Archive for June, 2008

Market Update June 30, 2008

David Kosmecki | June 30, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating

, but watching resistance

Current Price of FNMA 6% Bond: $101.00, +9bp

Big news about Inflation in the Eurozone shows the rate surging to 4%. This year over year rate, reported for June, was the fastest in 16 years, and more than double the ECB’s target of between 1 and 2%. Let’s remember, and as we have discussed, our Fed has a dual mandate – keep inflation low and promote growth. But the European Central Bank or ECB has a single mandate – keep inflation between 1% and 2%.

This news has started talk that ECB President Jean-Claude Trichet will raise rates (Europe’s equivalent to our Fed Funds Rate) by .25% this coming Thursday, making Europe’s benchmark rate 4.25%. That’s far higher than the 2% rate here in the US. So investors seeking higher yields will likely buy even more Euro Dollars instead of US Dollars as they convert their investments. This will make the Euro even stronger against the Dollar. And once again, oil is based on Dollars for price, so weakness in the Dollar means oil prices have to move higher in order to compensate – almost like our bond yield and bond prices do. The ECB President is in quite a pickle. Inflation is running hot throughout Europe, but at the same time there are several European countries seeing very weak growth, including Ireland and Spain. A rate hike as early as this Thursday would apply even more pressure on economic growth throughout the region.

A hike in Europe Thursday may just wake the Fed up and push them to hike in August. That would be good for mortgage bonds.

On the news, Oil is popping over a $142 a barrel, as Traders handicap the Dollar / Euro relationship. The Chicago Purchasing Managers Index was reported at 49.6, which was better than expectations of 48.5.

Technically, Mortgage Bonds are now trading just above the 25-day Moving Average, but are facing another ceiling of resistance.

Looking Back And Looking Ahead : June 30, 2008

David Kosmecki | in Uncategorized | Comments (0)

Mortgage rates improved last week, marking the first time since mid-May that has happened.

The rate drop is the result of how mortgage markets interpreted the Federal Reserve’s Wednesday press release.

In it, the Fed said:

  1. Inflation pressures should lessen soon
  2. Growth should remain steady this year
  3. The credit market is currently fragile

Separately, none of this was news to the markets. But considering all three statements together, investors grew nervous of leaving money in the stock market — specifically in financials.

Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.

As stocks sold off, though, mortgage shoppers were benefiting.

Rates ticked down in the Fed announcement’s wake because the mortgage bond market acted as a “safe haven” for traders. More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.

This week, the momentum may continue, or it may not. There is a lot to capture traders’ attention in this holiday-shortened, four-day work week.

The biggest data release of the week will undoubtedly be Thursday’s Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.

As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer. And, if stocks haven’t regained favor with investors by then, expect that mortgage rates will have a good week.

What To Do If Your HELOC Is Reduced By The Bank

David Kosmecki | June 27, 2008 in Uncategorized | Comments (0)

HELOCs are shrinking with real estate pricesA Home Equity Line of Credit is bank product that grants homeowners access to the equity in their home at anytime, usually using checks.

Often called a HELOC, these equity-based credit lines function very much like credit cards:

  • The rate is adjustable, tied to Prime Rate
  • There is a minimum monthly payment
  • There is a pre-set spending/credit limit

But different from credit cards is that a HELOC is “guaranteed” by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.

With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines. Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example.

And the banks aren’t being discriminate based on payment history or local real estate conditions, either — it’s happening everywhere with equal force.

The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.

One way to appeal a HELOC reduction is:

  1. Call your lender’s Customer Service line. Do not send an email.
  2. Politely ask why the HELOC limit was reduced. Listen carefully to explanation.
  3. Explain why you would like your HELOC reinstated. Acceptable reasons may include home improvement projects or improper home valuation by the lender.
  4. Be prepared to write a formal letter, if asked. Address the issues explained in #2.

Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood. However, because lenders rely on computer models to assess risk, it’s always a good idea to ask.

Sometimes the Human Element of an appeal can work in your favor.

Market Update – June 26, 2008

David Kosmecki | June 26, 2008 in Uncategorized | Comments (0)

Risks Favor: Floating, but be ready to lock

Current Price of FNMA 6% Bond: $100.38, +9bp

Mortgage Bonds are trading slightly higher, but the ceiling of resistance at the $100.47 level has prevented prices from improving further so far. Stocks are under heavy selling pressure this morning after Goldman Sachs downgraded the entire US broker industry from attractive to neutral citing continued deterioration of the banking industry and the prospect of a lengthy recovery.

Yesterday, as expected, the Federal Reserve left rates unchanged at 2% after seven consecutive cuts that started in September and ended at the April 30th FOMC meeting. The forward looking statement read “in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.” This phrase along with some others highlighted the Fed’s tough talk on inflation, but their lack of action initially pressured the Bond Market lower, before prices rebounded to finish the day just slightly lower. We feel strongly that the Fed has to step in and hike rates in order to strengthen the US Dollar and combat high Oil prices. In response to yesterday’s Fed pause, Oil is trading over $3.00 higher this morning and near the $138 level. With Oil prices this high and inflation threats looming, it is very tough to see Mortgage Bonds moving much higher from here.

