Stock & Bonds Like This Week

Auto Sales Slumping Now

The Retail Sales Report came in at 0.2%, which is where they expected it to come in, however, it was due to lower automobile sales.  So, when removing the auto sales figures, Retail Sales actually rose 0.5%.  This told us that even though we have higher energy costs, the consumer is still spending.  So rates spiked a bit on this news.  This was supported by Wal-Mart’s announcement of better than expected first-quarter earnings.  They did, however, indicate that second-quarter earnings would probably be lower due to increasing food and energy costs.  Good ‘Ole Ben Bernanke spoke this past week and said, “while markets have improved, they remain far from normal and we stand ready to increase the size of the auctions if further warranted by financial developments.”  He as talking about the Term Auction Facilities to increase cash to banks that I have been reporting on in the past.  That’s a good sign that the Fed is interested in keeping inflation down by news ways of doing business, so to speak.

Stocks & Bonds Win This Week

Wednesday showing good news to the inflation watching jittery market analyzers.  The Consumer Price Index (CPI) increased by a minimal 0.2%.  After taking out food and energy costs, the Core CPI rose only 0.1%.  Energy prices were tame, but food prices jumped 0.9%.  This is the largest gain since 1990.  Core Inflation readings were at 2.3%.  This is less than last month’s 2.4% reading, however still over the Fed’s desire to be between 1-2%.  This was interesting because the tame read on inflation was both good for stocks and good for bonds, so there was a little fight for whom would get the money…stocks or bonds.  Both won this past week.

Twist In Jobless #’s

Initial Jobless Claims were reported at 371,000 for the week.  The four-week average actually fell a little, to 365,750.  Interestingly, the number of people collecting unemployment benefits gained 28,000 to 3.06 million.  This is the highest level since March of 2004. 

Foreign Investment KEY to US Economy

Now, I’ve discussed the importance of foreign investment in our country in the past.  The March Net Foreign Purchases of US securities was $80.4Billion.  This is significantly better than anyone had expected.  Remember, I had written that foreign investment was largely why our interest rates were so low for so long.  So this is truly wonderful news. 

This past week provided better than expected Housing Starts and Building Permits.  This is good news, however, the cost to build is increasing so rapidly, that I must pessimistically remind you of this. 

The nationwide average price for a gallon of gas was up 22% from a year ago.  The people at Goldman Sachs have declared that the average cost of a barrel of oil will surpass $148 this next year.  Camry Hybrid, here I come! 

The Core Producer Price Index (PPI) was twice as high and what analysts thought it would be.  These higher costs for production are not always handed down to the consumer, but come on…if enough pressure is put on business to keep their costs down do you think they’re going to ask their stock holders to pay for it?  It’s just a matter of time.   Next week I’ll be reporting on the FOMC minutes, Existing and new homes sales, and depending on when I finish the article, I may have something on Consumer Confidence.  So, keep your hats on and buy, buy, buy…it’s such a good time to buy…Until next week…

Chase Buys Bear Stearns

$200 Billion Line of Credit

Wow!  It’s harder than ever to keep up with what’s happening on a day-to-day, or even minute-to-minute basis.  The Fed has come up with some unique managing tools to help spur economic stability and facilitate assistance with the liquidity crisis.  Initially, we’ve discussed Term Auction Facilities (TAF) and now we have Term Securities Lending Facilities (TSLF), which were introduced to funnel banks with an additional $200 Billion to draw on.  Let’s get into the grease of what happened this past week…

Carlyle Group, which manages mortgage backed securities, couldn’t meet their margin calls that we talked about last week.  So, just like people can buy a home on a short sale right now, and pay less than what the previous owner owed, savvy investors are capitalizing on Carlyle Group’s hardship. 

Did YOU Buy Gold?

Gold reached $1,000 an ounce and oil just keeps going up.  My uncle has been telling me to buy gold for about three years now.  Telling me this would happen.  Shoulda listened…

Retail sales were down, indicating that people just aren’t spending what they used to.  Interestingly enough, Jobless Claims moved down to 353,000.  So, the four week average of these claims moved slightly down to 358,500.  We’ll have to continue to keep a close eye on this weekly report. 

