Mark's Blog Report

I am sending this post early Tuesday morning as I did not have a chance to do this blog on Monday afternoon.

In case you were on vacation Friday, there was a huge sell-off in the bond market.  This was caused by news that a plan would soon be announced to "bail out" AMBAC, a huge bond insurer.  We would hope, that after such a crushing blow to rates that we would get some relief this week.  So far, not so good.

The only scheduled economic report for the day was the Existing Home Sales report.  And even though the number did fall as expected, it was less of a fall than analysts thought: 4.89mil versus 4.84mil.  Immediately after the data, mortgage bonds worsened and are continuing to fall.  The home sales news is not the only factor driving bond prices down, and this report is normally not considered of great importance to rates. 

The fact that it is impacting rates this morning speaks to the market sentiment.  There are hope and optimism surrounding the AMBAC announcement.  The market is latching on to any positivity it can find. 

The rest of the week has a good amount of data that could help bring rates down again, but strength in the data will surely cause rates to continue to skyrocket (remember that weak data, in general, is good for rates).

It's always risky to float when the market is showing signs of optimism.   On a technical read of the data, prices have pulled well above the moving averages.  As we move along the 50 day moving average, bond prices have "bounced" up and down off of the 50 day line.  If "the trend is your friend," then we will actually have some improvement in rates some time in the next two weeks.  Remember that a technical read of the data, though, must always be considered with economic data.  We have the new introduction of inflation concerns.  This could be the dark horse that ruins our nice upward trend on bond prices.  We'll have to keep a sharp eye on inflation data and news.  If it moderates in severity to any degree, this will be good for rates.  Lock/float is a 50/50 shot this week.  The technical data favors floating while the economic buzz favors locking.  So I hesitate to give an opinion as I am undecided myself.  If I had to take a stand, I would say float until the economic reports this week give us some insight on the validity of the trend.  If you can't afford to take that risk, then don't.

Happy Leap Year!!  We are ending the week on a high note - a high note for bond prices, that is, which as you know means lower rates yet again.

We have improved by about 14/32nds today on the 5.5% coupon.  The best thing about gaining ground today is not necessarily related to today's gains, but more importantly, it solidifies yesterday's boom.  Lenders didn't price in all of that MBS "goodness" into their rate sheets yesterday.  In fact, it's a pretty standard policy for lenders to "wait and see" if gains in the MBS market hold before translating that strength onto their rate sheets.  So when rate sheets are released today, hopefully these great MBS gains have lenders putting another "toe in the water."

What's causing this?

1. Personal Income and Outlays

           - Although the personal income and outlays report numbers were just a bit higher than expected, when the effects of inflation are factored out, people aren't making any more money or spending any more money.  This speaks to my favorite economic negative: consumer spending

 2. NAPM

         - The National Association of Purchasing Management released their index this morning at 44.5.  Expectations were 50.0  This indicates a contracting manufacturing sector.  It's also widely followed as an indicator of how ISM manufacturing survey numbers will come out.  44.5 is dismal.

3. Consumer sentiment

      - This came in relatively close to expectations (70.0), at a reading of 70.8.  That's right!  Slightly higher than expected.  But remember, the estimates are just those, and they account for all the economic negativity.  So although this consumer sentiment reading is not damaging the markets today, 70.8 is quite low historically and is more of a "confirmation" of worries..

4. Other News

      - The proposed AMBAC bail out plan that fueled a bit of a rally last week appears to have a few hurdles to get through, including the need to show more capital to the ratings agencies before they will approve it.  This mitigates some of the enthusiasm that caused rates to go up previously, and is likely helping rates this morning to a small extent.

So what next?  Late last week I had hoped that today would be the best day for rates we'd seen since late January and so far, it looks to be that way.  But will it last?  Will it continue to improve?

My cautionary thoughts are these: as we've said, technical factors exert pressures on rate movement both in the long term and short term.  The technical analysis I mentioned about the bond price "bouncing off" the 50 day moving average line has held true. So we will likely experience that ball dropping back towards the moving average, even though that moving average is trending up.  It's simply a matter of "when?'

I can tell you this: the market bulls will be looking for some good news after the past 3 days.  So watch out for sudden volatile changes.  I think we're in a good position as far as making lock decisions though.  The trend over the past several months has shown an uncanny resemblance to a ball bouncing up a hill, the hill being the 50 day moving average of prices (which are the path of the ball.  The ball bounce cycles have lasted 1 to 2 months since August.  This means you're looking to lock 15-30 days into a cycle.  This most recent cycle began about 10 days ago.  This is making next week look like mortgage rate promised land if you go by a purely technical read of the data.

