More on the Rate Cut & A Couple Friends

The market continued to rally today, though obviously not to the same extent, intoxicated on the Fed's rate cut. How long that intoxication lasts? As long as it takes to get a really sobering report that brings everything into focus. Tomorrow is a good chance the run comes to an end with Goldman Sachs and Bear Stearns reporting tomorrow. I have a feeling that those two will post earnings numbers closer to what Morgan Stanley did today versus what Lehman reported earlier this week.

We also will find out how Nike faired after the Michael Vick fiasco. Circuit City, Carnival, and FedEx report tomorrow also. Keep a close eye on FedEx, they have tended to predict the future based on their business.

Overall, I'm still underwhelmed by the impact of the rate cut. Maybe I'm bitter. Maybe it's that I sat through half a day of the Indiana Mortgage Banker's Association's annual meeting. Talk about underwhelming. I have another FULL day of it tomorrow. I should have some nice nuggets to share though when everything is said and done.

All two of you who read The Financial Bullet know that I also write for Nesteggr. I want to bring to your attention a couple of other individuals who write for Nesteggr and also maintain their own blogs. I feel that they are the best bloggers on Nesteggr and think you should check them out.

First is The Curious Investor.

I have referenced Dan before but I think he is worth mentioning again. He is a college student with some serious investment chops.

The other is Zach Stocks

Zach helps manage a hedge fund in his real life. He always has a wealth of ideas and an awesome perspective on individual stocks...and not just buys.

Check them out to help them out.

Samuri Ben

Ok, I gave 10 reasons not to cut this weekend and did Ben & Co. listen? Nope. They didn't listen to a darn thing that I wrote. I was encouraged that they did still mention that inflation was still a concern. If I say it once, I will say it a hundred times...inflation should forever and always be the Fed's main concern. Look at what treasuries did today.

Short term bonds are already starting to price in another cut. I think that may be misplaced. By cutting the rate .50 basis points here, the Fed can sit back and watch how things unfold over the next couple of months (as long as things don't get worse) and see what happens. If they had cut by only .25 basis points, that would have signaled a rate cutting campaign.

But notice that longer term treasuries sold off? Long term bonds determine long term interest rates, i.e. mortgages. It also is a clear signal that inflation is going to raise. Not a good thing.

Ultimately, I'm a little disappointed that the Fed did not make a stand here. By cutting the rate, it sets up the future to be more grim. Throwing easy money at an issue created by easy money doesn't make sense and someday in the future, maybe not this year or next, or even the year after that but someday we will all have to pay for the excesses we have seen over the last few years.

So we had a good rally today because of the Fed. Lehman Brothers posted a better than expected earnings report. Does this make everything gung-ho going forward? Not so fast my friend. Too many issues still remain and will remain no matter what the Fed does. It makes the holiday season a little brighter as credit card rates will decline. It will make businesses reinvest and start spending money again but these are short term fixes to a long term problem.

About Interest Rates & Credit Scores

Here is an article I found interesting. It basically states that your interest rate is based more on what your loan to value (LTV) is, rather than your credit score. The article focuses on home equity loans and lines of credit. I do firtst mortgages, I constantly hear people complain that the rate I am offering them is because of their credit. It is as often a case that they are combining a high LTV (80% or above), the loan purpose, and credit scores...in that order.

The less equity you have in your home, the higher the rate on your loan. If you are purchasing a home, using 100% financing is going to yield the highest interest rate and PMI. Putting at least 5% down will give you a better rate and 20% down will avoid the PMI altogether. The reason behind this is proven by statistics. The higher the LTV the more likely the loan is to default. Think about it. If you buy a home at 100% (no down payment) and you start to have issues making payments, if you have nothing into the home, the easier it is to walk away.

Loan purpose makes a big difference on rates. If you are refinancing and only refinance your current balance plus closing costs, the rate you will receive will be better than if you cash out for debt consolidation or home improvements. Combining a cash out refinance and a high LTV (80% is again the magic number) the better the chance your interest rate will increase.

Your credit score is next on the list. A score of 620 or more traditionally will get you an approval. The higher the score the more likely you are going to get a better interest rate.

