loans they issue. Sadly, we as a country don’t have NEARLY the capital in our banking system to support the weight of high homeownership rates. Drag, dude.

Fannie and Freddie have coordinated and are taking yet another feeble stab at staving off preventable foreclosures. It is aimed at helping those who are over 90 days late on their primary home’s mortgage and haven’t filed for bankruptcy. Of course, jack-squat is being done for Mr. and Mrs. Homeowner who are struggling but would rather not trash their credit by missing three consecutive payments.

The shining ray of good news for rates: job growth and gross domestic product are slipping consistently enough that mortgage rates are going to stay historically low for at least the next quarter. A strong dollar impeding exports, the auto industry in dire straits and a global recession will keep the economy weak enough to keep benchmark rates low and disallow the resurgence of inflation.

Hail to the chief

The deed is done, as they say. America has spoken and chosen a new Commander-in-Chief for our fine nation. And whether you want a high-five or a shoulder to cry on in the wake of that decision, there is no doubt that a new era is upon us, like it or not. No one knows exactly what Obama’s election will be an omen of, but everyone wants to tell you their opinion. The fact of the matter is that opinions are like...well, you know exactly what opinions are like. And everybody’s got one.

And so do I. So please, enjoy them with my compliments.

An enormous pile of taxpayer funded bail-out money is just starting to be put into motion. Some of that money is authorized for direct purchase of mortgage-backed securities, which manually drives rates lower. In the past two days alone we’ve seen fixed rates come down by over 0.25%, partially due to this allocation of funds. MY BEST GUESS: GOOD FOR MORTGAGE RATES

No one knows what is going to happen with Fannie Mae and Freddie Mac. It’s a well-known fact that the conservatorship under which both mortgage giants have been placed is an unsustainable situa¬tion. Talks of privatizing the companies (letting private shareholders own the place and make the rules) or nationalizing them (having Uncle Sam bring them onto the balance sheet officially, dumping the risk on taxpayers) or some combination thereof haven’t gotten anywhere yet. Something will need to be done in the very near future. MY BEST GUESS: DEPENDS ON WHAT DECISION IS MADE

China’s economy is slowing at an alarming rate. The USA and China are, for better or for worse, attached at the hip economically. Historically, we buy their cheap exports and they buy our debt. No one’s currency goes crazy due to the trade imbalance and everyone goes on happily ever after. Their gross domestic product averaged out at 12% growth last year and has slowed to a quarterly reading of 9% annualized growth. Now, while 9% is still a large number by our standards, try to realize the magnitude of their population boom. If they don’t generate 15 million brand-spanking new jobs per year, they will not keep up with the growth of their workforce. My guess is that they’ll have to turn on more spending domestically; and less spending on American debt. Add on a slowing American consumer which will slash demand and jobs at Chinese factories, and you’ve got bad news. MY BEST GUESS: BAD FOR MORTGAGE RATES

Obama is a middle-class-aholic, and the middle class would like to not lose their homes to foreclosure. Most economists agree that a fundamental aspect of moving out of this financial slump is to repair the housing market and prop up home values. Obama has made it abundantly clear that he is planning on making our housing crisis a high priority on his presidential list. It may eventually kill us in either taxes or inflation, but he is going to make something work for the housing market, and fast. MY BEST GUESS: GOOD FOR MORTGAGE RATES

The Fed Funds Rate is super-low. With a little more stability in the markets, the cost of borrowing has the opportunity to come roaring downwards. The Fed slashed rates by a full point (in two 1/2 point cuts) down to 1%. As long as inflation stays tame, that could open the door for some very attractive mortgage rates. MY BEST GUESS: GOOD FOR MORTGAGE RATES

Is your money safe? Or is it in a bank?

Today, the Federal Reserve launched another new facility aimed at purchasing certificates of deposit and commercial paper from troubled money market funds in an attempt to return liquidity to those markets. Another black hole to wheelbarrow our tax money into. Nice.

Please hold your applause until the end of the newsletter. And I say that with a great amount of sar¬casm. This move is just another IV of fresh blood going into a patient with a cannonball-sized hole in his chest. It might be prudent for us to point our cash at the underlying ailment as opposed to the resulting symptoms.

For the first time in our country’s history, our leaders are acting more like a bank than like a government. The only difference is, banks usually try to fleece whoever they’re doing business with by driving a hard bargain and reaping maximal returns. But, we can’t kick our ailing financial system while it’s down for the sake of taxpayer profits. So, through a tangled web of overly-rushed legislation, we have effectively privatized the banks’ profits and socialized their losses.

So, we’re acting like a badly run bank. Essentially, we’ve become a one-stop shop to dump any assets that had value, may have value in the future, and are currently valueless.

Another monumental failure is Hope for Homeowners, a program which heavily suggested that lenders be more flexible in writing down the principal balance of some troubled loans. This author is hardly surprised that banks didn’t want to absorb billions of dollars in forgiven debt just because we asked really nicely. Evidently, anything a republican administration does involving the word “hope” backfires. Which has led me to suggest the “Impending Doom for Homeowners Act” to capitalize on the apparent effectiveness of reverse psychology.

It’s a joke. Lighten up.

The fact is, trying to guess what the markets are going to do next is a futile effort. Half of the investment community are dialing 1-800-GET-ME-OUT-NOW every time the markets hiccup. Now is the time for a disciplined approach to our financial lives based on history, current market facts and sound professional advice. Divorce yourself from the temptation to succumb to volatile emotions. Capitalize on the opportunities this shake-out is creating. Ask questions. Be proactive. Be patient.

A 700,000,000 band-aid has been approved

Hooray! The bailout plan has made it through Senate and the House of Representatives and is now on its way to President Bush’s desk to be signed into law! We’re all saved! Champagne and cigars all around! Let the good times roll again!

Or is it slightly too early to celebrate?

Here’s what we know: the non-passage of this bill trashed the stock market on Monday (down 777 points on the Dow). Passage of the bill did very little to help equity markets and it is highly questionable whether 700 billion will be enough ammunition to un-jam the credit markets.

Also, you and I are now on the hook for 700 billion dollars. That’s an important little detail. One thing is for sure: the flight of our economic phoenix will have a lower trajectory for quite some time because of this contagion and the acts of desperation our leaders are employing to try and contain it.

