Historical lows

It’s incredible to think that 16 years ago when I bought my first home with an FHA loan the interest rate was 11.99%.  Today the rate for an FHA loan is staying down below 5.5%.  Now is such a great time for first time homebuyers to take advantage of the low house prices and these great rates.

Rates heading back up

Market Comment

Mortgage bond prices fell last week pushing rates higher. In an announcement earlier in the month, Fed Chairman Bernanke indicated the timing of a global economic recovery was "highly uncertain." This uncertainty was reinforced last week as the economic turmoil continued across the globe and Spain joined Greece to become the second Euro zone country to have their debt downgraded by Standards and Poor’s. A lower debt rating increases the cost to borrow further aggravating the attempts to fund the massive bailouts. For the second week in a row, interest rates on government and conventional loans rose by about 3/4 of a discount point.

Recap for 2008

By The Number$

1.     SADLY, HE WAS RIGHT - Stock market talk show host Jim Cramer predicted on 10/06/08 that the US equity market, already down 26.8% YTD (total return) on the S&P 500, could fall another 20%.  When the S&P 500 bottomed just over 6 weeks later on 11/20/08, the stock index was down 47.7% YTD.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research, S&P, Denver Post).    

2.     VERY WRONG - Stock strategist James Finucane predicted on 3/24/08 that the Dow, then at 12,361, would rise to at least 18,000 within a year.  The Dow begins today at 8599.  Finucane, who correctly called the turn in the market at its October 1987 low, saw an explosive rally coming based upon a huge cash-buildup by investors.  The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy (source: Barron’s).     

3.     DID I SAY UP? - The average year-end 2008 prediction for the S&P 500 made by 9 Wall Street equity strategists on 1/02/08 was 1612, a forecast that called for a gain of +10% for the year.  Instead, the S&P 500 finished 2008 at 903, down 37% on a total return basis (source: USA Today).     

4.     GONE - A 3/10/08 magazine cover story titled “Is Fannie Mae Toast?” suggested a government bailout may be needed.  Uncle Sam seized control of Fannie Mae on 9/07/08, committing $100 billion of support (source: Barron’s).    

5.     MISSED IT - Tom Hoenig, president of the Federal Reserve Bank of KC, said on 1/16/08 that the economy was not in a recession.  On 12/01/08, the organization responsible for determining the start and end dates of recessions announced that an official recession began on 12/31/07 (source: NBER, Denver Post).      

6.     OVER A BARREL - Russian oil executive Alexei Miller predicted in June 2008 that the price of oil would reach $250 a barrel in 2009.  Oil closed last Friday at $40.83 a barrel (source: Financial Times).       

7.     SAY WHAT?! - In a 5/17/07 speech in Chicago, Fed Chairman Ben Bernanke said that Federal Reserve officials “believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system” (source: Federal Reserve).     

8.     HE MUST HAVE CHANGED HIS MIND - At a symposium in Jackson Hole, WY on 8/31/07, Fed Chairman Ben Bernanke said that “it is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions” (source: Federal Reserve).    

9.     WHERE’S OBAMA? - A survey of 112 US money managers released on 11/05/07 predicted the outcome of the November 2008 presidential election.  61% of the managers believed Hillary Clinton would win the White House.  Taking 2nd place in the poll was Rudy Giuliani with 15% of the vote (source: Barron’s).    

10.   IT WAS CRUMMY - A 1/18/08 newspaper article quoted Michael Robinet of CSM Worldwide as predicting “it’s going to be a crummy year” for the auto industry (source: USA Today).    

11.   MUCH BIGGER - On 1/23/08, the nonpartisan Congressional Budget Office (CBO) predicted that the budget deficit for fiscal year 2008 (i.e., the 12 months ending 9/30/08) would be $219 billion.  The actual budget deficit for the year was $455 billion, more than twice the CBO forecast (source: Wall Street Journal, Treasury Department).      

12.   PREMATURE - In a 5/16/08 speech in Washington, Treasury Secretary Henry Paulson said “we are closer to the end of the market turmoil than the beginning.  Looking forward, I expect the financial markets will be driven less by the recent turmoil and more by the recovery of the housing sector” (source: Treasury Department).    

13.   GOOD CALL - A 6/16/08 magazine article titled “Why It’s Worse than You Think” written by Daniel Gross stated that “for months, economic Pollyannas have looked beyond the dismal headlines and promised a quick recovery in the second half (of 2008).  They’re dead wrong” (source: Newsweek).  

14.   SCANDAL - An article questioning Bernie Madoff’s investment strategy (titled “Don’t Ask, Don’t Tell”) appeared in print on 5/07/01, 7 ½ years before his Ponzi scheme was discovered.  When asked about the investment policy that he utilized, Madoff replied “it’s a proprietary strategy and I can’t go into it in great detail” (source: Barron’s).     

15.   A GIANT UPSET - In a 1/28/08 article dated 6 days before last year’s Super Bowl, sports writer Paul Zimmerman predicted a 4-point New York Giants victory over the 12-point favorite New England Patriots.  The Giants beat the Patriots, who had an 18-0 record going into the game, by 3 points (source: Sports Illustrated).