March 13 2006

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For the week of Mar 13, 2006 --- Vol. 4, Issue 11

Last Week in Review

“IF YOU LOSE THE POWER TO LAUGH, YOU LOSE THE POWER TO THINK”…Clarence Darrow And while there was certainly a good bit of economic news to think about, Traders weren’t laughing it up too much as they mulled over the events of the week. Right out of the gates, Bond prices fell on Monday and caused home loan rates to rise about .125%. Why? Due to continuing fallout from the European Central Bank’s decision to raise their interest rates with indications of more rate hikes to follow, the equivalent of our Fed raising the Fed Funds Rate. The concern is that foreign investors, who have had a healthy appetite for our US Bonds, will now start moving their money out of the US and towards Europe, in the hopes of higher returns. And unfortunately, concerns on this were given some validation later in the week when a Treasury auction received only minor attention from foreign banking institutions. Foreigners generally buy over 50% of our auctioned Notes, but this round showed an unimpressive 5.5% bought by foreigners. Lower demand for our Bonds will naturally result in lower Bond prices and higher home loan rates here at home…so this is a trend to watch. Good news on the Jobs front, as the latest monthly Employment Report showed a better than expected job growth of 243,000 new jobs in February, although a downward revision for January shaved off 23,000 previously reported jobs. Additionally, Hourly Earnings rose by 5 cents to $16.47 – what the average American worker gets paid per hour. It’s important to note that Hourly Earnings are up a considerable 3.5% on a year over year basis, which does raise wage-based inflation concerns…so read on to discover why inflation is bad for home loan rates. LOOKING FOR A GREAT STORY TO BRING TO YOUR NEXT SOCIAL OUTING? READ THIS MONTH’S MORTGAGE MARKET VIEW FOR A FAMOUS STORY ABOUT GOOD OLD CLARENCE DARROW, AND WHY HE WAS SUCH A SMOKING SUCCESS IN THE COURTROOM.

Forecast for the Week

A beefy economic calendar is in store for the week ahead, taking a broad look at the US economy, including Retail Sales, Manufacturing, Housing, and the always important Consumer Price Index Report. Inflation watchers will be on the edge of their seats, waiting to see if consumer prices are indeed on the rise. Inflation is bad news for Bonds, which deliver a fixed return to the Bond holder. Why? Because inflation means that the fixed dollar amount of return you are gaining on that Bond buys fewer goods and services over time, as prices “inflate”. Bond holders then have to raise rates, in order to compensate for the fact of inflation…therefore why inflation causes rates to rise! Now the chart below shows a technical “floor of support” that may help Bonds to hold their ground during the coming week. But if the news of the week looks economically hot, with inflation on the rise…look for Bond pricing to suffer and home loan rates to rise another .125%. Chart: Fannie Mae 6.0% Mortgage Bond (Friday Mar 10, 2006)

The Mortgage Market View...

“There is no such thing as justice – in or out of court.” – Clarence Darrow Order in the court! The courtroom is heating up as the trial of Enron executives, Ken Lay and Jeff Skilling, is fully under way. Jurors have been carefully chosen to hear the arguments of the prosecuting and defense attorneys, and the air in the courtroom will be thick with tension while each attorney states their best arguments to sway the jury in their client's favor. However, the air in the Enron courtroom will never be as thick as when Clarence Darrow, the greatest criminal defense lawyer in American history, was defending his clients. He was known for several famous trials, including John S. Scopes in the so-called "Monkey" Trial, and was also known for opposing the famous William Jennings Bryan, three time nominee for President. And back when Clarence Darrow was defending clients, smoking was permitted in courtrooms and Darrow was known for lighting up a good stogy while in the courtroom. But Clarence never lit up a cigar in a courtroom for the pure enjoyment or great taste. He saved his cigar for just the right moment during a trial, always lighting his cigar just when the opposing attorney got up to give their closing argument to the jury. There was a method to his madness. While the opposing attorney gave their closing argument, Clarence would puff away on his cigar, prominently holding out the cigar as the ash grew and grew…but never seemed to drop. One by one, the jurors would become transfixed, watching the ever-growing ash and anxiously waiting for the ash to drop. But it never did…why? Because Clarence wasn’t smoking just any cigar…he would smoke a cigar that had been “pre-wired” with a straightened paperclip, which kept the ash from falling. With the jurors increasingly engrossed by the progress of the ash, they would not pay close attention to the opposing counsel's statement, often leading Darrow to victory for his clients.

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. Economic Calendar for the Week of March 13 – March 17 Date ET Economic Report For Estimate Actual Prior Impact

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.

As your trusted advisor, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.