Friday, May 8, 2009

Rates at Highest Levels Since November

Rates on the 10 Year Note soared to 3.387% just prior to the release of today's unemployment announcement. While the job loss number was a "better than expected" 539,000, much of the improvement was due to government's hiring of 72,000. The unemployment rate now stands at 8.9%. Last month's unemployment level was revised to 699,000!

Rates are currently at 3.3% and one has to think that the Fed might be starting to get nervous. The whole point of their adding liquidity to the market and to be buying back long term securities is to force rates down so that those with adjustable rate mortgages and fixed rate mortgages at higher levels can refinance at lower levels, instead of defaulting and losing their home. The unemployment number, while cheered by the analysts as "improving," still leaves more than a half a million new people without jobs last month. The optimists stress that there are new jobs also being created but the unemployment rate increased from 8.5% to 8.9%. How can optimism prevail?

Rates are back at the November levels. This is when the market really started melting down! Are we already out of the woods with this economy? Does the Bank Stress Test show that the world is safe from further disaster? Rates are more than 1% off the lows. Consider that each 1% of interest equals $1,000 per year in extra interest that one will have to pay on a $100,000 mortgage. For a $200,000 loan, that amount doubles to close to $200 a month in extra interest. Also consider that credit card rates have already risen and now will rise even higher! It's plain to see that we are again on the road to disaster. The economy is being sapped by the banks.

I'm no economist and I'm certainly no genius. The problems that confront us seem so obvious. Will the Fed also be seeing this? Will they step in and aggressively buy long term treasuries to get rates again below 3%? I think that they will try. Still though, rates are headed higher based on my statistical work. Expect higher rates to hurt the stock market. If you've earned some nice profits in this recent runup, take some money off the table, sell options against your position or engage in some hedging strategies. Remember, Bulls and Bears Make Money, Pigs Get Slaughtered. Don't try to make back all of your losses at once.

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