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.
Friday, April 18, 2008
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.
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.
Saturday, April 5, 2008
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.
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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