Another hot topic…lots of talk about inflation lately. Fed Chairman Greenspan and the Fed crew, as well as several other noted economists, have expressed concerns over rising inflationary pressures. But the latest data shows that the culprit appears to have been pumped up energy costs. And with the price of oil slipping almost 20% during the past month, the fears over inflation are easing. This helped stocks enjoy a solid week, while Bonds and home loan rates ended the week about where they began.

DO ALL GREAT MINDS THING ALIKE? COMPARE YOUR OWN VIEWS AGAINST A LEGENDARY PANEL OF INVESTORS AND ECONOMISTS, AS THIS WEEK’S MORTGAGE MARKET VIEW GATHERS TIPS FROM THE EXPERTS TO SEE WHAT’S IN STORE FOR THE FINANCIAL MARKETS IN THE YEARS AHEAD…AND MOST IMPORTANTLY, HOW YOU CAN PROFIT.

Forecast For The Week

So for the second consecutive week, Mortgage Bonds traded quietly sideways and home loan rates were largely unchanged…but just like a spring being wound tight, this type of quiet trading often leads to a volatile breakout.

Further indicating a breakout is the “squeeze-play” being put on Mortgage Bonds on a technical level. Remember that home loan rates are tied to Mortgage Backed Securities, or Mortgage Bonds, and higher Bond pricing means improved home loan rates. Now take a peek at the chart below, showing Mortgage Bond prices getting squeezed between the 25-day Moving Average support line (Green Line) and the 100-day Moving Average resistance line (Orange Line). Prices are getting squeezed into the point of a triangle formed between the Upper and Lower trend lines.

These patterns suggest a breakout is imminent…and if the “spring isn’t sprung” this week, then it will be likely to occur the following week when the next Jobs Report is scheduled to be released on June 3. The possible catalysts for a breakout move this week? The release of minutes from the last Federal Reserve meeting on Tuesday and the release of first quarter Gross Domestic Product and its key inflation measuring Chain Deflator on Thursday might just do it.

BOTTOM LINE: After taking a breather the last few weeks, it’s likely there will be some volatility in home loan rates ahead.

Chart: Fannie Mae 5.5% Mortgage Bond (Friday May 20, 2005)

The Mortgage Market View…

“ IN MY HUMBLE OPINION…” Such a common phrase, but there are those few whose views have been on target so many times…they really have no need to be humble. And what do these legendary experts say about the financial markets ahead? Since the beginning of the year the stock market has struggled, bonds have held steady and real estate has performed exceptionally well. But what will happen to these markets over the next few years? Consider the views of several legendary investors and economists and get their opinions on these asset classes in the years to come.

Most everyone has heard of Warren Buffett, aka the “Oracle of Omaha”, one of the most successful investors of our time. Buffet has run his holding company, Berkshire Hathaway, with fabulous success for more than forty years. Berkshire is now a $130 billion company. In his most recent annual letter to shareholders, Buffett said he's "found very few attractive securities to buy." Therefore he ended 2004 with "$43 billion of cash equivalents." If someone as shrewd as Warren Buffett thinks the stock pickings are slim, then the average investor needs to take extra caution when navigating these tricky waters.

How about bonds? Let’s see what Bill Gross has to say about them. Gross, director of PIMCO, is perhaps the most successful bond investor of this generation. He has often been referred to as "the Warren Buffett of the bond world." Gross manages the PIMCO Total Return bond fund and is responsible for an enormous half-trillion dollars in bond assets, which has had an average gain of around 8.3% for the past ten years. Gross says "If we had to forecast... we believe a range of 3 - 4.5% for 10-year Treasuries will prevail during most of the next three to five years and that yields on Euroland bonds will be slightly lower." The current yield on the 10-year Treasury is around 4.15%, so Gross is suggesting a better chance of lower rates ahead. If Bill Gross is correct, and bond yields go lower, then bond prices would actually go higher. An investor would earn around 4% interest, in addition to capital appreciation. A total return of 8% a year may not be something to write home about, but it may surpass projected gains in the stock market over the next three to five years.

Then there is Martin Fridson’s opinion on high-yield or junk bonds: Martin is bearish. Martin Fridson literally wrote the book on securities and credit analysis and in 2000, Fridson became the youngest person ever inducted into the Fixed Income Analysts Society Hall of Fame…yes, there is such a thing. Fridson is recognized as a superstar analyst and he was just interviewed in Barron's about his specialty - high yield bonds. Fridson was quoted as saying "The outlook is for further deterioration in conditions. We reached a low point in spreads and the smallest risk premium earlier this year. The trend in the default rate over the next couple of years will very likely be higher, perhaps considerably higher." You can learn more about Fridson and his views at: http://www.martinfridson.com.

How about Real Estate? Warnings about real estate bubbles are surfacing in the financial press ever more frequently…the “bubble heads” appear to be everywhere. But Frank Nothaft, the well respected chief economist at Freddie Mac, sees no such threat. Nothaft looks at the strength in the job markets to keep the real estate market in good shape. He expects the rate of appreciation to slow, but not for prices to decline. Because housing is “local”, areas with weak job markets will likely see home prices under perform the overall market.

With these outlooks, where can an investor diversify some of their assets?

Jeremy Grantham, a legendary money manager known for his intelligent asset allocation, has over three decades of Wall Street experience. When asked “Where's an attractive place to allocate money for the long run?” Grantham replied in a Barron’s article that “timber is cheaper than anything else because there is nothing in the world that is fairly priced. It is a wonderful diversifier. It is the only commodity that has had a rising real price over the last 100 years, and certainly in the last 20 years... It is a mispriced asset class, it is still too cheap, and there are quite a few good decades ahead of it." (Reference: http://www.gmo.com). According to Grantham, timber stocks such as Plum Creek Timber (PCL, $35.47) and Rayonier (RYN, $53.90) might be prudent stocks to acquire and hold for the next several years.

So what’s an investor to do, according to these experts’ opinions? Pick your stocks carefully, expect real estate to remain solid as long as the job market stays strong, and buy good quality bonds and timber stocks.

The Week's Economic Indicator Calendar

This week’s calendar features the release of the minutes from the last Federal Reserve Open Market Committee (FOMC) meeting. The FOMC minutes can provide additional depth and understanding of the Fed’s policy toward interest rates and can have a high impact on the bond market. Also of interest will be Thursday’s release of first quarter Gross Domestic Product and its key inflation measuring Chain Deflator.

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

For the week of May 23 – May 27