Market Rebounds - What's The Rationale Behind That?
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What is the rationale for the market's remarkable turn-around this past week? Federal Reserve Chairman Ben Bernanke's remarks which signaled a possible further reduction in interest rates? The holiday shopping season going well? The government-led plan to freeze interest rates on certain troubled subprime loans? Oil dropping back under $90 a barrel? Take your pick. Probably a little dab of each.
You could argue we are not out of the woods yet. But then when are we ever "out of the woods?" There will always be the worry wall we have to climb. In any event, after falling to what the street refers to as an official correction (down 10% from a previous high) on Monday, the market chalked up four straight days of gains. That put the Dow Jones Industrial Average up 3% for the week and 7.3% for the year and now standing at 13371.72. However, the Dow ended November down 4% for the month, its worst monthly showing since December, 2002.
The talks underway to formulate a plan that could ease the subprime home loan crisis is drawing both positive and negative comments. Investors in the various vehicles that are backed by mortgages foresee losses. Others see the Bush administration as making the right move to stave off the dangers in the housing market.
The problem is it's not like the old days when just the bank and the borrower were involved. Today's loans have been sliced into pieces and sold to investors. To further complicate the matter, the securities that are backed by mortgages are held world-wide. Therefore it is not clear how any plan to ease the credit crunch can be successful without getting some parties upset. Some of the critics say the plan being pushed by the Treasury Department would merely delay inevitable foreclosures for some people who can't afford their homes.
Under the plan being worked on by the Bush administration and the mortgage industry, certain borrowers in subprime mortgages would be able to keep their current interest rate rather than see it "reset" to a higher rate as originally agreed. The plan is being negotiated by the Treasury Department and a coalition of lenders, mortgage counselors and servers - the companies that collect mortgage payments.
One of the many questions any plan would raise is - which homeowners might get mortgage help? Right now the mortgage industry and federal regulators are negotiating the final details, which probably won't be known before the end of the year. One area for agreement would be subprime loans that carry a teaser interest rate for the first two or three years, then reset to a higher rate for the remainder of the term - typically 30 years. In many cases the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrowers payment by several hundred dollars a month.
The fact that a plan is being formulated seems to have given the market a kick up. Challenges in the subprime market have taken a toll on stocks and bonds - even stocks and bonds that aren't directly related to the subprime market. This has resulted in increased volatility in several fixed-income asset classes This isn't the first time this has happened. The asset classes effected the most will rebound, some quicker than others. Individual securities within the classes may have a difficult time rebounding.
What this points up is the need to diversify your fixed-income portfolio. Many investors are aware of the need to diversify their equity portfolio, but aren't aware there is just as much need in the fixed-income portion of their portfolio. As mentioned before, you do this through asset allocation. Asset allocation means diversifying your investment dollars among various asset classes in such a way as to minimize overall risk and enhance overall return.
So whether you are for or against the government's plan to freeze interest rates on troubled loans - remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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