Happy New Year! And 2004 is already off to a great start. Thankfully, the New Year arrived with no reports of Terrorist activity in the US, despite some fears to the contrary and an increase in the National Terrorism Alert level to “Orange”. These very concerns had helped prop up mortgage bonds last week, as investors trended into bonds with what is known as a “flight to quality”. These moves embody the old saying, “Hope for the best, but prepare for the worst”, and are not uncommon when there are fears of Terrorist activities that could impact the stock market negatively. After the New Year holiday safely passed, Friday morning saw the disappearance of this “fear premium”. Combined with a very strong ISM Manufacturing report released on Friday – a 20 year high – the stock market surged forward, bonds took it in the shorts, and mortgage interest rates increased by about .125%.

WHAT’S IN STORE FOR 2004? UNLESS YOU FOUND A CRYSTAL BALL UNDER THE TREE THIS YEAR, IT’S HARD TO KNOW…BUT IN THIS WEEKS MORTGAGE MARKET VIEW, NATIONALLY KNOWN INDUSTRY EXPERT AND NETWORK FINANCIAL COMMENTATOR BARRY HABIB OFFERS HIS OUTLOOK FOR 2004. AS AN ADDED BONUS FOR THIS SPECIAL NEW YEARS ISSUE, THERE IS AN ADDITIONAL REPORT ON AN INTERESTING INVESTMENT TECHNIQUE KNOWN AS THE “DOGS OF THE DOW”.

Now that the holidays are over, Traders will be returning to the job at full force. Bonds will more than likely start the week by moving sideways in an attempt to stabilize at more normal trading volume. Rates have inched higher lately as bonds have been under selling pressure, but now should find some support in their current range. The big market mover will arrive Friday, with the release of the all-important Jobs Report. Economic data has been good of late, so the Jobs numbers could surprise to the upside. That would be friendly to stocks but could cause mortgage interest rates to rise. Savvy investors will look to Thursday’s Initial Jobless Claims number as a precursor to Fridays Jobs Report. Remember that last Thursday’s Initial Jobless Claims number came in at its best level in 3 years! Interest rates could modestly improve at the beginning of the week, but worsen as expected positive Jobs data pressures them higher by the c lose of the week.

2004 Outlook By Barry Habib

As Yogi Berra said, “It’s tough to make forecasts, especially about the future”.

Our forecast for last year, although not exact, was very accurate overall. We hit dead on with our stock market forecast and picks as well as the prediction for the rise in Gold prices. Our mortgage rate forecast correctly predicted a gradual rise in rates during the second half of 2003. We were wrong about our prediction that the government having to issue more T-Bills, Notes and Bonds, but we did correctly forecast an upswing in the economy.

Let’s look ahead at some key issues for 2004. We will see if the Crystal Ball will help us see the future as well as it did last time.

Overall US Economy – In the words of Greg Focker (played by Ben Stiller) from the movie “Meet the Parents”, we expect the economy to be “Strong to quite strong”. The consumer has carried the economy in the recent past; helped largely by low rates and refinancing. But now it looks as if businesses will chime in. Sales are brisk and profits are up. The last time businesses went on a technology shopping spree was 4 years ago, when the fear of the “Y2K” bug made them revamp their systems. That makes them long overdue for upgrades to those 2000 models in the near future.

A falling Dollar and Strong Job growth, both examined in more detail below should help Gross Domestic Product approach a vibrant 5% level in 2004.

Jobs – This area holds the key to so many areas of the economy. We see an impressive spurt in job growth this year, with the number of new jobs in the range of 1.25 to 2 million. This type of robust growth should help consumer sentiment and increase spending. Manufacturing will continue to improve, exported goods will be helped by a weak Dollar and excess factory capacity has been trimmed.

Some have grumbled that the job market is not as strong as it should be and that the recovery has been “jobless”. We strongly feel that the employment picture has been better than reported. Why? Productivity. Record levels of productivity, due to advances in technology, are allowing for far more output from the same worker. This has helped employers trim their workforce. Next time you dial 411 and get an automated operator that can recognize your speech, remember that used to be someone’s job. Just think of how much more productive we all are with the tools we routinely use today that were not in wide use just 5 short years ago. Mobile phones, email, the Internet, wireless devices…the list goes on and on – all adding up to increased productivity and less need for workers.

Additionally, high tech and broadband have helped spring up many self-employed. This can skew the employment numbers to look worse then they actually are. Still, the rate of unemployment is below 6%...a very good benchmark! Watch for strength in jobs to influence rates in 2004.

Housing – More good news here. The strength in home sales should continue in 2004. Perhaps sales will be a tad below the record setting pace of 2003, but still terrific. As mentioned earlier, Jobs will play a major role in housing…much greater than mortgage rates. A modest rise in rates may cause monthly payments to rise but most families will not be deterred from home buying because of a modest increase in monthly payment…but if should they feel that their job is in danger, they become paralyzed towards a home purchase.

Home sales activity is different from home price appreciation. During the past few years, prices have appreciated smartly through most of the country and have actually spiked in several areas. Many homebuyers ask if it still safe to buy, fearing that they may be buying at the top of the market. Levels of appreciation may be tempered, especially in the recent “hot” market areas, but prices are not expected to decline. Again, Jobs and an improving economy along with a favorable rate environment should keep housing very healthy.