So, now that we’re all angry, who do we throw our Molotov cocktails at in a fit of rage? Tough to say. A large cause of this collapse was the many derivative markets that manifested due to poor regulatory oversight and the general disconnect between the risk-taker and the risk-maker. For example, if I own a bank and I don’t have to hold on to the mortgages I originate, I’m not thrillingly concerned about their long-term performance. I can just sell them to investment banks and let them deal with the risk. That laissez-faire it-will-all-work-itself-out ideology, it seems, has bit us in the communal tail-end.

On the other hand, we can’t overly vilify Wall Street because, to a great extent, we wanted this. American homeownership is an institute you can’t disparage. So, in our frantic attempt to get every man, woman and child into a home of their very own, we overlooked things like “what if properties stop appreciating at this break-neck rate?” or “what if I don’t get a promotion by the time that my ad¬justable rate increases?” Remember, every time you point the finger at someone else, three other fin¬gers are pointing right back at you. There may be a lesson there.

The fact remains; this bill is on the fast-track to becoming law. Renewed confidence in stocks will draw money away from mortgage-backed securities in the short-run, inflating mortgage interest rates. However, the overall effect of this bill should be a smoothing out and a general decrease in interest rates, as the government will now start purchasing mortgage-backed securities en masse.

Hopefully, we will see this as a step towards reviving our ailing housing market and righting our economy.

So what's 700 billion taxpayer dollars between friends, eh? Come on. We'll pay it back.

A few weeks back, we saw IndyMac bank get seized by the government, marking the biggest bank failure ever to happen in these United States’ history. So what happened today, you may ask?

The biggest bank failure ever EVER in these United States’ history.

Yessir, in a thrilling display of one-ups-manship, Washington Mutual imploded under the weight of it’s own bad debt and was acquired at bargain basement prices by J.P. Morgan Chase. Mind you, this is the same Chase that picked up the irreparably busted Bear Stearns a few months back.

So, with all these “too big to fail” companies experiencing shotgun weddings on Wall Street, what would happen if one of these newly consolidated “super-duper too big to fail” giants happened to take a sudden media friendly turn for the worse?

We don’t know. And if Hank Paulson and Ben Bernanke have anything to do with it, we never will.

The financial markets are in a controlled seizure right now as Congress puts together a ‘financial rescue plan’ (i.e. a Wall Street bailout bill) with a cost of 700 billion taxpayer dollars. The provisions within the bill have been described as “involving a lot of experimentation”. Evidently, this is as good a time as any to try new and exciting things with our money.

The fact is, something is going to be hammered out, because legislature is too scared of the speculated alternative. And, since they have until Sunday at 8 pm (the time when Asian markets open), they’ll probably get it approved without doing their due diligence and will probably screw up a lot of stuff.

Hopefully, the overall effect of the plan will be worth the mountain of debt it will put us into.
Mortgage rates have gone up incrementally on the news, as a huge bailout will require printing more money, higher taxes, and a general erosion of our economy as a whole.

Here’s the bright spot amidst all of this: when the financial markets are whip-tailing all over the place, it gives you a chance to time the markets. With the right advice and knowledge, you can capitalize on an overly-large downswing in interest rates to buy a foreclosed property who’s value is artificially deflated. It’s like getting a good deal inside of another good deal (like a calzone, only with money). Lots of opportunities are out there for those looking for long-term benefits, and I would love nothing more than the chance to discuss them with you.

John McCain also changed his mind about needing a definitive answer to the financial crisis before debating Barack Obama. It’s always fun to see two political juggernauts go head to head in the midst of a growing and evolving crisis. Nothing says ratings like a nice bloody battle of wits.

The bailout nation is alive and well

Economic bulimia. Binging and purging. That’s exactly what our country’s financial markets are experiencing. Over the course of ONE WEEK, we’ve seen the following happen:

Lehman Brothers declares bankruptcy and Merrill Lynch narrowly dodges bankruptcy by being taken over by Bank of America, leaving only 2 of the original 5 major investment banks standing.

Goldman Sachs and Morgan Stanley (the 2 remaining investment banks) saw their stocks get trashed as our investment community threw the baby out with the bathwater during the mass exodus from failing financials. As such, Morgan Stanley is now entertaining the idea of a partnership with Wachovia...who now may also need a lifeline form the government.

And, now it appears that Morgan Stanley and Goldman Sachs are being taken over by Uncle Sam as well. There goes the entire investment banking community.

In a moment of exceptional restraint and poise, the Federal Reserve opted not to change benchmark interest rates on Tuesday (because, even if they did, little to noting would have changed).

Insurance giant AIG stared failure in the face, only to be bailed out by a taxpayer-backed bridge loan to the tune of 85 billion.

The Treasury agreed to buy twice as many Mortgage-Backed Securities than previously stated (translating to artificially lowered rates in the short-term for you, the mortgage borrower). They also have offered a broad-base bailout plan for money market funds, guaranteed up to 50 billion (so far) and are offering a housing market bailout whose price-tag has yet to be determined.

In 48 hours time, gold prices both rose then fell by the largest amounts seen in 28 years.

Short sellers (day-traders who tend to exacerbate stock price plunges) have seen increased regulation and forced transparency. The SEC has gone so far as to ban short-selling on many financial stocks.

A Resolution Trust Corp.-style of entity is being formulated, providing somewhere for the government to dump all their newly acquired terrible assets.

I could go on. For a while. But the fact is, we are going through a historic period in our economic evolution. Absolutely unprecedented stuff. Banks are failing and consolidating, the government is back-stopping everyone who asks politely enough, and free-market capitalism is withering in the wake of this greed driven calamity. There is no methodical thinking and hard solutions provided. No, a go in and cut out the tumor and hope no arteries are hit “operation”.

Our day of reckoning is upon us, kids. Ironically, 2 months before a presidential election. We can look forward to incrementally lower interest rates for mortgages and a very beefy set of tax hikes in the next presidential term, regardless of who we elect.

Where are we going and why am I in this handbasket?

Well. If you haven’t turned on the television or the radio or read a newspaper in the past 24 hours, let me be the harbinger of bad news: we had the biggest point drop in the Dow Jones Industrial Average yesterday. Why this massive stock crash, you may ask? Not because something catastrophic happened. It is because something Wall Street perceived as helpful DIDN’T happen.

