Posts Tagged interest rate

Housing’s a wreck. Builders rally. Huh?

Existing home sales plummeted in July. New home sales sunk as well, hitting a record low. And even though luxury homebuilder Toll Brothers reported a surprise quarterly profit Wednesday, that was largely due to a tax break. Sales were down slightly from a year ago and orders dropped 16%.

Despite this, some investors appear willing to once again bet that the housing market has hit bottom. Shares of Toll Brothers (TOL) were up more than 2% in early afternoon trading.

The S&P SPDR Homebuilders (XHB) exchange traded fund, which holds other builders such as KB Home (KBH) and Pulte (PHM), as well as building materials makers and home improvement retailers, rose 1.5%.

It’s a strange reaction to say the least. The broad market is down because of more gloomy housing data. But the companies that are most directly tied to the health of the housing market are up?

It doesn’t make a heck of a lot of sense. It may be a case of traders betting for the umpteenth time that this is finally a bottom for housing.

That’s a mistake. Now that the tax credit for homebuyers has expired, it’s difficult to imagine what can juice the real estate market again in the near-term. Read the rest of this entry »

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Greek uncertainty hurts euro

Confusion about the timing and amount of emergency aid for Greece prompted investors to sell the euro on Monday as markets worried whether the euro zone country will manage to avert a debt default.

The euro dipped briefly below $1.33, falling against the greenback for the seventh trading session in the last eight. It also hit a three-month low against sterling on investor concern about potential conditions attached to a loan for Greece.

The Federal Reserve’s policy meeting this week drew renewed attention to when the U.S. central bank will likely begin raising interest rates. The dollar rose above 94 yen as investors bet the Fed would raise rates before year end, well ahead of any move by the Bank of Japan.

Confusion over aid for debt-stricken Greece arose on Monday after German Chancellor Angela Merkel said the euro zone member, which on Friday had requested emergency aid, must commit to further savings measures and show it can return to a sustainable economic path before Germany can approve aid.

Greece had tried to reassure investors over the weekend that the 45 billion euros ($60.5 billion) in aid from the European Union and the International Monetary Fund would arrive in time to avert the euro zone’s first sovereign default. Read the rest of this entry »

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Greek Problems Will Drive Integration

European politicians seem to have learned from their counterparts in the Obama administration. Rahm Emanuel, Barack Obama’s tough-minded chief of staff, surveyed the inherited wreckage of the American economy, and told the President, “You never want a serious crisis to go to waste.” No one can accuse the EU politicians and their bureaucrats of wasting the serious crisis created for the eurozone by Greek profligacy.

Not that they have solved it quite yet. Mere talk of bailouts and International Monetary Fund intervention didn’t satisfy the markets, which remained sufficiently wary to levy so hefty a charge on Greeks bearing bonds that the Greek government capitulated, and publicly rattled its begging bowl. It will soon be filled by a euro-zone-IMF consortium.

For the proponents of greater European integration Greece’s crisis is their opportunity to push their agenda further than they would have dreamed possible had the Greeks not cooked their books and gone on a borrowing binge to support the lavish life style of the ever-increasing number of government employees.

It was no secret that a common currency and a one-size-fits-all interest rate would sooner or later run into problems in the absence of a unified fiscal policy. Nor did anyone really believe that the 3% limit on the deficit:GDP ratio contained in the Growth and Stability pact was more than a sop to the Germans for surrendering their stable Deutschemark. But so long as the world’s economies were booming, this kink in the armor of Europe’s integrationists was of little consequence. Germany’s export machine kept rolling, Greek consumers kept importing, borrowing at attractive rates to pay for the imports, and all seemed well. Read the rest of this entry »

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Bank Lending Still Slow To Recover

The Federal Reserve has started to normalize it’s banking policy by raising the discount rate last week, increasing the rate at which it charges banks for overnight lending. The Fed shrank the spread between the discount rate and federal funds rate early on in the liquidity crisis in 2007 and will probably return to the traditional spread sometime this year as they begin withdrawing their unprecedented stimulus to the banking system.

That being said, banks are still being fairly tight with their lending and while their capital levels have recovered somewhat, they are still in store for more losses with the labor and housing markets in their current states. Foreclosures are still on the rise and with employment opportunities scarce, that trend will likely continue for some time.

While the economy is expected to grow this year by around 3%, the free flow of credit is lagging noticeably behind in the recovery. As long as inflation remains muted the Fed would like to keep the federal funds rate near zero for some time.

Banks have recovered to the point where the Fed would prefer them to borrow from each other rather than using their discount window function as lender of last resort. Another factor that banks are carefully watching is how Congress will revamp banking regulation and how it will impact them in the long run. Read the rest of this entry »

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Europe’s Next Great Test

European leaders may have bought some time by backing in principle a bailout for Greece, but even if the money is handed over, it will be no silver bullet for Greece or for the euro zone.

