Multiline Mortgage Services

Market Commentary Report

2009-07-12T17:00:00.000-07:00

This week brings us the release of five important economic reports for the bond market to digest. Several of these reports are considered to be of high importance, meaning we will likely see volatility in the financial markets and mortgage pricing over the next several days. There are also plenty of corporate earnings releases scheduled for the stock markets this week along with the minutes from the last FOMC meeting.

The first piece of data comes Tuesday morning with the release of June’s Producer Price Index (PPI). The PPI is very important because it measures inflationary pressures at the producer level of the economy. It is expected to show a 0.8% increase in the overall reading and a 0.1% rise in the core data reading. The core reading is the more important of the two because it excludes more volatile food and energy prices. The bond market should react quite favorably if we get weaker than expected readings, but a larger than expected jump in the core reading could send mortgage rates higher Tuesday. June’s Retail Sales report will also be posted Tuesday. The Commerce Department is expected to say that sales at retail establishments rose 0.5% last month. This data is considered to be of high importance because it measures consumer spending. Consumer spending makes up two-thirds of the U.S. economy, so any related data is watched closely. A smaller than expected increase in sales could help fuel a bond rally and lead to lower mortgage rates, depending on the results of the PPI report.

Next on tap is Wednesday’s release of June’s Consumer Price Index (CPI). It is a mirror of Tuesday’s PPI with the exception that the CPI measures inflation at the more important consumer level of the economy. Analysts have forecasted a 0.6% increase in the overall index and a 0.1% rise in the core data. The core data is also considered to be the key reading because it gives us a more stable measure of inflation. Higher than expected readings could raise inflation fears and push mortgage rates higher both days. June’s Industrial Production data will also be posted Wednesday morning. This data measures output and U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength. It is expected to show a 0.6% decline in production, indicating that the manufacturing sector showed weakening conditions during the month. That is basically good news for bonds, however, with seasonal shutdowns and auto-related weakness likely included, a sizable decline should not surprise many.

Also worth noting about Wednesday is the release of the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following their 2:00 PM ET release, especially if they show some divisiveness by its members during discussion and voting at the last meeting or give any indication of the Fed’s possible next move with monetary policy.

There is no relevant monthly or quarterly data scheduled for release Thursday. Friday’s only relevant data is June’s Housing Starts report. This data gives us an indication of housing sector strength, but is not considered to be of high importance. Analysts are currently expecting to see a small decline in new starts of housing projects. However, I don’t see this data having much of an impact on mortgage rates Friday unless it varies greatly from forecasts.

Overall, I think we will probably see the most movement in mortgage pricing Tuesday or Wednesday due to the importance of the economic releases those days. The week’s corporate earnings also have the potential to heavily influence bond trading and mortgage rates via stock market swings. If the major earnings reports show better than expected results, we can expect to see the major stock indexes rally. This would lead to a shift of funds from bonds to stocks and in the process bonds will fall. The results would be higher mortgage rates. The other possibility is weaker than expected results from the key companies that would lead to stock selling and a bond market rally. One thing is safe bet though- it will likely be an active week for the markets and mortgage rates. Accordingly, please proceed cautiously if still floating an interest rate.

©Mortgage Commentary 2009 Please E-mail us your opinion of this report.

Mortgage Market News for the week ending July 10, 2009

2009-07-10T11:45:00.000-07:00

Strong Treasury Auctions Lower Mortgage Rates

With a light schedule for economic data, Treasury auctions had the greatest impact on mortgage rates during the week. Strong demand for the auctions and declines in the stock market helped mortgage rates end the week lower.

In recent months, mortgage rates have been heavily influenced by concerns about the enormous amount of debt the government needs to issue to pay for all the stimulus programs. The risk is that investors will require significantly higher yields to continue purchasing an expanding supply of bonds. Strong demand from both domestic and foreign investors at this week's 3-yr, 10-yr, and 30-yr Treasury auctions eased those concerns. Longer-term Treasuries are comparable investments to mortgage-backed securities (MBS), which are the basis for the level of mortgage rates, so the results from 10-yr and 30-yr auctions are particularly important. The willingness of investors to purchase longer-term bonds (including Treasuries and MBS) at the current low rates is very encouraging.

Also this week, there was mounting speculation about the passage of a second round of fiscal stimulus before the end of the year. Given the weaker than expected June Employment data, the political pressure is increasing to take additional steps to create jobs. If another stimulus package is passed, the increase in the supply of debt required to pay for it could pressure mortgage rates higher.

Weekly Market Report for the week ending July 2nd

2009-07-02T11:51:00.000-07:00

Mortgage Rates Hold Steady

There was very little daily movement in mortgage rates during the holiday-shortened week, and they ended the week nearly unchanged. The economic news during the week contained few surprises.

Following better than expected results for May, investors were closely watching the June Employment report for clues about the timing of any economic recovery. Thursday's data showed that the economy lost -467K jobs in June, and the Unemployment Rate rose to 9.5% from 9.4% in May. Average Hourly Earnings, a proxy for wage growth, rose at a slim 2.7% annual rate. High unemployment and slow wage growth have caused consumers to save more and spend less. Since consumer spending accounts for about 70% of economic activity, the slowdown in spending has had a large impact on economic growth. For mortgage rates, however, low wage inflation and slow economic growth are favorable.

While the Employment report may have captured the most attention, the week began with a significant announcement from Chinese officials. According to the head of China's central bank, there will be no sudden changes to China's foreign reserve policy, meaning that China will not pull back from buying US bonds. Over recent months, investors have been concerned that foreign central banks would decide to scale back their purchases of US bonds, so this was very welcome news. Recent Treasury auctions have confirmed that foreign demand remains strong.

2009-06-26T07:20:00.000-07:00

Demand Strong for Treasury Debt

With major economic data, large Treasury auctions, and a Fed meeting on the schedule, it was a busy week for mortgage markets. In the end, it was the Treasury auctions which had the greatest impact on mortgage rates. Demand was very strong at the auctions, which pushed mortgage rates lower. Wednesday's Fed announcement and mixed economic data were roughly neutral for mortgage rates.

Much of the rise in interest rates we saw in late May and early June was due to concern about the enormous supply of debt the government needs to issue to pay for all the stimulus programs. The question was whether investors would require significantly higher yields to continue purchasing bonds. Strong demand from both domestic and foreign investors at this week's Treasury auctions eased those concerns for now and helped mortgage rates to reverse some of their recent increases.

As expected, the Fed made no change in the fed funds rate. However, investor expectations varied widely for the Fed's statement, but the statement revealed no significant shifts in policy. In particular, there was no change in the timing or the quantity of future MBS and Treasury purchases. In addition, the statement contained no discussion about exit strategies to eventually unwind Fed stimulus programs. Overall, the Fed simply held the course, and mortgage rates were nearly unchanged after the news.

In the housing sector, May Existing Home Sales rose 2.4%. It was the first time since September 2005 that Existing Home Sales increased for two months in a row. The inventory of unsold homes declined to a 9.6-month supply from a 10.1-month supply in April. A NAR survey revealed that 29% of sales were to first-time homebuyers, helped by the $8,000 tax credit, low mortgage rates, and favorable affordability levels.

The Week Ahead

Next week, the important Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a loss of about 370K jobs in June. Before the Employment data, the Chicago PMI and ISM national manufacturing indexes will come out on Tuesday and Wednesday. Pending Home Sales, a leading indicator for the housing market, will be released on Wednesday. Consumer Confidence, Construction Spending, and Factory Orders will round out the schedule. Mortgage markets will be closed on Friday ahead of the July 4th holiday.

Weekly Market Report for the week ending June 19th

2009-06-19T11:54:00.000-07:00

Tame Inflation vs. Economic Growth

Tame inflation data helped mortgage rates move lower early in the week, but stronger than expected economic data turned them higher later in the week, leaving mortgage rates nearly unchanged from last week. The announcement of larger than expected Treasury auctions next week ($104 billion) also was negative for mortgage rates.

This week's Consumer Price Index (CPI) and Producer Price Index (PPI) data indicated that inflation is not a concern in the short-term. A significant decline in energy prices from one year ago resulted in a very low overall annual inflation rate. Even Core CPI, which excludes food and energy, rose at a tame 1.8% annual rate. However, the benefits from the favorable inflation news was offset by stronger than expected economic growth data. In particular, the Philadelphia Fed manufacturing index showed surprising improvement. In addition, May Housing Starts rose 17% from April, while Building Permits, a leading indicator of future activity, also exceeded expectations. This week's data sets the stage for next week's Fed meeting. With inflation currently low but at risk of increasing if the economy continues to improve, the Fed may be reluctant to introduce more stimulus, opting instead to wait and see how the economy performs.

President Obama this week proposed broad new rules for regulating the financial system. One proposal under the Obama plan would create a consumer protection agency which would have the authority to set rules for the mortgage industry. The details may not be known for quite a while, as the plan now faces a lengthy debate in Congress

2009-02-09T14:24:00.000-08:00

Monday 02/9/09:
Super-Size My BailoutBy Frank Bocchino, OpenClose

If I did the math, it would work out that I frequent a McDonald's about every 10 years. But during bad economic times, low-cost fast food establishments do well with added patronage from cash-poor Americans. In these days of "super-sized" bailouts and stimulus packages, it's then apropos that McDonald's Corp. announced today that its same-store sales rose 7.1% in January with total sales rising 2.6%. But now, watching what's going on in the Senate regarding the stimulus bill, it leads me to pose one question: Do you want fries with that?

The $827 billion stimulus bill should pass in the Senate according to most reports despite all the grand standing on both sides of the aisle. The pink elephant in the room, however, is reconciling that bill with the House's $819 billion version of the bill that passed. Democrats and Republicans have had at each other in what I've dubbed "The Senatebowl." President Obama is shooting for mid-February to sign the bill.

As for mortgages, Obama has been quoted about earmarking $50-100 billion to help the foreclosure hemorrhaging. What that plan will include is still unannounced though. That is partly why many investors seem more in tune with the administration's plan to roll out the $700 billion financial bailout package. Already passed by Congress, Treasury Secretary Geithner had scheduled to announce the plan today, but the speech was postponed until tomorrow.

After a great Friday on Wall Street with the Dow rising more than 218 points, S&P 500 futures fell 5.6 points to 862.10 and Nasdaq 100 futures fell 6 points to 1,269.80. Dow industrial futures fell 39 points to 8215. U.S. stock futures fell after Treasury Secretary Geithner delayed the announcement of the administration’s financial-recovery plan until tomorrow.

The 10-year note dropped to 106-4/32 and its yield rose to 3.02% from 2.99% Friday. The 30-year bond fell 17/32 to 113-25/32 and its yield rose to 3.72% from 3.69% Friday. Federal Reserve officials still debate on whether or not to purchase long-term Treasuries. Instead the Fed has been concentrating on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt some report.

The 3-month Libor rate ticked down a tad to 1.23% from 1.24% Friday. The overnight Libor rate was unchanged from Friday at 0.31%.

Oil prices rose 48 cents a barrel to $40.65. The dollar fell versus major currencies like the euro, the yen and the British pound.

So what will be on Tim Geithner be his Treasury menu Tuesday? Hopefully whatever it is, it will be low-fat, and conducive to a healthy economy. If it's not, I'll soon have to acquire a taste for 49-cent hamburger Wednesdays.

source: LionMTS: a division of OpenClose

Tuesday, December 23rd Mortgage Market Update

2008-12-23T13:29:00.000-08:00

Tuesday Mortgage Market Update

Stocks are slightly ahead in choppy trading this morning and Treasuries are narrowly mixed. Pre-holiday trading volumes are thin and market participants are attempting to maintain an even keel. However, the lack of liquidity leaves the markets vulnerable to exaggerated price moves. Stocks may be eventually feel the pressure from today's weak housing news and bond traders are facing more supply today.

In today's barrage of economic releases, the Commerce Department reported that, according to its final calculations, the gross domestic product contracted at a 0.5% annualized rate in the third quarter.

As expected, this was no change from the preliminary calculation reported last month but it was still the worst reading since a 1.4% decline in the third quarter of 2001. The advance estimate, released in October, was a contraction of 0.3%.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

Today's report indicated that consumer spending declined at a 3.8% rate instead of the 3.7% cited in the preliminary report. But government spending rose at a 5.8% rate instead of the previously reported 5.4%.