The 700 billion dollar Wall Street bailout plan got shot down by the House of Representatives yesterday, brutalizing the market in it’s aftermath. While this does save a ton of taxpayer money, it also presses more banks to the brink of insolvency. We just saw Wachovia get gobbled up Pac-Man style by CitiBank, and many people are wondering whish bank will be next to fall. As such, investors are afraid of investing, pulling a ton of capital out of the markets.

The super-terrible part about it is that mortgage rates hardly benefitted from the flight from risk. Part of the bailout was aimed at buying up mortgage-backed securities, which would have instilled a renewed confidence in the investment vehicle and would have driven rates down. With no bailout, people are back to treating mortgage-backed securities like active grenades. This means we can expect higher rates until some iteration of this bailout gets through Congress.

Thursday is the tentative date for a second attempt for Congress to pass the bailout bill. In the mean-time, it is expected that many more Democratic leaning provisions and earmarks will be added to the bill (because the Democrats have a majority in the House of Representatives).

Maybe we can jump on a floating door and start paddling to Cuba.

Do you know what's going on in our economy? Neither does the Fed!

Two big deals in recent days: A Federal Reserve Open Market Committee (FOMC) meeting and the most aggressive housing bill to pass through the legislative process in quite some time. Add on a commodity valuation plunge, high inflation readings, an artificially inflated Gross Domestic Product and bake at 350 degrees for 45 minutes and you’ve got yourself an economic pie fit for a king.

A king named America.

Here’s the breakdown. The FOMC met this Tuesday and left interest rates alone. They cited inflation as their chief concern, but reiterated that slow economic growth was also at the forefront of their minds; a balance fit for complete inactivity. Ultimately, given the softening labor market, international slowdown and declining commodity prices (most notably falling oil), they claimed that we could expect inflation to moderate over the tail end of this year.

I’m not quite as sure as Fed Chairman Ben Bernanke. The economic stimulus checks have essentially run their course, artificially raising the Gross Domestic Product to 1.9% annualized and consequently jacking up inflation short-term. I’ll buy that slow growth and a worldwide recession would put a lid on inflation expectations. However, the Personal Consumptions Expenditures index (the Fed’s favorite indicator of inflation) came in Monday at a whopping 4.1% annualized growth, which is way outside of the Fed’s comfort zone. I’m not implying we’re going to see 80’s style inflation, but a little bit goes a long way towards eroding wealth worldwide. So, super-low rates (and at a Federal level, 2% is super low) may be a bit too stimulating and could allow already present inflation to take root.

In other news, last week our piteous president and Congress passed the Housing and Economic Recov¬ery Act of 2008. Sounds nice and official, doesn’t it? For once, I gotta give a round of applause to the powers that be for listening to the Mortgage Banker’s Association as a huge influence on this bill. Politicians actually listening to experts in the field and implementing legislation accordingly. Hell has finally frozen over.

This bill is going to be a lot like a game of baseball: most of us will only care about the highlights.

So here they are:

Increasing conforming and governmental loan limits

The Federal Housing Administration is getting modernized

Fannie and Freddie are getting bailed out and are having new regulatory authorities established to watch over them

New regulations and a unified licensing system will be mandated for mortgage brokers and bankers

A fund is being created to facilitate affordable housing and stop foreclosures

More benefits are being given to our active military (because God only knows they deserve it)

Until April of 2009, our government is giving out free money (at least temporarily) for 1st time homebuyers to stimulate home purchasing via tax credits

All of that plus a few other fringe benefits to the ailing housing market gets a big, fat thumbs up from me. If you’d like the nitty-gritty specifics of the bill, either call me or check out the PDF document I attached. It is certainly not an instant fix for all of our housing problems, but it is a step in the right direction. It’s going to cost taxpayers, but the cost of NOT implementing this plan would be far worse.

Maybe a little sting in taxes would help to keep us from repeating the mistakes of the recent past.

Here comes the cavalry!

I’d like to open this installment of my newsletter by thanking each and every one of you for bailing out my industry’s big brother and sister, Freddie Mac and Fannie Mae. I really appreciate you paying your taxes in a timely manner to a government that has fully embraced the “too big to fail” concept of our financial markets and is willing to rob Peter (you) to pay Paul (Wall Street). It’s like Robin Hood...only backwards. And no one is wearing tights. And nobody could qualify as “merry.”

Am I jumping to conclusions? Quite possibly. I wouldn’t be surprised one bit if half of our politicians regularly wear tights (and I think that is a mental image we can all appreciate). But let me shed some light on how I view the past couple of weeks and let you folks draw your own conclusions.

In another crisis of confidence, the financial solvency of Fannie Mae and Freddie Mac was called into question two weeks ago. For those just joining us, Fannie and Freddie’s role in mortgage lending is to buy bundles of loans from banks and brokerages so that those banks and brokerages will have more money to lend. They essentially keep the inner workings of our country’s mortgage lending system well greased. If they ceased to exist, lenders would be lending their own money and would probably think a lot harder about who they wanted to lend it to. As such, guidelines would abruptly tighten and rates would shoot up. Probably not the best scenario for a housing market that is circling the drain.

So, investors flip out (as they have been known to do recently) and start vacuuming money out of Fan¬nie and Freddie. Their respective stocks plunge and appear to be headed for zero. Markets brace for the impact. This is all happening on the heels of our country’s third biggest bank failure when Indy¬Mac went ka-boom (in large part due to arguably sloppy mortgage lending) and got taken over by the government. And when things seem bleakest, who do we see rise up to meet the challenges of our frightened and failing markets?

It’s a bird! It’s a plane! It’s...Treasury Secretary Hank Paulson? I kinda expected someone in a cape.

Yep. Hank shows up with his unbounded ability to spend money and suggests a governmental bailout of Fannie and Freddie. To save you a pile of political jargon, here’s essentially what he is proposing: allow the federal government the infinite opportunity to buy equity in the companies (to bolster stock prices) and dramatically increase the credit lines available from the Treasury and the Federal Reserve Bank (to provide capital liquidity). Also, a 300 billion dollar fund under the Federal Housing Admini¬stration is being created to help troubled homeowners.

