March 31, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 175 basis points from 1.00% to its current 2.75%. The US Treasury 30 yr. interest rate is DOWN 84 basis points from 5.59% to its current 4.75%.

Let’s start this evening with a quote from Federal Reserve Governor Ben Bernanke’s speech yesterday at a symposium in Dayton, Ohio: “The person in the street might tell you that the Fed “controls interest rates.” That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities.” Every time you read or hear someone say that the Fed controls interest rates please take a moment to remember this quote because it comes from the mouth of the 2nd most important person at the Fed. (I assume everyone knows who is #1) One other important quote from this speech: “FOMC talk probably has the greatest influence on expectations of short-term rates a year or so into the future, as beyond that point the FOMC has very little, if any, advantage over market participants in forecasting the economy or even its own policy actions.” There it is maybe the most important point ever made by a Fed official admitting that the Fed has no reason to believe that it’s forecast for the economy is any better than anyone else!!! The Fed does have access to more timely economic information but even that does not give them an edge past a year or so……..The next time you read the Fed is fearful of inflation remember that those fears are realized less than 50% of the time…..

This morning the personal expenditure/income stats were released and showed Mr. Greenspan’s favorite inflation indicator still growing at 1.6% well below the feared 2.0% level. The national savings rate also fell again to 0.6% but no one seems to care because as long as real estate values continue to rise homeowners will just refi and take more cash out to continue their spending patterns.

Real estate continues to stay front and center and today’s Orange County Register had a front page story in its business section about Lennar homes building one 35 story, two 24 story and three 23 story residential housing projects in Anaheim. The story also discusses other major construction projects planned for Irvine and Santa Ana. It’s amazing that when prices rise supply is created and somehow we will see that real estate prices do NOT grow to the sky.

The front page of today’s NY Times had an article on states that have become addicted to gambling revenue and that the beneficiary is non other than home owners who have seen their property tax rates decline…..California is one of the few states that have not caught the fever as our Governor is opposed to turning horse tracks into “racinos” (tracks with casinos) but if the economy falters it won’t take long for California to catch up to the crowd at the roulette wheel.

We are just a few hours away from the monthly jobs number with the experts expecting a jump of 220,000. Usually this number is the key for the markets but tomorrow the focus will again be on average hourly earnings as the Fed induced inflation scare has everyone watching for signs that the Fed will start increasing the Fed Funds rate by 50 basis points instead of 25. If that does happen long term rates will plunge to new lows as the smart money quickly realizes that any inflation will soon disappear. BTW the bond market has rallied all week into the jobs number and that is usually the kiss of death for the interest rate market……..

Lastly I have been doing some research to see who has the BIG $5 billion dollar unrealized loss in its bond portfolio as reported by the Fed in its H8 report. I’ll have the answer in tomorrow’s report. A clue: What lender saw their non-performing loans triple in size in 2004???

March 29, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 175 basis points from 1.00% to its current 2.75%. The US Treasury 30 yr. interest rate is DOWN 75 basis points from 5.59% to its current 4.84%.

Is it time to convert a variable rate mortgage to a fixed rate mortgage??? I am asked this question over and over each week and for good reason. The last six weeks have seen long term interest rates rise sharply and convince many that inflation is on its way back and that the Federal Reserve will continue to raise short term rates for the remainder of 2005. I do agree with the latter but NOT the former point. Although we have seen commodity prices (oil, etc,) rise to new record levels this should not create a repeat of the runaway inflation of the early 1980’s. With a record low US savings rate but a record amount of Real Estate equity the wealthy consumer has been able to keep his spending habits at current levels by continuing to pull out equity from real estate investments.

