200 Point Stock Drop Isn't Even a Crash Anymore!

Percentage-wise a 200 point swing on a 11,000+ Dow isn't earth-shattering, but it still represents real dollars in my 401k (and yours!). Yesterday's drop received so-so coverage.

They say a Recession is when your neighbor loses their job, a depression is when you do. Well, I am not there, but a lot of my neighbors are worried. It was bad enough when everything was melting down, but now inflation is hitting at the same time; a big reason - $5 gas (coming soon!). As energy touches everything, it raises every ship in the harbor.

Heck, the interest rate cuts aren't even helping as promised, since credit markets are getting tighter. At least we could of had a refinance (I was hoping for one!) to dump some $$$ into the mean green machine.

So, how do we get off this Tilt-a-Whirl o' Doom....Eventually the Fed will have to tighten the money supply at some point. Which means it would get worse before it gets better. Not trying to be the Siren of Death, but it is one set of body blows after the next...gee I hope one of the political parties raises my taxes next :)

Then again, maybe I just shouldn't post after I pay bills :)-

Personal Finance QuickTake: Financial Market Mess

Leading Economists are saying the we are not only in a recession now, but probably a severe one. Most had earlier believed that this would worst case be like 2001. A drop an economic time that felt like a recession, the a nice bounce back once the economy shock off the doldrums.

Now with Bear Stearns and continued market turmoil they are convinced that this is not going to be swept under the rug quite so quickly this time.

From the report:

No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II.

Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion when the market closed on March 14 to being sold at the bargain-basement price of about $236 million two days later.

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

I was just looking late this afternoon, even with Fed Rates at 2%, 30-year Jumbo loans are still at 7%+! This makes it tough to refinance in a time where at least that market should be moving.

Some have said for awhile that 740 is the new FICO-08 720. In other words, even those that can now make there payments and would like to get in a more tradition loan structure can't due to tightening at the banks. There is a fine line between a small night-night drink and a fire house in your mouth. They have just well over tightened. You can't blame them given that the Bear went under in less than 2 weeks!

One of the rallying cries had been that rates will reset on those with ARM tied loans and they needed to move, but given that those rates are dropping is only those that are trying to do the right thing are getting punished.

It reminds me of the old joke about a group of folk on a plane and the Captain comes on the intercom and says, I have good news and I have bad news." The bad news is...we are hopelessly helplessly lost...but the good thing is with this tail wind we are way ahead of schedule!"

Personal Finance QuickTake: Uncle Ben's Nice

Uncle Ben's Nice to the market with a 3/4 point reduction in the Federal Rate, down to 2.25%.

This is the sixth cut in the Fed Rate and now at 2.25% reaches a low from 2004.

From the report:

However, there has been opposition inside the Fed to the aggressive moves. The latest rate cut came on an 8-2 vote with two members of the Federal Open Market Committee dissenting. Both Richard Fisher, president of the Dallas regional Fed bank, and Charles Plosser, president of the Philadelphia regional Fed bank, voted against the rate cut, arguing they would have preferred less aggressive action.

In explaining its actions, the Fed said that it was having to navigate a difficult policy environment that included sluggish economic activity and rising inflation pressures. The Fed statement said that "the outlook for economic activity has weakened further" but that "inflation has been elevated" with some signs that expectations of future inflation pressures are rising, a dangerous sign for the Fed.

But the Fed signaled that it stood ready to cut rates further if necessary, saying that "downside risks to growth remain." Bernanke and other Fed officials have said in recent comments that they view the threat of economic weakness as a bigger risk at the moment than inflation given the risks to financial markets.

"Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said in its statement.

Seems like some of the Fed Governors are getting nervous about the affect on inflation and feeling that the action is getting a bit aggressive, especially since the Stimulus checks are still 6-8 weeks away.

What...Me Worry?

(Photo from AP)

Personal Finance QuickTake: Big Cut Tuesday

Big cut Tuesday? The pressure is mounting. How aggressive? Caught between a rock and a hard place.

They have already cut rates this week on Sunday but are expected to cut cut rates Tuesday, perhaps even up to a point.

From the report:

With the quick collapse of the investment bank Bear Stearns, fears are mounting about whether other financial companies may fall. Many believe the country has already sunk into recession and all the problems — if not contained — will deepen and prolong the pain.

"The Fed is on high alert — something you don't see but once every quarter century; maybe, in this case, since the Great Depression. This is a very unusual period," said Mark Zandi, chief economist at Moody's Economy.com.

That's because the Fed is having to fight multiple battles at the same time: a housing collapse, a severe credit crunch and Wall Street turmoil that threatens the stability of the entire U.S. financial system. All those problems feed on each other, creating a vicious cycle that can be hard for the Fed and other Washington policymakers to break. The weight of those troubles is like a millstone on the ailing economy.

"Now the issue is fighting the deeper recession," said Brian Bethune, economist at Global Insight. "It has kind of moved to another level. The fires are spreading," he said.

