Friday, January 26, 2007

Rising Rates

As of yesterday, the rate on the 10 year T-note had risen to 4.86% and it appeared to be heading for 5%. The stock market does not like rising interest rates. Rising rates means that cash is becoming more valuable. In fact, we may now be seeing the end of the "cash is trash" period. The yields on the 91 day T-bills are now pushing over 5%. That's better than double the 1.8% yield on the overpriced S&P 500.

Roughly $2.3 trillion in adjustable rate mortgages are due to be reset this year, and it's hardly bullish that these mortgages will be reset in an atmosphere of rising interest rates. This is hardly the condition that the experts were predicting late last year. In fact, the smartest economists and money-managers were talking about declining rates in 2007. So far, it hasn't worked out exactly that way.

The sale of existing housing dropped 8.8% in 2006, it's biggest drop in 17 years. Then today we hear that more than 1.2 million homes were foreclosed in 2006, up 42% over the previous year. With interest rates now rising, the situation becomes rather interesting.

Real estate billionaire, Sam Zell, has put his entire real estate empire up for sale. Now why did he do that at this particular time. Then in today's paper billionaire Kirk Kerkorian has his Beverly Hill home for sale. This 30 acre property was put up for sale last year at a price of $25 million. The property didn't sell. Now Kirk has lobbed $7 million of the price. The place is yours for just under $18 million.

Rates now rising, the rationale for holding T-bills improves. The short T- bills now yield over 5% free of state taxes, and when you buy a T-bill you're guaranteed to get your capital back within three months. Stocks are always competing with bills and notes. When you buy stocks you receive historically low dividends, and you're not guaranteed that you'll get your money back when you want to sell.

Big money wants:

1.)Safety first

2.)Income second

3.) Possible appreciation third

That's a good thesis always to keep in mind.


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