Crucial Week Before Fed Meeting

Last week the market rallied on the prospect that Federal Reserve could pause in hiking rates at their forthcoming meeting on Aug. 8. It's quite evident from the drop in bond yields in Treasury market that many people expect the economy will continue to cool off.

This week we expect bearish trends taking over the market with traders opting to wait and watch the economic data and the mood in the street. Three key reports to be released this week will be keenly observed
(i) The Institute for Supply Management (ISM) will report Tuesday on its monthly manufacturing activity index for July. People are expecting the diffusion index to decline slightly from 53.8% reported for June. Readings over 50% indicate economic expansion.
(ii) The ISM's nonmanufacturing survey will be released on Thursday. People are expecting it to hold steady at June's figure of 57.0%.
(iii) Last but most important: The July payroll data will be released Friday. This might provide the definitive answer as to whether Fed would raise the short term interest rate again on August 8 or would rather pause for the first time after 17 rate hikes over the past two years. Job gains have been anemic in the 2nd quarter, averaging 108,000 jobs. If job growth tops 200,000 in July, the Fed might continue its uptrend but a sluggish number below 100,000 will reinforce the prevalent view of the street that the economy is slowing down and a pause or even a drop in the rate would be the option. A number somewhere in between would leave Friday's market hanging in the air.

This week will also eagerly await a number of crucial earning reports from some of the bellweather companies in order to gauge the trend of the economy. The list includes: Procter & Gamble (PG), Prudential Financial (PRU), Time Warner (TWX) and Starbucks (SBUX) .

Mortgage Rate Dips

Up-Down-Up and Down again. The Mortgage arte is not finding a definite direction to move. The speculation is that the Federal Reserve is near the end of its rate-hike cycle. All kinds of reports are indicating that the housing market is sinking after being the major engine of U.S. economic growth for four years. The mortgage rate is reflecting that.

According to Commerce Department data released today, sales of new homes fell 3% in June, while revisions to prior months show the U.S. housing market was weaker than what was previously estimated. The seasonally adjusted annualized rate of 1.13 million new homes sold in June was below the market estimate of 1.16 million. May's sales pace was revised to a 1.17 million pace, down from 1.23 million reported last month.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.72% in the week that ended today -- down from its 6.80% average last week. At this time last year, the loan averaged 5.77%. The 15-year fixed rate averaged at 6.34% this week, again a fall from last week's 6.41%. At this time last year this rate was 5.34%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.35% decreasing from last week's 6.36%. This rate averaged 5.27% a year ago. The 1-year Treasury-indexed ARMs also moved down this week to 5.78% from last week's rate of 5.80%. At this time in 2005, the 1-year ARM averaged only 4.46%.

WNS: New ADR from India

India is one of the strongest emerging markets and any new public offer from that country in a US stock exchange creates lot of interest and today was no exception.

WNS Holdings Ltd. is the IPO that started trading on the New York Stock Exchange today with the ticker symbol WNS. This is the 10th listing of an ADR (American Depository Receipt) from India. The stock rose to close at $24.50 from its debut price of $20 on volume of about 6.8 million shares.

WNS began operations in 1996 as an in-house unit of British Airways and started focusing on providing business process outsourcing services to third parties in year 2003. The company employs about 10,500 people. WNS Holdings has business with many U.S. firms.

Other 9 Indian ADRs are: Infosys (INFY), Wipro (WIT), Dr. Reddy's Laboratory (RDY), HDFC Bank(HDB), ICICI Bank Ltd (IBN), Satyam Computer Services (SAY), Tata Motors (TTM), Mahanagar Telephone (MTE), Videsh Sanchar (VSL), Silverline Tech (SLTTY), Rediff.com (REDF).

Ultrashort Mutual Funds

Ultrashort funds typically own a variety of investment-grade debt from government agencies, corporations and mortgage issuers with an average AA credit-rating. Because these bonds will mature soon, ultrashort funds are less sensitive to interest-rate movements that can badly affect longer-term bondholders. The principal of such funds fluctuate, unlike a money-market fund, but the fluctuations tend to be minor. It's a low-risk option for getting a rate higher than conventional savings account or Certificate of Deposits (CDs).

Prices of such a Bond typically fall when rates rise. Both 1994 and 1999, for instance, were punishing years for bonds. Rising rates pushed intermediate-term bond funds down 4% on average in 1994, and the group lost 1.3% in 1999. But ultrashort funds, with their ability to renew themselves, rode the rising-rate trend to post average gains of 4.4% in 1994 and 2% in 1999.

Because they offer low-risk income, ultrashort bond mutual funds should be considered along with money-market funds and bank certificates of deposit (CD) as a good option to keep your cash for a short time. Look for low expense ratio funds. A few names are: Fidelity Ultra-Short Bond Fund (FUSFX), Payden Limited Maturity Fund (PYLMX), Schwab YieldPlus Fund (SWYPX), Vanguard Short-Term Tax Exempt Fund (VWSTX).

