Making Money Alert
A THANKSGIVING BEAR?
11/21/2007
First off, let me just say that I have many great memories of past Thanksgiving celebrations. This is almost a sacred day of family gathering and feasting for me and my loved ones. I am looking forward to more of the same this year. Let me also wish you and your family the finest of times.
I also have fond memories this time of year of big stock market rallies around turkey day. Historically, we usually are about four weeks into the growth season by now, and most often this growth period has come after a significant low in stocks during the September-October lull.
Well, things didn’t quite play out to the usual script this season. The lows this year took place in August, and that lull was followed by a 10% rally to new highs. We then suffered through an 8% decline in stocks, and that was after two Fed rate cuts. This is almost an unheard of scenario on Wall Street.
So, what is going on? The way I see it, the markets are telling us something very important.
I’m sure you have heard me talk about how the stock market is a predictive indicator of the economy. It anticipates things. This is why the market goes up when economic news is bad.
Right now, the market is telling us that there still is a lot of uncertainty ahead. A 10% correction in stocks is a normal thing in a bull market and we now are on the verge of the first 10% correction in six years (see the chart above).
If the market breaks down from here and falls below 1,405 on the S&P 500, there’s a good chance of a more damaging, dare I say, bear market ahead.
My advice to you now, other than to enjoy the holiday, is to put your prevent defense on the field. That means you should be carrying high levels of cash in your portfolios, and you should have the patience to wait for the next big buying opportunity.
When the waters calm and when it’s safe to go back in, the market’s price action will let you know.
If you want to find out how to keep your money safe during this turbulent time in stocks, I invite you to check out my Successful Investing newsletter.
Right now, my Successful Investing subscribers have a huge cash position, and we largely have avoided the sell off of the past several weeks. For more about how you can avoid the current bout of selling, just click here.
Once again, happy Thankgiving!
Are You Ready to Downshift Into Income?
In January, the first Baby Boomer will start to receive a Social Security check. After that, a literal tidal wave of payouts will begin.
Consider this startling statistic: Every 10 seconds for the next 15 years, another Boomer will reach for his or her share of that grand government entitlement program. That’s a lot of money being paid out in the aggregate, but how much will you personally get?
The answer is not very much.
Can you live on $1,500-$1,800 a month? Of course not, and that is why you need to listen to my special audio report with Ameritas Advisor Solutions CEO Mitch Politzer. Mitch has studied the coming shift in demographics, longevity and retirement for nearly his entire career, and that means he’s got a lot of great stuff to say about this issue.
If you are even close to making that downshift into income investing, you’d be well advised to listen to what Mitch has to say.
Now is the time to start thinking about how you will generate the income you need for the next two-to-three decades.
To listen to my interview with Mitch, just click here.
Note: Ameritas Advisor Solutions is a sponsor of my weekend radio show.
Why Mortgage Rates Aren’t Going Significantly Lower
It now is time for some real estate-related insights from one of the brightest experts in the business, my personal real estate and mortgage advisor Josh Lewis. Josh will tell us this week why it is so critical to act now, especially if you have one of those risky, adjustable rate mortgages.
Take it away Josh.
By Josh Lewis, Certified Mortgage Planner
In any given week, I speak with five-to-15 people needing mortgage financing. Recently, the most common question I hear from these folks is some version of the following: "I read that the Fed is going to have to continue cutting rates. Shouldn’t I wait for mortgage rates to go down before doing anything?"
This is an important question for anyone in need of a new loan. The fact that we are entering a period with more adjustable rate mortgage resets than any other time in history makes this a critical question for many people to answer.
Let’s start by discussing what effect Fed rate cuts have on mortgage rates. In reality, there is no direct impact on mortgages. In a textbook case of "buy the rumor, sell the fact," most Fed cuts actually lead to higher rates in the near term. The reason for this is that the markets always are trying to assimilate the information available to predict what will happen going forward. Fed moves are no different. If the interest rate markets feel a Fed cut is coming, they will bid prices up and drive rates down. The markets do this before any actual Fed actions.
When the actual cut arrives, the markets then begin to anticipate the next move. If the markets expect a long series of cuts, they may push rates even lower. But if they are uncertain, or concerns arise that the cut may be the last in a series, they turn their eyes to inflation. Rate cuts are inflationary in that they are an indicator of a loose credit policy. If it’s easy to buy things with low-rated credit, demand goes up and prices rise. This inflation is the enemy of all types of bonds because it reduces the future value of bond payments.
