At some point I would think, the Fed will have to launch a defense of the dollar,
How ??? would they buy dollars (with what ???)
Would the raise interest rates and crash the economy ????
At this point they may as well raise interest rates , subprime is dead and houses are too expensive (at least in So-Cal) for the average (joe/jane) to buy at any interest rate anymore.
The Fed is under no obligation to to protect the value of the dollar. The Fed has two mandates:
1. Full Employment
2. Price Stability
The value of the currency only affects #2 negatively if the currency is falling fast enough to cause import prices to drive inflation. And since China is still quasi pegged to the dollar that's not happening as much as you would expect.
Actually, I'd argue that the Fed has failed miserably at "price stability." Although it has been magnificent at playing the game of "the marketing of the appearance of price stability." Anyone who believes the government's CPI stats with their "rental equivalents" and "substitution effects" is a nutjob. Inflation's gotta be running at least 2 percentage points above what the govies are reporting to us. See John Williams' Shadow Statistics for the details...
Submitted by patientrenter on July 23, 2007 - 9:42pm.
SD_R, I am looking forward to some pros surfacing to weigh in on this.
Chris, are you in the interest rate business? I haven't gone through all the archives, but I would have guessed you played mostly with your own money, and across multiple asset classes, mostly equities. Maybe I'm muddling the posts.
I'm no good at predicting it either. However, it is following the same pattern as last year, skyrocked above 5 Junish and came back down end of summer/fall. If last years pattern is somewhat of a predictor you may see it get close to the 4.6...
The "flight to quality" from CMO and junk bonds has increased demand for US Treasuries. Are mortgage rates decreasing in response? Is the "subprime slime" making mortgages more affordable?
Submitted by patientrenter on July 24, 2007 - 12:30am.
SDR, have rates come down for fixed rate conforming loans only, or for other loans too?
What I'm thinking is that spreads over Treasuries are widening for bonds with credit risk. Bonds issued by the quasi-government agencies (FNMA, Freddie..) are thought to be essentially risk-free, so their rates should have gone down with Treasuries, making it possible to lower rates on the mortgages they buy. Rates on loans that can't be sold to the agencies would have gone up, I would have guessed, especially for the riskier types of these loans.
I don't follow home loan types and rates. Are some home loan rates going down, and some up? I am guessing that risk-free interest rates might go down a little (or just stay level for a while) while riskier rates climb, and this should flow through to home loans.
Countrywide profit falls 33 pct, slashes outlook
Tuesday July 24, 8:27 am ET
NEW YORK (Reuters) - Countrywide Financial Corp (NYSE:CFC - News), the largest U.S. mortgage lender, on Tuesday reported a 33 percent decline in second-quarter profit and slashed its full-year earnings forecast, citing a difficult housing market.
Sorry I could not comment on this yesterday, for some reason I was blocked from this thread. As I think predicted in the thread at the beginning of the year about going on the record with predictions, I think Bond prices will rally in the 2nd half of the year ( rates will drop ). Even if I did not do it there, I wrote about it in my newsletter ( no I am not hawking the newsletter, just stating that I am officially on the record on this subject in it ), and also told Adam during my home purchase process, that I thought rates would rise into June, then decline. This is one of the most consistent seasonal patterns in the markets, rate rise through June, then decline through the end of the year. It is tracking almost to the week so far this year, so I expect it to continue.
Patient Renter, to answer your question, I mostly trade the futures markets, Bonds and S&P. I do trade stocks as well, but normally hold them for 6 months or so, whereas the futures I trade much more actively. I have commented alot on stocks this year, due to the strong trend in the markets that I saw people fighting, and it was my attempt to try and dissuade people from doing that. I have officially dropped that campaign, as it is hopeless. I have learned that lesson the hard way in my career, and I thought I might be able to spare some people the heartache, but it did not work.
I thought I heard BIG Ben say that Inflation was his primary concern, and isnt there a direct correlation between the devaluation of the dollar and inflation?
Submitted by SD Realtor on July 24, 2007 - 9:01am.
Thanks for posting Chris!
pr - Yes the rates have come down for conforming loans. In general all mortgage rates will follow the long bond yields, however all programs will build a premium in as an offset to risk. Loans that cannot be sold will eventually go away and not be offered. If a lender cannot make money on a loan then that lender goes out of business unless servicing a loan is part of their business model.
I would have to disagree with that. The Fed is heavily obligated to control not the price but the stability of the dollar. Right now the DX is at 80.08 and falling. There is a serious breaking point at 80.00 and the dollar would likely spiral out of control if it breaks 80 causing a whole host of problems including hyperinflation, real interest rate increase on a large scale and a depression the likes of which has never been seen. Controlling stability of the currency is likely the Fed's top priority unless they want to see equity's tank and revolution to occur.
