Danny Salas

Archive for October, 2007

Chico, CA Interest Rates Market Report – Economic Influences – October 30th, 2007

More Info. This Week

After minimal information to report on last week…there’s a ton to get to this week…so let’s get on it!  We mentioned last week that interest rates would closely follow the stock market direction. 

Well, that’s exactly what happened.  Merrill Lynch, our largest investment banker and broker, reported huge third quarter earnings losses.  Basically, Merrill indicated a few weeks ago that they would have to revalue about $5 Billion worth of very complicated financial instruments known as collateralized debt obligations (CDOs). 

What Are CDO’s?

CDO’s go further than logarithms; they are complex, MIT graduate, financial calculations – insofar as how an investment will perform.  Now, Merrill indicates that $7.9 Billion worth of CDOs will have to be re-evaluated on their value to investors.  They also reported a 94%, yes that’s ninety-four percent loss in revenue, earning $577 million.  This helped rates, as money flowed out of the Stock Market and into bonds, or Mortgage-Backed-Securities. 

Existing Home Sales for September moved to 10 ½ month average for homes on the market to sell.  The medium home price lost 4.2% nationwide, too. 

Foreign Investment In Bonds

Durable Goods Orders were reported at -1.7%.  Initial Jobless Claims were reported at 331,000, higher than the expected 320,000.  This week actually had a favorable auction of Two-Year Notes.  $20 Billion worth!  We have discussed how foreign investment in our Bonds in key to keeping down interest rates.  This last week was a good sign. 

Then Countrywide reported poor earning, however, not as poor as investors expected.  So, money went back into stocks, at the expense of bonds and rates worsened a bit. 

Black Tuesday – 78 Year Ago

Seventy-eight years ago Monday, this last October 29, 1929 we experience “Black Tuesday.”  Sixty percent of the stock market value was eventually lost, causing the Great Depression.  So, even though we’re going through this terrible mortgage market meltdown, think about it…things could be a lot worse.

So, again, I miss the Federal Reserve’s meeting and announcement of what they will do with the overnight rate by one day!  One day!  So, you’ll be reading this article and already have the answers that I can only prognosticate, at this point…let’s see how I do…

First, stocks started trading lower on Tuesday, when a Wall Street Journal Article stated that they didn’t think that the Fed was going to lower rates on Wednesday.  Hm?

Will The Fed Call It Right?

Exactly one day after the Fed Meeting on Wednesday, two very important inflationary important gauges will be released:  the Employment Cost Index, and the Core Personal Consumption Expenditure Index (PCE).  Will the Fed call it right?  I think they will, lowering the rate 0.25% on Wednesday.  Remember that the Fed’s main purpose in life is to combat inflation.  With the PCE showing inflation to be at 1.8% on a year-over-year basis, the Fed has room to lower the rate a little, but they also desire to keep employment moving at a good pace. 

Lately, employment numbers have shown some weakness.  Whilst being good for inflation (keeping rates lower) they also do NOT desire HIGH unemployment numbers…a fun teetering job of the Fed.  Let’s face it, the economy is moving a little slower, so a cut for these three reasons looks eminent…but I’ve been wrong before (I know it’s hard to believe).  One final note…Consumer Confidence is FINALLY reporting lower.  Remember back in July, I commented on the consumer’s willingness to spend and spend…this may be the straw to the finally move to 0.25%  lower…until next week.

Chico, CA Interest Rates Market Report – Economic Influences – October 22, 2007

Inflation Between 1.0% & 2.0%

Last week I had mentioned that we were missing the Consumer Price Index and Core Consumer Price Index (CPI) Report by one day.  Well, this last Wednesday, inflation concerns were somewhat swept away as the core rate of consumer inflation continued to show stableness and came in at expectations.  The Core CPI was reported at 0.2% for September.  On a year-over-year read, we’re remaining steady at 2.1%.  So, with the Personal Consumption Expenditure Index (PCE) at 1.8%, we remain quite close to the Fed’s desire to keep inflation between 1.0 and 2.0 percent. 

Unfortunately, the Commerce Department revealed greater than expected weakness in the housing sector.  Housing Starts for September reported 1.19 million, weaker than the 1.28 million expected.  Also, Building Permits dropped 7.3%. This is the lowest numbers in both categories in fourteen years! 

Another Fed Lowering of Rates?

Initial Jobless Claims came in at 337,000.  Well above the 316,500 expected number, and with the thought of wage-based inflation coming under control, it points to a greater possibility of the Fed lowering the overnight rate again, at its October 31, 2007 meeting. 

Conforming Loan Limits = $417,000

A quick note to let you know that the Office of Federal Housing Enterprise Oversight (OFHEO), announced last week that they will be keeping the conforming loan limit at $417,000 for a single family residence. 

Stocks got hammered last week.  After losing over 500 points in the Dow; mortgage bonds benefited greatly, by gaining close to 100 basis points.  So, whereby a loan might cost you one point, now you’re looking at zero points for the same interest rate.  A very welcome sign for rates!  Interesting that this happened on the twenty year anniversary of Black Monday…when the Dow lost 22%.

Stocks Will Move Rates…

Interest rates will definitely take their direction from wherever the stock market decides to go.  With not a lot of economic information coming out, stocks benefits will hinder bonds, and vice-versa.  On Tuesday, Apple, Inc. announced that their profits are skyrocketing due to sales of iPhones, iPods, and Macintosh computers.  They’re quarterly profits were reported up 67%.  It’s had an effect on the stock market, however, mid-day Tuesday saw things slowing down a bit. 

So, until next week!

