September 26, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 275 basis points from 1.00% to its current 3.75%. The US Treasury 30 yr. interest rate is DOWN 103 basis points from 5.59% to its current 4.56%.

Could Fed Chairman Greenspan be worried about not finding work after January 31, 2006??? I have been watching Fed moves for over 35 years and have learned to never be surprised by anything that comes from Washington but today while watching the Fed Chairman give a speech to the American Bankers Association Convention in Palm Desert I almost fell out of my chair when he announced that the Fed had recently completed a study on home mortgages and that HE was the lead researcher on the 83 page document. Mr. Greenpsan has hundreds if not thousands of researchers standing by waiting for the word and they will surely spend days, weeks, months and even years tracking down whatever data Mr. Greenspan wishes and probably working for close to nothing just to obtain the experience and being able to tell the world that they worked on a paper for the Fed Chairman. I’m sure Fed staffer Jim Kennedy is floating tonight as he was the lucky person who assisted the Fed Chairman on this project. Don’t try to read this in one sitting as there are thousands and thousands of statistics: http://www.federalreserve.gov/pubs/feds/2005/200541/200541abs.html For those that just want a summary….Mr. Greeenspan found that since 1995 much of the increase in consumer expenditures and decline in the personal savings rate has been financed by home equity extraction. If only the Fed Chairman had called I could have told him the same thing and saved him 82 of the 83 pages of his report. Oh well, that’s why he is the most important person in the world and I sit at my desk every night until midnight pounding out these e-mails…….

Hurricane Rita has left the US and although not as strong as Katrina refineries across the Southern US are at least a few weeks away from operating anywhere near capacity. Oil is trading tonight at close to $66 and it really doesn’t matter whether you believe that demand or supply is more important…oil is going lower and sooner than later. From lower demand because of higher prices we see cutbacks everywhere and the best place to start is Kentucky where the Jackson County school district is giving students every Friday off beginning October 21st: http://www.kentucky.com/mld/kentucky/news/12719269.htm We are seeing school field trips cut in Georgia and by December we will have the majority of states finding ways to cut back on gasoline demand in an effort to balance the books of municipalities. (Most states cannot run a budget deficit like the federal government. On the supply side the US government will continue to draw down the Strategic Petroleum Reserve and tankers full of oil are headed for the US. and Europe’s largest oil refiner Total SA announced today it will spend $10 Billion to extract oil from Canada. When demand slows and supply increases the only piece of the puzzle remaining is lower prices……

Last week the Federal Reserve published its quarterly flow of funds report (124 pages of fun reading) and the most important stat in the study was that household assets grew in 2nd quarter by $946.9 Billion and real estate gains were 62% of this total. ($585 Billion). Just curious…what happens to the US economy when… not if… the real estate sector is flat (no growth) for three months??? With a negative savings rate where will the consumer find $$$ to spend????? many believe that we could never have a quarter where real estate prices don’t rise….but just in case you might want to think about the consequences…I KNOW the Fed is thinking about this every minute of every day….the well is dry….the consumer has nothing for a rainy day….the government is running a massive deficit each year and the only entity with savings is the US corporation (foreign governments also) and they don’t want to spend any of their $$$$…….

Are the mortgage companies cutting back on those “easy money” loans??? The LA Times reported over the weekend that New Century Financial was raising the rates it was charging borrowers AND reducing the number of riskier interest only loans it approves….But for the real estate bulls there appears to be plenty of enthusiasm for real estate in Louisiana as an article in Sunday’s San Francisco Chronicle finds too much money chasing too little product as many homes have doubled in price in just a few weeks. The best quote comes from a Chicago based real estate agent who posted an ad on Craigs List in New Orleans seeking to buy flooded land in New Orleans. The agent admits he has little knowledge of the city aside from traveling there “for partying and stuff”. This article is bulletin board material for 10 years from now when we all laugh about the bubble that blew up at the wrong time….http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2005/09/23/carollloyd.DTL&type=printable

The UK government has the right idea…on Friday they issued 1.25 Billion (pounds) of 50 year inflation linked bonds at an interest rate of 1.112%. Japan is trying and trying to get rid of DEFLATION……inflation actually went negative early in 1998 and almost 8 years later is still BELOW the 0.0% line….The US is fighting inflation but Japan would love to import our greatest fear….be careful for what you wish…it is NEVER what it appears…..

