Panic and Uncertainty – the Twin Towers of Turbulence

Panic and uncertainty – uncertainty and panic. The twin towers of turbulence that are causing all sorts of commotion in our financial markets.

Sure there are real problems. But these two mischief makers are making things a lot worse than they need to be.

So much so that we are seeing interest rates approaching zero. Read on for the story.

Investor fear drives US Treasury yields to near zero

Dec 7 06:50 PM US/Eastern

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.

Due to stampeding demand for safe short-term investments, the US Treasury’s four-week and three-month bills on Friday yielded an effective rate of 0.01 percent — down sharply from 1.515 percent and 1.785 percent, respectively, in early September.

Other Treasuries are also showing record low yields. The 10-year bond yield fell as low as 2.505 percent and the 30-year bond yield slid to 3.005 percent at one point on Friday. The six-month bond yielded a mere 0.20 percent.

The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.

“Investors seem to be content to sell stocks and park into the bonds for now,” said Greg Michalowski of the financial website FXDD.

Analysts say the fear factor has pushed up demand for Treasuries, since investors are virtually certain the US government will not default.

Other factors include worries about deflation and the overall trend in interest rates, with the Federal Reserve having cut its base lending rate to a historic low of 1.0 percent, and further reductions possible.

But Bob Eisenbeis, analyst at Cumberland Advisors, said the unprecedented low yields are a sign of “dysfunction” in markets.

Eisenbeis said US municipal bonds are paying upwards of 6.0 percent tax-free and corporate bonds even more, but that fears of default and a lack of knowledge about underlying bond quality have led investors to shun these alternatives.

One reason for the surge in demand for Treasuries, said Eisenbeis, is the Federal Reserve’s decision to flood financial markets with liquidity including through other central banks.

Many central banks and commercial banks are reluctant to use this cash for traditional lending, and are buying Treasuries to ride out the storm, Eisenbeis added.

A big question for the market is whether the Treasury market has become a bubble that will burst.

Although the low rates allow Washington to borrow money cheaply, Eisenbeis said such a scenario could be perilous for the economy and the dollar.

“When you have this huge flood of liquidity into the marketplace, that can’t last forever,” he said.

A bursting of this bubble could mean a rush out of Treasuries, forcing the government to pay higher rates on an unprecedented amount of debt.

“We would have huge increases in our costs and people wouldn’t want to hold Treasury obligations anymore because of the capital losses,” Eisenbeis said.

“You could have a huge switch in interest rates very quickly.”

Mike Larson, an analyst at Weiss Research, says the long-term bond market could be “the biggest bubble of all,” worse than the dot-com and real estate bubbles.

“Treasury bonds almost never move this far, this fast. And interest rates, which move in the opposite direction of bond prices, almost never fall this far, this fast,” Larson said.

Larson said the yield on the 10-year Treasury bond plunged from a mid-October high of 4.08 percent to nearly 2.5 percent this week, “yielding lows not seen since the mid-1950s.”

“There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching,” he said.

Sal Guatieri, economist at BMO Capital Markets, acknowledged that “investors are throwing money at Uncle Sam with the same conviction that they bought houses and dot-com stocks in their heydays.”

But he argued that if inflation is quashed and investors retain confidence in the US government, the dangers have not yet hit a boiling point.

“While Treasuries may be overpriced, they probably are not yet in a bubble,” he said.

Copyrighted by the author.

After All the Volatility And All The Promise – All You Get Is A Measly 6.4%

12,463
13,264

Recognize those numbers?

I know that some of you do. And those do should be fatally disappointed with them.

Why?

Because they represent the opening and closing Dow Jones Industrial Average numbers for 2007.

2007 opened at 12,463
2007 closed at 13,264

A whopping 801 point increase for the year.

An increase of 6.4%. For the entire year. (But don’t feel so bad – the S&P 500 posted an increase of only 3.5% for the year)

That stinks. 3.5%? 6.4%? My money market account pays something close to that. Without the risk OR the volatility.

And don’t get me started again on volatility. Did you realize that during the year the Dow posted nearly a dozen days where the average dropped more than 2%? I don’t know how some investors sleep at night!

So my question to you is this. What’s your plan for 2008?

More of the same and another 3.5% or 6.4% with the sleepless nights thrown in for free?

Or are you ready for something better. A better way that’s more secure, less volatile, and with a fixed rate of return. Basically everything the Dow is not.

Isn’t finally time to look at something different?

Then why not rocket out of the gate in 2008?

Visit www.MPSG-LLC.com to learn more.

Can You Afford to Lose Any MORE Ground?

This is the performance of your retirement account while you have been investing in the stock market over the last six months. Look familiar? 

