Market Watch 12.29.08

Stocks opened higher this morning but have since reversed course, as tensions in the Middle East sent crude oil higher on concerns of supply disruption. Higher oil prices could boost Stock prices in the energy sector and may help lift the entire Stock market later today, but the rise in Middle East tensions may also help Bonds improve as traders seek a safe haven for investments.

There are no economic reports due out today, and the Bond market faces another short holiday week--with the market closing early on Wednesday and remaining closed all day Thursday in celebration of the New Year. This holiday environment creates lower trading volumes, which can cause unexpected price movements and additional volatility.

Currently, Bonds are riding a nice wave higher; therefore, I recommend floating for now. But with rates already near 50-year lows, I may change to a locking stance if the situation changes. I will keep you posted.

Market Watch for 12-23-08

Declining home sales are in the news this morning, as the median sales price of existing homes fell more than 13% over the past year. In addition, New Home Sales came in below expectations--falling to their lowest reading in 27 years.

During times like this, it's important to remember that while inventories are high and need to come down for housing prices to stabilize, the combination of abundant inventory and low interest rates does provide a great opportunity for buyers to purchase homes below market prices and at great monthly payment rates.

Currently, Mortgage Bonds are clawing their way back, after opening lower this morning. For now, I recommend floating as we watch to see if prices can improve more.

Market Watch 12.22.08

Mortgage Bonds are trading lower as we kick off the short holiday week. The Bond markets will close at 2 pm Eastern Time on Wednesday and will be closed all day Thursday for Christmas. Friday will be a regular trading session.

There are no economic reports due out today. However, later this afternoon, a record $38 Billion auction of 2-year Treasury Notes could influence prices, as the market absorbs additional supply.

Currently, Mortgage Bonds are trading in a wide range between resistance and support. For now, I recommend floating. But if the situation changes, I may suggest locking, as prices are hovering near 50-year lows, which is an unprecedented opportunity.

Market Watch 12.19.08

Volatility will once again be the key word in the markets today, as a number of Stock options and futures expire. This volatility has already jostled Mortgage Bonds around quite a bit in the early hours of trading.

In other news, the auto industry finally received some relief, as President Bush announced a deal that will provide GM and Chrysler with $13.4 Billion worth of government loans in exchange for restructuring.

Currently, Bond prices are sitting just above an important level of support and may move higher due to market activity. Therefore, I recommend floating for now.

Market Watch 12.18.08

After all the big Fed news from earlier this week, Bonds began the day on the quiet side as they attempt to regain some of yesterday's losses.

Meanwhile, the Job market continues to struggle. The four-week average of new Jobless Claims reached the highest level since December 1982, while the four-week average of continuing Claims is the highest since January 1983.

I recommend floating as Bonds try to move higher again. If anything changes, I will let you know.

Market Watch 12.17.08

The Fed lowered the Federal Funds Rate by .75% to a target range of 0% to .25%, and also lowered the Discount Rate by .75% to .50%. The statement that followed the cut said that the Fed was prepared to take aggressive steps to revive the sagging US economy.

In the past, Mortgage Bonds have reacted negatively to Fed cuts as fears of inflation come to life. But the Fed stated that inflation pressures have diminished appreciably and expects inflation to moderate further in coming quarters, hence the reason home loan rates are improving.

There are no economic reports due out today. For now, I recommend continuing to float.

Market Watch 12.16.08

It's Fed Day! And that means the Fed will release its interest rate decision and policy statement later this afternoon. Currently, the Fed Funds Rate stands at 1%. But, indications are that the Fed will cut by .50% or .75%.

In other news today, Consumer Prices dropped more in November than any other month on record, due in large part to falling gas and energy prices. Based on these numbers, inflation is almost non-existent and could shift thinking towards fears of deflation. Also today, housing starts for November came in at their lowest level since records began in 1959, and building permits were reported at record lows.

So far this morning, Bonds have improved, but have struggled to gain too much ground. The tame inflation numbers and the dismal housing numbers should have sparked a better reaction in Bonds, but traders are cautious ahead of a Fed Rate cut, which historically hurts Bond prices. Therefore, I recommend floating for now, but be prepared to lock this afternoon.

Market Watch 12.15.08

Mortgage Bonds are trading a bit higher so far today, as the New York State Empire manufacturing index came in with little surprise, given the current economic environment. By and large, the markets are awaiting the Fed's Interest Decision and Policy Statement tomorrow. The current Fed Finds rate stands at 1%, but there is a good chance the Fed will cut the rate by .50% or even .75% tomorrow.

In other news, Bernie Madoff's Ponzi scheme may eventually impact Mortgage Bonds. Essentially, a Ponzi scheme is a fraudulent investment that pays abnormally high returns out of new money being added by new investors, rather than from appreciation of the assets. Funds that invested in Madoff and lost all their money will now need to raise capital--which may lead to these funds selling Mortgage Bonds.

For now, I recommend floating. But be mindful that rates are near a 50-year low and there are a lot of things happening that could impact the market in the near term. So I may change to a locking stance soon, depending on how the markets move.

Mark to Market

	The 'Mark to Market' Accounting Rule: What it is and why it is important to you now! The financial crisis we are in today was not caused by mortgages or housing, although they were both catalysts. The real reason was an accounting rule called "Mark to Market" (also known as FASB 157). Few people have a strong grasp of this rule, and even those who do have a tough time explaining it on air due to time restrictions. So let's take a few minutes to break it down, so you can have the inside track on this very important concept and understand why it represents some great opportunities. Why does 'Mark to Market' exist? Let's go back to the stock market crash, which occurred between 2000 and 2002. With the S&P down 49% and the NASDAQ down 71%, many people lost much of their life savings and they were very angry. Companies like Enron and Arthur Andersen were able to find ways to make their books look more attractive, which was reflected in an artificially inflated stock price. Both the public and Congress had a call for more transparency in business and hastened the passage of "Mark to Market" accounting. This is the notion that all assets should be valued as if they were sold on a daily basis. Under the letter of the law, failure to do this conservatively can now result in jail time. So what's the problem? Before we get into what this means for banks, let me make a quick analogy using a scenario that should make perfect sense to you and your clients. Let's imagine that you own a house in a neighborhood where all of the houses are priced at around $300,000. Unfortunately, your neighbor, who owns his home free and clear, falls ill and needs emergency cash quickly. Because he is under duress, he must sell the home for $200,000 in order to get the cash he needs right away, even though the home is worth considerably more.

Now would this mean that your home is now worth the same $200,000 that your neighbor sold his for? Of course not, because you are not forced to sell under duress. It just means that your new neighbor got a great deal. However, if you were a publicly traded company and had to abide by Mark to Market account rules, you and the rest of your neighbors would now have to say, by law, that your home was worth only $200,000 - not the $300,000 you would get for it if you actually sold. So what's the big deal? Read on.

So how does this principle apply to banks? Let's say we decide to start a bank . . . call it XYZ Bank. We raise $2 Million to open our doors. Remember that our capital account is $2 Million. Banks make money by taking in deposits and paying low rates of interest to those depositors (maybe throw in a toaster too). We then take that money and make loans with it at higher rates. We keep the difference. So, we turn the $2 Million worth of deposits into $30 Million worth of loans. This puts our ratio of loans to capital (our Capital Ratio) at 15:1 ($15 Million in Loans to $1 Million in Capital). This level is acceptable, as long as we can shoulder some losses and recover. Because we are very conservative here at XYZ Bank, the loans we make require a minimum down payment of 30%, a credit score of 800 or better (that's nearly an 850 which is perfect), proof of income and assets, a reserve of at least two years of mortgage payments (normal is two months) and income requirements that only allow 10% of monthly income to cover all expenses (normal is 40%). We do this and our loans perform perfectly. We make lots of money. Nobody is paying late and our clients are sending us holiday cards. They love us . . . it's a party. You and I are celebrating as we see our stock price soar. But real estate values decline and, even though all of our loans are paying perfectly, we must re-assess the loan portfolio to account for the decline in real estate values, which leaves us with less of an equity cushion. We had a minimum 30% down payment, which means the loans were 70% of the value of our assets - until we account for the decline in the market. Now, our position goes from 70% to 90%. That's riskier and, therefore, worth less than when our loans had a 70% safety position. Our accountants tell us that we must "Mark to Market" or risk jail. They say our value is now reduced by $1 Million. Whoa! We must take or write down this loss against our capital account. It is a paper loss - we don't write a check, we have no late payers, no defaults, no bad business decisions. Still, we must reflect this $1 Million paper loss in our Capital Account, which drops from a $2 Million to $1 Million in value. Here's where things get problematic. At this level, with $30 Million in loans outstanding, we now have a capital ratio of 30:1. At this level of leverage, alarms begin to sound. Our ratios are out of the safe zone; we could go under with just a few losses, deposits are in jeopardy. Hello FDIC examiner, we are on the watch list, the Securities and Exchange Commission (SEC) is asking questions and our stock starts to tumble. The business networks are showing negative coverage of our now troubled bank. We are in big trouble. The problem, we are "over leveraged". The solution? We have to "de-lever" . . . and do so quickly. But there are only two ways to do that, and one of them isn't really an option. The first way is to raise capital, but that's not going to happen when our ratios are out of whack and we are in serious trouble as well as on the FDIC watch list. It is unlikely that anyone will be willing to invest cash in XYZ Bank. The other option is that we can sell assets, like the outstanding loans, which are increasing our capital ratio. Like your neighbor, who owned his home outright but needed cash for medical bills, we are now under duress. The paper we are holding has a lot of value, but we have to sell it quickly and, because of that, cheaply. So, we offload the loans at a loss, which exacerbates the problem because those losses further reduce our capital account. Very quickly, like a flushing toilet, things start to spiral - we are going down.

