Remember when Bette Davis said "Hang on, it's going to be a bumpy ride" ---- no truer words were spoken for times like these, eh? To help your clients get ready for the lending process I'm offering to give you a checklist that our processing dept utilizes - it gives a great insight into what lenders need nowadays to get a loan thru the system. Just reply or comment and I can email to you. Between the checklist, Tums, meditation breathing, etc maybe we'll come out of this stronger. "That which does not kill you makes you stronger" - can you guess who said that? Not the most cheerful person eh?

Have a wonderful weekend - it should be great weather for a visit to the old pumpkin patch.

From Think Big Work Small

Prior to 8:30 this morning the interest rate markets were improving with nice price gains across the curve as well as mortgage prices. At 8:30 however, economic data hit that was better than had been forecast. Start with Sept retail sales, expected to be up 0.4%, increased 0.6% with auto sales removed up 0.4%; auto and truck sales were largely expected to be flat but the data implies better sales of autos and trucks. Next up at 8:30; Sept CPI, expected to be +0.2% overall and +0.1% when food and energy are removed, CPI increased just 0.1% with the core at unchanged; yr/yr the CPI +1.1%, ex food and energy +0.8% yr/yr. The cost of living in the U.S. rose less than forecast in September, indicating limited consumer demand is making it difficult for companies to raise prices. Meanwhile, while the data was being released Fed chief Ben Bernanke was speaking on the Fed's concerns that inflation is too low; he pointed out that for decades central bankers were battling inflation, now the Fed believes inflation is too low and potential leading to deflation.

More at 8:30 this morning; a huge improvement in manufacturing in the NY State manufacturing index; the overall index was thought to be up to 6.0 frm 4.1 in Sept, it exploded to 15.73. The sub-components were also very strong; new orders jumped to 12.90 frm 4.33, employment index increased to 21.67 from 14.93 and prices received increased to 8.33 frm 1.49. Any index reading over zero is considered expansion.

Prior to the 8:30 data the 10 yr note was up 10/32, 30 yr mortgages up 11/32 (.34 bp). By 8:45 the 10 yr was unchanged and mortgage prices fell back to a 2/32 gain (.06 bp). Bernanke was still speaking but by 8:45 most of his prepared text had been read and dissected. He said the long term weak employment will be detrimental to economic recovery and keep spending lower than needed to keep the recovery going. Inflation is too low to foster the Fed's inflation target. Short term real rates still too high. Fed can purchase assets; that should cement any concerns that the QE 2 is on track for Nov. Most of Bernanke's remarks were about what we have heard from the Fed for months; his comment that the Fed can purchase assets to lower interest rates removes any concern that QE 2 is unnecessary, at least in the minds of the Federal Reserve officials. The remaining question for the Fed according to Bernanke is how much QE?

By 9:00 this morning al the initial early gains in the bond and mortgage markets had evaporated. The stock indexes, on the 8:30 data, were improving. The DJIA futures at 9:00 up 12, not a lot but Bernanke's remarks about the economic outlook were not encouraging. The 10 yr note at 9:00 -6/32 to 2.53% testing its 20 day moving average; mortgage prices at 9:00 were weaker across the board for 30s and 15s. At 9:30 mortgage prices were mixed; 30 yr FNMAs -3/32 (.09 bp), 30 yr FHAs -9/32 (.28 bp) and 15s -6/32 (.18 bp). The 10 yr note -9/32 at 2.54% above its 20 day moving average. The DJIA opened +36.

Going into more data at 9:55 and 10:00 the market volatility was extreme; better manufacturing on the NY Empire State data, lower inflation readings and better retail sales set up volatility as the dollar traded weaker then reversed on the data and Bernanke's remarks. At 9:55 the U. of Michigan/Reuters consumer sentiment index was expected at 68.6 frm 68.2, it came at 67.9; the 12 month outlook at 70.0 frm 61.0 at the end of Sept. At 10:00 the final data point for this volatile day; August business inventories, expected at +0.5%, increased 0.6% with sales up just 0.1%; the inventory to sales ratio at 1.27 months from 1.26 months in July. Later this afternoon (2:00) Treasury is set to release the budget deficit for Sept, expected at -$32B

Where are the markets now? After a substantial decline in interest rates after the FOMC meeting on 9/21 when QE was put on the table, markets are consolidating the gains but not adding more to the rally. What remains now is how much will the Fed buy of US treasuries; we have nothing more than a guess, likely $500B to start with, with the proviso that if needed the Fed will buy more. There is no time line either; will it be dished out slowly or will the Fed make huge move? Likely a slow easing process rather than shock and awe.

