Market Update _ My neighbor fixes cars like the government fixes economies

Economics and turning wrenches

My neighbor Dave bought his son a car recently.  The car is a used BMW and the plan was that they could get some good father and son time while working on it.  The car was having some problems recently so Dave came over to my house to borrow a set of car ramps. The idea was that he’d get the car up on the ramps, get a good look at the problem and then fix it.  About two minutes after he borrows the ramps the neighborhood was filled with the sounds of chaos.  There was lots of shouting and the sound of metal on metal contact…the type of scraping, smashing and grinding that would make survivors of the Titanic cringe. 

After borrowing the ramps Dave drove the car up them and then straight off the back.  At this point his son began screaming “NO NO NO!” as he watched his new chariot (along with his dreams of first dates) come crashing down right in front of him in a horrific show of automotive carnage.

A few minutes later Dave was back.  This time he wanted to borrow my 3-ton floor jack.  OK.  He drags the floor jack over to his house and at some point realizes it’s going to take more than he thought to fix this problem. 

A few minutes later Dave was back…again.  This time he wanted to borrow my jack-stands.  He was now just reaching for solutions.  He didn’t look like a man that was thinking things through…he was in full bore “reaction mode”.  Rather than think through the problem, he was just doing the first thing that came to mind and then dealing with the fallout of that action in the next round.

I haven’t seen Dave since the last round of borrowing but as I worked in the garage last night I glanced over at Dave’s house and chuckled when it hit me.  There are some similarities between Dave fixing that car and the government’s attempts at fixing the economy.  When it was first learned that there was a problem they both decided they could “fix” it.  They didn’t really have the tools they needed though so they borrowed stuff and decided they’d figure it out as they went.  The problems actually got worse once they started trying the fix them, then they got stuck and had to borrow some more, then that didn’t work and they had to borrow still more.  Now they’ve got all of the original problems to deal with plus a few more that they created along the way, and sooner or later the lenders will need their stuff back.

When I left for work this morning he still had car problems and he still owed me a bunch of tools.  I just shook my head as I drove past his house because I knew I’d be seeing the same story play out on my Bloomberg when I got to work…we’re still trying to “fix” the economy and we owe a lot of people a lot of money. 

Recent news

The economic news of the day surrounds the pace of business activity.  The Chicago Purchasing Managers index was in positive territory and beat the estimate, signaling a bit more growth than expected.  The NAPM-Manufacturing numbers behaved similarly, and the Dallas Fed Manufacturing Activity report eaked out a very small increase posting a 0.3% increase vs. an expectation of 0% change.  The market has not moved much this morning on the economic data.  In fact it rallied a bit after those releases, pushing prices a bit higher and yields lower.

 

Much of the news seems to be overshadowed by equity market concerns over the fallout of the Dubai debt situation.  Treasury levels are currently near their recent low-water mark.  The 10-year is trading at a 3.23%...close to the 3.17% level it posted back in October.  MBS spreads remain fairly tight as well with the spread between the 15-yr MBS and the 5-year Treasury running at 126 basis points.  This spread was well over 300 bps at the height of the crisis. 

 

So right now the market is fairly quiet and seems to be awaiting the fallout of both the Dubai situation as well as the Tiger Woods situation.  This morning we were trying to figure out if a

5-iron or a 6-iron is more appropriate for busting out the rear window on an Escalade.  If anyone has the answer to that please let me know because we’re trying to settle a bet.

 

If you have any questions or if there is anything we can be doing for you just let me know.

 

Steve Scaramastro

800-311-0707

 

Market update 11 6 09 _ Unemployment at 10.2%

Ten Percent

The news of the day is the Unemployment Rate. Today it posted at 10.2%, breaching the psychological 10% threshold, posting higher than the Bloomberg estimate, and hitting a level we haven’t seen since April 1983. This isn’t a terrible shock…we’ve had a number of economists and even a Fed Governor forecast that we’d go north of 10% at some point. What is really disturbing about the number is that despite all of the stimulus that has been pumped into the economy the Unemployment Rate is still on a steep upward trajectory. Scarier still is that this data series doesn’t come close to capturing the true nature of the employment picture. There are a number of “groups” left out of this number. Discouraged workers that have given up looking for a new job aren’t counted in the unemployment rate and full-time workers forced into part-time hours aren’t represented. If you lump these groups in with the total unemployed you get what the NBER calls the Under-Employment figure or their U6 Figure.

The “under-employment” rate takes into account Total Unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian work force. The “work force” in the US is currently in the neighborhood of 150 million people. The Under-Employment number for October hit 17.5%. That percentage on a work force of 150 million means that over 26 million people are in the U6 category of Under-Employed.

