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A Dollar Rally Based on Risk Trends Alone May Not Last for Long

It is difficult to forecast where the markets will be in a month or three months when volatility is as high as it is today. However, when measuring the quality of a trend; it is imperative to gauge the fundamentals that will carry the US dollar that far out to better ascertain the stability and duration of the incredible rally that the benchmark currency has carved out since the second half of January.

The Economy and the Credit Market

It is difficult to forecast where the markets will be in a month or three months when volatility is as high as it is today. However, when measuring the quality of a trend; it is imperative to gauge the fundamentals that will carry the US dollar that far out to better ascertain the stability and duration of the incredible rally that the benchmark currency has carved out since the second half of January. While there are a few fundamental signposts traders can point to when they are looking to qualify the greenback’s current bout of strength (the relief in a positive turn for NFPs or perhaps the better than expected 4Q GDP among other things); the real driver for this move is underlying risk appetite. Any doubts to this view can be cleared up by a quick review of the incredible correlation between all the major asset classes (on both sides of the risk spectrum). The US dollar is both a safe haven currency and its extraordinarily low market rates made it an ideal source of funding for the carry buildup through 2009. Both of these roles work in the benchmark’s favor now that sentiment has faltered and the effort to unwind extended yield positions is underway. Yet, the current correction in the market and underlying risk appetite will not last as long as the preceding build. The economy and rates are return are improving, just at a tempered pace. The value of dollar in euro is also improving. The foreign exchange is getting stable and the over all global economy is expected to boom in the long run. A point of equilibrium will be found within the first quarter; and valuation from there will rest with rates and economic progress. On that front, the dollar sits on a relatively strong recovery but Fed hikes look to be far off on the horizon.

A Closer Look at Financial and Consumer Conditions

The fissures that have developed in the global financial market have turned into panic-inducing cracks. Like the Dubai World reaction this past November, market participants are now fearing the potential fallout from the European Union’s financially ailing members. Greece has been at the front of the media craze; but Spain, Portugal and others are suffering just as much under the strict rules of the collective. Given how interconnected the markets are, a serious problem any one of these economies or for the Euro Zone in general could create global shocks. However, these aren’t the only threats. Japan’s credit outlook has been downgraded, the UK is facing a general election and the US is struggling to work down its record deficit.

The world’s largest economy is roaring back to life – at least that is what the casual observer would deduce from the 5.7 percent annualized pace of growth reported in last week’s advanced 4Q GDP reading. However, a critical look at the data offers a more realistic view of the United States’ recovery. The first consideration is that the annualized figure is a comparison of conditions during the same period a year ago. Considering the pain the economy was in during this time, current activity levels do seem to be running at such a breakneck pace. However, a realistic view of the economy can be found in the tempered pace of consumer spending, the Fed’s report of tighter lending conditions and the 10 percent unemployment rate.

The Financial and Capital Markets

The financial markets were shaken this past week. While the period would start off on a strong foot as the traditional benchmark assets would attempted to retrace some of the late-January losses; Thursday’s incredible plunge in sentiment and asset prices ushered in what may be the next wave of a larger bear wave. During this single day, the dollar pushed to its highest levels since July, the Dow Jones Industrial Average suffered its biggest single-day decline since July 2nd and gold caved over 4 percent. The severity of these moves is not a reflection of short-term catalysts but rather the long-term fundamental imbalance that had developed through much of 2009. With the return of speculative capital following the financial crisis of 2008, investors were looking to put their money back to work; but there is a relative bottleneck in terms of liquidity and price reaction. The influx of funds forced prices higher without the fundamental back to support the subsequent levels. Therefore, at the first sign of instability, investors that are already comfortable with cashing out will look to preserve profits or investable capital and send the financial markets on a rollercoaster.

A Closer Look at Market Conditions

Thursday’s epic declines brought the primary capital markets a big step closer to establishing a larger bear trend. The Dow’s channel break is now threatening 10,000. Gold has cleared three-month support near $1,075. Crude is just on the other side of the rising trend going back to the first quarter of 2009 now at $72.50. There are more than a few important securities that have already crossed the line; but these benchmarks all need to make their moves to crush all doubt that the bears are in control and investors have to move in to protect their accounts. It shouldn’t take long to confirm whether Thursday’s move was the catalyst to a bigger wave.With Thursday’s plunge for capital markets and the mass withdrawal of speculative capital, it comes as no surprise that risk premiums have soared. The traditional indicators are all responding as expected. The CBOE VIX jumped over 4 percentage points to 26 percent and the DailyFX Volatility Index has itself spiked. However, these indicators are highly reactive and correct on a dime. It is the two-month high in corporate default swaps, the surge in risk reversals and the influx of capital into government debt (of those countries which are not at immediate risk of default) that offers the true reading of sentiment. Under these conditions, dramatic things can happen.

