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Monday, April 28, 2008

What do you mean 6.25%?

Well, after a long week of rate inquiries, I thought it would be best to address the big question on everyone's mind. If the fed is cutting it's rate so much why is my 30 year fixed rate at 6.25%?

Let's firsts take a look at the fed rate. The general media has been singing the praises of the valiant attempts of the fed to reign in the subprime debacle and help out the average Jim with the ever increasing monthly payments on the adjustable mortgage rates. What is unreasonable to expect a lower rate for these victims of the tricky loans that they have committed to when the fed has lowered their rate 3% points.......First of all, the fed funds rate and the discount window are not for individuals to access funds. Historically, the opposite


The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.
Now let's take a look at what happened with the Fed's most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp.

The mortgage bond market briefly enjoyed a "knee-jerk" reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days.

So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp. On March 18, 2008 the Fed cut by 75bp and mortgage bonds lost 113bp in 6 days and 214bp in 22 days.

Longer term SP 500

It looks like two scenarios are forming:
1. 1424 target and then news for a correction

2. still consolidate in this range then a move up to a higher high maybe a 1.61 projection to 1492

I think the 1458 retrace is more likely, at which time this is the reaction high from 1252 and then a full capitulation of the bull and a move to 1108.

Also I can see this consolidating and then slight moves up until the elections. Next Feb would then kick off our next bear session.....

We shall see.

april 28 daily


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