Making Money Alert

Forgot?

Sections

Articles

When Will We Call It A Bear?

Print This

08/15/2007

Over the past few stunning weeks of market volatility, many people have called my radio show, e-mailed me and even stopped me on the street to ask me what direction I think this market is headed. People are rightly concerned that we may be marching headlong into a true bear market.

Now I have been about as vocal as anyone can be in my cautious approach to equities over the past several months, but still I must say that so far, what we are seeing is not, that's right, not a bear market.

Do I think we are in for more tumult, and possibly a lot more selling before this market washes out the weakest of holders? I do indeed. But that doesn't mean I think we now are in a bear market, or that we are even headed toward that dreaded bear moniker.

What I do think is that there is a solid chance we could see enough selling that would put us technically into a bear market. Now remember, a bear market is technically defined as a period of generally declining stock prices accompanied by a market drop of about 20%. Despite the big selling in equities, we are nowhere near a 20% pullback from the recent highs.

As you can see by the chart of the S&P 500 over the past two years, the index has just recently fallen back to its long-term, 200-day moving average. A correction indeed, but nowhere near the level it would need to fall to call this a true bear market. As you can see by the chart of the S&P 500 over the past two years, the index has just recently fallen back to its long-term, 200-day moving average. A correction indeed, but nowhere near the level it would need to fall to call this a true bear market.

And where do I think we could call this a true bear? Well, if the S&P 500 were to fall below the key support level of 1375, we could indeed start to tag this market with the bear label. More importantly, if we do see a breakdown in the S&P 500 below 1375, it might be the start of some very serious market damage that you don't want your serious money anywhere near.

If you want me to handicap the chances of stocks going down this far, I would have to say that there is about a 20% chance of this kind of steep market decline occurring. The good news is that this means I think there is an 80% chance that the market is just experiencing a healthy correction from the vaunted levels it hit last month.

But whatever I think the odds may be, remember that I am not in the business of handicapping stocks. I am in the business of watching what the market tells us and acting accordingly.

This objective approach to stocks is what the Fabian Plan has been about for more than 30 years. Right now, subscribers to my Successful Investing advisory service are safe and sound, and watching this market sell off from the security of cash.

If you want to find out how you can feel calm amidst the current market turmoil, too, click here.

A CREDIT CRUNCH OVERVIEW

What the heck is going on in the corporate debt market? Well, let me give you a general overview. First off, after years of stable interest rates and low bond market risk, corporate debt had become cheap. Too cheap, in fact, and the risk in corporate bonds had been under priced. Their yields have been low, close to government bonds, and the liquidity has been deep.

But in recent weeks things have changed. The subprime mortgage market (the junk end of the corporate debt market) has caused a re-pricing of risk. There is about $4 trillion of U.S. corporate bonds, and about $600 billion that is exposed to the subprime mortgage market. As of this writing, something like $120 billion of that subprime debt has gone bad.

Big investors, i.e. mutual funds and hedge funds, have finally realized that they don't want to be holding any subprime mortgage market exposure, so they have undertaken the process of selling. Unfortunately for them, no one wants to buy. They can't sell, and hence the liquidity in this market has in essence dried up.

The individual investors who put money into these big mutual funds and hedge funds have all heard about the problems in the subprime market and they want their money returned. So, they put in redemption requests. The funds exposed to the subprime mortgage market can't meet those redemptions. So they freeze redemptions instead.

Now people who are invested in any hedge funds are worried about those funds and their exposure to the subprime mortgage market. So those investors request redemptions even if the fund doesn't have, or says it doesn't have, exposure to the subprime segment.

Now all funds in the corporate debt market are getting redemptions. This has caused nearly everyone to sell nearly everything to meet redemptions and expected redemptions. All of the investors in corporate debt now want out. Even the quality funds and the big banks sense the problem and want fewer corporate bonds and more government bonds, and hence the current flight to quality in bonds. Funds are selling junk and buying quality. This is why 10-year Treasury notes suddenly started to improve as the credit crunch hit.

Now the selling has spread from those selling from necessity to those selling to make money from the event. Yields on corporate bonds are rising, just as yields on government bonds have fallen. Liquidity now is largely gone in the corporate bond market.

This is what I've been warning you all could happen with the subprime mortgage market and its potential to induce a credit crunch in the whole debt market.

In the short term, I think things are going to get worse. Over the long term, the net effect will be that corporate debt is re-priced against the bond market. This situation will make it harder, i.e., more expensive, for companies to raise capital, and that really could hurt corporate growth, the job market and earnings.

Hang on people, the ride isn't over yet.

The Mortgage Market Meltdown and You 2

Last week I ran a great piece by mortgage and real estate expert Josh Lewis on just what is happening now in the mortgage market, and how that relates to you. I got so much positive feedback on this piece that I decided to run it again this week.