The New York Times ran an article on Sunday titled “Is It Better to Buy or Rent??” and it states that in New York a homeowner needs 25% appreciation and California 40% over the next 10 years to just break even with rent over the same period……That’s like starting a 100 yard race 25 yards behind…possible…of course…probable….doubtful…..but when so many people keep telling me…..”It’s all I know…I’ve made all of my $$$ in real estate and I don’t know anything else”…..The world rarely ever makes anything easy and my feeling is that thousands of mortgage brokers, real estate agents, speculators, etc, will be looking for a new line of work within the next couple of years and NOT because it is their first choice…it is called survival..and it’s coming to a town near you…..on the other hand maybe the world has changed and everything really does grow to the sky….http://www.nytimes.com/2005/09/25/realestate/25cov.html

September 14, 2005

Since June 30, 2004 the Fed Funds Rate (short term) is UP 250 basis points from 1.00% to its current 3.50%. The US Treasury 30 yr. interest rate is DOWN 114 basis points from 5.59% to its current 4.45%.

We are six days away from the next Fed (FOMC) meeting and while everyone is wondering whether the Fed will pause in their march to higher short term rates (Fed Funds now at 3.50%) I’m not sure it really matters what Mr. Greenspan decides for next week. After studying every Fed move for over 35 years I am reasonably convinced that Mr. Greenspan will NOT actually make up his mind until next Monday evening after he has read every piece of information from his sources over the weekend. (If there is one person who reads more than me it’s the Fed Chairman) There are still three more Fed meetings before he retires (11-01,12-13,01-31) so the Fed has ample time to raise the Fed Funds rate at least another 75 basis points to at least 4.50% which would put the Fed Funds rate ABOVE the 10 yr. US treasury rate (4.15%) giving us the inverted yield curve I have been looking for all year. In the last week the Fed announced that the regularly scheduled January 31-February 1st meeting would be held only on January 31st so that Mr. Greenspan could vote on the next Fed move because that is the EXACT day he retires. If the meeting had finished on February 1st he would not be able to influence the decision by the FOMC. It is becoming more and more apparent that the current administration is in no rush to replace the current Fed Chairman and in fact if they somehow forgot (how could they forget??) to choose a new Fed Chairman (Ben Bernanke??) Mr. Greenspan would be asked to stay on for ???? until a new Fed head was nominated and confirmed by the Senate.

The long term (10 yr.) interest rate has been bouncing around since Hurricane Katrina in a tight 14 basis point range (4.03-4.17) as there is much confusion concerning the inflationary impact of the massive recovery operation. The markets again are in “fear of inflation” mode as $100 Billion of government funds (bigger deficit??) has bond holders worried that this will drive up prices (except gasoline??) and thus interest rates will follow inflation skyward…..The latest inflation theory comes from the South where it appears that all of the available apartments in Baton Rouge, Louisiana have been rented and commercial and residential real estate markets are booming, cell phone systems are overloaded, streets are filled with traffic and there are long lines at every gasoline station. I read that home prices are up 20% or more and that 2,000 homes have sold in the last 10 days. (Did Baton Rouge have an unsold inventory of 2,000 homes before the hurricane??) The final point for the inflation bulls is that the CPI (Consumer Price Index) uses an owners equivalent rent in the monthly inflation number and this is 23% of overall CPI and 30% of core CPI(less energy and food) Because rent’s in the South are rising (for now) does NOT equal rising rents anywhere else in the US and the bond market will be smart enough to see through these temporary CPI figures over the next couple of months. When not if New Orleans, etc. is rebuilt with new homes and apartment buildings it will be very difficult for these other Southern cities to hold onto their high rents and house prices. For the present and the future inflation is NOT a problem as both wholesale and retail inflation (ex energy and food) shows a growth rate of under 2%. For those that are worried about the inflationary consequences of an increasing budget deficit due to Katrina I remind that the past five years we have gone from a budget surplus to a $500 Billion deficit and the 10 yr. note has dropped from 6% to 4%.

The price of oil seems to have hit more than a temporary peak and is now trading just under $65. (see my August comments about a decline after Labor Day) With the attorney general from Maryland asking other states to join him in an official inquiry into the high price of oil I anticipate oil companies, federal government, foreign countries, etc. to keep the supply of oil overflowing to US refineries (many in the South will soon be operating again). This afternoon I heard the Chairman of Chevron on CNBC stating that his company was making less $$$ than other oil companies and that they were trying to supply more oil and make less profits….When he was asked why there hasn’t been one refinery built in the US in over 25 years instead of bobbing and weaving he should have told the truth….how can they pour $$$ into exploration and new refineries when their is so much pressure on them NOT to make profits….It’s a terrible circle and the public needs to be educated on the long term process of oil exploration and the risks involved (along with the fact that much of the oil producers today are in countries that are not friendly to the US). The good news from the South comes from the Port of New Orleans that began unloading its first cargo ship since the hurricane. Other points on oil: The southern part of China continues to experience gasoline shortages due to price controls at the pump. The local oil companies have stopped selling imported oil because they were losing money on every gallon. OPEC announced yesterday that they have drilled 7.5% more wells in the last year and the number of oil rigs rose by 18.8%…more oil is coming soon and prices will continue to decline at least 20%….The best story of the weekend comes from Canada where a postal employee ditched her SUV and is now delivering mail on horseback…..I remind her the winter is coming and not to throw away the key to the SUV….The big winner from the increase in oil prices has been Alberta where the government budget showed a surplus last year that was big enough to pay off ALL debt and is now Canada’s only borrowing free province. (Can you imagine the US having no debt??? what would people like me who study interest rates do??? probably study the price of corn which I continue to believe is too low and will start a sizeable rally soon….)

