A QUARTERBACK SNEAK… by Greenspan and the Fed! Last week started out quietly, in advance of Wednesday’s highly anticipated statement by the Fed. But while all the players thought they knew exactly what was coming, the Fed caught everyone off guard with a surprise move on Wednesday afternoon. No rate change was anticipated, and no rate change was delivered. So what happened that sent Traders into a scramble? Remember that every word of a Fed statement is dissected and analyzed, and as usual, it was the wording of the statement itself that turned out to be most important. The Fed had a few key changes from previous statements, all implying positive feelings about the US economic recovery. First and foremost, instead of using those magic words of “considerable period” when talking about how long they would remain accommodative, they instead switched to “we can be patient”. While it may not sound like a significant change, the words used definitely imply that rate hikes are coming, and now they are just waiting for the right time. The market expectation for the first probable 25 basis point rate increase has moved from possibly 2005 to more likely this summer. This is also important as the Fed has a history of not just making single rate changes, but instead a series of rate changes. Additionally, the Fed went even further in their statement, anticipating gains in employment, and admitting that the chances of deflation are nil. This optimism surprised the markets, caused Bonds to lose major ground, and mortgage interest rates jumped by .125% on Wednesday alone.

But not so fast…Friday brought some new action with the GDP Report, which measures the total production and consumption of goods and services in the US. 4th quarter numbers were released showing 4% growth – not bad at all, but after the 3rd quarter's blistering report of 8.2% growth, hopes were high for continued hot numbers. Remember that because Bonds are a “safe” investment versus Stocks, the Bond market likes anything indicating bad news for the economy. Traders had been looking for anywhere from 5 to 6.5% on the GDP Report, so the knee-jerk disappointment caused Mortgage Bonds to immediately skip higher in response. Despite a few other reports released indicating good consumer confidence and manufacturing numbers, Traders shrugged off the good news and instead focused on the disappointing GDP, helping Bonds regain a bit of the yardage lost on Wednesday.

YOU’VE GOT MAIL – BUT HAVE YOU GOTTEN A FEW HUNDRED EMAILS THIS WEEK WITH THE SUBJECT LINE OF “HI” OR “HELLO”? IT’S NOT JUST YOUR FRIENDS WANTING TO KEEP IN TOUCH, IT’S THE LATEST WORM VIRUS TO BE UNLEASHED, “MYDOOM”. TO DISCOVER THE RUMORS OF ITS ORIGIN AND LEARN HOW TO PROTECT YOURSELF - DON’T MISS THIS WEEKS MORTGAGE MARKET VIEW.

Mortgage Bonds were roughed up mid-week, but managed to stop the bleeding by Friday. For the week ahead – it’s all about JOBS. The all-important Jobs Report is scheduled for this coming Friday, and much like the early part of last week, Mortgage Bonds will likely just hang around the sidelines until this report is delivered. As food for thought, take a look back to last year at this time. In December 2002, a miserable Jobs Report showed a loss of 110,000 jobs. But the very next month, January 2003, 143,000 new jobs were packed on. Once again, we are seeing an ugly December Jobs Report. Will last years history repeat itself with January Job numbers coming in strong? Whichever way this report goes, it will have an impact on mortgage interest rates for days and even weeks to come. A strong number would likely pressure Mortgage Bonds hard as the Fed is looking at job growth as the final chapter to the economic recovery story.

The chart below shows that Mortgage Bonds have been in a generally upward trend, translating into generally decreasing mortgage interest rates over the last several months. Mortgage interest rates should remain stable to slightly improving at the beginning of the week, but Friday’s Jobs Report may determine if we can remain in this “bullish channel”.

A little worm is digging some very big holes. Meet the latest virus to be unleashed into the wild, “MyDoom”. It started worming its way around the world last Monday, and has already overtaken the spread of last years SoBig virus. Currently, one in twelve emails worldwide are being attributed to the MyDoom worm, where SoBig at its very peak was at one in seventeen. The FBI and Secret Service are involved, and a half million-dollar bounty is on the line for information leading to the creators of the virus. There’s an interesting story behind the creation of this one. Let’s take a closer look, and also learn how to protect against these nasty critters.

Just under a year ago, a computer programming company by the name of the SCO Group claimed that its intellectual property had been illegally included in the latest version of an operating system known as Linux. Linux is communally developed and distributed free on the Internet, and SCO claims that it owns part of the software code currently being used. The company has filed legal actions, and is also attempting to extract license fees for its use -- angering the software's supporters, many of whom have the computer programming skills necessary to create a virus of this type. "Arguments have been continuing for some months. It appears that the author of MyDoom may have taken the war of words from the courtrooms and Internet message boards to a new level by unleashing this worm which attacks SCO's website," said Chris Belthoff, senior security analyst for Sophos, an antivirus vendor. Computers infected with the virus will begin to attempt connection to the main page of the SCO website starting on Sunday February 1st. The connection requests will come roughly every second from each of the estimated 200,000 infected computers, in an attempt to overload SCO's Web server and knock the company's site off the Internet.

Research showed that the virus had been programmed not to send itself to certain email addresses, including large computer companies and US Government addresses. This was probably done to try to allow MyDoom more time to spread, although since its release, another hacker reprogrammed a variant of the worm to specifically attack Microsoft. Along with SCO, Microsoft is offering big cash for information that would lead to the creators arrest.

So what does this all mean to you? It is primarily a nuisance, as millions of people all over the world are spending hours deleting and purging virus laden email messages. Think of the cost in terms of productivity alone! There has also been a slowdown in Internet traffic, causing processing delays and frequent “page not found” results when hitting websites.

The MyDoom virus is a mass-mailing that will arrive as an email with an attachment. The email subject line is random, but is often showing as “Hi”, “Hello”, “Status”, “Test”, or “Server Report”. The emails are also set to “spoof” the email address of someone you know, appearing to have been sent by a friend or colleague. This fools you into thinking the email is safe, and encourages you to open the attachment. If the attachment is opened, the worm creates a “backdoor” into your system, allowing attackers to remotely access your computer, files, and network resources. Although you may not know or care anything about the fight between SCO and Linux supporters, you certainly do not want to allow this remote access into your system.

To protect yourself, exercise extreme caution when opening email attachments, even if they appear to be from someone you know. As a clue, the infected attachment will vary in title and appearance, but always show as 22,528 bytes in size. Always keep an anti-virus program running on your computer, such as Norton or McAfee. Check to ensure that your subscription and updates are current, and run frequent scans of your system.

The following links give more information on how to determine if you have been infected, and provide a free download to clean your system if you do find the virus.

Virus Info from McAfee

Info on MyDoom from Sophos

Security Response from Symantec

The economic calendar for the week starts off with some important manufacturing numbers and ends the week with the always-exciting Jobs Report. The Jobs Report will have the most potential for moving the bond market this week on Friday, and savvy investors will look to Wednesday’s Initial Jobless Claims number for clues to Friday’s big news.

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 February 2 – February 6, 2004