Fed Day!

[NimbleSexyXquisite]

Will the Fed cut or raise interest rates.?

Or just stay the same?

I feel it will not change today, but like last year, it will go up around end of june early july, when summer gas prices hike up.

All comments and opinions wanted!

 

[NimbleSexyXquisite]

Unchanged!

My heart is hoping for a cut, I will be buying a home within the 18 Months.

But my mind knows that it will not cut anytime soon.

Any one hear with a Option ARM Mortgage? How much have you [payments changed over the years?

 

[Maximus_NSX]

Do not get an option arm mortgage. Your principle will increase if you only pay the minimum. It's basically a mortgage that allows you to pay different amounts every month. I know that the lower starting monthly payments are attractive, but think long term here, unless you only plan on living in the house for a short term. Btw, the federal funds rate is not directly tied to long term mortgage rates, although there is some influence. HELOC rates are directly tied to the federal fund rates though.

 

[morrow]

Unchanged!

My heart is hoping for a cut, I will be buying a home within the 18 Months.

But my mind knows that it will not cut anytime soon.

Any one hear with a Option ARM Mortgage? How much have you [payments changed over the years?

Many have seen rate changes in excess of 2% on these in the past few years. Since you are not buying for a while you can monitor the movement of these loans now to see how much your loan would have changed. The POA rate is based on an Index + a Margin. The Index is usually tied to the MTA index, but can be a COFI or LIBOR. The Margin will be determined by your ability to document your income, LTV, FICO, etc.... Expect a 2% margin on average for these loans. These can be great loans for some but very risky for others. There are some POA loans that have the Rate (index and Margin) fixed for 30yrs. this will take some of the risk out of these. You will see more banks offering this type of POA very soon. Good Luck.

P.S. So much for the FED cutting rumors in 2007.

 

[redshift]

You might see Big Ben exercise the old Greenspan put in the second half if the housing bubble they created continues to lose air. After all, Ben is made out of the same stuff as Greeny Weeny, and the Fed NEVER does the right thing.

 

[Ski_Banker]

You might see Big Ben exercise the old Greenspan put in the second half if the housing bubble they created continues to lose air. After all, Ben is made out of the same stuff as Greeny Weeny, and the Fed NEVER does the right thing.

Low interest rates are only a contributing factor in the housing bubble. They are not the source.

 

[redshift]

Low interest rates are only a contributing factor in the housing bubble. They are not the source.

Cool, I'd actually love to hear your point of view on the matter since I always enjoy reading your well informed economic insight. :smile:


Anyway, here is my take on the chain of causality...
The Fed makes the cost of capital very inexpensive and pumps a metric butt load of money into the system. We know what happens to discretionary goods when money is cheap... consumers consume... a lot. Enter housing to absorb this new money. Rates are low, economy is high, buy buy buy. The housing boom begins. Bad lending practices jump into the rally and exaggerate it. Sub-prime is exposed and the rest comes to pass.

So it appears to me that crap lending is a symptom of the boom which acted as a super catalyst, but not a cause. Hence the Fed put their foot to the floor and drove another American business cycle through the roof (pun unfortunately intended).

That's my story, commence hole poking. :biggrin:

 

[Ski_Banker]

Cool, I'd actually love to hear your point of view on the matter since I always enjoy reading your well informed economic insight. :smile:


Anyway, here is my take on the chain of causality...
The Fed makes the cost of capital very inexpensive and pumps a metric butt load of money into the system. We know what happens to discretionary goods when money is cheap... consumers consume... a lot. Enter housing to absorb this new money. Rates are low, economy is high, buy buy buy. The housing boom begins. Bad lending practices jump into the rally and exaggerate it. Sub-prime is exposed and the rest comes to pass.

So it appears to me that crap lending is a symptom of the boom which acted as a super catalyst, but not a cause. Hence the Fed put their foot to the floor and drove another American business cycle through the roof (pun unfortunately intended).