	The problem multiplies The problem doesn't stop there. The fire sale we just had on our loans makes things worse - even for the banks that bought them up and thought they were getting a great deal. Under Mark to Market, the loans we just sold must be included in the comparables that other financial institutions use to value their assets. This is how the problem spread and got so bad so fast. Other good institutions, with good loans, have to mark down. Just like us, they become over-leveraged. It's a chain reaction, all triggered by a well intentioned, but over-reaching accounting rule. Financial institutions fold, sell, or freeze. Credit - the life blood of our economy - is cut off at the source. Because of a lack of available credit, home sales and refinances crawl, auto sales drop and jobs are lost. Additionally, the economy enters a recession. During the last recession in 2001, the economy recovered relatively quickly thanks to $3 Trillion worth of home equity withdrawals. But, more restrictive programs, a lack of available credit, and lower home values will make it difficult for us to use home equity to help pull us out of a recession this time around. Fixing the Problem The Federal Reserve has passed a rescue plan, which, over time, will provide some level of help. Some banks will get money to infuse into their capital accounts. Others can sell some assets to the government in an effort to "de-lever". But, the big thing that is not talked about, not well understood, is the part of the rescue plan that traces this financial crisis back to the source. The US Congress has given the SEC its blessing to modify "Mark to Market" accounting. And by January 2, SEC Chairman, Chris Cox has to get back to Congress with ideas, if any, on how to fix Mark to Market accounting. It won't be eliminated, as we will not want to go back to the Enron days. But he is likely to adjust the Mark to Market provisions. Here's one potential solution - even rental or commercial real estate properties can be valued two ways: The comparable sales method, which determines the value based on what other assets have sold for, which is the way Mark to Market work currently. A cash flow method, which values the property based upon cash coming in. If we see Mark to Market modified to use cash flow to value assets, without requiring a large percentage discounting mechanism - wow! What a shot in the arm that would be. We'd likely see the stock market rally, with financial stocks leading the uphill charge. Consider that, in today's market, fund managers are holding 27% of their assets in cash, compared with just 3% they held in cash when the stock market peaked in October of 2007. That means there is a lot of money on the sidelines that can push stock prices higher. Additionally, think about the redemptions from hedge funds that eventually need to be put back to work. That's another reason to be optimistic about stocks in the first quarter of 2009 - provided that Chairman Cox modifies Mark to Market accounting in a meaningful way. And a good stock market helps individuals feel better about purchasing homes. Additionally, stronger balance sheets for financial institutions will allow them to lend more money. The bottom line With some potentially very good news around the corner, there might be reason for optimism as we head into 2009.

Market Watch 12.12.08

Bonds have been all over the board this morning, as the big news of the day has Traders dazed and confused. Last night, the Senate rejected the $14 Billion rescue plan for the US automakers, citing a lack of wage concessions by the United Auto Workers. However, the White House is now indicating it may be willing to use funds from the Troubled Assets Relief Program to save the auto industry from immediate collapse.

