Archive for August, 2010
Was Bernanke’s Speech a Game Changer?
Posted by Jody Eisenman | Filed under Uncategorized
Fed Chairman Ben Bernanke spoke Friday about the state of the economy and the role of the Federal Reserve. His basic credo was that even though the economy still is lagging, not to worry! The Fed has the tools to carry us through. Such tools might include increased monetary easing. While the bond market dropped somewhat on this news, the stock market finally staged a rally. The Dow surged almost 165 points, having its’ best day in a month. Was this the impetus for the long awaited rally?
Maybe, but I doubt it. I’m still of the opinion that the market is going to churn around, much like it has for most of the year. Despite the rally, the Dow is still down about two and a half per cent for the year. In addition, I still don’t see many positive signs of economic growth. For example, Intel (The worlds’ biggest chip maker) warned Friday that demand was slackening, and that third quarter revenues were going to be below expectations. The Feds’ next move will hinge on this weeks’ key economic data, especially Fridays’ unemployment number. Even President Obama has conceded that the economy was not growing as fast as was needed, and that he had no “magic bullet” to change things. Sobering words indeed.
Meanwhile, the yield on the S and P is currently 2.6%. That doesn’t sound like much, but that’s actually greater than the yield on ten year treasuries. I would have thought that this would make stocks appear cheap vis a vis bonds. However, as long the economy continues to slump, investor sentiments continue to favor the safety of US treasuries. Personally, I don’t see the great benefit of lending my money to the United States for ten years at 2.5%. It will be interesting to see what happens going forward.
The Housing Market and the Economy
Posted by Jody Eisenman | Filed under Uncategorized
There has been much talk lately of a “double dip” recession. What this means is that although the economy has appeared to come out of a decline, the reality is that we are slipping back into the abyss. An unemployment rate which has remained quite high (currently 9.5%) adds to this theory. However, the real issue is the housing market. The housing markets’ initial decline led to massive losses when investment banks leveraged themselves and many of their clients into exotic products that few really understood. This has been discussed here several times. However, the bulls on the economy have felt that housing prices would rebound, leading to an overall rebound. Unfortunately, this is not the case.
Numbers released this week indicate that home sales are declining at a rapid rate. July home re-sales were expected to show a decline of 13.4%. Instead, the actual number was a staggering decrease of 27.2%. Over the past year, housing sales have plunged over 25%. This has occurred despite the fact that mortgage rates are at their lowest level in decades. Why the steep decline? After all, don’t home owners recognize a bargain when they see one?
There are two issues. The first is, after an unprecedented period of spending, consumers are now turning cautious. Most people I know are cutting back on their lifestyles. After all, with a stock market crash in 2008 and an uncertain job market, do people really need a 50 inch plasma TV, or expensive season tickets to your local sports team? The second reason is the incredible glut of inventory. With foreclosures are extremely high levels, banks are sitting are huge inventories of houses. In addition, many banks are not foreclosing on homes under water (meaning that the mortgage due is worth more than the home itself) because
They have already had a huge inventory of homes they can’t sell.
They feel they would do better if they allowed the borrower more time by restructuring their loans. Of course, this has not worked out the way the banks planned: http://www.jodyeisenman.com/2010/08/the-mortgage-refinance-relief-mess/
Overall, the stock market has performed poorly. Since August 9, the Dow has declined from 10,700 to about 10,000 now. I would expect the Dow to have some sort of a bounce up here, (as has been the pattern all year), but continued poor economic numbers could really hurt growth going forward.
The Mortgage Refinance Relief Mess
Posted by Jody Eisenman | Filed under Uncategorized
As has been well documented, the residential real estate market has been a mess for years. Thanks to predatory lending, NINJA loans (no income, no job, no verification), ridiculous standards, you name it, many homeowners now own homes that are worth less then the mortgages. According to zillow.com, this number is currently 21.5%. There were clearly many homeowners who purchased homes they could not possibly afford. I remember reading a story in my local newspaper awhile back about a woman with a take home income of $2500/month, who purchased a home with a monthly mortgage payment of over $6000! She went into foreclosure soon after. Her only comment was, “I just wanted to own a house”. Whether many of these people were foolish or mislead, the fact remains that there are lots of folks that cannot keep up payments. As a possible solution to this, The Obama administration instituted a mortgage relief program, intending to help three million homeowners. By and large, it has been a failure. Part of the problem was paperwork; the system was unable to keep up with demand. However, another problem soon became obvious. Although only about 600,000 homeowners actually have qualified since March 2009, almost half have fallen out of compliance. This, despite the fact that many qualified for rates as low as two percent for a 5 year period. The reason for this is simple: Many of these people could never afford these homes under any interest rate. Plus, many more have faced loss of or reduced income, which led to an inability to pay. The point is, why have a program to provide mortgage relief when all it is doing is postponing the inevitable. On Wall Street, we have an expression for this. Its’ called “Rearranging the deck chairs on the Titanic”.
