The Mortgage Guru

Fixed Rate Mortgages 
The 30 year and 15 year fixed rate mortgage is the most common type of mortgage program in the Las Vegas and Henderson areas and the one I highly recommend to my clients in our current market. Rates are near historic lows and are expected to go up this October 2008.  The fixed rate mortgage is a loan program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

FHA

FHA offers several program options such as Fixed Rate Mortgages offering 10, 15, 20 year fixed (temporary buydowns not allowed) or 25 and 30 year fixed rate mortages which do allow for a 2-1 temporary  buydown. Eligible borrowers include U.S. citizens and permanent resident aliens  (non-permanent resident aliens may qualify) and non-occupant co-borrowers. The properties you may obtain an FHA mortgage loan for include 1-4 unit  properties, PUDs, Modular and Manufactured Homes (double-wides only) A very nice feature with the FHA Mortgage Loan is that the seller may contribute up to 6% of the loan amount towards borrowers closing costs. The 3% down payment required per FHA guidelines may come from borrower’s own funds, it may be a gift from a blood relative or it may come from a DPA organization as previously mentioned.  Rates are excellent right now but are expected to rise this October 2008.

Adjustable Rate Mortgages (ARM)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
In today’s market I would only recommend this mortgage loan program to a client who is absolutely positive they will live in the home for less than the fixed rate period wether it be 2 years or 5 years.

Introductory Rate ARM’s
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

Standard ARMS and the Differences
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to the index rate.
6-Month Certificate of Deposit (CD) ARM
Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

Introductory Rate ARM’s
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security,

LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

Reverse Mortgages
A reverse mortgage is a special type of loan made to older homeowners (typically 62 +)  to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in-home health care, or other needs.
With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home — or “age in place” — and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.
The first, most widely available reverse mortgage in the United States was the federally-insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.
A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.
In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump-sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.
Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.
The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.
This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.
The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.
The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.
In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.
 

London InterBank Offered Rate (LIBOR)
LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London. The index is quoted for one month, three months, six months as well as one-year periods.
LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.
The most common quote for mortgages is the 6-month quote. LIBOR’s cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.
LIBOR is quoted daily in the Wall Street Journal’s Money Rates and compares most closely to the 1-Year Treasury Security index.

Balloon Mortgages
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Interest Rate Buydowns
The most common buydown is the 2-1 buydown. In the past, for a buyer to secure a 2-1 buydown they would pay 3 points above current market points in order to pay a below market interest rate during the first two years of the loan. At the end of the two years they would then pay the old market rate for the remaining term.
As an example, if the current market rate for a conforming fixed rate loan is 8.5% at a cost of 1.5 points, the buydown gives the borrower a first year rate of 6.50%, a second year rate of 7.50% and a third through 30th year rate of 8.50% and the cost would be 4.5 points. Buydown costs were usually paid for by a transferring company because of the high points associated with them.
In today’s market, mortgage companies have designed variations of the old buydowns rather than charge higher points to the buyer in the beginning they increase the note rate to cover their yields in the later years.
As an example, if the current rate for a conforming fixed rate loan is 8.50% at a cost of 1.5 points, the buydown would give the buyer a first year rate of 7.25%, a second year rate of 8.25% and a third through 30th year rate of 9.25% , or a three-quarter point higher note rate than the current market and the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works much in the same ways as the 2-1 buydown, with the exception of the starting interest rate being 3% below the note rate. Another variation is the flex-fixed buydown programs that increase at six month interval rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of 1.5 points, the first six months rate would be 7.50%, the second six months the rate would be 8.00%, the next six months rate would be 8.50%, the next six months rate would be 9.00%, the next six months the rate would be 9.50% and at the 37th month the rate would reach the note rate of 9.875% and would remain there for the remainder of the term. A comparable jumbo 30 year fixed at 1.5 points would be 8.875%.

Cost of Funds Index (COFI)
The 11th District Cost of Funds is more prevalent in the West and the 1-Year Treasury Security is more prevalent in the East. Buyers prefer the slowly moving 11th District Cost of Funds and investors prefer the 1-Year Treasury Security.
The monthly weighted average Eleventh District has been published by the Federal Home Loan Bank of San Francisco since August 1981. Currently more than one half of the savings institutions loans made in California are tied to the 11th District Cost of Funds (COF) index.
The Federal Home Loan Bank’s 11th District is comprised of saving institutions in Arizona, California and Nevada.
Few people who use and follow the 11th District Cost of Funds understand exactly how it is calculated, what it represents, how it moves and what factors affect it.
The predecessor to the 11th District Cost of Funds index was the District semiannual weighted average cost of funds published for a six month period ending in June and December. The San Francisco Bank was the first Federal Home Loan Bank to publish a monthly cost of funds index.
The funds used as a basis for the calculation of the 11th District Cost of Funds index are the liabilities at the District savings institutions: money on deposit at the institutions, money borrowed from a Federal Home Loan Bank (known as advances) and all other money borrowed. The interest paid on these types of funds is the cost of these funds.
The ratio of the dollar amount paid in interest during the month to the average dollar amount of the funds for that month constitutes the weighted average cost of funds ratio for that month.
The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed-rate mortgages.