Also this morning, inflation at the wholesale level came in near expectations in November, as the Producer Price Index dropped 2.2% due largely to declining energy prices. Retail Sales for November also fell for a fifth straight month, but were actually slightly better than market expectations.

Currently, Bonds are showing indications of being overbought, which could lead to price losses later today. I recommend floating for now, but be prepared to lock should prices start falling. I will keep you posted.

Market Watch 12.11.08

Mortgage Bonds had a nice rally yesterday afternoon and continue to test resistance at the previous price highs for 2008. Stocks, meanwhile, are facing some uncertainty as opposition in the Senate threatens to delay or kill the emergency loan legislation for GM and Chrysler that was approved by the House last night.

In other news, Initial Jobless Claims reached their highest level in 26 years. The data shows that businesses are laying off workers at a rapid pace, as the current recession drags on.

Currently, Mortgage Bond prices are at an important crossroads as they attempt to improve further. I recommend floating for now, but things can change quickly so be ready if we need to reverse course.

Market Watch 12.10.08

Mortgage Bonds are trading sideways in a wide range between support and resistance. There is a large $28 Billion 3-year Note auction this afternoon, which could pressure the Bond market due to added supply.

Stocks are rising today on word that Congress will approve a $15 Billon bailout to keep the Detroit 3 auto makers from seeking bankruptcy protection. Also helping Stocks are shares of energy companies, which are getting a lift from higher oil prices this week. Oil, now at $44.50 a barrel, has risen almost $4 a barrel since Friday's close.

There are no economic reports due for release today but the market remains very volatile and while this could change with the current action, for the time being I recommend you float.

The Credit Crunch: A Wake up Call for Consumers.

Over the last several months we've seen our economy take a severe beating. It started with the mortgage meltdown and is now seeping its way through Wall Street, the stock market and straight toward the credit card issuers. There are also signs that this trend has trickling down and is beginning to impact aspects of the consumer credit lending environment. These factors alone leave little doubt that we're facing one of the most severe economic environments since the great depression.

While financial analysts and economists continue to debate over the impact that the $700 billion bail out will have on the average American consumer, none of us really knows for sure what will happen over the next 12 to 24 months. What we do know is that lenders have already begun to tighten up their lending requirements and this means continued changes in the consumer credit environment as this crisis evolves. It also means that many Americans are facing a stern wakeup call in regards to the way we currently view and manage our credit.

It doesn't take a financial genius to figure out that the mortgage industry's lending practices were in dire need of a complete facelift. Two years ago, you could pretty much qualify for a mortgage with a minimum FICO score of 580 -- as long as you had a pulse. Not enough consideration was given to whether or not you could actually afford the loan or whether or not you had a high risk of defaulting on the loan itself.

These days 'easy money' is a thing of the past. To give you an idea of how things have changed, in order to get the best deal on a mortgage today you're going to need a score in the 720+ range. And the score alone won't guarantee an approval - you'll also need to meet the new income and collateral requirements. And if you think this is only happening in the mortgage industry, think again.

We're also beginning to see changes in the auto and credit card industries. Take GMAC for example, who recently announced that they would no longer approve loans for consumers that had FICO scores below 700. Other lenders like USAA, have not only increased their score cutoffs on their auto loans, but also on credit card and personal loan approvals. See the pattern? Make no mistake, lenders across the board are becoming more cautious and are beginning to safeguard themselves by looking for borrowers that pose less risk. Less risk means higher credit scores and more lenders are going to place even more emphasis on your credit scores and credit report data.

So how does this impact the rest of us? The current state of our economy has many of us worrying about what tomorrow may bring. This means that a lot of us will need to take a step back, re-evaluate the way we manage our finances and our credit obligations, and start living within our means instead of beyond them. There are two important lessons that we can learn from this debacle:

1. Credit isn't a right - it's a privilege. How we manage our credit reports and credit scores are a direct reflection of our credit risk. For high scorers (750-780+), the credit crunch probably won't impact your ability to obtain credit when you need it. But for those that have poor credit and credit scores, it's going to be even more important than ever.
2. It's time to start living within our means. That's right, it's time to take a step back and reevaluate our relationship with money and realize that if you can't afford something, then you shouldn't be buying it. This means reevaluating how and why we use credit cards. Is it to live an unrealistic lifestyle? If so, time to make the change.

