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For the week of Dec 20, 2004 --- Vol. 2, Issue 49

Last Week In Review

HO HO HOOOOLY SMOKES, CHRISTMAS IS JUST A WEEK AWAY? How time seems to fly…and the economic news was flying fast and furious all last week, causing some motion in Bonds and home loan rates. On Tuesday, the Fed did what everyone expected, and raised the Fed Funds Rate by .25%. The eagerly anticipated Policy Statement was worded very similarly to previous statements, with the key sentence being "Inflation and longer-term inflation expectations remain well contained." This eased concerns of Traders in the short term, as inflation erodes the value of Bonds…yet the year over year rise in inflation is a growing concern. But Bonds and home loan rates had remained stable for the early part of the week, until Thursday’s Initial Jobless Claims number, which showed the largest single week decline in jobless claims since December of 2001! Jobless claims are presently at their lowest level since the week ended July 3, 2004. Additionally, the Current Account or Trade Deficit set a new record high, resulting in the US Dollar being pressured lower against foreign currencies…also bearish for Bonds and home loan rates. Combined with a big Bond seller popping into play late in the week, all this action forced Bond prices lower, and home loan rates increased by about .125%. Now that’s interesting…why would an individual Bond seller cause motion in Bond pricing and therefore home loan rates? Check out the forecast, which explains this phenomenon in more detail. “YOU’RE A MEAN ONE, MR. GRINCH…YOU REALLY ARE A HEEL! YOU’RE AS CUDDLY AS A CACTUS; YOU’RE AS CHARMING AS AN EEL, MR. GRINCH!” FAMILIAR WORDS…AND IS THIS YOUR THEME SONG AS YOU CONTEMPLATE THE COMING OF THE “TAX GRINCH” THIS YEAR? READ THIS WEEK’S MORTGAGE MARKET VIEW FOR SOME LAST MINUTE IDEAS TO KEEP HIM AT BAY.

Forecast For The Week

So last week, Bonds had been pressured below three strong floors of support, seen in the chart below. For home loan rates to improve, they will really need to muster up some strength to break back above them. What will drive this week’s action? The economic calendar has quite a few reports of moderate impact, but remember that we’ve entered the holiday season. This means that the Bond trading pits may be more lightly occupied, as Traders take time off for the holidays…and believe it or not, this can impact Bond prices and home loan rates. Imagine that you spill a soda. If there is a whole roll of paper towels right at hand, it won’t be hard at all to absorb the spill. However, if there are only two paper towels available, the same spill is tougher to absorb and the spill itself seems much more dramatic. In the same way, during the holiday season when there are fewer traders available to “absorb” the buys and sells being made, trading moves are much more dramatic, and therefore impact pricing more strongly. While this is a simplistic example – you can see how lower trading volume can impact the market more significantly, as trades become so much more exaggerated in these circumstances. It would take some disappointing economic news for Bonds to improve and drive back above the 25, 50, and 100-day Moving Averages, which will now act as a ceiling of resistance. But if the economic reports of the week come in rosier than expected, Bond prices and home loan rates could worsen slightly. In advance of the holidays, home loan rates may move a little higher, but should stay relatively stable overall. Chart: Fannie Mae 5.5% Mortgage Bond (Friday December 17, 2004)

The Mortgage Market View…

Office parties...holiday shopping…Christmas…Happy New Year! These next few weeks will fly by, but you still have a chance to keep the “Tax-Grinch” away and put a little extra cheer into your pocket. But the clock is ticking – you’ll have to move fast to save a little extra on your taxes. Here are some last minute ideas… Speed It Up and Slow It Down - Think about any deductible expenses you may have coming due in 2005. Business expenses, subscriptions, real estate taxes, even your January mortgage payment. Guess what – by paying them right now, you can increase your deductions for 2004. But if you are subject to the AMT, consider doing the opposite with any December expenses that can wait until 2005. Additionally, if you have the ability to defer any income, such as a year-end bonus, put it off till January. You’ll save on the taxes you owe this year. You Paid for It, Go Buy It - You put money into your flexible spending account all year long. What goes in, must come out…or you lose it. Many had hoped Congress would ease up and allow for rolling over unused money but this has not happened. An easy way to spend any unused money is on eyeglasses and contacts. ‘Tis the Season of Giving – And donations to charity are deductible. If you are planning on donating a car to charity in the next few months, you may want to do it now. Starting in 2005, your deduction may be limited to the amount the charity sells it for, not fair market value. Would you like to give this year and pay next year? If you put your donation on a credit card, you can take the deduction this year even though you may not actually pay for it till next year. Make sure though it is a credit card, not a debit card, as donations made electronically are taken at the time the debit hits your account. And finally, if you donate property that may have long-term capital gains, like stock or mutual funds, you can deduct the full fair market value and skip the capital gains. Ho, Ho, Ho! Load up your IRA and Tax Deferred Plan – Load up your tax deferred retirement plans before year-end. In some cases your employer may match any money you put into your account. Its like “Buy One, Get One Free!” but in this case you get the money and a reduced tax bill too. You have until April 15th to pay into an IRA and/or set one up for 2004. "Yes Virginia, there is a Santa Claus." Here is a link to the interesting story behind that familiar phrase. http://www.educa.rcanaria.es/usr/zonzamas/virginia.htm Don’t Forget to Pay Yourself – If either you or your parents are over 70 ½ years old, the IRS says you must take a minimum payout by December 31st or get smacked with a 50% penalty. There is a special rule for those that hit 70 ½ this year so check with your tax professional to maximize your savings. Release the Hounds! – If you have short-term capital gains this year (assets held one year or less), expect to be taxed at ordinary rates up to 35%. Most long-term gains (assets held longer than one year) are taxed at a much more favorable 15% rate. Dump those dogs you’ve been holding to offset the gains first. Just remember that these do not apply to securities you hold in tax-deferred accounts like IRA’s. Give a Jingle – Of course, remember that you should always call and check with your tax advisor on your own specific situation. If you have any other questions regarding these or other financial issues, be sure to call your mortgage or tax professional. They may just be able to put one more present under your tree and make your holidays that much brighter this year.

The Week's Economic Indicator Calendar

Most of this week’s economic calendar takes place on Wednesday and Thursday. No high impact reports slated for release this week, but there are enough mid-level reports scheduled that could collectively have a greater than usual impact. Remember that there may be some heightened reactions to these reports, given the Bond market will be experiencing the lower trading volumes associated with holiday trading. Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise. For the week of December 20 – December 24