Consider it this way. If you buy $10,000 of Treasury bonds at 4.5%, your nominal return will be 4.5%. But what you actually are most concerned with is the real return, or how much you earn in interest after removing the rate of inflation. In recent years, inflation has run between 2% and 3%, so you would have earned 1.5% to 2% on your $10,000 investment. If inflation creeps up to 3.5%, your real return now is only 1%. Since investors want greater returns than 1%, even on incredibly low-risk investments like U.S. government debt, prices on these bonds will fall and the yield (rate) will increase.
In short, Fed cuts indirectly impact the interest rate markets. Since Fed cuts are inflationary over the long run, they usually lead to higher rates, especially as we get closer to the end of a Fed-easing cycle. What does that tell us about the current market?
Well, this week the Fed released the minutes of its last Federal Open Market Committee (FOMC) meeting, where a decision was made to cut rates by ¼%. Their notes showed that this was far from a unanimous decision, with several voting members believing it would be more prudent to hold off and see if the economy can stabilize without their assistance. They are forecasting a soft landing with strong employment and stable inflation. This is an indication that we are nearing the end of the current easing cycle.
That is what the Fed is saying they expect to happen. Currently, the interest rate markets are telling a different story. The federal funds rate, which the Fed directly controls, currently is at 4.5%. The 10-year Treasury, which is a proxy for market expectations of future Fed moves, currently is at 4.05%. A spread this large (.45%) indicates that the interest rate markets are concerned about the risks of recession and believe strongly that the Fed will be forced to lower more in the future.
In fact, most interest rate market experts, notably Bill Gross of PIMCO, believe that the Fed will continue cutting at least until we see a Fed Funds Rate of 3.75%. Getting to that level would require three more ¼ point Fed cuts. As you can see, based off of the 10-year Treasury, the markets already have priced two of these three cuts into current rates. If the experts are right, and there are three cuts ahead, there is only about .25% more for 10-year Treasury rates to move down.
Now, let’s close the loop. We talked about Fed moves and how they impact Treasury bonds, especially the 10-year note. That leaves one question to answer: "How does the rate on the 10-year Treasury note impact mortgage rates?"
The short answer is that mortgage rates follow the 10-year Treasury. If you have ever heard the term "flight to quality" you are aware that this often refers to money coming from risky investments into Treasuries. Since Treasuries represent U.S. government debt, it is considered the safest investment in the world. Since Treasuries are considered so safe, they offer the lowest yield of any bonds in the world.
You can measure the risk of any other bond by measuring the premium to Treasury debt that they offer. If a bond is considered "junk," it will yield anywhere from 5%-9% more than a comparable Treasury bonds to compensate for the increased chance of default.
During the housing boom when home values were skyrocketing and mortgage defaults were almost unheard of, mortgage bonds came to be perceived as the next best thing to U.S. government debt in the world. If you ran a large endowment or pension fund and you needed to invest in safe securities but get a better yield than Treasuries, you would buy mortgage bonds (pools of individual mortgages of similar quality sold on Wall Street). This demand drove the spreads between Treasuries and mortgage bonds to historical lows.
We currently are in the midst of a housing downturn with mortgage defaults skyrocketing. As a result, the perception of mortgage bonds has changed considerably. Investors no longer see mortgages as the next best thing to U.S. debt, and as a result demand has decreased immensely. With decreased demand, prices have dropped and yields have increased.
Depending on the type of loan you need, the increase in relative rates could be minimal or massive. If you are looking for a full doc, conforming (under $417,000) loan, the premium to 10-year Treasury rates is just slightly above where it has been historically. If you are looking for a $750,000 stated-income loan, you will be looking at a stiff premium above the vanilla loan in the previous example (and you better have real good credit and a nice-sized down payment or equity position).
The bottom line is that there is very little demand for mortgage bonds due to the current downturn in housing. As a result, rates are trending down along with Treasuries, but at a much slower rate. Since it appears that Treasuries are within .25%-.35% of their bottom for the current trend, mortgage rates are likely within .25% or less of their cycle lows.
If you are in a risky loan and you need to refinance, that is not enough incentive to wait. With home values dropping and lender guidelines tightening by the day, holding out for less than ¼% improvement could mean the difference between being approved or declined for your loan.
I know this is a ton of information to throw at you, but I believe this information is CRITICAL for so many people right now that I wanted to get it out to you.
If you have questions, need clarification or want to talk about your options, call me today at 888.944.5674 ext. 1, or click here to send me a message.
Investing In One Lesson: A Welcome Addition to Any Library
I recently had the pleasure of reading the new book, Investing In One Lesson, written by my friend and colleague Dr. Mark Skousen. Mark is one of the smartest guys in the room in whatever room he enters, and his intellectual acumen and understanding of financial markets is second to none.