So what do you do if you have a high LTV, a need to consolidate credit card debt, and a low credit score? Don't panic. Other aspects of your loan file can help offset your weaknesses. Providing your lender with assets can make a huge difference on your credit score. If you have other bank accounts, give your lender the last two months. Provide your most recent 401k or equivalent to your lender. Does your life insurance have a cash value? If so, provide that too.

The above article also references knowing the details of credit cards. Check out the Discover card that is on this page. Discover offers good cards, at decent rates, and offer cash back on your purchases. Good deal all the way around.

Also if you are wondering what your credit score is, check out the Equifax ad right beside the Discover Card ad on my page. If you do pull your credit and have any questions...feel free to contact me, I'd be happy to answer any questions you may have.

10 Reasons To Leave Rates Alone

Alan Greenspan, while he states he wasn't fully aware of the mess that he was causing in the mortgage markets, in his new book states the Fed will have to hike rates to 10% to fight off inflation by 2010. And you know what? For once, the old goon is right.

But in the meantime, Tuesday the FOMC meets and is widely expected to reduce the rate from 5.25% to 5%. I have seen a number of analysts call for a .50 decrease in the rate to "jump start" the economy.

I have a number of issues with the whole reasoning for a rate decrease.

1) Outside financials, certain hedge funds, and builders, where is the fire? Retail sales, have been inconsistent, but not bad. Techs are doing well. The Dow, Nasdaq, and S&P are all showing gains so far this year. So, why cut?

2) Unemployment numbers have stayed consistent at around 4.6%. This historically is a good low number showing high resource utilization. Yes, the jobs figures for August showed a decrease of 4,000 and June and July numbers were revised downward but a few more months worth of data is needed to determine if this is truly a trend or a financial/construction fallout.

3) The dollar is hovering around it's lows against the euro. A rate cut here will put further downward pressure on the dollar. Want to know why gold has made another run as of late? There it is. A lower dollar pushes investors into gold.

4) Inflation is just inside the Fed's target rate of 1-2%. Just because we are inside the magic 2% number doesn't mean that inflation is under control. Remember, that range does not include food or energy prices. Anyone taken a look at those in the last 6 months or so. Oil eclipsed $80 a barrel this week for the first time. I invite anyone to go to the grocery store and get as much food as they could just a year ago for the same amount of money. It won't happen. That is inflation too, it just is more volitile and that is why it is stripped out of the Fed's core numbers. And believe me, the Fed is aware what I like to call "beer inflation". A cost of my favorite 24 pack is up at least $2 over what I was paying last year.

5) GDP grew in Q2 over Q1, right? We won't know what Q3 will look like until the end of October but the most recent earnings season just ended and prospects for the up coming earnings look good too. I know that I mentioned it in this space before but have you noticed that for all the hoopla the financial sector has been making, not one of them has issued an earnings warning? Weird huh?

6) A cut will not fix all the current ills of the mortgage market. A .25 or .50 cut will leave no dent. Mortgage rates move in anticipation of what the Fed will do (so you won't see a big drop in rates after the announcement) and the market still stinks. Too many people are on the sidelines and are willing to stay put rather than risk buying a home today that will be worth less tomorrow.

7) So who does this really benefit? The investors and speculators that are accustomed to 30% plus gains each year and unfortunately are having a bad year. They are the ones screaming the loudest about the ugliness of the situation. Guess what? I don't feel sorry for them. Do you?

8) And finally, the worst one...the president would like the mortgage mess all figured out and in the past for the next election. A rate cut now, which would take between 6 to 9 months to filter through the system will be in full impact by next November's election.

9) You can't bandage the wound by throwing money at it. We all know that the issues we face now is an indirect result of the tech bubble bursting. If we bail everyone out with rate cuts now, a new bubble will form somewhere else and inflation will rise. Ultimately, someday down the road, inflation will be out of control and we will have a Volcker moment. Just like the one Alan Greenspan expects in his book.

10) Can we really afford to see Greenspan be correct on this? Do we really want to suffer with a 10% Fed rate...which will correlate to prime rate being 12%? If the Fed just stays put at this time, maybe we can avoid that in the future.

I'm not totally against a rate cut. I just think that more data that truly points to a rate cut need actually manifesting before one is done. Will that be too late to avoid recession? Maybe, maybe not. But if rates have to be hiked to 10% to fight inflation, we will have a recession then, and a long and deep one at that. A little recession now can be a large amount of cure later.