I am very freaked out about interest rates, thought they would go much higher, but now am convinced that they will stay stable or possibly go lower (but not by much).
That said my broker, with my permission, took 40% of my money and bought tax free municipal bonds. He wants to lock in revenue for me - seems to make sense. Since selling my company, I have had all the money in cash and some treasuries at Merrill Lynch. I expect some more cash over the next year or two which will make my bonds 1/3rd of the portfolio.
Does anyone see any dangers with the economy on this strategy? I wish I had put my money where my mouth was on the housing bad news, I have very little experience investing even though I understand finance to a reasonable extent.
It might be that the upward stock trend will hold. My big picture system is nowhere near a sell signal yet as I thought it would be by August 1st. The commercials are very heavily long at this point, which is very bullish. Also, the bond market rally if it continues, is supportive of stock prices. Maybe the PPT will hold stocks up for awhile until the RE mess calms down a bit.
Also, although an intangible, there seems to be alot of negative news out there, which is typically not what surfaces at market tops.
Boeing, which is one of my core stocks I bought in April, just made new all time highs today, so things are still ok for alot of the big caps. I like the boring steady companies, not the high fliers.
Submitted by SD Realtor on July 25, 2007 - 2:05pm.
Cyphire - It sounds to me like you have done well with your money. I have been working in a similar manner with the whopping majority of my money in money/markets, and CDs and a small percentage in some stocks. I have lots of wishes while reading about all the people making money on shorts and such. One thing that always makes me feel better is when old Ray Lucia says that one of the objectives of making money is not losing the money you have. Anyways the bond rally could be a harbinger of thoughts that yes a recession will be coming thus locking in rates now is not a bad idea. I don't really know as I am nowhere near being an expert. If your broker has done well for you in the past I doubt there is a reason to question his judgement now.
Submitted by patientrenter on July 25, 2007 - 10:44pm.
Cyphire, I too am looking to ensure a source of future revenue.
During the last 1 1/2 years, I've used money market and short bond funds (mostly munis) to build a diversified portfolio of about 40 foreign and domestic dividend-paying stocks across a variety of industries. My average dividend yield is about 4%. I don't know if the dividend income will tank with a recession, or lag inflation over the long haul, but I felt it was more likely to keep up with inflation or incomes over the very long haul than investing in munis.
I don't see a lot of good buys right now. Since January, I've been planning to use JPY/USD futures to buy yen. It seems the yen is a good long-term store of value, so I'm prepared to spend some carry cost money to diversify into it. If the dollar tanks because of inflation, I'll be hedged by my yen holdings. If the dollar holds up, then my stocks are probably doing well to offset the yen carry costs.
If I were in your shoes, I wouldn't be excited about buying a lot of stocks or other assets at today's very high prices. But I'd buy a few. And I'd buy a bunch of undervalued currencies (measured by PPP and a few other measures) until I saw a better buying opportunity elsewhere in the future.
Submitted by patientrenter on July 28, 2007 - 8:26pm.
SDR, Here's a relevant recent post on Calculated Risk:
"US Treasury yields declined last week in a “flight to quality” but this is not a new bull market for bonds. Credit spreads (junk bonds) are getting crushed as spreads widen. Investors are trying to unload junk bonds bought over the past few years as credit spreads tightened. Hedge funds long junk bonds and short US Treasuries are forced to cover, which exaggerates the situation. This includes structures that may include those “subprime” mortgage backed securities. The best way to illustrate is to consider 10-Year Swaps and 10-Year Fannie Mae debentures. The 10-Year Swap Spread ended last week at 75.8 basis points wider than the 10-Year, 28 basis points wider year to date. The FNMA 10-Year ended last week at 65.4 basis points wider than the 10-Year, 36.3 basis points wider on the year. Given these comparisons the lower 10-Year yield is not resulting in lower mortgage rates.
DH | 07.28.07 - 10:52 pm | #
Submitted by SD Realtor on July 28, 2007 - 10:29pm.
Arraya I know I have been watching it like a hawk.
PR I read caculated risk. Last week I posted a somewhat pertinent post "SD Realtor eats crow" where I in not such a clear way voiced my concern that the 10 yr yield was not as correlated to long term mortgages anymore because of the secondary market. Still though I did speak to a very close broker friend of mine and she did say that for very solid loans, under the conforming limit, very high credit score, full doc, strong ratios, etc... the rates have indeed dropped. I confirmed this with another broker. Still I kind of think they are blowing smoke.
The flight to quality though is quite interesting. No I would not call it a bond rally but man... it has been quite a little notch.
Nor_LA-Temcu-SD-Guy
At some point I would think, the Fed will have to launch a defense of the dollar,
How ??? would they buy dollars (with what ???)
Would the raise interest rates and crash the economy ????
