Bond Market Bingo

The promotion for the 1965 movie, “Beach Blanket Bingo” was simple: “Frankie (Avalon) and the gang are hitting the beach for some good old-fashioned shenanigans!” There happen to be some strange shenanigans in the bond market this summer, as some global investors are willing to accept negative interest rates for the bonds that they are purchasing. It’s the financial equivalent of BOND Blanket Bingo! Why would someone choose to automatically lose money? That is what occurs when investors buy bonds with negative yields, and hold them to maturity. Yet, with worldwide growth petering out, persistent low inflation and uncertainty about everything from Brexit to the US Presidential election, money has been pouring into government debt, pushing up prices and driving down yields.

Currently there is about $13 trillion worth of global sovereign debt yielding less than zero. Last year, Switzerland became the first country to sell debt at negative yields, followed by Japan, which did so in March. And then earlier this month, Germany became the first eurozone country to sell 10-year bonds with a negative yield in a government auction.

Under normal conditions, you would purchase a bond at a discount, meaning that you would pay $99.50 for a bond. Then at the end of the term, the government would send you $100 at maturity. But in the topsy-turvy negative yield world, you buy the bond at a premium, say $101 and only get back $100 at maturity.

Why would anyone lend money to a government for ten years, only to be contractually obligated to see less than the total amount returned? There are a number of reasons that this market quirk is occurring. Many investors believe that global central banks, like the European Central Bank, the Bank of England and the Bank of Japan, will continue to buy bonds to stimulate economies and therefore, the price of bonds will keep rising. In that case, an investor might accept a negative interest rate because she thinks that she can sell that same bond for even more money to someone more desperate for safety.

Others purchase negative yielding debt because they need a safe, liquid investment, amid uncertain conditions. These investors equate buying a negative yielding bond with paying for portfolio insurance against future economic disaster. For them, it is cheaper to lose a bit of money on a government bond than to park vast sums in a vault and then pay a guard to watch over the stash.

There is another point to consider: with little or no inflation to erode purchasing power, some accept lower yields, because “even if you earn zero percent or less on your savings, you still come out ahead,” according to Capital Economics. That’s why when compared to negative rates, receiving only 1.6 percent for a 10-year US government bond doesn’t sound too bad.

But low yields are tough to take for retirees who need to create an income stream from their savings. Many of these folks had planned on generating something closer to 3 percent from their “safe” assets, which is why many are turning to riskier, corporate junk bonds, which are yielding a comparatively juicy 5.5 percent.

But what seems great today can quickly seem terrible if/when the economy turns south and enters into a recession. At the end of 2008, after the financial crisis hit, junk bond yields soared to over 20 percent, which meant that the prices of these once-sought after instruments, had plunged. That’s why in Bond Market Bingo, the risk is not just that your number was not called, but that you could lose money in the process.

Bonds with Negative Yields

When investors buy bonds with negative yields, and hold them to maturity, they will automatically lose money. Yet, with worldwide growth petering out, persistent low inflation and uncertainty about everything from Brexit to the US Presidential election, money has been pouring into government debt, pushing up prices and driving down yields. Currently there is about $13 trillion worth of global sovereign debt yielding less than zero. Last year, Switzerland became the first country to sell debt at negative yields, followed by Japan, which did so in March. And then earlier this month, Germany became the first eurozone country to sell 10-year bonds with a negative yield in a government auction.

Normally, you would purchase a bond at a discount, meaning that you would pay $99.50 for a bond. Then at the end of the term, the government would send you $100 at maturity. But in the topsy-turvy negative yield world, you buy the bond at a premium, say $101 and only get back $100 at maturity.

Why would anyone lend money to a government for ten years, only to be contractually obligated to see less than the total amount returned? Many investors believe that global central banks (ECB, Bank of England and Bank of Japan) will continue to buy bonds to stimulate economies and therefore, the price of bonds will keep rising. Others purchase negative yielding debt because they need a safe, liquid investment. It is in fact cheaper to lose a bit of money on a government bond than to park vast sums in a vault and then pay a guard to watch over the stash.

An investor might also accept a negative interest rate because she thinks that she can sell that same bond for even more money to someone more desperate for safety. Or perhaps she fears future craziness in the financial world and wants to be sure to keep a portion of her portfolio stable. The former is a variation of the greater fool theory, while the later is a variation of paying for portfolio insurance against future economic disaster. There is one more point to consider: with no inflation to erode purchasing power, investors are choosing to accept lower yields, because “even if you earn zero percent or less on your savings, you still come out ahead,” according to Capital Economics.