The inflation data contained in today's report was positive for the markets. The GDP price index showed an increase of 3.9% for the third quarter, down from the preliminary reading of 4.2%. The core index for personal consumption expenditures (personal spending minus the volatile categories of food and energy) increased by 2.4% instead of the previously reported 2.6%.

Despite the improvements, however, the rise in the overall prices index was the largest since the first quarter of last year and the increase in the core PCE index was the biggest since the fourth quarter of last year.

The GDP news is having little impact on the markets as traders see it as old news. They are now focusing on the current and upcoming quarters. Recent estimates for the October through December period call for a contraction of between 3.0% and 4.5%.

In other news, the housing sales reports for last month were released this morning. The Commerce Department said that the seasonally adjusted, annualized pace of new home sales fell by 2.9% in November to 407,000, the lowest rate since January of 1991. Moreover, October's originally reported pace of 433,000 was revised down to 419,000.

The report said that the pace fell by 16.4% in the Midwest and by 7.1% in the South. The Northeast saw an increase of 14.3% and the West saw an increase of 11.0%.

With slumping sales, home builders are cutting back on new construction. The inventory level of new homes on the market (adjusted and annualized) was 374,000, the lowest level since February of 2004. At last month's sales rate, this represented 11.5 months of sales. Though down slightly from October's turnover time of 11.8 months, it was still high by historical standards

The average new home price rose by $8,000 last month to $287,500 but this was still 9.2% below the average of $316,800 posted in November of last year. The median price rose by $5,800 to $220,400 last month but was down by 11.5% from the previous November's $249,100.

In the larger category of existing home sales, the National Association of Realtors said that the pace fell last month by 8.6% to 4.49 million. October's originally reported rate of 4.98 million was revised down to 4.91 million. Forecasters had predicted a reading of about 4.90 million.
The decline was broad-based. The rate fell by 12.0% in the Northeast, by 10.9% in the South, by 7.4% in the Midwest, and by 4.3% in the West.

Inventories edged up from 4.198 million to 4.203 million. At the prevailing sales pace, this represented 11.2 months of sales, the highest turnover time since April.

The average existing home price fell by $5,500 in November to $224,200 and was down by 12.3% from the previous November's $255,700. The median price fell by $5,200 to $181,300 and was down by 13.2% from the $208,800 median price in November of last year.

The final news release of the day was stronger than expected. The final Consumer Sentiment Index for the month from the twice-monthly surveys conducted by the University of Michigan came in at 60.1, up from the preliminary reading of 59.1 and November's final reading of 55.3. Forecasters had predicted a weaker reading of 55.0.

The improvement came in consumers' outlook over the next six months. The expectations index rose by 54.0 from the preliminary 52.4 and November's final 53.9. The index of current conditions was little changed. It came in at 69.5, a tough higher than the preliminary reading of 69.4 but still a marked improvement over November's 57.5.

Still to come: The Treasury will be conducting its monthly offering of 5-Year Notes today. Last month's auction had mixed results. Bids exceeded the offer amount by 2.44 to 1, the highest in the last four auctions and above the average of 2.15 for the twelve auctions preceding November's. Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from October's $82 million and above the twelve-auction average of $90 million.

Today's offering has a record face value for a 5-year issue of $28 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

Monday, December 22rd, Mortgage Rate Market Update

2008-12-23T13:22:00.000-08:00

Monday Mortgage Market Update

Stocks lost ground yesterday morning and the decline accelerated in mid-afternoon. But stocks bounced in the final hour, leaving the Dow with a modest loss. Despite the late-session improvement, the other major indices still suffered hefty losses. The afternoon plunge helped lend some temporary support to bonds but they also finished well in the red as new supply kept them under pressure.

In late trading, the 10-Year Treasury Note was down by 14/32, raising its yield by 5 basis points to 2.17%; the Dow was down by 59.42 points to 8,519.69; and the Nasdaq was down by 31.97 points to 1,532.35.

A weak sales forecast from Toyota weighed against the auto sector, which had surged on Friday because of the announced government bailout measures for the industry. A poor earnings report from Walgreens pressured the retail sector and the threat of a credit downgrade of Alcoa sent that company's shares down sharply.

The energy sector was also hit by another decline in oil prices. In its first trading day as the front month futures contract, the price of a barrel of light, sweet crude for February delivery fell by $2.45 on the New York Mercantile Exchange to settle at $39.91.

The now-expired January contract closed lower last Thursday and Friday but yesterday's close for the February contract was the third lowest for the front month oil future since July of 2004. The problems in the auto industry may have acted as a reminder of declining demand for oil as the economy contracts.

Last week, the Organization of Petroleum Exporting Countries (OPEC) said that to support oil prices, the cartel would cut its output by 2.2 million barrels per day starting in January. But many analysts feel that some oil producing countries will be inclined to keep producing at higher levels in order to make up for some of the losses associated with the decline in price.

At its worst level of the day, the Dow was down by 206.85 points or 2.41% but by the end of the session it had trimmed the loss to just 0.69%. The S&P 500 had been down by 3.47% but finished with a loss of 1.83%. And the Nasdaq was down by 3.88% at its low, but closed with a loss of 2.04%.

Supply was an obstacle for bonds. The Treasury auctioned its monthly issue of 2-Year Notes on Monday The results of the sale were lukewarm but not terrible considering the record $38 billion offer size. The bid-to-cover ratio was 2.13, up slightly from last month's 2.08 but still the second lowest since July of 2006. Noncompetitive bids totaled about $343 million -- an exceptionally small amount for a 2-year offering.

And foreign demand was soft. Indirect competitive bids received 30.1% of the issue and 30.4% of all accepted competitive bids. The award portion was the lowest since September . . . .

Tuesday, December 16th Mortgage Market Update

2008-12-17T06:52:00.000-08:00

Mortgage Market Update

Both stocks and Treasuries made strong gains following today's stronger than expected Fed action. In late trading, the 10-Year Treasury Note was up by 2-11/32, lowering its yield by 25 basis points to 2.27%; the Dow was up by 359.61 points to 8,924.14; and the Nasdaq was up by 81.55 points to 1,589.89.

The FOMC unanimously decided to cut its target for the fed funds rate (the overnight borrowing rate between banks) to between 0.0% and 0.25%, meaning a cut of 0.75% to as much as 1.00% from its previous reading of 1.00%. The committee also cut the discount rate by 0.75% to 0.25%.
The policy statement acknowledged the weak economy, tight credit conditions, but low inflation pressures. It also said that the fed funds rate is likely to remain exceptionally low for some time. The committee also noted that it is ready to buy more mortgage agency debt and mortgage-backed securities if necessary and may purchase longer-term Treasuries as well.

Other options are also possible; the statement concluded by saying, "The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."(FOMC STATEMENT)

Before the announcement, the stock market had been trading in the green but was given a boost by the rate news. The early gains came on news of a record drop in the Consumer Price Index last month. The other news of the day was not as stock-friendly. The pace of housing starts declined by the largest amount since March of 1984 to the lowest level on record going back to 1959. The rate of building permit issuance also fell to a record low.

The bearish housing news and a drop in the value of the dollar tied to the rate cut news weighed against oil prices. Although futures traders are expecting a hefty cut in oil production to be announced tomorrow from the Organization of Petroleum Exporting Countries, the price of a barrel of crude oil for January delivery fell by $1.02 on the New York Mercantile Exchange to close at $43.49. This was a third consecutive session decline totaling $4.49. Today's close was the third lowest for a front-month contract in almost four years.

In the stock market, the Dow gained 4.20%, the S&P 500 gained 5.14%, and the Nasdaq gained 5.41%. The Dow closed higher on the 8th of this month but today's was the second highest since November 7th. The S&P 500 and Nasdaq posted their highest closing levels today in over a month.
The Fed rate cut and reiteration that the central bank may decide to buy long-term Treasuries gave strong support to the long end of the market. The benchmark 10-Year Note yield closed at a record low as did the yield of the 30-Year Bond. The long bond's price rose by over 5 points today (5-09/32).

Tomorrow, the only major release is the report on current account for the third quarter. The current account balance is the difference between dollars leaving and entering the country. In addition to regular imports and exports, the data includes investment income and unilateral transfers (foreign aid and government pensions sent abroad), so the report is broader than the monthly reports on international trade of goods and services.

In the second quarter, the balance was a deficit of $183.1 billion, the largest in four quarters. A similarly sized deficit is anticipated for the last quarter.

The inflation news of the day was a plus for both the stock and bond markets and both made gains in early trading. But stock traders are also facing more bad news about the economy and a weaker than expected earnings report for last quarter from Goldman Sachs.

Though the fundamentals seem to favor bonds, Treasuries are currently mixed with the long end of the maturity spectrum holding modest gains. Bond traders are taking a cautious position in front of today's conclusion of the Fed's monetary policy meeting.

In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, fell by 1.7% last month. This was the largest decline in the history of the data series going back to 1947 and supersedes October's previous record decline of 1.0%. Another large drop was expected due to falling energy prices but the actual decline was larger than the 1.3% that forecasters had predicted.

The major contributor to the decline was indeed in the category of energy. Due to falling oil/gasoline prices, the energy index dropped by 17.0% in November. This was a fourth consecutive monthly decline and the largest in the history of this data series going back to 1957. Another especially volatile category is food and its index rose by 0.2%, the smallest increase in eight months.

Excluding energy and food prices, the so-called core index was virtually unchanged (0.0%) in November. But of the non-core components, the energy-related category of transportation saw the biggest decline, falling by 9.8%. This was also the largest decline in the history of the data series going back to 1947.

The only other decline in the non-core sectors was a 0.1% drop in the housing price index. The largest increase was in the apparel price index with a gain of 0.3% following a 1.0% decline in October. The category of education and communication saw a 0.2% index increase as did the category of medical care.

On a year-over-year basis, the CPI was up by 1.1%. But the increase was the smallest since June of 2002. The core index was up by 2.0%, the smallest Y/Y increase since September of 2005.
The other major news release of the day was the report on housing starts and it was much weaker than forecasters had expected. The Commerce Department said the seasonally adjusted, annualized pace of new home construction plunged by 18.9% in November to 625,000. October's originally reported rate of 791,000 was revised down to 771,000. Not only was November's figure lower than the 730,000 that analysts had predicted, it was the lowest starts rate in the history of the data series that began in January of 1959.

The weakness was broad-based. The rate fell by 34.6% in the Northeast, by 23.1% in the Midwest, by 16.8% in the West, and by 15.6% in the South.

The outlook for near-term starts is also bleak. Today's report said that the pace of building permit issuance fell by 15.6% in November to 616,000 -- the lowest in the history of this data series which began in January of 1960.

The major event of the day will be the release of the Fed's latest statement on monetary policy. The Federal Open Market Committee (FOMC), the Federal Reserve's policy committee, concludes a two-day meeting today and most Fed-watchers expect the meeting statement to reveal another round of rate cuts to stimulate the economy and keep credit flows moving.

Because of the credit crunch and economic downturn, the Fed has cut the discount rate (the interest rate charged for loans directly from the central bank) eleven times since August of last year from 6.25% to its current 1.25%. The central bank's target for the more influential federal funds rate (the overnight borrowing rate between banks) has been cut nine times since September of last year from 5.25% to its current 1.00%. The rate is actually determined by the banks on a daily basis, but the Fed can adjust reserve levels to bring the rate into line with the target.

The Fed has also instituted numerous emergency programs to keep money flowing though the financial system. But even with all of the measures taken, further action is anticipated. Most observers are anticipating a 0.50% cut to both the fed funds target and the discount rate, bringing them down to record lows. Some forecasters are even calling for larger cuts of 0.75%. The bolder the action is, the greater lift it would likely give the markets. A less-aggressive move might have a negative influence.

The results of the meeting will be posted here when they become available . . . .

Friday, December 12th, 2008

2008-12-12T09:16:00.000-08:00

Morning Market Update

More bad economic news and word that the Senate had rejected the auto bailout package were expected to send stocks into a tailspin this morning. But, though the indices are in the red, news that the Treasury is prepared to back the auto industry has provided some support for the market. Treasuries had been up in early trading but prices have since dropped into negative territory.