So, with such an aggressive plan, you’d think there would be a ton of strings attached, right? Wrong. Aside from approval authority over executive pay plans and the Fed adopting a “consultative role” in overseeing their capital (whatever the heck that means), not much worthy of noting is going to change.

The House of Representatives passed the bill Wednesday and Senate followed suit on Saturday. Bush has already stated he’d sign it into law. Awesome to the max.

What this means for Mr. and Mrs. Mortgage Consumer is that the worst case scenario of sudden and ridiculous rate hikes and guideline alterations has been stemmed, at least for now. If the government is successful in their attempt to temporarily prop up the lending system, then we can expect a slow and steady decrease in rates as confidence crawls back into the mix. However, if the government gets their claws too deep into the current system of lending and overhauls the whole sha-bang OR if inflation worsens, expect growing pains through overly-cautious borrower requirements and fear-driven higher interest rates.

So, unless I missed something major (which is entirely possible), we’re gonna get stuck with the bill. It’s the lesser of two evils, I assure you. But it still stands as a monolithic event showing that we are not out of the credit crisis quite yet.

If you want help from Big Brother, you take orders from Big Brother

I’m pleased to announce that the news relating to mortgages and economics has gotten a lot more interesting for everyone this week. Lots of reasons to feel positive about where rates may be headed.

At least in the short-term.

First off, Fed Chairman Ben Bernanke announced earlier this week that the Fed governors were con¬sidering extending the time that investment banks would have access to the Term Securities Lending Facility. This means, amongst other things, that these ailing institutions can post their questionably valued mortgage-backed securities as collateral in exchange for loans from America’s central bank. This news prompted a renewed interest from the investment community in mortgage-backed
securities and sent mortgage rates roaring down.

Good news from this move: it helps to break up the log-jam in the mortgage financing industry. From a completely selfish perspective, this is a huge plus. It’ll bring more investment, help real estate prices to reach a solid market bottom and lower the interest rates that consumers pay. Yaaaaaay!

Bad news from this move: the doors are remaining open for the Fed to take on a ton of bad invest¬ments that have the distinct potential of getting worse. They can only do this for so long before these actions would bring forth higher taxes (because the central bank has gotta get money from somewhere) and would usher in a new era of political intervention and regulation to our financial markets that could strangle America’s international competitiveness right out of the system in the name of stability. Translation for the consumer: qualifying for a loan would get even harder than it is right now. Boooo!

This process is already starting to play out. Fannie Mae and Freddie Mac, two giants in secondary market mortgage financing, saw their stocks nosedive after former Fed President William Poole stated “(Fannie and Freddie) may need to be bailed out from the rising pressure of the greatest housing slump since the Great Depression.” This came on the same day that Treasury Secretary Hank Paulson and Ben Bernanke were testifying to House Financial Services Committee, pushing hard for a regulatory overhaul to “reduce the circumstances that require government intervention”.

Soooooooo…we’re going to bring in a ton more regulators and intervene…less?

This is one of those good-in-theory types of things that will probably help in the short-term and hurt in the long-term. I’m not suggesting that the system doesn’t need to change or that we should let Fannie and Freddie fail. I’m just suggesting that the We will bail you out as a “last resort” message that the Fed has sent out could prove to be detrimental to the economy if more institutions take advantage of it.

Israel and Iran continue to politically poke each other in the chest. Now Iran has tested some mid– to long-range missiles capable of reaching Israel. Aside from the whole potential threat of mass genocide international incident thing, this rising tension has caused oil to rebound higher, bringing inflation concerns back to center stage.

On the lighter side of politics, the Reverend Jesse Jackson was caught on microphone saying in reference to presidential hopeful Barack Obama that he “wants to cut his nuts out”. There are only so many things in this world that make me physically hurt from laughing. This is one of those things. Classy.

Speak loudly and carry a small stick

Last week, the Federal Reserve Open Market Committee met and decided to leave rates unchanged. This marks the official end of their non-stop rate cut spree that started back in September of 2007. They coupled this decision with some hard language about inflation, stating that “uncertainty about the inflation outlook remains high.”

No kidding.

Leaving rates alone was the right thing to do. You see, Bernanke and his posse are staring down the double-barrel of an anemic economy and rapidly mounting inflation. They have already cut the Fed Funds Rate by 3.25% in a historically short period of time and implemented every sort of liquidity-providing measure they could think of. So, long story short, they basically have no tricks left up their sleeves. Another rate cut would have accelerated inflation and heaped up inflation expectations, mak¬ing it a self-fulfilling prophecy. Hiking rates immediately after cutting them would have shown that we do not have this country under control. Staying put was the best decision.

So, they tried big talk as a method of soothing the markets. Guess what: it didn’t work.

The Dow Jones Industrial Average has been pounded into an almost official bear market (defined as a 20% total valuation loss), mortgage rates have been rising, inflation fears are growing, and the dollar is weakening. Bernanke said in his statement that “inflation pressures are expected to ease throughout the rest of the year,” citing hindered consumer spending as the primary cause. I would agree if we were isolationist. But, if American companies can sell overseas at higher prices, we’ll see inflation regardless of what our local yokels are or are not buying.

The time has come, in my opinion, for the Fed to start hiking rates at their next meeting. Like a mother eagle pushing her eaglets to the edge of the nest, the Fed needs to send a clear message to the banks that the low-rate coddling is soon coming to an end and that they had better clean up their balance sheets now or face extinction. It would be bold, but in the face of unabated fuel and food price increases, I think it’s necessary to strengthen the dollar, reign in oil prices, and return legitimacy to our international presence.

Some good news: a wage-price spiral (where workers who anticipate more inflation demand higher pay and, as a result, end up causing wage-driven inflation) does not appear to be forming. We have the jobs report coming out this week, which should be weak but not dismal. That is in part due to busi¬nesses maintaining lean staffs and inventories since the tech bubble of 2001. Because they didn’t over-hire when things were going well, they do not need to do a ton of firing when things are going poorly.

Another force waiting to revitalize our economy is all the money that is going into emerging markets. International Monetary Fund director Dominique Strauss-Kahn recently was quoted as saying “If food prices further and oil prices stay the same, some governments will not be able to feed their people and at the same time maintain stability in their economies.” And when investors get spooked and cause a ‘flight to quality’, where do you think they’ll bring their money? Right back to big, safe Mama USA.

