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Unsustainable Growth: US New Homes Plunge

When anything rises quickly and without a strong supporting foundation, it falls quickly. We see it in new housing sales and we see it stock markets when share prices surge.

This plunge will have ripple effects in all supporting industries in the housing sector. They all benefited from the dramatic growth - make hay while the sunshines - and now they are all facing the other side of the chart. Take note of the moderate growth in earlier years. Moderate. Stable. So, what caused the dramatic growth? Low interest rates? Perhaps. Though rates had been relatively low since 1999. Perhaps it was the growth and pervasiveness of sub-prime loans driving this situation. Now the plug has been pulled and the results are showing up.

Read the story.

Interest rate and the US Dollar

Money moves to where ever it can get the best return. The interest rate is a provider of this return. To get the interest payment, you must move your money into that country and thus acquire (exchange) the home currency. If the interest rate is high (compared to other interest rates) they money will move in. when it does, the demand for the home currency, relative to the other currency rises - this is the simple case of supply and demand. When the interest rate falls, money may move out to find a "better home" and thus the exchange rate may fall. This is what we are experiencing recently in the US. There are other factors that affect the exchange rate - like trade surpluses and deficits.

Why change the interest rate?
In recent years central banks have used the interest rate to tweak things in economies. when economies are expanding too quickly - this can cause inflation - increasing the interest rate, and thus the cost of borrowing, can moderate this growth. Conversely, when economic activity is slowing, lowering the interest rate can act as a stimulus for the economy so that businesses and individuals can borrow money to expand business or buy a home or car. We have seen the latter recently in the US as the Federal Reserve lowered the borrowing rate by a significant 3/4% in an effort to stimulate the US economy.

Times are not so bad, actually.

Times are not so bad, actually.

The Economist does a nice job of bringing insight and clarity to the global economic situation.

"In this article we look at three pieces of evidence: the underlying social conditions in poor countries; poverty alleviation over the past decade; and the incidence of wars and political violence. By those measures the world seems to be in rather better shape than most people realise."

Read the in-depth article:Somewhere over the rainbow

How you may be affected by the Fed's rate-cut

The US Federal Reserve has reduced the borrowing rate by 3/4% -- a significant and unexpected amount -- in an effort to stimulate the US economy and to help alleviate some stresses resulting from the sub-prime mortgage problem. The Fed’s cut to 3.50% was its first emergency move since 2001 and the largest single reduction since 1984.

What is the impact on the US economy and what is the impact on your personal finances?

How you may be affected by the Fed's rate-cut

Give a man a fish and feed him for a day...
Will the proposed "stimulus package" proposed by President Bush aid the economy? In a word: No. The proposed one-shot payment will do little.

Refinance - Should you refinance your mortgage?

Is it worth it to refinance from a 30 year 6.50% to a 25 year 5.5%?

A good question. Is it worth refinancing your home mortgage to a shorter term at a lower rate?

There are refinance charges to consider. You may be better to change how you pay your mortgage:
a) switch to weekly payments
b) make extra or annual / semi-annual lump sum payments

both a and b will help to retire you mortgage sooner and at lower overall interest payments from you.

Check an answer to this question here.

Big drop in the Dow? Don't panic

The Toronto Stock Exchange dropped 600 points (4.75%)on Monday. US Markets were closed for the MLK holiday. We'll see what Tuesday's market holds in the US.

The Dow Jones Industrial Index is a collection of 30 stocks. 30 Stocks. That being said, it is an indicator, and a psychological barometer.

Wait for the bounce.
When ever markets drop quickly they bounce back. Like a ball. We have seen it on many occasions. Let's see how the markets perform in the weeks ahead.

Ok, so there’s a recession. So what?

Americans: Recession near - or already here - CNN Money

More than three out of four Americans believe that a recession has already started or will hit in '08. Half have cut their spending, which could make a slowdown worse.

All economies move in cycles. Plan for it. Expect it. The smart money does. You can too. I’ve always been a bit of a contrarian. When times are good I’m always a little worried because I know they don’t last. Make hay while the sun shines.

When economies recede not all sectors are affected. Some sectors continue to grow.

The term “recession” is widely miss-used. In fact, the true definition is two consecutive quarters of declining GDP. Some times they refer to a decline as “negative growth”. Funny. Anyway, that’s the official definition that economist use to define one. The force that has the greatest impact on economic growth is the public’s perception. If people think times are bad, then times are bad. If there is perception that times are going to get worse then people will hold off on major purchases like cars, homes, home renovations and major appliances.

OK, so despite this, life goes on. People eat, kids go to school, you drive a car, gotta buy new socks and underwear. It may mean that you don’t buy a new car. You choose to go camping instead of visiting Disney World.

The money that we spend on everything beyond the necessities is called discretionary income. You spend it at your discretion beyond food, housing and clothing basics. So things like renting a DVD at Blockbuster, buying a latte at Starbucks or flying on Southwest Airlines to play golf in Arizona are all discretionary purchases. During a downturn in the economy these purchases can be affected. However, if you are still working and have job security you may be unaffected.

If you are an investor you may want to consider invested that are resistant to recessions – sometimes called “recession proof”. These are the companies that tend to chug along through good times and bad. They are not the sexy stocks one looks for when times are good but they ought to make up a portion of your investment portfolio.

Want some ideas for recession-proof or recession-resistant investments? Here are few:

You gotta eat – my feeling, and this is just my feeling, is that we are going to see a strain on the prices of many foods. This is due to an increase in incomes in China and India. With more income there is greater demand for wheat, citrus fruit, coffee, dairy products, pork and beef. Check out some food stocks. Don't know of any specifically at present.

