@theMarket: G-20 Weighs on Stocks
It wouldn't be a normal weekend in the financial markets without something to worry about. This weekend, it is the meeting of the two presidents, Trump and Xi, in Japan with $350 billion in new tariffs hanging on the outcome. What are the odds that they clinch a deal?
Not great, in my opinion. That doesn't necessarily mean that we need to brace for a worldwide economy-killing deluge of massive tariffs and counter-tariffs either. There is too much at stake for Donald Trump and China knows it. Instead, I expect we will get a classic Trumpian foreign policy "speak loudly and carry a little stick" maneuver.
Robert Lighthizer, our U.S. trade representative, already telegraphed just such an outcome earlier in the week. After a conference call on Monday with his Chinese counterpart, Vice Premier Liu He, several unnamed trade officials indicated that "the U.S. is willing to suspend the next round of tariffs on an additional $300 billion of Chinese imports while Beijing and Washington prepare to resume trade negotiations."
So sometime over the weekend, I expect one of those "my great friend, Xi, and I agreed to further talks, so I will delay implementing these new tariffs" kind of statements from the president. Of course, there will be the usual bluster about how much tariffs will hurt China and how we are making so much money on existing tariffs already, yada, yada, yada.
If my expectations are fulfilled, the markets should once again breathe a great sigh of relief. Stocks will likely rally. The economy will probably continue to slow. I expect businesses will continue to postpone investing while consumer prices on tariff-impacted goods will continue to rise.
Everyone (except Trump's wild-eyed loyalists) realize by now that the existing tariffs are hurting the economy, slowing employment, raising prices and causing more and more distress among the nation's farmers, manufacturers, and technology and retail companies. This year, we should see the largest one-year rise in tariffs since the Smoot-Hawley Tariff of 1930, which precipitated the Great Depreciation.
At the same time, the Fed's Jerome Powell, while acknowledging that the tariffs are hurting the economy, continues to hedge his bets. On Tuesday, he indicated that, contrary to Wall Street's expectations, a July rate cut was not a done deal. That was enough to send the markets lower just as the Dow Jones Industrial Average was about to join the S&P 500 Index in making a new historical high.
All of this week's jitters, however, is simply noise that you, the long-term investor, should ignore. Stocks had a great run last week and needed a pullback. It is that simple, and given the unpredictable nature of our president, pullbacks are increasingly becoming a dime a dozen. We can expect the S&P 500 Index to find support somewhere around 2,875. From where I sit, that simply clears the runway for another major leg up in the markets.
There is always an outside chance that I have it wrong. Could Trump do another "Kim Jong Il Walk Out" like he did in Vietnam a few months ago? If he does, or simply fails to cut any kind of deal (a low probability event in my view) then look out below. Markets will swoon, but at that point we should expect to see a central bank rate cut in July, which would support the markets.
|Write a comment - 0 Comments|
The Independent Investor: Reverse Mortgages
Some Baby Boomers have found themselves financially between a rock and a hard place. Rising costs, insufficient retirement savings and, in some cases, health issues, have forced seniors to consider taking out a reverse mortgage on the only asset they own. Is it a good idea?
For those who don't know, a reverse mortgage is a loan that uses a primary residential dwelling as collateral. It provides an option to generate cash by borrowing money against their home equity. Funds can be drawn as a fixed monthly payment, or a line of credit.
In order to participate, at least one owner must be over 62 years old. The bank or financial entity figures out what the house is worth at the time of the loan and lends the borrower a percentage of that number. As an example, if the market price on the home is $350,000, the bank or mortgage lender may front you $275,000.
The borrower then receives a payment (usually monthly) until the amount of equity (in this case, $275,000) in the loan is gone. Unlike a traditional mortgage, however, the amount a borrower owes on a reverse mortgage increases over time. No repayments are required during the borrower's lifetime. Payment is only due when the homeowners die or are no longer living in the property (over the past 12 months).
