Monday, November 10, 2008

The Ride That Never Ends

I have started working on our firms' forecast for 2009 and in looking an a number of micro and macro economic reports I've got to tell you that I don't like what I am seeing. Not in one bit.
The concerns are many, the challenges are well publicised. Am I predicting the end of modern finance as we know it.... No. Do I believe the experts when they say Americans have run out of money.... Perhaps. The driving concern I have is jobs. Should this recession (we are in one and if you don't believe me feel free to contact me off line to discuss) prolong itself past the second quarter of 2009, I anticipate significant job loss. Note that we have certain markets almost at 9.5% today (see my previous post titled National City Bank - Did the C ranks really drop the ball). I am referring to a national average perhaps as high as 12%.

Like it or not, the US government has and will continue to socialize our way out of this mess(including debt) because my first prediction mentioned above may no longer be a No. We could end up with a completely socialized banking, auto and our financial system. Since our country is no longer manufacturing oriented, service industries which make up a HUGE percentage of GDP (perhaps as high as 75%) now take center stage. In case you haven't noticed, it's a whole lot easier to get that corner table at the new high-flying restaurant or club. In short, if you think people aren't spending money today... you haven't' seen anything yet!

Back to jobs. If you look at the largest labor sectors (housing, manufacturing, service - already mentioned above) most are already depressed with the latter having more room to fall. The latest GDP numbers 0.3% was somewhat smaller then I expected. The reason for this contraction is not really a sound one: government spending soared. While I had expected government spending to rise, it rose a lot more than usual. Government purchases rose from 20.1% of GDP to 20.4%-the highest since Q3 1991, and up from just 17.6% in Clinton's last quarter (During the Clinton era, government purchases decreased significantly as military spending fell). As before, military spending increased particularly much, but non-military federal spending and state & local government spending increased its share of GDP too. Excluding government purchases, the contraction would have been closer to 2%.

My point, the citizens of the United States might have elected the right party in charge (at the present time). A return to a strong financial footing for this country may be through a significant government spending package, one the Democrats will likely give us. Otherwise, this could be a long painful road, one which this country hasn't seen in 70+ years.



This weeks economic figures: dominted by Treasury Auctions

Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. Nov. 10, 1:00 p.m. ET
Treasury auctions $25 billion of 3-year notes
This will be the first leg of a three-part borrowing Uncle Sam will engage in this week. By the time Friday rolls around, Uncle Sam will have tapped investors for an additional $55 billion. That’s a record amount for November – well above last year’s $18 billion capital need. All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.

Mon. Nov. 10, 2:00 p.m. ET
The mortgage market will close at 2:00 pm EST for the Veteran’s Day Holiday

Tue. Nov. 11
Veteran’s Day Holiday

Wed. Nov. 12, 1:00 a.m. ET
Treasury auctions $20 billion of 10-year notes
All of this incoming supply from the government will likely make mortgage investors hesitant to push mortgage interest rates notably lower.

Thurs. Nov. 13,
The current delivery month for most mortgage-backed securities “rolls” to December
This is a standard monthly administrative function of the mortgage market. The small price impact this event creates is already reflected on most investors’ rate sheets.

Thurs. Nov. 13, 8:30 a.m. ET
Initial jobless claims for the week ended 11/8
Up 1,000
The modest expected increase for initial jobless claims will likely draw nothing more than a passing glance from mortgage investors today.

Thurs. Nov. 13, 1:00 p.m. ET
Treasury auctions $10 billion of 30-year bonds
We might see a small “relief rally” in the bond and mortgage-backed security once the supply from Uncle Sam is out of the way. Any such rally will likely be limited in terms of price movement and duration.

Fri. Nov. 14, 8:30 a.m. ET
Oct. Retail Sales
Ex. auto
-1.9% vs. last -1.2%
-1.0% vs. last -0.6%
Unless they’ve been living under a rock – there is no one that doubts the October retail sales figures will be weak – the only question is how weak. The consensus estimate is already reflected in current mortgage prices, so it will take numbers considerably worse (a headline drop of 2.1% or more and an ex auto value showing a decline of 1.2% or more) to create much support for the prospects fractionally lower mortgage interest rates. The likelihood that the consensus estimate proves to be overly pessimistic is very small. Nonetheless a headline number showing October sales did not fall as sharply as expected will probably tend to nudge all credit including mortgage interest rates higher.

Fri. Nov. 14, 10:00 a.m. ET
Sept. Business Inventories
0.0 vs. last +0.3
This sliver of dated economic news will undoubtedly be completely overshadowed by the much more important October retail sales report that was released early today.

Mon. Nov. 17, 9:15 a.m. ET
Oct. Industrial Production &
Capacity Utilization
-0.5% vs. last -2.8%
76.1 vs. last 76.4
Already released reports showing sagging factor orders and plummeting retail sales make it a virtual “given” that these two measures of manufacturing activity will be puny as well. Look for this data to have little, if any noticeable impact on the trend trajectory of mortgage interest rates today.