Last Chance to Refinance

Not really – you can refinance at any time if you aren’t looking for the lowest possible mortgage rate. However, mortgage rates are up and there is better chance they will continue to rise than fall over the next year, as all longer-term interest rates are projected to rise. So, if you haven’t yet refinanced and taken advantage of low mortgage rates, now is the time to do it.

Mortgage Bankers Association

According to this article from Calculated Risk, the Mortgage Bankers Association (MBA)’s Weekly Survey from last week shows that average 30 Year Fixed rates have risen 50 basis points since the beginning of this year and now average 3.36%. Not bad, but not as appealing as the sub-3% rates we saw during Q4 2020. As a result, the article goes on, their “refinance index” is down 5% from the prior week’s survey, meaning that fewer applications for refinance are being submitted. This doesn’t mean the housing market is weak. On the contrary, it is significantly stronger and is expected to remain so due to, as the article says, inadequate housing inventory.

Human Nature

If you think about it, it makes sense that refinances will decline as mortgage rates go up. As with any purchase decision – and I consider a mortgage refinance to be a purchase decision because the borrower likely doesn’t need to refinance – if the price is going down, the buyer/borrower will wait to see if the price might go down some more before committing to the transaction. This is called bottom-fishing, and it is also indicative of why deflation is such a bad economic thing: people refrain from economic activity if the price is going down. Then, once rates bottom out or even rise a bit, borrowers will put their chips on the table and commit. They will continue to refinance as rates go up slightly – I am speaking in a macro sense here – until it no longer makes economic sense to refinance. This could take a long time if the borrower hasn’t refinanced in a while, or it could be a short time for serial refinancers.

Pros and Cons of Refinancing

The obvious pro of refinancing is that you have a lower interest rate and a lower monthly payment, especially if you don’t take any “cash out” in the process of your refinance. Another pro is that you might be able to pull some cash out if your home has appreciated significantly since your prior loan and you need a lump sum of money for some reason. Some families finance their children’s college educations through cash-out refinances, which is a very good way to do it because it is better to pay for college by borrowing in the low-3%’s and paying it back over 30 years than it is to borrow at the higher rates of some student loan programs.

The cons of refinancing include the following:

  • You may have to pay points and/or fees for your refinance loan, which means comparing your current mortgage rate to the new proposed mortgage rate is not an apples-to-apples comparison. You have to factor in the cost of these fees and points, which the lender should provide to you when it quotes you the Annual Percentage Rate (APR) of the new loan.
  • One of the reasons your monthly payment goes down is because, with the new mortgage, you now have a new 30 year timetable for paying off your loan. Let’s say you were 10 years into your prior loan: that means you would have your house paid off in 20 years at the current payment. Now, although you are paying less per month with the new loan, you won’t pay off your house for another 30 years. Of course, you can always make extra principal payments that will speed up the payoff process – typically with no penalty payable to the lender. Or you can refinance into a 15 year fixed rate loan, and get the lower rate (and potentially lower payment) and still own your home free and clear in 15 years.
  • If you take cash out as part of a refinance, now you owe more. No problem, you may say, as long as your loan is 80% loan-to-value or lower, meaning that you have at least a 20% equity cushion if you have to sell your house. And, you may be right if you feel like you are in a growing area with a strong housing market. However, don’t take the decision lightly if you are considering a cash-out refinance. It could get you into a financial bind down the road.


I believe you should act now if you are considering a mortgage refinance if you want a good rate. I believe mortgage rates will rise over the next year, so don’t wait. With the for-sale housing market as strong as it is, there is a better possibility that your house will appraise out at a value that will justify the loan amount that you want, especially if you are looking to take cash out of the transaction.

A Company Is Worth Its Future Earnings

That Gamestop (GME) is in the middle of another Reddit-fueled run is baffling to me. It makes me think that people who are “long” GME believe that GME is worth what someone else will pay for it, and not what the the company will earn in the future. The “Greater Fool” theory, meaning that I will make money as long as some other greater fool pays me more to buy it from me than I paid to buy it, is aptly named. Once all of the greater fools either get skunked or go away to their next victim, those investors who remain will revert to valuing a company based on its projected future earnings. I guess there will will always be greater fools out there who don’t understand this basic Investing 101 concept.


