Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – November 13th, 2007

Start Getting Ready To Buy!

If you haven’t figured out that now is a great time to buy, than you haven’t been paying much attention to where interest rates are, and where home values are.  Foreclosures are starting to rear their ugly head, and this will cause opportunity for low purchase prices.  I am currently in escrow on two investment properties (shortsales) because I believe that it doesn’t get much better than now, to buy and build.  Let’s look at what’s happening in the market today…and what the future may hold in store. 

Earlier in the week, the stock market took a nose dive.  General Motors reported a $39 Billion loss for the third quarter.  Keep in mind that GM formerly held GMAC which was their financing company who did a lot of loans these past few years. 

China Moving $$$ OUT of the US

Remember that I have mentioned numerous times in my article that foreign investment in our mortgage-backed securities is what has kept our long term (30 year fixed) interest rates so low the past decade or so?  Well, this last week China indicated that they would be moving their investments away from the US Dollar.  “We will favor stronger currencies over weaker ones, and will readjust accordingly.  The US Dollar is losing its status as the world currency.”  So, China will start to sell off their US holdings including Mortgage Bonds.  Also, their participation in purchasing new Mortgage Bonds will continue to hurt Bonds, pressuring their yield (and therefore interest rates) higher.  A good time to buy? 

Oil Is Just Too Expensive

Oil is touching on $100 per barrel.  This is inflationary and remember that inflation is interest rate’s worst enemy.  What really saved us last week was that we bounced off of the 50-day moving average.  Remember that these averages cause trends in bond values and therefore interest rates…so the 50-day moving average (or that trend) was a level of support for interest rates because markets don’t like to shy away from trends…they follow them!  

10-Year Treasury Yield Throws Off Unprepared Mortgage Professionals

Interesting to note this week that the yield on the 10-year Treasury Note and the yield on Mortgage-Backed Securities were moving in opposite directions…so if you were working with someone that really didn’t understand how interest rates worked, you could have ended up paying for it in your interest rate. 

Initial Jobless Claims were reported at 317,000, however, the market anticipated 325,000.  Of importance was the fact that the Bank of England (BOE) and the European Central Bank (ECB) announced their monetary policy this week.  They both decided to leave their overnight rates where they were.  This is important because foreign yields on bonds have a direct impact on investments in our bonds. 

Foreign Investors Shying from US

The first test of auctioning our Treasury Bonds didn’t fair so well this week.  This is something that we’ll continue to keep our eyes on. 

Wachovia Corp. announced a $1.1 Billion loss on CDO’s.  Collarteralized Debt Obligations are the fancy-shnancy critically calculated investment bundles that included included mortgage backed securities that are losing value with each passing mini-second.

Retail Sales numbers will be coming out soon, however, the markets are moving on speculation because WalMart reported strong earnings.  WalMart is always watched by the market, just because as the nation’s largest retail chain, it would make sense that if they had strong earnings, than the nation should follow suit.  Remember, also, that when Retail Sales come in strongly, than the stock market would do well, taking money out of bonds, or mortgage backed securities.  So, buy, buy, buy!  Values are down and rates are low…but with all of this information in your pocket, how long will rates remain low?  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 – August 28th, 2007

Conforming Loan Limit Increase?

No word yet on the increase in conforming loan amounts.  In last weeks article we mentioned that Fed Chairman Ben Bernanke was meeting with officials to see about the opportunity to help our current liquidity crisis by increasing the number of loans that FannieMae and FreddieMac would purchase.  By increasing the loan amount, from the existing $417,000 limit on single family residences, it would free up banks to fund more loans and help with this crisis. 

FHA Loan Limit Increase?

An emergency increase in Housing and Urban Development’s FHA loans, is also in the works.  Currently, in our area, the maximum loan amount, for a single family residence, is $304,000.  Rumor has it that they would like to increase this amount to the existing Conforming Loan Limits of $417,000. 

Interest rates have remained relatively steady over the past week.  Even with a lot of the economic data that was reported, we are in somewhat of a tight crunch between the 100-day and 200-day moving averages.  The 100-day moving average has really been a significant level of support, but the 200-day moving average has really been strong level of resistance.  Remember that there are “trends” or “averages” that bonds (mortgage backed securities) follow.  For example bonds will make a 50 day, 100 day, or 200 day moving average that they like to stay close to.  By watching and measuring these “averages” or “trends” you can generally tell where bonds (and therefore interest rates) will move. 

Last week four major lending institutions borrowed money from the Federal Reserve’s Discount Rate discussed in last week’s article.  Citigroup, JP Morgan Chase, Bank of America, and Wachovia Bank all borrowed $500 Million each.  Next week we’ll learn just how much money was borrowed from this “Discount Window.” 

Jobless Claims Are Concerning

The Bank of Japan decided to keep their overnight rate unchanged.  It’s largely believed that if they did raise their overnight rate, even to deal with concerns of inflation that they’re having, it would have sent more concern into to global markets.  Initial Jobless claims were up to 322,000.  That’s near expectations, but this number keeps moving from the 300,000 normal range…to 325,000 as being where “expectations” are…more softening in the labor department?  Durable Goods Orders were way up!  But this report has been very volatile, recently, and therefore the markets did not react. 

Interestingly, the Bank of China revealed they held a significantly greater number of subprime mortgage investments than expected.  This story will continue to develop and we’ll see how it will affect our market. 

Recession Around the Corner?

There are a number of economists that are indicating that we’re heading toward a recession.  Hopefully, the moves that the Federal Reserve is acting on; lowering the discount rate, watching core inflation and wage based inflation, a probable move to lower the overnight rate on September 18^th,  should prevent such an outcome. Also, consumer confidence is really low.  Actually at it’s worst level of the year. 

Next week we’ll be reporting on the Gross Domestic Product and the Fed’s Favorite Gauge on inflation, the Core Personal Consumption Expenditure Index (PCE).  So, for the week ahead, generally it would look very favorable for interest rates, however, as mentioned above, the 200-day moving average has been as stubborn as a mule to get past.  We actually bounced right off of it on Monday.  So, if we can’t get by that tough level of resistance, we may see the opposite and slightly higher rates for next week.  Until then…