The final Gross Domestic Product (GDP) was released today showing a 1.0% increase for the first quarter and was inline line with estimates. Initial Jobless Claims were 384,000, slightly higher than expectations of 375,000. The four-week average of those claims rose to 378,250, the highest since October 2005. Both figures are above levels signal continued weakness in the labor market.

Existing Home Sales for May were reported at 4.9 Million units, which was inline with expectations. The inventory of unsold existing homes dropped slightly to a 10.9 month supply. The report tells us the housing market is weak but stable.

Mortgage Bonds are now pressing up against Resistance at $100.46 with the next level of $100.79 seen at the 25-day Moving Average. We can cautiously float for now – but be ready to lock as there are some strong headwinds to contend with. First – Stocks are heavily oversold and with everyone having such a negative outlook on Stocks in general, contrarian thinking may mean a bottom in Stocks is near. A reversal higher in Stocks would likely hurt Bonds. Additionally, the Bond market will have to absorb a $20 Billion Five-Yr Note auction at 1pm ET and the added supply could weigh on the market overall. Finally, as mentioned, higher oil prices and overhead resistance could put a lid on any further price advance.

Making English Out Of Fed-Speak (June 2008 Edition)

David Kosmecki | June 25, 2008 in Uncategorized | Comments (0)

The Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent this afternoon, as expected.

In its press release, the Federal Reserve noted the co-existence of inflation and recession.

On inflation, the Fed said that energy and food prices are contributing to an “elevated state” of inflation, but that it expects price pressures to ease “later this year and next year”.

On the topic of recession, the Fed seemed a bit more concerned.

Overall, markets reacted favorably to the press release; both stocks and mortgage rates showed signs of improvement in the statement’s wake.

Parsing the Fed Statement
The Wall Street Journal Online
June 25, 2008

Market Update – June 25, 2008

David Kosmecki | in Uncategorized | Comments (0)

Risks Favor: Cautiously Floating

Current Price of FNMA 6% Bond: $100.00, -31bp

Fed Day is here once again, and there’s lots of anticipation about the Fed’s Policy Statement, due to arrive at 2:15pm ET this afternoon. There will not be a change in rates, but the Fed will likely be more “hawkish” in their comments and concerns about inflation. This should help mollify some members of the Fed like, “Three Swing” Charlie Plosser and Richard “Loose Lips” Fisher, who have both been very concerned about inflation.

We actually agree with a more hawkish view – and although the Fed will not hike, we hope they decide to do so sooner than later. There is a possibility of a hike in August but it is not likely. The Fed is in a tough spot – the economy stinks, housing is struggling, confidence is low and costs are rising. You need only look at your last receipt from the grocery store or gas station to see how quickly things have changed. And a walk through your local shopping Mall tells another story of individuals who are less able to spend. That is the Fed’s problem…the smart move is clearly to hike. Inflation is rapidly eating away the value of money. And while food price increases hurt, oil is the real story. So why has oil risen so wildly? The answer…The Fed. The evidence is too clear to ignore.

Let’s take a look at where we were before the first Fed cut on September 18th. The Fed Funds Rate was at 5.25%, Oil was at $73 per barrel and the Euro was $1.35. Not great, but not bad. Fearing a recession, the Fed did the right thing to stimulate the economy – they cut. But cutting rates in the US makes higher rates in Europe appear much more attractive. So the Dollar began to tank against the Euro and just got worse as the Fed continued to cut. Now it takes $1.56 to equal one Euro. That is a huge swing. And here is where it gets interesting…Oil is priced in Dollars, so as Dollars decline, Oil price per barrel must rise. Oil has gone from $73 a barrel before the Fed cuts to yesterday’s close of $137 a barrel.

And the European Central Bank President, Jean – Claude Trichet, has been talking about a rate hike in Europe, even though they are headed for a recession. Remember there is a big difference between the US Fed and the ECB – the US has a dual mandate, fight inflation and promote growth. The ECB just fights inflation. And just the talk of a hike from the ECB has sent oil even higher.

Again, oil prices are surging mainly because of the Dollar weakness and the Fed cuts. Think about it – has demand for oil suddenly skyrocketed in the past 8 or 9 months? Sure it has gone up, but oil had already doubled in price when it was at $70. And higher prices for oil hurts everything. Sure at the pump and for heating, which allows less to spend, but travel, manufacturing, shipping…the list goes on and on.

Back to this morning’s news – New Home sales for May were reported at 512,000, inline with expectations. The inventory of New Homes rose to a 10.9 monthly supply. This report suggests the new home sale market is still struggling.

