As we are now in an official bear market, as far as the stock market is concerned, gloom and doom should abound. During such periods savvy investors also seem to find great buying opportunities. Those investors generally recognize that one will probably not spot the exact bottom, so a steady investment program would allow for the concept of “dollar cost averaging” to even out the cost of an investment around the bottom price. On the real estate front the numbers of houses sold are edging up, prices are still declining  but at a slower rate, there appears to be great interest in buying distressed portfolios of both debt and real estate and Bank of America has closed on its acquisition of Countrywide, the nation’s largest mortgage originator. There is clearly a light at the end of the tunnel and it does not look or sound like an oncoming train.

 

IT IS easy to understand why bond markets are vulnerable to inflation, since the value of most bonds is fixed in nominal terms. But the remarkable thing about the inflation scare is that it has left them virtually unscathed.

The yield on America’s ten-year Treasury bond finished June where it started in January, at around 4%. Perversely, bond markets have held up so well, it seems, because investors have perceived them as being low-risk. Instead, they have taken out their fears on the stockmarket.

At first blush, shares ought to be a good hedge against inflationary pressures. After all, inflation is a rise in the price of goods and services, and businesses make those goods and services. Their revenues should thus keep pace in real terms. In the jargon, equities are a real asset and bonds a nominal one.

In the long bull market from 1982 to 2000, stockmarket investors enjoyed the twin pleasures of soaring profits and expanding p/e multiples, which culminated in the dotcom bubble. But when the stockmarket rallied from 2003 to 2007, it was because of profits growth rather than a 1990s-style surge in multiples.

That could be a source of comfort. On the basis of trailing p/e ratios, shares look a lot more attractively valued than they did in 2000. (Much better to look at trailing, rather than prospective, earnings, because profit forecasts are still ludicrously high—investors are expecting a 20% rise in American earnings next year, according to Dresdner Kleinwort.)

But the problem is not the ratios; it is the earnings. If profits fall as a share of GDP all the way back to their 1982 low, or even to their 2001 nadir, share prices will suffer. Valuation measures that adjust for this, by using a ten-year average of profits, make shares look a lot less appealing.

Figures from HSBC show that the “sweet spot” for the stockmarket is when inflation is between 2% and 4%. When inflation falls out of the bottom end of that range, the economy is normally flirting with recession and deflation. When inflation rises above 4%, and particularly when it reaches 6%, stockmarket valuations start to deteriorate sharply.

For the entire article from THE ECONOMIST click here:

Rates on 30-year fixed mortgages fell for the first time in three weeks after the Federal Reserve said last week that it expects inflation to level off, according to mortgage backer Freddie Mac.

Freddie Mac said that 30-year fixed-rate mortgages averaged 6.35% with an average 0.6 point in the week ending Thursday, down from 6.45% last week. Last year at this time, the 30-year loan averaged 6.63%.

"Mortgage rates reversed their three-week rise, falling this week after the release of the latest Federal Reserve's policy statement that it expects inflation to moderate later this year," said Frank Nothaft, Freddie Mac vice president and chief economist, in a statement. That led to market participants lowering their expectations about future rate hikes, he explained.

Last week, the Federal Reserve left its key short-term interest rate unchanged at 2%. For the previous nine months, however, the Fed had cut interest rates seven times. In the written statement released by the central bank at the time of the announcement, the Fed said it expects inflationary pressures to ease later this year, although it remains concerned about increasing oil and commodity prices.

The 15-year fixed rate mortgage this week averaged 5.92% with an average 0.6 point, down from last week when it averaged 6.04%. A year ago at this time, the 15-year fixed rate mortgage averaged 6.30%.

Five-year adjustable-rate mortgages (ARMs) averaged 5.78% this week, with an average 0.7 point, down from last week when it averaged 5.99%. A year ago, the 5-year ARM averaged 6.29%.

 

 

Copyright © 2008 Mortgage-X.com
Source: www.mortgage-x.com
Reprinted with permission

For the entire article from CNNMoney click here:

Many U.S. cities where home values have taken a double-digit drop have seen their sales rise by a similar measure as foreclosed homes -- usually a sign of market distress -- are sold off at a discount, paving the way for a recovery.

