Current Events

1
Current Events

• An Introduction to Financial Markets

2
The current state of the economy

• What is the outlook of the stock market over the
  short-term? Long-term?
• What direction are future interest rates going?
• What is the current state of the economy?

3
Interest Rates

• Who has the most influence over the direction of
  interest rates in the U.S.?
• What is the interest rate that is most often
  talked about in the U.S. financial press?

4
Key Interest Rates
5
The current state of the economy

• Factors to consider
• Unemployment
• Interest Rates
• Consumer Confidence
• Stock Markets
• Housing

6
The current state of the economy

• The unemployment rate held steady at 5.5 percent
  in June.
• The number of unemployed persons increased by
  62,000 to 8.5 million.
• A year earlier, the number of unemployed persons
  was 7 million, and the jobless rate was 4.6
  percent.
• Jobs losses
• Construction 528K since Sept 06
• Manufacturing 353K over past 12 months have
  been lost
• Retail 194K over the past 12 months
• Health Care 348K over past 12 months

Source the Bureau of Labor Statistics
7
What is the state of the economy?

• CPI-U
• CPI-U rose 1.5 over the first 5 months of 2008
• Rose 4.6 in 2007
• CPI-U excluding food and energy
• Rose 0.8 over the first 5 months of 2008
• Rose 2.6 in 2007

• Energy costs
• Increased 6.5 in 2007 (compared to 2.9 in all
  of 2006)
• Increased 29.8 in 2007 (compared to 2.9 in all
  of 2006)
• Food costs
• Increased 2.5 in 2008
• Increased 5.4 in 2007

• What is the importance of examining the CPI-U and
  the CPI-U excluding energy costs?
• Consumer Confidence
• Has fallen to a 16-year low
• Fifth lowest reading ever
• Why is consumer confidence important?

8
Stock Markets

• Dow Jones Industrial Average - July 8th close
  11,384.21
• 52-week high 14,198.10 October 2007 Low
  11,120.61 July 2008
• Factors that have affected stock markets over the
  last year
• Overall U.S. economy
• Inflation the Unemployment rate are still
  historically low, but both are increasing
• Are we in a recession?
• Greater integration of global
• financial markets

9
Worldwide GDP Growth
10
World Indices
11
Housing Markets

• Future of the housing market
• In May existing home sales rose 0.2 dropped
  15.9 over the last year
• In May new home sales decreased 2.5 over the
  last year new home sales dropped 40.3
• 10.8 month supply of homes for sale (4.49M units)
• Housing Concerns
• Over the last five years the housing market has
  benefited from the low interest rate environment
• Allowing households to refinance higher rate
  mortgages
• Allowing non-traditional (lower income, lower
  credit ratings) borrowers access to credit
• Lower interest rates have allowed borrowers to
  buy more expensive homes

12
Housing Markets

• Home prices fell 3.2 in the 2nd quarter of 2007,
  which is the steepest drop in 20 years
• Sub-prime market
• 20 of all mortgages approximately 1.5 trillion
  in loans
• 20 of these loans are expected to be foreclosed
• Alt-A loans (Alternative-documentation loans)
• Loans that are primarily credit-score driven
• Candidates tend to lack proof of income from
  traditional employment (commissioned employees,
  sales people).
• borrowers pay a slightly higher interest rate
  often from a quarter, up to half-point more than
  fully documented
• 1 trillion in loans
• 20 of these loans are expected to be foreclosed
• The losses of the housing meltdown could approach
  1trillion!!!

13
Housing Markets
14
Cities with the highest foreclosure rates

• STOCKTON, CA 7,116 31
• DETROIT/LIVONIA/DEARBORN, MI  25,708  33
• RIVERSIDE/SAN BERNARDINO, CA 31,661 43
• FORT LAUDERDALE, FL 16,595 48
• LAS VEGAS/PARADISE, NV 14,948 48
• SACRAMENTO, CA 15,479 48
• CLEVELAND/LORAIN/ELYRIA /MENTOR, OH 16,332 57
• MIAMI, FL 15,484 60
• BAKERSFIELD, CA 3,947 64
• OAKLAND, CA 13,245  71

Source RealtyTrac
15
Writedowns of Loans from MBS
Writedowns on the value of loans, MBS and CDOs