I am able today to tear myself away from my philosophical dilemma to ponder the possibilities of gaining income. Those of you who are interested in the stock market may have been upset at the market volatility over the past couple of weeks. The market has been going up and down at an extreme rate during the first thirty minutes of trading as well as the last thirty minutes of trading. It has reversed itself almost every day by over 100 points. To the weak of heart, this can be a nerve wracking experience. I am here now to describe it to you as I see it.
Yesterday morning, the market sold off by about 180 points if I remember correctly. Then the Federal Reserve Bank agreed to purchase 19 billion dollars worth of mortgage bonds from mortgage companies, who have been forclosing on mortgages at an unprecedented rate lately. The market went up on this news and then down. The Fed then bought 3 billion more dollars worth. The market went up and down again. Then the Fed bought 19 billion dollars worth more bonds. When I say bought, I mean, they agreed to buy the mortgage bonds for a three day period which ends on Monday. This is intended to give the mortgage companies a three day supply of money to issue mortgages with for a three day period. The stock market ended the day yesterday with a 31 point loss, which although an improvement, was not a spectacular closing.
What we don’t know is what will happen when the mortgage companies repay the 38 billion dollars on Monday. Will the Fed give them another three day loan ? Will the Fed cut interest rates and make mortgages more affordable ? If the Fed does this, it will help the stock market in some capacity, but the 38 billion that it helped with yesterday only limited the Dow Jones sell off to 31 points. Although money is not worth as much as it used to be, 38 billion dollars is still worth something in this inflationary world ( unless you exchange it into English pounds or euros.) I have reason to believe that one more massive selloff will have to occur before the stock market resumes an upward course again.
There are a few hedge funds that are heavily invested in mortgage backed securities; billions of dollars worth of these securities. The individual investors in these hedge funds can begin requesting their money back on August 15th. These requests for reimbursement can continue until the last day of September, the end of the quarter. In order to repay these customers, the hedge funds may have to sell stocks in order to generate the cash that the customers are asking for. If a large number of customers demand their money back, the hedge funds will have to sell a large number of stocks, including good, profitable stocks to generate the cash. This could cause a massive selloff in all stocks, including the good, profitable stocks. The market could sell off to a level below 13,000, devestating the retirement funds and life savings of millions of people.
Please invest with caution over the next couple of weeks !
I.C.