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Thursday, November 29, 2007

Subprime: A Financial Year In Review

I've written an article that I'm having published this coming Monday in the newsletter for the Financial Management Association at Temple University. The article is an overview of what has been going on in the U.S. markets over the last year. Since most of my readers are not currently attending Temple University, I'm going to re-print that article here:

Subprime: A Financial Year In Review

The year began with markets in a very different place than where they are now. The equity markets were happy as the DOW was well on it’s way to 14,000 points. An American overseas could expect to spend approximately $1.30 for a Euro. Consumer confidence was at its highest level since the Dot Com tech bubble burst. Home prices were only in a slight, modest decline, and it was still relatively easy to get a cheap and easy home loan. 2007 looked like it could be a bright and prosperous period of economic expansion. Unfortunately, a wave of Adjustable Rate Mortgages that were offered to home owners at low introductory rates began to adjust upward. These home owners began to default at a greater and greater pace on their “subprime” loans. This has led to the currently ongoing crisis in financial markets.

Over the rest of 2007, U.S. investors and businesses have been challenged. Volatility has affected their way of thinking, caused them to react, and forced them to consider operating differently. Currency markets, stock markets, and bond markets are all more active, and are experiencing greater swings than they have in the past several years. These swings are due to the fallout in the housing market from the subprime mortgage crisis. 3rd quarter home prices have fallen 4.5% since last year while defaults and foreclosures are on the rise. This has hurt banks and lenders, who are now less willing to finance mortgages and HELOCs. The ripple effect is being felt everywhere. Real estate investors and “flippers” have found it more difficult to sell properties at a profit and some have been forced to sell at a loss. Retail has been affected, in a year in which consumers spent 3.5% per consumer less this Black Friday than they did the same time last year. According to the US Conference Board in a report released on November 27th, consumer confidence is down to its lowest levels since October 2005. The dollar is dipping to all time lows against the Euro at $1.48 each. Even the Canadian Dollar has risen in value over the dollar. The slipping USD has led to higher prices in energy, especially oil which hovers near $98 per barrel. Higher energy costs have led to higher costs to producers. Overall, this year has provided a very difficult environment for businesses to remain profitable in. The DOW is back under 13,000 as investors have been come cautious and guarded.

What may be the most memorable word of 2007 for all of the U.S. markets is “subprime”. Let’s hope the most memorable word next year is “recovery” and not “recession”.

Original Article Written For The FMA Newsletter By
Trevor Stasik, FMA Vice-President of Communications

Please post a comment to my article and let me know your opinion.
---Sincerely, Trevor Stasik

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