Mel's Blog

Well, it was a tough initial start for domestic stock markets last week as renewed fears of a prolonged global economic slump emerged. What exacerbated the move was a report from the World Bank that that the global economy will shrink 2.9 percent this year, much worse than the earlier prediction of a 1.7 percent contraction. Housing data added to the woes as sales of existing homes rose only 2.4 percent in May, less than expected. Monday witnessed the biggest single-day drop in two months as the Dow slid 201 points. Large financial company stocks are particularly and extremely volatile in these times. However, by the end of the week, the markets had regained most of their composure and had settled back to levels only slightly below the Monday pre-opening levels. The Dow index closed out the week at 8,438 while its NASDAQ cousin finished at 1,838. To put it in context, the Dow is still up a whopping 29 percent from its closing low of 6,547 hit on March 09. However, the Dow "blue chips" still remain a pocket-numbing 40 percent down from the highs set in October 2007. In other words, we still have a way to go before most of us can breathe a sigh of relief when looking at our 401(k) statements.

The Federal Reserve held steady this week as they announced the minutes from their latest meeting. The Federal Open Market Committee (FOMC) voted unanimously to maintain the federal-funds rate at a range between zero and 0.25 percent. There was some disappointment when the Fed did not boost the size of the $300 billion Treasury-purchase program. Yields on Treasury bonds increased as a result but still finished the week lower at 3.53 percent versus a recent high of 3.95 percent set on June 10. This is good news for mortgage rates, as these rates, for the most part, move directionally in tandem with their 10-year Treasury counterparts. The recent mortgage refinance boom has collapsed of late under the weight of rising mortgage interest rates and so any down-draft in rates is excellent news for consumers and lenders alike. The Mortgage Bankers Association (MBA) cut its forecast of home-mortgage lending this year by 27 percent. It now expects $2.034 trillion of originations of one-to-four family mortgages in 2009, down from a March forecast of $2.780 trillion. This has everything to do with the fact that 30-year fixed-rate conventional mortgage rates have recently been in a range of 5.25 percent to 5.625 percent, up from the 50-year lows of less than 5 percent in April and May. Refinance transactions accounted for a staggering 78 percent of 1-4 family mortgage originations during the first quarter of 2009. Refinance activity accounted for 72 percent of total originations in 2003 when all-time records for lending and refinance volumes were set.

Consumers are starting to spend more as the May data reflected an increase in purchases, the first gain in three months. In tandem with this, the earnings rate climbed 1.4 percent, driving the savings rate to a 15-year high. However, the destruction of wealth caused in large part by the housing crisis may keep savings trending higher which is not necessarily good news for an economy that relies on consumer spending, thereby implying that any economic recovery will be slow in developing. Certainly, Bernie Madoff won't be doing his bit to stimulate any spending anytime soon as he faces as many as 150 years in jail. Maybe he can find solace in the fact that he will be in "good" company and that he might be playing "Charades" with the founder of Adelphia Communications (serving 12 years) , a WorldCom chief executive (serving 25 years), a hedge fund executive (serving 20 years) and a former Refco CEO (serving 16 years). Speaking of incarceration, Texas financier Allen Stanford is currently fighting and hoping that he can continue being served martinis by bikini-clad waitresses on the sun-soaked beaches of Antigua rather than having to settle for bitter prison-brew served up by someone called "Bubba."

This week's economic reports include Consumer Confidence, Construction Spending, Pending Home Sales and Vehicle Sales culminating in the much anticipated Payroll Report on Friday. The unemployment rate which is part of this report is expected to show more grim news as we anticipate a rise in the unemployment rate to 9.6 percent, up from last month's 9.4 percent.

                                Mel

Information provided by Amtrust Bank Capital Markets