12.04.09

12.04.09

            The economy appears to be working its way through the muck and mire of the riskiest year investors have ever faced since the Great Depression. Don’t get me wrong, there are still some pot holes and speed bumps in the rod ahead. The two big ones that could still derail the train are Jobs and Real Estate (Housing and commercial). Also Retail Sales will be in the headlines in a couple of weeks. We need a little more proof that the economic recovery is not just temporary and will slide back into recession next year. I am not convinced of that yet, but some of my concerns are easing.  However, recent reports were that existing home sales shot up again in October (by a big  10.1%), new home sales rose a better than expected 6.2%, ‘pending’ home sales rose 3.7%, and home prices rose again in October. I expected those improvements would be temporary, since 30% of the sales were to first-time home buyers who were assisted by the $8,000 tax rebate program, which was going to expire at the end of November. But the program has now been extended into next spring, and expanded to include some folks who are not first time buyers.

           Last month Fannie Mae, the largest mortgage lender in the nation, with 57,000 foreclosed properties on its hands, announced a ‘Deed for Lease’ program. It allows qualifying people to stay in their foreclosed homes and pay rent at a level they can afford (rather than putting them out and putting their homes on the market). Other major banks are reported to be launching similar programs. It would give banks some income while they hold onto houses for the possibility of getting higher prices when they do unload them a couple of years down the road.

          Credit-card delinquencies have grown to a near record high. That may explain another big worry, which is that so far retail sales in the very important holiday shopping period have been a big disappointment. That still keeps the possibility of more layoffs after the first of the year in the picture, and with consumers accounting for 65% of the economy it keeps worries alive about the economy slowing down again.

          Getting back to signs of the stimulus efforts working out quicker, and possibly better than anyone expected in February (when Congress authorized the additional $780 billion of stimulus money), estimates vary but apparently only $175 billion to $250 billion of it has been spent, and the rest may not be. And already a total of $70 billion of the TARP money used to bail out financial firms has been repaid to the Treasury. This week Bank of America made arrangements to pay back all of the $45 billion of TARP money it received.

          Thanks to the big rally in bank stocks, the Treasury Department has so far also been able to sell at a profit the warrants it received from Capital One, JP MorganChase, and TCF Financial as additional sweetening in their bailouts. (They have also paid back all of their TARP loans). So while there are many remaining clouds that can, and probably will cause setbacks, the large patches of sunshine have been surprising. 

          We are still staying on the sidelines 100% in CASH. But some of the risk is fading and if things continue to improve, we may be putting some money back into the market in the near future.

Till next time

The MTA Staff