Graduated Payment Mortgage (GPM)
The GPM is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualifying for home financing
Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% - 12.5% of the previous years payment.
GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% - 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.
The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan. GPM loans with 7.5% annual payment increases offer the lowest qualifying rate but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization and a note rate of 10.50% with 12.5% annual payment increases, the negative amortization continues for 60 months. The qualifying rate is 5.75% and the negative amortization is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally .5% to .75% higher than the note rate of a straight fixed rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. In markets where appreciation is moderate, and a borrower needs to move during the scheduled negative amortization period they could create an unpleasant situation.

Choosing A Mortgage Program
There isn’t a single or simple answer to this question. The right type of mortgage for you depends on many different factors:
Your current financial picture.
How you expect your finances to change.
How long you intend to keep your house.
How comfortable you are with your mortgage payment changing.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage — but your payments could get higher when the interest rate changes.
The best way to find the “right” answer is to call me or e-mail me directly so we may discuss your finances, your plans and financial prospects so I may help you determine the loan that will best suit your current and future needs. 

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Reverse Mortgages

A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs.

With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home or “age in place” and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first most widely available reverse mortgage in the United States was the federally insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.

Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.

This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.

The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.

In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.

Market Commentary

Monday: 03/10/08 10:30 AM EST: Treasuries at the long end of the maturity spectrum are ahead this morning despite some stronger than expected economic news. Market commentators note that yield spread dynamics are guiding bond action so far this morning. In the stock market, the indices are chopping around unchanged levels.

Last Friday, the spread between the closing yields of the 10-Year Treasury Note and 30-Year Bond widened to over 100 basis points — the first time this has happened since July of 2003. The spread between the 2- and 10-Year Notes is in the neighborhood of 200 basis points — the largest spread since June of 2004. Traders are currently betting that the curve will flatten and the repositioning helps fulfill the prophesy.

In today’s only major economic release, the Commerce Department reported that the seasonally adjusted level of wholesale inventories rose in January by 0.8% following a 1.1% increase in December. The latest rise was larger than the 0.5% that analysts had predicted. December’s increase was the largest since August of 2006 but it was seen as a bearish indicator since the sales level fell by 0.5% — suggesting that the increase in inventory was due to the lack of outflow.

But January’s inventory increase is seen as a bullish economic indicator since the sales level rose that month by 2.7%, the largest jump since March of 2004. The developments caused the inventory-to-sale (I/S) ratio to slip from December’s 1.09 to 1.07.

The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. The faster the turnover rate, the more pressure there is to replenish wholesale stocks. January’s ratio matches last November’s as the lowest on record.

Although the inventory news is a plus for stocks, other news is weighing against the market. The financial sector is being pressured by word that Countrywide financial is under investigation by the FBI and that Lehman Brothers is making deep staff cuts. Negative analyst guidance on Citigroup is also holding back the market.

Looking ahead: Tomorrow, the report on international trade for January comes out. December’s report surprised observers by indicating that the seasonally adjusted value of imports exceeded that of exports by just $58.8 billion. Analysts had been anticipating a larger deficit of $62.0 billion. The report said the value of imports shrank by 1.1% between November and December while exports rose by 1.5%.

Despite the import decline, December’s level was still the second highest on record. The level of exports was a tenth consecutive record high. For all of 2007, the trade deficit was $711.6 billion. This was down from the record $758.5 billion deficit posted in 2006 — the first time the deficit has been smaller than the preceding year’s since 2001.

The smaller than expected deficit caused forecasters to raise their predictions of gross domestic product growth in the fourth quarter. However, their predictions were not fulfilled in the Commerce Department’s revised GDP report, which showed no change from the 0.6% cited in the initial estimate. Though the revised GDP report did indicate an improved net export reading, this was offset by weaker inventory growth than had been originally reported.

The price of oil (a large import component) rose in January so a somewhat larger trade deficit is anticipated for the month. Current predictions are for a gap of about $59.5 billion.

On Wednesday afternoon, the Treasury will release its latest budget figures. In February of last year, receipts exceeded outlays by $120.0 billion. Due to shrinking revenues and increased outflows, a larger gap of about $140.0 billion is predicted for last month.

If this estimate is accurate, it would push the running total for the current fiscal year to date (begun last October) to a deficit of $227.7 billion, a much larger gap than the $162.2 billion for the same period in the last fiscal year. In fact, it would be the worst deficit reading for the first five months of a fiscal year since 2004.

High deficit figures are a negative for Treasuries since it means the government will have to issue more debt securities (Treasuries) in the future to cover operating expenses and interest on existing debt. The increased supply projections dilute the value of those securities already in the market.

