THE GOOD, THE BAD, AND THE UGLY… and at the end of it all, what happened with mortgage interest rates last week? By and large, absolutely nothing. After the dust settled from this past week’s mortgage bond trading, mortgage bond prices and therefore mortgage interest rates, ended the week unchanged. What is good for the economy and the stock market is often bad for mortgage bonds and mortgage interest rates, so let’s take a peek at the events of the week.

The good: As far as the overall economy is concerned, last week had some very positive moments, such as the better than expected Initial Jobless Claims Report. Unemployment Claims took a dive lower by 23,000 to 382,000, the lowest number since last February and below expectations.

The bad: GE caused some concern on Friday when it lowered its full-year profit forecast for the second time, blaming the tough economy and higher raw material costs. GE's results are seen as a barometer of the overall economy because of its far-reaching business units, and analyst’s state that although the report was not as positive as expected, GE still did extremely well.

The ugly? Nothing terribly ugly, except a few very politically correct statements by Federal Reserve President Robert McTeer, saying that there's a "good chance" the economy is growing at a reasonable rate and that he's "pretty optimistic" about the U.S. economy overall. Not exactly a bold vote of confidence.

The truly ugly? Check out the Mortgage Market View below for stunning income tax statistics. It’s not a pretty picture, but DON’T MISS the beautiful “LOOPHOLE” for small business owners, also revealed in this weeks View…

Which way will the winds of change blow in the coming week? It does not appear that mortgage bonds will provide a very clear picture of where mortgage interest rates may head this coming week. The deciding factors in terms of interest rate direction will be provided by this week’s economic reports and the continued release of stock earnings. Monday will provide a breather with the Columbus Day holiday, but the latter portion of the week will be action packed.

The outlook has been optimistic for the economy, and hopes are high that this week’s reports and releases will continue to show encouraging signs. Strong positive data is needed to confirm beliefs that corporate revenues are on the rise and the economic recovery is holding steady. Analysts are also looking for job creation. "If this acceleration stage is to continue, we have to see 150,000 to 200,000 new jobs per month to get the feeling the economic recovery is sustainable," said Bruce Bittles, chief investment strategist at Nashville-based Robert W. Baird & Co. Without more jobs, he added, confidence inspired by the third quarter may not be enough to carry into the New Year. A cautionary note on the stock earnings reports this week - analysts do not expect the remainder of third-quarter results to cause a major upbeat response from the stock market as seen over the past week, since so much optimism is already priced into the market.

If the data reported is worse than expectations, mortgage bond prices should move higher and mortgage interest rates should edge lower. If the data is better than expected, then mortgage bond prices will fall and mortgage interest rates will creep up higher. The mortgage bond chart below shows the sideways direction bond prices have been moving in lately. If they continue to do this, rates should not fluctuate much from present levels. The green “candle” on the far right of the chart shows how bonds are floating in the middle of support and resistance. Will mortgage bonds and mortgage rates continue to float somewhat aimlessly this week, much like the Nina, Pinta and Santa Maria once sailed the ocean blue? More than likely not, and we’ll be sure to update you in next week’s issue of the Mortgage Market Guide Weekly.

The numbers are in, and they are not pretty.

The top 1% of income tax filers paid 34% of all federal income tax in 2001. An AGI of more than $292,000 was needed to be in this group of tax payers, who made 17½% of adjusted gross income nationally, but paid almost a third of the federal income tax bill.

The top 5% paid 53% of total income tax and made 32% of total AGI, with incomes of $127,900 or more.

The top 10% of all filers bore 65% of the income tax burden, while making 43% of all AGI, averaging at least $92,700.

Viewing this in another way, the bottom 90% of return filers paid only 35% of income taxes overall, and the bottom 50% of filers paid just 4% of total income tax. The lowest-income earners actually had a NEGATIVE tax rate, due to the earned income credit refunds income and payroll taxes.

Ready for some good news? If you are a small business owner, you might be eligible for the “Light Truck LOOPHOLE”.

A law originally intended to make it easier for farmers to afford larger pickup trucks has evolved into a “dream come true” for many small business owners. In 1984 the government, after being concerned there were too many taxpayers writing off the family car as a business expense, limited tax depreciation on luxury cars. But it allowed the write-off to remain for light trucks having a gross vehicle weight rating or GVWR of at least 6000 pounds. In 1996 Congress, in an effort to boost business investment, adopted an accelerated depreciation schedule starting at $17,500 on equipment used in a business, and increased to $25,000 in 2003.

Small business owners are often intensely interested in Internal Revenue Code provisions that apply to automobiles, Section 179 deductions, and the amortization of intangibles. Automobiles are generally treated as assets with a five-year recovery period. Luxury automobile rules limit depreciation write-offs for most business autos costing in excess of $15,300. There are, however, exceptions to the luxury automobile rules you can take advantage of, especially if you like large luxury SUV’s.

For example, a Cadillac Escalade sells with a sticker price of $56,510, not including any special buyer’s incentives. However, under Section 179 of the tax code, it qualifies for an “immediate tax depreciation” break of $25,000, then the vehicles remaining value is depreciated over the course of five years, with 20 percent depreciation in the first year. But wait, there’s more to deduct, thanks to the Congressional passage of President Bush’s 2002 economic stimulus package. You can also deduct a bonus 30 percent of the remaining cost before placing your new Escalade into a normal five year depreciation cycle with the 20 percent first year deduction. This adds up to about $38,710 worth of deductions and a final price after depreciation of around $17,450.

But wait, there’s even more! The 2003 economic package will let some business auto buyers “super-size” the tax break to $75,000 in addition to the existing bonus. This applies to new vehicle purchases between May 6th and January 1, 2005. Under the new 2003 economic package formula, you could write off a whopping $86,000 on the sticker price of a new, fully loaded $100,000 Hummer in the first year alone: $75,000 in equipment investment, a bonus 30 percent of the $25,000 remaining ($7500), plus 20 percent depreciation on the $17,500 balance ($3500) for the first year. This can translate into a tax savings of more than $33,000 for buyers in the highest tax bracket. If you choose a less expensive model, you would be able to write the whole thing off in the year of purchase.

The only requirement to get this tax break, other than buying one of the eligible vehicles, is the vehicle must be for work and not for personal use. This means you must be in business, filing a Schedule C or Corporate tax return for that income, and not simply using your SUV for business purposes. Even though these vehicles produce bigger gas bills, some business people may find the choice to buy one of these vehicles an easy one to make. When you compare either the existing or proposed tax incentives to the measly $7660 initial deduction allowed for cars and smaller SUV’s or the miserly $2000 for fuel-efficient hybrid cars, you and your accountant may wonder the same thing: Have you driven a Hummer lately?

The table to the right shows a few examples of qualifying models with manufacturer’s sticker prices/estimated 2003 deduction amount. You may need to act fast, as this “loophole” is under pressure to get closed! Call your tax consultant for more specific details.

The bond market will once again intensify its focus on a heavy slate of upcoming releases this Wednesday, Thursday, and Friday. It will be an action-packed three days. On Wednesday a report on retail sales will get the bond market’s attention. Thursday brings important Consumer Price Index information. On Friday, housing data will undoubtedly show the obvious -- the interest sensitive housing sector is still booming given low long term mortgage rates which will keep housing at elevated highs despite some expected give from the peaks of recent months.

In general, weaker than expected numbers would indicate the economy is not improving as quickly as expected, and could cause mortgage rates to improve. Positive numbers would indicate a strengthening economic climate, and could cause mortgage rates to gradually climb higher.

For the week of October 13th - October 17th, 2003