As if the current economic climate related to housing and mortgage defaults and foreclosures is not enough to raise concerns, we now see the problem of rates moving higher, which could delay the reduction of home inventories. That would change the current environment where home buyers are opting for pre-owned foreclosed homes rather than purchasing new homes and thereby reduce overwhelming inventories.
This past week, as the Treasury markets continued to reflect on the Fed Chairman Bernanke’s insistence that economic conditions are improving, the his effect on the housing market due to higher rates as a result could cause ongoing damage. The 10 to 12 million homes either in foreclosure or heading toward foreclosure is weighing heavily on both the housing industry and exacerbating the labor situation as relates to construction. When a new home is not planned, not only is the construction crew on that home impacted, but the various industries tied to that home are.
The U.S. economy will not improve without an improvement in the unemployment picture. The idea that the reported monthly creation of 227,000 jobs applauded by the administration with no mention of the weekly figure reported Thursday of 350,000 first time unemployment ignores the disparity completely. A person in the unemployment line is there because he or she lost a job, so a monthly gain of 227,000 jobs does not quite offset the weekly job loss of 350,000. As I have stated in the past, "an unemployed consumer does not consume, and the producers of those (unconsumed) products will be next to reduce their labor staff and costs." Analysts and economists are not taking into consideration that people who accept jobs paying less than the jobs they had lost are underemployed and that number is increasing weekly.
Another consideration is the Federal government's tax income which, if salaries of those underemployed are lower than they had been, their taxable income is also lower and the general account income is reduced. That causes the U.S. government to either reduce spending (unlikely in the current political climate) or raise taxes to meet obligations. The obligations include the servicing of the enormous debt owed to Treasury paper holders such as China and others.
This past week's selling of Treasuries and higher yields only increases the debt service obligations on new paper issued by the Federal government. We could easily be at a point where interest payments are close to the overall GDP of the United States.
Now for some actual information…
Interest Rates: June Treasury bonds closed at 136 14/32nds down 3/32nds culminating in a weekly loss of nearly 700 basis points from last weeks 143. The optimism demonstrated by the Federal Open Market Committee release of its minutes prompted the increase in interest rates. We had long suggested that interest rates could not go materially lower and that consideration be given to shorting treasuries, buying puts, or selling call options as we viewed prices near the high of our anticipated range. We now see prices heading towards the lower end of our projected range but would not consider stepping in on the long side just yet. Our overall view of the U.S. and international economies remains negative and on that basis, interest rates will have to retreat at some point to enable the economies to garner demand for goods, autos, and homes. The Fed reported industrial production rose by only 0.3% in February, less than economists had projected and auto production declined. Higher gasoline prices pushed the consumer price index up by 0.4% last month, its largest gain in months and prices continued higher so far in March. With the University of Michigan’s consumer sentiment index coming in below analyst expectations we could see renewed buying interest in treasuries. However, for now we view treasuries as a trading affair with an eye towards the long side on further breaks.
Stock Indices: The Dow Jones industrials closed at 13,232.62, down 20.14 points but for the week gained 2.4% as money moved from the relative safety of the treasury market back to equities. The "optimistic" FOMC minutes prompted the equity market rally and the decline in bond prices. Higher yields and rates resulted from this weeks activity. The S&P 500 closed at 1,404.17, up 1.57, and for the week gained 2.43%. the Nasdaq closed at 3055.26, down 1.11 on Friday but for the week managed a gain of 2.24%. Higher gasoline prices could reduce travel and therefore shopping resulting in reduced retail sales. We view the equity markets as overbought and would once again suggest strongly the implementation of hedging strategies, something we can provide assistance with.
Currencies: The June U.S. dollar index closed at 8006.5, down 44 points on profittaking after recent strength tied to higher interest rates, a precursor to dollar investment demand. The June Euro closed at $1.3179, up 77 points on shortcovering after weakness from the previous sessions. Other currency gains were made in the Swiss Franc 70 points to 10932, the Japanese yen 3 points to 12005, the British pound 111 points to 15823, and the Austtralian dollar 42 points to 10477. The Canadian dollar lost one tick to close at $1.0066 on Friday. We look for continue price swings as economic data affects interest rates which in turn affect the U.S. dollar and other currencies. We continue to favor the long side of the dollar based on continued concerns over the European debt crisis, which, in our opinion, will only increase angst in the future. Bailouts only contribute to the problem as debtor countries not able to meet current obligations should not, in my opinion, be granted additional credit.
Energies: April crude oil closed at $107.06 per barrel, up $1.95 and will contribute to still higher gasoline prices. Oil gained on the basis of the weak dollar Friday and on the U.S. inflation data showing the consumer price index gain of 0.4% which prompted higher yields and lower treasury and dollar values. The announced suggestion of a release of stocks from the Strategic Petroleum Reserve might pressure prices but only for a short term. The longer term approach, in our opinion, is the Keystone pipeline project which was put aside by the current U.S. administration. For now both the SPR and the pipeline are sidelined, and continued concern that implementing additional sanctions on Iranian oil could impact supplies and therefore lead to still higher crude prices keeps us on the sidelines. Our overall expectation has been for adequate supplies and reduced demand to prompt lower prices for crude down to the $75-80 level but geopolitical events such as mentioned above could negate that expected decline. We like the sidelines pending clarification of fundamentals.
Next page: Metals and ags report