Last week was the best week in the stock market since it reached its July peak. The market bobbed up and down along with its perception of the breath of the mortgage crisis. A $2 billion infusion into Countrywide rallied the market. When two mortgage lenders used the “R” word – recession – the market retreated. Then speculation the Fed will cut the key Fed Funds rate at its September 28th meeting took hold and the market rallied.
What to expect this week? A quiet market. There will be a lot of nervous brokers sitting on the beach checking their Blackberrys. (Labor Day week expect to see a surge of Blackberrys in for repair due to sand damage.) It’s going to take some time for the mortgage market (lenders and buyers of securitized mortgage products) to return to normal. Lending standards will be tighter, especially for subprime mortgages. The related problems in the debt market – private equity/LBO buyout financing, liquidity for securitized debt of all types (mortgages, loans, etc.) are continuing to sort themselves out. Lenders and buyers of debt (investors) have to become confident that credit spreads are not going to widen further, and their contra party is solvent, for liquidity to return and the current problems to recede.
While the debt markets seek their new equilibrium, investors will continue to speculate on the likelihood of a Fed Funds rate cut. I think the market will be disappointed on September 18th. The Fed won’t cut rates because the economy is strong, except for the housing sector. Corporate earnings, ex-housing, are meeting or beating expectations and industrial production is solid, driven by global growth. Although consumer spending remains a question mark, international demand is taking up the slack. All-in-all this looks like a normal later stage economic cycle.
The market turmoil of the past few weeks has presented some investment opportunities. (The best opportunities present themselves during times of uncertainty.) International mutual funds have been hit hard. Many good funds are down 10% from their peak. International growth continues to be strong. If you haven’t diversified your portfolio internationally, now’s a good time. Big Cap US mutual funds also should do well. The companies they invest in have significant overseas exposure. (See for World Stock Funds and Large Growth Funds for ideas.)
For the money market and CD investor, some interesting opportunities have presented themselves. Countrywide’s bank, for example, is offering savings accounts with 5.5% interest and one year CDs at 5.65%. Both are FDIC insured, up to the regulatory maximum. Other mortgage lenders are, or own, banks. If you shop around on-line you can find some very attractive yields on money market type instruments. Just remember to make sure they’re Federally insured.