Many homes in such regions were seized by banks and are, in industry jargon, 'real estate owned' or REO properties that have had their prices slashed when put back on the market.

"In this market, there are so many REOs that the banks are getting their clocks cleaned," said Mark Partipilo, a prospective Las Vegas real estate investor.

On a tour of the brown lawns and bare windows of foreclosed properties in southern Nevada, Partipilo said he smelled opportunity.

"This might not be the bottom, but waiting six months might be too late," said the 36-year-old Chicago native. A deep nationwide downturn in sales, prices and housing construction has pushed the economy toward recession. However, some hard-hit cities are now seeing a strange whiplash of sinking values and rising sales.

Deflated prices are enticing first-time buyers and investors who want to pick over homes on which banks are willing -- if somewhat reluctantly -- to take a loss in a 'distress sale'.

Home prices have fallen at least 15 percent from a year ago while sales have seen an uptick of more than 20 percent in Las Vegas and Ft. Myers as well as in Riverside, California which also tasted housing boom and bust.

Around Riverside, single-family home prices are off 35 percent in May from their year-ago levels while the sales pace is up 79 percent. Local agents say almost all of those sales are REO.

"Everybody thinks bank-owned properties are the best deals," said Gene Wunderlich, the head of a local real estate agent trade group. "If you are not buying REO properties, you are probably not buying anything at all."

Ironically, such housing markets may now be primed for a recovery.

"Markets where a large share of homes are heavily discounted because of REO sales, they may be seeing a bottom," said Cynthia Kroll, an economist and real estate market scholar at the University of California, Berkeley.

We are clearing out some inventory," she said. "When these REOs get sold, then people can start selling their own homes."

In a normal market, real estate brokers would turn their backs on the red tape, uncertainty and lower margins of a forced sale but today, such transactions are bread and butter for many agents.

One-third of homes on the market in Ft. Myers are priced below their last sales price, meaning lenders will take a loss in a 'short sale' or else push the home into a costly foreclosure.

"Three years ago there was no such thing as a short sale in this market," said Grimes.

For the entire article from CNBC click here:

THEY rarely ring a bell at the bottom of bear markets. Investors who thought they had heard a tinkling sound when Bear Stearns, a failing American investment bank, was bundled into JPMorgan Chase in March have been disappointed. The Dow Jones Industrial Average is now weaker than it was in the spring.

The American stockmarket had its worst month since 2002 in June and is now down more than 20% from its peak, the definition of a bear market. It is not alone. According to Standard & Poor’s, a rating agency, the value of global stockmarkets fell by $3 trillion during the month, thanks in particular to a 10% decline in emerging markets.

Share prices are suffering because of the outlook for four forces that impel stockmarkets: economic growth, profits growth, interest rates and inflation. At the moment, the first two seem to be slowing while the last two are rising. That is the worst possible combination.

It looks like a lengthy period of gloom is in store for the stockmarkets. Meanwhile, the best investors can do is hope, Micawber-like, that something will turn up. A collapse in oil prices would help.

For the entire article from THE ECONOMIST click here:

In a case of the pot calling the kettle black, the U.S. Federal Reserve, the European Central Bank and the Bank of England are telling their developing-country counterparts to get their respective economic houses in order and do something about growing inflationary pressures.

``In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability,'' Fed Vice Chairman Donald Kohn said last week.

China is growing at an annualized 10.6 percent; India is chugging along at 8.8 percent; and Taiwan's gross domestic product is expanding 6.1 percent, while the economies of Thailand, Malaysia, Singapore and Hong Kong are advancing between 6 percent and 7.1 percent a year.

No doubt, this fast growth is contributing to global inflation. Food and energy prices, which account for a much bigger share of developing-country consumer spending than in industrialized nations, are soaring. Crude oil for future delivery climbed to a record $1.4585 on July 3, while corn futures reached a record $7.99 a bushel on June 27.

Developing countries are notoriously inefficient users of energy, and many subsidize gasoline and other commodities, preventing higher prices from deterring consumption.