Bonds continue to trade in a wide 100bp range between support at $99.47 and resistance at $100.46…but technical indicators generally take a back seat to important news like the Fed announcement. For now, we will Cautiously Float in advance of words from the Fed later today. The more “hawkish” the Fed statement, the better it will be for Bonds. But if the Fed does not at least talk tough, Bonds will be pressured and Oil will move higher.

How The Fed’s Words Should Trump The Fed’s Actions Today

David Kosmecki | in Uncategorized | Comments (0)

The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today. It’s widely expected that the group will leave the Fed Funds Rate unchanged at 2.000 percent.

However, it’s not what the Fed does today that has markets so interested. It’s what the Fed will say.

One of the Federal Reserve’s roles is to promote stability in the U.S. economy by protecting it from two major threats:

  1. Inflation
  2. Recession

The Federal Reserve’s primary weapon against both of these hazards, though, is the same — the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.

But in today’s economy, there is evidence of both inflation and recession meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.

Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.

If the Fed admits added vigilance against inflation, it’s expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it’s expected that mortgage rates will increase.

Either way, today’s press release should be a market-mover.

If you’re currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.

It may be prudent to complete your rate shopping before 2:00 P.M. ET.

Market Update – June 24, 2008

David Kosmecki | June 24, 2008 in Uncategorized | Comments (0)

Risks Favor: Cautiously Floating

Current Price of FNMA 6% Bond: $100.25, +25bp

Mortgage Bonds are trading in positive territory so far this morning, as the Stock market is moving lower causing money to flow over into Bonds.

Pressuring Stocks lower was news from delivery giant UPS, which issued a profit warning. The reason this is of great concern to the Stock market and overall economy is because much of commerce is done through shipping giants like UPS, so less shipping means less sales and less sales means continued weakness in the economy. Of course, Bonds liked this news.

Additionally, Dow Chemical is saying they will have to raise product prices by as much as 25% as CEO Andrew “The Liverman” Liveris cited a “continuing relentless rise in the cost of energy and hydrocarbon feedstocks.” Oil prices are pushing record levels once again at $139/barrel, which will be bad news for both Stocks and Bonds, and could cap any major advances for Bonds today.

Consumer Confidence for June was reported at 50.4, well below expectations of 56.0. Not much of a surprise.

Today begins a two-day Fed meeting, with the arrival of the Fed’s Rate Decision and Policy Statement at 2:15 tomorrow. We believe the Fed will move to a paused position, and hold the Fed Funds Rate at 2%. What will be most interesting is the carefully crafted wording of the Policy Statement, and if it should indicate signs of a hike during August. A hike during August would mean the quickest turn from cutting to hiking since March of 1988.

Technically, Bonds are in trading in the middle of a wide range, with a tough overhead ceiling at $100.46 and a floor of support at $99.47. For now, we can Cautiously Float as we watch Bonds improve this morning.

Simple Real Estate Definitions: PITI

David Kosmecki | in Uncategorized | Comments (0)

PITI stands for Principal, Interest, Taxes, and InsuranceMost homeowners make four housing-related payments each month:

  1. Principal on a mortgage
  2. Interest on a mortgage
  3. Taxes on the real estate owned
  4. Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI but don’t let it fool you — a homeowner’s monthly expenses are still called PITI even if one or more of the elements doesn’t apply.

For example, a homeowner with an interest only mortgage does not pay principal each month.

Additionally, condo owners typically don’t pay homeowners insurance — they pay a monthly assessment and/or maintenance fees to an association instead.

But regardless for what it stands, determining a comfortable PITI should be every homeowner’s starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it’s a lot easier to compare homes and their related expenses.

It’s certainly better than asking the bank “how much home can I afford” — all that’s going to tell you is the P and the I. As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

(Image courtesy:

Market Update – June 23, 2008

David Kosmecki | June 23, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating

Current Price of FNMA 6% Bond: $100.22, unch

With no economic reports set for release today Stocks and Bonds will battle over investment dollars. Stocks begin trading today at their lowest level since March. This comes after some sharp declines of late. But, these lower levels are attracting some investment dollars which are helping Stocks point to a modestly higher open.

This week’s number one subject will be the FOMC interest rate decision at 2:15pm ET on Wednesday where it is widely expected that the Fed will hold the benchmark Fed Funds Rate at 2%, pausing after seven rate cuts that started in September. The post-FOMC meeting statement may highlight policymakers’ continued worries about inflation and rising consumer prices. The 2-day meeting will begin tomorrow.

Word from Wall Street is saying that Citigroup, Inc. and Goldman Sachs may cut 10% of their investment bank divisions. This suggests the turmoil in the financial sector hasn’t yet lifted.

We don’t expect Bond Traders to place any big bets over the next two days ahead of the key FOMC Meeting on Wednesday, so for now, we can cautiously float. But as always sentiment can quickly change so stay tuned.