08/24/2006
Yesterday, two Fed presidents set an ominous tone for the future of the U.S. economy. They warned consumers that interest rate hikes may be far from over. Expressing their unwavering commitment to winning the war on inflation, the Fed made it abundantly clear that consumer collateral damage would not divert them from their goal of curbing inflation to prevent a further slide in the dollar.
So, the Fed has made its intentions quite clear. It is going to win its battle with inflation -- and most American investors are going to lose. Higher interest rates will continue to squeeze consumers who are already suffering under the weight of bigger mortgage payments and increased credit card payments. Everyone carries some kind of variable debt and that debt will continue to be more expensive. The news couldn't come at a worse time, since oil and energy already are eating a hole in pocketbooks of consumers who are getting hit from all sides. Many of those consumers are going to cave under the pressure.
Based on the frank talk from the Fed, I am putting all investors on notice that a recession is on the horizon because the Fed has gone too far. After 9/11, the Fed desperately tried to bolster the U.S. consumer with deep cuts in interest rates to spur spending. And consumers responded by spending to buy homes, to refinance debt, and to obtain goodies galore. Much of that spending was financed with low-interest credit card debt. The overly accommodating Fed wanted dollars moving through the economy, so it made consumers the proverbial offer that they could not refuse.
Since then, the dollar has lost 30% of its value, compared to other major currencies. In addition, the U.S. government's deficit spending is out of control. A case in point is the high cost of oil. It now takes 30% more dollars to buy oil from foreign countries, compared to five years ago. The result? The trade deficit continues to rise and foreign investors are less than excited about buying more of our debt paper. This problem is the battle the Fed is attacking with its inflation-fighting zeal. At this point, the Fed does not seem focused on the effect its policies have on consumers.
There are no longer rate cuts to relieve consumers. That overused formula will not work any magic this time. Consumers are forced to suffer through what's ahead. Most of those consumers will not be prepared. In the recession that looms, spending will slow to a trickle and jobs will be lost. The weakened housing market will be hobbled in the face of the declining economy. The Fed can offer no remedy because it will use policies to bolster the dollar. We are between a rock and a hard place. It's time for you to set yourself up for protection and profit -- as a consumer and as an investor.
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Last week's rally turned out to be a short sprint that completely lacked any endurance. The sporadic market movements are just more of the same activity that we have seen since mid-May, reflecting completely insincere attempts to move higher. That situation ultimately leave optimistic investors holding the bag. A case in point is Nasdaq, which staged its best week since 2002, only to do an about face and end up languishing in the red.
There's plenty of resistance to the upside due to negative sentiments regarding inflation, interest rates and housing. While selling has not been heavy, it has been consistent, indicating an underlying weakness in the market's ability to digest the bad news and to move forward in a positive direction. The S&P 500 continues to show resistance at about the 1300 level. Ongoing weakness could see it trend back down to about 1210. I have drawn a line in the sand for that market at 1310. If the S&P 500 can break through that level, we may have some upside potential. However, I continue to remain vigilant to the downside potential and I recommend tight stop losses for anyone investing at these levels.
We now can safely say that the housing boom has officially ended. This morning, the National Association of Realtors reported that sales of existing homes dropped for the sixth consecutive month. At the current rate, approximately three quarters of a million LESS homes will be sold this year compared to the peak reached one year ago in August of 2005. While sales have sagged, rapid appreciation has all but disappeared. Most homes have seen little or no appreciation in 2006 and the trend looks like it will continue into 2007. If you read my special report, “Boom to Bust: How to Prepare, Protect and Profit When the Bubble Bursts”, you know that I believe we will see significant declines in home prices in many markets. The question you must ask yourself is this; am I prepared to profit or will I get slaughtered when the correction comes?
Specifically, you MUST know the answers to the following questions:
I cannot stress enough how critical this issue is to your long-term financial health. You can't afford to put your head in the sand and ignore the possibility of a housing downturn. If you are a homeowner, I implore you to do your homework and see how much real estate risk you face. If you would like help with assessing your situation, I highly recommend that you call my mortgage expert, Josh Lewis, at 888-944-JOSH. Josh will walk you through the process of analyzing your current financing and equity position, while comparing it to the financing available today.
"Time moves in one direction, memory in another."
—William Gibson
It's easy for us to fall into a trap when it comes to our investing decisions. Often, we think about what we should have done, or the profits we could have made if we would have only bought a certain stock way back when. Don't get caught up in the trap of regret when it comes to managing your own money. As Gibson says, time moves in a different direction than memory. If you want to succeed in the here and now, you've got to take action in the here and now. Don't hesitate any longer. Get your financial house in order before it's too late.
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.