The Fed Makes Its Move - More To Follow
The the US Federal Reserve has made a move and the stock market has responded positively. Value stocks are still in vogue, but large and mid cap growth stocks will become more popular as the Fed makes additional moves.
Will the Fed lower interest rates further? Yes. When the Fed lowers interest rates they change the cost of borrowing not the availability of money. There is plenty of money around, but people are afraid to lend it.
Why are lenders afraid to lend? Uncertainty. the Sub-prime mortgage situation is still too murky. Current security and mortgage holders do not have the procedures in place to liquidate their defaults properly. They do not have a method to turn borrowers with un-performing loans into good customers. Without this ability they cannot separate the wheat from the chafe and put money into motion again.
One of the big problems is the mental state of the lenders. As a group they are trying to hang on to their money. They want the interest the loan states or they want the sale price the loan was based on. They have not yet abandoned all hope. The market will not turn until they give up on their dreams of getting the full price. This may be a problem in having sold these securitized mortgages to foreign buyers, but I’m sure there are plenty of US lenders who are just as pig headed.
So, the constriction of money caused by the sub-prime mess will continue longer and drag down more borrowers and lenders. Until people in the financial industries can get a clear view of what individual securitized packages really contain it will be a problem. The good news is that we are on the way. The bad news is that we are not moving fast enough to avoid the next round of problems which will come mostly from the condo market.
Expect the Fed to lower rates. The economy is in good shape and soon to get better. Though the dollar is weak other world markets are strong and eager to buy our exports. Based of P/E ratios stock prices are historically low. Keep your cool and look for bargains.
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