Amid the low/negative yield world, the Fed is set to begin a two-day policy meeting this week. It is widely expected to do a whole lot of nothing, but there will be close scrutiny of the accompanying statement. The focus will be on how the Fed describes economic conditions. While job creation has tapered off to 170,000 per month, down by about 50,000 from a year ago, a slowdown is consistent with an aging recovery. With wages picking up, underlying retail sales growth close to a two-year high and core inflation inching towards the Fed’s desired target of two percent, the central bank may surprise markets with a September rate hike. Right now the bond market implies just a one in five chance of that occurring, but stay tuned for Chair Janet Yellen’s appearance at the Jackson Hole symposium on 26th August. Many Fed chairs have used Jackson Hole as place to float future policy moves.

Any rate increase could come as a big surprise to all of those sovereign bondholders. It is worth noting that a one percent increase in interest rates would push down 10-year prices by 9 percent – so much for safety!

MARKETS: Large indexes closed at all-time highs for the second week in a row.

• DJIA: 18,570, up 0.3% on week, up 6.6% YTD
• S&P 500: 2175, up 0.6% on week, up 6.4% YTD
• NASDAQ: 5100, up 1.4% on week, up 1.8% YTD
• Russell 2000: 1212, up 0.6% on week, up 6.8% YTD
• 10-Year Treasury yield: 1.566%, (from 1.547% a week ago)
• British Pound/USD: $1.3105 (from $1.3214)
• September Crude: $44.19, down 3.8% on week
• August Gold:  at $1,323.40, down 0.3% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.22 wk ago, $2.74 a year ago)

THE WEEK AHEAD: While the US economy is not exactly firing on all cylinders, it is far better than other developed nations. When the government releases the first estimate of second quarter growth this week, economists expect a rebound to 2.5 percent, up from the disappointing 1.1 percent level in Q1.

Mon 7/25:

10:30 Dallas Fed Mfg

Tues 7/26:

Apple, Caterpillar, Under Armour, Verizon Communications 

9:00 S&P Case-Shiller HPI

10:00 New Home Sales

10:00 Consumer Confidence

FOMC Meeting Begins

Weds 7/27:

Boeing, Coca-Cola, Whole Foods Market

8:30 Durable Goods Orders

10:00 Pending Home Sales Index

2:00 FOMC Meeting Announcement

Thursday 7/28:

CBS, Dow Chemical, Ford, Marriott

8:30 International Trade

Friday 7/29:

ExxonMobil, Merck, United Parcel Service, Xerox

8:30 GDP

8:30 Employment Cost Index

9:45 Chicago PMI

10:00 Consumer Sentiment

#281 Does your Financial Advisor Put You First?

The fiduciary duty entails asking an important question: Does your financial advisor put you first? That's what our guest Mary A. Malgoire, CFP helped explain. Mary is the founder of The Family Firm Inc, a fee-only financial advisory firm in Bethesda, Maryland and believes in the client-first, fee-only model, because there are “too many conflicts that exist.” As the past President and Chairman of the Board of the National Association of Personal Financial Advisors (NAPFA), she is fee-only true and blue!

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Mary joined the board of the Institute for the Fiduciary Standard in January 2015 and has been instrumental in developing the Campaign for Investors website. The Institute is a not-for-profit organization that formed to advance objective and competent financial advice, by educating investors about their rights and promoting best practices among financial advisors. In short, the Institute seeks to change the financial services industry and improve investor outcomes. The web site has lots of resources for investors including: How to find out if your current advisor is a fiduciary, how to calculate your investing costs and to know your rights as an investor.  The six duties of a Fiduciary are: Serve the client’s best interest; Act in utmost good faith; Act prudently -- with the care, skill and judgment of a professional; Avoid conflicts of interest; Disclose all material facts and Control investment expenses

 Callers/Listener E-Mails/References:

Here's the article I referenced: Financial Threats you CAN Control

We fielded retirement account questions from Henry, Dev, Shirley; debt issues from Matt and Jean (check out the NYT and ProPubica NJ Loan Program article that outlines some of the ridiculous rules around education debt); and investment strategy questions from Pete and Beatrice.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Why are Stock Markets at New Highs?

"Why are stock markets at new highs?" The easy answer is that there are more buyers than sellers. The more complicated answer is that the Dow and the S&P 500 reached new all time highs last week, as investors shrugged off post-Brexit concerns and refocused on global central banks. In the case of the Bank of England, the Bank of Japan and the European Central Bank, the bet is that each will do something in the coming months to fight economic malaise. And in the US, the recent resurgent stock market is a result of investors’ belief that that the Federal Reserve will likely sit on its hands for the remainder of the year. Even if those assumptions are correct, the climate for investors is still riddled with danger. To earn anything approaching an acceptable return, many are turning back to risk assets, despite the bump in volatility seen over the past 18 months. In fact, since May 2015, when stocks previously saw new peaks, investors have endured two corrections (drops of 10 percent from recent peak) amid worries about slowing growth in China, plunging oil prices and fears over an emerging market debt crisis.

Those who gritted it out and stayed on course with their asset allocation, have done just fine. After dropping to 52-week lows in February of this year, the Dow is up a stellar 17 percent (and up 180 percent since the March 2009 nadir). But pity the market timers who sold at the various bottom points and then chased assets higher—they are likely licking their wounds and perhaps even sitting out this most recent leg higher.

There are also many investors who are on the sidelines because they see the world as a scary place. These folks likely stumbled upon the Economist Intelligence Unit’s updated list of Top Threats as a rationale for not feeling comfortable with any risk right now. Those top ten threats are:

1. China experiences a hard landing
2. Currency volatility and persistent commodity prices weakness culminates in an emerging markets corporate debt crisis
3. Donald Trump wins the US presidential election
4. Beset by external and internal pressures, the EU begins to fracture
5. "Grexit" is followed by a euro zone break-up
6. The rising threat of jihadi terrorism destabilizes the global economy
7. Global growth surges in 2017 as emerging markets rally
8. The UK votes to leave the EU
9. Chinese expansionism prompts a clash of arms in the South China Sea
10. A collapse in investment in the oil sector prompts a future oil price shock

My vote for number 11 on the list is “Corporate Share Buybacks halt”. As noted in the Wall Street Journal, “Among the most prominent drivers of the 2016 stock rally has been companies’ willingness to buy back shares. The strategy…drives up share prices and improves per-share earnings by reducing the number of shares outstanding. Some investors decry buybacks as financial engineering.”

The concept of companies buying back shares to drive prices higher is what Time business and economics columnist and author Rana Foroohar calls “financialization.” In her book “Makers and Takers: The Rise of Finance and the Fall of American Business,” Faroohar says that buybacks are a type of financial engineering that can juice short-term profits, thereby enriching shareholders. Unfortunately, waving a financial magic wand over a company’s balance sheet does nothing to serve the real economy, something that would occur by a company using its capital to invest in long-term growth.

Financial shenanigans may push the stock market higher for the foreseeable future, but they are unlikely to create a sustainable economic model that will produce results over the next several years.

MARKETS:

• DJIA: 18,516, up 2% on week, up 6.3% YTD
• S&P 500: 2161, up 1.5% on week, up 5.7% YTD
• NASDAQ: 5029, up 1.5% on week, up 0.5% YTD
• Russell 2000: 1205, up 2.4% on week, up 6.1% YTD
• 10-Year Treasury yield: 1.547%, (from 1.366% a week ago)
• British Pound/USD: $1.3214 (from $1.295)
• August Crude: $46.02, up 1.4% on week
• August Gold:  at $1,327.40, down 2.3% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.24 wk ago, $2.77 a year ago)

THE WEEK AHEAD:

Mon 7/18:

Bank of America, Hasbro, IBM, Netflix, Yahoo!

10:00 Housing Market Index

Tues 7/19:

Discover, Goldman Sachs, Johnson & Johnson,, Microsoft, Philip Morris, UnitedHealth

8:30 Housing Starts

Weds 7/20:

Abbott Labs, American Express, eBay, Halliburton, Intel, Mattel, Morgan Stanley

Thursday 7/21:

ATT, Chipotle Mexican Grill, GM, Starbucks, Visa 

8:30 Philadelphia Fed Business Outlook Survey

8:30 Chicago Fed National Activity Index

9:00 FHFA House Price Index

10:00 Existing Home Sales

10:00 Leading Indicators

Friday 7/22:

American Airlines, General Electric, Honeywell, Schlumberger

Saturday 7/23:

China hosts the G-20 meeting of finance ministers and central bankers.

