Over the past decade, as interest rates declined, some homebuyers gravitated towards interest-only loans. However, times are changing, and borrowers should be careful in considering this kind of mortgage loan. During the past two years, many financial lenders have tightened credit standards across most loan types. The combination of the Coronavirus pandemic, supply shortages, inflation and the impact of the Ukraine war has created a drag on the U.S. economy. A slowing economy increases the risks of lending, thus tighter standards emerge. Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most mortgages, exclude interest-only mortgages. And while…
Insights & Advice
The Retired Advisor
Investors prepare for the Fed
Investors are preparing for the Federal Open Market Committee (FOMC) scheduled for Wednesday, May 3-4, 2022. Stocks have been sold down to a level that may have discounted some of the bad news most expect. Is it enough? Could a couple of days around May 4th see a re-test of this year’s lows? It depends on how hawkish the Fed is prepared to be. Expectations are now for a 50-basis point hike in the week ahead, and two more in the next two monthly meetings. The markets are also expecting a substantial reduction in the Fed’s multi-trillion-dollar balance sheet. That…
Does this look smaller to you? Shrinkflation is here.
By now, you may have noticed that something doesn’t look quite right on your grocery shelves. Could it be that bag of chips, or maybe that roll of toilet paper, seems to have shrunk? Let me assure you it is not your eyes; we have all come down with a bad case of shrinkflation. Shrinkflation is an actual term, according to Wikipedia, which means “a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold.” I must admit that, until recently, the…
Earnings matter, but the Fed trumps everything
The first quarter 2022 earnings season kicked off this week with mixed results. Thus far, the standouts were Netflix and Tesla. The two companies’ results could not have been more different, but in the end it didn’t matter. Netflix disappointed, reporting its first loss in subscribers in recent memory, while investors were expecting a gain in subscriber growth. There were many reasons for this including the loss of 700,000 Russian customers as a result of the Ukraine War. At last count, the stock lost 37% of its worth in three days and took the NASDAQ index down along with it….
The U.S. dollar hits two-year highs
The Federal Reserve Bank’s tightening of monetary policy has driven up interest rates, while causing investors to sell stocks. It has had another impact—a steep rise in the U.S. dollar. The U.S. bond market has already priced in a 96% chance of a 50-basis-point rise in the Federal funds rate at the next FOMC meeting in May 2022. The fixed income markets are expecting a cumulative 2.15% rise in interest rates by the end of 2022. In the meantime, the U.S. 10-year Treasury yield hit 2.90% this week on its way to 3%. As interest rates continue to rise, so…
Food, famine, and global unrest
More than a decade ago, the Arab Spring roiled the Middle East from Tunisia to Egypt to Yemen. Massive protests demanding freedom, equality and bread were met with repression and conflict. Could today’s growing scarcity of food spark another Spring of discontentment? The origins of the name “Spring,” whether Arab or otherwise, was a term historians used to describe the Revolutions of 1848, known as the “People’s Spring.” It was a series of upheavals that swept through Europe at that time. Republican revolts took place first in Sicily, spreading to France, Germany, Italy, and the Austrian Empire. They all ended…
The Fed tightens further
It is called “Quantitative Tightening,” or QT, a term used to describe how momentary authorities are planning to shrink an $8.9 trillion balance sheet. The U.S. Federal Reserve is the only central bank in the world (and in history) that has attempted to implement a reduction in assets. The first time they tried, things did not go so well. “Quantitative Easing,” or QE, may be a more familiar concept to readers since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance…
A new defense stock cycle
Defense stocks have soared since the outset of the Ukraine-Russia conflict. That is a typical reaction to geopolitical strife. Frequently, investors bid up the sector only to sell these stocks once peace returns. This time may be different. Vladimir Putin has put the world, and specifically Europe, on notice that he is bound and determined to resurrect the formal might of the USSR, no matter how long it takes. His actions have caused a sea of change in Europe’s decades-long freeze on defense spending. Germany is a prime example of what analysts believe will be the beginning of a new…
Markets are too frothy
Speculation is not quite rampant but it’s getting there. Volume is trailing off and the short covering that has boosted this market higher is fizzling. These are signs that beg for a nice sharp pull back that is overdue. As I have been suggesting (hoping) over the last two weeks, negotiators from Russia and Ukraine are making progress. Investors are beginning to hear more positive statements from both sides. A combination of factors are pressuring negotiators to cut a deal that would be acceptable to both heads of state. I expect that to happen soon. Remember that we are now…
Housing headwinds
The red-hot housing market is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place. The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000. This year, demand for housing will remain…
Markets needs to consolidate
Commodities continue to run. Interest rates are hitting new highs, and stocks are holding their gains from last week. Nothing has changed on the geopolitical front and all eyes are once again focused on the Fed and its’ next meeting in May 2022. What else is new? Stocks have been surprisingly resilient this week in the face of dire predictions that a recession is just around the corner. Many investors, and those who preach to them, are convinced that the Federal Reserve Bank is intent on hiking interest rates to a level where the economy will collapse as inflation continues…
U.S. shale producers can’t rescue us
Oil prices are up 70% since last year. Prices at the pump are well over $4.25/gallon. Everyone from President Biden on down is scrambling to find a way to reduce energy prices. Why, therefore, aren’t we looking at our own domestic oil producers? Unlike Saudi Arabia or the United Arab Emirates, which can increase the global oil supply with a flick of a switch, the shale energy community would need to increase spending in areas such as exploration, drilling and production. That is something they are not willing to do for a variety of reasons. For years, shale drillers have…
Markets liked the Fed’s message
The first interest rate rise in years was officially triggered in this week’s Federal Open Market Committee Meeting. Since then, stocks gained more than 5 % on the news, which was contrary to many investors’ expectations. The reaction was even more confusing when you consider how hawkish Chair Jerome Powell and his FOMC members were, both in the minute meetings and in Powell’s Q&A session after the meeting. The Fed is officially planning for seven rate rises this year after the 25-basis point move on Wednesday. The next hike could come as early as the central bank’s next meeting in…
Has China just yelled “uncle”?
Throughout the last year, the People’s Republic of China (PROC) have instituted several far-reaching policies that have roiled their economy and stock market. As a result, the Chinese stock market has lost some $2.1 trillion from its high. Are things about to change? In a brief statement on March 15, 2022, China’s top financial policy body seems to have relented somewhat (if not completely made a U-turn) on policy. The governing policy committee promised to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on technology companies. Both the central bank…
A whiff of stagflation
The economy is slowing. Inflation is climbing. Investors are worried that these trends appear to be a recipe for the “S” word. The economic concept of stagflation where the witches’ brew of a faltering economy, aided and abetted by skyrocketing inflation, harkens back to the malaise of the late 1970s. At that time, interest rates rose to nearly 20%. Inflation, as measured by the Consumer Price Index (CPI), reached an annual average of 13.5% by 1980. Oil prices (like today) surpassed $100/barrel. Blame for this period of stagflation fell squarely on OPEC, a newly formed energy cartel of oil producers,…
Gold is back but for how long?
Commodity prices are flying. Nickel doubled in price in two days. Wheat is up 50% and has experienced trading halts for five straight days. Gold has breached $2,000 an ounce and we all know what has happened to the price of oil. How long can it last? As longtime readers know, I formally recommended commodities as out-performers back in January of 2021. At that time, I was bullish on oil, copper, and soft commodities like food and lumber. I also liked crypto currencies. As for precious metals like gold and silver, not so much. Back then, most market participants had…