The question then becomes when and how will they get back to work? We need some serious economic growth to re-employ 26 million people on a full time basis. The lack of growth prospects for the economy is what leads many firms to forecast that jobs won’t return to their pre-recession levels until 2013. The combined bursting of a credit bubble and an asset bubble along with an over-leveraged and now under-employed consumer has created a very ugly landscape for growth prospects. This is why the Fed continues to state that they will keep rates low for a long time.

The Fed can keep the short end low…they have a lot of power there. However, the market controls the long end and if investors begin to lose faith they will demand more yield and the curve will steepen. For now the 10-year is settling in to a trading range around the 3.50% level…a much better place than the 3.17% we had a few weeks ago. Treasury prices are up on the day, as are mortgage prices, leading to lower yields than were available earlier in the week. The long end of the market is experiencing a lot of volatility this morning as it gets whip-sawed between up a point an down a point. After the release this morning the 30year jumped up 22/32’s immediately, ten minutes ago it was off a full point, and now it’s rallied back to almost flat on the day…this is volatility with a capital “V”. The short end of the curve where most banks buy (2-yr to 10-yr) is up in price.

Will the consumer show up?

I was watching Game 6 of the World Series the other day…mainly because I couldn’t find anything else to do…and I saw the strangest commercial. I saw a commercial advertising a “layaway” program at a big national retailer. When is the last time you saw a “layaway” program? Much less saw anyone advertising that they have a layaway program? This is a huge sign from one of the largest retailers in the country that times are tough and that they are going to new lengths to accommodate a battered consumer. The same shoppers in prior years didn’t need “layaway” as they could just charge it. The times they are a changin’.

The layaway commercial made me try to recall the last time I heard someone say “I’m going to save up and buy (insert your consumer good here)”. I haven’t heard it in years. Over the last few years nobody has had to “save up” for anything. Easy credit and rising asset prices made saving “unnecessary”. If you wanted it you just charged it or you took equity out of your house to get it. No problem. Our national savings rate as a percentage of disposable income dropped down close to zero right before the bubble burst. Suddenly people “get” the whole savings thing. Increased savings in the US means some pain over the short to mid-term as people square away their balance sheets, reduce their excesses, and readjust to living within their means…but long term it will mean greater stability and less reliance on foreign capital. For reference I’ve attached a graph of Personal Savings as a Percentage of Disposable Income below.

Now-a-days the rules have changed. Maybe we’ll be seeing the return of this powerful phrase as we digest the lessons from our most recent economic troubles. Until then I’m saving up for retirement…if it still exists when I get there.

If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

Vining Sparks, Portfolio Mgmt. Group

800-311-0707

FOMC Press release - no change in rates, some language chage

A very brief summary of the FOMC statement is:  No change in rates, very little change in verbiage.  Treasuries are selling off a bit pushing yields slightly higher.

 

One bit of verbiage that will likely see get some headline status is that the Fed has lowered its Agency purchase amount from $200 Billion down to $175 Billion.  This is based solely on availability.  The GSE’s have reduced funding needs and are therefore issuing fewer bonds…this means there are fewer bonds available to purchase.  An example of this reduced issuance was that last Friday FNMA closed their desk mid-morning…a very unusual event but one that points to the fact that they aren’t in the market as much as they were when the housing market was booming. 

 

The Treasury curve is steepening at the moment.  The 30 year is off over a point, the 10 year about a half, and the short end is virtually unchanged.  As I type the market is rallying back a bit.  It looks to be one of those days where some news comes out that causes a nice pullback in prices…but half an hour later prices begin creeping back up.  Many times in the last month the “creep” has undone most of the sell off by days-end. 

 

The full statement is attached.  If you have any questions, or if there is anything I can be doing for you just let me know.

 

Steve Scaramastro

800-311-0707

 

 

 

 

Vining Sparks Portfolio Management Group 800-786-1282 / PMG@viningsparks.com Will Taylor; George Hancock; Cheri Dye; Steve Scaramastro; John Pender; Sandy Berlin; Lisa Butler
____________________________________________________________________________ News NOTE: Some links require registration or paid subscription Banking News | Consumer Finance News | Financial Service News | Forex Market News The next Fed meeting is scheduled for Dec. 16, 2009. ____________________________________________________________________________ Release Date: November 4, 2009 For immediate release Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. ____________________________________________________________________________ Historical Yield Curve Video and Overview at Fidelity.com Composite Bond Rates | Bloomberg Bond Rates ____________________________________________________________________________