Chico, CA Interest Rates Market Report – Economic Influences – October 16, 2007

Inflation Is UGLY!

Last week I mentioned that the Federal Open Market Committee’s Minutes, from the September 18^th meeting, would be released to the public.  Basically, the Fed is showing more and more concern for economic growth.  They also were very vocal regarding inflationary pressures.  So Bond traders are concerned that there won’t be any support for bonds, if inflation starts rearing its ugly head.  And remember, interest rates think that inflation is uglier than Cinderella’s less attractive, of the two, half sisters.  

Interesting little note; since the Fed lowered the overnight rate by 0.5%, the value of the U.S. Dollar has lowered against foreign currencies.  When the dollar is low, things overseas cost more.  When things cost more money, well, that’s inflationary.  So, this inflation puts pressure on bonds and mortgage-backed securities, causing higher rates. 

“Trend Lines” Again?

The good news is that bonds have had support from the 50-day and 200-day moving averages.  Remember that interest rates change daily, but they also set averages that become trend lines.  So, rates can bounce back and forth between two trend lines, as one could act as support, but the other could act as resistance.  So, movement between the two averages, if those two trend line averages are close together, keeps interest rates relatively stable.  Read that again, slowly, it actually does make sense.  This last couple of weeks, Bonds have touched the 200 day moving average twelve times. 

This last week initial jobless claims were reported at 308,000.  This is still hinting that the labor market remains stubbornly bold.  The Balance of Trade for August was lower than expected and represented the closest deficit since last January.  So, in contrast to paragraph two, this is good news for inflation because of the weak dollar…we’ll have to keep an eye on how import and export costs will influence inflation.  “Witch” way will inflation go?

The Producer Price Index (PPI), which measures inflation at the wholesale or producer level, was 1.1% higher in September than in August.  This, of course, caused Cinderella’s sister to reveal her disadvantage once again.  Even tough the year-over-year Core PPI was right around the Fed’s desired inflation level of 2.0%, the PPI made traders nervous. 

Missed It By That Much…

Of course, this week’s article will miss the biggest potential market changing statistic by one day, just as last week’s Fed minutes were missed by such a close time-frame.  The Consumer Price Index will read consumer inflation and could give us a hint as to what the Fed is going to do on their Halloween Meeting.

Remember when I had said to watch foreign investment in our bonds?  Well, in August, foreigners dumped $69 Billion is US debt securities.  This could be scary for bonds! 

For loans right now, however, we are cautiously floating and waiting to see what tomorrow’s CPI and Core CPI will bring.  We’re expecting both to be about 2.1%.  So we’ll have our fingers on the lock trigger if they’re reported higher than that!  Happy Halloween!

Chico, CA Interest Rates Market Report – Economic Influences – October 9th, 2007

Last Week’s Info. Led to This Week’s Rate Movements

Last week we report on a few things.  Mortgage backed securities’ desire to hover around the 200-day moving average, the Fed’s favorite gauge on inflation – the Core Personal Consumption Expenditure Index, and the anticipation of this last Friday’s Jobs Report Numbers.  Here’s what transpired: 

In anticipation of the Jobs Numbers, that good ‘ole reliable ADP Employment Report came in showing that 58,000 new private sector jobs were created in the month of September.  When you allow for 30,000 new government jobs, ADP’s estimates were about 88,000.  Remember, last week we were talking about 100,000 new jobs were expected.  Since the ADP report has performed somewhat like a fiasco in their estimating procedures, the market did not react to their information.  Rates did move in the negative direction, just slightly on the ISM Services Index showing that “prices paid” for services was a little high, fearing inflation concerns.  But this wasn’t too significant of a move. 

Previous Months’ Numbers Adjusted

Thursday was actually a day that we locked in some clients before the jobs numbers hit on Friday.  Here’s why we took that approach.  Initial Jobless Claims were significantly improved from recent months.  This was showing some muscle in the job market.  Remember that Ben Bernanke, our Fearless Fed Pontificator is watching inflation, but particularly wage-based inflation, very closely!  Wage-based inflation, of course, is in direct correlation with jobs numbers.  So, even though ADP numbers were low, they weren’t too low.  88,000 compared to 100,000 is pretty darn close to expectations.  The biggest concern was that we were concerned with adjustments to previous months’ numbers.  Including last month’s loss of 4,000 jobs.  All of this, coupled with the fact that that darn 200-day moving average has been a very difficult trend line to get away from, leant us to believe that locking in on Thursday, might be a good idea. 

Did You Lock Your Loan?

Friday, the Labor Department reported 110,000 new jobs!  However, just as our assertion on Thursday led us to believe that locking was prudent, the revised numbers for previous months were huge.  So large that it’s almost funny.  118,000 jobs were somehow missed in the two previous months.  That’s right…118,000.  So, while August showed the depressing figure of 4,000 lost jobs to the labor market, only to be revised upwardly 93,000 for a net gain of 89,000.  I’m telling you, who’s driving this flying umbrella?

Another concern was some more inflationary fears with the Hourly Earnings rating at 0.4%.  More wage based inflationary pressure.  The only good news (for bonds and mortgage backed securities) on Friday, was that unemployment rose to 4.7% from 4.6%.   

Next week we will report on the release of the Federal Reserve’s minutes from their September 18^th meeting.  This is when they lowered the overnight rate by 0.5%.  The minutes discuss the state of the economy, inflation woes and worries, and detailed discussion about the rationale of cutting 0.5% as opposed to 0.25%.  Of course, this could really move markets as the Fed’s “tone” is listened to closely, by the world…until next week…