Nine Terrifying Words

"THE NINE MOST TERRIFYING WORDS IN THE ENGLISH LANGUAGE ARE: `I'M FROM THE GOVERNMENT, AND I'M HERE TO HELP.`" Ronald Reagan. And regardless of if those words do indeed terrify you or perhaps give you confidence, the government held center stage last week, with a pivotal Federal Reserve Board Policy Statement, President Obama's first State of the Union address, and Ben Bernanke's confirmation for another term as Fed Chairman. First, let's start with the Federal Reserve Board, who on the heels of their most recent meeting reiterated their important line, "rates will remain low for an extended period" in their Policy Statement. This tells us that the "carry trade" which has pushed Stocks, Commodities and even Bonds higher may continue, as the driving force of this trade - low interest rates - will likely provide a tailwind. This piece of the Statement was good news for Bonds and home loan rates. However, this was offset by further confirmation that the Fed's Mortgage Backed Security purchase program will indeed end March 31st, 2010. This was bad news for Bonds and home loan rates, and overrode the "extended period" statement in terms of Bond market and home loan rate action. Then on Wednesday evening, President Obama delivered his first official State of the Union address, and just like in his initial post-election speech, a big theme was job creation. He discussed a new jobs package, but no details on how much the package would cost or where the resources would be spent have been provided yet. With lots of money already spent with this goal in mind during 2009, and the jobs picture still worsening, hopes are high that future plans will be carefully crafted and targeted to achieve this important goal. And finally - Ben Bernanke ultimately received a hard-won Senate confirmation for his second four-year term as Chairman of the Federal Reserve, but it was a bit of a bruising confirmation fight. Bernanke has been under some criticism as he led the Fed in taking a series of extraordinary measures to protect the economy during the financial crisis, including the decision to help home loan rates stay low during 2009 and early 2010 via the aforementioned $1.25T Mortgage Backed Security purchase plan. In other economic report news - last week's Advanced read on 4th Quarter Gross Domestic Product (GDP) showed a climb of 5.7%, and as you can see from the chart below, that was the best reading since the 3rd Quarter of 2003. ----------------------- Chart: Gross Domestic Product (By Quarter) And while it's nice to see positive gains on this broad read on the economy, we need to take the report with a grain of salt. Last Friday's report was only the first or the Advanced reading. So we still have two more reports - the Preliminary and the Final - due out regarding the 4th Quarter GDP. And in the past, we've seen some of the gains go away when the additional reports were released. In fact, just last quarter, the GDP reading dropped 2.2% from the Advanced reading to the Final report. It wouldn't be surprising to see a similar revision lower this time, as when the economy slowed, businesses reduced their inventory rather than keeping their shelves full...and in the 4th Quarter, many businesses began to restock their shelves, with restocking accounting for 3.4 of the 5.7 percentage points in GDP growth. The problem is that sales haven't increased along with the restocking. In fact, Consumer Spending actually declined when compared to the previous quarter. Th is means last week's GDP report probably overstated the level of growth and, as a result, will likely be revised lower in the future. Overall - Bonds and home loan rates experienced quite a bit of mid-week volatility while absorbing all the news, but ultimately ended up very close to where they had started.

Forecast for the Week

This will be a busy week for economic reports, starting off with the Personal Consumption Expenditures report on Monday. This report measures consumer price changes, and also gives us a look at inflation. We'll also get a glimpse at Personal Income and Personal spending on Monday, as well as the Institute of Supply Managers Index, which is the king of all manufacturing indices, and is considered the single best snapshot of the factory sector. By mid-week, the labor market will lead the big news. In addition to the latest Initial Jobless Claims numbers, ADP's Employment Report will also be delivered. These two data points will lead the way to Friday's official Jobs Report from the Labor Department. This report includes the latest information on job losses and the unemployment rate, as well as the average work week and hourly earnings. With all the recent talk about the job market, it will be important to get a current read on the situation. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Mortgage Bonds traded in a tight technical range last week between a ceiling of resistance at the 100-Day Moving Average and a floor of support at the 200-Day Moving Average - and as always, I'll be watching carefully to see which way Bonds and home loan rates are headed. Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jan 29, 2010)

Food for thought ... where's your passion?

My good friend Joshwa Fuchs Wolf noted on his Facebook page that "There are a lot of starters in the world. Who doesn't love starting new exciting things? The hard part is finishing. It is finishing that seperates those w(ith) passion and those with out it."

He's right.  Passion IS the key ... the challenge is to find the emotion that ties our actions to our dreams. Without that link, we don't have passion ... we merely have infatuation of the moment. Passion is for the long haul because it pulls us through the crud ... and it can only do that because it is tethered to our deepest desires and dreams.

Passion is the key to finding courage ... and remember courage is the ability to act in spite of fear (not the absence of fear)!

We all need courage at critical points in our lives.  It all starts with our passions.  Our passion WILL point us in the right direction when we have a tough choice, because we'll do what is true to our nature (if we're true to ourselves).  Our passion will remind us of what's important in our lives when we begin to lose focus.  And our passion will uniquely define us as we look back over the course of our lives and trace the path we've taken.