As many of you are aware, in January 2021 GME went from a boring low-$20’s stock to a $400+ stock over the course of a couple of weeks because of a social media-inspired short squeeze. Well, the short squeeze play died out a bit but not completely, and GME went from about $50 back up to over $250 just this month, and it trades today at about $188. Again, this March run was fueled by a Reddit forum. Do GME’s fundamentals and future earnings justify a $400, or a $250, or a $188 price? They do not. GME announces its earnings later today, and although GME is expected to show a profit for Q4 2020, it lost almost $300 Million for the first 3 quarters of 2020. Though Covid didn’t help, it also wasn’t the cause of GME’s losses, as GME lost nearly $500 Million for the first 3 quarters of 2020. A start-up new high-tech IPO company can have its stock go up while losing hundreds of millions of dollars, but not an established retailer like Gamestop. The point is, based on future earnings, GME’s stock price of $188, or $250, or $400 cannot be justified.


I wrote about the discounted cash flow model of business valuation a couple of weeks ago. My point then was that corporate valuations are up because the discount rate, specifically the portion of the discount rate that is termed the “risk-free” rate, is low – in the 1% range or a bit higher. The discounted cash flow, or dcf, model is how legendary investor Warren Buffett values his investments. Buffett views any potential investment purely as a stream of future cash flows. If he understands the nuances of the business and knows and trusts that the managers of that business can do a good job and deliver, then Buffett believes the risks that he will eventually see the projected future cash flows are minimized. When Buffett discounts those future cash flows to the present, if that net present value is more than the price at which the company is trading today, Buffett will look to buy the company’s stock. Fortunately for him, he has enough money that he can buy the entire company, and not just a 100 share piece of it.


Don’t let Buffett’s store of dry powder for investing cloud your own thinking as to how you should look at an investment. Look to future cash flows. Don’t use the Greater Fool theory and believe someone out there will eventually pay you more than you paid. Use the DCF method for valuing the future prospects of your potential invesstments. And don’t play the GME game.

It Worked For A While, Then It Didn’t

Our doorbell at our home is broken and I am in the process of putting a new doorbell system in place. Easy, you may say, in this age of Bluetooth electronic doorbells with cameras. Well, it turns out it isn’t that easy. I did install a new camera doorbell – a major name brand in the market. It worked for a while, but then it didn’t. The reason it quit working had to do with software: I also subsequently installed a new WiFi router. The doorbell needs to interface with the WiFi in order to connect with the doorbell chime and to send you the pictures of your front door that you can see on the app related to the doorbell. The problem was that the new router’s software and the doorbell’s software wouldn’t speak to one another. Perhaps I should have known this before I spent mega $$ on my router, but who knew? So now I am in the middle of installing a whole new doorbell system, and I am hitting more roadblocks along the way. Funny how what you think should be an easy project turns out to be all-consuming.

Need To Adapt

The point that I am making is that one needs to be able to adapt even if one finds what one thinks is the solution to their problems. This is because stuff happens that could render their solution obsolete. Don’t get too comfortable because the world may change and your solution doesn’t work any more.

Your Personal Finances

There are many ways this lesson applies to your personal finances. In fact, the process of changes and the need to adapt to changes plays out in real time every business day that the markets are open for business. Think about what your plans were a year ago (ok, 13 months ago), before Covid. How have you had to adapt your financial plans and goals since Covid? If you are lucky, you haven’t had to change and adapt very much at all. If that is the case, then your plan back then was solid, and you should keep plugging at it even now as we (hopefully) reach the back end of this awful period. If you have been personally set back by Covid, either through business or job loss or worse, it doesn’t mean your plans were no good. It means that stuff happens and you need to adapt. Maybe you have “retired” a little earlier in your life than you thought you would. If so, you have probably had to adapt and change your personal financial plan and goals a little more than you had hoped to do. Hopefully you have been able to do so without missing many beats.

Your Portfolio

Another issue may be with the composition of your investment portfolio. As markets change, what may have worked before may no longer work for you now. Interest rates change. Industries and sectors move in and out of favor. New technologies may disrupt companies that you may have a stake in. It can be disconcerting to you if you set up what you think is a strong portfolio only to have its foundation shaken by these market changes and disruptions.

The Ask

One thought I have for you is that you don’t have to face the stormy seas of all of these changes by yourself. I ask that you consider getting help from a Certified Financial PlannerĀ® such as yours truly. Though you may feel like you have a handle on your own finances, often, two heads are better than one. Having a trusted financial professional with whom you can discuss and debate plans and ideas may be the perfect ballast that you need to steer your ship. Back to my issue with my doorbell: I didn’t have the right person to help me find the right solution to my broken doorbell. I had good people who knew about doorbells, and other good people who knew about home WiFi systems, but not people who knew enough about both and how they interface with one another. The piecemeal approach didn’t work for me and it cost me. Don’t make the same mistake with your personal finances. If you work with a professional, as you should, make sure the professional has and understands the entire picture, not just a part of it. Only then can they come up with a solution that addresses the entirety of your situation.

