Explosive Rally Fizzles at End of Week

“I GUESS WE ALL LIKE TO BE RECOGNIZED NOT FOR ONE PIECE OF FIREWORKS, BUT FOR THE LEDGER OF OUR DAILY WORK.” Neil Armstrong. And while the summer’s fireworks started in full force on the July 4th holiday, they continued daily last week in the financial markets as Bonds and home loan rates ignited and began the week by improving sharply. This early-week rally was sparked by a speech made by Fed Chairman Ben Bernanke, who said that the Fed may continue to provide emergency loans to investment banks to help them overcome credit problems. This led to improvement in the Bond market because the markets saw this as a sign that the Fed is willing to take action to maintain stability and counter any turbulence or explosions that may occur.

And speaking of explosions, some explosions in the Middle East helped douse the rallying flames mid-week after Iran test fired nine medium- to long-range missiles, one of which has the range to reach Israel. The instability of that situation…and new testimony by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke before the House Financial Services Committee regarding ways Congress can overhaul the financial regulatory system to prevent future crises (the first hearing of its kind)…caused the improvements in the market to fizzle as Traders watched and waited for the finale these events would cause.

As it turned out, last week’s finale was a bit of an implosion. Despite Paulson’s encouraging words about Fannie Mae and Freddie Mac, Bonds and home loan rates worsened after reports on Friday that the government is considering a plan to take control of both companies if financial problems threaten their collapse. Stock prices of Fannie and Freddie would essentially become worthless if this happens, and Stocks and Bonds both reacted poorly to this news as investor confidence plunged.

Also, another record high for oil (remember higher oil prices means higher inflation, which is the arch enemy of Bonds and home loan rates) added to the implosion and worsening of Bonds and home loan rates on Friday. However, when all the smoke cleared, Bonds and home loan rates still managed to end the week slightly better than where they began.

FIREWORKS MAY BE A FUN PART OF SUMMER, BUT HIGH ENERGY BILLS CERTAINLY AREN’T. CHECK OUT THIS WEEK’S MORTGAGE MARKET VIEW TO LEARN SOME GREAT WAYS TO SAVE ON COOLING COSTS.

Click here to read my “Forecast for the Week.”