That's my story, commence hole poking. :biggrin:

No hole poking, you're right on. But that is only part of the story. Most importantly, the Fed's job is to regulate inflation and smooth the business cycle - which it has done fantastically well in the last 2 decades. So I disagree with the common assertion that the Fed should be blamed for stock or housing bubbles.

Yes, low interest rates have been a particularly strong catalyst for the housing boom. But those rates, as you know, are not set by the fed. They are dictated by global investor desire for risk, and supply/demand for money at any given (perceived) level of risk. Mortgage rates have been low because in the last 5 years, people have piled money into bonds including mortgage backed securities. A large part of this results from our trade deficit with China. Since the Chinese don't have a floating exchange rate, their government has essentially kept billions of US$ in various US$ denominated bonds (treasuries, corporates, mortgages). Until very recently, this money has not been invested in U.S. stocks - just bonds. So, without all this money going into bonds, we might have had 1% Fed funds rates, but still 6-7% LT treasury rates and even higher corporate & mortgage rates.

Other contributing factors:
1. Lending practices have been getting consistently more lenient over the past 25 years, which has allowed more homeownership. This is primarily due to the development of the mortgage backed securities market, allowing banks to offload weaker loans. In the past few years, it has gotten out of control however. Who ever heard of not verifying income on a mortgage application to someone with poor credit?? The ratings agencies like S&P and Moody's are very much at fault for assigning ratings to MBS bonds (even weaker credits) when the underlying mortgages have poor documentations. They'll take a lot of heat -- might be a good stock short. :wink: (As an aside, rating agencies primarily use statistical analyses on delinquencies and defaults when rating debt. Statistics work great, except when there are changes in the data that isn't reflected historically. Those jokers can be really terrible at making forward looking assessments of risk)

2. After the stock market bust, people looked for "safer" ways to invest and real estate has had that perception for decades. It's wrong to some extent. It's also why there is so much liquidity in the debt markets.

3. Booms and busts are a fact of life, for whatever reason. Human nature. 98% of the population doesn't know how to value an investment (even finance and accounting folks) which begets bad decision making. Price momentum does happen, and residential real estate is just the latest evidence.

 

[redshift]

ah yes, very good read. I suppose the tendency to blame the Fed for all aliments comes from their inability to fix all problems... which is understandable since it is certainly a balancing act. Though it does hurt to see them always side on the short-run.

Just curious, but do you really believe the Fed isn't responsible for past stock bubbles? Of course, there are many internal and external factors to consider but from the top down it sure does look like their hands are red.

 

[Ski_Banker]

ah yes, very good read. I suppose the tendency to blame the Fed for all aliments comes from their inability to fix all problems... which is understandable since it is certainly a balancing act. Though it does hurt to see them always side on the short-run.

Just curious, but do you really believe the Fed isn't responsible for past stock bubbles? Of course, there are many internal and external factors to consider but from the top down it sure does look like their hands are red.

No, I don't believe that the Fed was responsible for the tech stock bubble or the housing bubble. Investors are - they bid up the assets. Keep in mind that for the $X Trillion of market cap lost when tech stocks crashed -- that's money that was made by someone else that was smart enough to sell before the top.

However, speculative asset pricing is still a major concern of the Fed when it impacts the rest of the business cycle. They just, quite frankly, don't know how to address the problem very well. No one does, at least not within the confines of a free-competitive market.

My OWN speculation, on the subject of momentum investing and speculative pricing is that these bubbles will only continue for a few reasons. Fundamentally, momentum & bubbles happen only when lots of people/capital learn of the same opportunity at the same time, and among those people have to be those that don't know how to value the opportunity.

First, the internet has only recently allowed people the ability to instantly receive and share information around the world. We could all read of some news story about a niche industry in Thailand, and shares in those businesses would multiply overnight. Further, going back to "human nature", people respond to changes in price -- unknowledgable investors buy stocks going up, sell those going down. The internet allows for much broader communication of price changes however, exacerbating the effect.