Thanks to all of you who wrote to tell me what a great job Josh did explaining the entire mortgage mess, and how it pertains to you.

Doug

 

By Josh Lewis

Anyone who watches the nightly news or reads the newspaper is well aware that the "subprime mess" now has become the "mortgage market meltdown." What most people don't know is what this means, why it happened and how it will impact them. This is a complex issue that will take time to sort out. In this short space, I will try to answer these questions and help you create an action plan to protect you and your family.

What is a "mortgage market meltdown?" What has occurred in the last 10 days is best described as a complete shutdown of the mortgage markets for all loans not guaranteed by the FHA, VA, Fannie Mae or Freddie Mac. Included in this shutdown are all subprime loans, all jumbo loans (loans greater than $417,000) and most "exotic" loans such as Option ARMs and limited documentation loans.

Why did this happen? As recently as the 1980s, getting a mortgage meant going to a bank or savings and loan, which funded your mortgage from their bank deposits. After the savings and loan crisis, the mortgage markets underwent a significant shift due to changes in the regulatory environment. In the new system when you applied for a loan, it often was through a mortgage bank. A mortgage bank is an institution established to originate and sell mortgages. Mortgage banks operate with lines of credit that allow them to borrow money to fund your loan, and then pay off the funds they borrowed by selling your loan into the mortgage market and pocketing the difference as profit.

As you can imagine, Wall Street isn't very interested in buying mortgages that only amount to a few hundred thousand dollars. What they want is to purchase pools of hundreds of similar mortgages that total millions of dollars. Over time, this business became so lucrative that nearly two out of every three mortgages was pooled this way and sold to investors as mortgage-backed securities without the benefit of FHA, VA, Fannie or Freddie guarantees.

Over the last five years, with the global financial markets awash in money seeking any investment with a decent return, the loans that were funded and sold in these pools got riskier and riskier. This situation meant lower credit scores, higher loan-to-value ratios, interest-only and even negatively amortizing loans. At the same time, the premiums required by investors to accept this risk, in the form of higher rates and fees, got skinnier and skinnier until anyone with a pulse could qualify for a big loan with great terms and tiny payments.

That laxness all stopped recently. For the last several months, as subprime delinquencies and foreclosures grew at a far faster rate than Wall Street anticipated, the market for those loans dried up and underwriting guidelines got much tighter. The major headlines here were the near overnight bankruptcy of New Century Financial, one of the largest subprime lenders in the country, and the failure of two subprime mortgage hedge funds run by Bear Stearns. For most Americans, this fallout was a concern, but not too much of a concern. After all, most of us have good credit and never rely on subprime loans.

Which brings us again to last week. Within a matter of four days, American Home Mortgage, the 10th-largest wholesale lender in the United States, announced margin calls, had trading of its stock halted and finally filed for Chapter 11 bankruptcy-court protection to wind down its business. The big news here was that American Home Mortgage didn't deal in subprime loans. The company primarily was an Alt-A lender. Alt-A loans fill in the grey area between prime and subprime loans, usually due to some combination of high loan-to-value and limited documentation. When the media references "exotic loans," they are generally referring to Alt-A loans.

The AHM implosion was the spark that lit the fuse of this meltdown. Within days, investors on Wall Street who were paying 101% to 102% of the value of mortgage-backed securities stopped bidding entirely. They wouldn't buy them for 90%, 80%, or even 50% of their value. Most mid-sized mortgage banks have been forced to stop funding loans until buyers resurface for these loans. Larger lenders with the capital to hold loans in their portfolio for a period of time, most conspicuously Wells Fargo home loans, responded by raising rates on these loans by 1-1.5% overnight.

To put this situation into dollar terms for you, consider that a client of mine qualified for a $1.3 million dollar purchase loan. These are good buyers with a 25% down payment, good credit and full documentation. I initially quoted these borrowers 6.375% on an interest-only loan to give them a payment of slightly more than $6,900 per month. Within two days, the best rate on this type of loan jumped to 7.25% and the payment spiked to $7,850, an increase of $950 dollars. Even loans of half this amount would have seen a similar rate increase and a payment leap of $400 to $500 per month.

What Does This Mean to YOU? The answer to this question depends on your circumstances. For all homeowners, the rapid increase in the payments required to finance a home likely will speed the fall of home prices throughout the country, especially high priced and so-called "bubble markets."

If you have a fixed rate mortgage and plan to live in your home for an extended period of time, you probably have no need to worry. The mortgage market will correct to more normal levels and the impact on you should be minimal.

If you have an adjustable rate mortgage, especially an Option ARM loan with a negative amortization feature, or a hybrid loan with a fixed period ending in the next 18-24 months, you should consult with your mortgage professional to see what options currently exist for you, and to formulate a game plan for avoiding a rate and payment spike, or worse, in the near future.