Corporate Earnings Discount Rate

The value of a corporation is best determined by estimating future earnings and then discounting those earnings back to the present at some discount rate. The discount rate for that corporation includes the “risk-free” rate, which is typically the US Treasury rate, plus some risk premium that an investor is willing to take on for investing in that corporation in that industry. For instance, a discount rate could be the 10 Year US Treasury plus 800 basis points. This is how Finance 101 students learn to value a company.

Today’s Problem

The problem we are having in today’s market is that the “risk-free” rate is so low. For the past year, since Covid hit and the Federal Reserve dropped interest rates, Treasury rates across the yield curve have been at or below 1%. Only recently have long-term rates (10 years and longer) risen above 1%, and the 10-Year is at about 1.5% right now. With one element of the corporate earnings discount rate so low, either the risk premium will increase and corporate valuations will remain the same, or risk premiums will remain the same and corporate valuations will increase. A lower discount rate means a higher valuation for those future earnings.

The Past Year

We hit the bottom with the Covid shutdown and stock market correction during the 3rd week of March 2020, which is almost 1 year ago. Since then, it has been almost straight up, with the exception of the past couple of weeks. As of today, the Nasdaq 100 Index is up about 88% since the March 2020 low. That tells me that the risk premium that investors place on the earnings of the Nasdaq 100 corporations has not risen; if anything, it has declined. Consequently, the discount rates for their corporate earnings have declined and corporate valuations have risen – by 88% in this case.

Will This Trend Continue?

I mentioned that the past couple of weeks have not been straight up for the stock market, especially the Nasdaq 100 Index. What has crept back in is a fear of inflation. Investors now realize that all of the actions by the Federal Reserve to buy bonds and to loosen the money supply, as well as the fiscal stimulus bills, including the American Rescue Plan Act of 2021 just passed by Congress, could cause higher inflation. Why? Because together they represent significantly more money in the hands of consumers during a period where there are shortages caused by the Covid economic shutdown. More money chasing fewer goods causes higher inflation, and higher inflation causes higher interest rates. The “risk-free” 10-Year US Treasury rate has risen from below 1% couple of months ago to about 1.5% now. This rise in Treasury rates, caused by fears of increased inflation, is causing jitters for investors, particularly for those heavy in the high-flying Nasdaq 100 index companies. If you assume that earnings in these companies will remain strong but now you have to discount them at 50-60 basis points higher than you did 1-2 months ago, that causes a significant change in what you think those companies are worth today. This change in the corporate earnings discount rate, more than changes in the outlook for corporate earnings, explains why we had a 10% +/- correction in the Nasdaq 100 index from mid-February to earlier this week. The Nasdaq 100 has reversed itself during the past couple of days, but further increases in US Treasury rates could send it down once again.


I hope this explanation shows you that it is not always changes in the forecasted fortunes of companies that causes stock sell-offs. Instead, it can be changes in the assumptions of how investors mathematically derive their valuations, such as in changes in US Treasury Rates and/or changes in risk premiums. So, don’t blame corporate management at first; blame those old bugaboos, inflation and higher interest rates.

Life Is A Journey

I am currently listening to an Audiobook version of Ken Langone’s autobiography, titled “I Love Capitalism!”. Ken Langone was a Wall Street banker who arranged the financing for Home Depot and became very wealthy as a result. He became a philanthropist, and the School of Medicine at New York University is named after him. Despite his riches, Langone is a noted cheapskate, and he would be proud of me because I am borrowing his Audiobook for free from the library.

Ken Langone

Assortment of Jobs

Langone came from a working-class family and his drive to work hard to make money and achieve his goals was evident early on. The jobs that he had while he was still going to school and college included the following:

  • Paperboy
  • Grocery Store Shelf Stacker
  • Snow shoveler
  • Road construction laborer
  • Cigarette salesman
  • Stationery vendor

The key word is work. Langone had to work to make money and he didn’t care much about what other people thought about the jobs he had, as long as he got paid. As a kid, Langone didn’t really have an idea of what he wanted to have as a career, so rather than sit around and think about it, he just worked his jobs and figured something good would come of it. That’s a great attitude to have.

Life Is A Journey

The point I am making by using Ken Langone’s life experience is that life is a journey. While it is important to have a goal, it is also important to work and to learn and enjoy all of the experiences that you have with each job you have and with each day. The more you show up every day, the more you learn and the better you can figure out how and where you fit in.

