Schizophrenic market data

Today, I went scouring various websites, newsletters, and journal looking for data. I'm trying to make of sense of where the market is now and where we are heading.

The headline of the day was that mortgage rates headed south. It was based on a report released by Freddie Mac. I decided to go to Freddie Mac's website ( www.freddiemac.com ) to read the news release. This week's 30-yr fixed rate mortgage averaged 6.26%, down slightly from the 6.28% average of last week. The 15-year FRM remained unchanged at 5.81% while the five-year treasury indexed hybrid ARM averaged 5.76%, up from last weeks average of 5.75%. The one-year ARM averaged 5.16%, up slightly from 5.14%. So what? The weekly average goes down slightly and the media is making a big deal about it. I think media must be doing a little of what I am, staring at the data, looking for any signs or anomalies, grasping for straws. What's more interesting is the one year data. A year ago, the 30-year FRM was 5.81%, the 15-year FRM was 5.23% and the 1-year ARM was 4.19%. There is no one-year data for the 5-year ARM. Why is this interesting? Because the Fed has raised interest rates 14 times since June 2004, yet interest rates have only gradually gone up with the biggest jump in ARM, up approximately 1%.

Also in the news, gold close at $506.50/ounce and the yield curve is still flat (it briefly inverted on Monday). With gold so high you would think inflation to be running out of control, the dollar to fall, and the economy to stagnate. With a flat curve, there is no risk assigned to time- no inflation risk, no interest rate risk, no default risk, etc. Is the market hedging? Or do bond and commodities traders operate in different spheres in and of themselves.

The WSJ reported Wednesday that, through September 2005, a greater percentage of this year's high risk ARM holders are 30 days or more delinquent in payments than the first nine months of the previous three years. The National Association of Realtors is reporting delinquencies surged nationwide in October. At my office downtown, we started getting cold calls, mailers, and faxes from small investment banks and dealers trying to unload collateralized mortgage obligations (CMO). For those of you who don't know what a CMO is, it is a pool of mortgages that are securitized and sold to investors. Banks generally won't lend unless they know they can sell the loans on the secondary market. It is the secondary market that helps keep the mortgage market liquid and, more importantly, the banks lending.

Speaking of Freddie and secondary markets, Freddie and Fannie raised the limit for loan guarantees 16% to $417,000 (according to the California Association of Realtors our median home price is $538,770). This should calm the secondary markets a bit.

Conclusions from the data? It's hard to draw any, except that something is out of whack.