The DJIA was off 50 points today as news of a slowdown in existing home sales dropped 2.6% in July. As I have told you in the past, misleading data and hype are music to alert contrarian's. Some housing experts want you to believe that rising interest rates are the cause for the recent slowdown in existing home sales. Nothing could be farther from the truth.
In fact, the real cause for the slowdown in housing is soaring housing and energy prices. As far as interest rates are concerned, the only rates that are going up are short term rates. So, if home buyers are stupid enough to invest in short term or adjustable rate mortgages when interest rates are at 40 year lows, they deserve to get whacked. Smart buyers would have locked in longer term rates at these levels.
Here are the facts: The only rates that have risen dramatically are the Fed Funds Rate and the Discount Rate which have risen 200 basis points or 2.00% since August of 2004. The Prime Rate, that is tied to adjustable rate mortgages and lines of credit have risen in lock step with the FF Rate and Discount Rate.
As far as intermediate and long term rates are concerned, they are about the same or lower than they were a year ago. The 10 year Treasury was at 4.25% a year ago, and is now 4.29%. The long bond (30 year) was at 5.2% a year ago and currently stands at 4.5%. This being said, what do I think is going to happen next? This is an easy one.
New and existing home buyers are realizing that they made a huge mistake by locking in adjustable rate and interest only mortgages. Since they will never admit at dinner parties that they made a mistake, in time, or as we speak, they will slither down to the bank and begin trading in their short term mortgages for longer term loans.
We are on the verge of another refinancing boom that will reap huge profits for mortgage lenders and banks. The current sell-off in bank stocks is providing us with a terrific buying opportunity.
Use the current sell-off in the banking sector to add to Bank of America (BAC), CitiGroup (C), and JP Morgan (JPM). The financial sector is also one of the most heavily shorted sectors on the exchange. I would love to add Old National Corp (ONB), Wachovia (WB), and Melon Bank (MEL), but the weighting in the portfolio would be too heavy in financials.
I have one new buy today for the IA portfolio, Wal-Mart (WMT). A slowdown at Wal-Mart is being blamed on high energy prices. For those of us that own energy stocks, what better hedge is there than Wal-Mart. If energy prices do begin to fall, Wal-Mart stock should begin to rise. I would not be too concerned about a temporary sell-off in oil stocks either. I think oil stocks will resume their march upward even if oil prices pull back.
