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The stock market in mid May regained its bullishness raising stocks once again out of the doldrums.
Most economic statistics released to the public throughout May depicted that the U.S. economy was growing at a subdued pace, with the most vibrant sector continuing to be the real estate sector.
Real estate prices have been growing at double digit percentage gains throughout the U.S. in the past few years.
Financial gurus began to discuss in the media that there may be a real estate bubble building in the U.S., and that this bubble is sure to burst soon.
Some real estate pundits were more sanguine with their predictions about the real estate boom in the U.S. economy.
These pundits sighted that demand for housing is driven by the creation of new households in the U.S. at a pace exceeding supply, and that this was the cause of the rocketing home prices.
They neglected to mention in their reasoning that it was the easy credit and low interest rates that have been driving this real estate boom.
They also neglected to discuss what will happen when mortgage interest rates near forty year lows would rise again.
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In addition, the structure of the mortgage loans in 2005 has changed significantly. Many home buyers now are utilizing interest only or variable rate loans to finance their real estate purchases. These loans allow home buyers to buy higher priced homes than they could afford utilizing conventional 30 year fixed rate mortgage loans.
In the past, most buyers of real estate (especially when interest rates are low) chose to be conservative and therefore, borrowed their mortgage funds utilizing a 30 year fixed rate mortgages.
Stock market investors throughout May neglected the risks to the U.S. economy that the real estate bubble represented.
Most stock market indexes continued to climb during May.
Wall Street continued to be disinterested with the daily events in Iraq. I guess after two years of daily carnage investors became immunized to the horrendous daily blood letting in Iraq, and the potential consequences to the stability of the Middle East and the flow of crude oil.
June was a month for most stock market indexes to tread water.
Investors were worn out from the threat of the Fed’s determi-
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nation to continue to raise interest rates to mitigate inflation and cool the real estate explosion.
After all, at some point if long-term interest rates did in fact eventually rise significantly along with mortgage rates it could slow the U.S. Economy down significantly and that wouldn’t be great for stock prices.
In addition, fueling the duel between the bulls and bears during June was crude oil prices rising again, rising more than ten percent during June, closing the month at near $57 per barrel.
The Fed did raise short-term interest rates 1/4% at their regular scheduled meeting on June 30th. This was the ninth time in a row that they raised short-term interest rates since June of 2004.
I have reduced the oil, commodities and gold mining stocks in the portfolios that I manage for my clients. I have significantly raised the cash levels of the portfolios that I mange to there highest levels in more than a decade, waiting for the investment opportunities that are ahead.
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