The strength of the domestic recovery evident in housing and automobile sales are now being tested from the spike in borrowing costs. Granted the spike occurred from historically low rates and now still offer very attractive levels when viewed from an historical perspective. The same sense of buyers retreat happened not too long ago with gasoline sales. I can still recall the good old days of when filling up the tank costs $16 on .89 cent per gallon of petrol. Then I was horrified when gas spiked all the way up to $4.45/gallon which took a hefty $71 out of my wallet. I even began to monitor my bi-weekly jaunts to Costco. Gasp! So, now that gasoline has fallen all the way down to $3.44/gallon I no longer feel so bad, gas is virtually on sale. I believe we're experiencing the same effects with interest rates. Potential home buyers and investors alike were fed a healthy dose of ultra-low borrowing costs and 3% mortgages for years. Unfortunately many would be buyers couldn't qualify either from tightened underwriting standards, damaged credit or job losses. Now that they are ready to take the plunge rates have moved aggressively up to 4 1/2%. Ouch! Not really. I can still remember when home mortgage rates were over 8% and that was for excellent credit scores. So, as you can see it's all relative. The "shock" of higher rates will abate some as we get accustomed to the new reality and the pent up demand continually growing will be released, it will just take some time and the recovery will experience an extended period to play out.
The US President has been virtually backed into a corner. The President took flak from the right for his "leading from behind" Libya plan, which from where I stand, worked. He is also taken some sniper fire from conservative for pulling our troops out of Iraq and Afghanistan too early leaving the job "unfinished". We flash forward to the Syrian civil war and President Obama's red line in the sand regarding chemical weapons. It appears clear Government forces have used poison gas on its people. What will be the Obama response? Jawboning? Lead from behind? UN resolutions? No, it is too late and too weak for the Obama administration. The administration is building a coalition among its friends to act outside of the UN and appears to have the UK, France, Israel and of course local powerbroker Saudi Arabia in full support of a direct and aggressive response in order to force the Assad government into serious diplomatic negotiations with rebel fighters. There are far too many questions to figure out how this ends. Is the coalition prepared to put boots on the dirt and send troops into Syria? Will they create a no-fly zone and allow the battle to rage on? What happens if the Syrian response is to refocus their arsenal towards Israel? What will Iran's response be? Will Oil supplies be disrupted? What will the Russian response be?
There are many more questions and scenarios to ponder which can/will lead to heightened market volatility and nervousness as we head ever closer to the US budget negotiations. We at Grand Street Advisors believe we are currently stuck headline reading and not yet ready to move aggressively to alter our portfolios. Once the US coalitions plan of attack/negotiation with Syria becomes clearer we believe we'll have plenty of time to adjust accordingly. To move now we believe would be premature as the recent sell-off has uncovered some attractive investment opportunities at current levels. However, as stated earlier, it's all relative.