Financial Markets – Stocks were due and delivered in 2003. The NASDAQ gained 50% while the DOW and S&P 500 gained an impressive 25% and 26% respectively. Can they continue higher in 2004? YES! Corporate profits will continue to rise and so will foreign interest in the US market. Individual investors are coming back to stocks, especially with the favorable treatment of dividends. Again we like healthcare, which was a super pick last year, due to an aging population and the incredible medical advances. We also like technology, yes we do! In years past it was all about “getting wired”. Well, we think that the hot tech area in 2004 and beyond will be all about getting “unwired”. Wireless is coming of age and we see this as a major growth area for years to come.

The tax cuts in 2003 worked, as they played a major role in the blockbuster 8.2% GDP growth for the third quarter. Play it again Uncle Sam… The tax cuts of 2003 were enacted in July for withholding of taxes. But the reduction in rates was effective from January 1st of 2003, so the first six months of last year had individuals paying withholding tax at higher rates than they will actually owe. This will have many filers smiling this spring as they will either owe less or get more in the way of a refund. What will they do with this added bonus? Spend it, of course! This should give the economy another positive jolt. Stocks should react well as the good news gets reported.

Gold has been on a tear, breaking above $400 an ounce. We see more appreciation but then a correction back towards where it began the year.

Oil prices have been stubbornly high. They should drift lower in 2004 providing some additional lube for the strong economy by putting more disposable income in the pockets of US consumers.

Mortgage Interest Rates and The Fed – Rates will rise in 2004 but not out of hand. The stronger economy and stock market will pressure bond prices lower and rates higher. As it was in 2003, the market will be volatile in 2004. Good economic news will spike rates higher around April. Expect an improvement over the summer but ending the year around 6.75% with zero points for a 30-year conforming fixed rate. It would not surprise us to see rates tickle 7% on the high side and retreat to the 6% range on the low side. This rate environment will allow housing to remain strong but refinancing originations to be similar to the last few months of 2003…slow.

Will the Fed raise rates? Yes, they will have to. The Fed will be reluctant to do this as the election heats up, so we think it will happen around the summer months. Remembering that a raise in the Fed discount rate does not translate into an increase in mortgage interest rates, this should help contribute to the improvement we have forecast for this summer.

The Dollar – The precipitous fall of the Dollar was a huge story in 2003. This actually helps importers here in the US by making US goods more attractively priced abroad; thus helping the US economy. Foreign Central Banks have actually been intervening by buying Dollars to slow the fall in price. This is because the benefit US products receive from the Dollars fall will hurt the economies of the foreign nations because their goods are now less affordable. Therefore, their Central Banks try to support the Dollar by buying US debt instruments like Treasury Bills, Notes and Bonds. This helps keep rates low here in the US. But if they throw in the towel and stop trying to slow the Dollars decline, we could see a spike in rates. Additionally, if the Fed raises rates and the economy continues to hum along, the Dollar will strengthen. This will provide less reason for the foreign Central Bankers to have to hold US debt instruments . We see this as a “no-win” for bonds.

Wildcards: the Election and Osama – The Election shouldn’t be a surprise this time. George Bush is riding a high approval rating and the political experts see him as tough to beat. We see it the same way.

The biggest wildcard is, unfortunately, Terrorism. The US had been sheltered from this for so long, but after 9/11 things changed forever. As it did in 2001, a major Terrorist act can totally alter forecasts and plans. We do think that Osama Bin Laden will be found in 2004, which should help in the fight against Terrorism.

Summary – Rates will be higher but still very good. Home refinancings are going to be way down but purchase loans will be as strong as ever. People will still need to borrow money so HELOC’s will continue to be very popular. The Job market, Housing and the Economy are all looking up for 2004. George Bush will get another term, the Fed will hike rates and Stocks will continue to climb.

All the fuss about the economy and attempts to predict its future has a place. But never lose sight of what is important in life…family, friends, health and laughter. We wish you all of these, along with prosperity and the time to enjoy them.

BONUS INVESTMENT REPORT

BOW WOW – DOGS of the DOW

As the New Year begins, a popular stock investment approach has been the Dogs of the Dow method. In its most basic form, the Dogs of the Dow approach is an investment technique whereby one purchases the 10 highest yielding Dow stocks at the beginning of the year, allocating the same amount of money to each stock. This basket of stocks is then held for the remainder of the year. At the beginning of the following year, it is replaced with a new basket of Dow Dogs.

There are a number of variations to the Dogs of the Dow approach, one being to buy the five lowest priced of the ten highest yielding stocks and to use this as your basket of Dow dogs. Theoretically, the low-priced stocks already reflect the bulk of bad news that has already been priced into the stock and this provides a potential for greater performance. Whether you choose to implement this investment process, which has a track record of success, is up to you, but for those who may be interested, here is the list of the ten Dow stocks that are barking the loudest as 2004 starts.

Applying the variation where you buy the five lowest priced of the group of 10 highest yielding Dow stocks would yield the following Dogs of the Dow portfolio:

1. AT&T (T, $20.30)
2. SBC Communications (SBC, $26.07)
3. General Electric (GE, $30.98)
4. J.P. Morgan Chase (JPM, $36.73)
5. ExxonMobil (XOM, $41.00)

The focus for bond market traders will remain on jobs and inflation data for the foreseeable future. The bond market trading desks return to full strength this week as the economic calendar starts with construction spending and ends the week with the all-important Jobs Report. The Jobs Report will have the most potential for moving the bond market this week on Friday.

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

For the week of January 05 – January 09, 2004