Over one million reverse mortgages or Home Equity Conversion Mortgages (HECM) have been sold since the government program started back in 1990. The program is run by HUD and over 90 percent of these mortgages are insured by the Federal Housing Administration (FHA). One important reason reverse mortgage are sought after, according to government statistics, is that one-third of U.S. households have nothing saved, while the remaining two-thirds have less than $75,000 in retirement funds. But the program has had its fair share of controversy.
Reverse mortgage scammers abound. Over the years there have been several scandals, including one where more than $1 million of reverse mortgage proceeds from seniors was stolen by a Florida title insurance company. The Consumer Finance Protection Bureau fined three companies a total of $790,000 a few years back for alleged false claims. It is a market where the buyer must beware and therefore borrowers should seek out and do business with the most reputable firms.
One important requirement of taking out a reverse mortgage is the borrower's responsibility of continuing to pay property taxes and maintain the condition of the home. There have been many instances of seniors who were forced into foreclosure prematurely for failing to satisfy one or both of these conditions. Unscrupulous marketers conveniently neglected to inform them of this fact.
The pros of reverse mortgages are fairly obvious. If you are one of the elderly, like my widowed mother-in-law, who was left with little to nothing by her spouse, a reverse mortgage may be your only option to make ends meet. Of course, she could have sold her home, but that is something the majority of seniors are loathed to do. They want to age in place, especially after the loss of their loved one.
She had no income outside of Social Security, so she could not refinance her home. It is true that her heirs (two adult sons and a daughter) would need to repay the loan in order to inherit her home, but two out of the three siblings live elsewhere and have no interest in the house. The reverse mortgage payments are also tax-free, which means a lot of savings when you are on a fixed income.
If, on the other hand, you are retired, but have sufficient income to pay your bills, or are willing to sell your home, either to down-size or to tap into the equity of your house, then reverse mortgages don't make a lot of sense. However, for many of us facing the unknown future of advanced age, the option of taking out a reverse mortgage on what, for most, is our largest asset as a last resort, may be comforting.
There is one caveat, though. If you are contemplating a reverse mortgage and you own a condominium, you are out of luck, unless that condo is FHA-insured. Few, if any condos, in my town, anyway, have ever applied for FHA approval, which is both short-sighted and a major oversite by this region's developers.
In my next column, I examine another type of reverse mortgage that could be a big help in dealing with the one nightmare of all elderly Americans. The fear that without much, if any, long-term care insurance, seniors will end up living in some squalid Medicaid-approved nursing home, depleted of all their assets, while their homeless spouse bags groceries at the local supermarket to survive.
|Write a comment - 0 Comments|
@theMarket: Stocks Should Move Higher From Here
It was a good week for investors. The S&P 500 Index hit an all-time high. The Fed indicated that they might cut interest rates sometime soon, and the President is once again optimistic about a China trade agreement. That’s a heady cocktail that could see markets gain another 3-5 percent over the next few weeks.
Of course, the critical caveat to my forecast remains President Trump's next tweet on the progress of a trade deal with China. As you know, with such a big “if” on the table, making future forecasts with even a modicum of certainty is impossible.
In last week's column, I enumerated all the scenarios that could play out, but it really comes down to how much faith an individual has in the president's ability to pull-off a deal with China. And while a successful agreement would definitely be good for the economy over the long term, I am not so sure it would be beneficial for the stock market.
My concern rests upon the Fed's reaction (or lack thereof) if an agreement is put in place. Chair of our Federal Reserve Jerome Powell has hinted that cutting interest rates would largely depend on what happens next on the trade front. That has sent the stock market to new highs.
The Fed reasons that additional tariffs of the size contemplated by Trump would impact our economy by over one half of one percent. That would be on top of a U.S. economy that is already slowing, thanks to the existing level of tariffs, and the rhetoric of even more actions if things don't go the president's way. Under those circumstances, one, two, or even three rate cuts could be justified by the Fed.