Late this afternoon both Northwest Airlines and Delta Air Lines filed for bankruptcy so now 50% of US airline seats are flying under the BK flag. The only answer is a new airline backed by the federal government and called “United States Government Airlines”….unless the price of oil falls and quickly this may be the only solution….how about a train, boat, bus, submarine????? they are all powered by fuel…….this is not inflationary…it just means that consumers are paying for gasoline with $$$ that they would be using for other items and now have to pass…unless they can tap their private ATM (house) and refinance again and again and again…..I saw a friend this morning who reads these e-mails regularly…he said: “You have so right about interest rates this year BUT soooo wrong about real estate prices” and yes he is correct but the game hasn’t reach the 9th inning yet and I have a strong feeling that when we get there not even the great relief pitcher of all time…Mr. Alan Greenspan (soon to be retired) will be able to save the game for the real estate team.

Last thought: If things are going so well for the US economy and the big fear of inflation is coming from analysts who see strong consumer demand and higher real estates prices then why are consumer surveys showing the lowest confidence numbers in a few years???? The Michigan survey will be released on Friday morning at 6:55am and should confirm my suspicions that everything isn’t as rosy as it appears to be…….we’ll soon see as the clock keeps ticking on Mr. Greenspan’s eventual retirement……

September 13, 2005

The bond market continues to act very tired and the US Treasury 10 year has again failed in an attempt to stay under 4%. We are overdue for a 4-6 week period of rising interest rates and I would use any bond market strength to LOCK all fixed rate loans. I hope many of you took my advice on Friday June 3rd and used the low jobs number to lock loans.

In case you didn’t read the e-mail that was sent that morning (6-03) at 9am, the advice still applies today…………….

Even though the jobs number (78,000) was well below the consensus forecast the bond market has not reacted to the good news with new low rates in US Treasuries and even worse the mortgage lenders have not lowered their 30 yr. fixed rates this week despite new low US Treasury rates. Don’t forget that FNMA continues to sell mortgages into every rally thus helping to put a floor under long term mortgage rates. Bottom line: The bond market rally of the last 8 weeks is tiring and I would LOCK any 30 year loans today or at the latest Monday morning. All the talk of the Fed being in the 8th inning of rate hikes is probably wishful thinking and the bond market will probably see a good bit of selling in the next couple of weeks. Remember Mr. Greenspan speaks next week to Congress and his retirement is not until January 2006 so I highly doubt he will throw in the towel on his inflation fight until the end of 2005.

LOCK, LOCK, LOCK

Although we are only 3 weeks into the new cycle (lower long term rates) the bond market is acting a little tired and in need of a breather for a few days….last night crude oil hit a new high of $70.80 which I believe we will NOT see again in 2005. (oil now at $68.10) The hurricane has taken the focus away from Mr. Greenspan’s speech on Saturday and the market may decide to concentrate on the massive rebuilding that will take place in Louisiana and Mississippi over the next few months (stimulative for US economy). Although I don’t see a significant rise in rates if you have customers waiting to lock I would take advantage of the recent down move in the US 10 yr note (4.16%). The hurricane and Greenspan’s speech have NOT changed my forecast that we will see an end to Fed tightening in 1/06 and that the ultimate low in long term rates will occur in 2006 when the Fed eases (lowers short term rates) for the first time since 6/03.

September 1, 2005

The bond market action today was not what I would want to see going into tomorrow’s jobs number. Expectations are for an increase of close to 200,000 jobs.This morning Mr. Greenspan met with President Bush at the White House and I am sure they discussed monetary policy in light of this week’s events in New Orleans. The short end (2yr.) has outperformed the long end (10 yr.) all week as the yield curve has steepened on anticipation that the Fed will NOT raise rates at the September 20th FOMC meeting. In the last 4 days the 2 yr. treasury is down 34 basis points while the 30 year is down only 6 basis points. If the Fed does pause it will have an opposite effect on long rates (they would rise) In times of economic uncertainty it is best to look at the overall trends that existed before this tragedy.

Bottom Line: The interest rate market will be much more volatile in the next four months than it was it the first eight months of 2005. Economic statisitics will be unreliable and the uncertainty of the new Fed Chairman will have many interest rate traders darting in and out of the market unwilling to take long term positions. If you have anything left to lock I would do it today as one of my top five rules is: A market that rallies into a big number is a market that is set up for a surprise (prices) to the downside.