As many of you know I read at least 25 newspapers and periodicals daily and on the weekend at least 25 more….I was stunned by the numerous articles last week detailing the insatiable demand from investors to purchase real estate. Any property in any town at any price will do because of the fear that the price will be higher tomorrow, next month and next year. What I found most interesting were the stories of who was selling these properties and the fact that they were NOT going to reinvest but rather pay the taxes and live to buy another day. It appears to this observer that the small investors are coming in to be slaughtered??? just as the BIG boys are taking their chips off the table. The California Public Retirement Fund which has a stellar performance record has given its investment managers the message that it’s time to get out while the getting is still good. It’s impossible to time real estate like one can time the stock, bond or commodity markets so many of these sellers may be a little early but the only people bullish on real estate prices are those people that have a vested interest in a purchase with a commission, etc.to follow and not the overall performance of the property investment. With so many apartment buildings being purchased for conversion to condos it may be the time to start to look for apartment buildings that make sense from a cash flow basis. (NOT Southern California)

Moving to the Far East, Japan reported that residential housing prices ROSE 0.9% in 2004 the first rise in 17 years!!! Can you imagine if housing prices fell for even one year in Southern California. The results wouldn’t be pretty….Moving to China residential construction of homes has hit 15 million with approx. 166 million households it appears that someone is building houses for investment and not owner occupied purposes. It’s a market waiting to crash and banking regulators are watching closely…..China’s banks have $200 billion of non-performing loans (that’s Billions not millions). On Sunday the China banking regulatory commission issued a 13 point memorandum to banks on how to control lending risks. All of the publicity is centered around China’s incredible potential growth/demand but the real story is that this is an accident waiting to happen…..This is still an immature economy trying to grow quickly with a government that still has an IRON hand in everyone’s pocket book.

Friday we have the US jobs number and although the bond market has recovered somewhat from last week’s FOMC statement I still believe we have another 2-4 weeks of higher long term rates. The number Friday is predicted at 200,000 but I wouldn’t be surprised at something much higher……..Thursday we have Mr. Greenspan’s favorite inflation indicator…the Personal Consumption Index and it should show inflation still under 2%. I still expect to see selling from those that believe that further Fed tightening will translate into higher long term rates which will NOT happen unless the Fed falls asleep for the remainder of the year. Remember Mr. Greenspan has only until January 2006 and then he rides off into the sunset……

I’ll have more on the jobs number before Friday…..

March 23, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 175 basis points from 1.00% to its current 2.75%. The US Treasury 30 yr. interest rate is DOWN 74 basis points from 5.59% to its current 4.85%.

The #1 question in Jay’s mailbag today was: ” When will long term interest rates decline?” and the #2 most asked question was: “Have you changed your interest rate forecast?”

The answer to #1 is that we are getting closer to the end of this bear market in long term bonds but we may need a few more weeks where 30 yr. mortgage rates rise above 6%… The answer is #2 is a definite NO….I continue to believe that we are not at the beginning of an inflationary cycle but have hit a temporary bump on the road that has given us NON-inflationary growth for almost 4 years. I know it is hard to understand that when every newspaper in the world had article after article today about the Fed raising short term interest rates and that this is just the START of something BIG….Most major Wall St. firms changed their forecasts to higher rates and if there is anyone left in the world besides me that believes this won’t last past the end of the year please have him/her e-mail me…it’s lonely when you don’t agree with the crowd but I have doing this for so many years (35) that it really does NOT faze me in the least…….

Crude oil inventories increased again this week by 2 million barrels but the experts are now saying that this recent price increase is permanent and that we will never see oil under $40 again…Buyers of oil are much like buyers of real estate today…..the main reason for buying is because you are afraid the price will be higher tomorrow….Bank loan demand is increasing due to inventory accumulation of raw materials and commodities and that means you pay interest but receive no return while you are waiting for the price to rise….unlike a piece of real estate that does have rental income….

