Re:The Economy - 2007/02/26 21:30We were not overweight equities or underweight fixed income. This is a bull market and the Executive Board has cut the top off of our potential gains by changing us to a bear market allocation. What made the decision worse is that the reallocation increased our exposure to financial firms, who I beleive will be going to be going thru a downward correction due to the fallout in the subprime loan market.
Mike, the first thing I would like to say is that the number Bryan came up with was a speculative figure, using current analysis and comparing that with past performance. The market has had a wave of growth since January 1, 2007 and as Bryan has stated, it will be difficult to sustain this growth throughout the whole year. Your observation of the economy currently being in a bull market I fully agree with, but cutting the top off is a pure overstatement. We have analysts whose duties are to analyze the fixed income sector, pick winners, and bank on dividends (which we plan to do). We also have a plan to take $130,000 of the 200,000 and invest it into individual securitiess. Once you learn the entire process to evaluate companies, I believe you will be less opposed to our strategy and more diversified.
HOW MUCH HAS THE SUB-PRIME LOAN MARKET FALLENOUT? HOW BIG IS THE SUB-PRIME LOAN MARKET?
Okay. These are a few question I would like to answer. "The subprime mortgage market, by itself, is not large enough to constitute a systemic risk to the banking or financial system unless a “contagion effect” boosts rates on all mortgages." The most 'down to earth' definition of a Sub-Prime Loan is a loan to a person who hasn't the financial stability of a person with AAA creditwothiness. These are people who could face losing their homes in a rising interet rate economy. Are the interest rates rising?
Secondly, these loans on make up approximately 10% of the entire mortgage market. 10% of 9.5 trillion or approximately 960 billion. How much are we spending in Iraq? How about Iran? Not to worry, though, we can almost be assured that not all of those 10% are going to default on their homes. Some people are more financially prone to defaulting but we will just consider that a fact of human nature.
Lastly, the Sub-Prime Market has nearly come to a end since intrest rates have risen slightly and property values have stopped increasing (two important model characteristics in SPL), so this market is basically un-enterable because too great of risk lies on the lender. But, remember, there is currently a market, and yes, it has fallen, but it is not dead!
So I feel that if our bond analysts believe that the position we are going to allocate our funding to should be in the finacial sector, we should take the most of their knowledge and using to our advantage.
BMM
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