Achieving Your Goals

The other point is that you don’t reach your goal on Day 1. Instead, it takes a lifetime of experiences to reach your goals. With respect to planning your finances and achieving financial independence or whatever else your goal may be, it will only happen over a long course of time. As a result, you need patience. Other people’s life experiences may get in the way of your own, as manifested in the ups and downs of the value of your investment portfolio. Make sure you keep this in perspective. It’s great if you hook up with a hot company and make megabucks and realize your dreams upon its IPO, but that’s not the norm. In fact, even that IPO story involves a crap-ton of work by the people who built the company. Ken Langone became an “overnight success” with Home Depot only after years of working his butt off in different capacities on Wall Street. If you are getting impatient, please don’t be, and instead enjoy the experiences of the journey that you are in the middle of.


In addition to the concepts of working hard and being patient that Ken Langone expresses in his autobiography, another concept is also music to my ears. Just the title, “I Love Capitalism!”, with an exclamation point, is a sentiment that is in short supply these days, and is certainly not “woke”. It is great that so many people, particularly young people with no life experience with socialism, feel bad that not everyone shares in our abundance in equal measure. The empathy therein expressed to the lessers is laudable. However, big state-controlled socialist government models are not the answer. Capitalism is not perfect but it does a lot better job distributing wealth to those that want it and need it than does socialism. Socialism has never worked and never will. We need more Ken Langone’s who are willing to go against the current sentiment and express admiration for capitalism, warts and all.

10 Year Treasury vs. Nasdaq

Last week we saw the Nasdaq 100 Index sell off as interest rates, specifically the yield on the 10 Year US Treasury, rose. For instance, on Thursday 2/25, the Nasdaq 100 fell by about 3.5% while the 10 Year yield rose about 20 basis points to about 1.55%. Did these two phenomena occur by happenstance or are they linked? It’s investing, so of course they are linked, but how are they linked? Perhaps not how you might think


Cost of Borrowing?

You might think that stocks go down when rates go up because higher rates increase the cost of borrowing for companies. That is true, but if you think about it, higher rates don’t affect tech companies as much as they do older industries, and the Nasdaq 100 is full of high tech companies. The Apples, Microsofts, and Googles of the world have so much cash and working capital already on their balance sheets that they don’t really have the need to borrow money in a substantial amount. So, if the yield on the 10 Year Treasury goes up 20 basis points, Apple, Microsoft and Google aren’t affected operationally, and their profits won’t take much of a hit. Companies in “old economy” industries such as energy and utilities, by contrast, do finance using debt and so will take an earnings hit if rates go up. Yet it was the Nasdaq 100 Index that took the biggest hit when rates went up last week. Why is that?

Appeal of Alternatives to Stock

The answer is that higher rates make investing in bonds and debt that much more appealing. With the tech stocks that comprise the Nasdaq 100 Index at all-time highs prior to last week’s sell-off and with their future earnings discounted back to the present at lower and lower discount rates that mirror rates along the US Treasury yield curve, any increase in interest rates is bound to have a profound effect on the discount rates that the number crunchers use to value these high-tech companies. If rates go up, then prices go down. Look at it another way: When Treasury rates were below 1% all across the yield curve, as they were for most of the last 3 quarters of 2020, then an investment in Treasuries doesn’t look that appealing. However, if now and investor can earn 1.5% in “risk-free” Treasuries, then that becomes more appealing – not great yet, but better. If so, an investor might be tempted to allocate slightly more money into Treasuries and away from stocks because stocks are already so pricey. With comparatively more money flowing to Treasuries and less to stocks, particularly Nasdaq 100 stocks, then you can see why the Nasdaq 100 stock were the main victims of last week’s increase in interest rates and not other sectors that use more debt to finance their operations.


I am writing this on Monday 3/1 (Happy March!) and the trade-off between Treasuries and the Nasdaq 100 remains, but in the other direction. Yields on 10 Year Treasuries are down about 10 or more basis points from Friday’s close, and the Nasdaq 100 Index is now up over 2.5%. Clearly institutional investors are watching Treasury yields closely as changes in rates seem to be driving both the stock and the bond markets.


In a way it’s good news that fundamental issues such as changes in interest rates are what’s important to the stock market, rather than external issues such as geopolitical maneuverings or terrorism. If so, then although most economists predict that economic activity will improve in 2021 over 2020 as businesses emerge from the Covid shutdown, the stock market may not rise in accordance with the economic improvement. Why? Because interest rates will rise as the economy improves. If rising rates mean that some investors may choose bonds over stocks, then the stock market may have a rough go of it as rates continue to rise. How quickly rates rise and to what extent may be the roadmap for stocks as well, because a more gradual rise in rates will be preferable to a short, sharp shock.