Saturday, January 16, 2010

Impact of Falling Dollar on Your Financial Future (Part 2)

Please make sure to read Part 1 first.

Here’s the link…
http://mirro7.blogspot.com/2009/11/impact-of-falling-dollar-on-your.html

There are four basic things to watch to get a feel for the direction of our equity markets in the year 2010.

This may be an oversimplified approach to tracking economic and business trends for an investor who drives his income from the equity markets. It has worked well in the past to keep me on the right side of the market [bullish or bearish] most of the time.  However, there are several other weekly and monthly economic indicators that you may want to look at… if you are a trader with a shorter investment time span.

DOLLAR:
If the dollar rallies, the markets will pull back? And it certainly seems that that way if you are watching CNN or Bloomberg?

Over the long term, the dollar may go lower… and the markets may rally, assuming the interest rates don’t go thru the roof. However, dollar is currently very much oversold, and as a minimum the US dollar is due for some type of short-term bounce.

INTEREST RATES:
If the interest rates start to increase, the markets will pull back?

Fed Chairman Ben Bernanke has been dropping hints recently that rates could go up later this year. The Federal Reserve Bank has [recently] been reducing its purchases of mortgage-backed securities from Fannie Mae and Freddie Mac, and has not said it will extend those purchases past the end of March. Those purchases have kept interest rates artificially low for months.

Look for interest rates to rise, not only after the end of March, but possibly even before then in anticipation of an end to those purchases.

REAL ESTATE:
In recent news, the American Bankers Association reported that while delinquencies on consumer loans have been falling recently… the delinquencies on home-equity loans are continuing to rise, due to unemployment and underemployment.

The delinquency rate for home-equity loans (fixed) as of the third quarter of 2009 was 4.3%. For home-equity lines of credit (variable rates), the delinquency rate was 2.12%.

Both of these delinquency rates are now all-time records.

Now another report from Fitch Ratings states that 9.2% of all prime jumbo loans (conventional loans over $417,000) are now delinquent. These are the types of mortgages that one would least expect to be in default.

However, residential properties are not the only problematic areas. Delinquencies on commercial mortgage-backed securities reached an all-time high of 6.07% in December, with hotel delinquencies up almost 900% to an astounding 14% rate.

All of these delinquents threaten to further depress both residential and commercial property values nationwide.

December brought an unexpected drop in pending home sales. This seemed to indicate that buyers were in no rush to buy, following the government's decision to extend the first-time homebuyer tax credit through April 30, 2010.

However, December 2009 closed sales (the only kind that count) were once again stronger than the previous year's same-month total, capping off a year that was far superior to 2008 in closed sales. This positive trend is likely to continue at least through April, which is when the $8,000 first-time homebuyer tax credit will end… assuming it is not extended again.

So if you are planning on selling your home in 2010, I suggest that you get it on the market within the next month or two!

MORTGAGES:
Mortgage rates have been on the increase during the past two months, and the 30-year rate has once again moved above 5%. Fifteen-year fixed rates hover around 4.6%.

Adjustable-rate mortgages remain low (around 4.3%), and will probably continue to be that way until at least the second half of 2010, as the Federal Open Market Committee does not appear eager just yet to raise its overnight target rate.

The Federal Reserve has recently been reducing its purchases of mortgage-backed securities from Fannie Mae and Freddie Mac, and has not said it will extend those purchases past the end of March. Those purchases have kept interest rates artificially low for months.

Look for mortgage and home equity loan interest rates to rise, not only after the end of March, but possibly even before then in anticipation of an end to those purchases.

I hope it helps understand what we are up against in 2010.

Anant Goel
http://www.wealthbyoptions.com/