WHOEVER SAID TALK WAS CHEAP? All the talking done by Fed officials on inflation has scared Bonds and home loan rates into some losses over recent weeks. But last week, the talk got tough, as a parade of seven Federal Reserve officials took turns discussing plans for combating inflation. The inflation-hating Bond market was reassured, and home loan rates stabilized over the course of the week.

Additionally, the latest numbers suggest that the housing sector remains strong. Construction of new homes kicked into high gear last month, posting the highest numbers since February. Building Permits also surged, with the highest numbers reported in over 30 years! And pay close attention to this Tuesday’s Existing Home Sales Report. All eyes will be on the important inventory component. Two months ago, inventory hit a 32-year low of 4.0 months, but last months report showed that inventory levels rose to 4.7 months. While still very low, the rise caused some concern, so this month’s number will have added significance. Yet speaking of cheap talk, all the housing bubble-talk certainly hasn’t been cheap for all the potential homeowners who have been scared into stepping to the sidelines in recent years.

“MONEY WON IS TWICE AS SWEET AS MONEY EARNED”…FROM THE MOVIE ‘THE COLOR OF MONEY’. WHETHER EARNED OR WON, THE COLOR OF MONEY IS CHANGING, IN ORDER TO COMBAT COUNTERFEITING. AND WITH $250,000 IN COUNTERFEIT MONEY BEING INTRODUCED INTO CIRCULATION EVERY 24 HOURS…IT’S VERY POSSIBLE THAT YOU MAY HAVE HAD SUCH A BILL PASS THROUGH YOUR HANDS. HOW WOULD YOU KNOW? DON’T MISS THIS WEEK’S MORTGAGE MARKET VIEW.

Could Bonds be attempting to step off the brutal “Down Escalator”, which has caused Bond prices to decline and home loan rates to rise in recent weeks? The chart below shows how the Fed’s tough talk on fighting inflation slowed the decline last week…but let’s look at what might happen next.

Mortgage Bonds – which home loan rates are based on – move and trade just like stocks do. Price movement is generally either based on “technicals”, meaning patterns or historical levels that impact current trading, or “fundamentals”, meaning news, economic and geopolitical events. And as a general rule, weaker or negative fundamental data is good for Bonds and home loan rates, while positive data has the opposite effect.

This week brings some “fundamentals” for Bonds to chew on, such as housing numbers, Consumer Confidence, and GDP (Gross Domestic Product), a good indicator of inflation and economic strength overall. There are also some “technicals” weighing on Bonds as well. The chart below shows that Bonds haven’t been able to consistently trade above their own 10-day Moving Average (the red line) since early September, a technically weak signal. But if the pending fundamental news is negative this week, Bonds may move higher and convincingly break this weak technical trend.

A break above this level would help home loan rates to improve…but if Bonds are unable to bust a move, they will likely be forced firmly back onto the “Down Escalator”, causing rates to continue to rise.

A few years back, a young man approached the cashier at a local McDonald’s and paid for his hamburger with a $20 bill. Next in line was his friend, who did the same thing. After that came a third. Nothing unusual about this…except that these young men had produced the bills at home on a desktop computer.

Welcome to the new face of counterfeiting. Where it once was an expensive and laborious process to reproduce a high-quality US greenback — today’s color photocopiers, scanners, and ink-jet printers have opened up counterfeiting to a new breed of criminal. Younger, more comfortable with technology, and sometimes with no prior criminal record, the ease of counterfeiting has tempted some people into committing a serious felony…who otherwise might never have dreamed of taking such a risk.

But identifying and detecting the authenticity of a note can be quite simple if you know what to look for. Use these tips to determine if a note is phony or real. Put the suspect note and the genuine note (of the same denomination) side by side and use a magnifying glass to compare the portrait, the paper, and the print quality.

The portrait on the genuine note will be lifelike, sharp, and will stand out from the background of the note. On the counterfeit note, the portrait will appear blurry, lifeless, flat, and will blend into the background of the note. The paper of a genuine note has a distinct look and feel. Genuine currency paper is one-fourth linen, three-fourths cotton, and contains tiny red and blue fibers embedded throughout the paper. Counterfeit paper has the red and blue lines printed on the surface not embedded in the paper. When looking at the print, compare the Federal Reserve and Treasury seals, border, and serial numbers. On the genuine note the Federal Reserve and Treasury seal saw-tooth points will be distinct and sharp, borders will be clear and unbroken, and serial numbers will be evenly spaced and printed in the same color as the Treasury seal. On the counterfeit bill the print will be blurry, uneven, and the numbers will not be uniformly spaced.

And to combat the growing risk of counterfeiting, the US Government is taking great strides to redesign currency with enhanced designs and security features. The redesigning process started in 2003 when the new $20 note was introduced, followed by the $50 note in 2004. The new $10 note will enter circulation in early 2006.

Check out these new features:

• Color-Shifting Ink - the numeral located in the lower right corner of the note changes color when tilted from copper to green.

• Watermark - hold the note up to the light and look for the watermark or faint image located to the right of the portrait. The faint image will be similar to the portrait on the face of the note and can be seen from both sides of the note.

• Security Thread - a small strip has been embedded in the note with the words USA, the denomination of the note spelled out, and a small flag. These features are visible when held up to the light or held under an ultraviolet light. When held under an ultraviolet light, the thread will glow in color and the color will differ depending on the denomination.

A few additional design features worth noting include the added background colors. Of all the design features, the added colors will be the most noticeable. The borders and the fine lines surrounding the portrait on the face of the note and the building on the back of the note have been removed. Symbols of freedom have been added to the face of each note and differ for each denomination.

By adding the security and design features to the notes, counterfeiting of US currency has already significantly dropped. In an effort to continually keep the levels of counterfeiting low, the government expects to redesign our currency every seven to ten years. The next note to be redesigned with the new security features will be the $100 bill. At present, there is no plan to redesign the $5 note, and the $1 and $2 notes will not be redesigned at all.

If you ever have a note that you suspect is counterfeit, turn it over to your local police department. If the police department determines that the note is genuine it will be returned to you. Although you will not be reimbursed if the note is counterfeit, knowingly passing a counterfeit note is against the law. For more information about the enhanced designs, security features, or to view an interactive presentation about each note, hit this informative link: Money Factory.

This week brings mostly mid-level economic reports, including another look at the housing market with Tuesday’s Existing Home Sales and Thursday’s New Home Sales. Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of October 24 – October 28