I will close tonight with a few thoughts on the supply of residential housing…Over 140,000 condo units now in conversion from apts. or under construction will be ready for market consumption by the end of 2005, the highest level in 20 years. 60,000 are in Southern California, Florida and Las Vegas. When prices rise supply is created and when these condo buyers realize that prices are not rising at the rate they anticipated they become rental units where the income does NOT cover the mortgage payment while the condo buyer waits for the “guaranteed” appreciation. Their has never been a time when the Fed raised short term interest rates and an economic accident didn’t follow and this year will be no exception. If you buy a house in Las Vegas today and rent your return on investment will be approx. 3.4%… less than a risk free 5 year U.S. government bond. The end is coming sooner than everyone believes as the last person in the door will soon find out the hard way. If the Fed increases short term rates above long term rates as I have predicted all year the Real estate/mortgage business will be the biggest loser and just maybe that is what Mr. Greenspan wants as he rides out of town for the last time. Paul Volker used to say that the job of the Fed is to take away the punch bowl just as the party was getting exciting…….

March 22, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 175 basis points from 1.00% to its current 2.75%. The US Treasury 30 yr. interest rate is DOWN 69 basis points from 5.59% to its current 4.90%.

These are the days that interest rate watchers live for……the Fed announced a much anticipated 25 basis point increase in the Fed Funds rate to 2.75% and the long end of the bond market fell rapidly with long term interest rates reaching new highs for the year. How could something that was so well known before hand have caused such a violent reaction in the interest rate market??? A slight change in the Fed’s statement that included the words “pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has NOT notably fed through to core consumer prices.” That’s it, just a few simple words that were interpreted as “inflationary” and an increasing FEAR that the Fed will begin raising short term rates in 50 basis point increments instead of 25 basis points and that it will not stop until ????? The bond market is running scared and as I have written for months that it is afraid of what occurred in the past not what is happening now….Every piece of economic news is looked at from an inflationary viewpoint and just as the market saw long term rates dropping at a rate that would have put them at 0.00% by June the market is now projecting 6-7-8% long term rates by the summer. When you have been watching interest rates for as long as I have (35 years) it’s not difficult to put these events in perspective so I still believe that Mr. Greenpsan will continue to tighten until short rates rise ABOVE long term rates and that all of the hard work will be finished by the Fed by the time of his retirement in January 2006.

Remember that although all of the so called experts have been predicting a rise in short term rates they have NOT been able to make any $$$ from their predictions because the markets anticipated everything that has happened since June 30, 2004. But when one reads the London Financial Times this morning and sees an article with a headline “US interest rates must rise, and quickly” it is easy to become alarmed if you are a borrower and not a lender.

There are some big black clouds overhanging the financial markets and they stem from the fact that Fannie Mae continues to liquidate mortgage securities and according to an article in today’s Wall Street Journal they sold $9.54 billion in February and $6.36 billion in January. Their portfolio now stands at $875 billion and it is estimated that they need to sell another $60 billion by September 30. This is NOT a small number and someone has to be the buyer so they will demand a premium to purchase these securities and place them in their portfolio. The result of this is going to be a wider spread between US treasury rates and mortgage rates. I know I have many readers who are either in the mortgage/lending business or are borrowers and this is not good news. It means that whenever long term treasury rates fall mortgage rates will NOT follow so 30 yr. fixed rate loans will be more expensive than normal and 2005 will be anything but normal for the mortgage business.

The best read of the day appears again in the Wall Street Journal with an article on rents that have NOT followed increasing house prices. Rents are a function of demand and supply but also people’s incomes and NOT borrowing rates. In Los Angeles it appears that the cost of renting an apartment is approximately 55% of a current house payment. Yes housing interest is deductible and rent is NOT but we are rapidly getting to the point where on an after tax basis it is cheaper to rent than to buy a house…..BUT and here is the main point…many people today are buying because of a fear that if they don’t prices will rise to such a level that they will never be able to afford a house, not because they can afford it today….remember that according to a study by the National Association of Realtors that 25% of all houses purchased last year were for investment purposes and not for the owner to live in…..I have written over and over and over that when the price of anything (oil, houses, etc) rises rapidly that amazingly the efficient market creates supply and I truly believe that this bubble (yes, we are in a RE bubble) will soon pop and though it probably won’t crash…….the chances of rapid appreciation in residential housing are being reduced every day…..it’s way too late in the game to enter and the really smart $$$ is getting out and resting while the late comers find out how hard it is to make a profit when everyone is lining up to enter the arena…..

