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Feature
Market Update for July 2007
by Van K. Tharp, Ph.D.
This will not be my normal update for several reasons. First, before the first of July, I am going off to London to do several workshops, so I won't have my normal end-of-the-month information. Second, I think we're at a major crossroads in the economy. Things could go either way right now and I think you need to know what's going on so that you can protect yourself.
The Debt Factor on the Dollar and the U.S. Economy
I just read Steve Sjuggerud's True Wealth newsletter for the month of July. Steve talked about being in London and paying $600 per night for his hotel and $60 for burgers and cokes for two in a restaurant. Steve is starting to suggest investments in the dollar that will look good over the next couple of years because he believes that when the dollar is at an extreme low, it will spring back. I'll get a first hand experience of Steve's comments while in London.
I hope Steve is right because that will mean that the U.S. has, at least temporarily, avoided another crisis. However, there are two reasons that things are at an extreme and that's what I want to talk about in this update. Those two things are the current account deficit of the U.S., the reactions of other countries to it ,and the subprime lending crisis. Both could have a severe impact on the U.S. economy, although I have no idea how that will play out.
The Current Account Deficit
The first piece of news is that according to Federal Reserve data that was released on the 7th of June, foreign central banks are starting to become net sellers of U.S. Treasuries. Overseas central banks sold a net $10 Billion more than they purchased. Now that's just a drop in the bucket, but net selling doesn't happen that often and if it continues it won't be pretty. For example, by the end of the day on June 7th, Treasury yields had soared from 4.96% to 5.12%. However, they are slightly under that figure as of this date (June 26, 2007) at 5.105%.
This has serious consequences for the U.S. economy as in 2006 our deficit spending was approximately equal to the yearly interest on our debt. This is a first, and higher interest rates would send that spiraling.
The world is in a catch-22 situation with regard to holding U.S. debt. The world (Central banks and foreign private investors) now holds about $13 trillion in U.S. debt and during the first quarter (that's quarter) of this year, they increased their holdings by $1.3 trillion. Central banks now hold $5.7 trillion in U.S. debt as reserves to support their country in case of an emergency.
But notice what happened in one day when it was announced that foreigners were net sellers � the price crashed. So what are those $5.7 trillion in reserves worth when you cannot sell them without the price crashing? If the U.S. was a company, an auditor would say they were worthless. But right now everyone is playing a game that says they are worth billions of dollars. For a while, this will keep the U.S. on a sound footing as foreigners say, �We can't sell our U.S. debt holdings because they'll become worthless if we do.�
I printed the following graph in the new edition of Trade Your Way to Financial Freedom and it's worth looking at again. This is the official debt of the U.S. government since 1900. Notice that the last decade is not complete but debt has still increased dramatically. Our official debt is now nearly $9 trillion and foreign central banks hold $5.7 trillion. And in the last quarter alone, that increased by $1.3 trillion. Do you think that there might be a crisis here? By the way, this doesn't account for future entitlements or the debt that is hidden because it is bought up by the Social Security fund. I've already pointed out that the St. Louis Federal Reserve commissioned a study this year in which they concluded that the U.S. was bankrupt with a total debt, including future entitlements, of $67 trillion. All this is supported by an economy that only has a GDP of $13.2 trillion (for 2006). It's not a pretty picture and no one wants to talk about it.
I also find it interesting that the U.S. debt clock (which was used for this figure) now stands at $8.8 trillion, while our debt held by foreigners stands at $13 trillion. And while foreign central banks are in a position in which they politically cannot sell off their U.S. debt, the private (sector?) holds another $7.3 trillion which they can sell if they decide to do so.
Yet, when I ask people in Europe to describe the big picture from their viewpoint, many of the same issues come up: 1) high debt; 2) huge future pension obligations with no equity to back it up; plus some things that we don't have� including unfair labor laws which make it almost impossible to fire someone, so there is an extreme reluctance to hire anyone for the long term. Overall, I see no reason to suspect that Europe will replace the U.S.
Okay, so this is the big picture debt wise both in the U.S. and in Europe, but on top of that we have a mini-crisis going on as well with subprime mortgages.
The SubPrime Debt Crisis
So what is subprime debt? We've been in a situation in which lenders decided that anyone could get a loan if the interest rate was high enough. You want a house, but you don't have any money? No problem, we've got a subprime loan for you. You don't have to put down anything. You can get the seller to pay all of your closing costs and you can move into the house for free. Sure your mortgage payments will be about 20% higher than most people to make up for the risk they are taking. But even though you have never had good habits and cannot save anything, we'll still take the risk and give you this loan for a 20% premium.