At this point they may as well raise interest rates , subprime is dead and houses are too expensive (at least in So-Cal) for the average (joe/jane) to buy at any interest rate anymore.
The Fed is under no obligation to to protect the value of the dollar. The Fed has two mandates:
1. Full Employment
2. Price Stability
The value of the currency only affects #2 negatively if the currency is falling fast enough to cause import prices to drive inflation. And since China is still quasi pegged to the dollar that's not happening as much as you would expect.
Actually, I'd argue that the Fed has failed miserably at "price stability." Although it has been magnificent at playing the game of "the marketing of the appearance of price stability." Anyone who believes the government's CPI stats with their "rental equivalents" and "substitution effects" is a nutjob. Inflation's gotta be running at least 2 percentage points above what the govies are reporting to us. See John Williams' Shadow Statistics for the details...
SD_R, I am looking forward to some pros surfacing to weigh in on this.
Chris, are you in the interest rate business? I haven't gone through all the archives, but I would have guessed you played mostly with your own money, and across multiple asset classes, mostly equities. Maybe I'm muddling the posts.
Patient renter in OC
I'm no good at predicting it either. However, it is following the same pattern as last year, skyrocked above 5 Junish and came back down end of summer/fall. If last years pattern is somewhat of a predictor you may see it get close to the 4.6...
The "flight to quality" from CMO and junk bonds has increased demand for US Treasuries. Are mortgage rates decreasing in response? Is the "subprime slime" making mortgages more affordable?
Hi Arraya that is what I am thinking. The key will be how long it stays there assuming it does get to that point.
Yes Herewego rates have tracked treasuries and started to fall slightly.
SD Realtor
SDR, have rates come down for fixed rate conforming loans only, or for other loans too?
What I'm thinking is that spreads over Treasuries are widening for bonds with credit risk. Bonds issued by the quasi-government agencies (FNMA, Freddie..) are thought to be essentially risk-free, so their rates should have gone down with Treasuries, making it possible to lower rates on the mortgages they buy. Rates on loans that can't be sold to the agencies would have gone up, I would have guessed, especially for the riskier types of these loans.
I don't follow home loan types and rates. Are some home loan rates going down, and some up? I am guessing that risk-free interest rates might go down a little (or just stay level for a while) while riskier rates climb, and this should flow through to home loans.
Patient renter in OC
Speaking of mortgages
Countrywide profit falls 33 pct, slashes outlook
Tuesday July 24, 8:27 am ET
NEW YORK (Reuters) - Countrywide Financial Corp (NYSE:CFC - News), the largest U.S. mortgage lender, on Tuesday reported a 33 percent decline in second-quarter profit and slashed its full-year earnings forecast, citing a difficult housing market.
Adam,
Sorry I could not comment on this yesterday, for some reason I was blocked from this thread. As I think predicted in the thread at the beginning of the year about going on the record with predictions, I think Bond prices will rally in the 2nd half of the year ( rates will drop ). Even if I did not do it there, I wrote about it in my newsletter ( no I am not hawking the newsletter, just stating that I am officially on the record on this subject in it ), and also told Adam during my home purchase process, that I thought rates would rise into June, then decline. This is one of the most consistent seasonal patterns in the markets, rate rise through June, then decline through the end of the year. It is tracking almost to the week so far this year, so I expect it to continue.
Patient Renter, to answer your question, I mostly trade the futures markets, Bonds and S&P. I do trade stocks as well, but normally hold them for 6 months or so, whereas the futures I trade much more actively. I have commented alot on stocks this year, due to the strong trend in the markets that I saw people fighting, and it was my attempt to try and dissuade people from doing that. I have officially dropped that campaign, as it is hopeless. I have learned that lesson the hard way in my career, and I thought I might be able to spare some people the heartache, but it did not work.
I thought I heard BIG Ben say that Inflation was his primary concern, and isnt there a direct correlation between the devaluation of the dollar and inflation?
"Isnt there a direct correlation between the devaluation of the dollar and inflation?"
Only in the stuff you need to live, ie.. (Food, Gas, Health care, cost of buying a house etc...) But it's not core !!! as Ben would say..
Thanks for posting Chris!
pr - Yes the rates have come down for conforming loans. In general all mortgage rates will follow the long bond yields, however all programs will build a premium in as an offset to risk. Loans that cannot be sold will eventually go away and not be offered. If a lender cannot make money on a loan then that lender goes out of business unless servicing a loan is part of their business model.
SD Realtor
Chris,
"strong trend in the markets"
What trend(s) do you see in the second half ???
I think the LBO stuff is almost dead as well now.