March 18, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 78 basis points from 5.59% to its current 4.81%.

Although the interest rate market has been quiet for the last two days black storm clouds are gathering…..The Fed’s weekly H8 report was just released and it appears that there is blood (losses) somewhere at one of the large US banks. For the second week in a row the report shows an UNREALIZED loss in marketable (bonds, mortgages) securities that total a $3.8 BILLION (that’s billions not millions). I have watched these stats for over 35 years and very rarely do we see much in the way of losses in fact the only time in 2004 that we saw losses in the Billions was when WAMU took a big hit in their mortgage portfolio….We saw the stats quickly but it was months before WAMU announced that it had sustained huge losses from its mortgage portfolio. I am sure that the Fed is monitoring this situation closely and if it feels that there is danger on the horizon they will step in and advise the bank to liquidate its position before there is more damage to their balance sheet. This might be one the reasons that the short end outperformed the long end this week…If this loss is not contained soon it could have a dramatic effect on US interest rates and monetary policy. It could (20% chance) force the Fed to stop raising interest rates and increase the money supply quickly to calm the markets.I have written for over a year that the Fannie/Freddie problem was going to be bigger than anyone imagined and if the liquidation of their excess mortgage holdings is not done in an orderly manner this could turn out to be the biggest financial disaster since the LTCM debacle in 1998. I am NOT saying this is going to occur but I see my job as similar to a weatherman (with better results) that warns of pending storms and then refines the forecast as things become more clear. I tend to be very early with my forecasts because I see many things that are common to me but foreign to everyone else so please do NOT start to react just yet but I will keep you updated if I see the odds of a disaster increase to the point where action should be taken by all.

Next week is a short (markets closed on Good Friday) but an important one as we have the FOMC meeting on Tuesday and at 11:15am the Fed will announce another 25 basis point increase in the Fed Funds rate. It will be interesting to see if the Fed mentions the recent price rise in oil AND if they feel this will have inflationary or deflationary consequences to the US and world economy. Japan and many of our trading partners import almost all of their oil and this may put a halt to their recoveries. Fed tightening and higher oil prices should put a floor under the dollar and I continue to believe that the big winner in 2005 will be the greenback. On Wednesday morning at 5:30am we will have the CPI release with the consensus expecting an increase of 0.2% (ex energy & food) which will leave the inflation rate around 2.5%.

I continue to expect an increase in volatility this year and markets will be moving faster and wider than they have in years, so hold on tight and be sure and fasten your seat belt.

Have a great weekend!!!!!

March 16, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 83 basis points from 5.59% to its current 4.76%.

This mornings headlines come from all over the world but the biggest news is that oil is now trading at an all time high of $56.09 a barrel. When prices of a commodity rise they are always accompanied by worries over permanent supply shortage. In the 1970’s when we had lines for gasoline and the newspapers were filled with stories about permanent supply disruptions and sky high prices forever……The price of oil continues to rise due to higher demand (China, US, India, etc) and supplies that can’t be produced fast enough…. In this morning’s edition of The Scotsman there is an article about the lack of drilling rigs in the North Sea: http://business.scotsman.com/index.cfm?id=284402005&20050316174246 . Although this appears to be a major problem I can assure you that as the price of oil continues to rise that the supply of drilling rigs will somehow magically appear and it’s all because of the $$$ or profit that will drive the suppliers to find these needed rigs. Commodity shortages are very painful and can last longer than anyone wishes BUT they do end with increased supplies and lower prices due to the fact that higher initial prices are ALWAYS followed by increases in supply. (Do you remember the price of silver in the 70’s reaching $50 an ounce and everyone melting their forks, spoons, knives, etc.???) There is no question that oil is in a major BULL market as this morning it was announced that crude oil supplies ROSE by 2.6 million barrels last week and yet prices just keep on going higher and higher and higher…. The increase in oil prices has both inflationary and deflationary consequences for the US economy as the price increases will flow through to retail inflation indices BUT it will also cut demand on other goods and services purchased by US consumers.