Well, these shenanigans went on for some time until it became a crisis. First, if you are a seller and you have to pay all the closing costs, then you certainly will only sell if you get top dollar for your house. This is the situation for most areas. But in some inner city areas, such as Memphis, most loans are subprime loans.
Second, if you bought a house that you paid top dollar for and you suddenly lose your job and have no equity in your house, what do you do? You walk away. And a lot of people have done that. Foreclosures in the subprime section rose 5.3% in the most recent quarter. In fact, as of May this year there is now an 8.9 month supply of unsold homes. And the median house price in the U.S. has slid for the 10th month in a row. It's now $223,700, which is down about 14% from its peak in April 2006. Defaults are now at their highest in the 37 years since records have been kept.
Does this sound like a crisis to you? Well, there is a lot more. Hedge funds have been buying this subprime debt in the form of collateralized debt obligations or CDOs. Bear Sterns had a fund that was down considerably and tried to auction off its assets. No one was prepared to bid more than 85% of face value for the CDOs that were rated A or better. The sale had to be called off after buyers took only $200 million of the $850 million mix and there was talk of buyers only willing to pay 30% of face for the mix.
Bear Sterns, abandoned by its fellow banks, now has to put up $3.2 billion of its own money to rescue its funds and Bear Sterns still has another fund that may need to be bailed out. $3.2 billion (although there is talk that it might drop to $1.6 billion) is a quarter of its capital and that's just for the first fund.
And when I arrived in London, the first thing I started reading was about English hedge funds potentially going bankrupt from their purchase of CDOs. It's not just a problem in the U.S.
And this might just be the tip of the iceberg. First, there are $2 trillion in mortgages with adjustable rates. And since 10-year bond prices have risen by 0.65 points over the last six weeks or so, these will soon have to be reset at higher rates. What that will do to defaults is anyone's guess.
In addition, banks (not just hedge funds) now hold about $750 billion in CDOs. The total capitalization of those banks is not much more than that. So are we looking at another major bailing for the U.S. government, all of which will fall on top of the big picture already presented.
In Europe we are looking at hugely inflated real estate markets that have probably already reached their peaks and are on the downside. And if real estate declines in a major way, it means many, many defaults. When people own more on a house that it is worth, they often stop making payments. Instead, they make it the bank's problem. And this is a much more serious problem in Europe than in the United States.
So if the CDO problem keeps growing, what will happen? I don't know. What's the impact for the stock market? I don't know. What's the impact for interest rates? I don't know. What will the Federal Reserve do? I don't know. You really don't have to know if you simply watch the markets. These economic times require that you be able to watch the markets carefully and adjust when the markets change. And change could come quickly.
Is Steve Sjuggerud right? Does this simply signal a time in which the dollar is at a record low and it is time to buy the dollar? Does this signal a bottom and thus a new boom in the economy? Steve points out that a house in London that cost millions might sell for $200,000 in the U.S. and that's very cheap. But cheap can always get cheaper. And if you are in the market for some �cheap real estate� on a relative basis, then I have some cheap real estate that I'd be willing to sell you.
Until next month when we'll return to the normal market update format, this is Van Tharp.
About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.
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Top Notch Internet Resources Part XI � Another High End No-Cost Charting Resource
By D.R. Barton, Jr.
Thanks once again for all of the useful links and e-mails that keep coming in. If you haven't sent your favorite sites in yet, please see my e-mail address at the bottom of the article.
Today, we'll dig into prophet.net charting. This site offers a bunch of other no-cost and paid services, but today, we'll concentrate on the charting, and address some of the other areas (screening, etc.) in another article.
I found, as many of you have written in your e-mails, that prophet.net has excellent interactive charting capabilities. But there are a few caveats, most of which are minor.
The main caveat is that prophet.net was acquired by Investools. The upside to having such a parent company is that the banner ads on the site are fairly low key for either Investools training or their newly purchased brokerage arm. The downside is this: Investools is an educational company that I cannot recommend.
But, with that said, the no-cost charting portion of their prophet.net website is pretty slick.
Getting to their most useful charts is not particularly user-friendly, but it's not too tough either. You have to click on an �Analysis� tab on their home page and then on a �JavaCharts� submenu.
If you keep the chart inside your current browser window, you can't resize it. But, follow the well laid out instructions on detaching and resizing and you get a chart in a new browser window that has a lot going for it.
