Making Money Alert
Rising Rates -- What They Mean To You
06/13/2007
There is no bigger news in the financial markets than the latest spat of rising long-term Treasury bond yields. In case you've missed it, long-term bond rates have soared about 25% since December. That is a really big move for this normally steady segment of the financial world.
If you look at things from an historical perspective, you'll realize that yields have been trending down for nearly two-and-a-half decades. Since the peak in interest rates in the early 1980s, when money funds paid out 18% and long-term bond yields hovered at 13%, the yield picture has been steadily declining.
Sure, we've had some sharp swings higher over this long time period, but by and large the trend has been steadily lower. Below is a great chart highlighting the trend toward lower interest rates since about 1982.
There is no way to know how high yields will go, but I do think that if rates continue to climb there will be a lot of damage inflicted on this economy. The damage will be inflicted not just here domestically, but globally as well.
How will higher bond yields (higher interest rates) affect you as a consumer? Well for starters, mortgage money will become much more expensive. You'll also have to pay more interest on those already high interest credit cards, and you will see fewer offers for cheap money to be lent.
Those with lower than average credit scores will see much higher rates sooner rather then later, and equity lines of credit will become more expensive. So far the prime rate and the Fed funds rate (this is the rate the Fed charges banks) has not changed, but since many loans are tied to the 10-Year Treasury note yield, there's no question that money will become more expensive.
For investors whose primary concern is generating income from their assets, this spike in bond yields means bond values have taken a shellacking. In my High Monthly Income advisory service, we've already instructed subscribers to exit bonds and to start raising cash.
So far bonds of different maturities haven't seen much divergence. I am referring here to bond spreads. This is the difference in price between riskier corporate and high-yield bonds and long-term Treasuries. If bond spreads were to begin widening, it would be a sign that institutional investors are getting nervous about defaults. We may see a decline in mergers and acquisition business as a result of this new environment. That risk could spill over into the stock market and be reflected in lower equity values.
WINDED HOUSING HORSE
Perhaps the biggest effect of this recent rise in yields will be felt in the housing market. The real estate industry has more cheerleaders than the Dallas Cowboys, but I say don't believe all the rah-rah hype. Realtors, mortgage lenders, home builders, retailers and investors are all hoping and praying that the worst in housing is behind us.
My opinion is that the worst is still yet to come. This new surge in rates has just made access to mortgage money much more costly. What fueled the boom in housing was the easy access to cheap money. Money is still relatively cheap, but not as cheap as it was four months ago. This will cause fewer people to be able to afford financing. Few buyers, more inventory, rising foreclosures and credit tightening all lead to lower home prices.
Long-time readers know I have been commenting on the housing market bubble for years. I hold a strong opinion that when people are allowed to borrow massive sums of money at relatively cheap prices, they are apt to easily get in over their heads. This is where I think real estate in America stands today.
We are in a period where many, many people own more home then they can afford. This problem is not just in the so-called subprime market. It's in all price ranges and economic classes.
Today, we are seeing a glut of homes on the market, a wave of foreclosures that's just beginning to hit shore, and now, thanks to the current spike in bond yields, a sharp rise in the cost of money.
What this adds up to is lower home prices across the country for the next several years. That's good if you currently are renting your dwelling and are looking to buy a home soon. Of course, the pending decline in home prices will probably be at least partially offset by the higher interest rates you'll have to pay on that mortgage.
For those who are banking on rising real estate values to get you up to the next level of financial security, well, you may be in for a lot longer wait than you'd originally anticipated.
There's no doubt that higher interest rates will take the wind right out of the sails of the housing market, which already had to aggressively tack back and forth just to get enough air to keep up a modest pace.
DIPPING BELOW THE 50-DAY AVERAGE
Technical analysts -- including yours truly -- often monitor price trend lines to get a real picture of where a stock, ETF or mutual fund stands in relation to its past performance. One technical indicator we all are watching right now is the 50-day moving average.
