Making Money Alert
Bernanke Surprise
09/19/2007
Tuesday, Sept. 18, 4 p.m. Eastern Daylight Time -- the closing bell has just rung on the floor of the New York Stock Exchange and the numbers on the big board tell the story quite clearly.
The Dow finished the session up a whopping 336 points, or 2.5%, its biggest one-day rise in nearly five years. The S&P 500 exploded for a 43-point gain, or nearly 3% in the session, while the NASDAQ Composite surged 70 points, or 2.7%, in what was a truly memorable day in market history.
The reason for all this exuberance on Wall Street was, of course, the Federal Reserve’s unexpectedly deep reduction in the federal funds rate and the discount rate. Both key interest rates were slashed by a half a percentage point. The federal funds rate now stands at 4.75%, while the discount rate is now 5.25%.
There is nothing the market reacts to with more intensity than a surprise, and this is true of both negative and positive surprises. Big Ben Bernanke’s strong move to aggressively reduce the cost of capital took the vast majority of economists and pundits by surprise -- and it was that surprise that lifted stocks so high after the Fed’s announcement.
As you can see here by the chart of the S&P 500, stocks are now fighting their way back to the record-high levels they hit in July.
But before we all get too enamored with the market, I want to first point out a couple of the money quotes from the Fed’s statement.
“Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” read the Federal Open Market Committee statement.
All this really means is that the Fed took a look at the credit and liquidity crunch and decided to take action to ameliorate this potentially disastrous circumstance.
Perhaps the more important wording in the Fed statement had to do with its cautious sentiments on the economy:
“Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”
This statement, coupled with the aggressive 50-basis-point rate cut, leaves me a bit worried about the future of economic growth and the very real possibility of a recession in our future. If you stop and put it in perspective, the Fed wouldn’t have had to cut interest rates so deeply if the governors didn’t feel the need to try and head off some real pain on the horizon.
We’ll all soon see if the Fed’s actions were enough to stave off recession. A more immediate concern, however, is the specifics of what to do with your portfolio now that the Fed has acted.
Right now, subscribers to my Successful Investing advisory service are preparing for what may be the best buying opportunity in the market in many years.
The key to buying into the market properly is to know what, where, and how to allocate your portfolio dollars. Knowing how to do that requires education, discipline and a proven plan.
Our investment plan has been helping investors beat the market for nearly three decades, so after 30 years of success, I think I can say that the efficacy of our plan has certainly been proven.
Now that the Fed has acted, don’t just jump into stocks blindly. Get Successful Investing, and get the information, tools and experienced guidance you need to make the most of what looks like it will be a tremendous buying opportunity.
To find out how you can make the most of the Fed’s moves, click here.
So The Fed Cut, Now What?
This week I am pleased to present an opinion of the Fed’s move from the mortgage perspective, and who better to write it than my esteemed colleague, mortgage expert extraordinaire Josh Lewis.
By Josh Lewis, the Fabian mortgage expert
Despite persistent concerns about inflation, the Federal Reserve gave in to the markets on Tuesday and cut both the federal funds rate and the discount rate by half a percentage point. They did so in an effort to bring some liquidity back to the secondary market for mortgages. Their hope is that lowering borrowing costs for institutional investors will trickle down to homeowners in the form of better mortgage rates and terms.
This is critical right now as the housing market teeters on the edge of a major downturn as lenders have cut off funding for risky borrowers eliminating the safety valve for many homeowners with “exotic” adjustable rate loans that will soon, or have already, reset to much higher market rates. Now I realize this is an oversimplification of the issue, but for our purposes it sets the stage for what really matters, which is what does the Fed’s actions mean for you?
First off, let’s discuss what a Fed cut does and does not mean for the mortgage markets. Any time the Fed cuts the federal funds rate, I get several calls from borrowers and prospects who want to know how much better rates are. What usually happens is we see a knee-jerk reaction of improved rates followed shortly after by an uptick.
The reason that mortgage rates move in the opposite direction of Fed policy is that inflation is still the arch enemy of mortgage bond holders. Inflation eats away at the value of their investment. Fed cuts are seen as inflationary, while a rate increase is viewed as likely to decrease inflation, which maintains or increases the value of mortgages in an investor’s portfolio.
What this means is that we may give back some of the recent improvement in mortgage rates as the markets had largely priced in Tuesday’s cut. Over the next two-to-three months the markets will be closely watching inflation figures. If they remain tame, increasing the possibility of further rate cuts, we will see mortgage rates improve. If inflation signals rear their ugly head, mortgage rates will worsen as the markets realize more cuts won’t be coming, and as the value of fixed-rate investments decrease.
One group of people who directly benefit from the Fed cut is homeowners with home equity lines of credit. The vast majority of these loans are tied to the prime rate, which moves in lock step with the Fed Funds Rate (+3.00%). Most well-qualified borrowers pay close to prime for their HELOC rate. Tuesday’s cut means their rates dropped from 8.25% to 7.75%. Those rates don’t look so great when you consider that most folks took out their lines of credit in 2003 and 2004 when prime was as low as 4%, but hey, every little bit of interest saved helps.
In the bigger picture, what will the rate cut mean for the real estate market? Unfortunately, not much.