To limit the damage, Bernanke and his colleagues may ratchet down a key interest rate, now at 3 percent, by as much as a full percentage point, to 2 percent, which would put that rate at the lowest it has been since late 2004. Because that rate affects a wide range of rates charged to millions of consumer and businesses, it is the Fed's most potent tool for reviving economic activity.

I don't know if it is the dawning of a depression, but it seems that the Government, nor many others have a feel how deep the rabbit hole goes.

The real concern is to over-correct or to blow-out inflation. But if this is the beginning of the issue and not the beginning of the end, we are using a bunch of our ammunition right away. The question is that would be be running this fast if it wasn't an election year?

Personal Finance QuickTake: RIP Bear Sterns

According to a report from AP, Four Days after saying the company was OK, Bear Stearns will sell out to JPMorgan-Chase for the bargain price of $2 per share, or $236 Million.

This is a stunning reversal for Bear Stearns, that will at least save them from bankruptcy, as the Mortgage Liquidity crisis gets its first well-known victim.

The Fed jumped in already and not only approved the buyout, but also guaranteed $30 Billion of Bear's assets, essentially making the buyout risk free for JPMorgan. JPMorgan Chase & Co. said it will guarantee all business — such as trading and investment banking — until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29

No word on Bear Stearns 14,000 employees or if the brand that survived the Great Depression and World War II would continue. They were considered to be the most leveraged major bank out there and based on the last weeks news, basically went into a death spiral.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

This doesn't feel like the end of this. Maybe the beginning of the end, but not beginning.

Personal Finance QuickTake: Stock Market Loves the Fed

The Stock Market jumped 416 points today based on the Federal Reserve move to improve liquidity to the market. This is the largest gain for the market since July 2002.

This $200 Billion flu shot, gives liquidity to an area that companies have been to afraid to buy or allow to use as backing for other loans; Mortgage backed securities. This will develop a market for those securities that have seen constant write-down, as even good performing portfolios have been painted with this tainted brush.

This International Fund, backed by the Federal Reserve, European Central Bank, the Bank of Canada and the Swiss National Bank aims to put a floor over the bottomless pit that had drained markets over 500 point in the last 3 days. Based on the large increases today, Wall Street believes that they did just that.

These Central Banks are hoping that these moves prove more effective then rate cuts, which have been only temporary bandages.

From the Yahoo Report:

"It's not just a rate cut. I think it's a very creative way to do financing," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "It shows the Fed is willing to do things that are a little out-of-the-box to shore up credit issues. I really think they went to the heart of the issue."

The latest step by the central banks was seen as a direct lifeline to investment banks, which previously couldn't borrow beyond already established Fed liquidity plans. The plan basically allows Wall Street's biggest institutions to put up troubled assets as collateral for loans, use the new capital to make money in the market, and then pay back the loan up to 28 days later.

Though eventually banks would be forced to take the troubled mortgage-backed debt back on their books, the plan still takes short-term pressure off them. Many of these banks will release first-quarter earnings reports next week.

Hopefully this puts a stopgap into place so the market can break out of this death cycle. The constant write-down of these debts has put many small and medium banks on the edge of Bankruptcy. As the report states this is only a 28 day cooling off, as this is how long they would have to repay the bridge loans, but it might be the break needed to re-establish liquidity.

One of the issues has been that even though the Fed has cut rates, mortgages and other credit vehicles haven't lowered as much as there just isn't a lot of money available to loan, even for the good customers. This had led to a viscous circle, where you can't even refinance to take advantage of the lower rates so the rates keep going lower to help the economy.

Only time will tell...Funny, that Zombie movie is called "28 Days Later!"

Homeowner Equity Lowest Since End of WWII

The amount of equity Americans have in their homes fell below 50% for the first time since 1945, according to an AP Report on Yahoo. That was the first year the Fed began to track that data.

Per the report:

Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing. Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

The threat of so-called "mortgage walkers," or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of this. On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners.

While I'll be happy to take a reduction on the principle owed on my house, it feels like we are setting ourselves up for more issues in the future. "If I can't pay in the future, why can't I get help then too?" will be the call. The process that the government worked with lenders on to get people over to fixed rate loans was byzantine at best. A real system like that, but works makes more sense to me. If you cut the amount I owe and then the rate flips and I still can't afford it, all it did was to catch a write-off.

At the same time this is really starting to punish those that do want to pay. As all of the houses hit the market, on foreclosure, the overall property value goes down. So even if some one bought a house with 20% down and a 15-year loan, now the house is below the 80% threshold. Does he need PMI now?

A big mess, we need a cleanup on aisle two...stat.

(Photo from AP)

Personal Finance QuickTake: Another Rate Cut Coming

Chairman Ben Bernanke signaled to Congress on Wednesday that the Fed is ready to again cut rates to help jump start the economy according to an AP story.

The Fed is in the unenviable position to get the economy moving while not fanning the flames of inflation, which is already showing its ugly head. Bernanke is fighting an uphill battle against home mortgage and general credit issues in the market. But the economy is the top concern, over inflation fears. He pledged to adjust a key interest rate and help the economy, which many fear is on the verge of a recession, if not already in one.