On the other hand, if the economic pall of trade sanctions were to be removed from the world's economies, there would be few, if any, reasons to cut interest rates. In fact, if global growth picked up as a result of a trade deal, an interest rate hike might be the better policy. Of course, that won't sit well with a President who expects to be re-elected on the back of a strong stock market and economy.
"Let's see what he does," warned Trump, when asked about the future of Jerome Powell. Trump would like interest rate cuts now to back-stop him (and the economy) if the G-20 meeting with President Xi Jinping blows up in his face next week. In the event the meeting is progressive, and chances of a deal improve, Trump wins (in his mind) on all fronts. A stronger economy, a higher stock market, and a campaign promise almost fulfilled.
From the central bank's point of view, doing the president's bidding now before the certainty of a trade deal, opens up the possibilities, in the medium-term, of an over-heated economy, a spike in inflation (that may be difficult to control), and a Pandora's box of subsequent economic dislocations down the road.
Despite the pressure from the White House (firing or demoting him if he doesn't cut rates now), Powell, while sounding dovish, managed to avoid cutting rates this week, not that the market expected him to. He couched his language with just enough promise to satisfy Wall Street and mollify the President.
The markets anticipate 2-3 interest rate cuts between now and the end of the year; so does the president. By maintaining a wait-and-see attitude despite, the fact that almost half of the Federal Open Market Committee members are urging a rate cut, Powell is between a rock and a hard place.
My bet is that next week, the Trump/Xi meeting goes well. There will be more negotiations, but no deal. The markets will like it. The economy will not, and thus should continue to slow. That will set up the Fed to cut the Fed Funds rate by a quarter point in July. The tension, the wall of worry, the negotiations, and the atmosphere of uncertainty swirling around the president's next tweet will continue throughout the summer. That should be good for the market and your portfolio.
|Write a comment - 0 Comments|
The Independent Investor: Why FHA Loans Are so Popular
Federal Housing Authority Loans have long been one of the most popular types of mortgage loans available. Roughly 20 percent of all mortgage applicants will choose an FHA loan because it makes total economic sense to do so. And the older you are, the more important having an FHA approved dwelling becomes.
To many, that may appear to contradict your understanding of the FHA loan market. Most believe it is a program to assist younger folks, who need a hand to purchase their first home. You wouldn't be far wrong from a historical perspective, but times have changed.
The FHA loan was originally designed during the Depression years to help home buyers, (usually first-time applicants), with low credit scores and a small bank account, to afford a home. But the FHA doesn't make the loan; the bank does. The Federal Housing Administration, however, guarantees the loan, and as such, provides mortgage lenders an added degree of confidence and security in lending to the prospective home buyer. If the borrower defaults on the loan, the FHA will reimburse the lender the amount due.
Some of the benefits to the borrower include lenient credit scores, much lower minimum down payments (as little as 3.5 percent down), and lower mortgage rates, usually 0.10 percent-0.15 percent lower than the average rates on conventional loans.
The Veterans Administration's Home Loan Program is also available to qualified vets and works like its FHA brethren, guaranteeing the lender a portion of the loan if the vet defaults. An added benefit is that there is usually no minimum down payment required, and much lower credit scores, interest rates, and income requirements than even the FHA loan.
While many youngsters are taking advantage of these government resources, an increasing number of elderly and retirees are seeking out these same benefits, but for entirely different reasons.
As Baby Boomers become empty nesters and then realize they no longer want or can afford the expense, upkeep, and taxes on their original homestead, they are seeking out a more modest and affordable dwelling, either in their local neighborhood or in some more exotic (or warmer) locale. It is called "down-sizing," a popular trend among Boomers that has been gathering steam in this country for decades.
Many times, a condo is the dwelling of choice for these new home buyers. As a result, the number of condos throughout the United States continues to grow. Since most retirees have more than enough money to purchase a condo with the proceeds of their larger home, FHA or VA loans have not been a factor in their purchase until now.