Bernanke's boys will hold the line

The headlining article at money.cnn.com today is titled Did the Fed go too far?, asking whether or not the Fed was prudent in hacking our Fed Funds Rate all the way down to 2%. I’ll save you some time and skip to the end of the story: yes. Yes the Fed did go too far. But they ALWAYS go too far. They almost have to.

As much as we like to think of ourselves in this country as a shining beacon of sense and logic, we really are very prone to mob-mentality. When the media gets us all whooped up over an economic slowdown, we start demanding that the government (in this case, those that decide monetary policy) fix everything or else we’ll kick them out and find someone else who will.

It’s a lot like when any of us gets in the shower. We turn the water on and crank it all the way to the “hot” side because we are impatient and we want the hot water now. Of course, when the hot water finally starts to spray out, it’s way too hot and we’ve got to crank the dial further back to the “cold” side until we find a good balance. Well, by dropping the Fed Funds Rate all the way down to 2%, our Federal Reserve has essentially made the monetary “water” too hot. Now, we’re feeling the burn of inflation.

The question we are now faced with is whether or not we should cool things off by raising rates at this week’s Federal Open Market Committee meeting to battle inflation or leave them alone to help prop up our sputtering economy.

My opinion: if the Federal Reserve opts to raise rates, they are living in a delusional state that I can’t even conceive of. Here’s my three reasons.

Number one: Guiding our economy via monetary policy (the toggling of key interest rates and money liquidity) is like trying to steer a naval aircraft carrier. You can’t just turn the wheel and expect immediate results from a behemoth economy like ours. So, we need to give the rate cuts some time to mend our weakening housing sector and rising unemployment.

Number two: Monetary policy can’t do a whole lot to stop the increase in oil and commodity prices that are the largest forces driving inflation. Sure, we can shore up the dollar’s strength, but any benefit of that will, short-term, be eaten up by the decrease in exports that rely on a currency imbalance. The central problems are systemic and need to be addressed through foreign relations as opposed to interest rate hikes.

Number three: We’ll look really dumb as a country. Reversing monetary policy after our recent rash of aggressive rate cuts would send a clear signal that we do not have this bus under control. That would undermine international confidence in America and bring to life a whole host of new problems.

All that being said, exports are getting more expensive as the commodity boom continues unabated. We will eventually need to increase rates once we see a bit more stability in our economic recovery. But not yet, Big Ben. Not yet.

If having foreclosed properties was a contest, we'd be winning!

This was a big week for economic data, especially concerning the fate of our ailing housing market. I try and avoid belaboring statistics because, well, they’re boring as heck. These numbers, however, are pretty staggering.

First, consumer confidence hit a 28 year low this month. John Q. Public is afraid of our problematic economy and the media is aggressively cramming that agenda down his throat. No surprise there.

Consumer Price Index numbers came out this morning, which are commonly seen as the most accurate depiction of inflation as it effects the general public. On an annualized bases, the CPI rose 4.2% which was a tad hotter than economists expected. The majority of the move upwards was, you guessed it, skyrocketing gas prices. The good news in the report was that core inflation, measured by the CPI minus food and energy, came in at a tame 2.3% growth rate. The markets generally liked this data, suggesting inflation’s flare up may not be upon us quite yet.

While we’re on the subject of inflation, economists are divided concerning the Fed’s next move. Many are calling for an immediate rate hike to strengthen the dollar and stop any inflationary trend. Others would believe that inflation-targeting would drive up unemployment. These Phillips-curve huggers would have us think that a little more inflation is acceptable as long as it keeps a lid on job losses. In a closed economy, I would probably agree. But we’re global these days. People can borrow money from across the world and currency strength (especially our own, which most of the world’s commodities are priced by) is becoming all the more important. My estimation would be the exact opposite of these guys. If we are to promote business expansion, we need to maintain a competitive labor-cost advantage. Should prices get out of control, labor unions everywhere will rally for higher pay and inflate our comparably inexpensive labor costs. No good for growth of payroll employment.

Bernanke moved the markets again on Monday night when he gave a speech headlining the rising threat of inflation. He did not, however, indicate that the Fed was in any huge hurry to hike rates because of the “slack” in the economy that will inevitably dampen any price increases we may experience. Hiking rates in the very next meeting after lowering rates would send a big red flag to the world that we do not have our economy under control. Regardless of what is best or worst for the economy, I am placing all bets that the Fed will do nothing at their late-June meeting and remain stalwart in their rhetoric.

But the big enchilada of housing data this week has to be about foreclosures. Remember 12 months ago when we were complaining about ALL of the foreclosures plaguing our neighborhoods? Our country’s foreclosure rate is up 48% year-over-year, with 1 in every 483 homes in foreclosure. And you thought it was bad a year ago. Florida remains in the top ten states (#4, to be exact) with the highest rate of foreclosures, up 72% year-over-year with 1 in every 228 homes getting papers stapled to their doors. At the major metropolitan area level, the Sunshine State holds 2nd place (Cape Coral/Ft. Myers area with 1 in every 79 homes) and 10th place (Port St. Lucie/Ft. Pierce area). These areas were bloated with speculative investors, and now we’re seeing the fallout. It hurts, no question. But ultimately it will be healthy for the continued growth of real estate both locally and nationally.

For anyone who is worried about the long-term future of Florida real estate, allow me to remind you that the baby-boomer generation is retiring and old people love to buy homes and retire in sunny Florida. Probably will also be good for the Bob Evans restaurants, too. And Buick dealerships.

Oil prices vs. rising unemployment: The showdown of the century!

I hate it when I am dead-on correct about negative things. Allow me to quote myself from last week:

“Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future.”

Friday marked the release of our latest jobs report. Low and behold, in it we saw the biggest single-month leap upwards in unemployment in 22 years to a rate of 5.5%. Stocks responded by tanking over 350 points on the Dow. Consequently, the strength of the U. S. Dollar fell precipitously.

Here’s the catch for a falling dollar. Any commodity price that is pegged to the dollar (for instance, oil) goes skyrocketing. So, we saw the price of a barrel of crude oil jump from $128 to over $139, marking the biggest single day increase in history and the highest inflation-adjusted close for oil. I think we can safely say that holding your breath for a pullback in gas prices would be a bad idea.

