Despite Relatively Good News, Dow Jones Drops to 11,220.96
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Despite some relatively good news on the economy in the recent past, such as the University of Michigan's index of consumer sentiment rising to 63 in August from 62.2 in July, those investors who see things getting worse had their way this past week. The Dow Jones Industrial Average fell 2.8% on the week to close at 11,220.96.
Most of the damage occurred on Thursday when the Dow dropped 345 points in anticipation of grim employment data. This was substantiated on Friday when the Labor Department reported that the unemployment rate hit 6.1% in August, the highest reading since September 2003, and nonfarm payrolls declined for the eighth straight month.
Adding to the negative sentiment, investors digested new data from the Mortgage Bankers Association, which reported that the number of U.S. homeowners falling behind on their mortgage payments or facing foreclosure jumped in the second quarter as housing markets in several states continued to deteriorate sharply. The increased rate was particularly seen in the states of California and Florida.
The foreclosure crisis in now considered by some as the worst since the Great Depression of the 1930's. It began in late 2006 with a surge in defaults on subprime loans, those to people with weak credit records. As falling real-estate prices have left more people owing more than the current value of their homes, defaults have gradually spread to include more prime loans. Among the most troubled prime loans are option adjustable-rate mortgages, which let borrowers start out with very low monthly payments and pose much bigger ones after a few years.
Who is to blame for the whole housing mess? Take your pick. There was certainly greed and avarice on the parts of both lenders and borrowers. And as with any market that experiences outlandish growth, speculators played their part. And as with any similar situation, we all end up paying the price. However, as usual it is the little guy who gets hurt the most.
So in usual fashion the federal government is stepping in to help those most in need. Whether this is appropriate or not is the subject of much debate. Any such action by the government always carries a "moral hazard" in that a bailout only invites a repeat of poor or improper practices.
On the other hand, governments are there to help those who need it. So to that end, there is now a tax credit available to first time home buyers and government insurance for those mortgages that can be re-figured to come in line with new market evaluations. And the latest is a new plan that will allow the Treasury to shore up mortgage giants Fannie Mae and Freddie Mac. Precise details of the plan are not yet known, but it is expected the Treasury will have authority to provide an injection of capital into the beleaguered companies.
The plan also includes a management shakeup at both companies which would call for chief executive officers of both to step down from their posts. These moves would represent perhaps the most significant intervention by the government in the financial industry since the housing bust started all the turmoil in the credit markets over a year ago. The moves have ranged from the $168 billion economic-stimulus package in February to the bailout of investment bank Bear Stearns earlier this year.
Fannie and Freddie are vital to the functioning of the housing market. The Treasury intervention could help the main street borrower by keeping interest rates on mortgages lower than they would be in the event of continued instability. The Treasury's extended power to intervene extends until the end of 2009. Let's hope they get the whole plan right!
In the meantime be sure 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 or of www.mybaycity.com)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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