However, for many retirees, cutting expenses is one of the central reasons for downsizing. They find making ends meet is becoming increasingly difficult in today's environment. Social Security benefits, low interest rate returns on fixed income investments, and the rising cost of health care and other services are forcing more of the elderly to pinch pennies. Unfortunately, even downsizing is not enough.
More and more seniors are forced to turn to using their dwelling as an asset of last resort. The use of reverse mortgages to make ends meet is becoming increasingly popular. And here is where the rubber meets the road when it comes to an FHA loan. If your house or your condo is not FHA insured, you do not qualify for a reverse mortgage or a home equity conversion mortgage.
In my next column, I will explain how the failure to qualify your dwelling as an FHA-insured home/condo today can prevent you from leveraging your greatest asset when you need it the most.
|Write a comment - 0 Comments|
@theMarket: Markets Expect Fed to Cut Rates
Investors can credit the Fed once again for the market's revival thus far in June. The buying is fueled by expectations of three rate cuts by no later than December. Is that wishful thinking?
While only 23 percent of investors expect a rate cut next week when the Fed meets, 83 percent do expect a cut in July. The odds of another cut in September are now at 63.8 percent, with a third cut in December, which is expected by over half of market participants.
Given that the Fed's job description is to keep inflation under control, while supporting robust employment, one or the other of those variables will need to change in order for the Fed to cut rates. The inflation rate is still below the Fed's stated targets, so that shouldn't be the issue, which leaves jobs as the area of concern for the Central Bank.
Over the last few weeks, job creation has slowed down, but so far the data does not indicate the unemployment rate is set to skyrocket. It is true that warning signs are flashing for economic growth both here and abroad, but the U.S. is still expected to grow by 2.2-2.5 percent this year. Most economist models indicate a further slowing to slightly under 2 percent for the U.S. economy in 2020, but that still results in an acceptable performance for an economy that is on its 10th year of expansion.
I guess the real issue that makes forecasting by the Fed, investors, and myself so difficult is the ongoing trade and tariff threats that will most likely decide the fate of the global economy. Three rate cuts might be justified if the two antagonists (Trump and Xi) meet at the G-20 at the end of June and fail to compromise. The kind of tariffs Donald Trump is threatening to levy on China would certainly put a big dent in global trade and shave a half percentage or more off the U.S. economy next year, if not sooner.
On the other hand, if the two agree to disagree, but continue to negotiate through the summer, corporations would still be living on borrowed time, but won't invest. Our farmers and other exporters would continue to try doing business within the continuing status quo of uncertainty. That sort of atmosphere, while not a robust business climate, might not be sufficient enough to justify a rate cut by the Fed.
In this land of the unknowns, therefore, we are left with throwing the bones and/or reading tea leaves to come up with all sorts of what-if's. Story lines like "Donald Trump needs a China deal, otherwise, the economy slows, the stock market plunges, and he loses the 2020 Election."
Then there is the China sub-plot: "China's game plan is to procrastinate until after November 2020, or at least wait until the economic pain in the U.S. is such that Trump caves-in and is willing to strike a better deal than he is offering now."
If one looks at the action in the bond market, where interest rates have fallen to multi-year lows, the consensus seems to be gloom and doom. But that is nothing new--bond investors are a gloomy mob even at the best of times. If you look at the stock market, which is only a few percentage points away from historic highs, you could say that the future is rosy and there are blue skies ahead. Which is right, since they can't both be correct?
Maybe it simply comes down to whether you are a half-empty or half-full kind of investor. Donald Trump is definitely in the camp of those that believe the stock market should go higher. If that means the Fed should cut interest rates and be dammed the consequences, then so be it!
In the other camp are those who get hurt when interest rates fall. Retirees, pension funds, and all those who shun undue risk in exchange for a steady income. While those voices do not appear to be well represented in today's environment, they do represent a sum of money that dwarfs that of the equity market. Yet, they also have the reputation for being smarter than equity investors and are right more times than they are wrong.
|Write a comment - 2 Comments|