As I’ve discussed endless times before, rising oil prices has an inflationary effect on all products. No matter what any business is selling, I’d bet they used trucks or planes (which both require gas) to get their merchandise from point A to point B. These inflationary pressures tend to force interest rates higher.

But rates came roaring down on Friday.

Here’s the scoop: there were contradictory forces at work on Friday. The oil price jump is inflationary, no doubt. But the large increase in the unemployment rate has a deflationary effect, and produced a net gain in mortgage bonds for the day. Basically, if everyone’s losing their jobs, it’s kinda hard for vendors to jack up prices and expect their stuff to keep selling. That made available fixed mortgage rates go down, which is super-duper for the home-buying or refinancing consumer.

In other news, Bernanke re-affirmed the Fed’s desire to stop the rate cutting cycle. He was quoted this week as saying that the Fed is “...attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

Translation: We’re sorry we did so much damage to our national currency and we’re gonna try to fix it pretty darn soon.

That could mean rate hikes by the end of the year. Honestly, the Fed raising rates would probably have a lowering effect on interest rates, so long as the free market perceives that inflation will remain contained.

As far as lending guidelines are concerned, there is no sign of them loosening in the nearby future. As Fannie Mae and Freddie Mac and other secondary market investors take bad loans onto their balance sheets, the government will impose more and more regulations, clamping down on an already tight set of lending guidelines. That means it’s going to become progressively harder over the next couple of months to qualify for any loans. The bright side is that rates are still at very low levels, historically speaking.

America: It keeps slowing and slowing and slowing and slowing

This week was a mixed bag of encouraging economic news and dismal forecasts from everyone who matters. I’ll do my best to keep the statistics to a bare minimum, but there are a couple of pertinent numbers that deserve our attention.

First and foremost, our 1st quarter Gross Domestic Product growth was revised upwards from +0.6% annualized to +0.9%. That implies that our economic slowdown isn’t quite as shocking as analysts 1st expected. Also, the core inflation reading was revised downward ever so slightly from +2.2% to +2.1%, meaning the cost of goods and services is rising, but not as rapidly as we’d 1st thought. Both items are surprisingly good news for our country’s economic situation.

But of course, right as I’m breaking out the party hats and champagne bottles, Warren Buffett comes forward in all his ridiculously smart and wealthy glory and tells a German interviewer that the U.S. economy is already in a recession as far as the average person in concerned. For those of you that don’t know who Warren Buffett is, he’s like the Oprah of old, rich men. The investment guru went on to state that he sees that this recession we are already allegedly in will be “deeper and longer than many think”. So, I guess it’s time to put away the Dom Perignon and break out the Natural Ice.

Yum.

The Federal Reserve also lowered their growth forecast and simultaneously raised their expectations for both inflation pressure and unemployment in their latest press release. Sounds like a party to me. The kind of party that makes grown men cry.

At a technical level, a recession is defined as two consecutive quarters of negative GDP growth. So far, we haven’t had a single negative quarter. But all semantics aside, we are in a very anemic growth pattern as a country, and sometimes a prolonged stagnation can be worse for John Q. Public than an overt downturn. I do agree with what the Mr. Buffett is saying, as much as I hate to admit it. The fundamental problems that caused our credit crisis have not been purged from the system yet, and until that happens, we’re in for a rocky ride.

In other news, inflation concerns are still assailing the countryside. In a recent study released by JP Morgan, the anticipated rate of headline inflation will reach 5% by this summer. To give some contrast, we’re at 3.9% now. That would crimp the already abused consumer discretionary spending and slow our economy down even more. But here’s the bigger problem: the THOUGHT of inflation becoming a self-fulfilling prophecy. Let me explain. Mr. factory worker believes that prices are going up. To adapt for his loss of spending power, he and his union buddies rally for higher wages. The factory complies, but has to raise their product prices in order to offset the higher wages they are paying. And bada-bing, we have an inflationary trend.

I don’t think it’s going to play out that way, though. Companies don’t want to increase their prices and become less competitive in the international marketplace if they can help it. However, that money is going to have to come from somewhere. So, if I had to guess, I’d say we’re gearing up for a big series of layoffs in the foreseeable future. Now would be a good time to comment on how good your boss’s hair looks.

Dallas Fed Governor “Loose Lips” Fisher noted that if price expectations continued to worsen in the coming months, Fed policy makers would opt to raise interest rates “sooner rather than later” even if the economy is weak. So, if you’re planning on capitalizing on the low rates we have available, you probably want to get the ball rolling fairly soon. Don’t say I didn’t warn you.

The Olympics isn't the only thing China has to worry about!

Investors have survived another week of wacky business antics, violent market swings and general malaise domestically. However, I want to diverge from my normal within-boundaries commentary and discuss our friends on the other side of the globe: The Chinese. Why should we be so concerned with an emerging economy half a world away? Because they have historically loved our mortgage-backed securities and we have historically loved to buy their affordable imports. We buy their goods, they buy our debt. This maintains the currency imbalance that keeps Chinese goods so cheap for Americans and keeps China’s manufacturing sector growing and happy. Everybody wins. Right?

Maybe not so much anymore. Times have changed since our recent economic derailing. With an ailing dollar, Chinese imports are being driven higher and higher in price, consequently decreasing our demand and their revenues. This is an unacceptable scenario, as China has a massive generation entering the job force as we speak. They need jobs for all those hungry young workers, or else they will find themselves in a state of rapidly growing unemployment.

The other fun little fact that most people seem to skip over is the enormous appetite China has had for our mortgage-backed securities and their comparable lack of any substantial valuation write-downs. You see, in America we owned up to our balance sheet woes pretty darn quickly. As such, we became the front car on the economic rollercoaster that’s headed south and we’re dragging the world down with us. However, this early purging is placing us in a unique position to bounce back quickly and capitalize on international weakness that will doubtlessly linger well beyond our own set of problems. China, however, hasn’t really owned up to the massive drop in value that their cumulative asset pool has suffered over the past year.

So here’s my worry. Let’s say China slows down their purchasing of our mortgage debt (which they have started to do). That means less demand for mortgage-backed securities. With less demand, an over-supply will develop. In an attempt to encourage investors to eat up all this excess inventory, the return-on-investment (also known as the mortgage rate) will have to go up to engender more interest. That means bigger rates for even well-qualified borrowers.