If you have a subprime loan, run, don't walk, to see your mortgage professional. You need to understand your situation and all of your options. The situation is just too complex to try to figure out on your own.

For anyone who does not have a relationship with a trusted mortgage advisor, or would simply like a second opinion, please call me at 888.944.JOSH (5674) or

e-mail me here. I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market.

 

. I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market.I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market. I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market.

I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market.. I can analyze your current financing, your needs moving forward and create a game plan to give you the peace of mind you require in these uncertain times in the market.

INTERESTED IN 8-12% YIELDS? 3

The big sell off in the stock market has created a lot of opportunities for income investors. I can't get into all the details in here in the Alert, but I do have a complete presentation for you that I call Creating Passive Income. It's my latest live workshop, and it now is available online.

All you have to do is

click here for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.

for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.for all of the details on how you can listen to one of the most important seminars for your wealth that you will ever see.

In this unique workshop event, Josh Lewis -- my mortgage and real estate expert -- and I team up to show you the keys to creating the passive income you need to create the life of your dreams.

You will discover:

For more on how to download this seminar right now, simply click here.

BLOGS AWAY: A SPECIAL INTERVIEW WITH DAVID TICE

On this week's audio blog I have a special treat for my listeners. It's my interview with Prudent Bear Fund manager David Tice. David is an extremely smart money manager, and a guy whose insights and opinions on the current market I really respect.

If you want an opinion on what's going on in this market that differs from the usual bullish cheerleading you here on CNBC, then my interview with David is for you.

To listen to the audio blog, simply click here.

 WHAT IS WEALTH COACHING?

I've been talking about our new Fabian Wealth Strategies (FWS) coaching sessions for a while now, but it occurred to me that I really needed to explain just what a coaching session is, and how the process works.

Basically, a FWS coaching session is a two-part discovery and recommendation process designed to help you create a roadmap to attain your financial goals. FWS is unique in the financial advisory field with this consulting service. We begin with a complete asset review including your liquid assets, investment portfolio, real estate, and small businesses. We ask for you to share with us your long-term goals, and then we recommend the wealth strategies designed to attain those goals. These recommendations are grounded in sound financial principles using a safety-first investment methodology developed over our combined 30-plus years experience in financial services.

Fabian Wealth Strategies Portfolio Review

We begin by asking you to fill out a wealth coaching questionnaire. This simple form gives us a comprehensive overview of your financial picture. Next, we request that you set up your first 45-60 minute phone interview. During this conversation, I personally will review your situation to ensure we have a clear understanding of your needs, goals and concerns. After this no-cost evaluation, FWS will provide an estimate for your complete personal wealth plan.

If you decide not to move forward for any reason, there is no cost or commitment required. Our services are billed on an hourly basis at $250/hour. We design your strategies with a focus on low cost and high value. Once your personalized Wealth Strategies have been completed, we will contact you to schedule your final coaching session.

Fabian Wealth Strategies Personal Wealth Plan

After completing your portfolio review, I will present you with your unique Wealth Plan in person, either in our offices or at a location that is convenient for both of us. Your Wealth Plan will include a statement of your goals and objectives, observations of your current accounts, an asset allocation review, retirement savings projections, and your personalized wealth strategies.

You will have the opportunity to pose questions and clarify any points made throughout the interactive presentation. This face-to-face meeting is aimed at empowering you to make the right choices for your family's future. Once you have an understanding of your Wealth Plan, we will talk with you about implementation.

Fabian Wealth Strategies Implementation

Our strategies can be implemented by you, by Fabian Wealth Strategies, or even by another advisor. You are paying us for our best efforts in making recommendations for your financial future. Sometimes other financial professionals are required to help you handle more complex issues, which is why we offer you access to our elite network of qualified experts. A CPA, attorney, insurance, or real estate expert may be recommended to give input on your specific situation, and if this happens we've got you covered.

FWS offers investment management services to implement your Personal Wealth Plan. We are fee-only investment advisors specializing in exchange-traded funds. This means that we manage our client's portfolios through a relationship of transparent cost and value.

If you are considering Fabian Wealth Strategies as a partner in your wealth management process, I encourage you to contact us directly with any questions about the FWS Wealth Coaching process and/or services. We are here to help you reach your long-term goals.

The only thing you have to gain is the life you desire.

For more information on how to schedule your very own coaching session, call David Fabian at 800.391.1118, or e-mail him.

OF MIRACLE AND WONDER

"The wonderful thing is there are no miracles."

—Albert Einstein

Einstein found beauty in the immutable laws of nature, and therefore the concepts of miracle and wonder had a different meaning for him than they do for most others. No matter what your philosophic beliefs, keep in mind that wonder is everywhere in this world, all of the time. We may not come close to understanding even a fraction of all there is to know, but we do know it is all intelligible. Keep that in mind when you feel like you just can't get a grasp on more trivial things like the wild conditions in the market.

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.

Test message.