In today's economic news, the Commerce Department said that the seasonally adjusted level of retail sales contracted for a fifth consecutive month in November with a decline of 1.8%. Analysts had predicted a smaller decline of 1.4%. Moreover, October's originally reported decline of 2.8% was revised to a slightly steeper drop of 2.9% -- the largest decline in the current data series going back to 1992.

The sales level in the large but volatile category of auto and light trucks fell by 2.8%. But even excluding the category, sales were down by 1.6% following a 2.4% decline in October. Another volatile category is sales at gasoline stations and due to falling prices there, the sales level fell by a steep 14.7%. A bullish detail in the data is that excluding both the auto and gas station categories, sales rose last month by 0.3% after three months of contractions.

Declines were posted for non-store retailers (-1.3%); building materials, garden equipment and supplies dealers (-1.2%); and miscellaneous store retailers (-0.8%). But the other categories posted gains. The largest gainers were in sporting goods, hobby, book, and music stores (+2.8); electronics and appliance stores (+2.8%); and general merchandise stores (+1.2%). Sales at clothing stores rose by 0.8%. This was the first increase in the category since July and the largest since January.

In the other major release of the day, the Labor Department said that its Producer Price Index, a gauge of inflation at the wholesale level, fell in November by 2.2%, a deeper drop than the 1.8% that forecasters had predicted. This was a fourth consecutive monthly contraction and October's 2.8% drop was the largest in the history of the data series going back to 1947.

The declining price of oil is a key contributor to the contractions and today's report indicated an 11.2% decline in the energy price index last month following a 12.8% decline in October. Another volatile category is food and its index was flat (0.0%) last month. Excluding both volatile categories, the so-called core index rose by just 0.1%, the tamest reading in eight months.

Price pressures further down the production pipeline also contracted last month. At the intermediate stage, the price index fell by 4.3% and even excluding food and energy, the index was down by 2.3%. At the initial -- or crude -- stage of production the price index fell by 12.5% in November following an 18.5% drop in October.

The data indicate declining inflation pressures and that constitites a plus for both stocks and bonds. However, the price declines are due to falling demand and that is bad for corporate earnings and, therefore, stocks.

There were also a couple of minor releases today and they were mixed. The Commerce Department reported that the seasonally adjusted level of business inventories fell in October by 0.6%. This was the largest decline since August of 2003 and was worse than the 0.1% decline that had been predicted. In addition, September's previously reported decline of 0.1% was revised to a drop of 0.4%.

The inventory declines reflect the response to falling sales. Today's report said that the sales level decline in October by 3.5%. Consequently, the inventory-to-sales (I/S) ratio rose to 1.34 from September's 1.30 (originally 1.29). The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean decreasing pressure on manufacturing to replace supplies. October's ratio was the highest since June of 2003.
And lastly, the preliminary read on consumer sentiment for the month from the twice-monthly surveys by the University of Michigan resulted in a sentiment index of 59.0, up from November's final reading of 55.3 and stronger than most observers were expecting. The increase in optimism is being attributed to the decline in gasoline prices which has improved current conditions. But the bleak employment situation is casting a shadow over expectations for the future. News sources report that the index of current conditions spiked up to 69.4 from 57.5 while the expectations index slipped to 52.4 from 53.9.

Thursday, December 11, 2008 Market Update

2008-12-11T15:01:00.000-08:00

Thursday Market Update

Despite news that was mostly negative for stocks, the indices showed resilience for most of today's session, hovering near unchanged levels until mid-afternoon. But they then lost ground and continued to fall, closing near their lows of the day. The decline spurred a shift into the safety of government-backed Treasuries and they finished with strong gains.

In late trading, the 10-Year Treasury Note was up by 24/32, lowering its yield by 8 basis points to 2.60%; the Dow was down by 196.33 points to 8,565.09; and the Nasdaq was down by 57.60 points to 1,507.88.

Today's economic news was bond-friendly; that is, either indicating economic weakness or low inflation pressures. The weekly jobless claims report showed a huge jump in initial claims last week and in continuing claims the week before.

The trade gap for October was larger than expected, reducing expectations for the current quarter GDP figure (recent predictions call for a decline in GDP in the fourth quarter of between 3.0% and 4.0%). And import prices fell sharply in November, both in the large category of petroleum products, and outside of the category.

Oil futures spiked today. The price of a barrel of light, sweet crude for next month delivery rose by $4.46 on the New York Mercantile Exchange to close at $47.98. The increase was the largest since November 24 and the closing price was the highest since December 1.

Despite waning demand for oil, the price was supported by word that Saudi Arabia had cut production of the commodity. Another factor was a decline in the value of the dollar. Apart from being seen as a trading hedge against a falling dollar, oil investments around the world are priced in dollars and traders demand higher prices when the currency value declines.

Higher oil prices are positive for the energy sector of the stock market but high energy costs are seen as a negative for the broader market since they divert funds from businesses and consumers that might have been spent in other areas of the economy.

The final straw for the stock market today was news that the bailout package for the auto industry has stalled in the Senate. A measure passed the House of Representatives late yesterday but a number of senators are pressing for more stringent conditions for the car makers.

By the end of stock trading, the Dow had lost 2.24%; the S&P 500, 2.85%, and the Nasdaq, 3.68%. The losses helped boost demand for Treasuries despite a tepid reopening auction of last month's 10-Year Note. Bids exceeded the offer amount by 2.44 to 1, not a terrible bid-to-cover ratio for a reopening, especially considering the large offer size -- but it was not exceptional.

Noncompetitive bids, a gauge of individual investor demand, totaled about $33 million, down from the $39 million in the last regular 10-Year Note reopening in September but on the high side of the average in the last couple of years.

Foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, received just 12.7% of today's offering, the lowest award portion since last March. The award was 26.3% in September's auction.

Despite the soft auction results, the gains in the market pushed the yield of the benchmark 10-Year Note down to its second lowest close since perhaps the 1950s (daily records are available going back to 1960). Last Thursday's closing yield of 2.55% was the only one lower than today's in the available data.

Tomorrow brings a couple of heavyweight economic releases. One is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. It fell in October by 2.8%, a third consecutive decline and the largest in the history of the data series going back to 1947.

Once again, a major contributor to the decline was energy prices. The index for this category fell by 12.8%, the biggest drop since July of 1986. Another large and volatile category is food and its index fell by 0.2% in October. But not all of the inflation news was positive. Excluding the categories of energy and food, the so-called core index rose by an above-trend 0.4%.

The year-over-year data was also mixed. The PPI was up by 5.2% from a year earlier but this was the lowest margin since September of last year. The core index was up by 4.4%, the highest margin since September of 1989.

Inflation pressures further down the pipeline were tame. At the intermediate stage of production, the price index declined by 3.9% overall and by 1.7% at the core. At the initial or crude stage of production, the overall index declined by 18.6% and the core index fell by 17.0%. On a year-over-year basis, the intermediate index was up by 10.2% but this was the best margin since last February. The crude index was down by 1.4%, the first Y/Y monthly decline since January of 2007.
With oil prices still declining last month, the overall index is expected to have fallen again by about 1.8%. The core index is expected to have risen by a tame 0.2%.

The other major release is the retail sales report for last month. With the economy shrinking and job losses mounting, consumers have been holding back on spending. In October's report, the Commerce Department said the seasonally adjusted level of sales fell that month by 2.8%. This was a fourth consecutive monthly decline and the largest in the current data series going back to 1992.

A large but volatile category is autos and light trucks. Sales fell there by 5.5%, the largest decline since August of 2005. But even excluding the category, sales were down by 2.2% in October -- also the largest drop in the sixteen year look-back period.

Another large category is sales at gasoline stations. Given the drop in gas prices, it is not too surprising that the sales number there fell sharply. The report indicated a record drop of 12.7%. Excluding both the auto and gas station figures, sales were still down by 0.5% in October following a 0.6% decline in September and a 0.8% decline in August.

Poor auto sales and falling gasoline prices are expected to have resulted in another drop in overall sales last month of between 2.0% and 3.0%. A similar decline is predicted for sales excluding autos.

Though the PPI and retail sales report are tomorrow's major releases, there are a couple of others scheduled as well. The Commerce Department will release its report on business inventories for October. This is more comprehensive than the wholesale inventories report since it also includes the manufacturing and retail sectors.

In September, the inventory level declined by 0.2%, the first contraction since March of last year and the largest since July of 2005. Sales also contracted, falling by 2.0% after a 2.2% decline in August. The comparatively larger rise in outflows pushed the inventory-to-sales (I/S) ratio up from August's 1.27 to 1.29, the highest since February of last year.

The overall inventory level for October is expected to have fallen by 0.1%. A larger decline in sales is expected to have pushed the I/S ratio up again.

Lastly, the preliminary consumer sentiment index for the month from the University of Michigan will be released on Friday. Given the state of the economy, it is not surprising that consumers are pessimistic. The final index for November came in at 55.3, down from October's 57.6 and the lowest reading in twenty-eight years. Forecasters are predicting a bounce to about 58.0 in this month's preliminary reading. Though lower gas prices may be a positive influence, the bleak employment situation may result in a lower than forecast index number.

10:30 AM EST : The economic releases of the day were more bearish than expected but they have not had a major impact on the markets as traders have become accustomed to bad news. The stock indices began with sizeable losses but they have worked their way higher and are currently narrowly mixed. Treasuries are moderately higher.

In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 58,000 to 573,000. Though the seasonal manipulation of the data to account for Thanksgiving may have contributed to the spike, the jump was still the largest since September of 2001 and the claims level was the highest in twenty-six years.

The four-week moving average, which smoothes out some short-term volatility, rose by 14,250 to 540,500 -- also a twenty-six year high. For the forty-nine weeks of the year to date, the average initial claims figure has been 412,000. For the same period last year, the average was 319,878.
The report said that continuing claims rose by 338,000 to 4.429 million in the week ending November 29 (continuing claims must be at least a week old). The increase was the largest in thirty-four years. The four-week average rose by 130,750 to 4,133,500. For the first forty-eight weeks of the year, the average continuing claims figure has been 3,248,188. For the same period last year, the average was 2,539,729.

Last week's employment report for November prepared traders for today's news. It said that nonfarm payrolls fell by 533,000, the largest drop since December of 1974. The employment report also said that the percentage of the active workforce without jobs rose from October's 6.5% to 6.7%, the highest unemployment rate since October of 1993.

There were a couple of trade-related releases this morning. The Commerce Department said that the seasonally adjusted value of imports exceeded that of exports in October by $57.2 billion. This was wider than September's gap of $56.6 billion and was larger than the $54.0 billion deficit figure that analysts had forecast.

Their expectation was based on the declining price of oil, a major import. The report indicated, however, that the volume of imported oil increased in October. Overall imports still declined by 1.3% from September to October, but exports dropped by 2.2%.

Net exports are a component of gross domestic product and the larger deficit figure means a larger subtraction from the fourth quarter calculation than previously thought.

Another report released this morning showed that inflation pressures associated with the trade situation are contracting and this is a plus for both stocks and bonds. The Labor Department said that its index of import prices fell by a record 6.7% in November (the data series goes back to December of 1988). October's originally reported decline of 4.7% was revised to a drop of 5.4% and contractions have now occurred in each of the last four months.

Not surprisingly, the major reason for the decline was the drop in prices for petroleum products. The category saw a dive of 25.8% last month. However, even excluding the category, prices were down by 1.8%.

The report said that overall import prices were down by 4.4% from a year earlier with petroleum prices down by 29.0%. Excluding petroleum, prices were up by 2.4%.

Prices also fell on the export side of trade. The overall decline was a record 3.2% in November following a 2.0% decline in October. The large but volatile category of agricultural products saw prices fall by 7.0% following an 8.4% decline in October. But even excluding agriculture, export prices declined by 2.9% last month.

Low inflation preserves the value of stock and bond investments. In addition it diminishes the argument against further interest rate cuts by the Federal Reserve. But the import / export news is also a reminder of declining demand as the global economy slows and this is a negative factor for stocks.