On Thursday, the jobless claims report will be reviewed for the latest insights on the labor situation. In last Thurday’s report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 24,000 to 351,000. The decline was larger than forecasters were predicting after an increase in the previous week of 21,000 (originally reported as 19,000). The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,500 to 359,500.

However, levels remained elevated. The average weekly claims level for the year to date is 344,556. The average for all of 2007 was 322,135.

The report said that the level of continuing claims rose by 29,000 to 2.831 million in the week ending February 23 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 12,750 to 2,789,000, the highest reading since October of 2005. The average weekly reading for the year to date is 2,757,750. For all of 2007 it was 2,551,231.

Since the last reported initial claims reading fell further than expected, a partial rebound of between 5,000 and 10,000 is predicted for last week.

One of the month’s heavyweight releases also comes out on Thursday. This is the report on retail sales for last month. In January, the seasonally adjusted level of sales rose by 0.3% following a 0.4% contraction in December. A large but volatile category is that comprised of autos and light trucks. Sales there grew by a stronger than expected 0.6% in January following a 1.1% decline in December. But even excluding the category, sales were up by 0.3% after declining in December by 0.3%.

The data series has been volatile lately but the average monthly change in overall sales in the last twelve months has been an increase of 0.5%. Excluding the auto category, the average change has been an increase of 0.6%.

Predictions for February’s headline number range from no change to another gain of 0.3%. The ex-auto estimates range from flat to 0.2%.

Another release on Thursday is the report on import and export prices for last month. In January, the index of import prices rose by 1.7%. With the exception of November’s extraordinary spike of 3.1%, January’s was the largest increase since May of 2006. Like November’s jump, a main contributor to January’s was a rise in the category of imported petroleum products. Prices there rose by 12.4% in November and by 5.5% in January. But even excluding the category, January’s prices were up by 0.6%, twice as high as the twelve-month average.

Export prices were also up in January. They surged by 1.2% following a 0.4% rise in December. The large but volatile category of agricultural products rose by 5.0%, but even excluding the category, prices were up by 0.8%, twice the twelve-month average increase of 0.4%.

Forecasters are looking for a tamer import price change in February. Predictions are for an increase of between 0.6% and 1.0%.

The report on business inventories for January will be released a little later on Thursday morning. In December’s report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.6%, a ninth consecutive increase and the largest jump since May of 2006. But sales were down by 0.5%, the largest decline in eleven months. This pushed the inventory-to-sales (I/S) ratio up to 1.26 from November’s record low of 1.25.

The latest report on factory orders said that manufacturers’ inventories rose by 1.3% in January, the largest increase in three years. According to today’s Wholesale report, inventories there rose by 0.8%. This leaves the retail sector and it averaged monthly gains of 0.2% in 2007. Using these figures, the overall business inventory level is predicted to have risen by 0.7% or 0.8%. The I/S ratio is not expected to have remained at 1.26.

Also on Thursday, the Treasury will be offering an additional amount of last month’s initial issue of 10-Year Notes. The arrival of new supply usually keeps bond prices down until the market has a chance to begin digesting the inventory. Traders who will be making bids refrain from pushing prices up prior to an auction in order to keep yields up (bids are for yield — the higher, the better for the auction participants). Other traders also avoid purchasing the soon-to-be off-the-run issue since the new one will have greater liquidity. They also assume a wait-and-see posture until the results of the sale are known.

The last reopening auction of 10-Year Notes was in December and the issue met with weak demand. Bids exceeded the $8 billion offer amount by 2.23 to 1, the lowest bid-to-cover ratio for the maturity in two years. Noncompetitive bids, a gauge of individual investor demand, were relatively strong as they totaled $27 million — above the average of $19 million for the twelve reopenings preceding December’s.

But foreign demand was almost nonexistent. Indirect competitive bids, which include those from foreign central banks, garnered just 6.6% of the offering, the lowest award portion since March of 2006.

This month’s reopening issue is expected to have the same face value as the last eleven such offerings: $8 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

Friday brings a major inflation indicator, the Consumer Price Index (CPI). This gauge of price changes at the retail level rose in January by 0.4%, matching December’s increase. A key contributor to the latest increase was a 0.7% rise in the volatile category of energy. Yet, the increase there was the smallest since a decline was posted last August.

Another volatile category is food and its price index also rose by 0.7% — the biggest gain since a same-sized increase in February of last year. But even excluding both food and energy, the so-called core index was up by 0.3%. Though this is only slightly above the 0.2% trendline over the last decade, it is still the highest reading since June of 2006. Moreover, on a year-over-year basis, the core index was up by 2.5%, the largest Y/Y margin since last March.

For February, forecasters are looking for a slightly smaller increase in the overall index of 0.3%. The core increase is also expected to be a bit tamer at 0.2%

The last news item of the week is the preliminary read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. The final index for February came in at 70.8. While this was an improvement over the month’s preliminary reading of 69.6, it was still the lowest in sixteen years. January’s final index was 78.4.

Little change is anticipated for this month’s initial sentiment index.

Tags: Uncategorized by Matt Garnes
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