Mortgage Rate Up Again

After a drop last week, the mortgage rate hiked this week again, probably influenced by Consumer Price Index figures for June, which indicated that inflation could still be a threat for US economy. But comments made yesterday by Federal Reserve Chairman Ben Bernanke allayed that fear to certain extent, which saw significant gain in stock prices on Wednesday. Bernanke's comments could possibly limit the up-side of mortgage rates in the coming days.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.80% in the week that ended today -- up from its 6.74% average last week. At this time last year, the loan averaged 5.73%. The 15-year fixed rate averaged at 6.41% this week, again an increase from last week's 6.37%. At this time last year this rate was 5.32%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.36% increasing from last week's 6.33%. This rate averaged 5.26% a year ago. The 1-year Treasury-indexed ARMs also moved up this week to 5.80% from last week's rate of 5.75%. At this time in 2005, the 1-year ARM averaged only 4.42%.

Housing Market Slowing Down

Sure signs of a slow-down in housing sector are now coming up before us. The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending July 14 and that reveals all supporting evidences for such a slow-down. The survey covers approximately 50% of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.

The Market Composite Index, a measure of mortgage loan application volume, was down by 4.6% on a seasonally adjusted basis from last week. This week's figure is a drop of 31.3% from a year ago.

The purchase index sank by 6.2% this week to a level 19% lower than a year ago. The refinance index fell 1.6% this week to a level 46% lower than a year ago. New-home sales have sunk about 6% in the past year, while sales of existing homes are down about 7%.

Refinancings accounted for 35% of total applications last week. At the peak of its boom in 2003, refinancings accounted for more than 80% of applications.

Adjustable-rate loans accounted for 29% of applications. In March 2005, ARMs accounted for just over 36% of applications.

EmigrantDirect's 5.15% Savings Rate

EmigrantDirect.com is increasing the rate for its savings account to 5.15% APY effective July 28th. This would be the highest rate of the nation, unless some other competitors like HSBC bank (5.05% currently) or Citibank (5.00% currently) announces a rate hike before that.

EmigrantDirect is also offering good rate on CDs to its customers only -- currently the rate is fixed at 5.35% with maturity from 6 months to 10 years -- whatever one prefers. Although the bank has not announced yet, we can guess this rate is also likely to go up on or soon after July 28th.

We prefer EmigrantDirect or IngDirect (currently 4.35% APY) more than others because they transfer money either way within next business day (they say 2-3 business days but they are always prompt). Other banks have hold period of 2-3 days when your money just sits and earns nothing -- a disadvantage if you have large amount of cash.

Proshares' Short ETFs

Last Thursday ProShare Advisors LLC listed four index-linked ETFs (Exchange Traded Funds) on the American Stock Exchange. These innovative ETFs seek to provide twice the daily opposite return of the Nasdaq 100 (NDX) , Standard & Poor's 500 (SPX) , S&P MidCap 400 (XX) and the Dow Jones Industrial Average (DJIA) .

Ticker symbols of these new ETFs are UltraShort QQQ ProShares (QID) , UltraShort S&P 500 ProShares (SDS) , UltraShort MidCap 400 ProShares (MZZ) and UltraShort Dow 30 ProShares (DXD) . These attempt to give 200% of the opposite return of the targeted benchmarks. So, if the index falls 1%, the corresponding fund is designed to gain 2%. The new ETFs can thus also be used to hedge stock portfolios against market pullbacks.

Caution: Investors in these ETFs can lose money when markets rise. So, such volatile, leveraged investments should be approached with care. If you are not mature enough in investment market, it's better to avoid these funds.

Last month the company introduced its first 8 ETFs of the following two kinds:
(i) 4 leveraged funds that seek to provide double the index's normal return:
Ultra QQQ ProShares for Double the NASDAQ-100 Index (QLD), Ultra S&P500 ProShares for Double the S&P 500 Index (SSO), Ultra MidCap400 ProShares for Double the S&P MidCap 400 Index (MVV), Ultra Dow30 ProShares Double the Dow Jones Industrial Average (DDM).

(ii) 4 ETFs that provide 100% of the inverse, or opposite, return:
Short QQQ ProShares Inverse of the NASDAQ-100 Index (PSQ), Short S&P500 ProShares Inverse of the S&P 500 Index (SH), Short MidCap400 ProShares Inverse of the S&P MidCap 400 Index (MYY), Short Dow30 ProShares Inverse of the Dow Jones Industrial Average (DOG).

Mortgage Rate Drops

After reaching an almost steady state last week, the mortgage rate finally dropped this week after 4 consecutive weeks of increase. Two factors seem to be playing behind this fall: (i) June's unemployment figures indicated a slowing economy, (ii) Some people are anticipating that the Federal Reserve has only one more rate hike left possibly in its August meeting.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.74% in the week that ended today -- down from its 6.79% average last week. At this time last year, the loan averaged 5.66%. The 15-year fixed rate averaged at 6.37% this week, again a drop from last week's 6.44%. At this time last year this rate was 5.25%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.33% sliding from last week's 6.39%. This rate averaged 5.15% a year ago. The 1-year Treasury-indexed ARMs also moved down this week to 5.75% from last week's rate of 5.83%. At this time in 2005, the 1-year ARM averaged 4.39%.