Interest rates in and of themselves have very little correlation to real estate prices. Historically, home values have done best when rates are increasing (the 2000-2005 boom is the first period of rapid real estate appreciation to occur in a decreasing rate environment). Additionally, the troubles in the real estate markets are most closely tied to a lack of affordability.
When lenders eliminated many teaser rate programs and required borrowers to start documenting income, the market of potential homeowners able to qualify for financing greatly decreased. At the same time, speculators have been heading for the exits by putting properties up for sale or losing them to foreclosure, increasing supply and reducing a large source of “artificial demand.”
What does all of this mean for you? If you have a HELOC on your property, you will be paying less in interest next month. If you are looking to buy a new home, rates are at their best levels in about a year, but qualifying guidelines are still very tight. If you are a home seller, your potential buyers will be facing the same issues.
At the end of the day, the Fed’s move was, in my opinion, largely symbolic. But even if it’s just a Band-Aid, the message is clear that the Fed is being vigilant and will do everything in its power to help stabilize the mortgage and real estate markets. And right now, that’s about the best we can ask for.
If you have questions regarding your mortgage financing or your real estate, give me a call at 888-944-5674 ext. 1. I will be glad to go through your situation with you. To send me an email, click here.
ETFS: THE FUTURE OF INVESTING
Come visit Doug in person as he brings his latest workshop to Southern California for an exclusive look at one of the fastest growing investment products in the world -- Exchange-Traded Funds.
Whether you’re an ETF novice or an advanced trader, this workshop is packed with information that will change the way you invest. In this informative seminar, Doug will teach you:
- The current state of the market and how to identify what may be the best buying opportunity since 2003.
- A history of ETFs and what the current landscape looks like today.
- The advantages of investing in exchange-traded funds.
- A comprehensive overview of the different types and styles of ETFs.
- How to build portfolios using ETFs, including several sample portfolios you can implement in minutes.
- What are some of the pitfalls of ETF investing -- and how to avoid them.
- New ETFs Doug likes right now
- And much more!
This seminar will be held:
Tuesday, October 9, 2007, 6:30-9:00 p.m., at the
Pasadena Westin Hotel
191 North Los Robles
Pasadena, CA 91101
The cost for this event is only $24.95 per person.
Register now and you’ll get these four Special Bonus items:
SPECIAL BONUS #1: Workbook that includes the complete list of nearly 600 ETFs and their recent performance data.
SPECIAL BONUS #2: Audio recordings of the event that you can listen to again and again.
SPECIAL BONUS #3: My top 3 ETF portfolios to profit in bull and bear markets.
SPECIAL BONUS #4: A complimentary autographed copy of Doug's book: Maverick Investing
Don’t miss out on the most comprehensive ETF workshop of the year! We offer a 100% money-back guarantee if you are not completely satisfied with the presentation.
To register click here.
Or call us toll free at 800-391-1118
Be sure to act soon, Doug's SoCal events are almost always a sell out.
Blogs Away: A Fabian Aural & Visual Fixation 2
This week it’s all about the Fed rate cut and the market’s extraordinary response to the central bank’s move. Plus, Doug talks about asset allocation and how to take inventory of what’s in your portfolio. He also introduces a market first, the debut of a new municipal bond ETF.
To listen to the audio blog, simply click here.
FITNESS TRAINING AND FABIAN COACHING
I am a big fitness buff, and I’ve worked with a personal trainer for many years. But before working with my trainer, I still worked out very hard. I hit the weights often, and I went through the motions with a sense of purpose and determination. After about six months of expending a lot of effort, I noticed that I really wasn’t making much progress.
Frustrated, I decided to seek the advice of a professional. That’s when I met my trainer, who told me that while I was working hard, I wasn’t working very smart. After just a few sessions under the tutelage of a real pro, I was able to make the huge progress I was after.
You see, I was doing things wrong in the weight room that I didn’t even know I was doing. It took a trained eye with the knowledge and expertise to be able to point out my errors and correct my problems. Once those corrections were made, I was able to take my performance to a whole new level.
I bring up my fitness training story because I think it is nearly perfectly analogous to the way most people manage their investment portfolios. Most people make an effort to buy and sell stocks and mutual funds, but like the novice fitness trainee, most people aren’t making the progress they want to make.
The reason for that lack of progress is the lack of a professional trainer. At Fabian Wealth Strategies, we like to think of ourselves as your personal portfolio trainers. We can coach you on how to properly manage your assets, and we can help you get to that new level of performance you’re working so hard to achieve.
If you need some help assessing your portfolio’s fitness, Fabian Wealth Strategies can help.
All you have to do is call us and schedule your very own coaching session.
For more information on how to schedule your coaching session, call David Fabian at 800.391.1118, or e-mail him.
RUNNING AGAINST THE WIND
Well those drifters days are past me now
I’ve got so much more to think about
Deadlines and commitments
What to leave in
What to leave out
Against the wind
I’m still runnin’ against the wind
I’m older now but still running
Against the wind
—Bob Seger, “Against the Wind”
I had occasion early this morning to apply these lyrics to my own circumstance, and so I thought I’d share them with you. You see, no matter what stage of life we find ourselves in, we are often all just running against the wind. The sooner we embrace this fact, the faster we can cut through the turbulence.
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.