Overview and Observation;
The ongoing rhetoric from Washington along with the "spin doctors" in the media are "painting a picture" of economic recovery. Unfortunately that picture is reminiscent of "Dorian Gray" where the "portrait" is the actual "recovery." Sooner or later the actual "picture" will be unveiled to show what the global recovery really looks like. The two major industries in the U.S. are the housing industry, which encompasses a myriad of sub-industries right down to the "doorbell," and the auto industry. While auto sales are apparently improving in some areas, the increase in existing home sales does not alter the jobs picture. Much of those purchases are by investors for the purpose of renting to homeowners who lost their homes.
The unemployment and "underemployment" rate which we estimate at around 17%-19% remains problematic. The sharp decline in new home sales does however indicate an underlying problem and cannot be dismissed. New home sales declined by 13.4% according to the U.S. Commerce Department in their report Friday. The recent increase in mortgage rates is also of great concern and the on-again/off-again talk by the various Federal Reserve regional Presidents of the "tapering" of its quantitative easing adds to that concern.
Also, the continuing speculation as to who will replace Fed Chairman Bernanke also provides for the angst prevalent in the market place. Larry Summers who was instrumental in the repeal of the Glass/Steagall act allowing banks to operate brokerage divisions, securitize good and bad mortgages, and market the securities globally was a major source of the "credit crisis" in my opinion. He is apparently favored by President Obama as a "reward" for his past support. We prefer Janet Yellen, an economist and professor and current Vice-Chairwoman of the Board of Governors of the Federal Reserve.
In addition to the foregoing, the lack of restrictions on mortgage requirements was also a factor promoted by the Real Estate and Mortgage bank industries as well as the "generous" appraisals allowing buyers of homes the ability to purchase homes without equity. With the "shadow inventory" dominant in this country and the tighter restrictions on credit, I see no improvement in an important basic industry forthcoming in the near future. As banks are "foreclosing" on a few homes at a time while thousands remain in default, the resulting "shortage" of available properties can be tied to the reluctance of banks to foreclose even as mortgages are not being serviced. Those defaulting mortgages remain on the "asset" side of the balance sheet and once foreclosed, are moved to the other column requiring the banks to increase reserves. For that reason, and the problematic "mystery" tied to Obamacare costs to companies I must temper my recommendations as relates to the markets I follow. The hiring of part time workers at the rate of four to one over full timers is an ongoing concern. Now for some actual information to help guide my readers through the "maze" of reports and data……….
Interest Rates:
The December U.S. Treasury bond (CBOT:ZBZ13) closed Friday at 130 13/32nds, up 1 and 8/32nds tied to the sharp decline in new home sales easing concern that the U.S. Federal Reserve would "taper" or cut off completely the quantitative stimulus program next month. Fed officials met at a conference in Jackson Hole Wyoming but without the two notable participants, U.S. Fed Chairman Bernanke and the ECB head Mr.Draghi, I could not understand its purpose. Three of the U.S. Fed regional bank Presidents interviewed commented on the timing for reducing the Fed’s $85 billion of monthly bond buying with differing opinions. We continue to see bonds trading in a range depending on "who says what" comments from the Federal Reserve.
About the Author
John has over 40 years experience at major U.S. Brokerage firms as Manager and Director of various International Divisions and is the founder of his own trading and brokerage firms. Over the years John has gained a wealth of knowledge and experience in all aspects of investments and trading. He was also a floor trader at the Commodity Exchange in New York. He formed Acuvest in 1999 and can be reached at futures@acuvest.com.