I wish I could just say the technical read will always be right, and keep floating until next week.  But the constant truth is to assess the interest rates at which certain loans in your pipeline no longer are executable.  If you are below that interest rate now, you won't regret locking on what might not be your best rate as much as you'd regret not locking and potentially losing the opportunity. 

If you're forcing me to take a stand, I'll do so from the top of this fence!  The indicators are there to say rates will improve next week.  But the huge mitigating factor is the headline economic news that seems to have been hitting recently.  One big, unexpected announcement could ruin the whole party.  So the name of the game is to cautiously float.  If we see our bouncing ball start to fall back towards earth, we'll still have an opportunity to lock at better rates than we had 3 days ago.  But if you take this approach, it' imperative that you keep an eye on the markets and on this blog.  Remember, that there is still some fluctuation as rates improve.  For instance, the past path of the bouncing ball is not a perfect arc.  We may see rates take a small step back Monday, only to continue on with strength through Friday's employment situation report.

The epic battle of the week between economic weakness and inflation raged on today.  Yesterday inflation had some wind taken out of it's sails and Mortgage Backed Securities (MBS) advanced nicely.  As we discussed, yesterday's PPI data was the only major inflation report of the week, and the rest of the data would speak to the other factors of the economy.

I had said earlier that even though inflation may be high, that other economic reports would continue to disappoint, and that if we could make it through Tuesday on a fairly positive note, that the rest of the week could be great.  So far, so good!

The economic data is certainly helping: new home sales are the lowest in 13 years, durable good orders fell by  5.3% (almost double expectations), and mortgage applications are down by a good margin.

Today Bernanke testified before Congress.  MBS are doing well with prices improved by roughly 1/3 over yesterday's close.

The federal regulator for Fannie and Freddie just announced that their investment caps would be lifted, allowing them to buy more loans.  As this is somewhat optimistic for those that still believe we can "skirt a recession", MBS responded immediately after the news and fell a bit from their highs of the day. 

The line that graphs MBS prices today was up and down, but if one were to plot points each time the line bottoms out, and then draw a line connecting those points, it would be moving upward at a 45 degree angle.

In other words, bond prices are steadily climbing today which is good for rates.  Since the low points on the price graph all lie exactly on this line, this establishes what's known as a technical trend.

Looks like we are going to push to the highs of the day as MBS trading closes.

The 5.5 coupon is up 20/32nds!  That's it's highest level of the day and has been a technical "ceiling" that has enticed bond holders to sell earlier in the day.

Volume reports indicate buyers outnumber sellers 4 to 1!  

Until now, sellers stepped in fairly aggressively when the price got this high, so it's fantastic news for mortgage rates.

I have yet to see a lender that has priced in anywhere near this level of improvement in today's rate sheets even with reprices, so feel free to float until this improvement gets baked into the cake.  This will likely be tomorrow and we'll have to hope that none of tomorrow's data is damaging to MBS or these improvements could get washed out.

Whatever the case, the benefits of floating into tomorrow certainly outweigh the risks.

Well, mortgage backed securities are fighting inflation.  This is probably due to yesterday's sell off, or perhaps there is support from weak economic data, but even in the face of dismal inflation data, MBS are holding steady on the day.

The economy was weakening by the hour with more companies releasing bad earnings, a weak consumer, and a weak housing market. 

Combine that with the sell-off yesterday and MBSs have a weapon with which to fight inflation today.  Unfortunately, the inflation news is not good for bonds in the long run, but it is encouraging to see them holding their ground despite such a forceful blow. 

Consumer Confidence Numbers were released today and they are at a five year low! 

Fed Vice Chairman Donald Kohn spoke today and had 3 important things to say that will impact mortgage rates:

1. Rate Cuts won't prevent near term economic weakness

2.  Return to growth will "take a while"

3. Most importantly, he does not expect recent inflation rates to persist and inflation will slow in coming years

All in all, this is great news for mortgage rates.  I expect the mortgage bond market to react quite favorably.  Also, officials from the FED commented that the economic slowdown is more of a concern than inflation.  Mortgage rates reacted favorably this afternoon.  More price improvements have come from lenders throughout the day and many lender's opening rate sheets could improve more if everything continues to trend in this direction.

Yesterday I said that rates would resist moving lower unless inflation concerns eased and quality perception of mortgage bonds increased.  Today has introduced the dark horse to our current economic tumult.  In short, I missed the call.

