THE FED TALKS, GRASSO BALKS, BUT NO BIG NEWS FOR BONDS OR STOCKS. Most of the economic news for the week was as expected, but Bonds still managed to eke out a modest gain over the week, somewhat due to the Bank of Japan’s continued participation in buying Bonds. This resulted in mortgage interest rates being unchanged to very slightly improving by .125% for the week. But will the Bank of Japan continue to buy Bonds indefinitely? The buzz is that The European Central Bank may cut their interest rates sometime during the coming week, which would strengthen the US Dollar and cause less reason for the BOJ to extend their buying spree. This would cause Bond prices to fall and hurt mortgage interest rates.

The Fed and Chairman Greenspan himself seemed to have a lot to say last week. Greenspan asked Congress to cut social security benefits, increase the retirement age, or even try a combination of both. Greenspan foresees high social security expenses continuing to create deficit problems and drive up long-term interest rates. On Thursday evening, Fed Governor Bernanke reassured that inflation is still low, which helped Mortgage Bonds close at 5-week highs on Friday.

Friday morning, the New York Stock Exchange asked former NYSE head Dick Grasso to repay $120 Million in compensation. As might be expected – Mr. Grasso’s attorneys in turn asked the NYSE to take a flying leap. This should be an interesting story to watch unfold in the days ahead!

THE MAN, THE MYTH, THE LEGEND… MR GREENSPAN SPOKE FAVORABLY THIS WEEK ABOUT ADJUSTABLE RATE MORTGAGES AND THEIR HISTORICAL PERFORMANCE – BUT ARE THEY ALWAYS THE BEST CHOICE FOR THE FUTURE? READ THIS WEEKS MORTGAGE MARKET VIEW, AND “ARM” YOURSELF WITH KNOWLEDGE.

So – what lies ahead? Unless there are midweek surprises in store, Mortgage Bonds and therefore mortgage interest rates will probably see little movement until the release of the all-important Jobs Report on Friday. Remembering that Bonds get happy when hearing bad news and vice versa, we know that if the Report indicates strong employment data, this will be bad for mortgage rates. The technical signals would tend to indicate that Bonds are ready to cut lower, as they are in “overbought” territory, making them ripe for a sell-off. Additionally, the chart below shows that the floor of support is heading up toward the ceiling of resistance, and Bonds will soon be caught in a “squeeze play”. A breakout up through the ceiling or a fall through the floor is due, and these technical signals would indicate that Bonds are more apt to fall rather than rise, causing mortgage rates to head up a notch.

Bottom line: interest rate movement for the week will probably rest on the much anticipated Jobs Report scheduled for release first thing Friday morning. A good or better than expected Report could send Bond prices crashing lower and kick interest rates higher. A disappointing Report could allow Bond prices to move higher, crack through a seemingly concrete ceiling of resistance, and cause rates to fall even lower.

ADJUSTABLE RATE MORTGAGES - A QUESTION FOR THE PRO’S

QUESTION: Mr. Greenspan spoke this week about Adjustable Rate Mortgages (ARM’s), and talked about how much money ahead someone would be had they chosen an Adjustable instead of a Fixed Rate Mortgage ten years ago. In fact, he came very close to implying that ARM loans are always best choice. Is this true?

ANSWER: There is no question that ARM loans have performed well in the past, and in fact, for some individuals, definitely be the best option for the future. But while ARM loans can certainly be a great alternative to the standard 30-year fixed, there are a few factors to consider about Mr. Greenspan’s statement.

First – hindsight is always 20/20. It’s easy to look backwards and make a statement of this type, but it sure isn’t a guarantee that rates will always continue to behave in the same way in the future. His statement makes it seem that ARM loans will always be better…even in the long run…which is not necessarily the case.

Next – his statement assumes that you didn’t pay the loan off, pay the balance down, move or refinance over the past 10 years. This assumption is just plain silly! Especially refinancing – you are always more prone to refinance an ARM loan, because the fully indexed interest rate is always much higher than the initial teaser rate. ARM loans have been great candidates for refinancing, especially when considering the low fixed rate market we have been fortunate enough to experience over the past several years.

Further – Interest rates have not gone straight down during the past decade. In fact, they have had periods of sharp increases too. If you took out an ARM loan and rates went up afterwards, your payment increased and you suffered!

Last, but maybe most important...can you even put a value on peace of mind? Many people are very uncomfortable with the uncertainty of an ARM. When their head hits the pillow at night, they want to sleep soundly. ARM loans are not for everyone. If Mr. G thinks they are so great, why do they often have 6-point rate increase caps? Can he assure that it will never go that high?

In summary...ARM loans can be a great fit, and many people have been extremely happy with their choice of an ARM over the past 10 years. But it is not always the best choice across the board. When analyzing ARM loans as a mortgage option, the most important step is to look at the features, and with the help of a mortgage professional, decide if it really does fit your individual needs, plans and risk tolerance levels.

Friday’s Jobs Report will get top billing for the week as the most significant and potentially market-moving economic news. Knowing that employment growth is being watched carefully as the missing “piece of the pie” of the US economic recovery, Traders will tend to keep their “powder dry” until the report is released to make sure they are on the correct side of the market. A delayed Producer Price Index (PPI) report originally scheduled for release last week could surface sometime this week and act as a “wild card” in the economic news calendar. No one seems to know why this report has been postponed for release but it could have a moderate and possibly high market impact when it surfaces, especially if it is well above or below expectations.

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 01 – March 06, 2004