"I DON'T KNOW WHY I GO TO EXTREMES." Billy Joel.

Last week, Bonds went to the extremes of their trading range, battling tough layers of technical resistance as they attempted to improve. Let's take a closer look, and understand the news of the week.

There was good news on the inflation front as the Federal Reserve's preferred inflation gauge, the Core Personal Consumption Expenditure Index (PCE), indicated that inflation remained tame last month. Generally tame inflation is a good sign for Bonds - but there is still concern, as inflation is certainly coming...it's just a matter of when.

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Chart: Core Personal Consumption Expenditure Index

As part of that same report, Personal Income and Spending were both reported inline with expectations. Interestingly enough, consumer spending has now risen three months in a row. However, this needs to be taken with a grain of salt, as this boost comes on the heels of the Government's "Cash for Clunkers" program, which likely boosted spending statistics. Until the labor market stabilizes, we won't likely see a meaningful pickup in consumer spending. Speaking of the consumer, the Consumer Sentiment Index was also reported in line with expectations.

There was also more good news on the housing front last week. The Case-Shiller Home Price Index showed home prices rose for the second straight month while New Home Sales surged 9.6% in July from June's reading, signaling that the housing market is stabilizing. Adding to the positive tone of the report was a drop in inventories, which now stands at a 7.5-month supply from last month's 8.8 month reading.

Keep in mind that some of the current buyers are adding a bit of what may be an artificial boost to the housing numbers, as they normally would have purchased in 2010 but have moved up their buying decisions to take advantage of tax credits and historically low rates. Let me know if you would like more information on these time-sensitive tax credits.

It's also important to note that the revised second Quarter Gross Domestic Product Report showed that the economy has now contracted for four consecutive quarters for the first time since the Great Depression. This is another area to watch in the coming months as we gauge the pace of recovery.

Remember, positive economic news typically causes money to flow from Bonds to Stocks, causing Bonds and home loan rates to worsen. However, even with the pressure of more supply from last week's Treasury auctions, Bonds and home loan rates were able to hold on to some improvements and end the week very slightly better than where they began.

"IF YOU BUILD IT...THEY WILL COME."

And while that line from the movie Field of Dreams may have referred to a baseball field, there are some small signs that it could perhaps refer to the housing market once again before too long.

The housing market continues to show signs of stabilization, and although home prices are not about to spike higher, the decline certainly seems to have subsided. Existing Home Sales came in better than expectations, reaching their highest level in two years, as you can see in the chart below.

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Chart: Existing Home Sales in July

And while the inventory of unsold homes remains lofty, it was reported at its best level in a year. In addition, while Housing Starts and Building Permits both came in slightly below expectations, they did rise in July - another sign of stabilization in the housing market. New Home Sales data will come out this Wednesday, so indeed we will soon find out if home buyers are coming out to buy those new built homes. With home loan rates still at exceptionally low levels - it presents a great opportunity to buy. Do let me know if you or one of your friends, family, neighbors or coworkers would benefit from learning more about buying a home in today's market.

On the wholesale inflation front, the Labor Department reported that the Producer Price Index (PPI) fell more than expected. However, the Core PPI - which strips out volatile food and energy prices - was inline with expectations. In the past year the Overall PPI has dropped by a record -6.8%...this going back to 1947, when data was first collected on PPI. This decrease in wholesale prices is certainly reflective of the recession, but also points to the power of the cost reductions through technology and productivity gains.

Remember, inflation is the arch enemy of Bonds and home loan rates. While it's good news that inflation is not currently an issue, with an unprecedented amount of government spending, no one really knows what the full impact will be down the road. This will be something to watch for in the weeks and months ahead.

The job market also continues to be something to watch. Initial Jobless Claims were reported at 576,000, which was a bit higher than expected, particularly after a string of better-than-expected reports recently. Claims readings will need to be in the low 400K's before the Unemployment Rate can stabilize and start to improve.so we have a ways to go.

Although not all the news of the week was necessarily positive, Stocks found ways to take a ride higher, finishing last week on the plus side and at the highest levels so far this year. The Dow surged ahead by 155 points closing at 9,505, the S&P gained 18 points to 1,026 while the Nasdaq rose 31 points ending at 2,020. But Bonds and home loan rates were in turn under pressure, and found it hard to maintain any positive momentum. And with more Treasury auctions scheduled for next week - which have not been overly friendly for Bonds and home loan rates - the pressure could increase.

Surprise, your lifes changing!