Second, wealth distribution is widening for numerous reasons. But the net result is that there is more liquid capital in the world that can quickly move from one hot sector to the next.

Third, securities investing is now available to anyone cheaply. Particularly through new ETF-type products, people can invest in just about anything from home or work. The more unsophisticated investors, the more likely that asset prices will run up from investors basing their decisions on price and not value.

(these are just my OWN speculations. And no, I'm not a momentum investor )

 

[redshift]

Sure, I agree. But high liquidity in the markets is a gift from the Fed... it seems to me that it can easily fuel a bubble. Economics, being a social science and the Fed being an arbitrator of economies, it would seem that they knowingly squirt lighter fluid on the charcoal. In doing so, they raise the value of assets - because they're discounted less - and light a match. I completely agree that speculators and investors have the potential to get ahead of themselves at this point, bucking past valuation conventions, paying unreasonable multiples, and crying "new economy" at the top of their lungs - but in the beginning it was the Fed who let them out of their cages and dangled a carrot in front of their faces.

I really like your thesis on momentum investing and the continuation of bubbles... good stuff. :biggrin:



BTW, keep in mind that I'm not trying to argue, I'm just trying to extract more information from you. I've learned so much from your various posts throughout prime. I'm really just a punk 28yr old kid with an engineering education and a thirst for economics that has made the great majority of his money in the US stock and options markets - I definitely lack a lot of real long term experience, but I'm working on that. :biggrin:

 

[sahtt]

Ski probably has 10 times the knowledge on this subject that I do, but I have a little knowledge from some fairly well educated professors at UT.

The Fed's role is always complex and their efforts are always, to an extent, futile. The economy is a roaring beast and all you have is a leash and a skateboard to try to keep up. In today's context specifically, I think the Fed is more concerned about constraining inflation as best they can while keeping things as stable as possible.

I agree, they do have the ability to throw a little diesel on the fire, but unlike that natural reaction, investors choose to act on those actions they often see as incentives. The Fed could pour 10 gallons of gasoline, it's up to "us" to produce the flame.

Ski touched on a very important point that the Fed is certainly dealing with/considering now. In today's global economy entrenched with consumer and national debt, market information/trends being published and shown to the world instantly [often before they've even happened..] and increasing liquidity/availability of the average person to invest; although we know more than ever, we are also faced with an equation we haven't begun to figure out while adding exponentially more variables. Add that to the immense pressure the Fed faces to "fix" things and it's all a bit unreasonable, the expectations/blame that is, IMO anyhow.

This reminds me of when people blame the President when any political issue goes wrong. While there is sometimes a direct or indirect correlation with a President's actions, usually there are a million other things going on that NO ONE PERSON completely understands, yet someone has to make a move, so he takes the fault. Is the Pres/Fed important.. of course. Do both face unrealistic expectations from mostly completely uneducated people on the matter.. you decide.

 

[sahtt]

I also have learned Mandarin Chinese hoping to do business overseas in the near future. I have studied the Chinese economy as well as the other 'Asian Tigers' in less detail. If you are really interested on seeing how things work, it's easier IMO to learn the basics from them. Japan and China both started from scratch trying to model what they thought was good with our system and what they thought they could improve on. As you can see.. they undoubtedly picked up on a few good strategies. The progress China has made since the economic revolution of the 1980's is almost like watching an economic experiment right before your eyes. It's far from perfect but you'll never get the visible foundation studying the U.S. economy like you can in China where all their strategies are implemented by more or less a single power, all purposely. Pretty interesting stuff, I know it will be valuable stuff as well sooner or later [hopefully sooner :smile: ].