The dollar was again hit hard this morning (3am) when the Ukrainian Economic Minister said that he wanted to see a diversification of the country’s foreign exchange reserves out of dollars and into euros. Ukraine has a total of $11 billion in FX reserves which is a very small amount of the world’s reserves BUT it does show how badly the world’s investors and speculators need the dollar to drop as we have Warren Buffett, Bill Gates and everyone except the foreign central banks who are betting on a lower dollar. This week’s Newsweek has the cover story on the shrinking dollar, The Economist Magazine had it’s cover story in December 2004 and there isn’t a day that goes by without a major newspaper story about why the dollar must continue to fall in 2005. Remember just because everyone says it will happen does NOT mean it will…..over the last 35 years that I have been following world markets I have seen the dollar fall and just when everyone was convinced that it would fall in further it stopped and reversed direction. I repeat that if I am correct in my prediction that the Fed will increase short term interest rates to a level ABOVE long term rates that the dollar will be the BIG winner in 2005.

In China the central bank announced today that home buyers will now have to put down 30% on house purchases up from 20% as the Chinese real estate market has seen gains that make California look small. They have no refi market so almost all of the lending on residences is for purchases only. Can you imagine if this happened in the US??? the prices of houses would fall quickly……

I have written that US corporate takeovers has put billions of dollars in investors pockets to spend or reinvest in other securities. In Australia Goldman Sachs has calculated that $36 billion (Aussie dollars) is about to come back to investors due to increased dividends, share buybacks and mergers. The total Australian GDP is only $228 billion so the impact of this $$$ could be HUGE!!!! http://www.smh.com.au/articles/2005/03/15/1110649198898.html

Finally from Arizona is a story in today’s Arizona Republic titled: “Historical homes in demand” where the real estate boom has continues where stories of double digit appreciation are many in certain zip codes. Many California buyers have moved East to Arizona and will soon move to New Mexico in search of more golden nuggets…..http://www.azcentral.com/business/articles/0316historichomes16.html

March 14, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 82 basis points from 5.59% to its current 4.77%.

FEAR (False expectations about reality) has taken a tight grip around the US bond market with long term treasury rates rising almost 50 basis points in just the last 4 weeks. Has anything really changed??? Wages are still growing at a 2.2% clip and that is NOT inflationary…..Commodity prices (oil, copper, etc.) haven risen strongly BUT much of this is demand from industrial users fearful that if they don’t stockpile inventory they will have to pay much higher prices in the near future. This is why we have seen an increase in Commercial and Industrial loans in 2005 (along with M&A activity) Speaking of loans the HELOC category is stalled at the 406-407 Billion level and although it is too soon to call a top in the real estate lending sector we are getting very close….What I did find interesting in the Fed’s H8 report on Friday was that someone has a $2.8 BILLION dollar unrealized loss in the bond portfolio and ALL in the last week (ouch!!) the last time we saw that it turned out to be WAMU’s undoing….we will have to see who is the unlucky bank …..

Tomorrow morning we have retail sales at 5:30am but the interest rate market is much more focused on the dollar (dropped last week, rallied on Monday) and future inflation. Mr. Greenspan speaks Tuesday at 7am to the Senate Committee on Aging and on Friday at 9am at the National Community Reinvestment Coalition annual conference.

If you believe (as 99.999% of investors and economists) that long term interest rates are going much higher than you also must believe that the FED is BEHIND the curve in its tightening process and that short rates will go much, much higher AND you are betting on an outcome that has been anticipated by the majority. I’m not saying it won’t happen but if it does the rewards will be small because investing is a ZERO SUM game and if the game ends with everyone winning then I must ask how much can they win from the few losers remaining????

