It’s Alive…Alive!

Unexpectedly, the Federal Open Market Committee (FOMC) cut the federal funds rate by 50 basis points during its September 18 meeting. The stock market reacted avariciously—the Dow rose 336 points that same day.

More importantly has been the effect on the troubled credit markets. While the sub prime sector of this industry continues its downward slide, there are signs of life in the overall credit market. The signs of life have been measured in increased issues of out of favor securities and falling interest rates for some borrowers. According to an article in BusinessWeek (October 1, 2007) titled, "The Debt Market: Signs of Life," authors Peter Coy and Mara Der Hovanesian detail the turnaround.

"The rapidity of the recovery in some hard-hit sectors is impressive. Take asset-backed commercial paper, which companies such as mortgage lenders issue to raise short-term funds. The market nearly melted down in August when buyers started worrying about the quality of the assets backing the debt, which can include sub prime mortgages. Buyers refused to accept paper that matured in more than one day. Now companies are able to issue paper with maturities of up to six months. And the interest rates they pay are falling. From a high of 6.20 percent on September 4, the yield on the top-rated paper with a one-day term fell to 5.27 percent on September 19, a drop much greater than the decline in the federal funds rate."

The article points out that while the damaged parts of the market are showing recovery, other sectors never faltered. Issuance of investment-grade corporate debt in August and the first half of September continued unabated as before the crisis began—in the range of $80 billion a month.

Even so, millions of homeowners who were in over their heads with real estate they could not easily afford will continue to default on their loans. As supply continues to outpace demand, home prices will continue their decline, further exacerbating the sub prime crisis. Defaulting debt is deflationary, which has eased the Fed’s fears about near-term price inflation and may be why it cut the federal funds rate by 50 basis points instead of the expected 25 basis points.

On another front, the devaluing dollar keeps falling, falling, falling. Last week, it hit parity with the Canadian dollar and an all-time low against the euro. Imports will cost the American consumer more (putting pressure back on price inflation), but our exports will cost less (benefiting those corporations in our country with a large export sector of their business).

In the October issue of Kenneth Coleman’s Investment Tracker, I plan to discuss more avenues available to investors for protecting their nest eggs against the devaluing dollar. There are more ways than ever to fund a Swiss annuity. STAY TUNED!