 

[redshift]

sahtt, I totally agree with your analogy of the economy as a raging beast; it is always in front of the Fed and they're trying to guide it from the rear by throwing peanuts with their off hand on either side of it. That begs the question, why do we even need a central bank? The same question can not be asked of the President... at least not without being tarred and feathered :smile:. I think so many are quick to blame the Fed because they believe we'd be better off without them and classical economists just can't stand what they're doing with the money supply. I personally find it difficult to blame investors (though I may be biased :tongue... they are a mob in the throws of primitive group think... they can be easily guided and they look to the Fed for that guidance.

Very cool on learning Chinese... they are proof that communists make good capitalists :biggrin: :biggrin: :biggrin:!

 

[NimbleSexyXquisite]

Low interest rates are only a contributing factor in the housing bubble. They are not the source.

Yea, i felt the source was appreciation and the lower interest rates helped sales.

the lower interest had a bigger factor on mortgages like refi's and 2nd's

 

[redshift]

Yea, i felt the source was appreciation and the lower interest rates helped sales.

the lower interest had a bigger factor on mortgages like refi's and 2nd's

Appreciation or speculation? In our case, speculation begot appreciation so the question comes down to "what came first, the speculator or the Fed." My argument was against the Fed, I pointed out that rallies start when the cost of capital is low and there is a constant injection of new cash into the money supply. Ski then provided a broader and deeper view of the events by examining what was happening in the bond market - which is obviously tightly coupled to mortgage rates. The difficulty in understanding and processing what has happened stems from the fact that none of the variables are independent of one another... enter balancing act.

 

[NimbleSexyXquisite]

Appreciation or speculation? In our case, speculation begot appreciation so the question comes down to "what came first, the speculator or the Fed." My argument was against the Fed, I pointed out that rallies start when the cost of capital is low and there is a constant injection of new cash into the money supply. Ski then provided a broader and deeper view of the events by examining what was happening in the bond market - which is obviously tightly coupled to mortgage rates. The difficulty in understanding and processing what has happened stems from the fact that none of the variables are independent of one another... enter balancing act.

appreciation was dependent on massive real estate investors investing in real estate when the time was right. when interest rates were cut and low and also certain markets like especially where i live in Los Angeles, CA the market had to correct itself form being priced so lowed.

California was under valued before 2003-2004. So there were alot of investors old and new using the flip technique, buying land and sub dividing, basically buying low and selling high to get a profit.

so when we all sold high, it made the comps go up.

So thats why we saw appreciation up to the 20%. It was ridiculous at the time.

Then when appreciation was high, there were more massive investors doing 2nd homes and using the Option ARM at low interest rates and as low payments per month, this creating a higher net worth for the investor, living off of the appreciation.

But as appreciation wnet down and rates went up...well we all know...because its happening now.

I think all opinions are dependant on where you live. where I live in Pasadena, CA, it was about time for California to correct its self to New York levels, because the too best real estate states are California and New York.

So I feel in California has met its future median, and it wont drop as much or correct itself as much to having home prices of the early 2000's.

"Its a Bullish Market!"

 

[redshift]

appreciation was dependent on massive real estate investors investing in real estate when the time was right. when interest rates were cut and low and also certain markets like especially where i live in Los Angeles, CA the market had to correct itself form being priced so lowed.

California was under valued before 2003-2004. So there were alot of investors old and new using the flip technique, buying land and sub dividing, basically buying low and selling high to get a profit.

so when we all sold high, it made the comps go up.

So thats why we saw appreciation up to the 20%. It was ridiculous at the time.

Then when appreciation was high, there were more massive investors doing 2nd homes and using the Option ARM at low interest rates and as low payments per month, this creating a higher net worth for the investor, living off of the appreciation.

But as appreciation wnet down and rates went up...well we all know...because its happening now.

I think all opinions are dependant on where you live. where I live in Pasadena, CA, it was about time for California to correct its self to New York levels, because the too best real estate states are California and New York.

So I feel in California has met its future median, and it wont drop as much or correct itself as much to having home prices of the early 2000's.

