Market Watch 1.22.09

It's been another wild and volatile morning for Mortgage Bonds after a slew of disappointing economic news and negative corporate earnings reports initiated an early sell-off in the Stock market.

Initial Jobless Claims reached its highest level since November 1982. In addition, housing remains weak as Housing Starts fell more than 15% in December and Building Permits also came up short.

Mortgage Bonds are attempting to trade above support. I recommend floating for now, but I will let you know if today's volatility requires a change of course.

Market Watch 1.16.09

This morning, the Consumer Price Index for 2008 was reported the lowest since 1954, indicating that inflation is not a problem. The big news of the day, however, is in the banking sector.

Citigroup reported a $8.29 Billion loss, completing its worst year ever since its inception in 1812. Bank of America also lost $1.79 Billion in the 4th quarter, making 2008 the bank's first yearly loss in 17 years. However, Bank of America received a lifeline late last night in government funds in exchange for preferred stock.

Currently, the Stock market is rebounding a bit higher, which is applying selling pressure on Bonds. However, prices have already improved since early lows. For now, I recommend floating, as we watch to see if prices can hold.

Market Watch 1.14.09

Mortgage Bonds improved and Stocks lost more ground today on the awful Retail Sales news. Sales plunged by 2.7%, far worse than expected. Even worse, when you strip out autos, the number declined 3.1% versus expectations of a 1.4% decline. Retail sales have now fallen for six months in a row.

In the banking sector, Deutsche Bank, which is Germany's largest bank, warned of a fourth-quarter loss of $6.3 Billion, and Chase announced they are pulling out of their broker wholesale lending. This has added to the selling pressure on Stocks.

The Fed's Beige Book will be released this afternoon at 2 pm and could influence the markets, so stay tuned. For right now, I recommend floating to see if prices can revisit resistance at the all-time price highs, about 40 basis points above present levels.

Market Watch 1.12.09

Today kicks off the 4th quarter earnings season for the Stock market. No one expects any stellar reports to be in store, but many eyes and ears will be on what these companies say regarding future earnings.

In other news, Oil prices are tumbling this morning to near $38 a barrel on concerns that slumping demand will outweigh output cuts by OPEC. Due to the present economic slowdown, Oil consumption is expected to fall by 1 million barrels a day this year in the US alone.

Currently, Bond prices are down, but may rebound a bit later if the Fed steps in with some buying. Therefore, I recommend floating for now. With so many variables affecting the market, it's more important than ever to have an advice-based strategy when structuring your loan, and I appreciate you trusting me with this role.

Market Watch 1.8.09

Mortgage Bonds are trading higher and at historic levels as the Fed was likely active in the markets continuing their purchase program this morning.

Meanwhile, Stocks are under selling pressure thanks to a rash of earnings warnings from the nation's retailers. Wal-Mart said today that 4th quarter profits will miss expectations after one of the worst holiday shopping seasons on record, while Macy's and Limited Brands cut their earnings forecast after the weak December sales readings. Macy's also said they are closing 11 stores.

In other news, the markets are bracing for a bad Jobs Report tomorrow and if the number is indeed bad, Mortgage Bonds could improve further as Stocks will likely come under selling pressure. Therefore, I recommend floating into tomorrow's report, but I will let you know if the news of the day requires a change of course.

Market Watch 1.7.09

Mortgage Bonds are taking a breather so far today, after a sharp run up the last two days which was fueled by the Feds long-term purchase program of mortgage backed-securities.

This morning, the ADP Employment report showed US private firms lost a whopping 693,000 jobs in December. This was far worse than expectations of 495,000 jobs lost.

The Fed's purchase program should help mortgage rates going forward. For now, I am recommending to carefully float however with so much volatility in the markets, things can change quickly.

Market Watch 1.6.09

Mortgage Bonds are taking a breather so far today, after a sharp run up the last two days which was fueled by the Feds long-term purchase program of mortgage backed-securities.

This morning, the ADP Employment report showed US private firms lost a whopping 693,000 jobs in December. This was far worse than expectations of 495,000 jobs lost.

The Fed's purchase program should help mortgage rates going forward. For now, I am recommending to carefully float however with so much volatility in the markets, things can change quickly.

Market Watch 1.6.09

The Fed was back in the markets this morning aggressively buying Mortgage Backed Securities pushing prices higher as it tries to lower home loan rates. The Fed will be buying $500B of Mortgage Bonds - that equals approximately $4B in buying power each trading day...that is pretty good buying support, which could help mortgage rates move steadily sideways to lower over the first two quarters of 2009.

At 2pm ET the Fed will release the Minutes from the December 16 Meeting which may shed some light on the Fed's view of the economy and the reasoning behind the aggressive cut. The Fed lowered the Fed Funds Rate by .75% to a range of 0 to .25% at that meeting.

With the Fed providing underlying buying support to Mortgage Bonds, I am recommending to float longer-term, but on short-term transactions we should be ready to lock at a moment's notice to protect pricing. We will likely see the lowest rates in our lifetime during the first two quarters of 2009, so get this message to everyone who can benefit and have them lock in during this once in a lifetime opportunity.

Market Watch 1.5.09

Happy New Year! Mortgage Bonds are off to a great start in 2009, as the Fed begins its planned purchase of Mortgage Backed Securities. This process will continue gradually through June and should help buoy Mortgage Bond prices. For today, there are no economic reports due out, so Mortgage Bonds will likely respond to today's Fed announcement.

In other news, President-Elect Obama's new stimulus package will reportedly be worth $775 Billion and will include hundreds of Billions of dollars worth of tax breaks and credits for individuals and businesses. This is good news for the economy and should help with consumer confidence over time.

Currently, I recommend floating, as Mortgage Bonds ride a nice long-term trend higher. Remember, with today's continued volatility and sharp swings in the market, trusted market knowledge is as important as price in your rate decision. If you have any questions or concerns, please contact me. I’ll be happy to help."

Market Watch 12.31.08

Mortgage Bonds are soaring higher this morning, thanks to the Fed reiterating its New Year's Resolution to purchase $500 Billion of Mortgage Backed Securities by June 2009. The announcement has led to another wild disconnect between Mortgage Bonds and Treasuries, as the 10-Year Note is trading sharply lower, while Mortgage Bonds are sharply higher.

In other news, Initial Jobless Claims were reported at 492,000, which was well below expectations that it would rise to 575,000. The Labor Department said that seasonal volatility led to the surprise drop in unemployment claims.

With the Fed's new program starting early next month, we should see improved Bond prices ahead - but we're also likely to see more volatility as the New Year begins. For now, I'll maintain a floating stance, but be ready to take action if the situation changes.

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 12.15.08

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.