HAPPY BIRTHDAY TO WHO? Happy One-Year Birthday to the US Stock Market rally, celebrating exactly one year of gains last Friday! But last week in general was far from party time. Stocks got hammered all week long as the dismal February Jobs Report continued to overshadow the market. Greenspan spoke to Congress, and while optimistic that job growth is coming, acknowledged his concerns about the lack of new job creations in recent months. The four-year anniversary of NASDAQ’S peak of 5048 was noted on Wednesday, perhaps reminding Traders to take some profits this time around. Then on Thursday, terrorist attacks in Spain killed nearly 200 and injured 1500.

But the birthday party seemed to kick into gear on Friday morning, as fears of Al-Qaeda’s involvement in the terrorist attacks seemed to be diminishing. Stocks put on the rally cap and rebounded after four straight days of losses. Since money flows out of Bonds and into Stocks, Bonds took their lumps, and mortgage interest rates ended up very close to where the week began. So what happens next? Some very interesting and little known factors are impacting mortgage rates – read on to understand how another whirlwind of Refinancing activity could actually drive rates lower still.

GRAB THE ASPIRIN…TAX SEASON IS UPON US. EVEN IN LIGHT OF ALL THE BENEFICIAL CHANGES THIS YEAR, PAYING TAXES CAN BE A HARD PILL TO SWALLOW! FOR A FRESH PERSPECTIVE, BE SURE TO READ THIS WEEK’S SPECIAL MORTGAGE MARKET VIEW, WHERE NATIONALLY KNOWN SPEAKER, AUTHOR AND TELEVISION HOST SUZE ORMAN OFFERS HER THOUGHTS ON PAYING TAXES, EXCLUSIVELY FOR MORTGAGE MARKET GUIDE WEEKLY READERS.

Looking ahead, even after the slight correction on Friday, Mortgage Bonds continue to trade at fairly lofty levels. Take a look at the chart below to see the “Up Escalator” that Bonds have been riding over the past few months. Bonds prices are closing in on levels that may trigger “convexity buying”, which could boost Mortgage Bonds even higher and cause mortgage interest rates to fall further still.

What is convexity buying? Here’s the story: If mortgage rates decline another 1/4%, this would set off another round of “Refinance mania”. Existing loans will be paid off because they are being replaced by a new loan. Due to the payoffs, Mutual Funds that are heavily invested in Mortgage Backed Securities will suddenly have lots of cash on their hands, and the Fund Managers will need to act quickly to put this cash to work. What will they invest in? More Mortgage Bonds. This additional buying bids Mortgage Bond prices higher. Mortgage interest rates then drop due to the Bond improvement, and…you guessed it…the cycle begins all over again. This is exactly what happened in 2003 when interest rates reached historic lows. But as we also saw last year, this cycle can come to an angry halt and unwind quickly if favorable economic signs appear.

Tuesday’s Fed meeting is a wild card as always, but no surprises are expected in terms of rate or policy stance. Barring any other market moving Fed comments or major news on the economic or geopolitical fronts, Bonds will likely trade within the range illustrated below with only modest changes in mortgage interest rates.

THIS WEEKS SPECIAL MORTGAGE MARKET VIEW FEATURES SUZE ORMAN, WRITING TO MMG WEEKLY READERS WITH HER FRESH APPROACH TO OUR ATTITUDES ABOUT PAYING TAXES.

Dear MMG Weekly Reader:

Be Grateful to Pay Taxes.

This may sound unconventional, but I am constantly amazed and frustrated when people tell me they do not want to sell an investment because although the timing to sell may be right…”they will have to pay tax.” I hear this all the time, and it really makes no sense. Listen up and listen good: You will never go broke paying taxes. You only pay taxes when you are making money and your investments are going up! May you always be so lucky!

Additionally, have some perspective. If you hold an investment for at least one year and one day and then sell, most of us would pay a capital gains tax rate of 15 percent. Let’s do the math. Imagine that a $2,000 investment grew to $10,000. Upon sale, yes, you would pay 15 percent tax on the $8,000 gain made on the sale. The tax would be $1,200, but leaves you with a great $6,800 profit!

Be proud you have a gain, and don’t fret about sharing some of it with Uncle Sam. When it’s time to sell an investment, it is far better to realize a gain—and pay the tax—then hold on too long and run the risk of the investment losing value.

Best wishes to you –

Suze Orman

The potentially market moving New York Empire State Manufacturing Index will come out swinging at 8:30am ET on Monday morning. This report has been favorable of late, so it could cause some downward pressure on Bonds if the streak continues. Thursday’s Initial Jobless Claims will also attract some interest as job growth, or the lack thereof, has been taking center stage in recent news.

And don’t forget the always-exciting Fed meeting this coming Tuesday. While an FOMC (Federal Open Market Committee) meeting usually creates apprehension in the minds of traders, conventional wisdom would indicate that the weak February Jobs Report has all but assured no “new news”. It would be highly unlikely to have any change in the Fed Funds Rate, and the accompanying statement will likely reiterate the Fed’s “patient” stance on policy accommodation. Although Greenspan’s statement will still be carefully picked apart, the expectation is a continuing status quo…but with so much of the recent Bond price gains at stake, you can’t fall asleep at the wheel and will need to stay tuned.

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 March 15 – March 20, 2004