"Its a Bullish Market!"

I think you're right for the most part, but I think you also may be missing my point. There is always a catalyst that sparks this type of event. So you're saying that appreciation is the catalyst... then where did the appreciation come from? What was it that caused investors/speculators to push prices upward -> Cheap money.

BTW, we saw appreciation (if you can call it that) as high as 40% here.

 

[Ski_Banker]

There is always a catalyst that sparks this type of event. So you're saying that appreciation is the catalyst... then where did the appreciation come from? What was it that caused investors/speculators to push prices upward -> Cheap money.

Cheap money, whether 100% Fed induced or 1% Fed induced, positively impacts the valuation of all assets. Stocks, bonds, real estate, commodities too (carrying costs lower). So then, why didn't P/E multiples expand in 2002-2004?

The point here is captured in Nimble's signature -- price is what you pay, value is what you buy. The equity and total asset value of real estate (and stocks) increases when debt financing becomes cheaper. But the lower interest rates didn't increase the value of real estate 3x in some areas. Off the top of my head, a move from 8% mortgage rates to 6% might equate to a 20% increase in value. Beyond that is speculation, all else being equal and assuming the real estate values were fairly priced 5 years ago -- probably a safe assumption.

 

[NimbleSexyXquisite]

Its this simple.

If there is a great value out there, I would buy, no amtter what rate I get.

I just dont invest or buy something because its cheap to finance.

Buying Low and Selling High. the Idea of making money is the catalyst. :biggrin:

But i never said rates weren't a factor, its just not the main factor.

Appreciate all the opinions, keep it coming fellas.

Because I dont thinkwe have ever seen the real estate market like this ever.

New Exotic loans from IO to OPtion ARMs and super hgih inflation have created the situtation we are in.

Record forclosures and other things of this nature we should discuss more of.

What will happen, not what already has happened. Cus what I am seeing is more inflation to come. :frown:

 

[redshift]

Cheap money, whether 100% Fed induced or 1% Fed induced, positively impacts the valuation of all assets. Stocks, bonds, real estate, commodities too (carrying costs lower). So then, why didn't P/E multiples expand in 2002-2004?

2000-2001 was supposed to be our post war recessionary time period - America should have been tightening ship. The only problem was that it never really happened, at least not to historical standards because the Fed encouraged borrowing and spending during that time frame. It can be argued that Greenspan smoothed out the dip, but in doing so he dramatically reduced the 2002-2004 recovery period. We didn't see big PE expansion because growth was so dramatically sapped from the earlier injection by the Fed to curb the recession. So while the Fed may have been devaluing the dollar at an alarming rate to cheapen money, real growth was about 7% lower than would have been expected by historical measures. That puts a huge draw on that premium we would usually pay on growth for assets. So while asset values were increasing due to discounting, they were decreasing due to lackluster economic growth. So we paid a higher premium on a lower (due to growth) multiple (i.e. PE stagnates).

Hehe, I'm sure you'll have a field day with this one. :smile:

The point here is captured in Nimble's signature -- price is what you pay, value is what you buy. The equity and total asset value of real estate (and stocks) increases when debt financing becomes cheaper. But the lower interest rates didn't increase the value of real estate 3x in some areas. Off the top of my head, a move from 8% mortgage rates to 6% might equate to a 20% increase in value. Beyond that is speculation, all else being equal and assuming the real estate values were fairly priced 5 years ago -- probably a safe assumption.

Exactly, asset values were increased by means of cheap money. Investors solved for value and closed the gap. Momentum guys jumped on board and pushed prices (not value) higher. What you're saying is that cheap money in housing primarily came from foreign investors in the US bond market and secondly from the Fed's monetary tampering - I can agree with that... but can you step back a bit and explain why foreign investors were only pumping up the bond market in the first place?

 

[redshift]

Its this simple.

If there is a great value out there, I would buy, no amtter what rate I get.

