Making Money Alert
Breakout or Fake Out?
10/14/2009
Stocks are surging this morning on news of better-than-expected earnings from bellwethers Intel and JP Morgan. The S&P 500 Index now is above its Sept. 23 high of 1080. So, does this new high represent another breakout for stocks, or is this a market fake out and the hitting of a new top for equities? We'll all know for certain in the weeks ahead, but until such time, there are two things you can do to make sure you take maximum advantage of current conditions.
If you now are long on equities, my advice is to continue holding your positions. You also should make sure you have stop losses on each and every position in your portfolio to ensure you don't let your gains slip away.
Now, one thing that worries me about this rally is that to a large extent, prices have been fueled by the trillions of dollars of government assistance -- some might call it interference -- in the free market. The amount of cheap, short-term money invested in the stock market by professionals seeking fast gains is huge right now, and if those professionals decide to move out of stocks, we could be in for a waterfall of selling that could take stocks down hard.
Another fly in the ointment right now is the potential for rising interest rates. Below is a chart of 30-year Treasury yields.
Here we see rates beginning to creep higher since the beginning of October. I think if interest rates start to climb significantly higher, the cost of borrowing by businesses and the federal government will wreak havoc on our economy. I am paying very close attention to rates here, as it could be the spark that sets a market sell-off on fire.
The Opportunity in Mortgage Interest Rates
Whenever I need an update on the current real estate and mortgage rate environment, I turn to my trusted experts at Miracle Mortgage Corp. Today, we have a special treat from Miracle Mortgage President John Doan, who lets us in on his keen insights straight from the mortgage front. Take it away, John.
The Opportunity in Mortgage Interest Rates
By John Doan, President, Miracle Mortgage
Today, consumers are finding deals on all kinds of goods and services, as businesses struggle with decreased demand. It was announced recently that consumer spending now makes up 71% of our GDP, which is the highest percentage ever. With all of these deals in the market and a tough economy, can there really be a peak in the real estate market?
When it comes to home purchases, consumers most closely review the price they pay at the time they make their home purchase. They will negotiate price, and may even walk away from the deal for a couple thousand dollars difference. But let's be clear, the biggest impact on real estate's total cost over the long term is one thing... interest rates.
Assume a buyer bought a $500,000 home with 20% down at 6% for 30 years. That buyer will pay $963,353 during that 30-year period, with $463,353 to cover interest alone. At just a 1% drop in the rate to 5%, the total 30-year cost of the same home would be $873,023, with $373,023 representing interest. That's a discount of $90,330.
Financing your real estate at favorable rates is the key here and, fortunately, rates never have been lower. With an increase in the federal debt likely to continue for the foreseeable future, the government will have to lend more and more money. And with the increased supply, they'll have to offer higher yields to those buying Treasuries.
Observe the correlation between 10-year government debt and mortgage rates since 1972 in the chart below. Here, it is easy to see the long downward trend that's now reached all-time lows.
If you currently are in an adjustable-rate loan and your rates are over 5%, allow us to do a free assessment to provide you options for your real estate financing needs. Imagine your payment going up 20%, 30% or 50% overnight just because you did not review your options?
Do your due diligence and call Miracle Mortgage today at 888.536.3453, or email me for your free, no obligation assessment. You may have the opportunity to provide yourself with long-term security for your home or other real estate investments.
Note: Miracle Mortgage Corp. is a sponsor of my radio program, Doug Fabian's Wealth Strategies.
ETF Talk : Forecasting a Dollar Turnaround
The value of the U.S. dollar has been hammered in recent months, and observers -- me included -- feel that the greenback's decline is bound to run out of steam sooner rather than later. When this happens, investors will have a chance to profit by riding the U.S. dollar higher. Of course, nobody knows yet when a reversal of fortune for the dollar will take place, but when it does, you'll want to be prepared.
One fund that lets investors bet on the recovery of the U.S. dollar is the PowerShares DB US Dollar Index Bullish (UUP). Investors also may view the UUP as a hedge against a falling stock market and a slowdown in the economy. UUP is an exchange-traded fund (ETF) that gains in value as the value of the U.S. dollar climbs and rival foreign currencies fall. In a nutshell, UUP is a bet in favor of a rising dollar.
For those of you who may be eyeing an investment in the dollar, UUP could be a good way for you to hedge against what I suspect will be asset deflation in the equities and a decline in prices stemming from a declining economy. However, such an investment only should involve a small portion of your assets, since it is meant to serve as a hedge against a potential decline in the market and in the economy. If you opt to invest in the dollar, do not make it a primary holding in your portfolio. You also will want to put a stop loss on this position, if you choose to buy it. In addition, only risk the amount that you are prepared to lose, since a bet on the U.S. dollar right now is a gamble that the current downward trend of the greenback will reverse.
I actually recommended UUP in my investment newsletters recently, but primarily as a hedge, and only for a very small portion of each respective portfolio. If you want a hedge in your portfolio as well, investing in the U.S. dollar is a good way to mitigate the potential damage from a market drop.
A final warning on any dollar bet is that if you are not willing to place a stop loss on your position, don't even think about buying UUP. I cannot stress enough that a hedge position such as this mostly serves as insurance in the event the market comes down and the economy continues faltering. If the idea of hedging seems a bit of a stretch to you, you're probably better off avoiding such investments.
For those of you who want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs. To send me your questions, please click here. You may see your question answered in a future ETF Talk.
Get Your Q3 Intelligence Report Now
As regular readers of the Alert know, I am a huge fan of exchange-traded funds (ETFs). An ETF is like a virtual basket of stocks that usually tracks a specific index or sector. To put it another way, ETFs are like a homologous species of mutual funds that allow investors to buy into a specific area of the market without all of the hassles, management fees and trading restrictions imposed by traditional mutual funds. You could say that ETFs are a kind of mutual fund without any of the downsides.
Mark Your Calendars
In my line of work, I often get emails that are very gratifying. This month, I thought I'd share one such email with you that you also can be a part of. Here's the text straight from my inbox.
Dear Mr. Fabian:
Thank you so much for making 2009 another very successful year for The MoneyShows.
We truly appreciate your continued support and dedication to educating investors. Therefore, we would like to take this opportunity to invite you to the 2010 MoneyShows.
Below are the dates of the 2010 MoneyShows that we would like to invite you to speak at next year.
As most of you know, we work on our programming four-six months in advance, so please let us know what shows you'd like to do in 2010 at your earliest convenience.
We're looking forward to another year of working together again.
Sincerely,
The MoneyShow Staff
First, let me say that I am honored to be invited back for all three MoneyShows next year, and I have accepted the company's gracious invitation to attend all three. So, if you are going to be in or near any of the above locations at any of the respective dates, I cordially invite you to join me. These shows are always a great time, and I guarantee you'll learn a lot.
So, mark these dates on your 2010 calendar, and I hope to see you there.
Stinging Wisdom
"Men go crazy in congregations. They only get better one by one."
-- Sting, "All This Time"
I believe that when people start thinking along with a group, they stop improving their independent thinking skills. If you want to make real progress in life, a good way to do so is to separate yourself from whatever groups you belong to and reevaluate if what that group says comports with what you actually think. If it does, then by all means return to that group. If not, then go your own way. Whatever your conclusions, at least you'll know you reached them independently.
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. Click here to Ask Doug.