I'm surprised at the resiliency that the market is showing amongst the deluge of downtrodden economic news coming out each day. Today we came to know that the unemployment rate increased to 6.1% in August, a much bigger jump that the market was expecting. The stock market reacted to it in the beginning but then the negative effect gave way and most of the indices ended the session up, albeit slightly. Most of the news was already incorporated yesterday when the DOW fell more then 300 points. I think the ADP unemployment report that came out yesteday gave a glimpse of what to expect today since those numbers were also worse than expected. Financials led the market today after a downbeat report on the foreclosures, which would have surely spooked some investors had it come out on any other day.
Now we wait to hear the consumer credit numbers on Monday. It will be an important gauge of how the consumer is meandering through this rough phase in the economy where unemployment and inflation are on the rise, credit is shrinking, and a lot of people are either losing their homes or are seeing the equity in their homes evaporate. This is especially disconcerting to a lot of people who invested their life savings in order to have a roof over their head. The most hard hit are those who took out lines of credit on their homes and now owe balances on their mortgage as well as on their lines of credit.
A lot of people have chosen to walk away. This measures up to the report on housing that came out today. The Mortgage Bankers Association said that 4 million American home owners were either behind on their payments or in foreclosure as of the end of June. Most of them took out exotic loans with balooning monthly payments. For the uninitiated, this means that a lot of people took out variable loans where initially they just paid some portion of interest. Whatever was left over got added to the loan balance. This can go on until the balance reaches to about 10-20% of the loan (varies from lender to lender and on the loan agreement). Once this trigger point is reached the monthly payments go up and most of the people are left with an increase of almost 30-40% of what they were paying before this reset. This is a big threat to the US, and the world's, economy. There will be a lot of loans that will be reset in 2009 and 2010. We will not know the extent of those failures for a long time. In the meantine, the housing bill passed by the US Congress has helped some borrowers in staying current with their mortgage payments. In my opinion, this will have a limited effect since in most cases it will just be delaying the inevitable.
Among some of the stocks that saw action today -
AIG jumped 5.3% despite a Morgan Stanley analyst downgrading the stock to "equal weight" from "overweight" citing the fact that the world's largest insurer might need to raise more capital in the near future. IMO this is still a solid stock. Most of the losses they have shown on the balance sheet are due to mark to market accounting and they should be able to recoup most of those when the market outlook turns rosy.
Apple ended the day slightly in the negative territory. This is puzzling to me since they have an event coming up on Tuesday and are expected to announce some new products. I am a fan of their products and am most certain that they will trounce all expectations for the Mac and iPhone sales this quarter.
Visa ended up (+1.8%). I especially like their business model since they don't assume any credit risk. The risk stays with the credit card bank and they make their moeny off of the transactions they process.
Wisdom Tree India ETF ended in the green as well (2.6%). This is a good play on the Indian stock market. Although it has seen its share of volatility in the near term, it still is a good buy since India is an emerging market on track for several years of growth and unlike China, gets most of its growth from domestic consumption.
Freddie Mac ended in the green (+3%). This has proved to be a pretty good stock for swing traders. I've played it a couple of times and still hold some of it for the long term.
MSII did ok, up a penny.
These are all the stocks I own in varying capacities in my personal portfolio. I do my own research and thie should not be misconstrued as an advice to buy them.
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