#280 Stocks Market Highs, American Business Lows

Despite stock market indexes reaching all-time highs, American businesses are falling to new lows. The reason is that the golden age of US innovation and capitalism has given way to what our guest Rana Foroohar calls "financialization.” Rana is the Time business and economics columnist and author of "Makers and Takers: The Rise of Finance and the Fall of American Business." The book divides the American business world into "Makers," those companies that serve the real economy by providing capital and investing in long-term growth and "Takers," those who use financial engineering to juice short-term profits and as a result, enrich their shareholders and themselves.

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How did we go from the simple explanation of banking that Jimmy Stewart provided in "It's A Wonderful Life" ("The money's not here [in the bank]. Your money is in Joe's house that's right next to yours. And in the Kennedy house and Mrs. Macklin's house and a hundred others") to a world where only about 15 percent of all the money in our system actually ends up in the real economy?  Rana notes that the 40-year process has culminated in the financial sector holding "a disproportionate amount of power in sheer economic terms. It represents about 7 percent of our economy but takes around 25 percent of our economy of all corporate profits, while creating only 4 percent of all jobs."

And if you have an MBA or are thinking of getting one, you might be interested in knowing that "an increasing number of business educators at top schools are concerned that MBA programs are churning out number crunchers without a conscience." Before you get too depressed, listen to the whole interview, because Rana notes "Despite all our problems, America is still the prettiest house on the ugly block that is the global economy." There are also some interesting policy shifts that could occur that would remedy the trend.

Callers/Listener E-Mails:

If you are interested in starting your own business, check out my conversation with Barbara, who is trying to decide whether or not to start a private practice. We discuss the Social Security Windfall Elimination for Scott, the use of fixed annuity for Deanna and robo advisors for Andrew.

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Financial Threats You CAN Control

Earlier this month, the Economist Intelligence Unit updated its list of the Top Ten Global Threats. They are:

1. China experiences a hard landing
2. Currency volatility and persistent commodity prices weakness culminates in an emerging markets corpo
3. Donald Trump wins the US presidential election
4. Beset by external and internal pressures, the EU begins to fracture
5. "Grexit" is followed by a euro zone break-up
6. The rising threat of jihadi terrorism destabilizes the global economy
7. Global growth surges in 2017 as emerging markets rally
8. The UK votes to leave the EU
9. Chinese expansionism prompts a clash of arms in the South China Sea
10. A collapse in investment in the oil sector prompts a future oil price shock

While any one of these events could throw the world’s economy into a tailspin, they are out of our control, so it may be smarter to concentrate on the Top Ten Financial Threats that are within our ability to manage.

1. Ignoring your Cash Flow: It is hard to live within your means if you have no idea where the money is going. Regardless of your income level, the key to reaching your financial goals starts with a simple task: tracking your income and expenses.

2. Borrowing too much: Whether it’s for a house or for your child’s education, carrying too much debt can prevent you from addressing important financial goals and may also create a huge emotion burden.

3. Not establishing an emergency reserve fund: Bad luck can occur at any time, so it is vital to save an easily accessible, liquid cushion of 6 to 12 months of expenses if you are still working - 12 to 24 months if you are retired.

4. Carrying No/Insufficient Life Insurance Coverage: If you have dependents, prepare for the worst-case scenario by purchasing adequate life insurance coverage. In most cases, term life will do the job.

5. Not Contributing to Retirement as Early as Possible: Ask any retiree about the biggest mistake he or she made and it will likely be “I should have started saving sooner!” Establishing the automatic saving habit early pays huge dividends in the future.

6. Tapping Retirement Funds Early: While the IRS allows for hardship withdrawals in certain instances, too many workers who leave their jobs, cash out plan assets and pay a tax penalty, instead of rolling over the funds into another retirement account.

7. Failing to Properly and Efficiently Manage Retirement Funds: Whether it’s not rebalancing, owning too much company stock or using high-fee funds, retirement savers are costing themselves money with easy-to-rectify oversights.

8. Claiming Social Security Early: You can claim SS retirement benefits as early as age 62, but doing so will permanently reduce your (and your spouse's, if he or she plans to claim one-half of your benefit) monthly income by as much as 25 percent.

9. Not drafting a will/power of attorney/health care proxy: Don’t create a mess for your heirs-draft the necessary estate documents NOW.

