Week of April 16, 2007

The Markets
 
Like a boxer shrugging off a punch, investors were undeterred by the Fed’s inflation concerns, and stocks ended the week slightly higher.

The market bounced back after a sell-off sparked by the Federal Reserve’s Open Market Committee (FOMC) minutes, which were far more hawkish on inflation than investors had expected.  The minutes indicated that, although the Fed remains concerned about weaker economic growth, it has decided that the predominant risk facing our economy is higher inflation.  Higher oil prices and a tight labor market (which creates demand for higher wages) all contributed to the Fed’s less optimistic stance on inflation.  Consumers’ concerns appeared to echo those of the Federal Reserve as the University of Michigan’s consumer sentiment index dropped to 85.3, which was below March levels.  Consumers, too, are concerned about a weak economy and have worries about higher inflation, according to the survey.

Regardless, the markets pushed higher, and stocks showed moderate gains by the end of the week.  According to Barron’s, the increase may have resulted when investors decided the FOMC minutes didn’t really change the underlying fundamentals of the markets.  They may have a point. The minutes reflect discussions held during the FOMC meeting that was held on March 20-21.

Source: Yahoo! Finance, Barrons Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

What is all the hoopla about subprime mortgage defaults?  If you’ve been reading the financial news during the past few weeks, you have probably noticed a recurring theme. Investors are worried about the impact of defaults and foreclosures in the subprime mortgage market.  What is the subprime mortgage market? Subprime lenders make loans to homebuyers who have weak credit histories or are facing other financial challenges.  In return for taking more risk by lending to someone who is less creditworthy, subprime lenders generally charge higher interest rates.  Recently, some companies have disclosed that they’ve been experiencing an increase in customer defaults and late payments, which has hurt them financially.

Some experts don’t think the issue will affect the broader American economy.  Others have suggested that the troubles subprime lenders are experiencing may slow economic expansion in the United States by causing banks to tighten their lending practices.  When banks make it harder to get loans, it becomes more difficult for businesses to expand and individuals to make large purchases.  The Federal Reserve’s January Senior Loan Officer Opinion Survey reported that commercial banks began tightening their residential lending policies during the last quarter of 2006.  The jury is still out: only time will tell whether economic growth will be affected.

How have investors responded to the challenges of the subprime marketplace? Some are borrowing!  They’re not borrowing money from banks; they’re borrowing stock from brokerages, and selling short.  When investors sell stocks short, they borrow shares and sell them at today’s price.  Their hope is that the stock’s price will fall and they’ll be able to buy the shares they’ve sold today at a lower price tomorrow—pocketing a profit.  However, if the stock’s price moves up, or it takes too long to move, investors can lose money.  According to Forbes, shares in Corus BankShares—a company that lends to condominium developers who are having challenges finding financing—have dropped 37% in the past year, largely as a result of investors selling short.  In fact, one-half of the stock’s outstanding shares have been sold short.

Weekly Focus – Have you been feeling that you may be getting older? Here are a few surefire signs:

1. You are proud of your lawn mower/double oven.
2. You can't remember the last time you sat on the floor to watch TV.
3. The gleam in your eyes is from sunlight hitting your bifocals.
4. You get into a heated argument about pension plans.
5. Your little black book contains only names that end in M.D.
6. Your children begin to look middle aged.
7. Your favorite part of the newspaper is "20 Years Ago Today."
8. You know all the answers, but nobody asks you the questions.

Source: The Freeman Institute

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.