I am out of the office today (Friday) but rushed a few things together yesterday. My apologies… Depending on tomorrow's markets, economic data (GDP, New and Existing Home Sales!), and news, I may add additional comments by Monday morning.

Stocks generally ended the week higher with the S&P 500 and Nasdaq gaining 0.6%, the smaller cap Russell 2000 up 1.3% and the Dow lower by 0.4%. Tech stocks had a mixed week with the Nasdaq 100 losing 0.3%, the Morgan Stanley High Tech index gaining 0.3%, TheStreet.com Internet index up 0.3%, the SOX down 2.4%, software stocks off 0.2%, and the Nasdaq Telecommunications index up 1.4%. Financials were also mixed with banks losing less than a percent and broker dealers adding less than a percent. Cyclical stocks were among the best performing groups with the Morgan Stanley Cyclical index gaining 1.6% while consumer stocks added 0.8%. Biotech stocks jumped 8.3% while oil stocks slid 1.7%. Year to date, tech groups are the clear winners with the SOX ahead 12.3%, the Nasdaq Telecommunications index up 14.8%, TheStreet.com Internet index up 15% and the Nasdaq 100 up 10%. In contrast, gold stocks have lost 14.6% this year as measured by the Gold Bug index.

Treasury yields fell with the 10-year closing out the week at 3.89% vs. 3.95% a week ago. The short end of the curve fell sharply with the 2-year closing at 1.57% vs. 1.67% the prior week. The CRB index ended the week about unchanged. Spot gold prices moved higher to $334.04 vs. $325.95 a week ago, but gold stocks fell 2.4% nonetheless. The dollar index weakened to 98.36 vs. 99.28 the prior week.

April 23 - Dow Jones (Henry J. Pulizzi): "Ford Motor Credit Co. tapped the European corporate bond market Wednesday, just a week after strong first quarter earnings helped ease concerns about weak profitability, pension liabilities and downward pricing pressure. The financing arm of Ford Motor Co. sold EUR1.5 billion in 5.5% three-year bonds, taking advantage of a recent sharp tightening in credit spreads. Though fears over the company's condition linger, the Ford deal met heavy demand from European investors desperate for higher-yielding assets. The transaction, EUR500 million larger than expected, was put together quickly over the course of the day and garnered more than EUR3.5 billion of orders."

April 22 - Dow Jones: "BMW Financial Services Tuesday sold its $1.6 billion securitization of retail auto receivables at levels that are believed to be the tightest ever for an auto-backed issue, according to syndicate sources. The asset-backed offering is the first this year from the BMW Vehicle Owner Trust securitization vehicle… Sources familiar with the offering said that the various tranches were two-three times oversubscribed ahead of the pricing."

April 23 - Bloomberg: "The U.S. is trying to push the dollar lower against the euro to narrow its trade deficit and retaliate against Germany and France for their opposition to the Iraq war, German magazine Der Spiegel said. 'This will be Europe's invisible contribution to our Iraq costs,' an unidentified U.S. official told European policy makers in Brussels, according to the magazine. The U.S. has given up its strong dollar policy, the official said."

Interestingly, dollar weakness seems to broaden by the week. The euro again traded above 110, with the dollar nearing a record low against the European currency. Year-to-date, we see that the Brazil real has gained 19% against the dollar, the Argentine peso 18%, South African rand 18%, Australian dollar 10%, and Canadian dollar 8%. This week, British pound trades to a five-week high against the dollar; the Swedish krona trades to a three-year high; the South African rand to a 2 ½ year high; the Israeli shekel to a 15-month high. Mexican peso trades to the highest level against the dollar since early January and the Brazilian real to the highest level since August. (Argentine stocks traded to five-year highs this week.)

April 22 - Wall Street Journal (Ray A. Smith): "AS INSURANCE COSTS continue to rise, property owners are looking everywhere they can to help rein in the costs. Among their tactics: bulking up deductibles, using disposable cameras to document damage and having get-togethers with insurers… Property-insurance costs for building owners have been rising since 2001, though 2003 policies show the rate of increase has begun to slow. After going up as much as 90% on average in 2002, premiums rose 10% on average for policies signed covering 2003, says New York insurance broker Marsh Inc…"

April 22 - Rocky Mountain news: "The apartment vacancy rate in Colorado outside of Denver shot up to 11.6%, compared to 8.3% a year earlier… Despite the rising vacancy rates, the overall average monthly rental rate has barely budged, down only 1 percent."

April 22 - BusinessWire: "The Nehemiah Corporation of California, the nation's leading nonprofit provider of down payment assistance, today announced a series of new hires in key markets to strengthen the Company's strategic national and local outreach program.

As Nehemiah's new Area Managers, these individuals will be responsible for engaging current and potential industry partners in participating in Nehemiah's down payment assistance program… To date, Nehemiah has provided more than $500 million in down payment assistance gifts, resulting in over $15 billion in real estate transactions and has helped nearly 150,000 families and individuals achieve their dream of homeownership."