Freddie Mac: 30-Year FRM Under 5 Percent for 23 Consecutive Weeks

Short-Term Rates Are Mixed

McLean, VA - Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), which found that the 30-year fixed-rate mortgage rate fell again to break the survey's all-time low; the 30-year FRM has been under 5 percent for 23 weeks in a row. The last time 30-year FRM rates were this low was April 1951 (based on a data series of FHA rates going back to 1948). The 5-year ARM tied the all-time survey low set last week.

Quotes

Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac.

•· "September's employment report held no big surprises to financial markets, allowing long-term bond yields and fix mortgage rates to continue to ease. As a result, both the 30-year and 15-year fixed mortgage rates hit all-time record lows for the third consecutive week.

•· "Historically low rates have spurred yet another refinancing wave. Conventional mortgage applications for refinance jumped 24 percent over the week of October 8th to the strongest pace since mid-April 2009, according to the Mortgage Bankers Association. The Bureau of Economic Analysis estimates that homeowners held an average effective mortgage rate of 6.07 percent in the second quarter of 2010. By refinancing into this week's 30-year fixed-rate mortgage, the average homeowner could save over $230 a month in principal and interest payments on a $200,000 loan balance."

Dick Lepre, San Francisco

Embrace Inflation Now

Unless I am reading the wrong stuff it seems that there are lot of people, including the folks at the Federal Reserve, who believe that another really large increase in money supply is what is needed to get the economy going - especially since nothing else has worked. I need someone to explain to me why, when we have $1 trillion in excess banking reserves parked at the Fed, we need more money out there. This is the same Fed which just a few months ago was talking about how the economy was recovering and it was time to start the final act of its easy money policy by, presumably, decreasing money supply. A strange thing has happened in the last year plus. The Fed increased what is called Monetary Base (which includes excess bank reserves held by the Fed) but Money Supply as measured by M2 did not increase accordingly.

The fact is that consumers started slowing down discretionary spending this past January. With the stimulus having failed to increase consumer spending and there being no sign of fiscal restraint, the Fed is in a lousy spot.

So now the thinking is, I guess, that $1 trillion of excess reserves just is not enough and we need to be concerned about deflation. Bernanke must wake up at nights thinking about Japan which has had an economy mired for 20 years.

What may really be happening is a new policy with the slogan "Embrace Inflation Now." (For those of you too young to get that, check out "Whip Inflation Now") The eventual result may well be that we have the price of everything except housing increasing and the traditional relationships between income and housing expense are restored. Last year the government borrowed money to support tax credits to keep housing prices higher than they would be if we allowed market forces to set values. Since housing is the collateral for mortgage debt that may have seemed desirable as a modus of keeping banks viable.

The Fed may be thinking that merely whipping up concern about inflation will get people spending and provide a pop to GDP. It is hard to see how this would work at present. Are people going to buy houses when they are already overpriced and there is lack of job security? We already did a "Cash for Clunkers." Milk and bread may cost more 5 years from now but have a short shelf life.

The mistake with last year's health care bill was that it failed to address the high cost of health care. The government also did everything possible to keep home prices high. The rising costs of housing and health care have reduced discretionary spending. The consumer may not be able to take advantage of increased monetary base.

This past February Bernanke said that the "We're not going to monetize the debt"... stressing that Congress needs to start making plans to bring down the deficit to avoid such a dangerous dilemma for the Fed. Congress ignored Bernanke and now the Fed must deal with the problem.

If there is no choice but to monetize debt then the results will be: 1) inflation such as we have not recently seen 2) a devalued dollar 3) much higher mortgage rates. In a few years, the politicians who created the fiscal mess through decades of irresponsibility will be able to blame this on the Fed's increasing money supply.

I suppose that the Fed could theoretically increase the monetary base and somehow hope that those dollars remain parked at the Fed as excess reserves but that hardly stimulates the economy. If those dollars are going to stimulate economic growth it is hard to see how this can happen with contained inflation. The Fed may well have to give up its goal of inflation below 2% and settle for controlling it below 6%. The fact that the Fed announced no dollar goals for increase in Monetary Base may indicate that they will keep increasing it until it has the desired effect.

This is gonna be ugly. The era of contained inflation and low interest rates is about to become a thing of the past.