Now given Mark’s tremendous and near encyclopedic knowledge of economics, investing and the markets, I was a bit surprised to see that his new book was aimed at the novice investor. I guess surprised isn’t the right word. Rather, I was a bit suspicious at first that he would be able to relate to the average investor, especially considering his sophisticated understanding of market intricacies.
But from the very first page, Mark proved to me that he can truly relate to the fledging market player. In fact, Mark’s characteristic humor and wit actually invites the reader into the world of investing with interesting anecdotal tales of lost wealth and common mistakes that befall many novice investors.
The "one lesson" Mark builds this compact-yet-powerful tome around is that "Wall Street is not Main Street." What this means, Mark wrote, is that the business of investing is not the same as investing in a business. Once you understand this vital precept and its corollaries, you will be able to conquer what Mark describes as, "The beast called Wall Street."
To help novice investors in their task of taming the beast, Mark lifts back the veil of perplexity and confusion that surrounds the workings of the stock market, and he explains such contradictory concepts as why good news for the economy is often bad news for the stock market.
Mark also explains why stock prices can suddenly skyrocket or collapse regardless of the underlying fundamentals in the economy or in a particular company. In one of the most interesting chapters of the book, Mark explains how Wall Street is like a giant casino, and more importantly, how it differs from a casino.
If you are just getting started as an investor, I strongly urge you to buy this book. If you are a seasoned investor, I also strongly recommend this book. I guarantee you’ll learn something you didn’t know before. Hey, I’ve been around this game for more than three decades, and even I picked up a few choice bits of knowledge.
Thank you, Mark, for writing this most-excellent book.
To order Investing In One Lesson, just click here.
Fabian Wealth Coaching: A Unique Financial Consulting Solution
Do you have a vision of what you want for the future, but no roadmap to get there?
We offer personalized wealth coaching for individuals and couples to jump-start you and your family to move towards your dreams.
As a wealth coaching client, here is what you will receive:
- Personalized Wealth Strategies to achieve your goals and objectives
- Current assessment of assets, including your real property and business interests
- Review, recommendations and projections for your 401(k), IRA and other retirement accounts
- An asset allocation snapshot, recommended adjustments and fee assessment of your current investment portfolio
- A customized ETF portfolio tailored to your objectives
- A review and opinion of your life insurance and annuities
What are Wealth Strategies?
Wealth Strategies are financial and investment plans designed to achieve a specific goal. At Fabian Wealth Strategies, we are all about helping you get what you want out of life: college savings for your kids; financial independence in retirement; the dream of starting your own business, or just the financial peace of mind for you and your family.
Fabian Wealth Strategies helps you achieve financial fitness with a personalized plan tailored to your goals and objectives.
Remember, money does not take care of itself.
For more information about Fabian Wealth Strategies, or to schedule your very own coaching session, please visit our new Web site.
You can also schedule your very own coaching session by calling David Fabian at 800.391.1118 or just e-mailing him.
Always Something New In Fabian Land
The innovation never stops in Fabian land.
You’ve already been told about our new asset management and wealth coaching services Web site and I invite you all to check and see if wealth coaching is right for you.
But wealth coaching isn’t the only new rabbit in our bag of tricks. For you fans of my radio program, we have a new show airing in the Phoenix, Ariz., market every Monday morning from 8-9 a.m. PST.
The Monday show can be heard on AM 1510 KFNN in Phoenix and adjacent areas. If you don’t live in the area, you can still listen live or get a podcast of the show by clicking here.
And finally, want to know how your mutual funds are performing? If you’ve been worried about the performance of your funds, then you are in luck.
This week we launched the new Fabian Lemon List, which is a complete rundown of America’s worst-performing mutual funds. To find out more about the Lemon List, and to get our free special report, Turning Lemons Into Lemonade, just click here. The report and the Lemon List are both free, so get yours today!
Blogs Away: A Fabian Aural & Visual Fixation
Want to hear my latest rant about the state of the financial markets? Well, listening and watching now is as easy as a mouse click.
To listen to the audio blog, simply click here.
Not satisfied by just listening? Would you rather watch me on YouTube?
Well, now you can. It's the latest addition to the Fabian bag of tricks: our brand new video blog.
We invite all Alert readers to check it. We assure you it's worth it.
Just click here for your Fabian aural -- and now visual fixation.
Bellowing with Wisdom
"A man is only as good as what he loves."
—Saul Bellow
In this pre-Thanksgiving issue of the Alert, I want to offer you one piece of advice you may not hear this time of year — or virtually any other time of year. You see, rather than being thankful for all you have, I say you should constantly strive to make things better. In the words of the great 20th century novelist, a person really is only as good as what he or she loves. Find out what you love, and then act on it. By doing so, you’ll thank yourself a thousand times over each day.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else.