While we have all heard about the sub-prime crisis in the US and the problems in the credit market, many are asking how and why a problem with the US economy should effect other areas of the world such as the UK.  While it is a very valid point, there are a number of reasons why it actually happens.

In brief, while the US economy is the largest and most powerful of the economies around the world, in effect there is only really one economy - the worldwide economy.  Individual areas such as the US, China, UK, etc have an impact on the worldwide economy to varying degrees, but such is the integration of multi-national companies, the ease with which you can purchase goods and invest overseas,  that basically all economies are connected in some way.

A drop off in the Chinese economy would impact upon demand for US goods and US services, which would then impact on the US economy where companies may have to cut costs, thereby impacting on the property market as more people find it difficult to find full time employment.  These are the types of connections which are now common place.

The financial sector is one of the purest forms of a worldwide market, with for example mortgages secured in the US probably sold on throughout the world as parts of more complicated financial instruments.  This has been one of the reasons why the credit crunch in the US has actually overlapped into areas such as the UK, etc, where many UK institutions have taken on exposure to the US mortgage market - with potentially billions of pounds at stake!

As worldwide economies become more and more entwined, the chance of knock on effects becomes even greater - something which we are seeing more and more of.   

In a move which was expected, but is set to be the first of many from the main mortgage providers, Northern Rock have today announced an increase of 1.25% in their sub-prime mortgage rate.  This on the same day that US house sales fell to a five year low, is a reflection of the current market turmoil - something which is far from over.

While there had been concerns that Northern Rock were at risk from the sub-prime mortgage turmoil, they have announced that their more risky mortgages are managed by broking giant Lehman Brothers, for a set fee.  This effectively covers the former Building Society from any major fall-out in the market, and allowed many investors to breath a huge sign of relief.

Even though Northern Rock seem to have protected themselves, the same cannot be said of Barlcays who are rumoured to have some major exposure to the troubled sector.  The departure of one of Barclays Capital’s major deal makers last week has added further fuel to the fire.  Until they (and other banks) come out and confirm their exposure, the rumours will continue and grow in strength.

The financial sector is currently under a cloud, and until the situation is resolved there seems little likelihood of any sunshine!

The mortgage crisis is truly wreaking havoc in the financial world and while it is causing problems on Wall Street and around the world it is really affecting small banks. In fact, the affect is so strong that it is possible that when you want to buy a home that you can afford the bank will be unable to loan you the money. This may occur because investors are shying away from mortgages so banks are stuck with 30-year mortgage loans on their books and may be unable to make new loans despite your credit or income. This does not seem possible but it actually is and if the banking sector does not bounce back soon small banks will really suffer. Plenty of home mortgage companies have already gone bankrupt so the outlook for small banks could be bleak if things don’t get better soon. So, what does this mean for you as a homebuyer?

It means that you need to ensure that you are the best possible applicant before you apply for a home loan. There are quite a few ways to ensure you are a good candidate for a home loan. First, you want to ensure that you have excellent credit. If your credit isn’t perfect that is okay because you have time to improve it. You should allow yourself six months to a year before applying for credit to improve your credit score. This includes making all payments on time, reducing your debt to credit ratio, and simply trying to improve your credit score. As your debt goes down and your credit goes up as well as making on time payments you will see your credit score inching forward. Keep in mind that taking the time to improve your credit score is important because with excellent credit you will get the best interest rates and it may be what encourages the bank to lend you the money in the first place. So, no matter how long it takes you to improve your credit focus on that first before you apply for a home loan.

The next thing you should focus on is saving for a down payment. In the past many loans were made without a down payment but in the current mortgage market crisis you want to make yourself the best possible candidate. Having a down payment will reduce your risk so focus on that. While you are working on improving your credit focus on saving as much as you can each month. That way when your credit is ready to apply for a home loan your down payment is as well. Having as little as $5,000 will help but you should really aim for about $10,000 to improve the odds of receiving a home loan.

Only time will tell what will happen with the mortgage market and what qualifications will be required in the future. One thing is for certain, however, and that is that qualifications will be much stricter than they were in the past so prepare yourself.

Are you an authorized user on someone else’s credit card? If so now is the time to consider applying for your own credit card. The reason why is that the new FICO 2008 system for determining credit scores will begin functioning soon and when this happens millions of authorized users on credit cards will see their scores plummet or disappear altogether. For example, if you do not have a credit card but you are an authorized user on your spouse’s accounts you may feel you have excellent credit and nothing to worry about. But, what happens if you want to apply for credit in your name?

You may be unable to simply because you don’t have a credit score anymore. Fair Isaac stated that using the credit of an individual’s well established and with a good credit rating to build credit for someone else, most likely a family member, is part of the problem in the mortgage market disaster. The claim is that individual with bad credit inflate their credit scores by becoming authorized users and as a result are approved for credit they do not deserve.

