Market Update 10-07-2008

US Stocks are extending yesterday's losses after a brief rally to start the day. Mortgage Bonds are trying to hold their gains as they trade in reactions to Stocks once again.

The Dow is currently down triple digits despite a positive start on news of the Fed's latest effort to kick start the Market. Just before today's trading opened, the Fed officially announced they would buy unsecured "Commercial Paper" by creating the Commercial Paper Funding Facility (CPFF). The Fed hopes this facility can help prevent further disruptions to the economy by helping companies with their day to day operations such as financing payroll, and buying inventory. Basically, the Fed becomes a source of credit, replacing the banks that have been unwilling to lend to each other for fear they won't get repaid. Bank of America jump started earnings season on Wall street yesterday by reporting quarterly profits decreased by two thirds year to year, and that they would be cutting their dividend for the first time since 1978. The largest consumer bank in the country has benefitted from the recent lack of confidence in other banks, seeing their deposits increase by 4% ($21 Billion) this past quarter as customers move their money out of smaller, "riskier" banks. The US Treasury named Neel Kashkari to head the $700 Billion rescue plan. Kashkari was one of the architects of the Bill, and is a former VP of Goldman Sachs who has been working as an Assistant Secretary at the Treasury. The Treasury is now looking to hire asset managers to oversee the purchase of these troubled assets, while establishing guidelines to deal with conflicts of interest as most of the candidates are currently working for the firms that will be selling those very securities.

Mortgage Bonds have been trading in a very narrow range close to yesterday's finish for the majority of the day. Once again, despite the negative performance by Stocks, Mortgage Bonds are not the main beneficiary as the concern centers on their marketability given the current credit crunch. Fed Chairman Bernanke gave a scheduled speech today, and European Central Bank President Trichet also spoke, but neither of their comments have had much effect on Bonds so far. It appears the World's Central Banks are indeed acting in a coordinated effort to improve US Dollar Liquidity within the financial system. The Bank's of England, Canada, Japan, Switzerland, and the European Central bank have pledged to support the Fed, and continue working together to provide liquidity to the Markets. Australia's Central Bank lowered their Prime rate by 1 full percent today, increasing speculation that the Federal Reserve may announce their own cut prior to their meeting later this month. The crisis is truly global with Iceland appealing to Russia for their own financial rescue in spite of the recent spate of Russian Market closings triggered by massive losses there. After trading ends tomorrow the SEC ban on short selling of financial stocks does as well, and with recent events, and Bonds in reaction mode to Stocks, there could be increased volatility ahead.

I am recommending to float for long term closing scenarios, but have a locking bias on transactions closing soon. Rates are near their best levels of the year, and with so much uncertainty, no one can be criticized for locking now.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington