July 17 2006

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For the week of Jul 17, 2006 --- Vol. 4, Issue 29

Last Week in Review

"FLIGHT TO QUALITY"...a phrase that was bandied about on the news last week, but all you have on your mind is a flight to the beach for a nice summer vacation. "Flight to quality?" Break off from the beach for a minute...it's worth knowing what this phrase means. Geopolitical headlines such as the recent escalation in the Middle East always catch the attention of traders and investors, because it may prompt them to rebalance their money from Stocks into Bonds. Why? Because Stocks represent the value of a particular business or company, and many companies and industries as a whole have interests in other parts of the world besides the US. The fear of war or crisis impacting the value of a business or company can cause investors to sell off some of their holdings in Stocks, causing Stock prices to decline. But where does that money go? It generally gets parked, at least temporarily, in something safe and secure like Bonds. Unlike Stocks, Bonds have a guaranteed value, so are a safe place to park money and still earn a return. When global tensions arise, this influx of money into Bonds is called a "flight to quality", meaning a movement of money into the quality "haven" of Bonds. But despite all the geopolitical unrest last week which should have caused this "flight to quality", and benefited Bonds and home loan rates...rising oil prices trumped out the news and home loan rates remained unchanged. Last week, oil broke above $78/barrel...and appears likely to head higher. This adds to inflationary pressure, which is the arch-enemy of Bonds, having a fixed dollar amount of return. Why? Because inflation means those dollars will not buy as much in the coming years! Escalating activity in the Middle East is adding a risk premium to the price of oil, because in this case, fighting may escalate to include oil producing nations. This is why the concern about inflation resulting from higher oil prices wiped out the normal home loan rate improvement generally seen from a "flight to quality". NOW BEFORE YOU HEAD BACK TO THE BEACH AND IMPRESS YOUR FRIENDS WITH YOUR MARKET KNOWLEDGE...YOU KNOW YOU'LL PROBABLY NEED TO HIT UP THE ATM AND GET SOME CASH. AND IF YOU WANT TO IMPRESS THOSE FRIENDS EVEN MORE, READ THIS WEEK'S MORTGAGE MARKET VIEW AND TELL THEM HOW YOU GOT YOUR CASH FOR FREE.

Forecast for the Week

Buckle up and hold on tight...the coming week may be a wild ride. There's big news on the docket almost every day this week, and all are potential market movers. Check this beefy calendar out: Monday brings a look at the manufacturing sector, with Industrial Production and Capacity Utilization; Tuesday has the heavy hitting Producer Price Index (PPI), examining the extent of price inflation on the producer side; Wednesday holds the Consumer Price Index (CPI), telling of price inflation on the consumer side...and if that weren't enough already, Bernanke will also speak before Congress on Wednesday; Thursday will bring another glance at manufacturing with the Philly Fed Index and the "minutes" or details from the last Fed meeting. And don't forget that all the geopolitical headlines will still be in the works throughout the week, with tensions remaining high in the Middle East and impacting the price of oil on a daily basis. So although Mortgage Bond prices and home loan rates haven't moved too much in the past week - get ready for some action in the week ahead. The chart below shows how Mortgage Bonds have been beached against the tough technical level to beat of the 25-day Moving Average. And since Bonds and home loan rates respond well to negative news, the flavor of the news in this coming week will likely determine if Mortgage Bonds can convincingly defeat the 25-day Moving Average, move higher, and bring some improvement to home loan rates. Chart: Fannie Mae 6.5% Mortgage Bond (Friday Jul 14, 2006)

The Mortgage Market View...

THERE IS A $3.00 FEE FOR USING THIS ATM MACHINE - DO YOU WANT TO CONTINUE AND PAY THE FEE, OR CANCEL? Aggravating...yet you quickly think to yourself, "What do you think, pal? I've got my kids standing here pulling at my leg to hurry up so we can move on with our day. Do you really think I'm going to run all over town to find a free cash machine? Get it over with, take your darn fee and just give me my cash!" It's a typical scenario repeated countless thousands of times per day, all over the world, as consumers pay the price for convenience. How big of a price is being paid? ATM income to banks is estimated to be around $4.2 billion per year...that's a hefty load of cash. And although banks have made literally billions of dollars on ATM fees over the years, faced with cut throat competition and growing consumer discontent over rising ATM fees, some banks are trying a new strategy...not charging the fees at all. So with interest rates on the rise, making profit margins slim for banks - how can they afford to do such a thing? The answer is that owners of the free networks will be charging your bank, instead of charging you...and hoping that the increased use of their machines will help to offset the loss of fee income from the consumer themselves. Smaller banks and credit unions in particular are willing to pay some fees to large free network operators, because the cost of building, maintaining and servicing ATM machines themselves would be so great. Even keeping the machines constantly loaded with cash has become increasingly expensive, factoring in the climbing cost of gasoline needed to power the vehicles that courier the cash out to the machines on a regular basis. This plan very well could be a win-win for everyone, but most importantly, could help keep those extra bucks in your own wallet...where they belong. To find free machines near you, and start saving on costly ATM fees, check these two free locator links: MoneyPass and Allpoint.

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 July 17 – July 21 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.