DOW - 6 months  111307.png

 

Take a closer look at the chart – over the last six months the market has been down – despite those huge peaks that you see. That means a negative ROI – and the fact that you probably lost money – and lost ground. Is this going to impact when you can retire? 

Now take a look at the chart below. This is the annual ROI that my private investors have earned since the beginning of the year. Notice any difference? The chart below kind of looks like the tortoise, doesn’t it? And the one above the hare?

 

MPSG ROI3.jpg 

My question to you is – which ROI do you think is going to come out ahead at the end of the year?

Which chart would you rather have associated with your retirement accounts?

www.MPSG-LLC.com 

 

Brace Yourselves

I have been staring is disbelief at an AP story this morning. Now I know that the AP is not up to the journalistic standards of accuracy as, say, the New York Times or the Washington Post. But the fact is their stuff gets widely distributed and widely read.

The first line is the report was:

“Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed their spending growth in September while a key gauge of factory activity flashed its weakest reading in seven months in October.”

And this is a surprise?

And the article continued:

“. . . manufacturing index dipped to 50.9 in October . . .” and “A reading below 50 indicates that manufacturing activity is contracting.”

Yeah, so? Why are you surprised by this?

And finally:

“The Federal Reserve on Wednesday cut a key interest rate for the second time in six weeks in an effort to make sure the economy does not tumble into a recession. However, the central bank also expressed concerns that surging oil prices could fan inflation pressures. Oil prices have soared to record highs in recent days.”

No s*** Sherlock.

Haven’t we been talking about this now for TWO months?

Let’s recap. Central banks around the world dump a couple of hundred billion into the economy for the SOLE purpose of propping up sagging stock markets without any concern at all about inflation. It works temporarily, then the markets get jittery again. So they dump MORE.

In the mean time, the subprime mortgage sector crashes and burns, and pretty much every financial institution tightened up on their credit criteria. This was actually a good thing, because it should have counteracted the Fed’s reckless dumping activity.

But unfortunately the Fed wasn’t done yet. Now shifting their focus from the stock market back to the economy (which by the way are two VERY different things) they decide to lower interest rates. Several times. Which counteracts the credit crunch but makes the inflation problem worse.

Do you know what the worst part is? Let me defer to the AP report again:

“The worse-than-expected economic news sent stocks lower with the Dow Jones industrial average down more than 200 points in the first hour of trading Thursday.”

So after all of the meddling, the dumping, and the interest rate monkey business, the stock market reaction is exactly OPPOSITE of what the Fed meddlers wanted.

Great. They ignore their 30+ year strategy of focusing on the economy, and start meddling to save the stock market.

And in the end they will end up tanking both the stock market and the economy.

Ok Ok We’re In a Recession Already

Now, What Are You Going to Do About It?

It looks like the rest of the country is finally waking up to the fact that yes, we really ARE in a recession in the US. A recession that is being led by the decline in real estate values. How can that be, you say. Real estate, while a large and important part of the overall economy, does NOT have the power, by itself, to drive us into a recession.

Quite right. Read on.

It’s actually not too difficult to understand how this happened. At present we have the largest economy in the world. An economy that’s fueled by consumer consumption of everything from Vente Lattes to plasma tvs to Hummers. The problem has been, though, that as a country we have been increasing our consumption and spending at a faster rate than out incomes have been rising, and so for the last decade and a half we have been funding our consumption habit by continuously borrowing against the steadily increasing value of our homes. That all works just dandy in the short term until – you guessed it – home values stop rising.

Now everything would have worked just fine if, three years or so ago when home values stopped increasing, we all stopped consuming everything in sight through the use of plastic. The problem would have worked itself out, the economy would have had, as they say, a “soft” landing. We would have had a temporary dip, recovered, and then all gone on with our lives.

But this is the US. Our national motto is “Live Beyond Your Means”. It should be on our currency.

As a real estate investor I can tell you from first hand experience that people are STILL in denial, TODAY, about the problems in the real estate market. It’s not really that these people disbelieve the evidence that’s staring them in the face. No. They believe the evidence but as a rule they ALL think that their home is the lone exception.

The net result is exactly what we’re seeing today. Consumers in denial continued to do what they do best – consume – even in the face of leveling and then declining home prices. Many thousands didn’t get religion on this until it was far too late – when they tried to refinance and couldn’t – and are now saddled not only with mortgage balances that are higher than their home values, but also piles of extraordinarily-high-interest-rate credit card debt that they have no hope of getting out from under until – you guessed right again – homes appreciate in value again.

So what we’re seeing now is the emergency brake being applied to consumption spending. This is a bad thing. For pretty much all areas of the economy.

When people stop spending, companies stop making things. When companies stop making things people then lose their jobs. And when people lose their jobs – they lose their homes. That puts an even heavier strain on a real estate market that’s already reeling from the flood of foreclosures that are clogging it up.