Economic data remain mixed and inconclusive. This week's ABC News/Money Magazine reading on consumer confidence jumped to a seven-month high. Bankruptcy filings increased to 34,793, up 12% y-o-y. Mortgage applications dipped again, with Refis down 8% and Purchase applications declining 4.3% for the week. Yet these are declines from very strong levels, with year-over-year increases of 287% and 2.4% respectively. Both the Bank of Tokyo-Mitsubishi (BTM) and Redbook weekly retail sales indices posted strong gains. BTM had y-o-y sales up 4.4%, with Redbook up 2.2%. But these comparisons may have been impacted by this year's late Easter. March's 2.0% gain in Durable Goods Orders compares to the forecast of a 0.5% decline. Impressively, gains were surprisingly broad based. Capital Goods orders were up a noteworthy 3.2% (reversing February's 2.5% decline). Machine orders were strong, as were orders for computers and electronic products. Orders for Defense goods surged 16%.

At this time, there is mounting evidence that we are in the midst of major "reliquefication" in some ways similar to the post-Russia/LTCM collapse episode back in the autumn of 1998. The financial sector is expanding aggressively, with extraordinary Credit growth, Credit market speculation, and consequent financial system over-liquidity. The 1998/99 "reliquefication" deluge provided the necessary fuel to propel the technology and stock markets - "sectors" with already strong inflationary biases - into the precarious "blow-off" stage of terminal excess. And, importantly, these extraordinary inflationary manifestations were magnets for global speculative finance, inciting a self-reinforcing "blow-off" melt-up for the dollar as well (much at the expense of other markets and economies, especially Latin America).

We then ask ourselves today: If this "reliquefication" is sustained, what will be the nature of prospective inflationary manifestations? First of all, unlike 1998, we don't see an inflationary/speculative bias in the technology, stock market, or dollar arenas. In fact, the dollar is an especially weak asset destined to suffer from ongoing runway U.S. Credit Bubble excess. So, then, what are the "sectors" likely to be over-stimulated by dangerous (Credit) inflationary manifestations?

This is where things get interesting. Certainly, there is a strong inflationary bias in the government sector and throughout healthcare and energy, which I expect to continue. The housing sector has been enjoying in an enormous boom for several years now, but its prospects are much less clear. There is certainly evidence supporting the view that the expansion is quite long in the tooth: home ownership is at record levels, the inventory of unsold homes is expanding; there are rising foreclosures and delinquencies nationally; and there are clear signs of problems in some markets (Denver and Dallas). And with stagnant job growth, there is reason to question the strength of future housing demand. Some even go so far as to claim that "deflation" is already impacting the housing sector. Yet, it would have to be a very strange stain of "deflation," as lending records are being shattered and the S&P Homebuilder index is up 22% year-to-date.

The bottom line is that unprecedented mortgage Credit growth runs unabated, with it likely that the first quarter will post another period of double-digit household debt growth (on top of the 50% expansion over five years). There remain millions of renters who would love to be homebuyers, and millions of owners that would enjoy nothing more than to move up to that larger dream home. The household sector has fully discovered the "wealth creating" power ("homes for the long-term") of aggressive mortgage borrowing. Correspondingly, virtually the entire U.S. financial sector has recognized that there is one special sector that affords easy profit growth (and minimal "risk"!). There are "nonprofit" groups springing up all over to provide down payment assistance to those with no savings, while lending standards could not be easier for those wishing to use inflated home equity to trade up. Frankin Raines endeavors to grow Fannie Mae by more than double-digits. And, importantly, the expanding national homebuilders have unlimited access to cheap finance, in one more extraordinary development that we can credit to contemporary structured finance.

In short, these are exceedingly powerful forces, with the mortgage finance arena retaining an extraordinarily strong inflationary bias. Inflationary psychology could not be more ingrained throughout mortgage finance. With this in mind, as we continue to analyze unfolding developments, we will look to mortgage finance as the "epicenter" for Credit growth, as well as a sector quite susceptible to inflationary forces.

April 24 - American Banker (Hannah Karp): "Healthy mortgage lending was the highlight of a generally lackluster economy in March and early April, according to the Federal Reserve (beige book) report… Mortgage lending remained strong in most districts…"

I thought it worthwhile to extract relevant residential real estate comments from the various District reports (Philadelphia did not address real estate).

Boston - "Residential real estate markets in New England remain very strong. After substantial increases in 2002, prices have either leveled off or have increased at a moderate rate this year… Most respondents continue to complain about lack of inventory. The shortage of supply is especially severe in the lower-to midprice range. In most areas, such houses sell as soon as they are listed and often at or even slightly above their asking prices… Sales remain robust throughout the region, limited only by lack of inventory."

Chicago - "Realtors said that existing home sales were still strong but may have leveled off in recent months, while builders suggested that sales and construction of new homes slowed somewhat in March."

