It's Fed Day, but that isn't the big story at the moment. Right now, all eyes are on insurance giant AIG, which is in very serious trouble. The company is in desperate need of around $75 Billion and it has until today to shore up this capital, otherwise it could face bankruptcy. This story is far reaching as AIG is a worldwide company, with $1 Trillion in assets and operating in 130 countries. Think about this - AIG provides insurance in all facets of life, from car to life insurance - and should AIG go bankrupt, claims around the world would not get paid - that is scary to imagine. We will see what happens in the next several hours as this story develops.
At 2:15pm ET, the Fed will release its interest rate decision and policy statement. Up until the last few days, there wasn't much of a chance for a Fed Cut - but as of this morning, the Fed Funds Futures are saying there is a 100% chance of a .25% cut and a 50% chance of a .50% cut. This is really amazing. We won't know for sure what will happen until later today - but with mounting issues in the financial sector, the Fed may just cut in an attempt to restore a sense of calm in the global financial markets. Should the Fed cut, Mortgage Bonds may not like this action because of its inflationary effects so stay tuned - prices are already down slightly on the day even in the face of heavy selling pressure in Stocks.
The headline Consumer Price Index for August was reported at -0.1%, meeting expectations and representing the first monthly decline since October 2006. When stripping out volatile food and energy, the Core CPI rose 0.2%, also meeting expectations. The Overall CPI year over year increased 5.4% and the Core CPI year over year rose 2.5%. With the report meeting expectations, the Fed may be feeling better about inflationary threats and this could help them justify a rate cut later this afternoon.
We hope the Fed doesn't cut, as they did when they panicked in January. We are just starting to see signs of inflation moderating, oil prices receding and the US Dollar strengthening. A Fed Cut would likely disrupt those nice trends. Should the Fed not cut - Mortgage Bonds may likely move another leg higher, but should they cut - we could see prices give up some of their recent gains. We see Mortgage Bonds moving higher in the longer-term, but a Fed Cut today could provide a speed bump and possible retracement in prices. Stay tuned.
A historic week is being capped off with an incredible day of news events, with an enormous impact. Thank goodness the economic calendar is quiet today, as government announcements have taken center stage.
There are three huge announcements that are changing the financial markets around theworld. First, we have been talking about the fear over the safety of money in savings for many Americans. Banks are either folding or on the brink of collapse, bonds are losing some or all of their value, and stocks are dropping at an alarming rate, all causing tremendous fear and anxiety for investors.
As we discussed in yesterday's Update, this fear caused a flight to quality of such magnitude that the return on Treasuries was actually negative. People are actually willing to pay money in order not to lose money ... forgetting all about any type of return for their investment. And yesterday this panic lead to a modern day "run on the bank". There was $180 Billion taken out of money market funds due to a lack of confidence. This resulted in a "breaking of the buck", which means that the Net Asset Value or NAV of some money market funds dropped below $1. Virtually all investors consider money market funds very safe and do not expect any change in the principal value, so a $1 invested will always result in a $1 balance plus any interest. But once the $1 valuation was broken investors panicked and the flood gates opened. This caused the Treasury to step in. This morning, Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds. It should be noted that this does not include high yield, enhanced type, or riskier money market funds. This action is helping settle the markets and as a result stocks around the world are marching higher.