I just dont invest or buy something because its cheap to finance.

Buying Low and Selling High. the Idea of making money is the catalyst. :biggrin:

But i never said rates weren't a factor, its just not the main factor.

Appreciate all the opinions, keep it coming fellas.

Because I dont thinkwe have ever seen the real estate market like this ever.

New Exotic loans from IO to OPtion ARMs and super hgih inflation have created the situtation we are in.

Record forclosures and other things of this nature we should discuss more of.

What will happen, not what already has happened. Cus what I am seeing is more inflation to come. :frown:

Yes, I understand the simplicity of value investing. I've been doing it for 8 years and absolutely crushing the market's returns. I've read Graham, Buffet, Soros, Lynch, Rogers, et al. and I've put their words in action in several investment vehicles. Though I have found high probability option income strategies to be more lucrative as of late, but I've only got a couple years behind me in that realm.

So, with that said, I am very familiar with the idea of buying value not price. I never said that you should go out and buy something just because it is cheap to finance. The fact of the matter is that consumers consume more when money is cheap. More importantly, the finance rate directly impacts the value of that asset which you are financing (i.e. if your asset's FV is discounted less, then its PV is greater).

So ask yourself what made those assets undervalued in the first place... that is your catalyst because it is a forgone conclusion that value guys will always buy cheap (they always have). I suggested the Fed's policy of uber liquidity and Ski suggested foreign investors in the US Bond market (which is obviously a much more direct cause of value adjustments in the mortgage business).

As for inflation, I might be just as inclined right now to worry about low economic output - you know we're in trouble when those two diverge dramatically. You'll get your rate cut when GDP goes negative :wink:.

 

[NimbleSexyXquisite]

You'll get your rate cut when GDP goes negative :wink:.

Yup, its just too bad home prices wont get cut. :frown:

I like what you said about post war recession, i guess its just a waiting game for now.

How is Scottsdale right now. I visit arizona once a year for Baseball Spring training. And I love scottsdale, that would be the only place i would buy in AZ.

ANd How is CHandler doing? last time i was there was about two years and i remember it going through a lot of growing pains.

 

[da3dalus]

I love fed day! Its like Christmas, but it comes 8 times a year. I booked 11.5 ES points during the event on wed. My personal best trading day ever.


Sorry... just was excited to see a thread about fed day on this glorious forum and wanted to share!

 

[Ski_Banker]

Redshift, I'm not really sure where to begin. I think you have it "all right" and "all wrong" at the same time, which I also think just stems from watching too much CNBC. The "all right" is that you understand how real estate prices have risen as they have (as well as I, or most folks do...I'm not a real estate expert by any means, but perhaps a valuation expert). The "all wrong" is from thinking that what has happened is entirely or mostly Fed related. CNBC is horrendous in inflating the importance of the Fed and every little move it makes. In the short term, for stocks, it does matter in much the same way technical analysis matters -- a lot of it is BS, but if everyone else is evaluating the BS, you have to as well for short term PRICE forecasting.

Why the Fed should generally be ignored for valuation: Think discounted cash flow analysis. As long as the Fed does its job of keeping inflation in check and moderating the business cycle, the PV of your future cash flows can be estimated, put simply. What happens to ST interest rates over the next 1-3 years, has very little impact on the value of a business. It's what long term interest rates, and how the Fed manages severe economic booms & busts that matter (and inflation). But, given the level of globalization in the last 10 years, what the U.S. Fed is now doing has a MUCH lesser inpact on the all-important long term interest rates than ever before. It would be a huge stretch to say that "the Fed doesn't matter" but it certainly has less power than ever before. I like the water skier analogy your or Nimble used - very accurate IMO.

So, do yourself a favor and lay off the CNBC :tongue: . You'll invest better by coming to your own well-thought-out conclusions than listening to others spout off with conflicting and often stupid arguments. Kinda like cable news, but that's a different topic. :wink: