Tuesday, October 02, 2007

No One Can Make Ends Meet

Erick left us a comment to ponder this afternoon so we just have to respond. Erick's quote was: "Is it possible that nobody has enough money to make ends meet these days."

There is so much anecdotal evidence that people are basically struggling financially. We would say they are mostly "house poor" meaning their mortgages are eating up their income. It's true that not everyone is in dire straits as many people actually own their homes outright and, for them at least, this period of time may not be so bad.

The normal troubles of spending more than what you make is something that many people used to do but they would come to a point where there was no more room on their credit cards so they had to cut back, and, dare we say, pay them down. Then, along came the stock market boom in the late 1990's and people were able trade and make money which could then be taken out to pay off their credit cards.

Then came the stock market implosion of 2000 and 2001 which wiped much equity off the books and put people in the credit card spending mode which was ok because they had just paid their balances down. The Fed then had a great idea, lower interest rates to 1% on the short end of the curve and allow people to get ARM's to finance their houses.

What a great idea! Housing prices went up due to the higher demand and people could "refinance" their mortgages and pull cash out to pay off credit cards or take a "much needed" vacation or buy that new SUV they were wanting to buy. Well, you know the rest of the story up until now.

Now, the credit card debt is just part of the overall debt and the mortgage payments are starting to bite down a little more. These are difficult times for many who have already lost their homes and more who are still to lose them.

So, no, we don't think there are very many with the means to get from month to month and they are juggling the mortgage and the other debt they have and possibly the utilities. We see very little relief in store for many as we go into winter across the country. We think Christmas (holiday, for those of you who prefer politically correct) sales will not be very good this year. The first indication was that WalMart is already slashing toy prices to get people to come into the stores.

That should be enough commentary on Erick's comment but please feel free to add your own in the comment section.

Just a few other comments this evening as we continue to wait for something Normal to occur in the stock market. First, there was the, can we say, dismal pending sales report which showed a big drop. The report was that the mortgage meltdown was responsible for lower sales because would be buyers couldn't get mortgages. Right, there were so many buyers out there and they just couldn't get loans. See above.

Second, there was the news that Ford sales dropped 21% and Toyota was also down 4% while GM was up 0.28%. These items were taken as good news by the market, why? Well, of course, you know why. The old argument that the Fed can lower rates on Halloween. But, finally someone decided to say what has been on the minds of all of us ever since the first rate reduction several weeks ago. How can the Fed lower rates when the Dow at Record highs?

Attached to that article is the note from Bill Gross that asks the question "Does the Fed know what it's doing?" By the way, we wonder, too. We have commented on their lack of concern for the global impact of their rate decreases. Their actions are strong verdicts on the financial world as they see it. The stock market doesn't see it because they only worry about the interest rate cuts. But, we are confused by the recent action of the Fed. Yes, the market had dropped a little but there was no panic around the fall even in the face of horrible action in the credit world.

The result of all of this has allowed the Asian stock markets to absolutely go wild. We can not believe the action over there with the Hang Seng up about 40% since the middle of August.

Third, today's action in precious metals is worth a mention. Gold and silver were hit pretty hard as the dollar managed a pretty strong day, and we would say finally. We have been dollar bulls and precious metals bears for a while now even though we haven't acted on those thoughts, thankfully. Today is the first day where that may have made some sense. We'll continue to watch this sector to find a good entry point--we are looking for gold in the $500 range.

No comments: