Mortgages, Home Loans, Refinancing, and Loan News from Winchester Lending Group http://www.winchesterlendinggroup.com http://www.winchesterlendinggroup.com/images/wlg_logo_web.gif http://www.winchesterlendinggroup.com/content/modesto-mortgage-news.asp Wed, 23 Jul 2008 22:13:11 -0500 Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/145/ ECONOMIC DATA / NEWS Recession is looking closer by the day. The ADP report proved to be overly optimistic once again. According to this mornings report from the Labor Department, only 18,000 jobs were added in December. That is well below the 70,000 job growth that was being forecast. It caused the unemployment rate to jump up .3% to 5.0%, the highest since November of 2005. Most of the recessions between the 1970?s and today have been precluded by a rise of .5% or greater in the unemployment rate. Early in 2006 it hit 4.4%, so we?re now up .6% from that point. It seems to be just a matter of time before the recession is official. The other economic data for today, the ISM services index was perfectly in line with expectations at 53.9. Plus, it was so greatly overshadowed by the weakness in the jobs market that most investors probably didn?t even notice the report was released. But what we can glean from it is that the service sector showed very little signs of expanding last month while the manufacturing sector contracted. Gold prices spiked over $868.50 after the jobs report on a flight to safety. Investors are going to be ducking for cover in investments like precious metals, Treasury bonds, and other commodities. Speaking of commodities, oil prices were thankfully down to $98.50 per barrel in early trading today. Although that mystical level was breached ever so slightly yesterday, there is probably still a lot of hesitation by traders to push prices above it. If oil prices stay lower it would seriously help inflation, especially in the face of a continuously weakening dollar. TECHNICAL ANALYSIS The FNMA 30-year 6.0% broke above 102.00 without even blinking. It is currently at its highest level of the day, up 18bp at 102.09. At this point the next support is the top of the upward trend channel around 102.30. There is a very good chance we?ll be a lot of closer to it by the end of the day. Plummeted isn?t a strong enough word to describe what Treasuries did within seconds of the jobs report. The 10-year yield matched its 3-year low of 3.80% before bouncing back up to 3.85%. It has settle around 3.83%, but it looks like it will continue sliding lower over the course of the day. http://www.winchesterlendinggroup.com/mortgage-news/article/145/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/144/ ECONOMIC DATA / NEWS Happy, happy, happy New Year! Over the last few weeks of 2007 investors were drooling over weak economic data in the hopes that it would bring about additional rate cuts. Weaker data had actually caused some big stock market rallies over the last few weeks, which is contrary to how the markets normally react. However, reality has set in with the new year, and investors were hoping the economy wouldn?t slow down this much. The Dow is down over 100 points already this morning, and between downgrades, geopolitical uncertainty, and technical factors, it looks like stock prices could fall much further. The ISM manufacturing index broke away from the trend of following the Chicago region in December. Declines in the Philly and New York regions proved to be more accurate, as the national average actually showed the manufacturing sector contracted in the last month of 2007. It was worst reading in just over three and a half years. Manufacturing was a problem all of last year, and it certainly isn?t a good sign that it slipped so much during the busiest shopping month of the year. Construction spending was stronger than expected in November, but that didn?t make up for the drop in manufacturing. However, the .1% gain was only due to commercial projects. Residential building crashed lower by 2.5%. Residential building probably won?t improve any sooner than the second half of 2008, and possibly not before 2009. The sunny side of that notion though is that it continues to alleviate the inventory issue that has caused home values to drop each month. Gold prices skied to record prices around $850 per ounce. This came on the back of oil prices jumping up about $2 per barrel, edging closer to the $100 mark. Traders are worried about inflation, which we already saw heat up just a bit toward the end of the year. The heavy buying in gold and other precious metals signals a flight to safety, which bodes well for bonds, another safe haven investment. TECHNICAL ANALYSIS MBS prices are now just 3bp off their two year high. The FNMA 30-year 6.0% is up 15bp at 101.75. And when you take the gap higher between last Thursday and Friday, and the last three day?s candlesticks, which have formed a marching soldiers formation, there are multiple signals of greater upward momentum ahead. If prices break 101.78, then the sky is the limit. The 10-year Treasury yield was already set up for a decline based on technical factors, but it really plunged immediately following the disappointing manufacturing report. It dove to its current level of 3.93% from a peak of 4.05% earlier this morning. We now see 3.80% as our next short-term target, which could be reach within the next two weeks, and possibly much sooner. This also supports our three to six month outlook for the 10-year yield to fall to 3.50% or lower. http://www.winchesterlendinggroup.com/mortgage-news/article/144/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/143/ ECONOMIC DATA / NEWS Existing home sales were minimally higher in December, creeping from an annualized rate of 4.98 to 5.00 million. That doesn?t offset the decline of 80,000 in new home sales. The housing market has not show true signs of bottoming out yet, but we believe the turnaround could begin as early as Spring of the new year. The Dow dropped about 50 points from the opening bell. That puts the index a little above 13,300 right now, but there are technical indicators suggesting that the stock market could be in for a big correction. In fact, combining these technical factors with the weak economic conditions, which are only expected to worsen, the Dow could be below 13,000 by the end of January. Furthermore, we believe there is a very good chance that the Dow could drop below 12,000 within the next six months. Oil look to be one of the major contributors to stock market losses. Prices are currently straddling $96 per barrel. Seemingly never-ending conflicts with the Middle East and North Korea create constant concern about supplies. And supplies have been dropping in the U.S. as it is. Weather is also an unpredictable variable. The weak dollar is pushing the value of oil lower too. Oil and gas prices could be a tipping point when it comes to whether or not the economy goes into a recession. TECHNICAL ANALYSIS The FNMA 30-year 6.0% is up another 9bp. Prices briefly climbed higher, but they?re having trouble crossing over 101.50. But, with little support or resistance, the stock market will most likely be the sole determinant in the direction of mortgage bonds today. If there is additional follow through on today?s rally, it could be an indication that the break out of the upward trend was just a fluke, and that the upward trend is really still intact. On the other hand, if MBS prices fall before the end of the day, then it will support the previous signal that the upward push is losing momentum. The 10-year Treasury yield has crossed under the 25-day moving average. At the moment, it is trading around 4.04%, although it briefly popped back up to 4.06% after the housing data came out this morning. There is moderate support at 4.00%, but outside of that, the next strong support is the long-term low of 3.80%. We believe the yield will be this low again within the next six weeks, if not sooner. http://www.winchesterlendinggroup.com/mortgage-news/article/143/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/142/ ECONOMIC DATA / NEWS Manufacturing numbers are providing mixed signals this month. While the New York and Philadelphia regions were showing severe weakness at mid-month, Chicago got a big surge. The Chicago PMI index jumped from 52.9 to 56.6. The national average has tended to closely mirror the Chicago area, so manufacturing on the whole may have actually improved considerably in December. The ISM manufacturing data comes out next week. New home sales were much lower than expected in November. They took a 9% dive to an annualized rate of 647,000, the lowest rate in 12 years. Existing home sales are much more important though, because they make up the majority of total home sales. Nevertheless, the new homes data was enough to cut down some of the stock market gains and create an immediate surge in bond prices. Another concern for the economy is oil prices, which had eased to under $90 earlier this month, are back above $97 per barrel. Yesterday?s combination of the assassination of Pakistan?s Bhutto and a decline in U.S. crude stocks revived fears that supplies may not meet demand. It seems that every time oil prices have surged higher they have reached new highs. So, there is a very real threat that prices might top $100 on this latest rally. That adds to the danger of inflation mixed with a slowing economy. TECHNICAL ANALYSIS MBS prices lunged higher straight out of the gates, but the weaker home sales and receding stock gains have propelled the rally higher. The FNMA 30-year 6.0% is up 37bp! That?s on top of the 28bp gain from yesterday. At a price of 101.34 we?re now well above the 50, 10, and 25-day moving averages. If prices close at their current level or higher, then all of these levels will become supports once again. Prices are also back within the upward trend channel and the stochastics have crossed firmly upward, so the last few days appear to have been an exaggerated fluke move that is now correcting itself. The 10-year Treasury yield burst through the 10-day moving average. It has plummeted from 4.20% to 4.10% this morning, and it is currently testing the waters just under 4.10%. There is moderate psychological support at this level, but the next strong support is the 25-day moving average around 4.06%. http://www.winchesterlendinggroup.com/mortgage-news/article/142/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/141/ ECONOMIC DATA / NEWS Global unrest has reared its head again this morning. Former Pakistani Prime Minister Benazir Bhutto was killed in a suicide attack during a rally at which she was speaking. Her party is the largest in Pakistan, and they have been projected to fair quite well in the upcoming elections. She was attempting to become Prime Minister for the third time, after eight years of self-imposed exile. The employment picture continues to dim. Weekly jobless claims rose again last week to 349,000. Continuing claims rose again as well, this time hitting a two-year high. For weekly claims to be rising like this during what should be the heaviest spending month of the year is a dismal sign for economic growth prospects. Surrounded by all the other issues, employment would probably be the tipping point to push the country into a recession. Business owners appear to be bracing for a slower 2008. Durable goods orders eked out a .1% gain. That?s compared to economists? forecasts for a 2.9% jump. And the underlying result was even worse, because orders excluding volatile transportation goods dipped .7%. There could be more problems still to come in the banking sector as well. Goldman Sachs analysts have lowered their expectations on Citigroup and Merrill Lynch, stating that the companies may take much greater losses on subprime defaults. They say that both companies could have to writedown as much as $8 billion more than each has forecast for themselves. If these new estimates are accurate, it means that the subprime fallout might hit the overall economy harder than many economists currently believe. The positive spin is that this would likely lead the Fed to continue cutting their rate, and it would lead to better mortgage rates next year. TECHNICAL ANALYSIS The FNMA 30-year 6.0% shot up to the 50-day moving average at 100.96, but those gains didn?t hold for long. The bond is still up 18bp, but there is no support to make sure it remains higher. Plus, there are now multiple resistance levels around 101.00. These include the 50 and 10-day moving averages, as well as the former upward trend line. The 10-year Treasury yield dove lower after hitting resistance late yesterday at the 50% retracement line. The yield fell as low as 4.18%, but it has bounced off the 10-day moving average. It has since been hovering between 4.21 ? 4.22%. The Treasury yield is still well within the long-term downward trend, and we feel it will continue well into 2008. http://www.winchesterlendinggroup.com/mortgage-news/article/141/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/140/ ECONOMIC DATA / NEWS Although sales over the Thanksgiving weekend were better than anticipated, economists had warned that the res of the holiday shopping season may not maintain the strong pace. Sure enough, Mastercard released data this morning estimating that retail sales rose 2.4% from the same period last year. That is much lower than the 6.6% gain of a year ago. The International Council of Shopping Centers reported that chain store sales were only up 2.8%. Indications from individual stores are also disappointing. Target lowered their profit estimate for the 4th quarter following a slow holiday shopping period. This news should drag the stock market lower, but it hasn?t moved any of that money into bonds yet. Oil prices have risen to the mid-$94 level this morning. There is concern that Turkish attacks on Kurds in Iraq could affect oil shipments from the region. This will put a further damper on the weak retail period. Many analysts believe that higher gas prices have been one of the roots of the consumer spending slowdown. This would be very poor timing for another spike in gas prices when spending is expected to slow anyway following the holidays. TECHNICAL ANALYSIS FNMA prices dropped further out of the upward trend, and they also made their first real break from the 50-day moving average. The FNMA 30-year 6.0% is down 6bp to 100.84. It?s their lowest level in a month. The next support level is the 100-day moving average, currently at 100.45. The stochastics show strong downward momentum in mortgage bond prices, but more substantial losses could be avoided if the stock market takes on heavy losses. The 10-year Treasury yield has climbed over 4.23%, and it is now experiencing support from the 50-day moving average. That could be bad news, but prices also traded above the 50-day MA for a few days in October before the downward trend line knocked the yield lower. The stochastics are also close to oversold territory, which is another sign that the yield could be topped out. http://www.winchesterlendinggroup.com/mortgage-news/article/140/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/139/ ECONOMIC DATA / NEWS Today is a shortened trading day. The stock markets will close at 1:00 PM ET, and the bonds markets close at 2:00 PM ET. There is no economic data and trading volume will be light as many traders are already on vacation for the holiday. However, like we saw around Thanksgiving, some larger traders will take advantage of the lighter volume, by using putting in large trades, which move the markets more significantly with less opposition. One bit of significant news from over the weekend is a spike in credit card defaults. We?ve been saying for over a year now that eventually consumers would run out of credit, home values would level off, and there would be no money in savings. The national savings rate has been negative for over two years, so it is no wonder that credit debt is finally overtaking card holders. It could lead to a weaker December for consumer spending relative to previous years. November?s numbers may have been much better than expected, but that could very well be more than offset by December?s results. TECHNICAL ANALYSIS Oftentimes, a bounce off an upward trend line that fails to reach a new high before falling back down represents a loss of momentum in that trend. The FNMA 30-year 6.0% has done just that, and this morning it has breached the upward trend line by 12bp. The one hope for a rebound in the short-term is the 50-day moving average, which is barely keeping prices above 100.93 at the moment. However, if this level is broken, we could be looking at a drop to 100.41. Treasuries are being sold off so the few investors that are out there this morning can buy stocks. The 10-year Treasury yield popped to 4.22%, but it did hit the 50-day moving average and drop to 4.19%. That leaves it room to drop to the 10-day moving average at 4.12%. http://www.winchesterlendinggroup.com/mortgage-news/article/139/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/138/ ECONOMIC DATA / NEWS Consumer spending in November rose by 1.1%, its biggest monthly gain in 3 ? years. But how will the markets receive this data. The first thought that comes to mind is that it is one more reason for the Fed not to change their rate in January. That has been the biggest fear of investors, and it could actually cause a sell off in stocks. The other major report today is the core PCE price index, which is the Fed?s preferred measure of inflation. It rose by .2% in November, matching economists? forecasts. Although not an overwhelmingly high increase month-over-month, it pushes the rate over the last year to 2.2%. Inflation has come back into focus, since a flare up in consumer prices would be grounds for the Fed to pause their rate cuts. Aside from the economic conditions that might prompt stock market selling, we also believe that traders will be closing stock positions as we head into Christmas week. It is also common for traders to want to start fresh in the new year, so we anticipate a decline in the stock indices over the next week. And Merrill Lynch is the latest financial firm to consider a partial sale to a foreign investor. They could get $5 billion from Temasek Holdings in Singapore. The deal has not gone through yet, and there is limited information on the discussions between the two firms. The story was leaked by an inside party, and spokespeople from the two groups have declined comment. It would certainly help subsidize the $8.4 billion in writedowns that Merrill has already taken, but the company is expected to sustain heavier losses due to their $27.2 billion exposure to subprime loans. TECHNICAL ANALYSIS It?s not the ideal start to MBS trading, but at least the decline has been muted. The FNMA 30-year 6.0% is only down 9bp at 101.28. They are within 7bp of the 25-day moving average, but that has only served as a moderate support level at best. In the face of a strong stock market though, the dip is not too bad, and it could lead to a solid rally if the stock market does pull back as we expect. The Treasury bond change is actually rather encouraging. Although it jumped to 4.08% almost immediately after trading opened, the yield has not moved much in response to the stock market gains. Presumably, most of the Treasury losses came in anticipation of the stock market surge. Like MBS, if stocks fall later in the day, there should be a significant improvement in the yield. http://www.winchesterlendinggroup.com/mortgage-news/article/138/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/137/ ECONOMIC DATA / NEWS Bear Stearns, which has been spotlighted throughout the second half of this year due to their high exposure to subprime mortgages, announced an $854 million dollar loss in the 4th quarter. Not to be outdone by Morgan Stanley, this is also Bear Stearns? first quarterly loss in the company?s history. And also similar to Morgan Stanley, the company?s stock has risen following the news. Investors seem to want to believe that this marks the worst of the mortgage defaults? impact, but that is obviously yet to be seen. Morgan Stanley is down in early trading today as perhaps reality about their current financial position is starting to set in. This morning?s data gave us final confirmation that GDP in the 3rd quarter rose by 4.9%. However, that hasn?t changed most economists? opinion that 4th quarter GDP will grow at just 1.0%. The early forecasts for the 1st quarter of 2008 are roughly 1.0% as well. If GDP comes in even lower, then we could be flirting with a recession (two consecutive quarters of negative GDP). Seasonal hiring is not helping employment figures as it normally does. Weekly jobless claims rose last month from 333,000 to 346,000. It appears likely that weekly jobless claims will be topping 350,000 by mid-January. Job growth number probably won?t be very strong this month if layoffs are rising with just two weeks to go before Christmas. Leading economic indicators surprised the markets by falling .4% last month, following a .5% decline in October. Economists were estimating it would only drop .1%. Soaring weekly jobless claims and a slumping stock market were two of the biggest causes for the dip. The Philadelphia Fed survey comes out at 12:00 PM ET. Considering how much the New York region disappointed by, there is a very likely possibility that manufacturing activity in the Philadelphia area fell as well. During normal trading situations this would be beneficial to bonds, but the markets have been backwards lately. So, we?ll just have to wait and see how traders decide to react to the news, whichever way it turns out. TECHNICAL ANALYSIS The FNMA 30-year 6.0% is up 6bp to 101.53 today, and the rally looks like it is going to continue. The stochastics have crossed upward, although they were not in oversold territory, making the turn slightly less significant. Nonetheless, it does highlight the sharp turnaround in bond prices. Prices could easily rise to the 2-year high of 101.78, reached just three weeks ago. Treasuries have jumped around this morning, but the 10-year yield is now flirting with breaking below 4.00% for the second time in the last month. Looking at the stochastics there is strong downward momentum, which might send the yield down to the 3.80% range by Monday, similar to what happened around Thanksgiving. http://www.winchesterlendinggroup.com/mortgage-news/article/137/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/136/ ECONOMIC DATA / NEWS The biggest news for all of us has to be the Federal Reserve?s proposal for additional limitations for lending practices. One of the practices they want to combat is misleading or deceptive marketing techniques; particularly those that promote ?fixed? rates that are not really fixed. They are also seeking to limit stated income loans, but we know that most lenders have already begun tightening up guidelines on stated income loans anyway. Fed Chairman Bernanke was explaining their goals in a speech this morning, and they will make the proposal public before officially enacting it. Housing starts slowed to an annualized rate of 1.19 million in November. Many homebuilders and other analysts have been saying for several months now that homebuilding will not pick up again until 2009. But, if we consider that building activity is only going to improve once home sales increase, we can infer that these people are saying they believe housing sales will turn around for the better sometime in 2008. We believe sometime between Spring and early Summer is when home sales will see a big jump based on lower rates and sales prices. Positive earnings reports from Goldman Sachs and Best Buy instilled some confidence in stocks as a whole, but there are technical factors that could prevent any kind of serious rally. The Dow is up about 80 points, but the 25 and 30-day moving averages are holding back any further gains. The stochastics are also showing strong downward momentum. There is always a mob mentality reaction immediately following one or two pieces of good news, but the markets will revert back to their longer term outlook by mid-day trading. As stocks begin to drop again, the money will move into the bond markets, thereby helping to lower rates. TECHNICAL ANALYSIS Things were starting to look bleak for the upward trend line, but traders decided that they were not ready to give it up yet. The FNMA 30-year 6.0% shot up 18bp to 101.12. Prices have been halted at the 10-day moving average. Plus, the 101.12 level was a resistance level prior to the rally from a couple weeks ago. The gains have come even in the face of increasing stock indices, so we expect the upward momentum to continue as the stock market shifts downward. The 10-year Treasury yield made a strong downward move late yesterday as stocks slid. That momentum carried through to this morning, and the yield is currently at 4.14%, down from 4.24% at yesterday?s open. The next support is the 10-day moving average around 4.10%. The stochastics are just beginning to turn downward, suggesting that the yield will continue to fall for at least another week or two. http://www.winchesterlendinggroup.com/mortgage-news/article/136/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/135/ ECONOMIC DATA / NEWS Manufacturing is off to a slow start in December. The first report from this sector came from the New York region. The Empire State index fell 17 points to 10.3. Last months reading of 27.4 was extremely high for this index. The 0 level is the divider between expansion and contraction, so there was a major slowdown in activity. The New York area has consistently been stronger than Philadelphia and Chicago. It has also been ahead of the national average. This could be the first sign of a broader decline in manufacturing activity. Our next indicator comes from the Philadelphia region on Thursday. Foreign investors have taken an interest in U.S. securities once again. After two of the worst months in the last decade, October made a huge comeback with $114.0 billion flowing into the U.S. from other countries. Part of the reason could actually be the weaker dollar. Foreigners may see U.S. securities as a bargain, if they are anticipating a rebound in the value of the dollar. And, the Fed will auction half of the $40 billion dollars that they plan to make available to banks for the purposes of adding liquidity to the lending markets. Based on the stock markets reaction after their announcement of the plan last week, it appears that investors are not fully convinced that the concept will work. The results of today?s auction will probably result in some late day market activity. TECHNICAL ANALYSIS Today?s candlestick on the FNMA 30-year 6.0% chart is trying to sneak out of the upward trend, but the 50-day moving average has kept it in line so far. Prices are up 3bp at 100.91 with no resistance prior to 101.12. Prices can pierce support levels without actually breaking them, and that could be what we?re seeing today. The support is a range more so than an exact point, so we can still consider prices to be within the upward trend at this point. Treasuries made a nice improvement, as money from Friday?s late drop in stocks has been filtered into bonds this morning. The additional losses in the stock market this morning have the pushed yields down even more. The 10-year yield is back under 4.20%, but it is hitting support around 4.18%. http://www.winchesterlendinggroup.com/mortgage-news/article/135/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/134/ ECONOMIC DATA / NEWS Rate cut optimists were dealt another blow today as consumer inflation showed signs of heating up in November. Overall CPI was up .8%, naturally related to gas prices spiking. However, core CPI, which factors out food and energy was up .3%, the largest single month increase since February. It?s interesting that retailers would be raising prices during the holiday shopping period when there is so much talk about this being one of the weakest holiday seasons in years. However, it seems to suggest that perhaps the additional costs from oil, which affects production and transportation costs, could finally be forcing businesses to raise their prices. Although the Fed funds futures market is starting to price in a potential hold on rates in January, the inflation figures could actually lead to a necessity to cut rates. The economy is already in slowdown mode, and Alan Greenspan told NPR that he feels the chances of a recession are ?clearly rising.? Higher prices are just going to make it that much more difficult for consumers to spend money, which will bring down economic activity even further. Something has got to give, so either consumer prices are going to come down in order for businesses to move inventory, or the economy is going to head toward recession as businesses lose profits on weaker spending. Either way, the opportunity, and perhaps the necessity, will be there for the Fed to continue cutting their rate. Industrial production picked up in November by .3%, following the .7% decline the previous month. But, capacity utilization slowed to 81.5%, which actually could be a plus for lower inflation. Even though the industrial production improvement was very mild, it was one more reason for those who are easily shaken to worry that the Fed may not cut their interest rate again. A lot of it was related to automobiles, which normally are in greater production around this time with the new models coming out. So, it really wasn?t a very strong result at all. But even it is considered strong, it should be one more reason for the stock markets to celebrate, rather than mourn. TECHNICAL ANALYSIS The FNMA 30-year 6.0% is down 6bp at 100.94. It has reached a critical point now, because it is touching the upward trend line. A bounce higher would indicate MBS traders? determination to push prices higher. However, if prices break below the downward trend line, it could set off chain reaction selling, pushing prices drastically lower in a hurry. Despite declines in the stock market, Treasuries have not benefited. In fact, it seems that at the moment, the two markets are on completely different wavelengths. Treasury traders are probably more intently focused on the higher inflation, which automatically detracts from the value of the fixed payments that bond holders receive. Furthermore, the yield broke above the 38.2% Fibonacci retracement line, which had been acting as a strong resistance. Now it is testing the 50-day moving average around 4.28%. It has bounced off this ceiling once already, but traders refuse to bring the yield back under 4.20%. http://www.winchesterlendinggroup.com/mortgage-news/article/134/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/133/ ECONOMIC DATA / NEWS Word on the street is that traders are not fully convinced that the Fed?s plan that they announced yesterday can solve the problems in the credit or equity markets. That?s probably why the stock markets pulled back so much by the end of the day. Stocks are down a little more this morning, but it?s not just lack of confidence in the Fed?s cash injection to increase liquidity. What should be causing a buying frenzy in the stock markets is creating a gloomy atmosphere instead. There is now a shadow of doubt that the Fed may not cut their rate again (or by as much), because retail sales were twice what economists were forecasting for November. They came in at a blistering 1.2% pace, and they were up an even more impressive 1.8% when excluding volatile auto sales. It is very clear that investors are just looking for the Fed to save them, but ignoring the fact that maybe the economy is not as bad off as they apparently would like it to be. There is growing sentiment that the economy may be able to avoid a recession, but it is difficult to gauge that based on a month when retail sales normally spike anyway. If December disappoints, then it still doesn?t bode well for the economy in the new year. Inflation might be another factor that has people thinking fewer rate cuts. The PPI in November showed producer inflation rising 3.2%. Oil prices obviously had a lot to do with that. But, even when excluding food and energy prices, there was a .4% increase. Consumer prices are what the Fed looks at though, so tomorrow?s CPI will be much more important when considering how inflation will affect future rate decisions. Weekly jobless claims remain at elevated levels, but they did come down a bit from the previous week. Last week?s new claims totaled 333,000, which means the four-week moving average remained above 330,000. Layoffs will normally drop during the holidays due to seasonal hiring. The fact that they have stayed at a relatively constant level suggests that hiring has not been strong in December. TECHNICAL ANALYSIS The FNMA 30-year 6.0% has only given 3bp this morning. It was down by more earlier, but bounced up when it approached the 25-day moving average. Prices are starting to condense into a sideways trading range between the 25-day and 10-day moving averages. Whichever way prices break out could determine the trading direction for the next month. With support from the upward trend line and the 50-day moving average, on top of the 25-day moving average, there is a good likelihood that the upward trend will continue as we head toward January. Treasuries have jumped around a bit. The 10-year yield has bounced between 4.13% and 4.16% most of the morning. The 38.2% Fibonacci retracement line has acted as a strong resistance to this point, and the yield may decline quickly once traders give up on trying to break that resistance. We still have a long-term target (3 ? 6 months) of 3.50% for the 10-year Treasury yield. http://www.winchesterlendinggroup.com/mortgage-news/article/133/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/132/ ECONOMIC DATA / NEWS The Fed rate cut was everything the people expected and less. Although the Federal Reserve chose to cut the Fed funds rate and the discount rate by .25%, which was the most common forecast, the stock markets were extremely disappointed. So much so in fact that there was massive selling across the board, smacking the Dow 300 points lower. Investors clearly were looking for a .50% cut, despite what they were indicating in the futures markets. The statement that accompanied the decision was very similar to the last couple. They talked about inflation easing, slowing economic growth, and commodities prices (primarily oil) as being a potential threat to inflation. Overall, it should have been a rather uneventful day. But everything changed this morning when the Fed announced a plan in conjunction with other central banks to inject a substantial amount of cash into the lending market. The plan is for $40 billion to be made available to banks as quickly as next week. They have acquired lines of credit with the European Central Bank, and other central banks in Europe. The plan basically reassured investors that the Fed is taking aggressive steps to create liquidity in the mortgage markets and offer support to the economy. Now, it?s hard to say whether the Fed announced their additional measures this morning in response to the markets? reaction or whether they had it in their back pocket but wanted to see how the markets? reacted. Or, perhaps they knew how the markets? would react to yesterday?s statement and they thought it would pack a bigger punch if it were announced separately. Knowing the way the Fed works, it?s probably a little bit of each. It is now believed that they will cut their rate again when they meet in January. And, if things don?t improve enough over the next six weeks, perhaps we?ll get that more aggressive move that investors were looking for this time. The economic data was pretty insignificant today, even without the Fed stealing the show. To recap it quickly though, the trade gap rose a little in October from $57.1 billion to $57.8 billion. And, import prices only rose .7% in November, which is much less than the 2.0% increase that economists had forecast. Neither of these are real market movers anyway. Tomorrow and Friday?s data include consumer inflation, retail sales data, and industrial production results, and they may carry even more weight than normal in light of this week?s developments. TECHNICAL ANALYSIS MBS prices have been bouncing all over the place. They?ve been pinging back and forth between the 25-day and 10-day moving averages, which happens to be a very wide range right now. The FNMA 30-year 6.0% is down 12bp from yesterday, but that?s not all that much, considering they were up 43bp yesterday. The stock indexes are high into overbought territory, so there could be money temporarily flowing into bonds. With prices at 101.22, the only resistance we?re facing is the 10-day moving average at 101.43. There is a lot of room for improvement, but at the same time there is not much of a floor either. The 10-year Treasury yield has erased the entire decline from yesterday, and has been propelled up to 4.16%. There is some resistance around 4.18% at the 38.2% Fibonacci retracement line. This should be a pretty strong resistance, and since stocks are oversold, there is a good chance that the yield will pull back soon and quickly. http://www.winchesterlendinggroup.com/mortgage-news/article/132/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/131/ ECONOMIC DATA / NEWS No more than a few days after measures aimed at helping both borrowers and lenders were announced, UBS AG says they will be forced to writedown another $10 billion in loans. They will apparently be selling off a stake in the company in order to maintain liquidity, which is what many other lenders have had to do. This has been of no concern to traders though, as they?re still firmly focused on tomorrow?s Fed rate decision. The question seems to be not whether or not they will cut their rate, but by how much. But, regardless of the percentage, stock traders seem very fond of the benefits that lower rates could bring for businesses. The Fed usually lowers rates to spark economic growth through business investment and increased consumer spending. This mentality has done wonders for the stock market over the last week, but bonds haven?t faired quite as well. We?ll talk more about that in the Technical Analysis section. So, obviously the Fed rate decision is the main focus of the week. But, there are some other hot topics as well. Retail sales might be the second biggest item on deck. Investors are going to want to see a big increase, because the early holiday shopping is supposed to cause a big boost for retailers. Forecasts are pretty modest, and if sales are in line with or below expectations, they could steal some of the thunder from a Fed rate cut. Inflation data is also on tap, but this hasn?t concerned investors since the summer, so it is likely to be virtually ignored. The week finishes up with industrial production, which also has the potential to be a market mover. With the economic data well spread throughout the week and the Fed meeting, this could be an action packed week. TECHNICAL ANALYSIS The FNMA 30-year 6.0% has pushed its way through support at the 25-day moving average now. Prices have fallen another 9bp to 100.97, which is 81bp lower than it was a week ago. Considering the strong downward momentum, as can be seen by the big red candlesticks and the sharp crossover in stochastics, the long-term upward trend line is in serious jeopardy. This trend has lasted for exactly six months and has already withstood four price pullbacks. It certainly has become a solid support, and it did hold up against a similar sharp decline back in July. The test is coming with less than 20bp between the current price and the trend line. The 10-year Treasury yield has started off the week in the same direction it was moving last week. The yield found support from the 25-day moving average, and traders quickly pushed the yield up to 4.17%. There is around this level though. It marks the 38.2% Fibonacci retracement level from the mid-October to early December decline. There will probably be a brief pullback, but an upward trend does seem to be taking shape. If the yield breaks above 4.18, we could be looking at the 50-day moving average as our next resistance. http://www.winchesterlendinggroup.com/mortgage-news/article/131/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/130/ ECONOMIC DATA / NEWS ADP?s job growth expectations were not even close, which happens way too often. The rest of the data over the last couple of weeks gave more accurate indications that job growth was tepid at best last month. There were only 94,000 jobs created. Although that beats estimates by about 5000 ? 10,000, it is considered a level that represents slower economic growth. October?s payrolls were revised higher by just 4000, but, much more significantly, September?s number was revised lower by 48,000 to just 44,000 new jobs for that month. So, when factoring in the revisions, there was a net gain of a mere 50,000 jobs. You?re going to hear some reporters and anlysts calling it strong, simply because it beat economists? forecasts. You?ll also hear others call it weak, which is a much more perceptive characterization. The main point to take away from this report is that it will likely lead to weaker retail sales this holiday season, and that might bring the economy one step closer to recession. Furthermore, the initial reading from the University of Michigan sentiment index showed consumer confidence continuing to slide in December. The result was 74.5 versus 76.1 last month. All early indications have been that the holiday season is going to be a poor one for retailers. Similar to last year, shoppers may have scooped up deals early, and there could be a lot less people out in the stores over the next three weeks. As we mentioned in yesterday?s alert, the government has reached an agreement with lenders to freeze rate increases for adjustable rate mortgage holders for as long as five years. This could affect over a million people, and it may allow many lenders to avoid some of the losses that they have previously estimated. The program only applies to those borrowers who have been making consistent on time payments, but cannot afford to pay rate increases. So, it will help many people, but there will still be numerous defaults from people who have already stopped paying their mortgages or can?t continue to make their payments even at current rates. TECHNICAL ANALYSIS Yesterday we talked about how strong downward momentum could potentially push FNMA 30-year 6.0% prices below the 10-day moving average. Not only did they break this support, but prices actually gapped lower. We?re now down 21bp at 101.25 and heading toward support at 101.12. The stochastics have crossed downward sharply, so that would suggest that there are more price declines to come. The 10-year Treasury yield has also turned on us. The yield broke the downward trend line this morning, and so far it has tapped on 4.09%. We do have resistance from the 25-day moving average just overhead, but the technicals are suggesting the yield could keep rising. The stochastics crossed upward yesterday and are making their way out of overbought territory. http://www.winchesterlendinggroup.com/mortgage-news/article/130/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/129/ ECONOMIC DATA / NEWS The jobs situation got even more interesting this morning. Weekly jobless claims were a relatively high 338,000 for last week. Although the reporters may be calling it an improvement, it remains at a much higher level than average claims in the first half of this year. In fact, the four-week average rose to 340,250. This is compared to averages ranging closer to 300,000 for the majority of the year. Continuing claims fell, but it is unclear whether that is due to stronger hiring or long-term unemployment. After six months, unemployment benefits run out. Then, those people are no longer counted in the unemployment figures, even if they are still out of work. Most of the economic data over the last couple weeks has been pointing toward slower hiring numbers for November. However, the ADP report yesterday threw a curve ball to analysts, many of whom have been revising their estimates upward slightly. We don?t anticipate payrolls growing as much as ADP estimated, but they may be a little stronger than the 80,000 or so that were originally being forecast. If they come in between 70,000 and 130,000, it is very difficult to say how any of the markets will react. The biggest harm to rates would probably be a payrolls figure of 150,000 or above, which would suggest a more resilient economy, thereby potentially decreasing the Fed rate cuts. Target and Walmart announced decent same-store gains for November, but they are uncertain about December sales. Items at the bottom of purchases from Target last month included toys, holiday items, and jewelry. Seeing as how we would expect these items to spike in sales volume during holiday shopping, they certainly have reason to believe that the shoppers may not be out in full force this year. Perhaps oil prices will ease some minds and allow for a pick up in shopping. After spiking at an all-time high of $99.29 per barrel, oil prices have tumbled to $86.64 as of this morning. This is in spite of OPEC recanting their allusions to increasing production and a large drop in U.S. crude oil reserves. But, the U.S. does have a larger than expected surplus of diesel fuel and gasoline, which has helped stave off potential price jumps. TECHNICAL ANALYSIS As we said yesterday, the FNMA 30-year 6.0% has drifted into a sideways trading pattern. However, that has caused it to break out of the sharp upward trend, despite the fact that prices are only down 3bp at 101.66. Our primary support is now the 10-day moving average, which is 22bp below the current price. It is also more vulnerable now that prices have traded above it for the last 15 days, so we could see at least a temporary break of this level. Treasuries have been interesting this week. Over the last two weeks, Treasury yields have been range trading, albeit in a very wide range, while MBS prices were climbing. However, now they have shifted roles, and it is the 10-year Treasury yield that has shot upward while MBS drift sideways. The yield briefly touched 4.00%, but it was bumped lower. It has bounced between 3.98% and 3.99% for most of the morning. There seems to be good psychological resistance from 4.00%, and the downward trend line is providing resistance at about 4.03% as well. The only problem we?re facing is that the yield opened above the 10-day moving average, which had provided resistance for about the last month and a half. If the yield can break back under the 10-day MA, then we could see a considerable rally follow. http://www.winchesterlendinggroup.com/mortgage-news/article/129/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/128/ ECONOMIC DATA / NEWS Economists are now speculating that the Federal Reserve may cut their discount rate, the rate they charge to lend to banks directly, by even more than the Fed funds rate when they meet next Tuesday. Vice Chairman Kohn and San Francisco Fed President Yellen recently gave speeches advocating more assistance by the Fed to the credit markets. A .25% to .50% cut is already assumed, but the markets are starting to factor in an extra .25% cut in the discount rate. For instance, if the Fed cuts the Fed funds rate by .25%, they would cut the discount rate by .50%. The gap between Fed funds and discount rates are usually one percent, but that difference was chopped in half back in August. This could be not just a catalyst allowing lenders to lower their rates more, which have already improved quite a bit over the last three months, but to possibly consider easing requirements on certain loans. The ISM index for the services sector was slightly below forecasts, but not enough to shake up the markets. The index came in at 54.1 last month versus 55.8 in October. Job growth in the services sector was slower, which is congruent with economists? forecasts that job growth slowed in November. However, the ADP employment estimate is contradicting those predictions. They have pegged job growth at 189,000 last month, which would beat other estimates by about 100,000. ADP has been known to be ridiculously wrong in the past, so we?ll take it for what it?s worth. When all the other indexes are showing slower job growth, this projection seems a little far fetched. Nevertheless, it does put that shadow of doubt in traders? minds that maybe the economy isn?t as weak as everyone has been saying. This has be a partial reason for the stock market rally, adding to the excitement of expected rate cuts, which are also expected to boost the economy in the long run. Other news putting confidence back into stocks is Fannie Mae?s announcement that they are going to issue $7 billion in preferred stock to raise capital to keep the company liquid. This should free up money for other lenders as well, now that Fannie Mae will have additional funds to buy mortgages from other banks. Fannie Mae will also slash their dividend, thereby preserving more money. Both of these moves have also boosted the companies stock due to the perception that it will create more opportunities to increase profits. TECHNICAL ANALYSIS MBS prices made some very late gains yesterday, but they dipped early this morning. The FNMA 30-year 6.0% is only down 3bp at 101.72, which keeps it above the sharp upward trend line. However, the stochastics have soared deep into overbought territory, and they are on the brink of crossing downward, indicating that upward momentum is decreasing. Prices will probably get pulled back to the 10-day moving average, and that could create a drop of 30bp. The short-term upward trend line generally becomes much more susceptible to breaks after a couple of weeks. We?re just reaching that time frame, so we do need to watch out for sudden price declines. Treasuries are not up too much, relative to some of the wild trading that we?ve seen recently, but the 10-year yield did pop up to 3.94% at the market?s open. Fortunately, it has not climbed much beyond that and has flirted with dipping back under 3.92%. The 10-day moving average remains a strong resistance. But, we do have to be cautious since the stochastics have lingered in overbought territory for close to two months. If resistance holds though, the yield could see late day downward movement, which would probably carry through to tomorrow. http://www.winchesterlendinggroup.com/mortgage-news/article/128/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/127/ ECONOMIC DATA / NEWS Oil prices have been prone to large swings, just like most other securities lately. Since hitting close to $100 per barrel less than two weeks ago, light sweet crude is down to $87.70 this morning. OPEC has been talking about increasing production in order to support the higher demand generally associated with the winter months. The ISM from October to November was virtually unchanged. The index suggests that the manufacturing sector is teetering on the brink of contraction. When the index falls below 50, it represents contraction, and this month?s result was 50.8. The employment index was one of the biggest decliners, slipping from 52.0 to 47.8. That?s the worst reading in four years, and it comes as a precursor to what is already expected to be a low number of jobs created in November. Monthly employment data comes out this Friday. The next Fed rate decision is only eight days away, so the economic data will receive even more attention that normal as analysts try to determine how it will affect the Fed?s decision. Based on recent comments by Bernanke and Fed Governor Donald Kohn, it sounds like the Fed is ready to make another cut. How deep that cut will be is still up fro debate though. We think that they will go with a more conservative .25% cut, because there are other members of the Fed who are not in favor of the rate cuts at all. TECHNICAL ANALYSIS MBS prices made a very late surge last Friday, but we felt they would pull back early this morning. The improvement in Treasuries and initial losses in stocks prevented that from happening. But, after a brief spike in early trading, the FNMA 30-year 6.0% is now flat on the day at 101.69. There is virtually no major resistance, but the stochastics have jumped back into overbought territory. Plus, prices are likely to get sucked back toward the 10-day moving average, which is currently at 101.21. However, we still expect significant gains in the long run. The 10-year Treasury yield is testing 3.90% again this morning. It has been as low as 3.87%, but it has spent most of the morning bouncing between 3.89% and 3.91%. The 10-day moving average has remained a strong resistance for most of the last month and a half, which is a very long time for such a short-term moving average to hold prices down. It highlights just how strong the downward trend really is, and it supports our forecast that the 10-year yield will eventually reach the mid-3.0% range and possibly lower. http://www.winchesterlendinggroup.com/mortgage-news/article/127/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/126/ ECONOMIC DATA / NEWS There was a lot of economic data this morning, and once again the markets ignored it. We?ll start with consumer spending, which was presumably the big news for the day. Yesterday?s GDP revision was written off as old news, and everyone was saying that the past quarter does not reflect what they expect going forward. But then when consumer spending turned out to have gained just .2% last month, the Dow gained over 100 points within minutes of the opening bell. There are two more big months consisting of holiday shopping to be reported before we get a clearer picture of where economic growth heading. Personal income only rose .2% as well, and consumers weren?t about to spend that money when gas prices are soaring and future paychecks are in question. All traders cared about were Fed Chairman Bernanke?s words. Just one key phrase, ?exceptionally alert and flexible,? was all they needed to hear. This was taken to mean that the Fed is very open to another rate cut at their December meeting. Stocks love this because they assume that companies will be able to grow quicker as borrowing costs are lowered, thereby increasing profits. Bond traders have been a bit more baffled by the news. They have yet to pick a clear path. Chicago PMI was probably overlooked by most. But, if anything, it added more confidence to the stock markets. The index shifted back above the key 50 level between contraction and expansion. It also beat forecasts by about 2 points, coming in at 52.9. Manufacturing one of the two weakest sectors of the economy right now, along with housing. The only difference is, people aren?t sure that manufacturing will ever recover. The core PCE price index rose .2% in October, but inflation has remained well contained this year. It is a distant second, in terms of concern by the Fed, behind economic stability. The least important data today in the markets? eyes was probably the .8% decline in construction spending in October. TECHNICAL ANALYSIS The FNMA 30-year 6.0% topped the six month high this morning, but it is currently unchanged from yesterday. Not only do we have the long-term upward trend supporting prices, but a much sharper upward trend has developed over the last week and a half. However, those sharper trends usually don?t hold for more than a couple of weeks, so we could see prices drop back down into a more steady range. The 10-day moving average is rarely such a strong resistance level for this long, but it held once again this morning. It has been pierced each of the last two days though, and, similar to a paper towel, if you poke enough holes in it, eventually it will break. The stochastics are starting to climb out of overbought territory, which is also a threat to resistance. The yield has traded widely over the last three days, but it has ultimately hovered around the 4.00%. This is a huge psychological resistance level now, which is why trading has defied all other technical indicators this week. http://www.winchesterlendinggroup.com/mortgage-news/article/126/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/124/ ECONOMIC DATA / NEWS The forecasts were accurate. GDP was adjusted a full percent higher to a growth rate of 4.9% in the third quarter. A smoking hot four-year high like this should be considered a welcome surprise for the stock markets. However, traders are viewing this as old data that has no bearing on what the economy will do in the future. Based on early bond trading, it looks like investor sentiment remains that economic growth is going to be weaker in the next few quarters. The employment outlook may be legitimizing that mindset. Weekly jobless claims kept with the upward trend as they skyrocketed to 352,000. That?s almost a two-year high. The unemployment rate is very likely to tick up another tenth of a percent, and payroll growth was probably very tepid this month. This has been of the primary drags on consumer confidence. It is also a big reason why many experts believe that the overall holiday shopping season is going to be the weakest in years, despite the surge over the weekend. New home sales rose in October, but only because September?s sales were revised significantly lower. They had been reported at 770K last month, but they have now been revised down to 716K. So, a technical month-over-month gain is really a net loss for the year. Oil prices spike over $94 per barrel after a fire at a pipeline carrying oil from Canada to the U.S. As of right now, it is not expected to affect supplies. Stock markets were slightly lower at opening on news that Sears? profits were drastically worse than expected in the third quarter. Other retailers? stocks are down modestly. However, E*Trade finally found some financial support, and that has the online bank/lender trading higher. Other banking stocks are mixed. The Dow is only down 20 points, which means that it is still holding onto the majority of its 330 point gains from yesterday. We would have expected stocks to be on another solid rally following the GDP data, but worries that the consumer spending is not going to be there to sustain that growth is dragging stocks lower. But if we look at the longer term, traders do believe the Fed will cut rates again, which should provide confidence in stocks over the next month. TECHNICAL ANALYSIS MBS prices are defying gravity, and the FNMA 30-year 6.0% is up 15bp to 101.38. We can see from the sporadic