Here we go again; I was able to put a house into escrow for the third time. Ugh. Appraisal killed the deal last time. Let's hope it comes together this time, as I've spent a record amount of time on this, for a deal that should be a no brainer. Because of the economy and the real estate disaster, new laws have made some simple things difficult for everyone. Oh well, it is what it is.

Interesting thing happened yesterday with Lili. After watching another season of So You Think You Can Dance and America's Best Dance Crew, all of which she goes crazy over, she let me know she no longer wants to do dance class but go back to competition cheer. Huh? I thought she'd be all fired up for dance to start up again, but no she got a bug in her and was all on fire for cheer.

She did all kinds of research online she found a bunch of places between Santa Rosa and Vacaville she wanted to check out. We went back and forth about it all day, me mostly trying to tell her how unlikely it will be that we could do something like this right now between time and expenses. It's difficult when you have five kids and no money to spread the opportunities around. However, Lili has been focused on competition cheer (or the like) for most of her life. None of the others have shown much desire for activities other than to do what someone else is doing for the sake of playing with others. This gives me reason to feel maybe this is the one thing she should get a shot at. I don't know where it could go, but I do want to teach the kids to follow their dreams and this appears to be her dream.

After half a day of negotiation and research, she talked me into checking out a place in Petaluma. We went and I have to admit I was impressed. This is no school cheer team. This is the stuff you see on ESPN. It still seemed unlikely she could get in as their training season starts in April and goes year round, according to their website. It turned out they only started actual rehearsals last week and felt like Lili could catch up. They sounded like they wanted her, and she certainly wants to join. This would be the beginning of many schedule and lifestyle changes for the family. Are we up for it? Where are we gonna find the money? Will the schedule work with all we have going on now? Not sure, but this is what Denise and I talked about after we finally got the kids to bed. Still not sure, but I think we're going to give it a shot.

This year will Cosette and Gracie will be in Girls On The Run, a cross country style running group at school. Cosette and Lili did it last year and it was great, and more than enough extra activity. Paris is still not interested in much of anything nor is Asher, so I think we have everyone covered for another year.

Band is going good. Music is getting...I don't know. I should be getting better as it seems I have the opportunity but I'm not spending enough time with it. Not as much as I'd like for sure. It'll be better once school starts. Real estate still feels like a crap shoot. I've been able to spend most of the summer with the kids but now that school is starting I'll be able to focus more on real estate and take on more business.

I'm thinking about going back to school. Thinking. I do think I'll speak with a school counselor and see what they have to say.

"ENERGY AND PERSISTENCE CONQUER ALL THINGS." Benjamin Franklin.

And indeed, Bonds and home loan rates definitely showed some serious energy and persistence this week, despite some serious headwinds, including additional supply flooding the market from this week's big Treasury auctions.

The Treasury unloaded an enormous supply of paper onto the markets this week...and remember, anytime there is more supply than demand, it means prices will naturally decline. And when Bonds are concerned, when prices decline, home loan rates go up. The heavy supply hitting the market caused some wild volatility for rates midweek, but overall home loan rates managed to find some improvement by the end of the week. However, it won't be long before another enormous supply of Treasuries comes on the market. In just two weeks, we'll be looking at a fresh round of auctions...and the size of those auctions will be announced on August 5th. This announcement date of August 5th, and the following week's auction dates of the 11th, 12th and 13th will probably have high volatility and provide a headwind for Bonds. It used to be that the dates of economic news would be circled on the calendar as the ones to watch for greater movement in Bond prices...but right now, the supply issue has become so important that it now may be the most dominant current factor in Bond pricing and home loan rates.

In other news, Advanced Gross Domestic Product (GDP) for the 2nd Quarter came in better than expected, while the 1st Quarter GDP was revised lower. GDP measures the total market value of all final goods and services produced in a country in a given year. Overall, GDP has fallen four quarters in a row for the first time since government records started in 1947. The report also showed consumer spending is down, as consumer savings increased to the highest level since 1998.

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Chart: Gross Domestic Product

However, there are continuing signs that the economy is stabilizing. First, the widely looked at Case/Shiller Home Price Index for May showed that home price declines in the 20 largest US cities appear to be moderating. This most recent report was the best reading in nearly twelve months, and the first month-over-month improvement in three years. Combining this report with the last few months improved Existing and New Home Sales Reports gives us reason to be more optimistic on housing, and a reason to feel that home prices are nearing a bottom for most of the country.

THIS MAY PRESENT A GREAT TIME TO PURCHASE A HOME, BUT BE AWARE THAT INFLATION WILL DEFINITELY PLAY A BIG ROLE IN THE DIRECTION OF HOME LOAN RATES...TO LEARN MORE, CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW.