Trading Lesson 8

Reading the writing on the wall

On August 25, 2003, I released an article regarding "America's Silent Mortgage Crisis" on the internet. In 2001 congress projected a $5.5 trillion surplus. Since then we have seen our country mount a deficit in the trillions of dollars.

Economists have continuously said that a perpetual deficit would drive interest rates up by 2% or more. The recent collapse in the subprime lending sector is just the beginning of the collapse of the housing boom.

More than 30% of loans in the marketplace are some form Adjustable Rate Mortgage (ARMs). ARMs allow home purchasers to have a very low initial interest rate that increases over time. ARMs typically match LIBOR interest rates. When interest rates are down, ARMs are great.

Unfortunately, interest rates fluctuate with the whims of current events. Current events such as the war, deficit spending, weak U.S. dollar, Greenspan reiterating a potential recession on the horizon, all negatively impact interest rates. Primarily affecting homeowners with ARMs and new home purchasers.

There is no Federal Reserve bailout on the horizon. They have lowered the rates to a 41-year low of 1.00%. Altogether, this means that over the next year ARMs homeowners will have to deal with increased mortgage payments of 50% or more.

Therefore there is no surprise at what is occuring right now. The key to long term success is an understanding of what factors go into the fundamentals of the markets you trade. By having a macro-view of the economy you can develop genuine long term tactics and strategies. Take stock of what's happening on every level and understand how the dollar, gold, oil, and inflation operate.

If you would like our free report on the factors that go into determining fundamental analysis send an email with the subject "fundamental analysis" to info@liverpoolgroup.com