Atlanta - "Low mortgage rates continued to propel District housing markets in January and February. The strongest reports in the District were from Florida…"

New York - "Residential real estate markets appear to have slowed since the last report. Home construction activity, as measured by housing permits, fell noticeably in the first quarter, hampered by heavy snow accumulations across much of the District. New Jersey homebuilders report that demand for moderately priced homes has remained fairly sturdy…"

St. Louis - "Home sales are still doing well in most of the District. The Memphis area saw an increase in total home sales of about 13 percent in February 2003 compared to February 2002. Similarly, northern Kentucky saw an increase of 26 percent. Contacts in St. Louis and northwest Arkansas reported that home sales were still strong in January."

Minneapolis - "Residential building and real estate activity continued to show signs of strength. Housing units authorized in District states were up 15 percent for the three-month period ending in February compared with a year ago."

Dallas - "Single family activity remains soft, with numerous foreclosures, particularly in the Dallas-Fort Worth area. Although activity is still moderately strong in the market's low end, several contacts mentioned a lack of "urgency" among buyers. Builders report an increase in incentives and downward pressure on home prices."

San Francisco - "…Contacts indicated that residential housing markets across much of the District remained robust in January and early February. Sales of low-to-median priced homes remained high in most of the District, especially in Southern California and Hawaii, although the pace of sales and of price appreciation has moderated in some areas. Throughout the District, contacts noted that markets for high-end homes had cooled off. Respondents attributed continued strength in overall home sales primarily to low mortgage interest rates."

Kansas City - "Residential real estate activity in the District continued to show strength in March and early April… Single-family housing starts increased further in most District cities, with builders reporting little effect from the onset of war. Much of the increase continued to be for lower-priced homes, although several contacts mentioned some pickup in higher-end homebuilding as well… Many realtors reported good buyer traffic in recent weeks and expect solid sales to persist into the summer months. Mortgage demand continued to be quite strong…"

Cleveland - "District homebuilders continued to report steady sales, at levels roughly 3 percent to 5 percent higher than a year ago. Although severe weather resulted in some slowing in sales and customer traffic in January and February, contacts reported that March sales and traffic were significantly higher, and quarterly sales were above most firms' projections."

Richmond - "Residential real estate agents reported stronger growth in home sales since our last report. A Richmond realtor said that sales were 'great," noting that his office posted record sales in March. A realtor in Fredericksburg, Virginia, said that home sales over the last two months had been exceptionally strong: in her words the brisk activity was 'wonderful," but 'exhausting.'"

April 23 - Financial Times (Goldman's Bill Dudley and Pimco's Paul McCulley): "The Federal Reserve has won its long war against inflation. And, with victory, go the spoils - evident in President George W. Bush's decision to reappoint Alan Greenspan for another term as chairman. But to ensure an enduring legacy, Mr. Greenspan now needs to solve a different problem: inflation is too low, rather than too high. How so? The economy needs a buffer of inflation above price stability to ensure that monetary policy has room to work effectively in the event of shocks to aggregate demand. The inflation rate should be high enough to allow the economy to take a shock without falling into deflation. …the Fed should commit to keeping its federal funds rate at or below the current 1¼ per cent until core inflation climbs back to, say, 2 per cent or higher on a year-on-year basis. The current reading of about 1½ per cent (on Mr. Greenspan's preferred measure, the core PCE deflator) is right in the middle of the 1-2 per cent range that Ben Bernanke, Fed governor, recently suggested as the working definition of price stability."

Well, any hope that the inflationists' might tone it down a little has apparently been lost. The financial world has changed a lot since those dark days last October, but that terrible evil "deflation" apparently still lurks around every corner. And while a deranged Credit system runs completely out of control, it is suggested that the Fed's primary responsibility is to fight some phantom "deflation" risk and soundly beat it like they are said to have whipped inflation. Though it may sound reasonable, it strikes me as disingenuous.

In the midst of rampant Credit excess, a faltering dollar, rising energy and import prices, surging insurance and healthcare costs and, even, generally rising consumer prices - rising interest rates would today be expected to pose heightened risk to Wall Street. Yet rising rates would immediately place the leveraged speculators and Wall Street's momentous Credit market speculative (and derivative) Bubble in serious jeopardy. Remember 1994? (Yet the Bubble was so comparably tiny back then) So, propaganda and disinformation will be the order of the day. We should expect to read a lot about the nebulous deflation risk from Wall Street and listen to increased chatter from the Fed about how they could move to "peg" long-term interest rates if necessary. And I guess Credit and speculative excess can run absolutely wild, with additional deleterious effects on the real economy. Mortgage Finance and housing markets can go to even greater levels of excess. Financial sector expansion can become even more extreme and dangerous, and our trade and fiscal deficits can balloon forever. That is, they tell us, as long as the core PCE deflator stays below a few percent. The whole thing gets more ridiculous by the week.

From Dudley and McCulley: "Expectations are what drive markets. By shaping expectations - and anchoring inflation expectations in positive territory with a buffer against deflation - the Fed could get the more exuberant economic recovery it desires, with less risk of deflation."

Yes, stoking inflationary expectations may sustain the Credit system and economic Bubbles. But at what cost? And how does one ever plan on reigning in the Credit and speculative excesses and coming to grips with disastrous asset Bubbles, financial fragility, economic impairment and a dollar problem? It's a losing game with very high stakes.