I’ve been wrong before and I may be totally wrong here. But I would bet that China is one massive time-bomb waiting to go off. And with their burgeoning political alliance with Brazil, India and Russia, that pending explosion could wreak some serious havoc internationally.

On the local front, the Consumer Price Index, the Fed’s favorite measure of inflation, came in at a surprisingly tame 3.9% annualized growth which is the lowest it’s been since October of last year. Mind you, that number is still well outside of the Fed’s ‘comfort range’. It implies that higher food costs have yet to find their way into consumer prices.

Ben Bernanke stated in his May 13th speech that there is “still a ways to go” in our economic slowdown despite a stabilizing of financial markets. As such, he is calling for banks to remain vigilant in raising capital in order to alleviate stress in the financial system.

The Senate is also inching closer to expanding a governmental program to insure hundreds of billions of dollars in refinanced mortgages. This would be a huge step to providing some relief to the rising foreclosure epidemic plaguing our country and could bolster home prices if successful. Here’s hoping.

The end of a Fed Cycle

For all his aggressive responses to our current credit crisis, Ben Bernanke certainly does like to end with a light touch. The Fed Funds Rate and the Discount Rate both received a 1/4 point cut on April 30th. This was what most experts predicted. Since rate cuts really take about 6 months to be felt by the economy, the Fed didn’t want to be overly forceful after a recent series of robust rate cuts that haven’t been absorbed yet.

However, our country’s economic unwinding seems to still be playing out. Pending home sales data came in -1.0% from February’s data to an reach an all-time low. Consumer confidence hit a 26 year low a couple of weeks ago. Gross Domestic Product for the 1st quarter of 2008 came in at a positive but meager +0.6% annual rate of growth. Crude oil recently hit a new intra-day high of $123.79/barrel based mainly on increased demand, which scares the living daylights out of consumers and businesses.

Additionally, these rising worries about an international food crisis are creating food-based inflation, adding fuel to an already growing inflationary fire. Kansas City Fed President Thomas Hoenig stated today that “inflationary pressures now stand at unacceptably high levels.”

So, Ben and his crew of Fed Governors cut rates but stated in no uncertain terms that the balance between the risk of negative growth and inflationary pressures had about evened out. So, unless something pretty darn big and catastrophic happens in the next 8 weeks, I would guess that the Fed is about done cutting rates. They wanted to signal that their loose monetary policy would probably stop loosening in an attempt to put some more international confidence in the greenback and slow the growth of inflation.

So that’s it, Wall Street. This is about as good as the Fed’s gonna make it for you. Enjoy it, because I doubt it’s going to last this way for very long.

Fannie Mae was the subject of much attention when they posted a quarterly loss in earnings and hinted at a potential liquidity problem due to the massive spike in loan defaults. As a result, they sought a capital infusion of 6 billion dollars to even things out and provide a good buffer of liquid assets. Lots of people get worried about the solvency of our secondary mortgage market when things like this happen. But think about it. The Fed bailed out Bear Stearns. Don’t you think they would want to bail out Fannie Mae if it came down to it?

With all of this going on, mortgage rates have been staying in a pretty steady range for the past week. If we see a drop in commodity prices like gold and oil or an increase in the value of the dollar relative to other currencies, mortgage rates should benefit. However, inflation and fear of mortgage-backed securities still pressure rates higher.

As a final note, the 1st wave of the tax rebate checks have already been distributed, and more are on their way. While economists are split as to the ultimate impact of these checks on consumer spending, we’re sure to see at least a small sugar-high of spending reflected in the 2nd quarter GDP figures. I find it very interesting how those numbers will come out smack in the middle of the presidential election season. Convenient, but not altogether surprising.

Stop feeling around for a market bottom: We ain't there yet!

It’s best to start with the big-time trends, so here it is: there was surprising stability in the markets this past week. Sure, companies are still experiencing colossal write-downs and credit is still notably tight. However, both the stock and bond markets have been comparably quiet, barring one substantial drop on the Dow mid-last week. This is not to say that the markets are “calm”, just “calmer”. The alarmist view seems to be giving way to a begrudging acceptance of modern circumstance as poor, but not explosively bad.

However, lots of fun stuff still happened. Here’s the blow-by-blow:

Martin Feldstein, president of the Bureau of Economic Research stated openly last week that he believed our country was already in a recession (experiencing negative growth). This is a big blow against consumer confidence, which tends to clam up on word of bad news from a trusted official. Whether he’s right or wrong, the economy certainly FEELS recessionary.

Median home prices locally (the Greater Orlando area) dropped 1.35% month-over-month in March, showing a 8.33% drop from March of last year. Not thrilling, but not horrible either.

Last week brought us the G7 Financial Summit, where financial leaders from around the world get together to strategize and share ideas. A major topic of conversation was trying to stop the decline in the dollar’s value, which no one internationally seemed to inclined to worry about. A weak dollar can decrease deficits owed to us, which is fine by them. Looks like we’re on our own to strengthen our currency.

National pending home sales contracts, a leading indicator for national home sales, fell to it’s lowest level last month since realtors started recording it in 2001.

Former Fed chairman Paul Volcker announced that he is concerned about food and gas inflation driving prices up across all consumer goods. The threat for serious inflation is looming on the horizon if Ben Bernanke and his crew repeat the mistakes of Fed Chairman Greenspan by leaving benchmark interest rates too low for too long in this recovery process. That’s how bubbles are made.

Maybe it’s just me, but I’ve been noticing a lot more talk about company acquisitions and mergers as of late. It seems industries are forcing consolidation in these meager times, despite the relative absence of risky credit providers. With Blockbuster bidding to purchase Circuit City, Microsoft trying to acquire Yahoo, and Delta and Northwest now aligning forces, it seems that Wall Street is determined to press forward regardless of economic circumstance.

Last week, General Electric took a one-day 11% stock hit when they failed to meet projected earnings. The CEO went on television and stated that mistakes were made internally, though the credit markets were making things difficult. GE mainly suffered from it’s floundering financial services division and it’s inability to liquidate assets and businesses (as is normal right before earning season) due to a lack of buyers in the open market. General Electric is viewed by many as a central pillar of our economy, so worries rose when the goliath stumbled.