10. Not Seeking Help When You Need It: There is no shame in admitting that you need help with your financial life. If you want customized services,work with a professional who has earned the CFP® certification or is a CPA Personal Financial Specialist. You can ask for referrals from friends or colleagues or use the search tools offered by the Certified Financial Planner Board of Standards, the Financial Planning Association, or for fee only advisors, go to the National Association of Personal Financial Advisors.

June Jobs Take Off: Stocks Surge

The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

• DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
• S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
• NASDAQ: 4956, up 2% on week, down 1% YTD
• Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
• 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
• British Pound/USD: $1.295, a 31-year low
• August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
• August Gold:  at $1,358.40, up 1.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 7/11:

Alcoa

10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

#279 Making Money in a Low Return World

Making money in a low return world is tough. Last week, the yield on 10-year US government bonds touched an all-time low and stocks have been stuck in neutral for two years. Given the current environment, return caller Ryan asked whether one asset allocation fits all portfolios? In other words, should you put those investments which are likely to appreciate the most in a Roth IRA, where you will never have to pay taxes on the gains? It may take some some work, but the idea has merit.

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Heather Long, CNNMoney's senior markets and economy writer, joins the show to weigh in how you can make money in the current low return era. Heather notes that most forecasters now expect below average returns for the major asset classes over the next five years. She helps us decide what to do about it. Heather also discussed politics, diving into the question: Who’s better for your money: Trump or Clinton?

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Bond Yield Plunge is a Boon for Mortgage Borrowers

Post-Brexit uncertainty has meant that global investors are pouring money into so-called safe haven investments, like US government bonds. As prices rise, benchmark 10-year Treasury yields touched an all-time low of 1.344 percent – think about that…if you lend the US government money for ten years, you will only receive just over 1.3 percent interest—and if you lend for 30 years, you will only get about 2.1 percent! That’s terrible news for savers, especially risk-averse ones -- as well as pension funds, which try to provide stable income for retirees. But it's great news for mortgage borrowers. The average contract interest rate for 30-year fixed-rate mortgages for conforming loans ($417,000 or less) has dropped to near all-time lows for those with good credit. There are some lenders going as low as 3.25 percent, the lowest level since May 2013. 15-year loan rates are running at about 2.75 percent. Adding to the good news is that at the same time, home prices have mostly increased and credit scores have improved, which means many people who couldn’t refinance a few years ago, can do so now.

According to Mike Raimi of Luxury Mortgage Corp, “Closing a loan is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 30 to 45 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can “add-back” tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack – the numbers on the return are set in stone.

Stocks Recover: Is Brexit Fallout Over?

Global stocks have mostly recovered from the previous week's steep sell-off, so is the Brexit fallout over? History may or may not look back on June 23, 2016 and declare it “UK Independence Day”. Since residents in the United Kingdom voted in a non-binding referendum to leave the European Union, there is still so much unknown, including who will succeed Prime Minister David Cameron. Despite an internal Tory party horse race, the leading contenders are Theresa May, who half-heartedly supported the Remain camp and Michael Gove, who along with former London mayor Boris Johnson, was a leader of the Leave campaign. (Here’s an easy way to remember their names: Invoke the Clash and hum to yourself, “Should I May or Should I Gove?”) As the next Prime Minister grapples with how to leave EU, US consumers and investors are trying to understand the impact of the historic vote. Unlike the run of the mill correction that we saw earlier this year, the UK’s exit from the 28-member union is an “exogenous event.” That means that it came from outside the predicted modeling system that most economists utilize and as a result, can have significant, negative effects on prices.

We saw how negative on the first two days of trading following the vote: the British pound sterling tumbled to its lowest level against the US dollar in more than three decades and global stocks fell sharply. Meanwhile, bastions of safety like US treasuries, German bunds and gold saw big inflows. Despite the magnitude of the surprise, large financial firms said that even in the hours after the vote, there was no liquidity crisis and markets functioned well. And by the end of the first full week after the vote, the damage was fairly contained and most global markets recouped their initial losses.

So is the Brexit fallout over? It would be great to think so, but that might be a case where optimism clouds a realistic assessment of the situation. Consider this: nine years ago, another unexpected June event occurred: investment banking firm Bear Sterns (BS) had to bail out two of its hedge funds that were collapsing because of bad bets on subprime mortgages. At the time, there was no mystery surrounding the risks that were emerging, though 15 months later, the world seemed shocked to discover what seemed clear in the middle of 2007: something very bad was brewing.

