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    Join Date
    Oct 2006

    Default Transparency May 2008 - Eric Hodges

    A Distilled Markets and Macroeconomic Letter
    May 2008

    Transparency Detail
    Bernanke Concerned about Foreclosures

    ...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
    I 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.

    If you would like to be on my direct email list to receive the PDF version of Transparency, please send me an email.

    The Markets

    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.

    The Economy

    The Fed

    See above.

    See above.

    The Consumer
    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.

    Transparency Snapshot

    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 Economy
    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) ( 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.

    Transparency Strategy
    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.

    Eric Hodges
    Financial Advisor
    Stahlschmidt Financial Group

    925 906 4600

    500 Ygnacio Valley Road
    Suite 150
    Walnut Creek CA 94596

    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Investing involves risks including potential loss of principal.

    The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies.

    Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. In General the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

    The price of commodities is subject to substantial price fluctuations in short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.

    The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results.

    Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness of reliability cannot be guaranteed.

    Registered Representative offering securities and advisory services through FSC Securities Corporation, a registered broker-dealer member FINRA/SIPC & A SEC registered investment advisor.
    Last edited by BDAdmin; 05-09-08 at 05:22 PM.



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