This may be the case in some instances but in most cases authorized users are legitimate users that deserve the credit score they receive. Husbands and wives as well as children are frequently authorized users and this helps them create and build their own credit rating. However, this is all about to end. It is believed that by mid September authorized users will see their credit score dropping and by the following year millions of authorized users will have been negatively impacted by the change.

It’s a shame that a few cheats have ruined authorized credit for the rest of the world. Now divorcees, children, and even people new to the country will have even a more difficult time establishing credit simply because they can’t find any credit card to approve for because they have never had any credit. It really is a vicious cycle because the best way to  receive a credit card approval is when you have had debt and paid it off. But, if you have never had debt how can you pay it off and build credit? Its’ a great question and one that has yet to be answered and maybe never will be answered.

IF you are an authorized user on someone else’s account and you have a current credit score then you should apply for a credit card in your own name. This may allow you to take advantage of the last minute credit score you have generated by the cardholder’s credit score. Otherwise your credit score will disappear and you will be without credit again. It’s a shame that these accounts won’t be included in credit scores anymore but they simply won’t. Because of this it is a good idea to get your own credit while you still can.

While we are currently experiencing a short term lull in the US credit crunch crisis, it has already had a major impact upon the corporate finance industry, the movers and shakers who put the big takeovers and mergers together. While funding has been relatively cheap for some time, the ongoing credit crisis has seen funding costs literally shoot up over night. So what next?

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There are a number of implications for the current situation, the lack of corporate funding being perhaps the main one, but stock prices are set to fall further as well. Over the last 2 years we have seen a number of high profile mergers and acquisitions, something which has impacted upon the share price of many companies. For every takeover or acquisiton which has actually happened, there have literally been another 100 rumoured ones yet to materialise. So how does this effect stock prices?

Much of the recent boom in stock markets, especially in the US, has been on the back of takeover speculation which has pushed some share prices to crazy prices - prices which can easily fall sharply if no takeover occurs. As funding for such takeovers has become more expensive, and it will be difficult to raise large sums of money in the short term, we will see much of the “froth” taken off many share prices.

Even when stock markets around the world have calmed down, the froth from the ramped up prices will continue to fade away. The effects are then two fold, in that stock markets will slowly fall back to more realistic levels and investor sentiment may turn negative as they slowly see their investments falling back down to earth.

All in all we are likely to see a lot less corporate activity over the coming months, and this current credit crunch is by no means over - the US Federal Bank would not take such drastic action as seen last week, without knowing there is further bad news to come.

Worldwide stock markets have today received a welcome, although unexpected boost with news that the US Federal Reserve have reduced US base rates by 0.5% to 5.75%.  In a move which was designed to both inject liquidity into the money markets, and give the economy a much need boost, stock markets have rebounded sharply from recent lows.  But is the worst over?

While a move such as that experienced today is not so unusual, in the past it has often precluded more bad news which the Fed were aware of, but which was maybe not yet in the public domain.  Even though the markets have good reason for this show of short term relief, the situation is far from over and there will still be further fallout.

True, there will be more readily available liquidity in the markets which may see many firms over their bad times, but some companies have already suffered beyond reasonable repair.  Many of Wall Street’s larger companies have become embroiled in the situation, and the fact that many are looking to be bailed out by larger banks around the world is a marked change from their front running attitude of the past.

The stock market is a volatile and unpredictable beast at the best of times, and it has a habit of biting back just when you think you have tamed the beast.  Today’s substantial buying pressure has been greatly received, but those who think the situation is now over may soon be disappointed.  The central banks around the world cannot support such man-made situations forever, and there will be some form of accountability at some stage - “pay back time”. 

Once the current euphoria calms, many will still wake up to the fact that the US property market is still in big trouble, personal debt has never been higher, and much of the recent stock market rise was pinned on the back of takover and merger rumours.  It is highly unlikely that we will see an immediate move back to wild takeover speculation, something which may bring many more share price valuations back into line with reality.

It is essential that investor tread cautiously in what is still a difficult period for world markets.

Commonly referred to as the “suckers rally”, worldwide stock markets have returned to their recent down trend after a recent rally which tempted some back into the market.  After a few days of rest bite, we are now seeing the first cautious statements from some of worlds largest companies, with many forecasting that the situation will get worse before its gets better.

We have seen statements from retailers, manufacturers and investment companies, all of whom have taken a similar line in their reading of the situations.  The next step will be some official reductions in the expected growth of both local and worldwide economies, which could well lead to further profit downgrades and even sell recommendations.  When you also consider that a vast number of recent takeovers rumours will soon disappear, as funding becomes more and more expensive, the premium in many share prices will soon evaporate.

Attempts by central banks around the world to shore up the money markets, by injecting much need liquidity, have had a short term impact but they cannot continue bailing out the markets for much longer.  Sooner or later the market will find its natural level, a level which will be a reflection of the concerns of the moment.

