Mortgage Rate Boon May Herald Further Economic Trouble

Mortgage rates reached a new low last week approaching their lowest level in 50 year. Although these record rates may help the housing sector recover, a growing number of investors read it as a sign for more economic miasma.

Mortgage rates are tied to long term U.S. Treasury, such as the ten year bond. And a drop in bond yield stems from investors moving money out of the stock market and into safe bond investments (raising bond prices and thus lowering the yield rate).

Bond rates are hovering around 3.2%. Many analyst are bracing for them to hit 3%. What remains unkown is if investors expect a the recession to extend for more years, or are simply nervous over current financial conditions such as the Greek financial crisis, or U.S. jobless rates.

Source:

Bonds Ring Economic Alarm Bells - CNN Money
Surprise Drop in Mortgage Rates - WSJ

Quote, "About the time we can make the ends meet . . ."

Quote of the Day

"About the time we can make the ends meet somebody moves the ends!" - Herbert Clark Hoover, 31st President of the United States.

Great quote for describing my 401K.  Just heard from financial pundits on the radio, Steve Forbes among them, that it's the usual 10% market correction.

---

Artificial Economy Hits Reality?

Another dismal week for Wall Street.  Has the Artificial Economy finally met up with reality?

Christopher Thornberg, a speaker at the Los Angeles Economic Forecast Conference and a founding principal of Beacon Economics, attributes last years economic growth to government intervention and not due to economic fundamentals.

"The fundamentals are still bad, and are creating a new set of imbalances," he said. " . . . how we got into this mess was that we had trends that made no fundamental sense."

The HAMP program, FHA program, low interest rates, Hope for Homeowners, housing tax credits, "government intervention is preventing the fundamentals issues from being fixed and has created its own set of potentially serious problems for the economy."


 Also consider these factors:

•  the increase in consumer spending responsible for corporate profits in some sectors, such as automobile sales, are not in line with their income
• the banking sector still has massive amounts of bad debt that will take years to work through
• 12 million homeowners are underwater on their mortgages
• Federal Reserve Bank of San Francisco does not see the economy humming until 2013, at the earliest (SBA newsletter May 2010)

---

The Artifical Economy - When Will it Crash?

In resolving to be more diligent in reviewing my 401K, I'm puzzling over the conflicting financial news.  On one hand, I keep hearing that the economy will grow slowly, take years to recover and  be a jobless recovery.

On the other hand, despite an anemic 3% growth, job loss has tapered off, corporations were reporting record profits and the stock market is at its 2 year high.

The stock market crash last week, just adds to the confusion. I had just concluded that the market would continue to rise until the latter half of 2010 when Wall Street imploded. The Greek debt crisis and a glitch in the computer order of a major trader caused the stock market to plunge over 900 points during the day.

Where are corporate profits coming from?

Where are those profits coming from while we are at a 9.9% unemployment?

Banks - no secret here.  With the government bailout, banks are getting virtually free money.  Its easy to make record profits when you can borrow money from the government for almost 0% interest then lend it out in the form of credit card interest rate of 23%.  Or, the banks can simply purchase government bonds and earn 3% - 4% interest on their free money.

Auto makers - had some of their best sales figures in three years. I attribute this to the cash for clunkers program which artificially drives auto sales, much as the government tax credit for home buyers fueled the huge home sales numbers.

Corporate Profits - this number didn't make any sense at all. With the record profits some companies were reporting, our economy should be humming!  A closer look shows that much of the profits came from two areas: the savings from cost cutting measures, such as reduction in workforce; and an increase in overseas sales.  Here are some examples:

Caterpillar

Earned $233 million, or 36 cents a share, up from a $112 million lost a year earlier. Chairman and CEO Jim Owens attributes the strong numbers in this light.

"The main driver behind our improved outlook is robust growth in Asia/Pacific and Latin America and continued improvement in mining and energy globally," - source Marketwatch.com


Whirlpool

Shares now trade at $112.42, near it 52-week high of $118.44.  Contrast that to a low of $37.24 last year.  The company credits the more than doubling of its first quarter to the $300 million rebate program offered as part of the government stimulus bill. - source Cleveland and Ohio Business News

Also, the company's press release shows that while North American sales (2.3 billion) and European sales (739 million) rose just 7% and 6%, while Latin American sales (1.1 billion) rose by 65%! - source Whirlpool company press release.


Summary

I believe that the best summary for this post is a quote at the second annual Los Angeles Economic Forecast Conference from Christopher Thornberg, a co-founder of Beacon Economics,

Although the economy appears to be on a rebound,  "but unfortunately it is not due to fundamentals, it is due to government intervention."

The question now is how to weather the current economic climate?  And how should I redistribute my 401?