Bear Stearns announced on Friday morning that their liquidity position has worsened to the New York Fed and JP Morgan Chase having to step in and rescue them from going out of business.  Bear Stearns!  They’ve been around for over eighty-five years!  So, coupled with some tame inflation readings from the Core Consumer Price Index (CPI) at 2.3%, this gave the Fed the room for a .75% adjustment to their overnight rate.  But the surprise was the Fed’s weekend lowering of the Discount Rate by .25%.  This hasn’t occurred in over thirty years and is quite interesting since they were meeting just one day after the surprise move. 

Learn from History…Overnight Cuts HURT Long Term Rates

The Bear Stearns announcement had JP Morgan Chase buying their stock at $2 per share when they were trading this last year at $160 per share.  Stock markets worldwide were stunned by the move and they plummeted, giving interest rates a huge bonus opportunity for many.  5.5% with an APR of 5.718% were locked in all day long…but as soon as we went into Tuesday, and the Fed did in fact lower the overnight rate by the .75%, rates moved up rapidly.  History has shown us that after a fed cut, rates might get better initially, but very quickly move in the opposite direction.  So, with this cut, the markets are learning in a “pavlovian” way that rates are going to go up.  It’s what this article has preached for months.  So, enjoy the ride.  There’s more to come next week…until then…

Santa's Stash

Twas the week before X-mas

when all through the banks

The Value of Bonds were falling, another closing bank joined the ranks

The Stock market plunged with the news of a quarter-point hit

Of the overnight rate cut down by lowering a bit

The Fed dreamed up a new plan that would bring $40 Billion to the table

An Auction Facility, to help the credit crisis, but would it really be able

It would be a 28 day window to ease preasure and increase liquidity

December 17 would be the first day, but would it put the crises at ease?

The Fed changed it statement that growth and inflation risks were in balance

To “act as needed,” said Bernanke…for the economy and inflation challenge

$57.8 Billion, our trade deficit did widen

The Senate passed an FHA reform bill, with only one decent, and it wasn’t Joseph Biden

The week showed the PPI move like 1973, higher than expectations

This really hurt Bonds, and not like the ball-players, perhaps awaiting incarcerations

When weekly initial Jobless Claims declined by 7,000

That news was kinda expected, so bonds lowered, but up was the Dow’s end

The CPI readings every month are more hot

2.1%, 2.2%, then, this month 2.3%, are bonds overbought?

Thank goodness for the 50-day moving Average, I will not lie

It acted as support, as it did back in early July

Now Bernanke, Donald Kohn, Kevin M. Warsh, and Frederick M. Mishkin

Lower interest rates for Christmas, is what we’re all wishin’

To the drop of the Dow, and the drop of bond yields

Now dash away, dash away high interest rates in our field

On Monday, Banks borrowed from the Fed’s auction Facility

Hoping that LIBOR loans adjustments and the ability

would lower ARM Rates when it come time for adjusting

So this credit crisis we’re in, doesn’t continue a-bustin’

And then from out of nowhere, Alan Greenspan, shouts, “recession”

High consumer prices, a receding economy, with whom does he think he’s messin’

Capacity Utilization was reported at 81.5 percent

a reading above 85 is inflationary, thank goodness this report didn’t relent

The ECB put $500 Billion in the banking system this weak

This calmed the credit pressures moved interest rates our way

Monday came and the Fed’s auction of $28 Billion went well

It appears as though our mortgage funding system may NOT be going to hell

 Bonds started to move higher as Housing Starts and Permits looked merry

But coming in at expectations, housing remains soft, like the fruit of a cherry!

New construction and single family permits hit 16 year lows

Lending people to wonder if I was their friend or foe

The Fed’s meeting real soon about a change in the lending practice

Stricter guidelines, no pre-pay’s, higher reserves, will become status

Friday will give us the Personal Consumption Expenditure Report

The Fed’s favorite gauge on inflation, it can move markets of the sort

The GDP will come out giving us a read on the third quarter

If that news is too bad, I’ll be drinkin’ a Sierra Nevada Porter

So, keep up your chins, markets change and us with ‘em

Go buy toys for your children that require some lithium

Just know that I told you when to lock and when to float

This market will change, so please, please, please don’t gloat

You heard me exclaim, rates again are below six

So, “thank you,” this Christmas, I’ll mention to Jolly ole’ St. Nick

Rates Are UP...NO...They're Down...No...