It appears that "crushingly poor economic performance" data still has the power to overcome the current inflation fears and lack of demand for bonds.  We'll get to the other reports in a moment.  The only important report today was the Philadelphia FED survey, which is an index of general business conditions.  Analysts who were polled on estimated results expected the index to be fairly bad at negative 12.0.  The report however demolished expectations with an abysmally horrible reading of negative 24.0.  This is a big deal--one of those things that analysts really didn't see coming.  And though I and others have argued the economy is worse off than the general perception admits, even we were not expecting this big of a slap in the face to economic growth.

The great news is that the bond markets have reacted!  I would not have guessed they would react this favorably even considering the shocking Philly Fed Survey numbers.  We have about a 50bps improvement on a 6.0 coupon and about a 100bps improvement on a 5.5% coupon.  What does this mean?  It's not certain how lenders will "price this in" this morning, but at this moment, it costs lenders 1% less to originate at 5.5% than it did yesterday.  Hopefully a good portion of that will filter into today's rate sheets, but I'm not sure we will see the full amount until the bond price gains hold their ground.

The survey numbers were just released, the bonds skyrocketed, and lenders may be slightly conservative to account for the potential overreaction.  So until you see the above mentioned improvement priced in to the rate sheets, you are probably safe to float for the first few hours of the day.

After that, it's very much anyone's guess.  Now the lines for the next great battle are beginning to be drawn.  On one side we have inflation and on the other side, blatant recession.  The tricky part about this battle is that both sides could win, resulting in stagflation.  In that case, no one wins.  But if inflation is controlled enough and the economic data continues to be bad enough, rates could move lower.  The general buzz on inflation is very negative.  The next time we get a strong indication of inflation from an economic report it will be that much more resistance to rates moving lower.  Today showed us that the markets were more concerned about recession than inflation, but the upcoming days and weeks could bring more surprises.

As such, it doesn't make sense for me, or anyone else to take a strong stance on interest rate direction.  I can take a stand that the economy will continue to slow down and even recede due to a weak consumer.  Inflation hawks can take a stand that inflation will worsen.  The question is: how will Mortgage Backed Securities react? 

Follow information regarding inflation and recession.  The less inflation and the more recession, in general, will be good for rates.  The thesis though is that because inflation is increasing in step with the signs of recession, it's really up to investors to determine the effect on mortgage rates.  Perhaps neither side can win, so a compromise must be reached.  Today was a glimpse of how that compromise might take shape with respect to the relative "weight" given to economic data in the face of inflation data.  Stay tuned!  Rates will be a fickle hellcat to say the least.

Well, it looks like it is happening just as I thought it would.  Last week through yesterday marked one of the worst increases for mortgage rates in recent memory.  There are 2 reasons for this - the quality concerns and inflation concerns.  The inflation concerns are out again and beyond the inherent inflation concern, traders are skeptical of the quality of Mortgage Backed Securities in general.  These reasons combined are devastating to mortgage rates, as we've seen over the past week and a half.

Here is some of the raw data for today:

1. Store sales were unchanged week over week (this is a relatively unimportant report)

2.  Housing starts nearly matched estimates coming in at 1.012 million.  Even though this number was expected, it confirms bad news for the housing sector as this figure is the lowest rate of housing growth in 16 years.  This would normally be good for mortgage rates, but it is mitigated by:

3. CPI (consumer price index).  This is the strongest measure of inflation in terms of economic reports.  Annual inflation increased to 4.3% up from 4.1% in December.  This is very very bad news for mortgage rates as inflation gains make mortgage bonds worth less.

So, in essence, the CPI data confirms the fears that have been causing the massive rate increases.  The non-inflation related market data will continue to be good for mortgage rates, but the normal benefits will not be felt as long as inflation looms.  Many are concerned that aggressive FED rate cuts can be inflationary.  In not so many words, we are in a catch twenty two.  The market data will be telling stocks to go lower, but saying inflation will go higher: the dreaded stagflation; one of the rare times where it's bad for both mortgage rates and for the economy in general.

But let's keep this in perspective.  Although volume and volatility are high, it appears that mortgage bonds have stabilized somewhat this morning.  There is not much of a change, if any, from yesterday afternoon's pricing, and so far, bonds are holding near unchanged today.  So historically, mortgage rates in the low to mid 6's are not going to cripple the mortgage market. 

It's very difficult to predict what will happen.  I personally don't see rates going lower than their current levels any time soon.  There are two variables that need to be satisfied first: quality and inflation.  The smaller of the two, quality, will only be gradually recognized by traders as they determine what the inherent value of a mortgage bond should be in relation to a T-Bill.  If the perception of quality improves, so will the mortgage rates.  More important is inflation.  There are no outstanding signs that inflation will moderate in the short term.  Of course we hope it does, but given the current tenor of the market, I fear it.  Protect yourself by locking now before the next wave of inflation news hits the market. 