and jerky moves in the stochastics, that these are not rational times. Obviously, 101.12 remains a support. The gains make sense this morning based on mild stock market declines and a massive rally in Treasuries. But, it is the extent of the Treasury rally that is out of step with the data and the other markets. The 10-year Treasury yield was knocked down by the 10-day moving average, and the yield was pounded lower to 3.93%. Given the other technical factors, including the stochastics crossing out of overbought territory and the two consecutive wide-ranging upward candlesticks, we would have expected another big jump in the yield this morning. The drop is also extreme given the mild losses in stocks. http://www.winchesterlendinggroup.com/mortgage-news/article/124/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/123/ ECONOMIC DATA / NEWS The Monday after Thanksgiving weekend is know as Cyber Monday. This is when the online holiday shopping kicks off, once all the in-store sales are over. This Monday produced similar results to what happened over the weekend. According to ComScore Inc., sales were 21% higher than a year ago. But, there were also 38% more shoppers than last year, which means that the average amount spent per person was lower. We are likely to see larger than normal sales at stores and online, since businesses know that many consumers are reluctant to spend money the way things are. But nobody can resist a great deal. If companies are offering exceptional discounts, then it could still be a happy new year for them. Existing home sales came in at an annualized rate of 4.97 million. Prices also fell by an average of 5.1 percent from a year ago. That is the worst decline ever recorded. This is based on closed purchases, so they would have originated back in August or early September. August was when credit was getting really tight, rates were higher, and a lot of would-be buyers were on edge because the housing market was looking a little overwhelming. Guidelines had tightened a lot, also making it difficult for people to get loans in August. And furthermore, there is usually not much buying going on in August anyway, because families are getting ready to go back to school, or people are taking vacations. The trend of declining sales will probably continue for the next three to six months easily before we find a bottom. October?s durable goods orders were also worse than expected. They dipped .4%, but that is much better than the 1.7% drop in the previous month. After taking out transportation, orders were .7% lower. Orders for these long-lasting items are a gauge as to how strong or weak businesses believe the economy will be over the next six months. Computer orders were down 15.2%. Just like consumers, businesses are losing confidence in their current and future expectations about the markets. When consumers and businesses are both withholding spending, the economy is inevitably going to suffer. TECHNICAL ANALYSIS The FNMA 30-year 6.0% briefly fell through the 101.12 level, but it ultimately closed at that price. Prices were threatening to break lower again this morning, but that level seems to be holding as a support level now. The price has jumped up 15bp to 101.31. The six-month high is 101.53 as of Monday. So, there is about 20bp between the current price and support or resistance. That could make for some volatile trading, which has been the norm lately. Until prices slow to their normal trading patterns, we will have to keep one finger on the trigger. Treasuries have taken a much different path. The yield was up from the start, but it did drop only to find support at 3.95%. That is approximately where the yield closed yesterday. However, it has also been bumping off resistance around 4.00%. Most of the morning the yield has traded up around 3.98% to 4.00%, but it looks like it could be on the brink of a big upward breakout. The stochastics are well into overbought territory and just beginning to cross upward, and we just bounced off a long-term low on Monday. Between profit taking and rallies in the stock market, there will probably be a lot of money flowing from bonds in the next day or two. http://www.winchesterlendinggroup.com/mortgage-news/article/123/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/122/ ECONOMIC DATA / NEWS The lack of consumer confidence is growing. The Conference Board?s index fell from 95.6 to 87.3. Oil prices close to $100 has to be a major fear for consumers. The general consumer has no idea how much higher gas prices might go, even though we know that oil prices are dropping off at the moment. Oil prices plunged to $94.77 in morning trading for the very reason that consumers are worried. That is, if the economy slows down too much, then there might be less demand for oil. But oil prices aren?t the only issue. The stock market has taken huge losses over the last two months, and we know that many of them are losing equity in their homes. Plus, there is the constant uncertainty of whether or not they will have a job tomorrow. Not all of these variables will be corrected in the next month or two. Until there is an overwhelming sense that economic growth is returning, we are likely to see consumer confidence fall even further. That then feeds into the economic slowdown and increases its momentum. Just like Countrywide sold a stake to Bank of America a few months back, Citigroup has sold a portion of its company as well. They received $7.5 billion from an investment group in Abu Dhabi called Investment Authority. This equates to 4.9% ownership in the company, but they will not be able to hold any board positions. This clearly frees up a lot of cash, making lending to consumers much easier. The Dow has rallied 160 points already. Credit concerns have been the main reason cited for stock market losses, so the Citi announcement has to be instilling some fresh confidence for traders. Plus, the steep declines have created some bargain basement deals for some stocks, allowing for plenty of growth potential. Stocks are deep in oversold territory, which means there is a good probability that the Dow could make its way back over 13,000. If that?s the case, we will see some quick declines for bonds. TECHNICAL ANALYSIS The FNMA 30-year 6.0% has fallen all the way back down to the previous resistance at 101.12. It is sitting on this ledge, down 25bp from yesterday?s close. Considering the strong downward swing, over bought conditions, and the massive turnaround in Treasuries, there is probably enough force to break through this level. The 10-year Treasury yield has bounced off a two and a half year low and climbed all the way to 3.98% in a matter of two hours. The 10-year has been in deep overbought territory for a month, and there has to be some profit taking going on after the incredible gains of the last couple weeks. We?re due to break back over the 10-day moving average, which means the yield could rise in the high 4.10?s in the next week. http://www.winchesterlendinggroup.com/mortgage-news/article/122/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/121/ ECONOMIC DATA / NEWS Excitement over a strong retail sales weekend is being muted by some troublesome announcements this morning. First off, retail sales were strong as we anticipated, rising 7.2% on Friday and Saturday from the same period last year. But investors are constantly being reminded that last year?s Thanksgiving weekend produced better results than expected, and yet the rest of the holiday season was mediocre at best. So, there are still another few weeks before investors will be truly convinced that consumers are spending. Another downer was potential layoffs at Citigroup, which could total anywhere from 17,000 to 45,000 according to a report from CNBC. This and other news, such as E*Trade?s struggle to sell or merge due to discrepancies in the value of their mortgage holdings. Online lenders are not governed by the same laws as other lenders, which allowed them to offer even riskier loans than some of the major lenders. And the Europeans are ahead of the game again. While major U.S. lenders Citigroup, B of A, and JP Morgan have talked about funding Structured Investment Vehicles (SIV?s), HSBC, Europe?s largest bank has beat them to the punch. They announced today that they would support two struggling SIV?s with $35 billion in funds. SIV?s biggest investments are usually mortgage-backed securities. Now that they are losing money on their current holdings, they don?t have the liquidity to buy new mortgages. This is creating liquidity issues in the credit markets, which are already having a tough time finding investors for their new mortgages. This has to be one of the big reasons that mortgage bonds are continuing to reach long-term highs this morning. Although this is a European bank, the U.S. banks and government have been following certain trends in Europe related to providing additional capabilities that allow banks to lend money. TECHNICAL ANALYSIS The FNMA 30-year 6.0% has just reached a new six-month high at 101.16. We did not expect a move this large this early in the holiday shopping season. And with strong retail sales over the weekend and Treasuries lingering deep in overbought territory, it seemed inevitable that all bond prices would be on a sharp slide any day. However, fear has seemingly overtaken technical factors, and investors are uneasy about risky stock positions during these uncertain times. If the bond closes above 101.12, this level will become a support. We are still concerned that prices may top out soon, but today should be a pivotal day in assessing the likely future trading direction. Today has been an interesting day for Treasuries. The 10-year yield started the morning up at 4.04%, but now finds itself near the six month low of 3.98%. Severely overbought conditions and strong support around the current yield are preventing additional gains. But there is also a lack of willingness to push the yield higher, as is indicated by the last two candlesticks on the chart, which are both inverted hammer formations. Where the yield finishes the day will probably be very dependent on how the stock markets perform. http://www.winchesterlendinggroup.com/mortgage-news/article/121/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/120/ ECONOMIC DATA / NEWS Today may be the single biggest day in determining what rates do for the rest of the year. Known as Black Friday, today is the biggest shopping day of the year as early holiday shoppers flood the malls and other stores in search of deals. Most retailers are trying to lure shoppers out with discounts as great as 75% off normal prices. Hundreds of shoppers will line up outside stores at 4:00 AM, if not earlier. Several large retailers even opened their doors as early as midnight, while other stores tried to get even more of a jump on things by staying open on Thanksgiving day. This weekend is considered a gauge of how strong retails sales will be in December. Strong sales would offer a big boost to stocks next week, which would most likely pull money out of bonds. And with stocks dropping so much over the last few weeks, there is even greater upside potential. Oil prices have receded this morning off Wednesday?s high above $99.00 per barrel. Light crude has fallen to $96.42. It is probably finding psychological resistance at $100, and there could be profit taking going on from speculators as well. But it?s going to take more than a one day decline to ease consumers? minds. At least it?s a step in the right direction though. TECHNICAL ANALYSIS The MBS rally on Wednesday was a shocker, to say the least. And so far, those gains are holding, with the FNMA 30-year 6.0% flat at 100.94. MBS were probably benefiting from the fact that Treasury yields plummeted on Wednesday, and investors were looking for better returns. They are finding resistance once again though around 100.91 to 100.94. By the end of the year, traders are going to have to choose between pushing prices above the six-month high at 101.06, or allowing prices to fall below the upward trend line. There is a very good chance that this will occur within the next couple of weeks, especially when we consider how volatile the markets have been lately. The 10-year Treasury yield bounced off support around 4.00% and popped up to 4.05%. It has been bouncing back and forth between 4.04% and 4.05% ever since. The stock market should help traders choose a direction, and considering the futures markets are indicating stocks are in for a higher opening, there is a good chance the yield will jump higher after 9:30 AM ET. There will be moderate resistance at 4.10%, a previous support. Then, there is strong resistance from the 10-day moving average at 4.15%. However, the yield is due to trade back above this line, as it has been below this average for the better part of the last month. It probably won?t break it today, unless there is a massive rally in the stock markets. But, we could very well be above it by Tuesday. http://www.winchesterlendinggroup.com/mortgage-news/article/120/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/119/ ECONOMIC DATA / NEWS The Fed meeting minutes take a long time to say a little bit. The reason that they are able to release a very brief three or four paragraph statement with their rate decision is that they can basically sum up everything they discussed in a very small amount of text. Most of the information was nothing that we haven?t already heard from Fed members? individual statements or seen from the economic data itself. The main points were consumer spending has remained solid, inflation has moderated, job growth has slowed, and the credit markets are not helping matters much. However, they were still making the point that the credit markets have yet to have an affect on the rest of the economy, which is at least debatable. They also discussed projections for the next three years, and they also agreed to revise the projections more often, and to make that information more readily available to the public. Their forecasts consisted of lower expectations for economic growth in 2008, with inflation declining. They also raised their expected unemployment rate. Their ?conclusion? was that they would adjust the overnight lending rate as necessary to promote strong economic growth while protecting consumers from inflation. Although this doesn?t give us any specific details about their future rate decisions, it is a subtle hint that they will cut their rate if the economy slows. And based on their forecasts, it will. Employment has already been showing signs of weakening. Job growth has slowed this year, and now weekly jobless claims are climbing into a higher range. They had consistently been ranging between 300 ? 320K for the first eight months of this year. However, over the last two months we?ve seen that range jump to 325 ? 340K. Last weeks claims totaled 330,000. It is not just an opinion anymore. There is evidence that unemployment is on the rise as we head toward 2008. Meanwhile, oil prices are attempting to sink the Fed?s forecast for tamer inflation. Light, sweet crude surged to $99.29 per barrel in overnight trading. A big part of the problem is the weak dollar, which was also reaching record lows during the Asian and European markets. This is why there has been talk of switching oil to euro denominated trading. U.S. inventories will be announced later today. Analysts expect them to show decent increases, which might help prices ease in late trading. And, as we?ve said before, when job security is in question and oil prices are rising, consumers are going to become much more uneasy. The revision to November?s University of Michigan sentiment survey may have ticked higher to 76.1, but that is a much weaker reading than earlier this year when the index was up in the 90?s. Lower consumer confidence generally results in lower consumer spending. This theory will really be put to the test as we enter the biggest shopping weekend of the year. There is guaranteed to be a spike in spending, but analysts will be comparing it to the same weekend in previous years to get a true measure of strength or weakness. Investors were spooked by the spike in oil and stock sell offs overseas. The Dow burst out of the gates, dropping 100 points in the first five minutes of trading. It was down 140 points within fifteen minutes before traders tightened the reigns. Since then it has been ranging between -80 and -120 points. Remember that the markets close at 2:00 PM ET today, and they will be closed all day Thursday for Thanksgiving. The markets do reopen on Friday at the normal time, but there will be another 2:00 PM ET close. It kind of makes you wonder why they don?t just keep the markets closed on Friday too, doesn?t it. At least one reason is that even though we celebrate Thanksgiving, the rest of the world does not. Therefore, their markets are still open without a break all week, so we can?t afford to fall that far behind. TECHNICAL ANALYSIS Under normal circumstances a 21bp pop shortly after the markets open would be something to write about. But after the previous four days, it gets little more than a yawn. The FNMA 30-year 6.0% jumped without a parachute yesterday, and it splatted 34bp lower by closing. It took out the 10-day and 25-day moving averages in one clean sweep. So at the moment, neither of them can be classified as support or resistance. The price came within just a few basis points of the upward trend line, so there remains support at this line. There was some indecisiveness in Treasury trading yesterday, as indicated by the spinning top formation. However, the 10-year yield dropped like a rock this morning, touching just a hair under 4.00%. It has been trading between 4.00 ? 4.02% since then. It has stretched far away from the 10-day moving average and is due to pull back to it. The 4.00% support level is holding firm, but the yield has not actually bounced higher yet. This will depend on where the stock market ends up today, and more importantly, what stocks do next Monday. http://www.winchesterlendinggroup.com/mortgage-news/article/119/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/118/ ECONOMIC DATA / NEWS Economists thought housing starts hit a new 15-year low in October. Instead, to everyone?s surprise, they increased from 1.19 million to an annualized rate of 1.23 million. Despite this improvement, building will probably see more declines, and we expect construction of new homes to stay low for at least the next six to nine months. However, we still feel confident that favorable mortgage rates, which we believe will drop even lower over the next three to six months, combined with steadily declining home prices will lead a new buying boom. It won?t be to the extent that we saw a few years ago, nor would we presume it to last as long. But, there is hope for the beginning of a recovery in the housing market by the middle of next year. We?ll admit this is a somewhat optimistic forecast, but we feel that a rebound is not as far off as many people think. Missed earnings by Target and a $2 billion loss by Freddie Mac last quarter could wreak havoc in the stock market this morning. However, they will be countered by the stronger housing starts, strong earnings from Hewlett-Packard, and a smaller than predicted loss by Barnes & Noble. Plus, Hewlett-Packard and Target both announced stock buy-backs following their earnings reports, which suggests that they anticipate stronger earnings going forward. The strong reports are likely to outweigh the negatives. And, especially with the stock market losing a huge chunk yesterday, we will probably see some bargain hunters this morning. Again, the lower volume will play a factor in creating bigger swings as well. And, the subprime defaults have claimed another CEO. H&R Block CEO Mark Ernst has announced his retirement. Many CEO?s of banking and financial firms have received strict criticism from shareholders and the public at large as their companies have taken multi-million or even multi-billion dollar losses. He will probably not be the last to go either, but the good news for stock holders is that the perception is these companies are making moves to correct previous mistakes. It should strengthen the mortgage markets in the long run. The minutes from the last Fed meeting will be made public at 2:00 PM ET. This is a potential market mover, but it is at a lesser level than the Fed rate decision itself. We feel that the minutes are going to lean toward a rate cut bias, but at the very least they should hint at an undecided position. TECHNICAL ANALYSIS We have seen upward price movements consistently lose steam somewhere between 100.91 and 101.00 for the last three and a half weeks. In fact, over the last three months prices have only closed above 101.00 once, and they were much lower prior to that. Currently, the FNMA 30-year 6.0% is down 9bp at 100.81, and it has not traded any higher than yesterday?s close of 100.91 today. The 10-year Treasury yield was flirting with moving lower in very early trading, but it popped up shortly after the stock market opened, as we expected. If you look at the historical chart of the 10-year Treasury yield, we saw a nearly identical move between mid-August and mid-September to that which we?ve seen between the very end of October to the present. The yield could climb to at least 4.30% if it does continue with that pattern from September. Right now, 4.19% is the key resistance level, because it marks the current rate at which the downward trend line resides. However, that trend line will fall as the days pass, and it will not be far from the yield, which has already risen to 4.11% this morning. http://www.winchesterlendinggroup.com/mortgage-news/article/118/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/117/ ECONOMIC DATA / NEWS There is not going to be much happening this week. Most economic data reports will be pushed back to next week. Plus, the markets close early on Wednesday and Friday, and of course they are closed on Thursday. Many traders take off Friday as well. They want to wait for the weekend sales results anyway before getting into any long positions. There are a couple reports coming out on Tuesday and Wednesday morning. Housing starts have become increasingly significant, thanks to the drastic slowdown in the housing market. It will probably affect stocks from sectors like homebuilding, furniture producers and retailers, banks, and any other industry that is tied to construction and home buying. This could have an indirect impact on bonds, if the stock market falls sharply enough. Weekly jobless claims is another gauge that has been thrust into the limelight. The jobs market has been shrinking since the start of the year, and if the economy slows like economists are predicting, there will be even fewer jobs in the new year. TECHNICAL ANALYSIS The FNMA 30-year 6.0% is up 6bp right now, but if we get any real movement, it will probably be to the downside, as trader close out their positions before the holiday. The 10-day moving average might provide some weak support, and the 25-day moving average, which has crossed above the 10-day, should be a moderate support level. The upward trend is approaching six months. We expect prices to continue higher for the next three to six months, but the trend may be broken in the short-term. For now though, it remains firmly intact. The 10-year Treasury yield has been fluctuating between 4.134% and 4.170% this morning. The two-year low, which was just hit last Friday, is 4.133%. This will be a very minor support level, but the strong downward trend could push the yield to a fresh new low. The only thing working against further declines is the fact that stochastics have been oscillating in overbought territory for the last month. That suggests that the yield will reverse upward very soon. http://www.winchesterlendinggroup.com/mortgage-news/article/117/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/116/ ECONOMIC DATA / NEWS September was the second straight month that foreign investors were pulling their money out of U.S. investments. $14.7 billion dollars moved out of the U.S. in September, adding to the $163.0 billion that spilled out the previous month. So, after nine years of positive net flows, we have now seen two consecutive month of negative cash flow. Sharp declines in the value of the dollar have led many investors to put their money into euro denominated investments. And, as the Fed has cut their rates, the spread between the return on U.S. and foreign investments has shrunk, which also makes foreign securities more desirable. This is another statement of how weak the U.S. economy is viewed, despite the past two quarters GDP readings, which were relatively strong. When retail sales came out earlier this week, we pointed out that weather is often blamed disappointing data. Well, it?s taking another knock today. This time it responsible for much weaker than expected industrial production. The warmer weather lessened the need for as much gas and electricity, causing industrial production to fall by .5% last month. Capacity utilization dropped as well, since fewer resources were needed. The index, which generally doesn?t move more than one tenth at a time, plunged from 82.2 to 81.7. TECHNICAL ANALYSIS MBS prices have settled down after a shocking 21bp gain yesterday. The FNMA 30-year 6.0% has given back 6bp, bringing the price to 100.84. Rallies have consistently fizzled out over the last three months every time they get close to 101.00. Prices are getting squeezed between support at 101.06 and the upward trend line, which are now only separated by about 50bp. When prices breakout of this large right triangle, it should set off a strong move in the direction of the breakout. Treasuries made an insane move yesterday as concerns about the state of the economy have increased. The 10-year yield tumbled to 4.14%, marking a new two year low. It popped back up to 4.19% prior to the data coming out, but the weak reports had investors ducking for cover in bonds. There should be psychological support at 4.10%, but the next major support is 3.98%. We?ve been forecasting the 10-year would fall to at least the high 3.00% range by the end of this year, and it?s looking like a good possibility right now. http://www.winchesterlendinggroup.com/mortgage-news/article/116/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/115/ ECONOMIC DATA / NEWS The employment picture appears to be worsening. Weekly jobless claims came in at 339,000 for last week, after falling to a one-month low at 319,000 the week prior. Looking at the November Empire State index, employment was one of the weak spots in an otherwise upbeat report. The index was a very strong 27.4, but current employment and future employment expectations both dropped. Manufacturing has been one of the big sectors that has been consistently losing jobs. The Philly Fed survey will be released at 12:00 PM ET. It has almost always been below the New York index for the last 2+ years. It is not forecast to show any improvement this month either. Consumer inflation was a touch higher than is desirable, but it was exactly what economists were expecting. The overall CPI rate was up .3%, while core CPI rose .2%. Almost nobody is talking about inflation these days. And, while a year-over-year core rate of 2.2% would have spun bond traders into a selling panic nine months ago, most of them probably couldn?t even tell you what the rate is as of today. It?s not far out of the 1.0 ? 2.0% range that the Fed ?unofficially? established anyway, and the Fed has much more important things to worry about. Primarily they need to figure out how to prevent the economy from diving into a recession. The best way to do that is to help repair the credit markets, which is why another rate cut or two over the next four months is extremely likely. TECHNICAL ANALYSIS This morning we got that upward break through the 10-day moving average for which we were hoping. The FNMA 30-year 6.0% up 9bp at the moment, but traders seem to lose the enthusiasm to continue buying at the current price of 100.78. The 10-day MA becomes support at 100.68, and upside potential is now 28bp. But, it?s only potential until we see some real momentum building. The 10-year Treasury tried for 4.20% for the third time in four days, but it came up short once again. The yield bounced higher to 4.24%, but that?s still a tad lower than where it closed yesterday. The difference between MBS and Treasuries right now is that the 10-year?s stochastics have lingered in overbought territory due to the continuing gains they made, while MBS leveled off or even dropped. http://www.winchesterlendinggroup.com/mortgage-news/article/115/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/114/ ECONOMIC DATA / NEWS Another clue that retailers may be in for a rough winter was this morning?s retail sales data for October. They may have been in line with expectations, but then again, expectations weren?t very high. Sales rose just .2%, both including and excluding automobiles. Warmer weather is being blamed for the lack of department store sales, because fewer people are buying winter clothes. Weather affects the economy in a number of ways, and it usually gets more blame than credit. If the weather were colder, then heating oil prices would probably be rising, and it would be accused of causing higher inflation. We?re not into the winter season yet though, so there is still time for winter clothing to be purchased, as well as oil prices to rise. Fortunately, if we can phrase it that way, oil prices have already climbed so high, that they are more likely to fall. And in fact, they are already down around $92 per barrel (scary that we?re saying down), from their record highs over $98. Overall PPI in October grew at .2%, which seems rather low considering where oil prices stand. However, the main incline was in September, and the most recent spike to $98 has occurred just over the last couple weeks. That?s why PPI for November will probably be similar to the 1.1% increase in September. Core PPI didn?t move at all last month, which is one step toward more Fed rate cuts. The slow retail sales growth will be another factor. Consumer inflation, which comes out tomorrow, could be the final piece of the puzzle. As long as inflation is low, the Fed can focus on jump starting the economy by cutting rates to try to free up money for lending. Bear Stearns says it will writedown $1.2 billion more this quarter. They have been one of the hardest hit by increasing defaults due to the high volume of risky subprime mortgages they originated. Their CFO assured investors that the worst is in the past, but they do expect an overall loss for the fourth quarter. Most banking stocks are modestly lower this morning, but the stock and bond markets are not moving much on the whole. TECHNICAL ANALYSIS MBS are showing almost no movement today. The 10 and 25-day moving averages are pinching today?s candlestick. The FNMA 30-year 6.0% has not moved more than 3bp in either direction. Whichever way they break out could be critical to which direction rates are going to move over the next month or longer. Prices are very close to the upward trend line, which is a support right now. However, prices didn?t bounce as high off the trend line in October as it did in August. A third bounce may not be in the cards, and if the upward trend line is broken, the 50-day moving average and support from a previous gap higher would both be taken out as support at the same time. The 10-year Treasury yield briefly touched the 10-day moving average at 4.31%, but it was smacked back down to 4.28%. The yield has traded under this MA for most of the last month. So, on the one hand, we can say that this is a strong resistance level. But, at the same time, it is more than overdue to be broken. This is the key level for the yield in the short-term. If the yield bounces off it again, then it could drop significantly. If the yield finally crosses over the 10-day MA, then the yield could easily jump above 4.40%. http://www.winchesterlendinggroup.com/mortgage-news/article/114/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/113/ ECONOMIC DATA / NEWS It?s impressive when one company is so large that it can move the markets all by itself. Well, that?s how big Walmart is. They reported stronger than expected earnings in the third quarter. And, CEO Lee Scott predicts a successful holiday season for the company. Earnings from other retail companies have been missing estimates lately, and many investors fear, especially with oil and gas prices rising, that consumer spending could be worse than normal, leading to dismal earnings from retailers. Walmarts confident position is being reflected in the markets as the Dow has jumped 126 points, and is back over 13,000. Thankfully, it doesn?t look like this is the week that oil will top $100. Prices have slipped back to $93.56, but falling under $90 may be difficult, now that there is psychological support at that level. Gas prices have risen 40 to 50 cents per gallon in most parts of the country, and this raises concerns about both higher inflation and slower economic growth. If oil prices are able to fall below $90 again, that would take a significant amount of pressure off gas prices. The rest of the week is packed with some big reports, including retail sales, inflation data, and industrial production. Even the foreign investment numbers could affect the markets, since they were negative last month for the first time in 9 years. If foreign investment doesn?t make a rebound, the value of the dollar and the values of U.S. bonds may take a hit. TECHNICAL ANALYSIS The FNMA 30-year 6.0% is flat today, because it is stuck at the 10-day moving average. This marks the sixth day in a row that we?ve traded below this line. The 100.62 level has become obsolete as a support or resistance level. We?ll leave it on the chart today for reference purposes, but it can be ignored at this point. We?re still range bound between the 10 and 25-day moving averages, with the 25-day moving average providing moderate to strong support at 100.57. The 10-year Treasury yield has created a new support level at 4.20%, which is a two year low. It traded down to this point last Friday as the stock markets suffered substantial losses. This morning it has bounced higher to 4.25%. There could be some weak resistance from 4.30% for psychological reasons, and then moderate resistance from the 10-day moving average at 4.33%. But, the stochastics are deep into overbought territory, so the yield could climb even higher than 4.33% in the short-term. http://www.winchesterlendinggroup.com/mortgage-news/article/113/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/112/ ECONOMIC DATA / NEWS If you thought $347 million is a big loss for one quarter, how about a $1.1 billion dollar loss in one month? That?s how Wachovia says its asset-backed securities, mostly consisting of mortgage-backed securities, declined in value in October. Bank of America will announce their third quarter earnings later today. The banking sector has not hit a bottom yet as is reflected in the continuing declines in their stock prices. Fannie Mae itself just reported a $1.39 billion loss last quarter, over three times Wachovia?s losses. Now Washington Mutual is under investigation by the attorney general for pressuring appraisers into overstating property values. This has undoubtedly affected Fannie Mae?s bottom line, as WaMu is the third largest seller of mortgages to Fannie Mae and Freddie Mac. Other lenders may come under investigation as well. This will probably push banking and financial stocks lower in the short-term, but because they are implications regarding past actions, it should not have much affect on new issues of MBS. Consumer confidence slid to its lowest point in two years. The University of Michigan sentiment survey gave up six points from 80.9 to 75.0. But then there hasn?t been much for consumers to get excited about lately. Their home values are falling, oil and gas prices are soaring, stocks are dropping, and now the Fed says things may get worse. Weaker consumer confidence is one indicator that economists look at when predicting consumer spending, the biggest contributor to GDP, over the next few months. The weakness is even worse based on the timing, seeing as how we are entering the biggest two shopping months of the year. The trade gap shrunk in September, which, for some reason, caught economists by surprise. With the dollar getting crushed against all major foreign currencies, exports have been on the rise, which has nibbled away at the U.S.?s monthly deficits. If went from $57.6 billion in August to $56.5 billion the following month. Although it won?t be a major factor, it is one input that could actually increase GDP. Import prices have been skyrocketing on a monthly basis. Last month they almost doubled expectations by jumping 1.8%. Of course, all you have to do is extract oil and all of a sudden, import prices only rose by .5%. All imported goods are becoming more expensive because of high oil prices and the weaker dollar. It does not need to be overly scrutinized unless we see the increase seep into domestic prices. TECHNICAL ANALYSIS MBS prices have not caught up to Treasuries yet, and it could be a very long time before they do. But, the FNMA 30-year 6.0% is up 9bp right now as investors are looking for a greater return than what they?ll get from Treasuries. However, at 100.56, the price is below resistance at 100.62 for a fourth consecutive day. The 25-day moving average has saved prices from falling lower, and the upward trend line is within about 12bp. The trend line should be a strong support, so we may finally see prices rise again in the next week or two. As money pours out of the stock market, bonds are slurping up every dollar they can catch. The 10-year Treasury yield has plunged to a new two-year low at 4.23%. There is no real support anywhere near the current yield, which makes resistance almost irrelevant at the moment. Treasuries are going to rise and fall with the stock market, but even with stochastics in overbought territory, there remains strong demand for Treasury bonds. http://www.winchesterlendinggroup.com/mortgage-news/article/112/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/111/ ECONOMIC DATA / NEWS Is the jobs market improving? We wouldn?t go so far as to say that, but layoffs did dip a little last week. Weekly jobless claims, which had been over 320,000 for the last four weeks, receded to 317,000 for last week. The four-week average is up to 329,750, and with certain costs of doing business rising the way they are (oil in particular), many more layoffs may be in companies? futures. Same store sales in October were weak, and although the holiday shopping normally doesn?t get into full swing until November, there are obvious negative implications for the data. Consumers are holding their money tighter to the vest as they?ve seen their home?s equity decline and gas prices rise. Bernanke reaffirmed what everyone has already been worrying about. He provided his testimony before the Joint Economic Committee to congress this morning. Amazingly, he wrote off the recent strong GDP numbers, saying that growth is likely to slow dramatically due to continuing credit issues and increasing mortgage defaults. Despite his past insistence that the housing market problems are contained and that it is not the job of the Fed to bailout the credit or financial markets, he cited these two areas numerous times in his testimony. The Fed is watching these sectors, whether they want to admit it or not. The fact that they still have significant doubts and concerns about the markets implies that they are going to do what they can to lighten the blows. TECHNICAL ANALYSIS MBS prices are starting to catch up with the gains in Treasuries. The FNMA 30-year 6.0% is up 3bp to 100.59, but it is below the previous support (now a resistance) of 100.62. Price have close below this level the past two days, so there is growing resistance at this level. There has been support at 100.52 (25-day moving average), so prices are caught in a tight range right now. The stochastics are well out of overbought territory, so prices have flexibility to move either way at this time. The 10-year Treasury yield slid lower yesterday after the stock market plunged 360 points. The yield is trading just under 4.30%, but this threshold has put up a strong wall of support so far. Unlike MBS, Treasuries remain deep in overbought territory, so there is greater potential for the yield to rise in the short-term. http://www.winchesterlendinggroup.com/mortgage-news/article/111/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/110/ ECONOMIC DATA / NEWS Citi knew they needed to make a quick move to assuage investors? fears, so they named Richard Stuckey to oversee their subprime investments. However, the appointment is probably too late to fix the company?s issues permeating from previous poor investment decisions. The confidence really comes from the belief that he will help assure that losses of this magnitude do not occur in the future. And while banks and investment firms continue to set record losses, oil can?t stop setting record highs. Light, sweet crude hit $96.60 per barrel this morning. If you had asked me if prices were going to hit $100 per barrel in the next five years, I would have said it was a long-shot. If you had said by the end of this year, I would have said impossible. Now all of a sudden it seems to be a question of whether it will be this week or next. There has been one scare after another regarding shortages or potential shortages. The latest problem is slowdowns in shipments from Mexico due to inclement weather. Also, bombings in Afghanistan and attacks in Yemen are stirring concerns that supplies from the Middle East could be affected. Although it has had little effect to this point, oil prices could eventually threaten to push inflation higher. At the same time, it could also slow economic growth if costs become too great. It will play a part in the Fed?s next few rate decisions, especially if it continues to rise. TECHNICAL ANALYSIS MBS were even worse about a half hour ago, but they have recouped some losses since stocks have turned negative. The FNMA 30-year 6.0% is down 6bp, which places it under the 100.62 support level. Our next support is the 25-day moving average, just 7bp below the current price. We have to be very aware of the evening star formation that has been formed by the past three candlesticks. This is a strong indication of a shift toward downward momentum. The stochastics seem to concur, as they have only just begun to turn lower. The 10-year Treasury yield is up at 4.35%. There is minimal resistance from the 10-day moving average, but that probably won?t hold for much longer. Unlike the FNMA, the stochastics for the 10-year are still in overbought territory, and have not even crossed upward yet. We could see the yield jump as high as 4.50% before making its next surge lower. http://www.winchesterlendinggroup.com/mortgage-news/article/110/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/109/ ECONOMIC DATA / NEWS Citigroup?s CEO was the latest person to lose his job as a result of mortgage market losses. Technically, Charles Prince ?resigned,? but that?s the way CEO?s are fired while being allowed to keep their dignity. He has received a lot of criticism for allowing the company to become overexposed in the credit markets. Citi announced that they may take as much as another $11 billion loss this quarter, on top of the $6.5 billion in write downs they already took in the third quarter. That is hurting banking and investment firms? stocks this morning, and MBS prices are down slightly as well. However, Treasuries are gaining because they are being used as a hedge against losses in all the other securities. This is one of those unusual instances where we could get a divergence between Treasury bonds and mortgage bonds, and it is the mortgage bonds that are going to provide us with direction for mortgage rates. The services sector, which makes up over two-thirds of economic activity, grew quicker in October than economists had forecast. The ISM index was expected to decline. Instead, it rose one point to 55.8, which is consistent with modest economic growth. TECHNICAL ANALYSIS The problems that continue to circulate through the financial sector are going to make their market on mortgage-backed securities. The FNMA 30-year 6.0% is down 9bp at 100.84. Prices peaked at the strong resistance level at 101.06 last Friday, and they were promptly turned away. Our primary support level remains at 100.62, so there is the danger that prices could fall at least another 22bp in the short-term. Conversely the 10-year Treasury yield has been wavering between 4.30% and 4.31%, but the bond has yet to threaten any losses today. The yield hit a new one year low at 4.27% in very early trading. There is no real resistance before 4.40%. There is only minimal support at 4.30%, and there are no major support levels before the three year low of 3.80%. We have been saying for about a year that the 10-year yield was going to fall to the high to mid 3.0% range, and we are still expecting that over the next six to nine months. http://www.winchesterlendinggroup.com/mortgage-news/article/109/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/108/ ECONOMIC DATA / NEWS Building on yesterday?s list of economic data that didn?t fall anywhere near economists? expectations, October?s employment payrolls surged upward by 166,000, which is double what forecasts were. The seasonal factors that boosted the number were education and health care, which added 43,000 positions, and leisure and hospitality, which grew by 56,000. Some of the schools that start a little later affected these numbers, and we?re approaching the season when more people tend to get sick. We?re also nearing the holiday traveling season, so those services (i.e. airlines, hotels, etc.) are gearing up for increased activity. Payrolls grew in spite of the loss of 48,000 jobs between manufacturing, construction, and retail. The unemployment rate stayed at 4.7%. Average hourly earnings were a little low at .2%, while the average hours worked was steady at 33.8. Aside from the fact that all of these figures were in line with forecasts, they generally take a back seat to the payrolls data in terms of market impact. And, the only thing more surprising than the strong jobs report was the financial markets? reactions. Stocks barely crept higher at opening, and now the indices are mixed with the Dow down about 60 points. And even more shocking is the bond markets. Bonds initially took a hit immediately after the payrolls data came out. However, they rallied very shortly after the stock market opened. This is one of those very rare instances when a piece of economic data of this significance comes in WAY above expectations and yet the bond markets saw dramatic gains. Clearly the sharp drop in the stock market yesterday is a heavy weight for traders to shake off. With money rapidly exiting stocks, there is nowhere to put it but bonds (or gold, which is up near all-time highs around $800). TECHNICAL ANALYSIS After a brief dip, that was as much as 12bp early on, the FNMA 30-year 6.0% is now up 9bp from yesterday. The improvement came between about 9:30 and 10:00 AM ET, during the first half hour of the stock market opening. We still have a very tough resistance at 101.06, and prices are currently at 101.00. But, the fresh one year low in the 10-year Treasury yield may be enough to finally propel prices through this level. That Treasury yield is all the way down to 4.31%, and took an extremely brief dip below 4.30% for the first time since 2005. Other than 4.30% acting as a mild psychological support, there is not much in the way of the yield falling a lot further. The stochastics barely made it out of overbought territory, but it was enough to allow them to cross downward again. http://www.winchesterlendinggroup.com/mortgage-news/article/108/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/107/ ECONOMIC DATA / NEWS The Fed decided to go with an unimpressive .25% rate cut yesterday. The reason bonds had improved so much over the past couple of weeks was because traders were banking on a .50% cut. When they didn?t get it, they sold out quickly. The stock markets were pretty happy with the decision though, and the Dow rallied 130 points after the announcement. It was also their least hawkish statement in months. They said, ?the upside risks to inflation roughly balance with the downside risks to growth.? Interesting that they would say such a thing on the same day that GDP in the 3rd quarter was the strongest it has been since the 1st quarter of 2006. But they?ve said they believe there is more weakness ahead. We happen to agree with them on that point. As perfect evidence that all is not well in the financial markets (which roughly translates to the overall state of the economy), the Dow has tumbled by about 225 points. The economic data from this morning, which we?ll get into in a moment, was completely contradictory to yesterday?s strong economic reports. Plus, oil prices have experienced very little resistance, reaching $96 per barrel in overnight trading. It is trading between $92 and $93 right now, but there are no signs of slowing in the short term. We talked about how the GDP measurement for the 3rd quarter did not include consumer spending from September. Spending came in at a .3% gain in September, as expected. That?s half as strong as August, and that could show up in the form of a revision lower to GDP next month. The ISM manufacturing index was close to the Chicago estimate. It was only down about a point. But, at 50.9 it is barely above 50.0, which is the separation between expansion and contraction. There was disappointing employment news as well. Weekly jobless claims were on the higher side for the third week in a row. They improved a bit from 331K to 327K, but it is well above the average for the year. And Chrysler was the latest company to announce a major layoff, saying that they will cut up to 12,000 jobs over the next year. Although the job cuts won?t be reflected in tomorrow?s payrolls numbers, the weekly jobless claims should be noticeable. ADP?s estimate seems very high, especially since it would suggest growth of over 120,000 jobs once government positions are added. Based on the data we?re seeing, we believe payrolls could actually come in under 100,000. Finally, the core PCE price index increased by .2% last month. It?s a little higher than the previous month, but right in line with forecasts. The Fed has shifted their focus toward economic growth, so inflation is off the grid for now as far as traders are concerned. TECHNICAL ANALYSIS The FNMA 30-year 6.0% has made back 21 of the 28 basis points it lost late yesterday. At the moment, prices are back above the 10-day moving average by 3bp, but this MA could still act as sort of an elastic resistance level that could still fling bond prices lower. Just as yesterday?s move was somewhat of an overreaction, this move may not be able to hold either. The stochastics are still indicating downward momentum, and they are just beginning to get out of overbought territory. Any rebound in the stock markets will probably cause prices to retreat. The 10-year Treasury yield has improved so quickly that it is better than it opened at yesterday. Prior to the data coming out the yield broke above 4.50%, but it has nose-dived (a good thing for the yield) to 4.37%. There is not much support before the long-term low of 4.30%, but a stock market rally would pull some money out of Treasuries as well. http://www.winchesterlendinggroup.com/mortgage-news/article/107/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/106/ ECONOMIC DATA / NEWS For now, the biggest shock of the day is the 3.9% GDP reading in the 3rd quarter. Most forecasts were in the low 3.0% range. Instead, we got the best quarter of economic growth in a year and a half. It barely topped the 2nd quarter by .1%. This is just an initial estimate since certain factors like consumer spending, factory orders, and inventories have not yet been measured for the final month of the quarter. It does throw a lot more on the load that the Fed is already carrying. All of a sudden, there is a lot more uncertainty surrounding their rate decision. The credit markets do still need some assistance, but the rate cut may not be as aggressive now. But, the reason we say GDP is the shocker of the day ?for now? is because the Fed decision could be an even bigger surprise. Actually, nothing has come in even close to expectations this week. The ADP employment estimate was well above forecasts. While most economists were expecting about 60,000 additional jobs for October, the payroll company came up with an estimate of 106,000 new jobs. This index has been known to be way off in the past, but we?ll find out how accurate it was for this month when Friday?s official payrolls data is released. While the first two reports were much better than projected, the Chicago PMI dropped considerably in October, from 54.2 to 49.7. The national manufacturing report comes out tomorrow morning, and it has tended to be very similar to the Chicago measurements in recent months. When this index falls under 50 it represents contraction in the industry. Manufacturing data is some of the earliest data we get for the current month. So, although the 3rd quarter may have seen a boom, the 4th quarter is starting off on the wrong foot. Another surprise was September?s construction spending. Rather than the predicted decline, spending increased by .3%. However, a revision to the previous month made it a wash, since it was adjusted from .2% to -.2%. Overall, it has not had much impact on the markets, especially with the bigger reports coming out before it. The stock markets were pretty pleased with the economic growth and employment results, but the gains are limited due to the Fed rate decision, which will be made public at 2:15 PM ET. Meanwhile, bond traders didn?t take the news quite as well. It limits the amount of rate cuts that traders now expect, at least in the short term. TECHNICAL ANALYSIS MBS prices might be a lot worse after this morning?s data were it not for the Fed meeting. As it stands now, the FNMA 30-year 6.0% is only down 9bp at 100.88. It is staying above the 10-day moving average, although price did attempt to break below it earlier. Our range has narrowed to between 100.86 and 101.06, but there is a good likelihood that this will change by the end of the day. The 10-year Treasury yield popped back over 4.40%. It is trading around 4.42%, and it will probably hover around this level until after the Fed statement. Unlike the FNMA, the Treasury yield has crossed over its 10-day moving average, after trading below it for the past 10 days. http://www.winchesterlendinggroup.com/mortgage-news/article/106/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/105/ ECONOMIC DATA / NEWS Consumer confidence fell more than expected in October. The Conference Board?s index dropped by more than forecast, coming down from 99.8 to 95.6. This is a fairly considerable change for this index, and it makes sense considering the spike in oil prices and increasing number of layoffs. Confidence is supposedly translated into how much consumers will spend. The fact that the index is the lowest since late 2005 goes right in line with predictions of a recession. The holiday shopping season is fast approaching, and the volume of purchasing during this time period will be a strong early indicator of whether or not a recession might be looming. Merrill Lynch?s CEO was just booted from his position following their worst quarter in the company?s history. The losses were attributed to the company?s huge exposure to subprime loans, which have been costing numerous lenders and investors vast amounts of money. UBS just this morning announced a loss of $712 million for the same reason. Of course, that?s nothing in comparison to the $2.3 billion hit that Merrill took. Those economists (including Fed members) who have been saying that the subprime problems would not spill over into other sectors of the economy were sorely mistaken. Right now it is directly impacting the financial sector as a whole. But, when that happens, it eventually affects the consumer, which then translates in to less overall buying power. All of this news will make the consumer spending data on Thursday that much more interesting. TECHNICAL ANALYSIS The FNMA 30-year 6.0% actually picked up a few more basis points than we thought it would yesterday, which was a welcomed surprise. But that also explains why it is down 3bp this morning. The current price of 100.97 is not far from resistance at 101.06. And, with the exception of the two days in the middle of last week, the bond has not traded above 101.00 since March of this year. This will make traders act very cautiously around this level. The 10-year Treasury yield is essentially flat again today. The yield is at 4.39%, and it has been trading mostly between 4.38% and 4.41% since yesterday morning. The 10-day moving average has quickly dropped to 4.42%, so there is at least minor resistance just above the current yield. http://www.winchesterlendinggroup.com/mortgage-news/article/105/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/104/ ECONOMIC DATA / NEWStec Not only have oil prices been reaching new highs every few days, but they are now getting close to the inflation adjusted all-time highs of the early 80?s, which would be approximately $100 per barrel in today?s dollar. Light, sweet crude charge upward by $1.34 to $93.20 per barrel during Asian trading. It is back under $93.00 right now. Gas prices certainly have not yet caught up with oil price increases. Plus, it is a major concern for any company relying on oil for production or transportation of its products. This is one of those factors that could have the Fed considering holding off on another rate move this week. The stock markets are edging higher this morning, but investors will act with caution up until the Fed rate decision on Wednesday afternoon. After that, look for significant volatility in stocks and bonds. Most likely they will trade in the same direction after the announcement. Although, if one market were to win out, it would most likely be the stock market. There are three possible rate cut options as far as most people are concerned: no cut, a .25% cut, or