Why Keeping a Higher Interest Rate Sometimes Makes Sense

Conventional wisdom often tells us that when given the choice of paying between debts, we should apply the payments to the highest yielding (i.e.-most expensive) interest rate debt. However, I think that is an antiquated way of handling your finances. Here’s why.

Let’s assume I gave you $20,000 that had to be applied towards debt. In your personal scenario “A” you could take the money and pay off a new acquired car note of $20,000 that bears an interest rate of 3.5%. The other option, scenario “B”, would be to take the $20,000 and pay down your $200,000 mortgage that bears an interest rate of 6.5%. Furthermore, if you made that down payment, it would allow you to reduce your current mortgage rate from 6.5% to 4.5%; a full 2% reduction! What would you choose?

I can tell you many of the people I speak to would quickly jump at the chance to reduce the mortgage so they could refinance. However, let’s actually look at the numbers and see what makes sense from a cash flow standpoint. You can use any standard loan amortization calculator on the internet to run these examples.

It is also important to carefully choose the money lender that you would seek help from. Most of these businesses really offer high interest rates for the amount of money that you borrow. So make sure to choose a reliable money lender to avoid any trouble and frustration in the future.

If you take a $200,000, fixed rate mortgage at 6.5%, the principal and interest payments are $1,264.14. Likewise, if you take a $20,000 auto loan at 3.5%, the principal and interest payments are $363.83. This gives you a grand monthly total for the two debts of $1,627.97. Now, let’s see what happens when we apply my generous $20,000 gift.

Under scenario A, the car note goes away, so you are left only with the monthly mortgage payment of $1,264.14. Under scenario B, the car note stays at $363.83. However, the new mortgage is now $180,000 fixed at a rate of 4.5%. This translates to a principal and interest payment of $912.03. This time, the grand monthly total for the two debts of $1,275.86.

How is this possible? You reduced your mortgage balance by $20,000 of higher interest debt and dropped your interest rate on the remaining balance by a full 2%! Yet you are still paying more money every month under Scenario B. It seems counterintuitive to keep a mortgage loan that has a higher interest rate and pay off a low rate car loan.

The key here is the amortization period of the loans. You are, without question, going to pay less interest on the mortgage over time. However, if you are look to maximize your monthly cash flow, it will almost always make more sense to eliminate shorter amortization loans. Reductions of long amortization period loans, even when substantially reducing the interest rate, simply don’t have the same impact. When you are developing your debt reduction plan, this is an important concept to remember.

What to Do When Your Mortgage Loan is Declined

Mortgage loans are declined on a very regular basis, however much more commonly the mortgage lender will put conditions on the mortgage which in no case can possibly be met, causing the consumer to be unable to accept the loan. For example, the underwriter could ask you for some documentation showing that you have more income than you actually make. Quite often a mortgage underwriter will find that you have a debt that was not on any of your credit reports and that you neglected to mention to the loan officer. Another cause of this would be that the home’s appraisal was less than the borrower had anticipated, making the loan more expensive to give out. It happens on quite a regular basis, sometimes there are things that you can do to take care of the situation, but other times the situation is out of your control.

When this happens, more often than not the lender will offer you a less desirable loan. You might see a slightly higher interest rate, a few extra points, or some extra fees. They will tell you that the loan is not that much more expensive. This has become a very effective ways for loan offers to bait and switch people into less desirable loans. In many cases, your loan has not actually been rejected, and instead they just want to stick you with a less desirable loan. However there is no way to tell if your loan has actually been rejected, or if they are merely trying to bait and switch you.

Now it is time to take some action. Since you simply cannot meet the guidelines for the loan, it is best to shop around mortgage companies again. As far as you should be concerned, the loan that you signed up for doesn’t exists. So go back to all the companies with the amended information and see what the best loan that you can get is. If a loan is declined, then Apply Online in Minutes for Your Fast Cash Loan requirements. The amount will be available according to the requirements of the person and less interest rate. A comparison can be made in different companies to get the desired amount. The availability of the best loan will be there. 

When you do o back and begin shopping again, you have to be very careful to not accidentally pay for two appraisals. Many lenders will want two on-site appraisals to protect their interests, but you shouldn’t deal with these people. High quality loan providers fully intend to give you the loan they are talking about without messing you around by asking for two appraisals. You should be able to use the same appraisal, and just pay a re-typing fee of approximately $100 without having for fork over all the money for a new appraisal.

Having your loan rejected can be quite an un-nerving event, but it is not the end of the world. There are always other options, and be sure that you find the best one for you.