The current financial crisis is a wake up call for all of us. And while many blame the current crisis on the sub-prime mortgage industry giving loans to consumers that shouldn't have been approved in the first place, (which may be true) -- we can't ignore the fact that consumers that got themselves into these loans should at least share a part of the responsibility. At some point, we all need to accept responsibility and be accountable for our own actions.

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Market Watch 12.9.08

Mortgage Bonds are trading higher, as Stocks trade slightly lower. There are no high-impact economic news reports scheduled for release today, so Bonds will likely take their direction from Stocks.

In other news, it appears a $15 Billion rescue plan for GM, Ford and Chrysler is close to agreement in Congress. Also this morning, news reports indicate that five members of the House Financial Services Committee are sponsoring a bill that would force the SEC to reinstate the uptick rule. Since the removal of the uptick rule in July 2007, market swings have gone wild. So reinstating this rule could help alleviate the excessive volatility in both Stocks and Mortgage Bonds.

For now, Bonds are holding steady at current levels. Therefore, I recommend continuing to float. I will keep an eye on the markets and let you know if the situation changes.

Market Watch 12.8.08

Stocks are building on their recent gains on news that lawmakers on Capitol Hill have reportedly agreed on the outline of a deal to rescue the ailing auto industry. Also adding some fuel to Stocks is the announcement of a massive infrastructure investment pledged by President-elect Obama. Stocks have taken a beating this year with the Dow down 40%, S&P 500 down 40% and the Nasdaq down 43% - but these announcements, as well as next week's Fed Rate cut and pending decision on "mark to market" accounting are setting the stage, that we have been forecasting, for a major Stock Market rally in the first quarter of 2009. Remember that close to 30% of fund manager's holdings are in cash and the redemptions we have been talking about from hedge funds will need to be put back to work between January 15th and February 15th.

There are no economic reports due out today so Mortgage Bonds may take a cue from technical factors as prices once again test the best levels of 2008. At 11:00am ET, the Treasury will announce a new 3 and 10-year Treasury Note funding. And at 1pm ET, there is an auction of 3-month and 6-month Treasury Bills. These events could be a drag on prices later today.

We advise floating for now, but with support still a ways beneath current levels and prices already off the best levels of the day - it promises to be choppy and volatile.

Market Watch 12.5.08

The November jobs report was released today showing some of the worst numbers in decades. Non-farm payrolls dropped 533,000 last month and was only the fourth time in 58 years that our economy lost over 500,000 jobs. The unemployment rate ticked up to 6.7%, the highest since October of 1993.

The news sent the Stock markets lower while the Bond markets didn't have much of a reaction. We are currently in a bad economy and only news of a better report would have been a surprise.

For today, I will continue to recommend floating, but be ready to lock because sentiment can quickly change.

Market Watch 12.4.08

This morning, the Initial Jobless Claims report came in at its lowest reading since the beginning of November. The four-week average, however, rose to its highest level in 16 years.

In other news, the Bank of England and the European Central Bank both cut interest rates today in an effort to revive their sagging economies. Here in the US, Secretary Treasurer Paulson is considering another plan to help boost the ailing housing markets. The Treasury already announced plans to buy Mortgage-Backed Securities issued by Fannie Mae and Freddie Mac and now wants to step up those purchases in a coordinated move to drive home loan rates down to 4.5%.

Currently, Mortgage Bonds are near unchanged levels this morning, as Stocks trade a little lower. Tomorrow, the Labor Department will unveil its Jobs Report for last month--and the markets are already bracing for poor numbers, which may help Bonds improve. For now, I recommend floating, but be prepared to lock if the situation changes.

Market Watch 12.3.08

After touching the highest prices of the year on Monday, Mortgage Bonds are trading lower today. Stocks have reversed course and are mow in positive territory day, even despite some weak economic data released this morning.

The Job market continues to look bad, as the ADP Employment Report showed a loss of 250,000 private sector jobs; the worst reading in six years. In addition, the ISM Services Index was reported at the lowest level since data has been compiled.

Later today, Fed members Randall Kroszner and Richmond President Jeffrey Lacker will be speaking and could cause a ripple in this jittery market.

For now, I recommend locking. The market remains volatile so I will alert you if there are any sudden changes.