Sensible Investing

It has been reported in numerous publications that the next wave of foreclosures could be caused by so-called “option ARM” loans.  These loans allow the borrower, at low introductory rate, an option to pay each month either the full monthly payment (including principal and interest), only the interest payment, or so-called “minimal” payment that is even less than the monthly interest which leads to negative amortization.  After a fixed period of 3 or 5 years, full monthly payments on remaining balance must be made.  The vast majority of such loans were underwritten in California in 2004-2007.

Well, the first of option ARM loans are resetting, and so far the borrowers are not complaining.  Since the index to which the rate is tied (typically LIBOR), is currently at very low levels, the loans are currently adjusting to 1-1.5% below the introductory rate.  While we can’t expect these conditions to persist and the rates will eventually go up, at least for now it appears that we don’t have to worry about this foreclosure wave.  Quite the contrary – extra few hundred dollars a month for option ARM holders may turn out to be another “stimulus” package – at least for the short term.

Last week, for the first time in well over a year, all major indices crossed above their 200 day moving average, which, technically, is considered a bullish sign.  I am not a big fan of technical analysis, but many traders are, so it is wise to pay attention to such events.  Of course, with today’s market action we may end up below that average again.

In my previous post, I argued that a period of consolidation and sideways movement may be in the cards, as investors are now searching for evidence of actual recovery as opposed to lower rates of decline.  We may see this evidence in second quarter company earnings that will be coming out in mid-July.  Until then, markets could be stuck in the trading range.

The mood at the G-8 meeting that took place last week in Italy was decidedly more upbeat.  Measures to stimulate world economies were no longer topics for the discussion.  Instead, the group acknowledged that the worst of the crisis has passed and started considering ways to back out of the dramatic rescue steps taken last year. Monetary policies have to be brought to normal levels to contain inflation.

In this short video, Peter Lynch, former manager of Magellan Fund and one of the best portfolio managers of all times, shares his views on market fluctuations, futility of market timing, and importance of staying the course and being fully invested.