In June 2007, the New York Times said the Bear Sterns hedge fund debacle stemmed “directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes. Bear Sterns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.”

While at the time, the event did seem small and well contained; here is the timeline of what occurred next:

• June 2007: BS Bails out hedge funds; markets convinced that all is well
• October 2007: US stock indexes hit all-time highs
• March 2008: BS goes broke and is taken over by JP Morgan Chase
• September 2008: Lehman Brothers Holdings files for Chapter 11 bankruptcy protection; Bank of America purchases Merrill Lynch; the Federal Reserve Bank of New York is authorized to lend up to $85 billion to AIG; the Reserve Primary Money Fund falls below $1 per share; Goldman Sachs and Morgan Stanley become bank holding companies

This is not to suggest that Brexit will cause a financial crisis, but we should carefully consider what dangerous spillover effects could occur. While US banks are better capitalized than they were leading up to the fall of 2008, the UK and European banks do not look nearly as healthy. In the two trading sessions after Brexit, the European Bank index lost about a quarter of its value and UK based banks did even worse.

And if European growth slows, its weaker economies (Greece, Italy, Spain) will once again be at the heart of sovereign debt questions. Additionally, as the dollar rises, emerging markets like China could come under pressure, echoing what happened in the first six weeks of the year, when global stocks tumbled and US stock corrected.

In terms of the US economy, analysts at Capital Economics say the UK and the EU account for 4 and 15 percent of US exports, respectively. If both regions go into a recession, Brexit could shave 0.2-0.3 percent from the current annual US growth rate of about 2 percent.

But estimates can be rocked by emotions. A US-based multinational may hold back on hiring everywhere to see how things shake out post-Brexit. For US exporters, the rising US dollar will create a drag on competitiveness in overseas markets and could potentially trigger lay offs at home. And if non-affected businesses and consumers start to feel unnerved, they too might pull in the reins, causing the US economy to slow down more than anticipated.

This week’s June employment report may go a long way to soothe nervous economists and investors. The May report was a dud-only 38,000 jobs were added, the worst month since September 2010. This year, the economy has added 149,600 jobs per month on average, the worst start to a year since 2009. Economists are hopeful that the job picture improved in June. The consensus is that 180,000 jobs were added during the month, including the return of 35,000 striking Verizon workers, and that the unemployment rate will edge up from 4.7 percent, the lowest since November 2007, to 4.8 percent.. Stronger than expected summer job creation may force the Fed to at least consider a hike at the September meeting (July is likely off the table due to Brexit), though the market is still betting on December as the only quarter-point increase for 2016.

MARKETS: Brexit uncertainty may test the third longest bull market in history, but in the first full week of trading, investors took the news in stride. Bond yields hit all-time lows around the world last week. The yield on the 10-year U.S. Treasury note touched a record low of 1.385%, breaking its previous intraday low of 1.389% set on July 24, 2012, when it also set a record closing low of 1.404%.

• DJIA: 17,949, up 3.1% on week, up 3% YTD
• S&P 500: 2102, up 3.2% on week, up 2.9% YTD
• NASDAQ: 4862, up 3.3% on week, down 2.9% YTD
• Russell 2000: 1156, up 2.6% on week, up 1.8% YTD
• 10-Year Treasury yield: 1.446% (from 1.56% a week ago)
• British Pound/USD: $1.3277, down 2.3% on the week, down 13.2% since Brexit vote (touched $1.3118 on Monday, its lowest level in 31 years)
• August Crude: $48.99, up 1.4% on week
• August Gold:  at $1,339, up 1.3% on week, highest settlement since July, 2014
• AAA Nat'l avg. for gallon of reg. gas: $2.28 (from $2.31 wk ago, $2.77 a year ago)

THE WEEK AHEAD:

Mon 7/4: INDEPENDENCE DAY-US MARKETS CLOSED

Tues 7/5:

U.K. Conservative Party lawmakers begin balloting to elect a successor to David Cameron as prime minister

10:00 Factory Orders

Weds 7/6:

8:30 International Trade

10:00 ISM Non-Mfg Index

2:00 FOMC Minutes

Thursday 7/7:

U.K. Conservative Party leadership holds second vote

8:15 ADP Private Sector Job Report

Friday 7/8:

8:30 June Employment Report

3:00 Consumer Credit

Saturday 7/9:

Group of 20 trade ministers meeting in Shanghai