Keep in mind though that there is not any inflation related news for the rest of this week.  The point is that if rates to manage to regain some ground, it won't be anywhere close to the amount of ground they will lose the next time the "I" word is mentioned.  So even though you might be risking a small profit today, the safest way to go in the short to mid term is to lock.  As you know by reading this blog, I usually don't take a strong stand on lock vs. float because I like to provide the data, my opinion, and let you draw your own conclusions (because no one can be a master of this market).  But as of now, I'm taking a stand on locking.  As soon as I see data to refute that stance, I will immediately update you.  And I apologize in advance if this admonition leads you towards locking if rates do in fact go down.  Consider the facts for yourself.  I think inflation is too big of a concern for the economy right now to allow much of a decrease in rates.

This is a big misunderstanding with many consumers and homeowners.   The fed cut rates for a total of 1.25% in 30 days last month.  So why are rates not continuing to go down?  Well, the good news is the Prime rate is going down.  When the fed rate drops , prime drops with it.  The fed rate is currently at 3% and that puts prime at 6%.  You will probably see another 0.25% to a more than likely 0.50% decrease in the fed rate during the March meeting.  When this happens you will see prime drop another 0.25% or 0.50% as well.  So HELOC mortgages in the first or second position that are based on Prime are going down at this time.

The mortgage rates on a first are more impacted by financial news, inflation, recession talk, the stock market, and the bond market.  When financial news comes out that is worse than expected it can have a negative impact on the stock market; therefore people may be putting their money in bonds which are more secure and safer.  When this happens the mortgage rates can drop.  So remember, a down day in the stock market fueled by an increase in bonds means lower mortgage rates.  I always have my TV in my office on Bloomberg which has a great a wealth of information to help you determine what is going on in the market.

During these volitale times it is a good idea to lock your loans early and do not get too greedy.  Always visit my daily rate lock advisory page at www.sfslend.com/dailyratelockadvisory.

There is no data set to release today in terms of economic reports.

Wal-Mart released earnings higher than expected which is adding to some mild stock gains this morning.

As such, bonds, including mortgage backed securities are unchanged to slightly worse.

Thursday and Friday were such horrible days for rates that they are resisting moving too much higher today despite continuing fears of inflation.  The environment of the immediate future is very unfriendly to bonds.  Market sentiment has turned abruptly towards fearing the inflation boogie man.  This is not good for mortgage rates.

All the market can hope for is some good news for inflation and the safety of MBS's compared to treasury bonds.  Until that happens, floating will continue to be a very big risk.  Even if the economy gets weaker, which I think it will, traders are not liking bonds priced as high as they were in mid January.  Perhaps a ridiculous stock market downturn could mitigate this warning, but that seems unlikely.   

Oil prices are up more than a dollar to $97.24.  European banks Credit Suisse (CS) and Barclays (BCS) have warned about increased writedowns having a negative impact on their bottom-line, and there are allegations in The Wall Street Journal that Lehman Bros. (LEH) might be facing its rockiest quarter since the mortgage crisis began due to its exposure to commercial real estate loans.  The futures market, however, is signaling a noticeably higher start for the major indices.

The bullish bias isn't being driven by any specific corporate news.  Granted Wal-Mart (WMT) topped fourth quarter estimates by two cents, yet its guidance for the first quarter and fiscal 2009 is on the conservative side at best when pitted against current consensus estimates.

The big news this morning is that Fidel Castro has resigned as president of Cuba.  Anyone attributing the futures rally to this news, though, is probably smoking something other than a Cuban cigar.  The island nation might matter from a political standpoint, but from an economic standpoint, it isn't much of a factor.  The country's estimated GDP for 2007 is slightly more than what Microsoft (MSFT) offered to acquire Yahoo! (YHOO).

Some more relevant factors include a report that Delta (DAL) and Northwest (NWAC) are near a deal to merge, a defense of Dow component AIG (AIG) as a value play in this week's Barron's, and perhaps, simply, some bullish sentiment shining through following the Fed's rate cuts.

The major indices continue to trade modestly below their best levels.  Crude oil has touched $100 per barrel, and is currently fluctuating near that mark.

Embattled bond insurer MBIA (MBI 12.24) announced the resignation of CEO Gary Dunton effective immediately.  Taking Dunton's place will be Joseph Brown, who served as MBIA's CEO until May 2004 and recently retired as executive chairman in May 2007.