A Distilled Markets and Macroeconomic Letter
Bernanke Concerned about ForeclosuresI think it’s always news when the Fed chairman is concerned and mentions that the housing downturn may hurt the broader economy and the financial system. It seems that the banking/credit crisis may only have paused for now.
...Bernanke did note that accelerating foreclosures may push home prices down further, hurting the broader economy and threatening the financial system. He anticipated the foreclosure rate will increase this year after such proceedings began on 1.5 million properties last year.
A quarterly Fed survey yesterday showed the share of banks making it tougher for companies and consumers to borrow approached a record last month in the aftermath of the subprime mortgage collapse. The Senior Loan Officers’ Survey found a net 70 percent of banks increased their loan rates over their cost of funds.
In the past, typical approaches to helping homeowners included temporary repayment plans or folding missed payments into the principal balance, Bernanke noted yesterday. That may not work in the current crisis, he said.
``In some cases, when the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a writedown of principal or other permanent modification of the loan,’’ Bernanke said.
One option would be for the FHA to refinance a loan after the lender or investor forgives part of the mortgage, he said.
Bernanke warned that ``to be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure.’’ Qualification guidelines could be set, such as identifying an amount of debt compared with income, or the extent to which the home value is below the mortgage amount, he indicated.
``Finding the right balance -- particularly the need to avoid programs that give borrowers who can make their payments an incentive to default -- is difficult,’’ the Fed chairman said.” - Bloomberg, April 16, 2008
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Fundamental: In short, I feel that the market is overvalued on a historical basis. If we see higher inflation, the market may move higher in Dollar terms but could well remain challenged in terms of other currencies. (This is still a potential outcome, but I think it is less likely than more market downside).
Technical: I think the current move above 1400 on the S&P is very speculative.
I’m concerned that longer dated bonds (5 years to 30 years) may fall in value at some point, although this may be a bit further in the future.
Gold has moved lower after its huge recent upside push.
Reminder: fiat currencies are not tied to anything of tangible value. They are only worth whatever the market, and the public, feels they are worth. As more fiat money is created the value of this paper money should go down. In my opinion, the U.S. is creating too much money and so are China, Japan, and Europe.
Dollar | Currencies
Long-term I’m still negative on the Dollar. The real story is the Dollar as measured against gold and oil etc., where the Dollar has lost a huge amount of value and may lose much more. I am watching the Yen for signs of the “carry trade unwind.”
Oil is at $121.93 (05/06/08). There is significant risk, in my opinion, that it may stay relatively high indefinitely. If oil prices move downward substantially, this may be pricing in a global recession. A major concern with oil is the potential for a wider conflict in the Middle East, which could crimp supply. There are many other potential geopolitical risks to oil as well.
I believe that many consumers have less home equity now than before because they have taken money out of their homes and spent those funds. Consumer savings rates are very low or negative. I believe that consumers are being gradually squeezed by high oil prices on one side and rising interest rates on another.
Stocks - Short Term - High Risk
Very short term, the markets seem to be heading higher. I don’t expect this to last very long though. The Ted Spread is still high at 1.11. The VIX (volatility index or fear gauge) is at 18.21 (05/06/08), which is quite low.
Stocks - Medium Term - Elevated Risk
I believe that the risk is the market averages may have quite low returns for some time or potentially flat/negative returns when inflation is taken into account. The fundamental picture is bleak in my opinion. The credit/insolvency crisis seems to be getting worse.
Treasury yields have been moving a bit higher. I’m still concerned about longer dated (5 year and longer) bonds loosing value.
Gold one month futures are at $877.70 (05/06/08). I’m watching Gold relative to stocks, Fed cuts, the Dollar, and other currencies.
Oil - Staying High
Oil is at $121.93 (05/06/08). If we have a global recession, oil might have a relatively steep sell-off. A Goldman analyst thinks oil may go to $150 - $200. There is significant risk that with Fed rate cuts we could continue to see high/relatively high oil prices even with a recession.
The housing/credit/insolvency crisis is still in force. Home prices have fallen in many areas, some quite significantly. I feel that we could see home values have a total drop from the peak of 20 to 30% nationally in 2008 Dollars. The non-inflation numbers may not look as bad.
The Dollar (USD) is at 73.00 (05/06/08) (stockcharts.com ticker: $USD). I feel that Dollar based assets may be at risk in general, both near and longer term.
Fed Funds are at 2%. The 3 month T-bill, at 1.62%, often leads Fed rate adjustments.
My concept is to bring you a the most transparent look possible on the economy/markets via a quick read with plain language. This letter is geared toward the busy executive/business owner. If you are really short on time just look at the Snapshot section where I keep everything as brief as possible. In the Detail section I try to give a little more insight into my thinking without delving so deep that I stifle the reader.
When constructing portfolios, I take the client situation into consideration first and then combine that with the current economic/market factors presented in this letter along with well researched asset allocation strategies.
If you have specific questions on where I see things, or would like to discuss your portfolio, please feel free to contact me.
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