Jobs Report Figures Compared to ADP

Look to your right when you’re in Valencia and you’ll see the interest rate chart I’m staring at off on the horizon.  That’s right…you’d get whiplash if you read it too quickly.  The interest rate chart looks like The Colossal at Magic Mountain.  First, remember me mentioning Automatic Data Processing (ADP) in other articles?  Well, they came out and said that the US would report about 189,000 new jobs.  We were expecting 70,000.  Another report showed Productivity revised to the highest level in four years, at 6.3%. 

Wage Based Inflation Lower

Interestingly, however, was the fact that Annual Unit Labor Costs, a gauge of inflation and profit that is closely observed by the Fed, declined 2.0%.  It’s the steepest decline in four years.  So, even with the hot jobs estimates from ADP and high productivity, what helped interest rates was this lower read on the Annual Unit Labor Costs (keeping wage-based inflation lower).

Other Countries’ Lower Rates Will Lower Our Rates

‘This last week Great Britain’s central bank, The Bank of England, lowered their overnight rate to 5.5% from 5.75%.  This is good news for the US because it will ease some of the pressure on the lowering US Dollar.  The European Central Bank remained steady, however.

Change Was Eminent

As you saw in last week’s article, we were enjoying low, low interest rates.  So low that we knew a correction was eminent.  It happened with the jobs numbers formally coming in at 94,000 new jobs (not ADP’s numbers, however, still quite high).  What was worse (for rates) was that the unemployment rate remained at 4.7%.  They expected those numbers to move to 4.8%.  Coupled with an Hourly Earnings number up 0.5% and above the 0.3% that was expected, this caused higher wage and tight job market fears.  Both inflationary – and interest rate’s nemesis.  So, the Fed’s task of determining which factor, weaker jobs growth compared to wage-based inflation, would have an impact on a .25% or .50% cut in rates on the 11th. 

It’s An Excellent Time To Buy

We’re back in the volatility craze right now, for sure.  And what happened on the 11th?…The Fed lowered the overnight rate (or Fed Funds Rate) only .25%  This was a little surprising to the stock market which was not doing very well late Tuesday.  It was down over 220 points.  So mortgage backed securities were up 74 basis points around noon time.  Remember, that’s approximately .75% better in points than a loan locked the day before.  The dollar responded to this move nicely.  This preserved the value of bonds, but obviously, the stock market did NOT like the move.   There is a level of resistance, just above where interest rates ended up on Tuesday the 11th, so we’ll have to watch those levels and lock in interest rates if they bounce off of those levels and cannot pierce through them.  Need I remind you that it’s an excellent time to buy?  Until next week…

Watch Mortgage Backed Securities

Rates Be Nimble, Rates Be Quick

So much to report on this week!  New York Fed Vice Chairman Donald Kohn indicated, “In my view, these (financial) uncertainties require flexible and pragmatic policymaking – nimble is the adjective I used a few weeks ago.  In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment.”   Nimble seems to be the operative word, here.  Lowering rates?

Durable Goods Orders for October saw the biggest monthly decline in this index since February of last year.  The National Association of Realtors reported that October existing homes sales fell 1.2%.  Interesting to note; the biggest drop was in multi-family and condominium sales. 

DON’T Watch the 10-Year Treasury!!!

Again…Mortgage Backed Securities were up 16 basis points on Wednesday of last week.  The 10-Year Treasury Note was down 34 basis points. 

Preliminary Gross Domestic Product showed the US economy growing at an expected 4.9%.  This is strongly due to a weaker US Dollar.  Initial Jobless Claims were reported at 352,000.  This is the highest level since February and some see this as our economy’s inability to continue to create more new jobs, than loosing old ones.

Rates Could Get Disappointing

The Fed’s favorite gauge on inflation came in on a year-over-year basis at 1.9%.  Remember, the Fed wants to see inflationary levels between 1 and 2 percent.  Bernanke said that resurgent financial strains have really made future economic growth in our economy quite pessimistic.  If you’re looking for additional interest rate improvements, after the monetary policy decision on December 11^th, you could be quite disappointed.