Still to come: the Treasury will be auctioning an additional amount of last month's 10-Year Note issue. The initial issue had an exceptionally large face value of $20 billion and tomorrow's reopening will have an exceptionally large face value of $16 billion.

The last regular reopening auction was in September (there were four atypical reopenings of old issues in October). Despite the fact that it had an offer amount of $12 billion, the highest for a 10-year reopening since December of 2003, it was well-received. Bids exceeded the offer amount by 2.51 to 1 -- in line with the average bid-to-cover ratio of 2.53 for the twelve reopenings preceding September's.

Noncompetitive bids totaled about $39 million, up from the twelve-auction average of $23 million. And foreign demand was also firm with indirect competitive bids receiving 26.3% of the offering, up from the twelve-auction average award portion of 13.7%.

Today's deadline for competitive bids is 1:00 PM Eastern time. The deadline for noncompetitive bids is noon . . . .

Monday, December 8th, 2008 Afternoon Market Update

2008-12-09T08:00:00.000-08:00

Monday: 12/08/08 5:00 PM EST :
Market Afternoon Update

Stocks rallied for a second day on speculation that a massive spending plan proposed by President-elect Obama will lead the economy out of recession. Treasuries were less attractive against stocks and they declined today, though losses were relatively mild.

In late trading, the 10-Year Treasury Note was down by 10/32, raising its yield by 4 basis points to 2.74%; the Dow was up by 298.76 points to 8,934.18; and the Nasdaq was up by 62.43 points to 1,571.74.

Besides the proposed spending plan unveiled this weekend, stock traders were encouraged by news that a rescue package for the auto industry may be close at hand. The prospect sent the auto sector sharply higher.

Oil futures rebounded somewhat today following declines in the previous six trading sessions. The rise came in part as a result of the brighter economic sentiments, which suggest increased demand for the commodity. But they also rose as a result of word over the weekend that the Organization of Petroleum Exporting Countries (OPEC) is leaning toward a significant cut in production limits. Representatives of the cartel will be having a policy meeting on the 17th of the month.

The price of a barrel of light, sweet crude oil for January delivery rose by $2.90 on the New York Mercantile Exchange to close at $43.71. The move helped support the energy sector of the stock market today. Yet, despite the increase, the closing price on the front month crude oil contract was still the third lowest since January 5, 2005.

By the end of stock trading, the Dow had gained 3.46%; the S&P 500, 3.84%; and the Nasdaq, 4.14%. The S&P 500 and Nasdaq closed at their highest levels since November 13. The Dow posted its highest close since November 7. In the last two sessions, the Dow has gained 6.66%, the S&P 500 has gained 7.63%, and the Nasdaq has gained 8.73%.

The pressure on Treasuries was augmented by the competition of a greater than expected amount of supply headed to market this week. The Treasury announced today that Wednesday's issue of 3-Year Notes will have a face value of $28 billion, up from last month's $25 billion. Thursday's 10-Year reopening of last month's issue will have a face value of $16 billion.

Today's losses followed deeper ones on Friday. The yield of the benchmark 10-Year Note has risen by 19 basis points in that time (yield moves inversely to price). But this followed a seven-day rally that had pushed the yield down by 77 basis points. Today's closing yield was the highest in the last six sessions but it is the sixth lowest since possibly sometime in the 1950s (daily closing data before 1960 is unavailable).

Tomorrow brings the report on pending home sales for October. The pace of existing home sales had been falling, reaching an eight year low in June; but the trend has been rising due to falling home prices. However, tight credit conditions and consumer gloom with the economy -- especially accelerating job losses -- are expected to keep sales under pressure. September's report on pending sales indicated a 4.6% decline following a sharp jump the month before of 7.5%. Another decline is anticipated for September of about 3.0%.

Monday, December 8th, 2008

2008-12-08T12:52:00.000-08:00

Monday Market Update

Despite the move in stocks, the 10-Year Treasury Note and 30-Year Bond are currently up slightly following steep losses on Friday. However, though these maturities are experiencing some technical bounce, this could easily dissipate due to the allure of rising stocks. Supply pressure from this week's 3-Year and 10-Year Note auctions are also weighing against Treasuries.
This week's economic release calendar starts off slowly.

There are no major economic releases scheduled for today. Tomorrow's only significant economic release is the report on pending home sales for October. In September's report, the National Association of Realtors said that its seasonally adjusted index of sales fell by 4.6% following a 7.5% increase in August.

The jump in August had surprised observers when the news was released in October but a subsequently released report on existing home sales corroborated the data by showing a surprise increase in September. But the pending sales index for September suggests that the sector continues to struggle despite some support from falling home prices. Analysts are anticipating another decline of about 2.3% in October's index.

The pending sales index was first published in 2005 and the data series goes back to 2001. The index is a measure of the seasonally adjusted, annualized rate of contract activity in a month. The NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.

On Wednesday, the report on wholesale inventories for October will be released. In September's report, the Commerce Department said the seasonally adjusted level of inventories declined by 0.1%. This was the first contraction since December of 2006. August's previously reported increase of 0.8% was also trimmed to 0.6%. The level of sales also decline in September, falling by 1.5% after a 1.6% drop in August. This pushed up the inventory-to-sales (I/S) ratio to 1.12 from August's 1.10.

The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean decreasing pressure on manufacturing to replace supplies. September's reading was the highest in a year.

A modest bounce of about 0.2% is anticipated in the inventory level but the I/S ratio is expected to remain above trend.

On Wednesday afternoon, the Treasury will auction a new issue of 3-Year Notes. Last month's auction drew strong demand. Bids exceeded the $25 billion offer amount by 3.07 to 1, up sharply from the 2.39 bid-to-cover ratio in the last such auction in May of last year. In the twelve auctions prior to last month's, the average ratio was 2.29.

Individual investor demand was weak. Noncompetitive bids totaled only a little more than $20 million. They totaled $391 million in the last auction and the twelve-auction average was $317 million.

But foreign demand was strong. Indirect competitive bids, which include those from foreign central banks, received 36.0% of the issue, up from the last award portion of 18.3% and higher than the twelve-auction average of 31.0%.

Also on Wednesday afternoon, the Treasury is expected to release its budget figures for last month. In November of last year, the budget report said that outlays exceeded receipts by $98.2 billion. Because of declining tax receipts due to the economic slowdown and because of increased government spending to rescue the economy, last month's deficit is expected to be about twice as large.

October's deficit was $237.2 billion and the projected November deficit would put the total deficit figure for the 2009 fiscal year (begun in October) at over $400 billion. The total deficit for the 2008 fiscal year was a record $454.8 billion. According to some economists, the deficit for the current fiscal year will be over one-trillion dollars.

On Thursday, the jobless claims report will address the employment situation once again. In last Thursday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 21,000 to 509,000. This is a second weekly decline for a cumulative total of 34,000 but it followed two weeks of gains totaling 59,000. The latest move may also have been distorted by the adjustment that had to be made for the Thanksgiving holiday.

Friday, December 5th, 2008

2008-12-08T12:40:00.000-08:00

Friday, 12/05/08

Market Update

Despite more bad economic news Friday morning, the stock indices slogged their way from deep in the red to finish with respectable gains for the day. Bond traders got little traction from the economic data and slid further into the red in the afternoon as stocks broke out of negative territory.

In late trading, the 10-Year Treasury Note was down by 1-13/32, raising its yield by 15 basis points to 2.70%; the Dow was up by 259.18 points to 8,635.42; and the Nasdaq was up by 63.75 points to 1,509.31.

The employment report released in the morning revealed a much larger than expected plunge in payrolls last month and the declines in the previous two months were deepened by data revisions. In addition, the unemployment rate rose to its highest level in fifteen years.

But the deteriorating state of the labor market is no secret and neither is the acceleration of mortgage delinquencies -- another item revealed Friday morning. The news did weigh against stocks but the gloom passed and buying picked up in the last hour of trading once the indices had broken into positive territory.

Market commentators note that stock traders may have concluded that the size of the recent job losses will likely spur more government stimulus measures. Atop the list of such measures is another rate cut by the Federal Reserve when its monetary policy committee meets on the 15th and 16th of the month. Such projections for rates often help Treasuries but they had already rallied hard since November 25. Aside from the lure of traders to take back some of their profits, bonds suffered from traders attempting to catch the rise in stocks.

The recovery in stocks was led by the financial sector. Positive guidance from Hartford Financial Services helped spur the sector. The Dow had been down by as much as 257.74 points or 3.08% but it managed to post a gain for the day of 3.09%. The S&P 500 was down by 3.17% at its lowest point of the day but finished with a gain of 3.65%. And the Nasdaq had been down by 2.82% but closed with a gain of 4.41%.

All three still took losses for the week. The Dow lost 2.19%, the S&P 500 lost 2.25%, and the Nasdaq lost 1.71%.

The employment news drove oil futures lower. A barrel of light, sweet crude for January delivery fell by $2.86 on the New York Mercantile Exchange to close at $40.81. For the week, the price fell by $13.62 and Friday's close was the lowest for a front-month contract since December 10, 2004.

Despite Friday's losses in the bond market, the yield of the benchmark 10-Year Note closed 22 basis points lower for the week (yield moves inversely to price). The yield has now fallen in five consecutive weeks for a cumulative total of 126 basis points . . . .

Wednesday, December 3rd, 2008 Market Update

2008-12-03T09:47:00.000-08:00

Wednesday: 12/03/08 10:30 AM EST :
Market Update

Stocks opened with moderately deep losses on a bit of profit-taking following yesterday's rally and bad news on the economy's services sector. But a better than expected report on productivity and a jump in mortgage application activity last week has eased bearish sentiments and stocks have pared their earlier losses. Treasuries opened under technical pressure after huge gains but the initial decline in stocks provided some footing. However, with the improvement in stocks, Treasury notes and the long bond have fallen deeper into the red.

In today's news, the Labor Department reported that the annualized rate of nonfarm business productivity (average output per worker per hour) increased by 1.3% in the third quarter relative to the second. This was up from the preliminary estimate of 1.1% reported in early November. Productivity rose by 3.6% in the second quarter.

The revision surprised forecasters who because of the downward adjustment to the gross domestic product calculation for the quarter (-0.5% instead of the initial estimate of -0.3%) had expected a productivity gain of just 0.9%. The improvement was due to a greater decrease in hours worked (down by 3.1% instead of the originally reported 2.7%) than the downward adjustment to average output (down by 1.9% instead of the originally reported 1.7%).

The better productivity number helps stocks by suggesting greater efficiency and therefore increased projections of corporate earnings. It also helps both stocks and bonds by pointing to reduced labor cost pressure, a welcome inflation measure. This was seen in today's report, which said that unit labor costs (ULC: average cost per unit of output) rose by 2.8% last quarter instead of 3.6% as cited in the preliminary report.

Moreover, today's report revised the second quarter change in ULC to a decline of 2.6% instead of the previously reported decline of 0.1%. On a year-over-year basis, ULC rose by 1.4% in the third quarter instead of the originally reported 2.3%. Second quarter ULC rose by just 0.1% Y/Y instead of the previously reported 0.8%.

Another plus for stocks came in a minor report. The Mortgage Bankers Association of America reported that its mortgage application index surged last week by a record 112.1% as mortgage rates plunged on the announcement that the Fed would buy mortgage backed securities and debt issued directly by the mortgage agencies. It should also be noted, however, that the extent of the move may have been exaggerated by a faulty adjustment factor for the Thanksgiving Day holiday.
The report said that the bulk of the jump came on the refinance side where the index soared by 203.3%. Both the overall application index and the refinance index posted their highest readings since last March. Refinances accounted for 69.1% of application activity last week, the largest portion since last February.

But the purchase index also saw an impressive increase of 38.0% and the reading was the highest since early September. Demand for adjustable rate mortgages was feeble, representing just 1.4% of application activity, down from 3.0% the week before.

But there was also bad news for the economy released today. The Institute for Supply Management (ISM) said that its index on the non-manufacturing -- or services -- sector came in at 37.3 last month, down from 44.4 in October and below the 42.5 that forecasters were predicting. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.
The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries.

The latest reading is the lowest in the current data series. Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. It came in at 33.0 last month, the lowest reading in the history of the series going back to 1997.

