Tuesday, December 23, 2008

Holiday Peak

I hope you and your family finds peace, solice and safe travels over the next 10 days. 2009 looks to be an exciting challenge to just about every industry in the US.

Release Date & Time
Economic Indicator
Consensus Estimate

Mon. Dec. 22, 1:00 p.m. ET
Treasury auctions $38 bil. of
2-year notes
Market participants’ desire for maximum asset protection continues to trump their desire for a meaningful return on invested capital as Uncle Sam comes to the market place looking to borrow a record setting $38 billion in the form of 2-year notes. This event will was supportive of steady mortgage interest rates.

Tue. Dec. 23, 8:30 a.m. ET
Final revision Q3
Gross Domestic Product
-0.5% vs. last -0.5%
Look for this data set to do nothing more than take up space on this week’s economic calendar as far as mortgage investors are concerned.

Tue. Dec. 23, 10:00 a.m. ET
Nov. Existing Home Sales
Down 1.6%
Mortgage investors have already “priced-in” expectations for a dismal November existing home sales figure. A reported value that falls anywhere near the consensus estimate will likely have little, if any impact on the trend trajectory of mortgage interest rates today.

Tue. Dec. 23, 10:00 a.m. ET
Nov. New Home Sales
Down 3.0%
Rising unemployment, stock market losses, tight credit underwriting standards and competition from a huge stock of existing homes for sale probably took a toll on the pace of new home sales last month. A number that lands to close to the consensus estimate will likely draw nothing more than a passing glance from mortgage investors. In the unlikely case new home sales post a decline of 2.5% or less – look for “surprised” investors to push mortgage interest rates fractionally higher.

Tues. Dec. 23, 1:00 p.m. ET
Treasury auctions $28 bil. of
5-year notes
Economic uncertainties will likely be strong enough to create decent support for this offering. If so, this event will tend to be supportive of steady mortgage interest rates. A poorly bid 5-year note auction will almost certainly make it difficult for mortgage interest rates to move notably lower today.

Wed. Dec. 24, 8:30 a.m. ET
Initial jobless claims for the week ended 12/20
The modest expected decline in the initial jobless claims figure will likely draw nothing more than a passing glance from mortgage investors today.

Wed. Dec. 24, 8:30 a.m. ET
Nov. Personal Income
Core PCE index
0.0% vs. last +0.3%
-0.7% vs. last -0.1%
0.0% vs. last 0.0%
The most important component of this data series is the core personal consumption expenditure index, the Fed’s favorite measure of inflation pressure at the consumer level. The expected unchanged reading for core PCE will tend to be supportive of steady to fractionally lower mortgage interest rates.

Wed. Dec. 24, 8:30 a.m. ET
Nov. Durable Goods Orders
-3.0% vs. last -6.9%
The modest improvement in this forward looking measure of manufacturing activity will likely be completely overshadowed by the announced month-long plant closing for most of the auto industry. This report will likely have little, if any impact on the direction of mortgage interest rates today.

Wed. Dec. 24, 2:00 p.m. ET
The mortgage market closes early for the Xmas Holiday

Thurs. Dec. 25,
Marry Christmas

Fri. Dec. 26, 2:00 p.m. ET
The CBOT will close early.

Thursday, December 11, 2008

US Financial Crisis Circa 2007 - 2010

Did my title grab your attention? I changed it 5 times in an attempt to properly convey my thoughts regarding this Blog.

Last night one of my partners' called me on his way home and during our discussion he stated that it was his opinion the US was in the bottom of it’s current "recession cycle". He has good reason to believe such a trend as we are having one of our best months year to date. But one month (good or bad) doesn't make a Quarter and One Quarter (good or bad) doesn't make a year. While I hastily supported his comment over the phone, selfishly because of statements I had made earlier this year regarding the timing of our rebound, it nonetheless got me thinking.

This morning I started to do a little research on where our country is today, reviewed how we got here and how exactly our government has attempted to fight this present economic slowdown. Time and time again, my research would defer to a lengthy recession which started in the 80’s and in Japan. While our country’s economic infrastructure is quite a bit different I concluded 7 similarities that I would like to share. Additionally, how their government responded is eerily similar to how the US’s.

In Japan mid to late 1980s, you found excess liquidity in the financial system. This caused an asset and stock market bubble. People with spare cash bought assets and shares causing them to rise (in the US this was paid through credit cards and mortgages. In the last 1987, the Japanese monetary authorities worried about inflation doubled interest rates. As the economy stalled, they were then slow to reduce them.

Loan defaults increased because Japanese banks had made a series of bad lending decisions. Sound familiar?

This caused a fall in house and share prices. Hmmm….

Higher interest rates ensued and slumping asset values caused an increase in loan defaults.

The Japanese economic miracle was based on a strong degree of government intervention. See Obama’s Great Works Plan.

When the crisis came, banks were encouraged to continue lending to firms, even if on verge of bankruptcy. In other words, the decision to bailout declining / inefficient firms masked the problem but didn't deal with the underlying issues.

There was a failure to acknowledge the true extent of the problem, hoping asset prices would rebound. Check your 401k value recently?

Inflation expectations fell to negative. Deflation made normal demand side policies ineffective. See US backs bonds at 0% yield.

The Japanese government eventually cut interest rates to 0%. As mentioned above, they increased government spending to try and increase aggregate demand. Unlike the US, there was well documented reluctance to increase money supply because even though Japan had deflation, they held an unwarranted fear of inflation. Here in the US, do you know anyone who would be interested in buying residential mortgages with negative HPA values a 8-15% annually? It’s almost as bad as car loans where you know you are going to lose value month over month on the asset.

Your history lesson for today is that the economic consequences of Japan's crisis were the following:

Longest Bear Market in History (10 years)

Long Period of stagnant Growth

Significant rise in Unemployment. Japan’s unemployment was almost unheard of from the post war period.

Rise in inequality. Issues such as homelessness have become a real problem.

National Debt rose to 180% of GDP.

These findings provided above will not be the first to declare that the systemic risks associated with the current path in which our country’s government decisions to address our problems will do more harm than good. When our government made that fatal decision that certain companies were too large to fail, capitalism (as this country is famous for) died. There are deep rooted discussions which I will save for another time regarding our country's softness as it relates to "Everyone being a winner" and the changing (liberal) attitues within this country.

In closing I am now under the impression that our economic woes will continue throughout all of 2009. Should some of this country's fiscal policies not change there is a very good chance we fall straight into a depression. This is the first time I have the D word and am afraid you may see it in future posts.

This Week’s Remain Economic Figures

Fri. Dec. 12, 8:30 a.m. ET
Nov. Producer Price Index
Core Rate
-2.0% vs. last -2.8%
+0.1% vs. last +0.4%
Falling food and energy prices will continue to limit inflation pressure at the producer level. The notable drop in the core rate (a value that excludes the more volatile food and energy components) will be welcome news for most investors. Look for this data to be supportive of steady mortgage interest rates.

Fri. Dec. 12, 8:30 a.m. ET
Nov. Retail Sales
Ex. Auto
-1.9% vs. last -2.8%
-1.7% vs. last -2.2%
No one will be surprised to see a sharp drop in retail sales as consumers are stressed by meltdown in the labor sector. If the consensus estimate proves accurate, investors will likely consider this data a positive for the prospects of steady to perhaps fractionally lower mortgage interest rates.