I would have to disagree with that. The Fed is heavily obligated to control not the price but the stability of the dollar. Right now the DX is at 80.08 and falling. There is a serious breaking point at 80.00 and the dollar would likely spiral out of control if it breaks 80 causing a whole host of problems including hyperinflation, real interest rate increase on a large scale and a depression the likes of which has never been seen. Controlling stability of the currency is likely the Fed's top priority unless they want to see equity's tank and revolution to occur.
capeman
I think the DX hit 72.xx this morning (new Low to the euro) but maybe I am reading it wrong (no finance expert here).
But it's good to be Australian these days ...
I am very freaked out about interest rates, thought they would go much higher, but now am convinced that they will stay stable or possibly go lower (but not by much).
That said my broker, with my permission, took 40% of my money and bought tax free municipal bonds. He wants to lock in revenue for me - seems to make sense. Since selling my company, I have had all the money in cash and some treasuries at Merrill Lynch. I expect some more cash over the next year or two which will make my bonds 1/3rd of the portfolio.
Does anyone see any dangers with the economy on this strategy? I wish I had put my money where my mouth was on the housing bad news, I have very little experience investing even though I understand finance to a reasonable extent.
Nor - La
It might be that the upward stock trend will hold. My big picture system is nowhere near a sell signal yet as I thought it would be by August 1st. The commercials are very heavily long at this point, which is very bullish. Also, the bond market rally if it continues, is supportive of stock prices. Maybe the PPT will hold stocks up for awhile until the RE mess calms down a bit.
Also, although an intangible, there seems to be alot of negative news out there, which is typically not what surfaces at market tops.
Boeing, which is one of my core stocks I bought in April, just made new all time highs today, so things are still ok for alot of the big caps. I like the boring steady companies, not the high fliers.
Cyphire - It sounds to me like you have done well with your money. I have been working in a similar manner with the whopping majority of my money in money/markets, and CDs and a small percentage in some stocks. I have lots of wishes while reading about all the people making money on shorts and such. One thing that always makes me feel better is when old Ray Lucia says that one of the objectives of making money is not losing the money you have. Anyways the bond rally could be a harbinger of thoughts that yes a recession will be coming thus locking in rates now is not a bad idea. I don't really know as I am nowhere near being an expert. If your broker has done well for you in the past I doubt there is a reason to question his judgement now.
SD Realtor
Cyphire, I too am looking to ensure a source of future revenue.
During the last 1 1/2 years, I've used money market and short bond funds (mostly munis) to build a diversified portfolio of about 40 foreign and domestic dividend-paying stocks across a variety of industries. My average dividend yield is about 4%. I don't know if the dividend income will tank with a recession, or lag inflation over the long haul, but I felt it was more likely to keep up with inflation or incomes over the very long haul than investing in munis.
I don't see a lot of good buys right now. Since January, I've been planning to use JPY/USD futures to buy yen. It seems the yen is a good long-term store of value, so I'm prepared to spend some carry cost money to diversify into it. If the dollar tanks because of inflation, I'll be hedged by my yen holdings. If the dollar holds up, then my stocks are probably doing well to offset the yen carry costs.
If I were in your shoes, I wouldn't be excited about buying a lot of stocks or other assets at today's very high prices. But I'd buy a few. And I'd buy a bunch of undervalued currencies (measured by PPP and a few other measures) until I saw a better buying opportunity elsewhere in the future.
Patient renter in OC
Getting close to the 4.6 SD R. We are at 4.8 today!
SDR, Here's a relevant recent post on Calculated Risk:
"US Treasury yields declined last week in a “flight to quality” but this is not a new bull market for bonds. Credit spreads (junk bonds) are getting crushed as spreads widen. Investors are trying to unload junk bonds bought over the past few years as credit spreads tightened. Hedge funds long junk bonds and short US Treasuries are forced to cover, which exaggerates the situation. This includes structures that may include those “subprime” mortgage backed securities. The best way to illustrate is to consider 10-Year Swaps and 10-Year Fannie Mae debentures. The 10-Year Swap Spread ended last week at 75.8 basis points wider than the 10-Year, 28 basis points wider year to date. The FNMA 10-Year ended last week at 65.4 basis points wider than the 10-Year, 36.3 basis points wider on the year. Given these comparisons the lower 10-Year yield is not resulting in lower mortgage rates.
DH | 07.28.07 - 10:52 pm | #
Patient renter in OC
Arraya I know I have been watching it like a hawk.
PR I read caculated risk. Last week I posted a somewhat pertinent post "SD Realtor eats crow" where I in not such a clear way voiced my concern that the 10 yr yield was not as correlated to long term mortgages anymore because of the secondary market. Still though I did speak to a very close broker friend of mine and she did say that for very solid loans, under the conforming limit, very high credit score, full doc, strong ratios, etc... the rates have indeed dropped. I confirmed this with another broker. Still I kind of think they are blowing smoke.
The flight to quality though is quite interesting. No I would not call it a bond rally but man... it has been quite a little notch.
Guess we will see what transpires.
SD Realtor