`Totally Unsuited'

What's more, many Asian countries pursue export-oriented growth strategies, a key feature of which involves directly or indirectly linking their currencies to the dollar. Because oil is priced in dollars, Middle East petroleum exporters do likewise.

``By maintaining too tight a peg to the dollar, some countries are led to largely `import' the U.S. monetary policy, which is often totally unsuited to their economic situation,'' said Christian Noyer, the Bank of France's governor and a member of the ECB's governing council. ``This situation may result in inflationary pressures that are difficult to contain, which then tend to spread to the rest of the world.''

Bank of England Governor Mervyn King added that ``monetary policy looks, on average, a little lax'' around the world.

Still, look at who is doing the lecturing. After cutting its key federal-funds rate seven times in as many months, the Fed finds itself battling 4.2 percent inflation with a 2 percent benchmark interest rate.

The ECB yesterday increased its benchmark lending rate a quarter-point to 4.25 percent. Even so, it had kept that rate at 4 percent for 13 months, while inflation in the 15-country euro area accelerated from 1.9 percent to 4 percent, a 16-year high.

Meanwhile, King last month wrote a letter to Chancellor of the Exchequer Alistair Darling, saying the U.K.'s 3.3 percent inflation rate -- already above the bank's 2 percent target -- was headed for 4 percent.

Maybe the big boys should learn that responsibility, like charity, begins at home.

For the entire article from BLOOMBERG NEWS click here:

Even by their usual standards of unpredictability, asset markets have had a funny 12 months. Since the credit squeeze began shares have fallen and then rallied, fallen and then rallied, even as economic shocks have rocked the world. But now the cracks are showing. Asset price falls this week suggest that the chance of a global economic slowdown has risen.

US and European stock markets have had a bad week and so have indices that measure the risk of corporations defaulting on their debt.

Even more striking, however, are falls in assets that were supposed to be insulated. Once high-flying Chinese and Indian shares have all but halved from their highs of last year. The price of chartering a cargo ship has fallen – a lot. The share prices of many mining companies, which have done well out of the commodities boom, are well off their peaks.

The markets are no longer just reflecting trouble in the US housing market and financial instruments relating to it. These falls are consistent with a global slowdown broad enough to reduce demand for energy and for Chinese exports. Two forces may bring that about: the credit squeeze, which has not abated, and the soaring price of oil.

Credit markets have quietened but they are not fixed. The premium that banks pay to borrow from each other is not at a “crisis” peak like those of September and December last year, but it is still exceptionally high. The market for bonds backed by mortgages is still closed and, unlike six months ago, there is no chance of a rapid recovery. Confidence in these assets has been so destroyed that it will take years to rebuild, if it can be rebuilt at all.

Investors, therefore, must continue to reduce their leverage. Many who borrowed cheap and used the money to buy a portfolio of property, bonds or more exotic investments will find that they cannot refinance their debt and still make a profit. Some will have to sell and that will put further pressure on the price of a range of assets.

Oil, meanwhile, is one commodity that has not shown the slightest weakness in price. Oil at $146 a barrel will have dramatic economic effects. It will depress profitability across a host of industries, from obvious examples such as airlines to retailers and leisure companies affected by lower consumer spending. Much capital – old aircraft, cars and machinery – will have to be scrapped. Oil importers will have to export more and consume less.

The economic adjustment may be achieved only through a long period of slow growth. In that scenario, with property and shares still highly valued compared with their historic averages, prices will probably fall further. Cheaper assets are an opportunity for long-term investors, but there will be much pain as well.

For the entire article from THE FINANCIAL TIMES click here:

In celebrating America’s birthday at a time when economic pressures abound it is worthwhile considering our blessings which are highlighted if the world’s population were reduced to 100 people:

There would be:

• 57 Asians
• 21 Europeans
• 14 from the Western Hemisphere, both North and South
• 8 Africans
• 70 would be non-Christian and 30 Christians
• 6 people will possess 59% of the entire world’s wealth and all six would be from the USA.
• 80 would live in substandard housing
• 70 would be unable to read
• 50 would suffer from malnutrition
• 1 would own a computer

Source www.snopes.com

 

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