MARKET UPDATE Week of October 10, 2011

QUOTE OF THE WEEK..."Waste of time is the most extravagant and costly of all expenses."--Anonymous

INFO THAT HITS US WHERE WE LIVE...The week before last, the Fed announced 'Operation Twist,' where they'll switch their short term bond holdings to longer term maturities. This strategy wasted no time benefitting mortgage rates. Last week, national average mortgage rates were the lowest since Freddie Mac's weekly survey began back in 1971. Some academic experts contend mortgage rates may have never been this low--even under a special loan program for war veterans in the mid-1940's. Potential borrowers should take note.

Those borrowers, however, aren't jumping into the fray in droves just yet. The Mortgage Bankers Association reported purchase applications were down 0.8% for the week and volume is still down from where it was a year ago. But, hopefully, the present super-low mortgage rates, supported by 'Operation Twist,' will get home sales and mortgage applications moving at a faster pace.

BUSINESS TIP OF THE WEEK...Do you talk too much? Instead of impressing others with your wit and insight, just say something that might interest them. You also come across as more confident when you don't try to dominate the conversation.

Review of Last Week

DOWN, UP, UP, UP, DOWN...That's the way stocks went for five days, but all three major indexes ended the week up nicely anyway. The negatives as usual came from across the pond, with a ratings downgrade of Italy and Spain spurring investors' fears of 'contagion.' In case you were wondering, this contagion refers to European governments' debt problems spreading to major European banks whose difficulties could then cause losses at major U.S. banks...unless the European Union steps in.

For positives, the September Employment Report showed 103,000 new jobs, with upward revisions to July and August bringing the total to 202,000. But we've averaged only 72,000 jobs a month for the last six months, which isn't enough to bring down the 9.1% unemployment rate. The services sector, providing about 85% of our jobs, still expands, with the ISM Services index on an upward, if slow, trajectory for 22 months. Even truck and rail volumes are up, two more signs of economic growth and no recession.

For the week, the Dow ended UP 1.7%, at 11103; the S&P 500 was UP 2.1%, to 1155; and the Nasdaq was UP 2.6%, to 2479.

It was a wild week for Treasuries as the Fed began 'Operation Twist' by selling over $8 billion worth of short-term maturities. Better-than-expected economic news ultimately sent prices south. The FNMA 3.5% bond we track closed Friday at $101.17, down 1.08 for the week. As reported above, national average mortgage rates hit record low levels that some think may be the lowest of all time.

DID YOU KNOW?...The Paper House in Rockport, Massachusetts, is made entirely of newspaper (215 thicknesses!). Even the furniture is made of newspaper, including a desk with reports of Lindbergh's historic flight.

This Week’s Forecast

FED MINUTES, RETAIL SALES, CONSUMER HEADSET...The bond market is closed Monday for Columbus Day. Tuesday, we'll see the FOMC Minutes from the Fed's September 21 meeting, which launched 'Operation Twist.' This initiative to buy longer term bonds should help keep mortgage interest rates low for a while longer.

We'll also see what kind of effort the consumer is making to help the recovery. Retail Sales are forecast up for September, while Michigan Consumer Sentiment is also expected to be on the rise.

The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of Oct 10 – Oct 14

Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months...The Fed has said it wants to keep the Funds rate down through the summer of 2013. So it's no surprise that economists see no change for the next few meetings. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.