Double-digits yields in a single-digit world:
Hang on to your position in Impac Mortgage Holdings… and use dips below US$10 to expand your position!

On November 6, the day after the midterm elections, analysts kept the wires humming in early morning trading—speculating that the tectonic shift in the American political landscape would make further rate cuts unnecessary. But the Fed went to town and cut anyway. Cut deep. Cut the federal funds rate to 1.25% and the discount rate to 0.75%!

All right. I admit it. I was wrong. And so were most of my colleagues here at the Taipan Group. Only two of our professional Pythias got their pre-announcement predictions right. And one of them nailed it right on the head, down to the exact decimal point.

It is probably no coincidence that both—Ian Cooper and Christian DeHaemer—are part of the pragmatic Red Zone Profits team.

I have to admit that the rate cut took me as much by surprise as the stunning Republican sweep at the polls. (You have to understand, after 13 years in Democrat-dominated Maryland, I had come to consider an Academy Award for Pauly Shore to be a more realistic prospect than a Republican governor!)

I actually felt Tom Daschle’s pain on live television as his facial expression shifted from radiant optimism to wide-eyed terror within a matter of hours. And I’m not gloating…

This is the danger of underestimating one’s opponents. For the past three years, the establishment media have been poking fun at George W. Bush and his perceived personal shortcomings… ignoring that here’s a politician who actually comes across as genuine and competent to those who come in contact with him.

And in the “50/50” America the soon-to-be Senate Minority Leader Daschle kept invoking on election night, that charisma only needs to sway one percent to make the difference between winning and losing an election.

And sway it did!

As for that rate cut: it’s as if Al Greenspan wants the American consumer to shed the bad habit of saving for good. With rates this low, they’ll soon pay you to go into debt!

(My own pet theory is that Greenspan wants to bore interest-starved investors back into the market!)

Even before the Fed’s big announcement, demand for car loans and mortgages had bounced back, notwithstanding a brief uptick in U.S. mortgage rates.

Hours before the Fed release, the Mortgage Bankers Association of America (MBA) indicated that the MBA refinance index rose 15% to 4,875.1 in the week ended November 1. Refinances accounted for 70.6% of the week’s loan business. Simultaneously, the MBA’s purchase index (which measures demand for loans to buy a home) rose 9.1% to 369.5.

Again, these were the trends before the rate cut. Lower rates typically trickle down into cheaper mortgages… and increased demand for mortgages and refinancing.

For us, that’s good news… since we can expect more business for our prime U.S. mortgage and real-estate play Impac Mortgage Holdings (IMH). The stock looked somewhat lackluster for a while there… but you and I know that this baby pays 15-19% annual cash dividends… and has raised dividends based on higher earnings every quarter this year as mortgage rates headed south.

Use price points between US$9 and US$10 to expand your position! n

—J. Christoph Amberger