All in all the next few months are going to be vital for both local and the world economy, although the probable slow down in economies may well reduce the likelihood of further base rate rises both in the UK and across the Atlantic.  However, for many investors, both directly and indirectly exposed to the stock market, this will be little compensation with stock prices likely to be under pressure for some time to come.

It has been revealed that UK workers receive the least paid holidays of any other country in Europe, with only 20 true holidays a year.  While official figures will show the average as being 28 days a year, this figure includes 8 days of public holidays - a practice which has been outlawed by the EU.  So when will the UK catch up?

Under EU guidance the UK worker will receive 28 days true paid leave from 2009 onwards, although this increase will be introduced in 2 stages, with 24 days leave in place by October 2007.  Even after the increase to 28 days, the UK will still be well behind the majority of EU states, with the likes of Denmark averaging a massive 39.5 days of paid holiday per year!

While this will be good for the UK work force, it is bad news for UK industry in general, with employer costs increased in an instant.  This may lead to either lower pay and or a reduced work force, with many employers not in a strong enough position to pass cost rises on to the consumer.  When you consider the total number of holidays which will be introduced overall, the cost to UK industry is likely to run into billions of pounds.

Even though the UK is currently bottom of the EU league table for paid leave, even 20 days paid leave a year looks generous compared to Japan and Canada, where the rate is only 10 days a year.  The situation is even worse in the US where there is no legal minimum requirement with regard to the number of paid days leave per year.

While the US sub prime lending crisis continues to unfold, the effects are now being seen on the European markets with above average demands for cash from those banks who have seen their balance sheets effected over the last few weeks.  Even the European Central Bank (ECB) are playing their part, injecting some $130 million into the system.  So what really is happening?

The concerns about sub prime lending in the US, and the deterioration in worldwide stock markets, have been the main catalyst for the recent money market problems.  While on the surface the problems appears to be confined to the US for the moment, today’s financial markets are very different from years gone by.  Complicated financial instruments are now common place, with many mortgages, loans and other financial investments chopped, split and repackaged for sale to other financial institutions.  As a consequence, many of the worlds largest banks will have substantial exposure to the US market, and many will be suffering at the moment.

The strength of the ECB support has spooked many in the market, as the reaction has been even above and beyond the support for 9/11.  Do the ECB know something which is not public knowledge or are they just trying to calm markets? Until the know sub prime lending situations unravels there will be those sceptical about the level of support, and the fact that the ECB have commented that more funding will be available, as and when required.

In the meantime the short term lull in the fall of worldwide stock markets is over, with both the US and European markets taking a hit over the last few days.  The worst situation for any stock market is one of uncertainty, and until the picture becomes clearer we can expect many more days of wild fluctuations.

Stocks are spiraling downward, surprisingly since it was only a few days ago that they were improving. The biggest part of the problem is that the issue over defaulted mortgage loans is still fresh and now investors are looking at bonds rather than stocks.

Recently many homes have been foreclosed upon because the free lending methods of the past backfired and all those bad credit home loans banks thought they would cash in on went belly up causing a big stir in the financial world. When things seemed to be settling down somewhat the problem arose again when American Home Mortgage Investment disclosed that it had hired advisors to help guide them. The end result may be that they must sell some of their assets, although this will not happen if the mortgage company is able to access its credit.

Towards the end of last week the Dow Jones tumbled hundreds of points and really scared investors. However, when the new week began it looked as if things might be working out in the world of stocks as the Dow gained almost 100 points. However, Tuesday rolls around and sees a loss of more than 100 points. This left investors a little anxious because it was difficult to tell exactly where the market was going.

Other aspects that are not helping the Dow Jones any include that oil prices reached a price of $78 for the first time ever. Gold had a higher price as well. With the market jumping up and down investors should be prepared for more of the same. Of course, better than expected earnings for any of the big businesses could turn things around for the Dow Jones but while the market is worried over lending and whether or not companies will be able to receive loans the market will be finicky.

It seems strange that the Dow Jones reached a record of 14,000.41 in July and then just a few days later managed to fall an astonishing 5%. Believe it or not but some investors believe the worst has yet to be seen and that it is possible for another 5% drop. That remains to be seen but investors should prepare themselves for a volatile market that may be high one day and tumbling the next.

Of course, long-term investors likely have little to be concerned over because they may sit tight and wait for the storm to pass. It is hard to do however when it appears the market is going straight for the toilet. Nevertheless, long term predictions for the Dow Jones look good so investors may prefer to ride out the bad wave and then be in position when the Dow starts rising again.

This is especially true now that many lending institutions are changing their standards for home loans and subprime lenders are more than likely going to be required to have higher credit to be approved than the borrowers that have recently defaulted on so many loans.