If you read this article and have been considering refinancing…now is definitely the time.  This Friday November’s nonfarm payroll reported is scheduled for release.  The hype is that less than 80,000 new jobs, coupled with unemployment moving to 4.8%, from 4.7% could create a 50 basis point lowering of the overnight rate on December 11.  If that number is more in line with over 110,000 and unemployment remains at 4.7% than just a 25 basis point move might be in line.  Most of you reading this may think that a 50 basis point drop would be great for interest rates.  

Home Values AND Rates Are Down

Here’s the problem.  Ten-Year Treasury yields are paying 3.88%.  The Consumer Price Index is reading 3.5% in October.  Should inflation readings like the CPI exceed what investors are getting paid to hold Treasuries, investors then throw their funds from bonds and into stocks.  This has occurred from August of 1973 through August of 1953 and from January 1979 to October of 1980.  So, again, I cannot stress enough…now is the time.  Home values and rates are down.  5.625% with an APR of 5.733% is what was being locked in on Monday.  Also, what’s interesting to note…Rate cuts are designed to help economic growth.  This pushes up demand for goods and services, but also the cost of capital.  This is not really a good formula for lower interest rates. 

Rate Freeze on SubPrime Loans

Last, a government sponsored plan to temporarily freeze interest rates on certain adjustable, subprime loans could be right around the corner.  Basically, the low, introductory rate on these loans could be extended for a certain amount of time to help home owners.  It’s still being worked on, but it’s another example of these uncharted waters we’re in around the mortgage industry.  Until next week…

Rates Moving Down, But Exceptions Costing More

Stock or Bonds?

So, last week we were waiting for Retail Sales numbers to come in and we expected numbers to be a little higher than we’ve seen lately because WalMart reported some strong earnings.  They came in at expectations, but the Producer Price Index (PPI) rose 0.1% for October.  But the Core PPI came in below expectations, which was good for interest rates.  The Consumer Price Index rose to 2.2% from 2.1%, which is inflationary and generally bad for interest rates, however, what kept rates down was the understanding that this inflationary information would mean that the Fed would NOT raise the overnight rate at their December meeting.  So, money poured out of Stocks and into Bonds on that news. 

CitiGroup Downgraded

This week, Goldman Sachs downgraded Citigroup to a “Sell” from a “Hold”.  Citi may have to write off $4Billion dollars, additionally to what they have forecasted in the past, due to sub-prime related losses. 

Federal Reserve Chairman Ben Bernanke indicated last week that the Fed is changing the manner in which reports, minutes, and other general information will be reported to the general public and markets.  This is really cool because it will enable us to follow, more closely, why the Fed makes certain monetary policies on the information that they’re being provided with.  This “transparency,” “will provide a more-timely insight into the Fed’s outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability.”  What they plan to do is provide information on economic growth, unemployment, and inflation twice as often as they do now, and estimate figures for three years out, as opposed to the two year estimates currently being produced.  This will be helpful to guys like me because it’s just more information that could have a result on the markets.  But, it also means that I could be writing myself right out of an columnist position with the News & Review (editor…don’t read this).

Mortgage Insurance Changes

I thought I’d take some time and go over some major changes regarding mortgage insurance (MI) that will go into effect in January, 2008.  Generally speaking, mortgage insurance is required whenever you put less than 20% down on the purchase of real property, one to four units.  There are ways around this…but for the sake of simplicity…The calculations have been pretty standard for years, but first, HUD came out and said that they were changing the Up front MI factors based on loan to value, credit risk score, and/or source of down payment funds.  Let’s give an example:  Richard N. Diedert buys a home.  Funds are a gift from pops.  His credit score is bummin’ at about 595.  In the past, regardless, his up front MI factor would be 1.5% of the loan amount.  Now, we would have to go to a matrix and look up what that factor would be.  With this scenario the factor would move to 2.0% of the loan amount. 

Fannie Mae & Freddie Mac Pricing Changes

Not to be outdone, Freddie Mac came out with their new model for pricing loans.  For example, let’s say the Richard is now buying an investment property.  He wants to put 20% down.  In the past, he could either pay 1.375% in points (this varies from lender to lender) OR absorb that cost in his interest rate (about 0.5% in rate).  Now, that add on will also be determined by credit risk score.  So, many changes keep popping up in this new environment and we’ll keep you posted.  Gobble, Gobble…Danny