Drink – beverages, alcohol, water. If it’s alcohol, it’s Diageo– makers of Guinness, Smirnoff, Bailey’s, Cuervo and a wide variety of others. Demand continues through out the developing world as incomes improves, and, hey, aren’t we likely to want to drown our sorrows during bad times?

Go to school – how do you make money from going to school?! There’s a great company, a Canadian company, called Laidlaw who are quite recession proof. They are in two business areas: garbage collection and school bus operations. In good times or bad times you are going to make garbage and your kids are going to go to school. Unfortunately, Laidlaw is now privately owned. Somebody thought it was a good investment.

Go to the doctors – Health related stocks are often worth a look. Shares in drug companies are risky. New drugs need FDA approval, patents expire and generic drugs take the place of name-brand drugs, lawsuits emerge. Tread lightly here. Rather, look for more stable health-related companies like medical supplies and equipment makers.

Use energy – electricity, oil and gas. High oil prices are great if you own shares in oil companies. I do. I hope oil goes to $200 a barrel. Invest and be happy like a Saudi sheik. Natural gas is often a by product of oil extraction. Gas can not be transported like oil and presently there is too much of it. Electricity has a regular, ongoing demand.

Throw away – Garbage collection – There is always garbage. These companies exhibit stable income streams – good times and bad. I know of one Canadian company called BFI CANADA INCOME TRUST. This trades on the Toronto Stock Exchange as an income trust and not as a regular equity. Income trusts pay out to unit holders monthly from their cash flow. This is considered income to you, the investor. Read up before you invest. See:

Insurance – I am not going to pick any here. There are lots around. It worked well for Warren Buffet.

This posting and all content published herein is not a recommendation for investment and ought not be considered as such.

Don't live beyond your means.

see title.

U.S. Consumer Debt Rose $15.4 Billion in November

A January 8th article in Bloomberg by Vincent Del Giudice reports:

U.S. consumer borrowing rose more than forecast in November as Americans used credit cards and auto loans to add to a record amount of debt, Federal Reserve statistics showed.

Consumer credit increased $15.4 billion for the month to $2.51 trillion, the Fed said today in Washington. In October, credit rose $2 billion, less than the previously reported gain of $4.7 billion. The Fed's report doesn't cover borrowing secured by real estate, such as home-equity loans.

The figures suggest Americans are relying more on credit cards and other short-term borrowing to maintain spending after the collapse in subprime lending made bank loans harder to get. An increase of 133,000 U.S. jobs in November and December was the lowest for those two months since 2002 and disposable incomes aren't keeping pace with inflation.

``With job losses mounting, this could be the tip of the iceberg with consumers needing to rely more on credit cards now that personal income is lagging,''

said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi, in New York.

Read the story.

By the way, $2.51 trillion looks like this: $2,510,000,000,000

Emerging Markets: A changing role

The big topic at the World Economic Forum in Davos, Switzerland will be the global credit crisis.

In fact the credit crisis is not global. The emerging markets are not exposed to the same credit problems. Once seen as borrowers of capital, dependent upon the US and developing economies, emerging economies are now holders of capital.

The developed economies may now be reliant upon these countries - China, India, Brazil, and several of the Middle Eastern economies.

See: Emerging markets withstanding credit crisis, reports EFIC's World Risk Developments bulletin
As well: China, India to drive growth as credit crisis gains momentum

As large as the US economy is, it is not the only economy and it has not been a growing one. The harping by the US media that a recession in the US will cause a global recession are totally unfounded and irresponsible. The EU is a strong, sound and stable economy. India and China will continue to grow internally. An economy does not need to rely heavily upon trade to grow. Besides, the US is not China's only market. And, when an economy recedes it doesn't mean nothing gets bought, built, or consumed. It just means that it may be less than it was. In some sectors.

The tables may have turned.

Perhaps now the emerging economies have emerged.

Changes to Canada's Bankruptcy Act

Bill C-12 Update

On December 14, 2007, Bill C-12, An Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005 received Royal Assent. No amendments were made by the Senate such that the bill became chapter 36 of the Statutes of Canada, 2007. Contrary to what you may have heard or read, none of the amendments are in force yet. A coming into force date will be fixed by order of the Governor in Council, which has not yet been tabled.

Read more

Home foreclosures increase 94%

Home foreclosures rose a staggering 94% in the United States in October compared with one year earlier according to real estate data firm RealtyTrac.

"Home foreclosure filings in October edged up 2 percent from September but at 224,451 were a whopping 94 percent higher than a year earlier, real estate data firm RealtyTrac said on Thursday.

The figure, a sum of default notices, auction sale notices and bank repossessions, was down from a 32-month peak in August however, RealtyTrac, an online market of foreclosure of properties, said in its monthly foreclosure market report.

RealtyTrac said the national foreclosure rate was one filing for every 555 U.S. households in October."

Nevada, previously the hottest real estate market, now leads the nation in foreclosures. California ranks 2nd in foreclosures according to the report.

Florida, Ohio, Georgia, Michigan, Colorado, Arizona, Indiana and Illinois round out the top 10.

Read the whole story on Reuters.

Bankruptcy and Insolvency Resources

Below are a collection of resources made available by Canadian, US and UK governments regarding bankruptcy and insolvency.

CANADA
Bankruptcy Basics - from the Government of Canada

USA
Bankruptcy Basics - from the United States Government

UK
The Insolvency Service - from the UK Government