Beware of FOMC meeting dates

The current volatility in Wall Street may not go away soon. The political uncertainties in middle-east, terrorist threats almost everywhere (India's financial capital Mumbai was attacked this week), rising oil prices and some lower corporate earnings may all work together to ensure that uncertainties should go on for quite sometime.

In the midst of all these there would always remain the inflationary fear that would haunt traders from time to time. In particular, one must keep in mind the following dates when you may expect severe downturns in stock prices: August 8th, September 20, October 24, December 12. These are the meeting dates of the Federal Reserve when the committee would decide the fate of the short term interest rate. If traders anticipate a hike in the rate, they would sell off in fear of lower level of consumer spending and less corporate earning. If Fed does not hike the rate, that would be read as an indication of downturn in our econonomy and traders may sell off in that case too.

So, just keep those dates in mind. If you see too many positive news in between, don't just get carried away. Although we all know the basic motto of investing, that is 'buying low and selling high', most of us trade out of emotion. We sell when the world looks grim and we purchase when the world is singing songs. Just be reasonable in coming months. Select stocks or funds carefully and, if possible, take those opportune moments before or after FOMC meeting dates to purchase some of those in your selected list at a lower price.

FDV Starts Trading on Tuesday

Tomorrow the American Stock Exchange (Amex) will launch trading in options on the following exchange traded fund from Lisle, IL based First Trust Advisors: First Trust DB Strategic Value Index Fund (symbol: FDV). The fund options will open with strike prices of (15 -25 1 pt increments) and position limits of 25,000 contracts and will trade on the March expiration cycle.

The Fund seeks investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the Deutsche Bank CROCI US+ Index. The Index is intended to reflect the total return performance of the 40 shares in the Selection Pool with the lowest positive CROCI Economic Price Earnings Ratios. The index is in existence since Feb, 2002.

The Top 10 holdings are: Harley Davidson (HDI), Marathon Oil (MRO), Eli Lilly (LLY), Carnival Corp (CCL), Merck (MRK), Apache (APA), Paccar (PCAR), EOG Resources (EOG), Devon Energy (DVN), Gannett (GCI). The expense ratio is 0.65%.

Mortgage Rate Steady

After the increase in short term interest rate to 5.25% last week by the Federal Reserve, the mortgage rate remained at a steady level over the past week ending today.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.79% in the week that ended today -- slightly up from its 6.78% average last week. At this time last year, the loan averaged 5.62%. The 30-year mortgage has not been higher since the week ending May 24, 2002, when it averaged 6.81%. The 15-year fixed rate averaged at 6.44% this week, again only a 0.01% increase from last week's 6.43%. At this time last year this rate was 5.20%. This rate hasn't been higher since April 12, 2002, when it averaged 6.49%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) was steady at last week's average of 6.39%. This rate averaged 5.19% a year ago. The 1-year Treasury-indexed ARMs also moved up by only 0.01% this week to 5.83%, from 5.82% last week. At this time in 2005, the ARM averaged 4.33%.

Retirement Funds with ETFs

Today we talk about 3 funds from the New York-based asset manager J. & W. Seligman & Co. Inc. : Seligman TargetETFund Core, TargetETFund 2015 and TargetETFund 2025. These funds have combined two of the hottest trends in investing: exchange-traded funds (ETFs) and "target-date" retirement funds. ETFs, which are indexed baskets of securities that trade on exchanges like stocks, have blossomed into a $250 billion business in the U.S. alone. Target-Date Funds ( See our past Posting on this type of Funds ) allocate a portfolio to broad asset classes such as stocks and bonds, reducing investment risk as the retirement date approaches. Assets in these securities jumped 65% to $43.9 billion in 2004.

The Core portfolio of these Seligman funds have 55% in stocks, 35% in fixed-income, and 10% in real estate investment trusts (REITs). Within the equity allocation, 30% is in U.S. large-cap funds, 5% in midcap, 10% in international large-cap and 10% in dividend-focused funds. Seligman says the new mutual funds overcome one of the main obstacles of building portfolio of ETFs and rebalancing it over time. Although ETFs have low expense ratios, investors must pay brokerage commissions to buy and sell shares. ETFs' cost advantage is diminished when contributing small amounts on a periodic basis.

Investors will have to pay for that convenience, however. Including fee waivers, expenses for Class A shares of the three new Seligman funds are 1.09%, for example, with a maximum sales charge or "load" of 4.75%, according to the prospectus. The average expense ratio for a U.S.-listed ETF is 0.42%, according to investment research firm Morningstar Inc.

HSBC savings 5.05% APY

This weekend HSBCdirect.com increased the rate of its savings account from 4.80% to America's highest 5.05% APY. Please read our last Monday's Posting on 'Hi Yield Savings Accounts'.

The only problem with HSBC accounts is their 3 day hold period during any transfer of money. So, if you are transacting large amount, you may loose significant amount of interest, while you deposit or withdraw. Emigrant-direct, Citibank or Ing-Direct are very prompt in that regard. They usually transfer by next business day.