Positive Surprises Outweigh the Negatives

Mortgage applications fell last week by 6.2%, but that shouldn't be a surprise since the average rate on a 30-year fixed-rate loan rose almost 40 basis points to 6.71%. I think the biggest reason for the sudden move up in rates had to do with fear that Fannie (FNM - commentary - Cramer's Take) and Freddie (FRE - commentary - Cramer's Take) wouldn't be able to buy as many mortgages as they have the past few months.

The basic law of supply and demand dictates that during a time of weak demand, a higher rate will be needed to attract buyers. With the bail out of FNM and FRE, look for the interest rate on the 30-year to move back down a bit.

The trading in the Government Sponsored Enterprises (GSEs) -- Fannie and Freddie -- has resumed a much more normal pattern. Tony Crescenzi of Miller Tabak noted in his RealMoney blog that the spread between 10-year GSE's and 10-year Treasuries is a more predictable 63 basis points. That is, the GSEs are yielding 63 basis points more than the Treasuries. That is down from 90 basis points recently. The biggest spread (I think) was almost 100 basis points, or 1%, at the time of the Bear Stearns debacle.

Earnings reports today continue the pattern established over the past two weeks, where the positive surprises outnumber the negative ones, and those that falter are punished.

Costco (COST - commentary - Cramer's Take) and Boeing (BA - commentary - Cramer's Take) disappointed, and those stocks are selling off.

McDonalds (MCD - commentary - Cramer's Take), Pepsi (PEP - commentary - Cramer's Take) and Whirlpool (WHR - commentary - Cramer's Take) beat expectations and are being bought. Seventy percent of the companies in the S&P 500 that have reported so far (about 150) have reported better-than-expected earnings.

James Altucher of Stockpicker.com passed along the fact that General Electric (GE - commentary - Cramer's Take), a stock I own and have recommended, has raised its dividend every year for 25 years. With a current yield greater than the yield on 10-year Treasuries, I continue to think GE represents sound value.

What I didn't know was that Bank of America (BAC - commentary - Cramer's Take) has also raised its dividend each year for 25 years. The company also just announced a 75-million-share repurchase plan. I think this is big news. Clearly, BAC sees no need to raise equity capital or cut the dividend, as has been feared.

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.