The JavaCharts option gives you a chart that you can make as big as you like, up to a full screen just by resizing the detached browser window. It's fully interactive, giving individual bar data just by hovering the cursor of a bar.
The no-cost version also includes a trendline tool that allows users to draw freehand trendlines and change the color and thickness.
The no-cost version also includes ample technical indicators (around two dozen). Paid versions include a veritable soup-to-nuts collection of indicators, but I believe that most serious investors and traders are going to have access to full-blown charting software (e.g., TradeStation, eSignal, etc.) and will use on-line charting mainly for �quick and dirty� jobs.
The JavaCharts option also has a nice feature that allows you to highlight a segment of data in a larger / longer-term chart and blow- up just that section for closer scrutiny. This works quite well.
Stock data is available back to 1968, an impressive amount of data.
One quirk: the default chart that comes up in the JavaChart selection is a log scale. Unless you recognize this and uncheck the log scale box, you may be confused about how your charts look!
Another downside is that the no-cost version doesn't allow you to view intraday charts only daily, weekly and monthly (and interestingly enough, quarterly and yearly) charts.
The bottom line is that prophet.net is a strong candidate for the best no-cost internet charting site.
Keep sending in your favorite sites to [email protected], and let me know if you've found this discussion useful! Until next week�
Great Trading!
D. R.
About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.
He is a regularly featured guest analyst on both Report on Business TV, and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine.
Who Do You Admire?
by Melita Hunt
I am currently in London with Van doing two of our workshops (Blueprint for Trading Success and Systems Development) and on Sunday I decided to have an easy night before the first workshop began. I ensconced myself in the restaurant/bar in the lobby with the intention of getting some writing done and instead I found myself engaged in the TV watching a tribute concert for the late Princess Diana. In addition to the music and festivities, there were interviews with many people whose lives she had touched in a positive way.
One personal development exercise that I do often is to choose three people that I admire (one alive, one dead and one that I know personally) and look at the traits or reasons why I like them or aspire to be like them. I then ask myself whether I am �being� that way in the world or where I am falling short and why? What do I need to focus on to become more of the person that I know I can be?
Princess Di has been one of the people that I have used in this exercise many times before because she exhibited traits that I admire and the tribute was a reminder of some of the wonderful things that she did in her 36 years and why I liked her.
This exercise is not designed to put anyone on a pedestal, nor is it designed to take the humanness out of the equation; it just helps me to identify the positive stuff. Of course Diana had her faults and issues, we all do, and I am sure that there are people out there who do not like her or see her in a completely different light than I do, and that's okay. This is a personal exercise and everyone has their opinion as to whom they admire and why. There is no right or wrong. The name of the game is to just notice.
To give an example, the traits that I saw in Diana were her ability to be giving and caring, her charisma, love, fun, class, her beauty, courage and humanitarian interests. All of these things are important to me and are ways that I endeavor to be in my life. So with that in mind, I looked at each trait to see whether I have been exhibiting these traits and where improvement may be needed.
The other rule that I set for myself is that the traits that I see in my three people must differ from one another. For some reason I always seem to find it easier to choose dead people � my list of the departed souls that I like is very long and includes people from Napoleon Hill to Eleanor Roosevelt, Jesus, Mozart and even one of my kindergarten teachers. But that's not the way to play the game. It must include one person who is still alive and one person that I know personally.
For the person I know, I chose a young man by the name of Nick whom I had the pleasure of meeting at a real estate conference many years ago. Nick was the epitome of inspiration. He had the most amazing smile, self confidence and pure, genuine energy emanating from him that I have ever felt. Nick was also born without arms and legs but that didn't stop him from doing anything that he wanted to do. He even asked me to lift him up on a table so that we could dance together. What a divine spirit and light he is.
I chose the Dalai Lama as my third person (someone living) because this week with all of the bomb threats and various things going on, I felt that I could really concentrate on compassion, forgiveness, happiness and peace.
Why not spend a couple of minutes doing this exercise yourself? Especially if things are feeling mundane, difficult or just a little negative at the moment. Give yourself permission to dream for a short while. Choose three people and a trait (or a number of traits) that you admire about them and make the commitment to exhibit those traits this week.
It may seem silly, but trust me, it will certainly shift your focus and your attitude. And it can be fun.
So allow your very own Princess Di, Nick or Dalai Lama to shine on through, if for no other reason than to appreciate the beautiful traits of other people that grace this planet, or have touched your life in an unforgettable way...
And realize that you only recognize those traits because they are inherently within you.
You can contact Melita at [email protected]
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