Just how bad is the housing market?

An article in the NY Times pointed out a couple of interesting things today:

The Joint Economic Committee of Congress predicts about two million foreclosures by the end of next year on homes purchased with subprime mortgages

There will be a decline of $917 million in lost property tax revenue to state and local governments, which will also have to spend more on policing neighborhoods with vacant homes.

In next 18 months, interest rates on more than two million homes loans will reset to higher adjustable rates.

Inventories of unsold existing homes rose last month to their highest level in almost 20 years.

So what does all of this mean? Well, it all depends on your perspective.

If you’re someone that has been living large on your home equity loan – the party’s over my friend. Best for you to sit on the sidelines – NOT consuming – and try to ride this thing out. Pay your minimum payments on all of your plastic and tread water for a while. You won’t get anywhere, but you won’t drown either. Good thing there’s a new version of Halo out.

If however, you haven’t squandered the crown jewels, then you need to jump into this real estate market TODAY. There has never been a better buyer’s market than there is right now, and the next couple of months before year-end are going to be the most extraordinary ever in the history of the area.

I’m already seeing this manifest itself on several fronts. Foreclosure Asset Management companies are more and more willing to negotiate; Short Sale Loss Mitigation Officers are calling me instead of vice versa, and what’s been most unbelievable of all – I’m now finding MLS listed properties – these are completely updated, occupied, non-foreclosure homes – at prices around where I bought foreclosures last year.

I’m negotiating one like this as we speak that, as a matter of fact, is in such good condition that I could have my renters move in the day after the current owners move out. You’ve heard about no rehab properties – this is the poster child in that it literally needs no rehab whatsoever, not even paint. AND it meets my #1 criteria for rentals – I can refi and get ALL of my money out and still have it cash flow.

You know what the best part is? I’ve found two more just like it.

This truly is a once in a lifetime opportunity to build a real estate portfolio and set yourself up financially.

What are you going to do about it? Why aren’t you already involved?

If you’re like most people in this area, like my brother, you are simply going to play turtle and bury your gold pieces in the ground like the servant in the new testament parable. When it’s all done you’ll breathe a sigh of relief that you “made it through” without losing anything.

But is playing not to lose the way to play the game of life?

I don’t think so. You don’t get ahead that way, and worst of all, you will have squandered an opportunity to see how much you could have achieved had you simply tried.

What a waste.

For those that are interested but don’t know how to get started – visit my website at www.ForeclosureConcierge.com and request my special report that will show you how.
 

Housing Cools, Inflation’s Up. See I Told You So . . . .

Two short months ago I wrote about the unbelievable action that the Federal Reserve took to prop up our sagging stock market by injecting billions of dollars into the economy, and that it didn’t take a freshman econ whiz kid to tell that this would undoubtedly lead to an increase in the inflation rate.

Strangely enough I found very few business reporters that even discussed the impact of the Fed’s foolhardy actions, and fewer still that predicted any impact at all on the inflation rate.

I found this strange, because while I may act like I’m the smartest person in the world sometimes, I know that in reality there HAS to be one or maybe two people smarter than me.

Well, maybe not.

BusinessWeek just published an article yesterday (Oct 17) titled “Housing Cools, Inflation’s Up”. Let me cut through some of the Econ-speak and relate a few excerpts for you:

  • Two economic reports released before the start of Wall Street trading Oct. 17 more or less confirmed the market’s expectations on consumer-level inflation: running ahead of the Federal Reserve’s comfort zone, and housing: still lousy
  • The report also revealed the expected September year-over-year inflation increased by 2.8%
  • We should reach a 3.5% rate in October

And on the housing market . . .

  • Housing starts plunged 10.2% in September
  • Permits fell 7.3%
    Single family starts fell 1.7% while multifamily starts were down 34.3%
  • We will continue to expect a 20% rate of decline in residential construction in both the third and fourth quarters, following the 11.8% rate of decline in the second quarter
  • We continue to expect existing home sales to fall by 3.6% in September, while new home sales fall by 5.7% in September

So let’s recap, shall we?

Inflation is spiking largely due to the two biggest expenditures that every household has – food and energy. And the housing market apparently is still declining and hasn’t hit bottom yet. All wonderful news for working households.

But the silver lining is, of course, that the Fed’s actions have cured the volatility in the stock market, right?

Nope. At least it doesn’t look that way on the charts that I’m using. They look more like an EKG chart than they did BEFORE the Fed wizards started to meddle with the money supply.

And oh by the way – one of the best indicators of the true inflation situation is the price of gold.

When I last looked today it was trading at $762 per ounce. This time last year? $590.

Your tax dollars at work.