It's taken me 50 years to be able to put this truth into words ... I urge you to weigh them and see how they can impact your life!  Find those things that excite you to your depths of your soul and line up your actions so you can do them repeatedly.  The more passionate you can be in your life, the more fulfilled and blessed you will be.

I have been passionate about my family and my ability to fix things for my friends.  I am blessed because I earn a living by solving challenges for my friends (mostly financial, but also some mechanical problems as well) and do it without reservation.  I'm here to help those who need it and share their joy when we get it worked out!

Passion is the key ... are you passionate about your life?

World News Brings Perspective

"WHAT DO WE LIVE FOR, IF IT IS NOT TO MAKE LIFE LESS DIFFICULT FOR EACH OTHER?" George Eliot. The current crisis in Haiti certainly puts this sentiment into perspective. Last week it was reported that the inflation measuring Consumer Price Index (CPI) for December came in lower than expected. Overall, CPI for all of 2009 was fairly tame. But as you can see in the chart below, the closely watched Core CPI, which strips out volatile food and energy, rose to 1.8% year-over-year in December after hitting a multi-year low of 1.4% in August. Chart: Core Consumer Price Index So what does this mean for Bonds and home loan rates? Clearly, inflation is tame at the moment...but slowly trending higher. The Fed will be watching this data very carefully in the coming months, as they seek to time perfectly the exit from what is essentially a zero rate environment. The Fed will likely err on the side of keeping the Fed Funds Rate lower for longer than they perhaps should, in order to avoid a "double dip" recession...but that will likely lead to more inflation down the road. Remember, Bonds and home loan rates hate inflation - so home loan rates are likely to trend higher as more inflation creeps into the economy. Speaking of the Fed, they stepped up their Mortgage Backed Security (MBS) buying in the latest week, purchasing $14B in MBS, whereas the most recent prior purchases were around $9.5B. The Fed now has $113B left of their $1.25T allotted commitment, with the buying program set to wrap up on March 31st. The Fed's purchases have helped home loan rates stay historically low - and although there has been some buzz about an extension of the program, it seems unlikely that will come to fruition. When the Fed purchases stop, home loan rates will be very susceptible to moving higher - so if we have not talked yet about your own home loan situation, or if you know of a friend, family member, neighbor or coworker who might like some advice, let's be sure to connect very soon...time is of the essence. The next Federal Reserve Policy Statement will be coming on January 27th, and they have gone out of their way to mention in the last several statements that the MBS buying program will not continue. Count on me to be listening closely when the Fed releases this next Statement, as this will help further gauge what home loan rates have in store. In other news, Retail Sales for December came in well below expectations and were down from the 1.8% increase seen in November. While this suggests weakness in the Retail sector, it has to be taken with a grain of salt, as it is likely that frigid temperatures and snowy conditions throughout much of the country were contributing factors to the decline. Overall, 2009 was a very tough year for retail. Retail Sales for 2009 dropped 6.2% compared with 2008, which was the biggest decline on record, dating back to 1992. There was some good news, however, on the manufacturing front, as the Empire State Manufacturing Index was reported above estimates, indicating manufacturing expansion in New York state and parts of New Jersey and Connecticut. For the week overall Bonds were able to break above important technical levels, and home loan rates ended the week slightly better than where they began.

Forecast for the Week

The markets will be closed on Monday in observance of the Martin Luther King, Jr. holiday, but plenty of news will follow later in the week. Wednesday brings more news from the inflation front, with the Producer Price Index (PPI) Report, which measures inflation at the wholesale level. Wednesday will also bring a read on the housing market, with the Housing Starts and Building Permits Report. There's also more manufacturing news ahead on Thursday with the Philadelphia Fed Report. Also in store for Thursday is another look at the weekly Initial Jobless Claims Report...so it's sure to be an interesting week, with a variety of data for the markets to absorb. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds and home loan rates improved last week, largely due to tame inflation numbers and a decline in Stocks. In fact, Bonds were actually able to power through a tough technical "ceiling of resistance" at the 200-day Moving Average...but it remains to be seen if they will hold their gains. I'll be watching closely to see if Bonds and home loan rates can build on their positive momentum in the coming week. Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jan 15, 2010)

I'm amazed people are willing to lay down and just take it!!!

I subscribe to a professional real estate blog and normally let most comments slip by, but this one got me riled up:

"Hindsight is great, and shows the error of such paths. We should have known better, but we didn’t want to miss what appeared the opportunity of a lifetime. Homes, however, are not a commodity to be traded like soybeans, pork bellies, or precious metals. Homes are just that, a place to live, raise a family, create memories, and find solace at the end of day."

I had to respond and this is what I said:

Hello!  I hate being the contrarian, but a house is like all your other assets when you look at it from a financial perspective ... money tied up in your four walls earns you ZERO return.  The smartest move is to take out as much equity as you're comfortable doing and INVEST IT (not consume it!!!) in a proven, safe instrument indexed for growth with no downside loss (they're out there - that's a whole different conversation).

