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In This Issue

Last Week in Review: Stock market teeters on the verge of becoming either a correction...or an "official" Bear market.

Forecast for the Week: A fully loaded plate of economic news is in store, including reads on housing and consumer attitudes.

View: How you can "insure" a smart and safe vacation this summer.

Last Week In Review

IT'S A SHOWDOWN...THE BULLS VS. THE BEARS. But we're not talking about the Chicago Bulls who were recently knocked out of the NBA playoffs. We're talking about the Bull Market that Stocks have enjoyed over the past months...that is now slipping back lower.

So why are these animal terms used to describe action in the Stock market anyways? The terms "Bull" and "Bear" are used because of the way those animals attack. Bulls attack using an upward thrusting motion with their horns, and Bears attack by moving their powerful claws in a downward motion. So an upward market is termed a Bull market, while a downward market is called a Bear market.

Last week, Stocks saw a sharp thrust downward, with prices down more than 10% from their peak. But that doesn't mean it's a Bear market just yet. Instead, the drop can be seen as a "correction", if prices recover and resume their uptrend. A correction can be quite healthy, and help a Bull market sustain its strength. But here's the trick: if the market drops 20% from its peak, it's officially considered a Bear market. That means every Bear market was once potentially just a correction. And so the debate rages on. Is this a good time to buy - because you believe it's a correction and prices will move much higher? Or is this a time to sell, before the correction turns into a Bear market? The answer should become clearer over the next few days, as the market's direction takes hold.

Waiting in the wings are Bond prices and home loan rates... A Bear market could help Bond prices and home loan rates improve a bit more, as some of the money from Stock sales finds its way into the Bond market, including Mortgage Bonds. On the other hand, a correction back to a Bull market will be at the expense of some of the recent improvements that Bonds and home loan rates have enjoyed.

The reality is, Mortgage Bonds have looked a lot like a lottery winner recently, since Bond prices really should be much lower, and home loan rates much higher. But Mortgage Bonds are catching every lucky break - from the situation in Greece...to the declining Euro...to the correction in the Stock market. It's all going in the favor of Mortgage Bonds...for now. But the Bond market's good fortune may not last very long - so be sure to give me a call if I can help explain the current rate situation, and how it might benefit you.

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BULL MARKETS THRUST UPWARD...WHILE BEAR MARKETS SWIPE DOWNWARD

Despite the sharp sell-off in Stocks, the markets did receive some good news last week on the inflation front. The Producer Price Index (PPI) was reported lower than expectations for the month of April, and the more closely followed Consumer Price Index (CPI) fell to report the first month-over-month decline since March of 2009. And when volatile food and energy prices were removed from the equation, the annual Core index came in at its lowest level since January 1966. Those numbers appear to show that inflation is subdued - and with oil prices significantly lower from where they were a few weeks ago, there will even be more downward pressure on headline inflation in the next report.

But the reality is that inflation will eventually begin to rear its ugly head - and once that happens, inflation can accelerate rather quickly. China recently reported a spike in inflation - and last week, the UK saw surprisingly higher inflation numbers being reported as well. So the Fed - and the markets - will have to continue to keep close tabs on inflation in the US.

WHILE YOU CAN'T CONTROL IF THE BULLS OR BEARS WILL WIN THE NEXT ROUND IN THE MARKETS...THERE ARE SOME THINGS YOU CAN CONTROL. FOR EXAMPLE, CHECK OUT THE MORTGAGE MARKET GUIDE VIEW BELOW FOR TIPS ON "INSURING" A SMART AND SAFE VACATION THIS COMING SUMMER.

Forecast for the Week

There's a very full load of economic reports on tap this week, including fresh news on the health of the housing industry. After last week's reports on Housing Starts and Building Permits in April, we'll see reports on Existing Home Sales right away Monday morning and New Home Sales on Wednesday.

We'll also discover how consumers feel about the economy with a report on Consumer Confidence on Tuesday, followed by the Consumer Sentiment Index on Friday. Both reports have risen lately, indicating that consumers feel better about the present and future economic conditions. The markets will be watching to see if that trend continues in this week's reports.