This week’s Newsweek has a cover story entitled “The Incredible Shrinking Dollar” and it’s the same story over and over….current account deficit, trade deficit, and low US savings rate….I may be crazy but if I am right and the Fed increases short term rates ABOVE long term rates the dollar will be the BIG winner and it will again leave the majority with yet another losing investment. BTW did you know that the savings rate in Canada for the 4th quarter of 2004 was 0.4% and yet no one seems to be worried and the Canadian dollar continues to soar against the greenback.

The US trade deficit widened in January to $58.3 billion but again it was from a rise in imports for consumer goods as the US consumer continues to spend, spend, spend…..Where is the $$$ coming from??? Higher than normal tax refunds, cash out refi’s on homes, cash from mergers and acquisitions, a rising stock market…..

Last week Mr. Greenspan was asked about a possible house bubble, his answer: “indices of house prices based on repeat sales of existing homes have significantly outstripped increases in rents.” English version…..it was reported that 25% of house purchases in 2004 were NOT for owner-users…..if that is true and I have my doubts, Mr. Greenspan is warning those buyers that the rental income they will collect will NOT be enough for their mortgage payments and these houses will NOT keep appreciating in value enabling borrowers to refi and take cash out to make their monthly payments.

March 9, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 73 basis points from 5.59% to its current 4.86%.

An earthquake shook the bond market this morning and it occurred just after 4am. I have been writing for over a year about Fannie Mae and Freddie Mac and that we haven’t even begun to see the devastation to the mortgage market due to their regulatory problems. Early this morning during a very quiet European session a very large amount (hundreds of millions) of US bonds were sold as a hedge against mortgages that had just been sold to major bond dealers. Fannie and Freddie still have hundreds of BILLIONS of mortgages in their portfolios that will be sold during 2005 and it will not only drive long term rates higher but more importantly the spread between mortgage rates and Treasury rates will widen as buyers demand a bigger premium for the indigestion they will have from owning these securities. Will this have a permanent effect on long term interest rates??? No, long rates are still a function of inflationary expectations but it will greatly disturb the long end of the market for many more months. It will be extremely important for mortgage professionals to time their locks by selling into strength (rates down) NOT chasing the market lower (rates up) as we are seeing this week. The fundamentals have NOT changed, inflation remains low (despite higher commodity prices), loan demand remains strong due to heavy M&A activity and inventory stocking of raw materials and the Fed is determined to raise short term rates ABOVE long term rates. Each year long rates rise quickly and sharply for about a two month period giving everyone a scare and we are in that period for 2005 that is similar to 2004 (March & April) and 2003 (June & July) so this year it will be February & March. Tomorrow’s 10 yr. note auctions should give the dealers a chance to cover shorts and give the bond market a breather for a few days before continuing on the March “blood” run to higher rates (30 yr. mortgage rates above 6%). But just when everyone is ready to declare that rates have bottomed “forever” the economic fundamentals that really haven’t changed will again appear and calm the nerves of many mortgage holders. It can be a bumpy ride when one loses sight of the shoreline and everything becomes larger than life……..

March 7, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 96 basis points from 5.59% to its current 4.63%.

the rubber band (market) can stretch and stretch and stretch but it never breaks and Friday’s jobs numbers provided an excellent example of how expectations are more important than actual statistics. The increase of 262,000 jobs was greater than the consensus of economists and traders and high enough to normally cause long term interest rates to climb BUT the bond market had dropped for two weeks on anticipation of these numbers and by the time Friday’s number was released everyone had raised the level of FEAR to such a high level that there was a sigh of relief when the number was reported to be ONLY 262,000. The markets are often very strange in that what was thought to be bad news turns around and becomes good news……..