That’s because the euro zone’s problems are not limited to Greece and not solely related to government debt and budget deficits.

Right now, Greece’s debt burden is unsustainable. With government debt equivalent to more than the country’s annual output and the government paying close to 6.5% to borrow money, Greece’s debt burden is not just growing but accelerating dangerously.

The best a bailout can do is to buy time to reduce those interest rates to give the government time to slash its deficits and set the debt on a downward path.

Yet it is the euro zone’s second challenge that is at once more widespread and more intractable. That is the euro zone’s competitiveness challenge: structurally weak economies, in southern Europe and elsewhere, locked by a common currency to Germany’s low inflation rate and economic stringency. Read the rest of this entry »

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10 reasons why this is not a bull market

Kevin Cassidy, a senior credit analyst at Moody’s, recently referenced the $700 billion in risky high-yield corporate debt on the horizon and offered, “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.”

Minyanville offered a similar assessment entering September 2008 as $871 billion of corporate debt was set to mature into year-end. We opined there were two plausible scenarios; a credit cancer that would chew through the financial body, or a car crash that would crack the system under the weight of an indebted world. Read Minyanville’s “Pirate’s Booty.”

I agree that another avalanche is building atop Credit Mountain; while risk transferred from corporate coffers to sovereign strongboxes, the magnitude is cumulative in cause and effect. And despite scary parallels between the 2008 financial crisis and our modern day sequel, savvy investors continue to monitor corporate credit as a timing mechanism for an equity downturn.

As stocks grind to fresh 18-month highs, we’re left to wonder if the upside window of opportunity will remain open until corporations are again forced to pay their bar tab. Credit markets are exhibiting surreal strength and through that lens and that lens alone, the equity market has plenty of room to run.

The question is therefore begged– will this singular proxy again ring the bell when a crimson tide is about to turn? Read the rest of this entry »

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Low Rates Needed for ‘Some Time’

Federal Reserve Bank of Chicago President Charles Evans said low interest rates are likely to be needed “for some time” as high unemployment lingers and inflation stays below his goal.

“With the unemployment rate at 9.7 percent and inflation significantly under my benchmark for price stability, there is no conflict between our policy goals,” Evans said in the text of a speech in Arlington, Virginia. Weakness in the job market, including long-term unemployment, means that “This accommodation will likely be appropriate for some time.”

Fed Chairman Ben S. Bernanke said last month the U.S. economy is in a “nascent” recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus fades. At the same time, policy makers are winding down emergency programs and laying plans for an eventual reduction of the Fed’s balance sheet to prevent an increase in inflation as the economy recovers.

The U.S. unemployment rate held at 9.7 percent in February and payrolls dropped 36,000, less than forecast, a sign that the labor market may be stabilizing after a recession that has eliminated 8.4 million jobs. The economy expanded at a 5.9 percent annual pace in the fourth quarter, the fastest rate in six years, the Commerce Department reported last month. Read the rest of this entry »

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How to Fix Your Finances in 2010

Still mulling over your New Year’s financial resolutions? – David Laibson, a Harvard University economics professor, has one for you—one that many of us may wish we’d made last year.

“Promise that you’ll never try to time the market again,” he suggests, a not-too-subtle gibe at the many investors who sold their stock in the depths of the downturn early this year and then missed the huge rally that followed.

That’s not the only thing many of us could afford to improve. We would also like to save more, earn more and spend more wisely in 2010. But despite the fresh promise of a new year and a new decade, tackling all our goals at once can be overwhelming.

So to help you accomplish your many New Year’s ambitions, here’s a year’s worth of personal-finance aspirations, timed to major holidays to raise your chances of success: Read the rest of this entry »

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Credit-Card Fees: the New Traps

A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.

The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.

Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.

“There are countless fees that can be introduced and rates can go through the roof,” says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.

Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don’t pay on time, your interest rate is 29%. Read the rest of this entry »

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The Greek Tragedy That Changed Europe

Plutus, the Greek god of wealth, did not have an easy life. As the myth goes, Plutus wanted to grant riches only to the “the just, the wise, the men of ordered life.” Zeus blinded him out of jealousy of mankind (and envy of the good), leaving Plutus to indiscriminately distribute his favors.

Modern-day Greece may be just and wise, but it certainly has not had an ordered life. As a result, the great opportunity and wealth bestowed by European integration has been largely squandered. And lower interest rates over the past decade—brought down to German levels through Greece being allowed, rather generously, into the euro zone—led to little more than further deficits and a dangerous buildup of government debt.

Now Plutus wants his money back. Europe is entering unprepared into a serious economic crisis—and the nascent global recovery could easily collapse due to the unsustainable and Ponzi-like buildup of government debt in weaker countries.

At the end of the G7 meeting in Canada last weekend, Treasury Secretary Tim Geithner told reporters, “I just want to underscore they made it clear to us—they, the European authorities—that they will manage this [Greek debt crisis] with great care.” Read the rest of this entry »

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