Personal Finance Advice

Some analysts say a recession is coming and some say it isn’t. What is for certain is that the stock market has grown increasingly volatile since the summer. While this increases the risks for investors it also increases the chance for reward.

Large movements swings have been the norm the last few months depending on whether the daily news was good or bad. If you had idling cash lying around it would open the opportunity for some serious bargain hunting. There are quite a few stocks that are trading below their historical PE or price to earnings ratios.

Now the big question for many bargain hunters is whether it’s time to jump back into financial stocks or not. There are some big names out there that have lost a large chunk of their market values after they started reporting huge writedowns during the month of November.

While some of them do look tempting, I believe it’s still too early to jump back into financials.  Another surge in defaults is expected after rates adjust upward this quarter for the many ARMs that weren’t affected by the government’s bailout plan. There is also the fact that we are still in a credit crunch and while we may get it under control sometime soon in this country, that may not be the case for the rest of the world.

The housing market is also expected to continue it’s slump well into this year and possibly the next. So, while the financial sector may get it’s house in order and implement smarter lending practices, at least in the short run there just won’t be as many avenues open for profit potential as there were in the past.

However, this is definitely a sector that needs close attention in the next few months. Finding the right time to get back into these stocks should net you a tidy bit of profit as they climb back to their historical PE levels.

A slumping dollar has helped spur U.S. exports as well as foreign investment and has contributed to a decline in the Current Account, a measure of international trade. However analysts cautions that this trend may not continue.

“Capital inflows into the U.S. surged in October, but cyclical downside and persistent credit concerns suggest the October print was a flash in the pan and not the start of a new trend,” said Gabriel de Kock, currency economist at Citigroup Global Markets in New York.

“The U.S. external deficit remains large and longer-term trends in capital flows suggest that foreign private investors are becoming less willing to fund the U.S. deficit,” he added.

Foreign investment won’t be helped by the Bush Administration’s mortgage bailout plan which freezes adjustable rates for five years. Anytime you have the government interfering in private contracts, investors will become wary, both foreign and domestic.

While the overall trade deficit has been narrowing in recent months, our trade gap with China continues to widen to record levels. The possibility of a trade war can’t be discounted.

There has been a large outcry of public sentiment for the imposition of trade sanctions. The recent scandal involving contaminated toys manufactured in that country hasn’t helped matters either.

As a large holder of our national debt, China has expressed in recent months, a reluctance to carry such large amounts a dollar denominated assets. A thinly veiled threat of their ability to wreak further havoc on our already beleaguered financial system.

With the a new wave of foreclosures about to hit an already beleaguered financial system, the Bush Administration and the mortgage industry decided to finally act. CNN reports that the plan would call for a five year moratorium on introductory “teaser” rates.

How will this affect the stock market?

This should be welcome news for investors. Financial stocks helped drive the market down last month in what many suspected was a prelude to an economic recession. While investors should still be wary, it appears that the worst may be over for now.

How will this affect the financial sector?

Credit markets will still be tight for awhile but this plan along with another expected cut in interest rates will give financial institutions a little wiggle room. They will be hard pressed to recover their previous levels of liquidity with the lack of demand for securitized debt. This will give them the time they need to regain the confidence of investors, who aren’t too happy right now seeing as their returns are being cut due to the rate freeze.

How will this affect homeowners?

It will help some but not the ones who need help the most. The plan does nothing for those that are already in default or are behind on payments. For those it will help it will give them time to hopefully refinance into a fixed mortgage once the credit markets aren’t as tight.

How will this affect the economy?

There is no question that many people thought the economy was teetering on the brink of a recession. Another shock to the financial system might have been the final straw. While it’s possible that this plan is only delaying the inevitable, it does gives time for the fundamental problem to perhaps correct itself.

How will this affect the housing market?

Here we come to the crux of the matter. It was the slump in the housing market the began this whole mess. Well, that and poor lending standards. This plan will help forestall another wave of foreclosed homes on a market that was already over supplied to begin with.

This is where the time length of the freeze becomes important because many analysts expect the housing market to remain soft for the next couple of years. Hopefully by the time the moratorium is set to expire, the housing market will have recovered to the point where it no longer serves as a drag on the banking system and the rest of the economy.