The 50-day average -- or more specifically, a crossing of the 50-day average -- often is a precursor to increased upside, or increased downside in a given security. In light of the current market sell-off, let's take a look at just where we are in relation to the 50-day average.
The above chart shows the price movement of the Vanguard Total Market VIPERs (VTI). This ETF seeks the performance of the index that measures every stock that trades on the major exchanges, so it's a good bellwether for gauging overall market direction.
Here we see that VTI has pulled back right up to its 50-day moving average. In my opinion, if this market continues selling off the way it has in first two weeks of June, we easily will see VTI blow past its 50-day moving average.
If that happens, I would view it as a low-risk buying opportunity in this ETF. By low-risk, I mean that based on its performance over the past three years, buying VTI somewhere below its 50-day average usually was a very profitable bet.
Over the course of the next few weeks, we'll see if this correction pushes VTI below its 50-day average, or if the market can sustain support right at this level. Whichever way things go, you can be sure we're monitoring all the action closely for you, the Alert reader.
BLOGS AWAY 9
To listen to this week's audio blog, click here.
HITTING THE ROAD IN JULY
You may recall that I just returned home from a fantastic week in Las Vegas where I attended the annual Money Show. Well, get ready Sin City because my team and I soon will be making another Vegas run.
This time we'll be there for FreedomFest 2007, July 5-7, at the Bally's/Paris Resort.
At this conference, I'll be conducting two investment workshops, one on the future of investing using exchange-traded funds and one on identifying the next hugely profitable market sector.
For more details on FreedomFest 2007 and/or to register for the event, simply point your browser here.
But hey, you don't have to make the trip out to Vegas just to catch one of my live events. If you are near the Los Angeles or Orange County area on Saturday, July 14, I invite you to attend my Creating Passive Income Seminar.
This event will be held at 9 a.m. at the Hyatt Regency Orange County, Garden Grove, Calif. For more information on this event and to reserve your spot.
Finally, don't forget about the upcoming San Francisco Money Show, which takes place July 26-28, 2007, at the San Francisco Marriott located in the heart of downtown San Francisco. Join me and over 50 of the country's premier policy analysts, advisors, and money managers who will share their best strategies for taking advantage of economic, political and market opportunities to grow your investment assets.
You can choose from over 150 educational workshops and 15 panel presentations. The show also features a state-of-the-art exhibit hall with more than 125 of the finest financial companies in the country displaying their cutting-edge products and services. For complete details or to register for free admission, call 800.970.4355 (be sure to mention priority code #008562), or visit: The Money Show San Francisco's Home Page to register today!
Hope to see you there.
THE COACH IS IN 8
Once again, I am really happy to report that so many of my Alert readers have taken me up on my offer for a free annuity coaching session. The issues you've brought to my attention have really helped me learn about the difficulties annuity investors face in this current market.
Your input also has helped me see the kind of marketing and sales pitches many of you are subjected to when trying to make annuity decisions. I probably don't have to tell you, but there are a lot of promises being made out there that, well, let's just say are laced with too much optimism and not enough realism.
If you are an annuity investor, or if you are planning on buying an annuity anytime soon, you owe it to yourself to take advantage of my offer for a free coaching session. I know I can help you learn more about this often complex investment tool.
One thing you've got to realize is that understanding annuities requires experience and knowledge. I want all my Alert subscribers to know all of their options before making decisions. If I can help you with your annuity questions, please just pop me an e-mail and let me know.
If you would like to get your FREE annuity coaching session with Doug Fabian, simply send an e-mail.
WISE THOUGHTS FROM A TRUE WARRIOR
"Its human nature to start taking things for granted again when danger isn't banging loudly on the door."
—Col. David H. Hackworth
Whenever you get complacent about the threats the world poses, whether it be to something as grandiose as our liberty or something more mundane like our finances, it might serve you well to remember the words of the late, great Col. Hackworth. Always a champion of the soldier class, "Hack's" no-nonsense approach to the threats this country faced should be lauded and remembered by all. May you rest in peace, sir.
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.