What a Tahoe summer!  There is a wonderful calm in the air.  It reminds me of the magical feeling I've experienced when watching my daughter or sons wakeboarding when they  jump the wake, fly gently but utterly thrilled through the air, and land headed back across the wake. All without falling.

The economy, as filled with sound and fury as any ski boat, seems to be in a similar confounding moment of crazy excitement and paradoxical peace. Nothing dreadful is happening; none of the dire predictions of dour economists is coming true. Indeed, we have rising stock indices, interest rates that are surely about as low as they will go, and a very slow awakening to the possible direction the recovery could be taking. It could, in fact, be firming--but slowly, and with as much back-and-forth as forward motion.

It may be six months before we are reasonably sure of the economy's direction--that is, of a sustainable recovery that will include more jobs, growing retail sales, and increased real estate sales volume. These will be the months that truly test the mettle of many of us. Surely they will be the best months ever for building a stronger client base and hitting the ground running when there truly is a good direction in which to run.

There are no guarantees, but there is the inherent strength of our nation's economy and the creativity of its businesses to make it happen--worth betting on.

 

KEY INDICATORS [8/3/10]

 

Gold $1189.30/ounce [up]

Crude Oil (Brent) $82.64/brl [up]

U.S. Dollar to…

    Euro .7600 [down]

    Japanese Yen 85.85 [down]

6-mo Treasury Bill Yield 0.19%

10-yr Treasury Note Yield 2.91%

[6-month down 1 bp, 10-yr down 14 bps]

11th Dist Cost of Funds 1.797%[+]

30-yr Fixed-rate Mortgage 4.92%

15-yr Fixed-rate Mortgage 4.40%

1-yr ARM 3.89%

[HSH averages rates: 30-yr

up 2 bps;15-yr up 2 bps; 1-yr ARM down 6 bps]

 

Mortgage Bankers Association Mortgage Applications Index

week ending 7/23

  Overall

    720.6 (down 4.4%; up 7.6%

the week prior)

  Purchase Money Loans

    172.3 (up 2%; up 3.4%

            the week prior)

  Refinancing Loans

    3918.1 (down 5.9%; up 8.6%

the week prior)

 

Jobless Claims 7/24

    457,000 – prior week 464,000 – continuing claims at 4.565 m

 

Gross Domestic Product (GDP) Second Quarter 2010

    Up 2.4%

 

Construction Spending June

    Up 0.1% over May – down 7.9% below June 2009

 

Personal Income June

    Unchanged (along with spending) with wages down 0.1%

 

Weekly Commentary

 

“While this year will be an improvement over the last, overall gains will be minor. Robust growth will not resume until 2011, when the second wave of house price declines stops and the labor market is strong enough to boost consumers’ spirits.” [Michael Zoller, Moody’s Economy.com]

 

Let’s start with a few seemingly insignificant details. The Eleventh District Cost of Funds Index (COFI), measuring the weighted average of what S&Ls in the three southwestern states have to pay for the money they then loan out, rose from 1.791 in its May reading to 1.797 in its June reading—the figure used for many adjustable rate mortgages for their August computations. (That is, the raw data from June is processed through July and the resulting COFI index is used in August.)

 

Now, a rise of six basis points isn’t something to get excited about, especially when it’s only shown up in one month’s COFI. But it is possible, especially after such a long string of declines for the index that we’re seeing the first hint that rates will soon start to edge north. If it costs the lenders more to put together money for loans, after all, the loans will cost borrowers more, and that added cost will show up in the interest rates they must pay.

 

We seem to be at a point where many rates are making—perhaps—their final small moves downward, and others are stopping or turning slightly higher. The Freddie Mac average for its 30-year fixed rate, for example, squeezed out a decline of two more basis points last week. The HSH Associates compilation of conforming and jumbo rates rose by two basis points. The two-year and five-year Treasury notes this past week reached new record lows in their auctions; and when the 7-year note auction rolled around on Thursday, attendance was softened by the expectation that the resulting yield would be very low – still, the yield wasn’t proportionately as low as those on the 2-year and 5-year notes.

 

The stock markets, in theory, should be losing ground if interest rates are reaching for record lows. But the Dow Jones Industrial Average rose a hefty 7.1% in July, and is holding its own as these words are written. Either the stock and credit markets are being pushed and pulled by sets of investors with opposite expectations, or investors are hedging their bets, just in case stocks OR bonds wind up on top here. Or—another alternative—we are on the edge of a change, as rates begin to solidify (rising a bit) and the stock markets continue to strengthen. None of this, at least as of yet, is negative news, since it’s still giving us extremely attractive rates and a decent level of apparent confidence in the stock markets. We can only hope that this confidence will soon work its way through to the ordinary consumer and his/her employer.