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Answer:
Dear Mr. Sauer,
There
are several reasons why, at least theoretically, the
market has recovered from its earlier lows of February
and March.
Interest
rates. Rates have stayed about the same for some
months now. And, it doesn't appear as though the Federal
Reserve Board has plans to raise them in the near
future, although that's not written in stone. When
interest rates are relatively low, people tend to
put more of their money into stocks because interest-bearing
accounts and bonds are less appealing and the prospects
for making money are greater with stocks. As money
pours into the market, a great many stocks rise in
price.
On
the other hand, when and if interest rates go up,
you can expect some money to shift from stocks into
money market funds, bank CDs and bonds - corporate,
municipal and U.S. Treasuries. (Note: The yield
on the 10-year T note is currently hovering around
4.65%.)
Corporate
earnings. During the first quarter of the year,
a number of highly-watched companies have come in
with impressive earnings growth. We cannot recommend
specific stocks in this column -- because we do not
know the reader's personal financial situation. However,
you can readily find out which companies have had
a strong first quarter by following the financial
news.
Mortgages.
I'm sure you're aware that the number of foreclosures
around the country is at a high, some say at an all-time
high. And a phrase that's new to most people, "subprime
loans," is popping up all over the news.
Subprime
loans are loans made to people who do not have good
credit; the banking industry likes to refer to them
as people with "impaired" credit. When lenders make
loans to impaired credit home buyers they do so at
a much higher interest rate than to those with good
credit histories. And, when the impaired credit homeowners
lose their jobs, have their work hours cut back or
face emergencies, such as health problems or a disability,
they cannot make their high-interest monthly mortgage
payments.
Within
the subprime borrowers group, the hardest hit are
those with adjustable-rate mortgages. Thousands of
these mortgages will be reset throughout this year
and next and, of course, at rates higher than when
they were taken out initially.
The
good news is that just recently several key players
in the mortgage world have offered to help homeowners
refinance and get out of their high-rate subprime
mortgages. Freddie Mac has pledged $20 billion to
buy loans from lenders who agree to refinance subprime
borrowers with more affordable mortgages. Washington
Mutual said it would refinance up to $2 billion in
subprime loans into fixed rate loans.
This
news has also boosted the stock market.
In
terms of your own portfolio, I suggest you read two
previous columns on the topic: "Selecting My Own Stocks."
Click HERE,
and "Sectors & Industries." Click HERE.
Good
luck!
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