Bill Gross is being blamed for dropping an enormous boulder on the road to an up 30% year for the US stock market.Apparently Mr. Gross envisions 6.5% on the ten year coming sooner than most people would like. This potentially hurts stocks and slows the economy as, quite obviously, accessing capital becomes more expensive.
While this is true I think it calls for a little perspective. A $300,000 mortgage at 6% for 30 years will have a monthly payment of $1798.65.
At 7.5% the payment goes up to $2097.64. For a couple, each making $3000-$4000 per month I am not sure this is a deathblow to the dream of owning a home. It probably is an inconvenience and it probably squeezes out the marginal buyer or more likely forces the marginal buyer to find a house that is a little cheaper. Here the context is people buying a home to serve as a primary residence.
For real estate that is intended to be an investment, speculative or otherwise, might not prices come down a little bit resulting in an balancing out or at least a partial balancing out? It seems plausible in some markets.
WRT to the portion of this rally that is attributable to private equity and whatever the expectation might be about the future contribution to any further lift would probably have to be repriced if rates do start moving up that much.
I think the real thing here and now is that the ten year and Bill Gross create an excuse for a sell off of some sort. The move this week has been very fast, and while the move may keep going for another day or two it is very unlikely that the market can maintain the type of velocity we have seen this week.
If this is the tipping point of the financial apocalypse (intentional hyperbole) you will have plenty of time to get out without succumbing to emotion today. This is why I have preached in the past about making a simple plan for yourself as to when you would take defensive action and what that action would look like long before you need to. This removes some of the emotion for folks who are prone to emotion.
8 comments:
But, but Bill Gross is selling his STAMP COLLECTION! The end is near! Or here already!
roger, i suppose your goal is to miss the meat of a severe downturn, but do you have in mind absolute figures of how much of a max drawdown percentage wise? pull up a 7 yr month chart of s/p with 20mma. If we break that line, oye ve.
tom k.....how's your timing system working....did you take that emerging mkt short...how much?...any adjustments today in mind?
for me...hard stops fell, took decision away from me, as selling is something i resist, a failing. still a lot of equities on the table.only 20% cash.
I saw that on FT Alphaville about the stamps...Philtelic? Was that the word?
As far as the drawdown question I will attempt to answer that in this weeks video.
Bill Gross just interviewed live on CNBC (8:30AM MST). He clarified his comments of yesterday to say his three to five year outlook for bonds is a bit bearish with 10 yr trading between 4.5 and 6.5%. He is NOT bearish on bonds short term (but I'm not sure why except maybe that the spike has already taken place short term).
He did say the spike in the 10 yr will push mortgage rates soon to near 7% and "decimate the already weak housing market".
He also said that we are returning to a more normal positive yield curve environment.
He sees global growth between 4-5% over next several years and sees money migrating to stocks and out of bonds.
For people who want fixed income exposure he likes emerging market currencies like the Brazilian Real (spelling?).
Roger, does this make sense to you?
Bill has lost some of his luster lately as he was predicting a "3" handle on the 10 year bond just a while ago and has now reversed course. His flagship bond fund at Pimco has been lagging for about the last year.
are you sure the numbers are correct on 300K mortgage; rate goes up by 25%, and payment only goes up by about 15%. First years are almost exclkusively interest and hence should go up by some 25%
Rainman
i should have cited my source, I plugged the numbers into the YahooFinance calculator.
As for the payment going up by the same percent, no because the payment is not 100% interest.
Note too that the difference in percentage terms is even a bit less than the ~15% delta Roger's calculation implies. Housing qualification ratios usually include also taxes and insurance which would be equivalent in either case. So when you factor that into calculation the change to affordable principal will be even smaller.
Anonymous 6:30,
I haven't run the the numbers yet this weekend but as of Friday my model is 90% long and 10% cash. I have small positions in UCPIX and UVPIX - they equal approx 5% my entire portfolio (TAA + Buy and Hold).
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