Can home prices ever decline??? An article in today’s SF Chronicle talks about the Las Vegas market where house prices have declined in the last year. http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/03/07/MNGOTBLIIR1.DTL It actually quotes someone who bought two houses in early 2004 and sold them in December and LOST $100M….You never know maybe it could happen in California….But in Seattle they just keep trucking along with prices going higher and higher according to the Seattle Times: http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=homesale05&date=20050305&query=house+sales

Warren Buffett is in the news again and he’s making $$$ again but apologizing to everyone for his new method of investing. His company Berkshire Hathaway held a $21.4 BILLION short position in the US dollar and made a profit of $1.84 billion in the 4th quarter of 2004. In today’s edition of the London Independent he apologizes to everyone for betting against the US dollar (but he is still keeping the profits) http://news.independent.co.uk/business/news/story.jsp?story=617584

Did you know that when the household holdings of mutual funds and equities hit 140% of GDP in 2000 the tech bubble burst and the stock market fell sharply??? Today household real estate assets are 140% of GDP….is the real estate bubble about to burst???

All of the talk is about the Fed increasing short term interest rates and by how much but it has been almost two years since they stopped lowering the Fed Funds rate and the record is 34 months (1992-1995) which would put us in January 2006 the last month of Fed Chairman Greenspan’s reign as Emperor of the Money Universe. What a nice gift for the incoming chairman….the first decrease in short term rates in almost 3 years…..

Did you know that the Chine spent $133 BILLION last year buying dollars from world wide traders and speculators who were selling dollars and buying the yuan (Chinese currency)….Do you think the Chinese have a vested interest in seeing the dollar rise in value???

Although Friday’s jobs number showed impressive strength for the US economy it should be noted that the work week was unchanged and earnings were up just slightly so inflation is still more a fear than a reality. One of the items inside the jobs report that I watch closely is the diffusion index which shows what industries are growing and only 57% of industries had job growth in February which means that 43% showed job losses…..

This week’s economic news is on the light side but Mr. Greenspan will speak on Thursday at 3:15pm and Friday at 7am. The Fed’s beige book (economic conditions by region) is released on Wednesday at 11am but there isn’t much else and I doubt that Mr. Greenspan or the other Fed speakers will have much of an impact on interest rates. What may affect rates really is not being talked about….Fannie Mae and Freddie Mac are selling hundreds of millions of mortgages into the marketplace and that will continue to widen spreads from Treasuries. But why would anyone in the mortgage business pay attention to this detail when it does NOT affect their rebates….the only loser will be the clients who are paying higher 30 yr. rates but don’t even know why……….

March 1, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 150 basis points from 1.00% to its current 2.50%. The US Treasury 30 yr. interest rate is DOWN 88 basis points from 5.59% to its current 4.71%.

The US bond market was very quiet today ahead of Greenspan’s House testimony on Wednesday at 7am. So let’s begin the evening again in Australia where Wednesday’s newspapers have declared that Australia has turned into a banana republic due to its record current account deficit. (strong economy and consumer demand). The RBA (Reserve Bank of Australia) raised its overnight funds rate by 25 basis points to 5.50% and thereby giving world investors more reason to put money into Australia and increasing demand for Aussie dollars. The rich get richer and the poor just keep wondering what happened???

Speaking of poor, how can the Euro not fall with Germany reporting it’s jobless rate now at a 7yr. high of 11.7%….

The headline of the day and maybe the year goes to the New York Times with a front page story titled: ” Speculators seeing GOLD in a boom in the priced for homes”. This is MUST reading if for no other reason than to post on your bulletin board for future reference. If we aren’t at the top of the market we are very close as the article talks about a study that found that the percentage of homes bought for investment in 2004 might be as high as 25% of the 7.7 million homes sold last year…Houses under construction but NOT sold yet are at an all time high of 260,000….we are getting closer and closer to an accident and with Fannie and Freddie reducing their mortgage portfolio the spread between mortgage rates and US treasury rates will widen soon…..

Did you know that S&P 500 companies have $601 billion in cash???? I look for many more mergers, dividends, stock buybacks in the next few months….but remember this does NOT create new jobs…it just makes asset prices rise and that means the rich get richer and the poor wonder what happened………