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told lawmakers. The country should prepare for "sluggish economic activity in the near term," he went on to say. Concern continues to grow for a new period of stagnation, where inflation grows stronger while the overall economy is weak.

The Fed is prepared to lower rates again to bolster economic growth, Bernanke said. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," he said, sticking closely to assurances he offered earlier this month.

Bernanke said at some point this year, the Fed will need to "assess whether the stance of monetary policy is properly calibrated" to foster the Fed's objectives of price stability "in an environment of downside risks to growth." Bernanke said he was hopeful that previous rate reductions and the $168 billion economic aid plan of tax rebates for people and tax breaks for business would energize the economy in the second half of 2008.

"Should high rates of overall inflation persist," Bernanke said, "the possibility also exists that inflation expectations could become less well-anchored." If people think inflation is escalating, they will act in ways that could make things even worse, a sort of self-fulfilling prophecy. Also, if oil prices continue to skyrocket this year, it would be "hard to maintain low inflation," Bernanke acknowledged.

What this means for us:

Most believe that the Fed will cut rates in March and in April hoping to get the economy in good strides when the economic stimulus plan hits. If consumers are still worried, larger numbers then planned for would save or paydown debt with the funds instead of spending them in the general economic. This would minimize the overall impact.

Personal Finance QuickTake: Fed Gloomy Forecast

The Federal Reserve put out a rather gloomy forecast on Wednesday. They have lowered growth, employment and other economic indicators due to damage to the housing and credit markets.

According to the minutes of the Fed meeting on Wednesday they are very nervous that cuts up to this point aren't enough and won't be enough to keep the economy from continuing to weaken. "With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action," the minutes of the meeting showed.

The Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That's lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent. Based on those numbers Unemployment is expected to rise to 5.3%.

Clearly the economic slow-down is heavier and faster then the Government thought it could have been. I would expect the Fed to continue to cut interest rate in our to try to jumpstart the economy. However, the deeper the cuts the more likely and higher we can expect inflation to rear its ugly head!

On a side note it looks like not just on this site, but most others Google's Feedfetcher is broken and unsubsribribed everyone that was using that service. At first I though it was just me, but aI saw som sites like www.johnchow.com lose 6000 subscibers! I would suggest thatif you were using that service, to resub through email HERE. Not only will GET the articles (for Free of course) but it will enter you into my current RSS signup contest!

Personal Finance QuickTake: Fed Ready to Act

Today Fed Chairman Ben Bernanke told Congress that the Fed was ready to continue to act as needed to support the economy. He also stated though that signs point to growth later in the year. The Fed has lowered interest rate 2.25% since September, lowering the rate to 3%.

From Reuters:

He acknowledged that the growth outlook has worsened over the past few months. His comments reinforced investors' expectations the central bank would lower interest rates by a half-percentage point at its next meeting on March 18.

However, the central bank chairman also said he expects sluggish growth to give way to a somewhat stronger expansion in the second half of the year as the impact of fiscal and monetary stimulus now put in place is felt. Bernanke painted a somber picture of risks facing the economy, and U.S. stock prices and the dollar fell on his gloomy assessment. In early afternoon, the Dow Jones industrial average was down more than 140 points, or 1 percent.

So it looks like more cuts are coming and they are doing whatever they can to avoid a recession, perhaps even at the cost of future growth as inflation becomes a bigger concern.

Personal Finance QuickTake: Fed Cuts Rate 3/4%

Early this morning, in a surprise mood, the Federal Reserve cut the Federal Funds rate by a whopping from 4.25% to 3.5% . A cut was expected at the next meeting, but by doing this they obviously are showing that they feel the economy is headed south ...fast!

The cut is not only surprising due to the timing, but also the size. .75% is an outsized drop at the Fed where the have been making small .25% cuts.

Unfortunately the market took this as further evidence that the economy is in worse shape than though of earlier. The stock market dropped over 450 points at the opening of the day, but bounced back as some tried to lock in lower prices.

What this means to us! It will be very hard for all of these high Interest Rate savings account not to cut the same percent, so it look like 4% is the new 5%! Credit Card Rates should come down a bit, and it may become a good time to refinance your house or debt.

The worst thing to do is panic. You will only lock in losses. Downturns happen and looking at them as potential buying times can secure good returns later.

Remember in budgeting or managing your money it is Buy Low, Sell High...not the other way around!

.25% Fed Move vs the Tortoise and the Hare...

So the Fed makes another rate move of a quarter point today. This apparently chapped everyone living in Manhattan 'cause stocks got beat up.

A little closer to home, I wonder how fast all of the savings rates will flip vs the rates on credit cards mortgages, etc.. I bet before I can zap my lunch in the microwave at work we'll see a couple major banks make a move regarding savings rates. Those same banks will probably make a move on lowering my credit card rate in 2108!

One of my goals for January is to contact all creditors and re-negotiate all of my rates. It is worth a shot and my FICO scores are climbing, so...