Market Commentary

World stock markets have sold off on the news of intensified financial pressures over the weekend on Wall Street. International financial crises have happened several times before and as the chart below shows, the initial losses do not have to have long lasting consequences to US equity investors. The table displays the Dow Jones Industrial Average’s returns approximately six months after the five major financial crises over the past two decades. This includes the US market’s one day drop of approximately 25% in October of 1987. Most experts point to the growing and timely coordination of reactions by the global bankers and government officials for the positive results. The actions taken by US institutions over the past year to get out ahead of the housing-induced US credit crisis have been reinforced by foreign central banks. As witnessed by last weekend’s actions, the Federal Reserve and US Treasury Department have been especially creative and forceful in helping maintain the confidence of worldwide investors. Reduced interest rates, new access to government loans, and coordinated buyouts of problem companies have all been examples of proactive involvement by global banks. By all reports, governmental bodies are ready to provide continuing leadership and if appropriate, financial support to prevent serious longer term effects to the global financial markets.

Six-Month Financial Crises Period Returns

Event

Reaction Dates Immediate
DJIA
% Gain/Loss DJIA %Gain/Loss
126 Market Days After
Reaction Dates
Financial Panic of ‘87 10/02/87-10/19/87 -34.2 15.0
U.K. Currency Crisis 9/14/92-10/16/92 -6.0 9.2
Russia, Mex., Orange Cnty. 10/11/94-12/20/94 -2.8 20.7
Asian Stock Market Crisis 10/07/97-10/27/97 -12.4 25.0
Russian LTCM Crisis 8/18/98-10/08/98 -11.3 33.7
Average Return -13.3% 20.7%
Source: Ned Davis Research 9/08

History suggests that short-term financial crises often present timely investment opportunities. Even longer-term investors can take advantage of market disruptions to enhance overall performance in the eventual rebound that always comes.

Prepared by: Martin J. Cosgrove, CFA, Director of Investment Research
Research Department/ING Advisors Network

The views are those of Martin Cosgrove, Director of Investment Research, Research Department, ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.
While diversification my help reduce volatility and risk, it does not guarantee future performance.

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Mortgage Market Update - Oil hits a new high

MMG Update - Tuesday, May 6, 2008 9:14am ET

Current Trend Direction: Sideways

Risks favor: Floating

Current Price of FNMA 5.5% Bond: $100.59, +19bp

Bonds are moving higher this morning after bad news was released for Fannie Mae, the largest provider of US home financing. The company said it lost $2.19 Billion in the first quarter due to the current housing and credit crisis, which equates to a loss of $2.57 a share compared with a profit of 85 cents a year ago. And like Freddie Mac, the company plans to raise capital and cut its dividend. Stocks traded lower on the news, pushing money into Bonds and helping Bond pricing improve.

In other headlines, oil hit a new record high of $120.93 this morning. Oil prices have doubled over the past twelve months, pushing the average price at the pump to $3.60 a gallon. Goldman Sachs is forecasting that black gold could rise to $150-$200 a barrel in the next twelve months. If this plays out as they suggest, the inflationary effects of high oil prices could pressure Mortgage Bonds lower, causing home loan rates to move higher...so this will be a story to watch. In other words, it might be the time to buy now while rates are low. And, because of the inflation alone, we may see higher home prices.

For now, Bonds continue to ride a dual floor of support at the 50 and 100-day Moving Averages. We will continue to Float for now, and watch how the Bond behaves near this strong floor.

Mortgage World

This week brings us the release of five monthly or quarterly economic reports. None of them are considered to be nearly as important as several of last week's releases were. This leaves other factors such as stock markets movement to influence bond trading and mortgage rates several days this week.
November's Housing Starts report will be released Tuesday morning, but I don't see it causing much movement in mortgage rates. This report, which is expected to show a decline in starts of new homes, gives us an indication of housing sector strength and future mortgage credit demand. But, it can be considered the least important of this week's news.