Another big announcement that is helping to calm the global markets and regain confidence is the Fed's decision to create a market place for illiquid mortgage debt. As we know, the mortgage mess has buried many companies, some were previous giants with long histories like Lehman, Bear Stearns, Fannie & Freddie. The big problem is that there are no buyers for this debt in the current marketplace. So the Fed is stepping in to create a vehicle to make these purchases of mortgage debt and provide a liquid marketplace. This is a brilliant move which has been very well received and should do a lot of long term good to help the housing and lending environment. Stocks around the world have responded very favorably to this. And there is more...As someone who has managed a fund and been a student of the stock market I can tell you first hand that there is a very dark side to stock shorting. The amount of greed is incredible. Many short sellers have used currently illegal tactics such as "naked" short selling. This means they are shorting a stock without the required step of first borrowing it. This has exacerbated the problem in financial stocks as they get unmercifully beaten down. This in turn hurts their balance sheet which also limits their ability to take on credit. And this is the vicious cycle we have been witnessing. Worse yet are the short sellers who sent armies of individuals to use scare tactics on message boards to convince people the sky is falling. Today, the SEC has placed a ban on short selling in 799 financially related stocks. This ban will last through October 2nd and can be extended if needed in 30 day increments. Some other countries around the globe are also instituting similar bans. There are some very foolish politicians and others who are commenting on what a negative move this is, as well as saying there are legitimate short sellers. The problem is that they have failed miserably in policing this problem for a very long time. It is the equivalent of an electronic store saying, "pay for what you take with the honor system". While some will actually pay what is due, there is no doubt that the store will wiped out in a short period of time. The SEC did the right thing here and hopefully this will add another level of calm to the current financial crisis.
These 3 steps will not fix everything, but it sure looks like a step in the right direction. And while interest rates are a bit worse this morning...who cares. The health of our financial system and confidence that our hard earned savings will not be wiped out is far more important. What good is earning a paycheck if there is no place to safely save that money. Prices will undoubtedly continue their volatile ride, but should remain within the trading range we have illustrated on the Bond page.
Uncertainty in Financial Markets Could Cause Dramatic Rise in Existing ARMs at Next Adjustment If you or anyone you know has an Adjustable Rate Mortgage, this is an important point to consider. Many ARM loans are tied to the London Interbank Offered Rate (LIBOR). In fact, there are six million loans in the United States that use LIBOR to determine the interest rate and as the name suggests, many banks use this rate to lend money to each other.
But, today, banks lack confidence that the money they lend will be paid back. In light of what has happened with Lehman Brothers, IndyMac Bank and others, as well as AIG, banks are requiring much higher rates on LIBOR to offset the added risk.
The Federal Reserve Left Rates Unchanged but...The Federal Reserve met yesterday leaving the target rate unchanged at 2.00% but just like LIBOR the actual rate being charged by banks to each other is closer to 6.00%. This again suggests that those with ARM loans should consider a refinance into historically low fixed rates.
What Happened? Financial companies have been under attack. IndyMac was the largest bank to falter in twenty years. What brought IndyMac down was their exposure to defaulting loans. This sapped investor confidence and drove down the stock price until they filed for bankruptcy.
Following IndyMac, we saw Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch succumb and were either forced into conservatorship, to close their doors, or to sell themselves. AIG, the world's largest insurance company was also impacted, forced to make a deal with the U.S. government to stay in business.
What You Can Do Now?I'd be happy to go over your loan situation and help you understand how the recent events may affect you, and how you can best be protected. Additionally, chaotic times like these often present opportunities. I look forward to hearing from you.
What all of this means for you as a potential borrower, believe it or not, is much better mortgage rates. Mortgage Bonds appear to be a safer place with a better yield than US Treasuries for investor’s money right now.
In other words, today’s tragic news represents tremendous opportunity for mortgage borrowers in the short term. Therefore, we should float for now, and I will guide you on our timing for locking in possibly the best mortgage rates this year."
"Mortgage Bonds are soaring higher on this weekend’s announcement that Fannie Mae and Freddie Mac will come under control of the government.
The government’s move to create a line of $200 billion to back all Fannie Mae and Freddie Mac loans at all costs is great news for homeowners. First, it ensures the continued liquidity of conforming loans nationwide and, second, it ensures that buyers of this type of Bond have a safe investment going forward. There’s no doubt that this will help the US housing market move through the current crunch that we’re in.
So far this morning, the news has lead to a nice rally in pricing. When combined with the break above the 200-Day Moving Average, this may lead to attractive rates. Therefore, I recommend floating for now."
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