In separate but related news, Wachovia posted a quarterly loss and worsened projections for future quarters, indicating to many that a bottom to this financial market collapse is still a ways off.

So, what does all the bad news mean? No end in sight to this economic downturn. Newscasters love to interview every Tom, Dick, and Harry and ask if an end is right around the corner. It’s not. Get over it. Investors seem to be adapting to the economic volatility and are easing back into a more normalized pattern of trading. With this, we will see less wild swings in the market indexes. God willing, we’ll see more predictability along with it.

Mortgage bonds have been trading in a very thin range for the past two weeks, indicating that the market is waiting for some sure direction before moving decidedly higher or lower. If inflation measures continue to steadily increase, mortgage rates will be forced to increase as well.

Market adaptation and looming inflation

The Dow Jones Industrial Average and the Standard & Poor’s 500 stock indexes both experienced a slightly better than 4% gain over this past week. Mortgage bonds (and rates) suffered as a result. Is this indicating a fundamental change in the direction of the markets?

Yes, we are seeing a change. But it’s not a change in the markets; it is a change in how investors have adapted to the markets. They are STARVING for good news to the point where they will throw a party even when slightly-less-than-catastrophic news comes out. It’s like the investors have selective hearing. To give an example, CitiGroup announced today that they will be laying off 9000 employees and are suffering a loss of 5.1 billion. How did the markets react to this ghastly proclamation? With a standing ovation. The Citi stock soared, in part catalyzing a substantial stock market rally today.

The other rally this past week was Wednesday, when the Fed put out their Beige Book. This is basically a report of anecdotal commentary of current economic conditions taken by the Fed’s governors and key contacts. The report was slightly better than expected, though certainly not all rainbows and gumdrops. Stocks leapt upwards as a result.

So, with the contraction leveling off across many sectors, international business still humming along nicely and every newscaster dropping the line “market bottom” every hour on the hour, why am I not getting onboard the bullet train to Happytown?

Because housing started this and housing WILL end this contraction. Sadly, there is no indication of a market bottom for the housing and mortgage industries. Loss of home values means many families lost their financial cushion and are tightening their spending to adjust. Fixed mortgage rates are hardly any better than when this whole credit crunch started. Existing and new home sales, numbers we will be getting next week, are projected to reach new lows (which isn’t surprising).

In the minutes to the latest Fed meeting (released on Tuesday April 15th), Fed governors mentioned the potential for a “severe and protracted downturn” in our economy. Inflation is rising at a consistent pace, albeit modestly. Crude oil prices are climbing to new all-time highs. Just today, oil hit a new intra-day high and a new closing high, both right around $117/barrel. I remember at the beginning of this year when analysts were speculating that oil wouldn’t go above $100/barrel. I guess the joke is on them. Oh, and the joke is also on everyone who buys anything or travels anywhere ever.

And there is an inflationary tidal wave on the horizon.

Demand for ethanol (which they derive from corn), foreign nations decreasing their food exports and a sudden increase of food demand from emerging markets has allowed food inflation to get out of hand. Oil prices continue to spur fuel inflation. We haven’t even begun to feel the true effects of dropping the Fed Funds Rate by 3% in 7 months and when we do, there will be too much money chasing too few goods. When the market turns around, the money that has been sidelined by fear will pour back into the markets, creating a momentum driven capital infusion and will rapidly overheat our economy.

And every taxpayer is getting $600 just for being so gosh-darn handsome on top of it. Ain’t that nice?

What does this all mean for mortgages? Well, rates jumped upward this week. I am confident that they will bounce back down to levels of previous weeks. But not too much better than that. It does send a clear signal that once the stock market starts to recover in any noteworthy way, mortgage rates will go up. This “low low” rate environment will be short lived unless the Fed reverses course and raises rates once this credit crisis ends. If they keep benchmark rates too low for too long, our bullet train to Happytown may be unexpectedly diverted to Skyrocketing Prices City.

But at least we have the Pope for a couple of days. He’ll make us feel better.

Even Big Ben is thinking recession

You are Fed Chairman Ben Bernanke. It is 6:00 pm on a Thursday. You get a phone call from Bear Stearns, a major investment bank, saying that they are experiencing a lack of liquid funds and will have to declare bankruptcy unless something is done by the opening of markets tomorrow. Taxpayers are already furious with the economy, and bailing the bank out would incite even more rage. However, letting the behemoth fall would begin an unstoppable unwinding in the already fragile financial system backing our whole economy.

So what do you do? You put on a pot of coffee and get to work.

This week, Ben and his friends had the pleasure of being subjected to a witch-trial style of inquisition where their actions in bailing out Bear Stearns were picked apart and scrutinized. Our senate gave us a fine example of what “armchair critic” really means as they hammered the deciding parties for decisions made in a thin window of time. Ultimately, the Fed defended their actions. When asked if they would do it again should another major firm fall, Ben cited market interconnectedness and stated firmly that they would take whatever actions are necessary to preserve the solvency of the economy.

Therefore, the precedent has been set: failure by the big guys in the financial system is completely unacceptable. And when failure isn’t an option, the only thing left is a sharp and permanent increase in market regulation which could effectively choke out the entrepreneurial spirit from our economy. It’s a real snafu, if I do say so myself.

Given the fact that we lost 80,000 jobs last month (by preliminary measures) and our unemployment rate ticked up to 5.1% (up from 4.8% last month), I would say the bailout was the lesser of the two evils. You can’t kick an ailing economy while it’s down and expect good things to happen.

Mr. Bernanke also opened the floodgates of speculation in a speech given this week. To quote him directly, “Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly.” A Fed Chairman directly alleging a potential recession? That’s pretty depressing.

I can’t say I’m sold on the gloom and doom, though. And even if we do hit a recession, the Fed’s actions have shown that they will cushion us from any sudden financial impacts, so it’ll be a smooth downturn with an equally smooth recovery. Indicators in housing are doing notably better than they have in recent months, which shows a good leading indicator of a light at the end of this dark economic tunnel. Single-family residence sales are up, available home inventories are leveling off nationally, and the homebuilder sentiment index seems to be flattening out, as an increase in foot-traffic to model homes is noted. Recession? Maybe. Sky is falling? Probably not.

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