I know people who did just this at the height of the market and now have THOUSANDS of extra dollars earning interest for them while their house value has slipped below their mortgage amount.  Are they upside down?  NO - the cash they invested has earned interest and now exceeds their house value.  That fund will rise above their mortgage amount within the next 18 months.

Don't fall prey to the thinking that an asset paid in full is safe!  I can introduce you to many couples who thought their house would be their retirement plan, only to be cash starved today. Money must MOVE to make more money and a mortgage is the way to leverage the money in your house.

Our parents and grandparents came out of the Depression paying off their houses to avoid the banks "calling the loan" - which no longer can occur. Now we're in financial bondage to the banks because we allow them to convince us the only way to own something is through their auspices - NOT SO! (and this is coming from a mortgage banker!!!) Take the final step and do what wealthy people have always known - leverage your money on safe plays and earn a "spread" that you can bank.

Just make sure you INVEST any money taken from your house, rather than consume it!

I had to try to set the record straight on the blog - the "group-think" expressed in that thread is unfortunate and reversible!

We need to beat the banks at their game and use the financial instruments at our disposal to tilt the playing field to our advantage! I can't believe so many people are willing to acquiesce to the institutions and their brand of marketing - it's time to control our own financial destiny!

Let me know if you're of a like-mind ... I'm looking for those independent souls who know they can do better than than living off the drivel we've been fed from the talking heads.

Here's to strength and independence!

A Volatile Week Ends a Volatile Year

As we begin a New Year, fresh with opportunity - here's what you need to know about the last week of 2009. The holiday shortened week had some fireworks, and not just those ringing in the New Year. The Treasury Department auctioned a whopping $118 Billion in T-Notes last week, and the added supply helped bring on some volatility in Bonds. And although the financial markets in general have been quite volatile of late anyways, the potential for increased volatility is typically greater during a holiday week. This is because trading volume levels decrease, and with fewer traders and investors pushing transactions, it opens the door for exacerbated market moves, as one large trade can cause prices to rise or fall more sharply. In fact, volatility was present through a good part of 2009 - not to mention the last decade. As you can see in the chart below, Stocks experienced a roller coaster ride during 2009, hitting Bear market lows in March...only to soar 60% higher since March 9th. Chart: Dow Jones Industrial Average Meanwhile, 2009 also brought some of the best home loan rates ever seen in the history of the US, but things have worsened over the last month. This is in part because the Federal Reserve is winding down their Mortgage Backed Security purchasing program...right at a time when there is an increased volume of Mortgage Backed Securities coming to market. So why are there more coming to market right now? It takes about four months for home loan originations to become securities - and summer originations were light, allowing the decreased Fed purchases during the fall to still help handle the flow of Mortgage Backed Securities coming to market at that time. But loan origination volume increased in late summer and early fall, due to lower home loan rates as well as the perceived expiration of the Home Buyer Tax Credit, which has since been extended. This increased volume of home loans are now securitized and hitting the markets, at a time when the Fed is buying less. As with any item, when there is lots of supply - in this case, the increased volume of Mortgage Backed Securities - and diminishing demand - i.e. the Fed buying less and less - Economics 101 tells us that the price of that item will subsequently go down. And as Mortgage Backed Security or Mortgage Bond prices go down, home loan rates go up, which is what we saw happen throughout December. While rates were able to end last week at about the same place as they began the week, they did worsen about .50% from the beginning of December to the end. THE NEW YEAR IS THE PERFECT TIME FOR A FINANCIAL CHECK-UP, SO MAKE SURE TO GET IN TOUCH WITH ME TO SEE IF STILL LOW HOME LOAN RATES COULD BENEFIT YOU OR SOMEONE YOU KNOW.

Forecast for the Week 

The first major economic report of the New Year will come on Friday, with the Labor Department's official Jobs Report for December. Last month's Jobs Report showed that only 11,000 jobs were lost in November, despite expectations of 125,000 jobs lost. This marked the least number of jobs lost in nearly two years, since December 2007. In addition, the Unemployment Rate improved to 10.0%, when expectations were for it to remain at the 10.2% level. Remember, though, that we need to create an additional 125,000 jobs each month just to keep up with population growth...so there is still quite a ways to go before we're out of the woods on the employment front. And while last week's Initial Jobless Claims number showed that new Unemployment Claims were reported at the lowest weekly reading since July of 2008, the holidays and large snowfall in many parts of the country may have prevented people from getting out to the unemployment office to file their claims...so this may well have skewed the reading. The bottom line is that the labor market is a key component to our economy's recovery, so both Thursday's Initial Jobless Claims number and Friday's Jobs Report will be important to watch. Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bond prices have been on a worsening trend of late, meaning home loan rates have moved higher. As the New Year begins, remember you can count on me to be watching closely as always - and I look forward to hearing from you or any of your friends, family members, neighbors or coworkers with any questions you might have. Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jan 01, 2010)