The manufacturing sector of the economy will also be in the spotlight this week. Wednesday brings the Durable Goods Orders report, which measures new orders placed and is considered a leading indicator of manufacturing activity. That report will be followed by the Chicago PMI on Friday. This report surveys more than 200 Chicago purchasing managers about the manufacturing industry and is a good indicator of overall economic activity.

And if that wasn't enough, we'll also see more inflation news this week. First, the Gross Domestic Product (GDP) and GDP Chain Deflator for the first quarter will be released on Thursday. The Chain Deflator is a key inflation measure included in the GDP Report. And since inflation is the archenemy of Bonds and home loan rates, this report could be a market mover. Unlike the Consumer Price Index that was released last week, the Chain Deflator has the advantage of not being a fixed basket of goods and services, so changes in consumption patterns or the introduction of new goods and services will be reflected in the Chain Deflator. Then, one day after the Chain Deflator comes out, we'll see the Personal Consumption Expenditures report on Friday. This report measures price changes in consumer goods and services, and is considered the Fed's favorite gauge on inflation. After last week's better-than-expected inflation news, the markets will definitely be watching these reports.

Rounding out the week, we'll also see reports on Personal Income and Personal Spending this Friday.

But that's not all...in addition to all those reports, the government will auction off $42 Billion of 2-years on Tuesday, $40 Billion of 5-years on Wednesday, and $31 Billion of 7-years on Thursday. These auctions may move the markets depending on how they are received.

Oh, not to mention that the news coming out of Europe may once again add to the market's volatility here at home.

That's a very full helping of potentially market moving activity. But you can count on me to be here and watching very closely. And remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

As you can see in the chart below, Mortgage Bonds have improved over the last few weeks, as Stocks have undergone their move lower. I'll be watching closely to see if Bonds...and home loan rates...can continue to improve in the week ahead.

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Chart: Fannie Mae 4.5% Mortgage Bond (Friday, May 21, 2010)

The Mortgage Market View

"Insuring" a Smart and Safe Vacation

Summer is right around the corner, and that means many people are starting to plan some kind of summer getaway.

When planning your fun-filled itinerary, the last thing you want to do is worry about any financial loss that might occur as a result of a missed flight, an injury or illness, lost baggage, or any other unforeseen incident. To ensure your peace of mind while away from home, many companies provide several different types of traveler's protection plans to help ease the burden.

Without insurance, a traveler can lose nonrefundable deposits and prepayments that can add up to hundreds, or even thousands, of dollars. A good, comprehensive travel insurance plan will often reimburse a traveler for all pre-paid, nonrefundable expenses for a covered loss.

Here are some general types of coverage you may want to consider before heading out for this summer's vacation:

Travel Arrangement Protection - This covers you in case of trip cancellation, interruption, or travel delays (these can include inclement weather, lost or stolen passports, quarantine, hijacking or natural disaster).

Medical Protection - Just because you have health insurance at home, the moment you set foot on foreign soil or even set sail on a cruise, many health plans are considered null and void, so be sure you get travel medical protection to cover emergency medical expenses, such as illness and accident expenses, and emergency medical transportation to the nearest medical facility.

Baggage Protection - Not only do you want coverage for lost, stolen or damaged baggage, but many plans offer reimbursement for the purchase of essential items if baggage is delayed.

Worldwide Emergency Assistance - If traveling outside of the country, make sure you purchase a policy that covers international emergencies. This can include emergency cash transfer assistance, legal assistance, and lost travel documents assistance.

The cost of travel insurance is based, in most cases, on the value of the trip and the age of the traveler. Typically, the cost is 5-7 percent of the trip cost. Like most every other type of insurance, be it automobile, medical, or homeowner's, you hope you never need to use it. But it can be a relief to have it when you do need it.

The bottom line is: Before embarking on your next trip, do your homework! Talk to your insurance agent - or call me for a recommendation - and learn more about all the different insurance options available to you, so you can make the best choice for your peace of mind!

Economic Calendar for the Week of May 24 - May 28