In addition to the weak services sector news, the employment issue was raised this morning with the release of the report from the employment services firm of Automatic Data Processing (ADP) on nonfarm private (non-government) payrolls for November. According to the company's data, the seasonally adjusted payroll figure fell by 250,000. This was a fourth consecutive monthly decline and the largest of them. October's originally reported decline of 157,000 was also revised to a larger drop of 179,000.

The news heralds the approach of Friday's report from the Labor Department. In recent months, the Labor Department's figures have been considerably worse than those from ADP. The last employment report from the Labor Department said that non-government payrolls fell by 263,000 in October. Analysts are looking for an overall decline (including government payrolls) of between 300,000 and 325,000 in Friday's report.

Still to come: this afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of the month.

The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).

Tuesday, 12/02/08 Stocks rallied yesterday morning, then fell sharply in the afternoon. But before the indices could reach unchanged levels, they rebounded once again and finished near their highs of the day. Treasuries caught a bid when stocks were sliding and remained elevated since much of the recovery in stocks occurred after the bond market closed.

In late trading, the 10-Year Treasury Note was up by 17/32, lowering its yield by 6 basis points to 2.67%; the Dow was up by 270.00 points to 8,419.09; and the Nasdaq was up by 51.73 points to 1,449.80.

Stocks got an initial boost from a technical bounce following sharp losses on Monday. But they retreated from their highs early this afternoon as auto sales figures for last month showed steep declines relative to those in November of last year. General Motors, Ford, Toyota, and Honda all reported Y/Y declines of over 30%.

But the declines in stocks triggered more bargain hunting and the indices moved sharply higher again. The market has been extremely volatile lately as economic data has been bleak but traders have been testing lows for a possible turnaround. On the 19th and 20th of last month, the Dow fell by 872.46 points or 10.36%. It then rose in each of the next five sessions for a gain of 1,276.75 points or 16.91%. This was followed by Monday's decline of 679.95 points or 7.70%. The index gained 3.31% yesterday.

The other indices have followed similar paths. Yesterday the S&P 500 gained 3.99% after declining on Monday by 8.93%. The Nasdaq gained 3.70% yesterday after a decline of 8.95%.
Despite the advance in stocks, oil futures fell again on Tuesday. The price of a barrel of light, sweet crude for next month delivery lost $2.32 on the New York Mercantile Exchange to close at $46.96. This was the lowest closing price for a front-month contract since May of 2005. Yesterday's closing price was down by $98.33 from the record high of $145.29 set on July 3.

Treasuries have been benefiting from the swings in the stock market and from the growing string of weak economic data. Word on Monday from the head of the Federal Reserve that the central bank may lower short-term rates again and make purchases of Treasuries further up the maturity spectrum provided additional support for bonds. The yield of the benchmark 10-Year Note fell by 65 basis points in the last five sessions to an historically low level (yields move inversely to price) . .

Monday, December 1st, 2008 Market Update

2008-12-01T10:54:00.000-08:00

Monday: 12/01/08 10:30 AM EST :
Market Update

Though stock traders expected more bad economic news today, the actual figures, combined with the urge to take some of last week's gains, have sent the indices down sharply this morning. Negative analyst guidance on Goldman Sachs and Morgan Stanley is another weight on the financial sector. The move in stocks has increased the safety allure of Treasuries and they are currently rallying, extending last week's gains.

In today's news, the Institute for Supply Management (ISM) reported that its index on the manufacturing sector came in at a twenty-six year low of 36.2 for November. This was down from October's reading of 38.9 and below analyst predictions of 38.0.

Any reading below 50.0 reflects a general contraction of activity relative to the preceding month. November's index was a fourth consecutive contraction reading and the eighth of the year so far. The average reading in the first eleven months of the year is 46.8.

The news was not entirely unexpected since several regional indicators, previously released, had shown larger than predicted contractions. A positive detail for both stocks and bonds with regard to inflation was a reading of 25.5 in the index of prices paid by manufacturers. This was the lowest reading since May of 1949.

In the other economic release of the day, the Commerce Department said that the seasonally adjusted, annualized rate of construction spending fell in October by 1.2%. This was a larger decline than the 0.9% that had been predicted, but September's originally reported decline of 0.3% was revised to a virtually flat reading (0.0%) and August's previously reported increase of 0.3% was revised to a surprisingly strong increase of 2.4%.

The report showed the pace of spending for residential construction fell in October by 3.5%. September's 1.3% decline was trimmed to a drop of just 0.5% and August's previously reported increase of 1.9% was revised up to 5.4%.

There are no major economic releases slated for tomorrow. On Wednesday, the revised report on productivity for the third quarter will be released. In the preliminary report released early in November, the Labor Department said that, according to preliminary data, the seasonally adjusted level of nonfarm business productivity (average output per worker per hour) grew at an annualized rate of 1.1% in the third quarter of the year relative to the second. This was the slowest pace of the year so far and the previously reported increase of 4.3% in the second quarter was revised to 3.6%.

A deceleration had been anticipated, however, because of the contraction reported in the advance report on gross domestic product. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). According to the initial calculations, they grew by 3.6% in the third quarter following a 0.1% decline in the second (revised from the previously reported decline of 0.5%).

The revised productivity figure is expected to show even more deceleration with a growth rate of 0.9%.

Wednesday also brings the ISM index for the services sector of the economy. In October, the index came in at 44.4, down sharply from September's reading of 50.2. As is the case with the manufacturing index, any reading of the services index under 50.0 reflects a general contraction in activity relative to the preceding month.

The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. October's reading is the lowest in the data series so far.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for October came in at 44.2, down from September's 52.1. It was the lowest reading since last January's 41.9 and the second lowest since October of 2001 when it came in at 40.5.

For November, the NMI is expected to be 42.5.

On Wednesday afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of December.

The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).

Thursday brings the weekly report on jobless claims and it will get added attention as it comes out a day before the employment report for November. The data collection periods for the two reports do not coincide but the trend in claims provides insight on the state of the labor market.
In last Wednesday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 14,000 to 529,000. The decline was not unexpected following two week's of increases totaling 59,000.

In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.

The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 -- the highest reading since January of 1983. For the forty-seven weeks of the year so far, the average initial claims reading has been 406,340. For the same period last year it was 319,085.
The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million -- the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.

Also on Thursday, the Commerce Department will release its report on factory orders for October. September's report said that the seasonally adjusted level of new orders fell that month by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.
All of the key sub-categories also saw sizeable declines. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August. September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.

Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December.
Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

For October, recent predictions have called for a decline in the factory orders level of 2.7%. But last Wednesday's report on durable goods orders, which make up slightly more than half of all factory orders, indicated a drop 6.2%. This suggests that the overall order rate may be a larger decline than previously forecast.

On Friday, the often market-moving employment report comes out. In the report for October, the Labor Department said the seasonally adjusted level of nonfarm payrolls declined that month by 240,000. This was a larger decline than the 200,000 that forecasters had predicted. In addition, September's originally reported decline of 159,000 was revised to a drop of 284,000, the biggest decline since November of 2001. August's previously reported decline of 73,000 was revised to a drop of 127,000.

The report indicated that job losses were broad-based; losses were posted in both the goods producing and services sector. Besides the larger than expected loss in payrolls, the report said that the unemployment rate -- the percentage of the active workforce without jobs -- jumped from 6.1% in September to 6.5% in October. This was the highest reading since March of 1994.
For November, payrolls are expected to have fallen by between 250,000 and 300,000. The unemployment rate is expected to have risen to 6.8%. This would be the highest rate since October of 1993.

Friday, 11/28/08 Late positioning for the month spurred buying in both stocks and Treasuries on Friday but light volumes in abbreviated sessions may have exaggerated price moves. Some safety flows favored bonds as news of terrorist activity in India continued to come in throughout the day. Events that may have an impact on the markets often motivate investors to seek areas of less risk before a weekend when they cannot react to the news.

But the safety shift did not extinguish last week's positive sentiment in the stock market as traders picking up what they perceived as bargains.

In late trading, the 10-Year Treasury Note was up by 16/32, lowering its yield by 6 basis points to 2.92%; the Dow was up by 102.43 points to 8,829.04; and the Nasdaq was up by 3.47 points to 1,535.57.

Despite bleak economic news released last week and expectations of more to come, stocks have had a good week. Announcements of new government efforts to facilitate credit flows and the selection of economic officials for the next administration have kindled some optimism and traders began to consider the stock market as being oversold. But analysts note that the bounce is a test of the recent downtrend and it could trigger new waves of selling as more bearish news is released.
Oil futures rose on Friday with a barrel of light, sweet crude for January delivery up by $1.08 on the New York Mercantile Exchange to settle at $55.52. For the week, the price rose by $5.59 and Friday's close was the highest for the front-month contract in two weeks. However, the price was down for the month by $12.29.

By the end Friday's stock trading, the Dow had gained 1.17%; the S&P 500, 0.96%; and the Nasdaq, 0.32%. All three made good gains for the week with the Dow rising by 9.73%; the S&P 500, 12.03%; and the Nasdaq, 10.92%. But they all declined for the month: the Dow lost 5.32%, the S&P 500 lost 7.48%, and the Nasdaq lost 10.70%.

The yield of the benchmark 10-Year Note fell by 28 basis points last week (yield moves inversely to price). For the month, the yield fell by 104 basis points and closed on Friday at an historically low level . . . .

Wednesday, November 26, 2008 Market Update

2008-11-26T10:16:00.000-08:00

Wednesday: 11/26/08 10:30 AM EST :
Market Update:

There was a lot of economic news released this morning and most of it was bad. The stock indices are down but they have been moving back toward unchanged levels. Treasuries are extending yesterday's rally but prices have backed off their earlier highs.

In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 14,000 to 529,000. The decline was not unexpected following two week's of increases totaling 59,000.

In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.

The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 -- the highest reading since January of 1983. For the forty-seven weeks of the year so far, the average initial claims reading has been 406,340. For the same period last year it was 319,085.
The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million -- the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.

In other news, the Commerce Department reported that the seasonally adjusted level of new orders for durable goods fell in October by 6.2%, the largest decline in two years. Analysts had predicted a drop of 2.5%. In addition, September's previously reported increase of 0.9% was revised to a decline of 0.2%.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

All of the key sub-categories also showed large contractions last month. The large and volatile category of autos and light trucks saw a decline of 11.1% but even excluding the category, orders were down by 4.4%. Orders outside the defense sector are often seen as a clearer picture of underlying demand because those within the defense sector are not governed by standard market forces. Defense orders declined by 25.2% in October following a 25.4% increase in September. But even excluding the defense sector, orders were down by 4.6%.

Another closely watched category is non-defense capital goods minus aircraft -- seen as a gauge of core business demand. The order level there was down by 4.0%. This follows a 3.3% decline in September and a 2.3% decline in August.

In a separate report, the Commerce Department reported that the seasonally adjusted, annualized pace of new home sales fell in October by 5.3% to 433,000. September's originally reported rate of 464,000 was revised down by 457,000. The latest reading was below analyst's predictions of 450,000 and was the lowest since January of 1991.

The decline was not consistent around the country. The pace rose in the Northeast by 22.0% and in the Midwest by 6.0%. But in the two largest contributing regions, the rates declined. The largest contributor, the South, saw a decline of 6.0% and the second largest contributor, the West, saw a drop of 18.0%.

With declining sales, builders have cut back on new construction. The level of inventory on the market at the end of the month (adjusted, annualized) was 381,000, the lowest level since March of 2004. At the prevailing sales pace, this represented 11.1 months of supply, up from 10.9 months in September.

The average new home price fell by $11,400 in October to $272,300, the lowest since August of 2004. The median price fell by $3,700 to $218,000, the lowest since September of 2004. The average price was down by 12.2% from a year earlier and the median price was down by 7.0%.
Another release this morning was the report on personal income and spending for last month. The Labor Department said that personal income, the fuel for consumer spending, rose by 0.3%. This was a little stronger than the 0.1% that forecasters had predicted though September's originally reported rise of 0.2% was trimmed to an increase of 0.1%. Of greater interest to observers was a 1.0% decline reported in personal consumption expenditures (consumer spending). This was a fourth consecutive monthly decline and it was the largest since September of 2001.

A key manufacturing indicator was also released this morning. This was the Chicago Purchasing Managers Index (PMI), a gauge of manufacturing activity in the heavily-industrialized region. It came in at 33.8 for November. Any reading below 50.0 indicates a contraction relative to the preceding month and the latest index is the lowest since 1980. The other principal regional indices -- New York and Philadelphia -- also showed deep contractions this month and the accumulated data suggest that Monday's national index will reflect another deep decline.

The last major release of the day was the final read on consumer sentiment from the twice-monthly surveys sponsored by the University of Michigan. The overall sentiment index for November came in at 55.3, down from the preliminary reading of 57.9 and October's final reading of 57.6. Forecasters had predicted little change from the preliminary figure.

The latest reading was the lowest in twenty-eight years, reflecting deep pessimism. The expectations index came in at 53.9, down from the preliminary 55.7 and October's final 57.0. The index of current conditions came in at 57.5, down from the preliminary 61.4 and up slightly from October's final 57.4.

In industry news, the Mortgage Bankers Association of America reported that its mortgage application index rose last week by 1.5%. The improvement was not too unexpected given a decline in average fixed mortgage rates. But the reading was still the third lowest since December of 2000. The report said that the refinance index declined by 2.1% after rising by 2.6% the week before. The purchase index rose by 5.1% following a 12.6% decline a week before.
Refinances accounted for 49.3% of application activity last week, down slightly from 49.9% a week earlier. Registrations for adjustable rate mortgages represented 3.0% of application activity, up from the previous week's 2.6%.

Tuesday, 11/25/08 : The stock indices gyrated yesterday on mixed economic data and technical pressure following two days of gains. But they found support and ultimately finished narrowly mixed on news that the government was acting to spur mortgage lending and to make more credit available for consumers and small businesses.

The government backing for the mortgage industry sent investors exposed to mortgage prepayment risk into Treasuries to hedge against an expected increase in refinancing activity. The backing also bolstered investor demand for Freddie and Fannie debt.

In late trading, the 10-Year Treasury Note was up by 1-28/32, lowering its yield by 21 basis points to 3.11%; the Dow was up by 36.08 points to 8,479.47; and the Nasdaq was down by 7.29 points to 1,464.73.

Tuesday's major economic release was the preliminary report on GDP for last quarter. As expected, it showed a slightly larger contraction than the one in last month's advance report. Though not a surprise, it did spotlight the slump in the economy -- one that is expected to get worse.

The other major release was the Consumer Confidence Index. It came in stronger than expected this month but from a record low last month.

Another report released yesterday indicated the ongoing decline in home prices. Once again, the news was not entirely unexpected but it underscored the weakness in this critical economic component.

Both stocks and bonds reacted favorably to the Fed announcements to free up credit flows. But since stocks had already made strong gains in the previous two sessions, further progress there was more difficult.

Nevertheless, the Dow managed to make a 0.43% gain on the day, bringing the three-day total to 927.18 points or 12.28%. The S&P 500 gained 0.66% for the day and 13.95% for the last three sessions. The Nasdaq fell by 0.50% but it was still ahead by 11.29% for the three-day period.
The GDP news helped reduce demand projections for oil and futures fell. The price of a barrel of light, sweet crude for January delivery was down by $3.73 on the New York Mercantile Exchange to settle at $50.77. With the exceptions of last Thursday and Friday, yesterday's close was the lowest for a front-month contract since May of last year.

While stocks were rallying on Friday and Monday, Treasuries were falling. This made yesterday's advance easier. The momentum even trumped the pressure of new supply. Yesterday's 5-Year Note auction results were mixed. Bids exceeded the $26 billion offer amount by 2.44 to 1, the highest bid-to-cover ratio in the last four such auctions and above the average of 2.15 for the twelve auctions preceding yesterday's.

Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from last month's $82 million and above the twelve-auction average of $90 million.

But foreign demand was disappointing. Indirect competitive bids, which include those from foreign central banks, received 20.6% of the issue, the lowest award portion in the last six auctions and below the twelve-auction average of 25.8%. . . . .

Tuesday, November 25th, 2008

2008-11-25T13:22:00.000-08:00

Tuesday: 11/25/08 10:30 AM EST:
Market Update:

New government programs designed to support consumer lending were announced today and this gave an initial boost to stocks. But the indices have fallen back in recent trading following two strong rallies. While the Fed measures are meant to address the issues in the credit and financial markets, they also underscore the severity of the problems. Treasuries are up this morning after two days of strong losses.

Today's economic data was mixed. The Commerce Department reported that according to additional data, its latest calculation of gross domestic product (GDP) indicated that the economy contracted by 0.5% last quarter instead of the 0.3% cited in last month's advance report. The figure was in line with predictions.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. A final report will be released next month.
Today's report indicated a 3.7% contraction in consumer spending versus the 3.1% decline cited in the advance report. The category represented a 2.69% subtraction to the GDP calculation instead of the initially reported 2.25%. In the areas of strength, net exports represented an addition of 1.07% instead of the originally reported 1.13%. Government spending rose by 5.4% instead of 5.8% and represented a 1.06% addition to GDP instead of 1.15%.

The inflation data in the report was positive in relative terms. The GDP price index showed an increase of 4.2% in the quarter. Though this was the largest increase since the first quarter of 1991, it was the same figure as that released in the advance report. What was even better was a revision to the price index for core personal consumption expenditures (consumer spending excluding the volatile categories of food and energy). It showed an increase of 2.6%. Though still the largest increase since the second quarter of 2006, it was lower than the 2.8% reported last month.
Interpreting the implications of today's news is a matter of perspective. Although the latest GDP figure was not a surprise, it was still the first decline since the fourth quarter of last year and the largest since the third quarter of 2001. But most observers are expecting the economy to get even worse. Predictions for the current quarter call for a contraction of between 3.0% and 4.0%.
In the other economic release of the day, the independent research firm, the Conference Board, said that its Consumer Confidence Index came in at 44.9 this month. This was a bounce from October's revised reading of 38.8 (originally 38.0) and it was better than the 39.5 that analysts had predicted. The news release said that the expectations index rose to 46.7 from 35.7 (originally 35.5) but the index of present conditions fell to 42.2 from 43.5 (originally 41.9).

Despite the improvement, November's index was still a reflection of deep pessimism by historical standards. October's index was the lowest in the history of the data series going back 41 years.
A minor release today was even more bearish. The S&P / Case-Shiller report on home prices said that the 10-city index fell in September on a year-over-year basis by 18.6%. This was the largest decline in the history of the data series going back to 1987. The 20-city index fell by 17.4% since the preceding September. This was also a record drop in the series going back to 2000. The decline means homeowners have less equity in their property, a major source of personal wealth. The declines also highlight the weak housing sector in which sales and new construction have fallen sharply.

The Federal Reserve announced today that it was establishing a program to foster the extension of credit to consumers and small businesses. The program is entitled the Term Asset-Backed Securities Loan Facility (TALF). Under the program, the Treasury will lend up to $200 billion to holders of securities backed by consumer and small business loans. (FED TALF ANNOUNCEMENT)

The Fed also announced that it would buy as much as $600 billion in debt issued or owned by Fannie Mae, Freddie Mac, or Ginnie Mae.(FED ANNOUNCEMENT ON GSEs)

This afternoon the Treasury will be auctioning off this month's issue of 5-Year Notes. Last month's auction results were not bad. Bids exceeded the $24 billion offer amount by 2.28 to 1, the highest bid-to-cover ratio in the last three auctions and above the average of 2.18 for the twelve auctions preceding last month's. Individual investor demand was soft, however. Noncompetitive bids, those from individuals and small institutions, totaled just $82 million, the lowest amount in the last six auctions and down from the twelve-auction average of $92 million.

Foreign demand was decent but not spectacular. Indirect competitive bids, which include those from foreign central banks, received 28.1% of the issue, up from the award portion in September's auction of 26.6% and higher than the twelve-auction average of 25.2%.

Monday, November 24, 2008 Market Update

2008-11-24T10:22:00.000-08:00

Monday: 11/24/08 10:30 AM EST:
Market Update

Despite more weak economic news, stocks are extending Friday's rally with additional fuel from word yesterday that the government will bail out Citigroup. The rise in stocks is drawing investment flows away from Treasuries and bonds are down sharply.

In today's news, the National Association of Realtors reported that the seasonally adjusted, annualized pace of existing home sales fell in October by 3.1% to 4.98 million, down from September's 5.14 million (originally reported as 5.18 million). All areas of the country saw declines. The pace fell by 6.0% in the Midwest, by 3.2% in the South, by 1.6% in the West, and by 1.2% in the Northeast.

Inventories of homes on the market declined last month by 0.9% but the drop in the sales pace pushed the turnover time up to 10.2 months from September's 10 months. The average home price fell by $10,300 or 4.4% to $224,700. This was the lowest average since March of 2004. The median price fell by 4.2% or $8,100 to $183,300 - the lowest since April of 2004.
Despite the latest decline in sales pace, lower prices have been providing some support for the market. September's sales pace was the highest in a year and October's sales were just 0.7% below where they were a year earlier (unadjusted).

But the focus for the stock market this morning is the Citigroup bailout. The government will invest $20 billion in the company and back as much as $306 billion in the financial institution's assets. The move has given a boost to the financial sector and the broader market has followed along in its wake.

Besides the stock flow, bonds are being pressured by the approach of new supply. This afternoon, the Treasury will be conducting its monthly auction of 2-Year Notes. Last month's was well-received. Bids exceeded the $34 billion offer amount by 2.49 to 1, the highest bid-to-cover ratio in the last four offerings and above the 2.35 average for the twelve auctions preceding October's.
Noncompetitive bids, a gauge of individual investor demand, were relatively soft, however. They totaled $539 million, the lowest amount in the last eight auctions. The twelve month average was $637 million.

But foreign demand for the issue was strong. Indirect competitive bids, which include those from foreign central banks, garnered 41.3% of the issue, the highest award portion in the last twenty auctions. The twelve-month average was only 25.8%.

Since new issues will have greater liquidity, traders avoid buying the soon-to-be off-the-run issue. Traders who will be bidding at the auction avoid buying the old issue since they want to keep yield levels high (bids are for yield). And many traders take to the sidelines until they learn how well the new issue has been received. Caution may be particularly high in front of today's auction because the issue has a face value of $36 billion, a record high. The size could dilute demand.

This week's trading activity will be largely compressed within the first three days since the Thanksgiving Holiday will have the markets closed on Thursday and many traders will stay on the sidelines Friday as they attempt to stretch the weekend to four days. Inasmuch as Thanksgiving is a domestic holiday, foreign markets will be open on Thursday and defensive positioning against event risk may favor Treasuries.

In addition, portfolio managers will be adjusting their holdings during the week according to such characteristics as risk, yield, and return horizon. This rebalancing process also often entails the purchase of Treasuries. But purchases already made this month may prevent much further progress. Supply pressure may also weigh on the bond market because of this week's Treasury auctions.

The economic release calendar is also compressed this week. Tomorrow, the Commerce Department will release its first revision to last month's initial estimate of gross domestic product (GDP) for the third quarter. Last month's advance report said that GDP declined at a 0.3% annualized rate in the July through September period. This was the first decline since the fourth quarter of last year and the largest decline since the third quarter of 2001. GDP grew by 2.8% in the second quarter.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. As more data becomes available, the calculations are revised. A final report will be released next month.

The last report indicated that consumer spending declined by 3.1% in the third quarter, the steepest contraction since the second quarter of 1980. The category represented a 2.25% subtraction from the GDP calculation.

A negative inflation indicator in the report was a 4.2% increase in the price index. This was the largest rise since the first quarter of 1991. The price index for core personal consumption expenditures (consumer spending minus food and energy) rose by 2.8% in the third quarter, the biggest increase since the second quarter of 2006.

But not all of the news was bad. Most analysts were actually anticipating a decline in GDP of between 0.5% and 1.0%. Net exports were a strong point, adding 1.13% to the GDP calculation. A somewhat more equivocally positive contribution came from a 5.8% expansion in government spending. This was the largest increase since the fourth quarter of 2001 and it represented a 1.15% addition to the GDP calculation.

The preliminary report is expected to be a little more bearish than the advance report. Predictions are that it will say the economy slipped last quarter by 0.5% or 0.6%.

A little later tomorrow morning, the independent research firm, the Conference Board, will release its Consumer Confidence Index figures for November. Last month, the overall confidence index was 38.0, the lowest reading in the history of the data series going back 41 years. There was little consolation in the fact that September's reading was revised up to 61.4 from 59.8. The news release said that the index of current conditions came in at 41.9, down from September's 61.1 (originally reported as 58.8) and the expectations index came in at 35.5, down from 61.5 (originally 60.5).

Although the index readings were much weaker than analysts predicted, the credit crunch, falling stocks, news of failed financial institutions, and announcements of government bailout measures have understandably raised consumer anxieties. November's confidence index is expected to remain pessimistic but analysts feel that it will come in a little higher at between 39.0 and 41.0.
Tomorrow afternoon, the Treasury will be auctioning off this month's issue of 5-Year Notes. Last month's auction results were not bad. The bid-to-cover ratio for the $24 billion issue was 2.28, the highest in the last three auctions and above the average of 2.18 for the twelve auctions preceding last month's. Individual investor demand was soft, however. Noncompetitive bids totaled just $82 million, the lowest amount in the last six auctions and down from the twelve-auction average of $92 million.

Foreign demand was decent but not spectacular. Indirect competitive bids received 28.1% of the issue, up from the award portion in September's auction of 26.6% and higher than the twelve-auction average of 25.2%.

Like the 2-Year offering, the size of tomorrow's issue is also a concern. It will have a face value of $26 billion -- also a record high.

Wednesday will be a busy news and trading day. The report on jobless claims will highlight the employment situation once again. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose the week before by 27,000 to 542,000. The jump was somewhat of a surprise following an increase of 31,000 the week before (originally 32,000), though the latest figures may have been distorted by the Veteran's Day holiday.

Nevertheless, the latest claims level was the highest since July of 1992. The four-week moving average, which smoothes out some short-term volatility, rose by 15,750 to 506,500.
Any initial claims reading over 400,000 is considered an indication that layoffs are outpacing hiring and the recent figures suggest that job losses are accelerating. For the forty-six weeks of the year to date, the average weekly reading has been 403,630. For the same period last year, the average was 318,435.

The last report said that the level of continuing claims rose by 109,000 to 4.012 million in the week ending November 8 (continuing claims must be at least a week old). This was the highest level since December of 1982. The four-week average rose by 71,250 to 3.867 million. For the first forty-five weeks of the year, the average continuing claims reading has been 3,186,400. For the same period last year, the average was 2,533,222.

Following the 58,000 rise in the initial claims level in the last two weeks, a decline in last week's claims figure would not be too surprising, but it would not change any opinions regarding the deteriorating situation in the labor market.

The report on durable goods orders for last month comes out on Thursday morning. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
The report for September said that the seasonally adjusted level of orders rose by 0.8% and this was subsequently revised up to 0.9% in the last factory orders report. The bounce followed a 5.5% decline in August, the largest contraction since October of 2006.

A major contributor to the rise in September was a strong jump in the volatile category of transportation. Excluding the category, the order level fell by 1.0% after a dive in August of 4.2% (the largest since January of 2002). A rise in defense orders also helped the overall increase. But orders for defense are not governed by standard market forces. Excluding defense, orders were down by 0.5% following a 6.0% drop in August.

Another closely watched category is that of non-defense capital goods minus aircraft. This is seen as a gauge of core business spending. The order level fell there by 1.5% in September following a 2.3% decline in August.

The overall order level is expected to have fallen in October. The forecast range is between -1.3% and -2.5%.

Also out early on Thursday morning is the report on personal income and spending for last month. In the last report, the Labor Department said that personal income, the fuel for consumer spending, rose in September by 0.2%. Though this was slightly stronger than the 0.1% increase that analysts had predicted, August's originally reported increase of 0.5% was revised to 0.4% and July's previously reported decline of 0.6% was revised to a drop of 0.8%.

The data series was jolted last May by the government rebate checks distributed under the economic stimulus package. This caused average income to jump by 1.9%, the largest increase since September of 2005 when the data was skewed by the impact of Hurricanes Katrina and Rita. Since May, income gains have been meager and July's decline was the largest since August of 2005. For October, analysts are once again calling for just a slight increase of 0.1%.
The last report said that personal consumption expenditures (consumer spending) fell in September by 0.3%. This followed no changes (0.0%) in the preceding two months. For October, forecasters are predicting a decline of between 0.6% and 0.9%. Even if the decline matches the 0.6% estimate, it would be the biggest drop since September of 2001.

A little later on Wednesday morning, the report on new home sales will be released. In the report for September, the Commerce Department said the seasonally adjusted, annualized rate of sales rose by 2.7% to 464,000. The increase was unexpected but the news was blunted by a revision to August's originally reported sales pace. It was trimmed from an originally reported 460,000 to 452,000. Moreover, September's reading was still the second lowest since January of 1991.
Inventories of homes on the market fell for a seventeenth straight month as builders cut back on construction. September's decline was a steep, 7.3% to a seasonally adjusted 394,000. This was the lowest level since June of 2004. With the pickup in sales pace, this reduced the turnover time to 10.4 months. This was down from 11.4 in August (originally reported as 10.9 months). August's was the highest since April of 1980.

Like the existing home sale figures, the improvement in new home sales reflected generally falling prices. Though the average new home price rose in September by $11,400 or 4.3% to $275,500, this was down by $16,700 or 5.7% from the average a year earlier. The median price fell by $2,000 in September or 0.9% to $218,400 but was down by a sharper $21,900 or 9.1% from the level in September of 2007. September's median price was a four-year low and the average price was the second lowest in four years.

But gloomy economic conditions are expected to have dampened buying demand in October. Current estimates range from a decline of 3.0% to 5.2% to a rate of between 450,000 and 440,000.

An important regional manufacturing indicator comes out on Thursday. This is the Chicago Purchasing Managers Index (PMI) from the Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management). October's index for the highly-industrialized region came in at 37.8. Any reading below 50.0 generally reflects a decrease in activity relative to the preceding month. Not only was October's reading down from September's 56.7, it was the lowest reading since May of 2001.

Another strong contraction reading is anticipated for this month's index but the consensus prediction is for a slightly better number of between 38.0 and 39.0. In combination with exceptionally weak indexes for the New York and Philadelphia Fed areas, the regional data suggests that the national index for November (to be released next Monday) will also reflect another sharp contraction of activity. October's ISM index was 38.9, the lowest since September of 1982
The last economic release of the day will be the final read on consumer sentiment from the twice-monthly surveys by the University of Michigan. In the preliminary release on the 14th, the overall sentiment index came in at 57.9. This was up slightly from October's final reading of 57.6. Nevertheless, it was still not much higher than June's final reading of 56.4 which was the lowest since 1980. The final reading for November of last year was 76.1 and for November of 2006 it was 92.1. Not much change from the preliminary figure is expected in this month's final reading.
The domestic markets and all government offices will be closed on Thursday but the markets will be open on Friday. Trading volumes will be light then but this will provide market participants with their last opportunity to make adjustments to their portfolios for the month.

Friday, November 21, 2008 Market Update

2008-11-21T14:47:00.001-08:00

Friday: 11/21/08 5:00 PM EST :
Market Update

The stock indices traded in a relatively thin channel around unchanged levels for much of the session but they surged in the last hour for substantial gains. The jump coincided with the release of news that President elect Obama has chosen New York Fed President Timothy Geither to be his Treasury Secretary and some market commentators have attributed the rally to trader satisfaction with the selection.

Treasuries spent the day in negative territory as traders there took some profits made in recent sessions.

In late trading, the 10-Year Treasury Note was down by 1-20/32, raising its yield by 19 basis points to 3.20%; the Dow was up by 494.13 points to 8,046.42; and the Nasdaq was up by 68.23 points to 1,384.35.

Oil futures were little changed today. The price for a barrel of light, sweet crude for January delivery rose by $0.51 on the New York Mercantile Exchange to settle at $49.93. This was $0.31 higher than the closing price of yesterday's now-expired December contract. Today's price was still the second lowest for a front-month contract in three-and-a-half years.

By the end of stock trading, the Dow had gained 6.54%; the S&P 500, 6.32%; and the Nasdaq, 5.18%. Despite today's strong gains, the indices took heavy losses for the week. The Dow lost 450.89 points or 5.31%. The other major indices did even worse. The S&P 500 fell by 8.39% for the week and the Nasdaq fell by 8.74%.

This was the third straight week of heavy losses for stocks with the Dow losing 13.71% over that time, the S&P 500 losing 17.42%, and the Nasdaq losing 19.56%.

Despite today's losses in the bond market, the yield of the benchmark 10-Year Note fell this week by 53 basis points. For the first three weeks of the month, the yield has fallen by 76 basis points.
Next week's trading will be front-weighted as the Thanksgiving Holiday will have the markets closed on Thursday and many traders will stay on the sidelines Friday as they attempt to stretch the weekend to four days. Inasmuch as Thanksgiving is a domestic holiday, foreign markets will be open then and defensive positioning against event risk may favor Treasuries.

In addition, portfolio managers will be adjusting their holdings during the week according to such characteristics as risk, yield, and return horizon. This rebalancing process also often entails the purchase of Treasuries. But purchases already made this month may prevent much further progress. Supply pressure may also weigh on the bond market as the Treasury will be auctioning new issues of 2-Year and 5-Year Notes.

On the economic release calendar, Monday brings the report on existing home sales for last month. The report for September was more bullish than expected. The National Association of Realtors said that the seasonally adjusted, annualized rate of existing home sales rose that month by 5.5% 5.18 million from August's rate of 4.91 million. The increase was the largest since February of 2006 and the pace was the highest since August of last year.

The pickup in sales caused inventories of homes on the market to decline. The seasonally adjusted, annualized level fell by 1.6% to 4.266 million in September. At sales pace prevailing at the time, this represented 9.9 months of sales, the lowest turnover time since February.
Though more home buying activity is a plus for the economy, it also reflects the weakened state of the housing market since the pickup in buying interest was prompted by a sharp decline in home prices. The average price fell by $10,700 in September or 4.4% to its lowest level since April of 2004.

The median price was down by $11,500 or 5.7% to its lowest level since February of 2005. On a year-over-year basis, the average home price was down by $22,600 or 8.8% and the median price was down by $18,900 or 9.0%.

The declining prices are due to lack of demand and from the increase in inventories earlier this year. The lower home values decrease personal wealth, further dispiriting consumers who are also watching their stock investments plummet. Falling prices also have a negative aspect on sales since some buyers may be reluctant to take on a large debt for an asset they feel is still declining in value.

For October, the sales pace is expected to have declined by 2.5% to 5.01 million. This would still be in line with the average pace over the last year.

On Monday afternoon, the Treasury will be conducting its monthly auction of 2-Year Notes. Last month's was well received. Bids exceeded the $34 billion offer amount by 2.49 to 1, the highest bid-to-cover ratio in the last four offerings and above the 2.35 average for the twelve auctions preceding October's.

Noncompetitive bids, a gauge of individual investor demand, were relatively soft, however. They totaled $539 million, the lowest amount in the last eight auctions. The twelve month average was $637 million.

But foreign demand for the issue was strong. Indirect competitive bids, which include those from foreign central banks, garnered 41.3% of the issue, the highest award portion in the last twenty auctions. The twelve-month average was only 25.8%.

On Tuesday, the Commerce Department will release its first revision to last month's initial estimate of gross domestic product (GDP) for the third quarter. Last month's advance report said that GDP declined at a 0.3% annualized rate in the July through September period. This was the first decline since the fourth quarter of last year and the largest decline since the third quarter of 2001. GDP grew by 2.8% in the second quarter.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. As more data becomes available, the calculations are revised. A final report will be released next month.

The last report indicated that consumer spending declined by 3.1% in the third quarter, the steepest contraction since the second quarter of 1980. The category represented a 2.25% subtraction from the GDP calculation.

A negative inflation indicator in the report was a 4.2% increase in the price index. This was the largest rise since the first quarter of 1991. The price index for core personal consumption expenditures (consumer spending minus food and energy) rose by 2.8% in the third quarter, the biggest increase since the second quarter of 2006.

But not all of the news was bad. Most analysts were actually anticipating a decline in GDP of between 0.5% and 1.0%. Net exports were a strong point, adding 1.13% to the GDP calculation. A somewhat more equivocally positive contribution came from a 5.8% expansion in government spending. This was the largest increase since the fourth quarter of 2001 and it represented a 1.15% addition to the GDP calculation.

Next week's preliminary report is expected to be a little more bearish than the advance report. Predictions are that it will say the economy slipped last quarter by 0.5% or 0.6%.
A little later on Tuesday morning, the independent research firm, the Conference Board, will release its Consumer Confidence Index figures for November. Last month, the overall confidence index was 38.0, the lowest reading in the history of the data series going back 41 years. There was little consolation in the fact that September's reading was revised up to 61.4 from 59.8. The news release said that the index of current conditions came in at 41.9, down from September's 61.1 (originally reported as 58.8) and the expectations index came in at 35.5, down from 61.5 (originally 60.5).

Although the index readings were much weaker than analysts predicted, the credit crunch, falling stocks, news of failed financial institutions, and announcements of government bailout measures have understandably raised consumer anxieties. November's confidence index is expected to remain pessimistic but analysts feel that it will come in a little higher at between 39.0 and 41.0.
On Tuesday afternoon the Treasury will be auctioning off this month's issue of 5-Year Notes. Last month's auction results were not bad. The bid-to-cover ratio for the $24 billion issue was 2.28, the highest in the last three auctions and above the average of 2.18 for the twelve auctions preceding last month's. Individual investor demand was soft, however. Noncompetitive bids totaled just $82 million, the lowest amount in the last six auctions and down from the twelve-auction average of $92 million.

Foreign demand was decent but not spectacular. Indirect competitive bids received 28.1% of the issue, up from the award portion in September's auction of 26.6% and higher than the twelve-auction average of 25.2%.

Wednesday will be a busy news and trading day. The report on jobless claims will highlight the employment situation once again. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 27,000 to 542,000. The jump was somewhat of a surprise following an increase of 31,000 the week before (originally 32,000), though last week's figures may have been distorted by the Veteran's Day holiday.

Nevertheless, the latest claims level was the highest since July of 1992. The four-week moving average, which smoothes out some short-term volatility, rose by 15,750 last week to 506,500.
Any initial claims reading over 400,000 is considered an indication that layoffs are outpacing hiring and the recent figures suggest that job losses are accelerating. For the forty-six weeks of the year to date, the average weekly reading has been 403,630. For the same period last year, the average was 318,435.

The report said that the level of continuing claims rose by 109,000 to 4.012 million in the week ending November 8 (continuing claims must be at least a week old). This was the highest level since December of 1982. The four-week average rose by 71,250 to 3.867 million. For the first forty-five weeks of the year, the average continuing claims reading has been 3,186,400. For the same period last year, the average was 2,533,222.

Following the 58,000 rise in the initial claims level in the last two weeks, a decline in this week's claims figure would not be too surprising, but it would not change any opinions regarding the deteriorating situation in the labor market.

The report on durable goods orders for last month comes out on Thursday morning. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
The report for September said that the seasonally adjusted level of orders rose by 0.8% and this was subsequently revised up to 0.9% in the last factory orders report. The bounce followed a 5.5% decline in August, the largest contraction since October of 2006.

A major contributor to the rise in September was a strong jump in the volatile category of transportation. Excluding the category, the order level fell by 1.0% after a dive in August of 4.2% (the largest since January of 2002). A rise in defense orders also helped the overall increase. But orders for defense are not governed by standard market forces. Excluding defense, orders were down by 0.5% following a 6.0% drop in August.

Another closely watched category is that of non-defense capital goods minus aircraft. This is seen as a gauge of core business spending. The order level fell there by 1.5% in September following a 2.3% decline in August.

The overall order level is expected to have fallen in October. The forecast range is between -1.3% and -2.5%.

Also out early on Thursday morning is the report on personal income and spending for last month. In the last report, the Labor Department said that personal income, the fuel for consumer spending, rose in September by 0.2%. Though this was slightly stronger than the 0.1% increase that analysts had predicted, August's originally reported increase of 0.5% was revised to 0.4% and July's previously reported decline of 0.6% was revised to a drop of 0.8%.

The data series was jolted last May by the government rebate checks distributed under the economic stimulus package. This caused average income to jump by 1.9%, the largest increase since September of 2005 when the data was skewed by the impact of Hurricanes Katrina and Rita. Since May, income gains have been meager and July's decline was the largest since August of 2005. For October, analysts are once again calling for just a slight increase of 0.1%.
The last report said that personal consumption expenditures (consumer spending) fell in September by 0.3%. This followed no changes (0.0%) in the preceding two months. For October, forecasters are predicting a decline of between 0.6% and 0.9%. Even if the decline matches the 0.6% estimate, it would be the biggest drop since September of 2001.

A little later on Wednesday morning, the report on new home sales will be released. In the report for September, the Commerce Department said the seasonally adjusted, annualized rate of sales rose by 2.7% to 464,000. The increase was unexpected but the news was blunted by a revision to August's originally reported sales pace. It was trimmed from an originally reported 460,000 to 452,000. Moreover, September's reading was still the second lowest since January of 1991.
Inventories of homes on the market fell for a seventeenth straight month as builders cut back on construction. September's decline was a steep, 7.3% to a seasonally adjusted 394,000. This was the lowest level since June of 2004. With the pickup in sales pace, this reduced the turnover time to 10.4 months. This was down from 11.4 in August (originally reported as 10.9 months). August's was the highest since April of 1980.

Like the existing home sale figures, the improvement in new home sales reflected generally falling prices. Though the average new home price rose in September by $11,400 or 4.3% to $275,500, this was down by $16,700 or 5.7% from the average a year earlier. The median price fell by $2,000 in September or 0.9% to $218,400 but was down by a sharper $21,900 or 9.1% from the level in September of 2007. September's median price was a four-year low and the average price was the second lowest in four years.

But gloomy economic conditions are expected to have dampened buying demand in October. Current estimates range from a decline of 3.0% to 5.2% to a rate of between 450,000 and 440,000.

An important regional manufacturing indicator comes out on Thursday. This is the Chicago Purchasing Managers Index (PMI) from the Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management). October's index for the highly-industrialized region came in at 37.8. Any reading below 50.0 generally reflects a decrease in activity relative to the preceding month. Not only was October's reading down from September's 56.7, it was the lowest reading since May of 2001.

Another strong contraction reading is anticipated for this month's index but the consensus prediction is for a slightly better number of between 38.0 and 39.0. In combination with exceptionally weak indexes for the New York and Philadelphia Fed areas, the regional data suggests that the national index for November (to be released December 1) will also reflect another sharp contraction of activity. October's ISM index was 38.9, the lowest since September of 1982
The last economic release of the day will be the final read on consumer sentiment from the twice-monthly surveys by the University of Michigan. In the preliminary release on the 14th, the overall sentiment index came in at 57.9. This was up slightly from October's final reading of 57.6. Nevertheless, it was still not much higher than June's final reading of 56.4 which was the lowest since 1980. The final reading for November of last year was 76.1 and for November of 2006 it was 92.1. Not much change from the preliminary figure is expected in this month's final reading.
The domestic markets and all government offices will be closed on Thursday but the markets will be open on Friday. Trading volumes will be light then but this will provide market participants with their last opportunity to make adjustments for the month.

10:30 AM EST : With no fresh economic data to provide drag, stocks are rebounding somewhat following two days of steep losses. But gains have been modest so far compared to recent swings (the average daily move for the Dow since the beginning of September has been plus or minus 298.77 points).

The rise in stocks has helped justify profit-taking in Treasuries this morning following steep gains in the last five sessions. The yield of the benchmark 10-Year Note declined by 31/100 yesterday (yield moves inversely to price) and in recent trade this morning, it had risen by 20/100.
There are no major economic releases slated for today. While there is no guidance from new indicators, it does not mean that the markets will not be volatile. Stock traders are looking for a turning point to the downtrend that, as of yesterday, had pulled the Dow down by 6,612.24 points or 46.68% from its October 9, 2007 record high of 14,164.53. More than half that loss came in the last three months.

But the overriding view of the economy is bearish. This view has been confirmed by a growing string of weak economic indicators -- many at record low levels. The weakness is widespread. The financial sector has been hit by the credit crisis stemming from poorly performing mortgages and the securities backed by them. Manufacturing, construction, and the service sector are all contracting. Unemployment is rising and consumer spending is falling.

The severity of the situation has been underscored by the extraordinary measures already taken by the Treasury and the Federal Reserve. There has been an economic stimulus package for taxpayers, a sharp reduction of interest rates, numerous new vehicles instituted for lending money to businesses including a major bailout package. Moreover, the situation has had global effects which have spurred actions by foreign central banks as well.

Against this backdrop, stock traders are caught between fear and hope. Government debt securities (Treasuries) have benefited from the retreat out of the stocks. The demand for the safety of Treasuries has pushed yields to historical lows. Today, however, bond traders are cashing in on recent gains.

Oil futures are up this morning but the January contract (the new front-month future) is currently still below $50.00 per barrel . . . .

FREDDIE MAC SUSPENDS ALL FORECLOSURE SALES

2008-11-21T06:41:00.000-08:00

FREDDIE MAC SUSPENDS ALL FORECLOSURE SALES OF OCCUPIED HOMES FROM DAY BEFORE THANKSGIVING UNTIL JANUARY 9, 2009

McLean, VA – Freddie Mac (NYSE: FRE) today announced it has ordered its national network of mortgage servicers and foreclosure attorneys to suspend all foreclosure sales and evictions involving occupied single family and 2-4 unit properties with Freddie Mac-owned mortgages between November 26, 2008 and January 9, 2009. The suspension will help servicers implement the Streamlined Modification Program recently announced by Freddie Mac, Fannie Mae, the Federal Housing Finance Agency (FHFA), HOPE Now and 27 mortgage servicers. The temporary suspension is also expected to give servicers more time to help borrowers avoid foreclosure.

Specifically, Freddie Mac servicers and foreclosure attorneys were told to contact as quickly as possible an estimated 6,000 borrowers with foreclosure sales scheduled between November 26, 2008 and January 9, 2009. If the property is occupied, the servicers and foreclosure attorneys will halt the sale. This temporary suspension of foreclosure sales will not apply to vacant single family properties. Additionally, no evictions will be completed between November 26 and January 9.

“By working closely with FHFA and our servicers, Freddie Mac is on track to help three out of every five troubled borrowers with Freddie Mac-owned loans avoid foreclosure this year,” said Freddie Mac Chief Executive Officer David M. Moffett. “Today’s announcement builds on this momentum and provides a new measure of certainty to many of these families during the holidays.”

Moffett said that by delaying these foreclosure sales, the nation’s servicers will have the opportunity to work with more borrowers who could qualify for a modification under the new Streamlined Modification program scheduled to begin by December 15.

“Today’s announcement has the potential to enable more families struggling in these extraordinary times to take advantage of this vital new initiative developed with FHFA, the Treasury Department and the mortgage finance industry,” said Moffett.

Moffett also emphasized that lenders servicing Freddie Mac-owned mortgages will continue to work with borrowers to consider all workout options Freddie Mac employs to help distressed borrowers who can and want to stay in their homes, such as permanent rate reductions and mortgage term extension modifications.

This year, Freddie Mac expects to approve 84,000 workouts for the estimated 140,000 who are delinquent on Freddie Mac-owned mortgages. (For more about Freddie Mac workout options, see freddiemac.com/avoiding_foreclosure.)
Freddie Mac's temporary suspension of foreclosure sales is the latest in a series of efforts to help troubled borrowers. Other recent initiatives have included, delegating expanded workout authority to servicers, doubling the amount of money servicers are paid for successful workouts, and paying non-profit organizations to reach out to worried borrowers.

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

###

Thursday, November 20, 2008 Market Update

2008-11-21T06:33:00.000-08:00

Thursday: 11/20/08 5:00 PM EST :
Market Update:

Stocks had a choppy trading session as bad economic news contended with the lure of low prices and conflicting opinions regarding a bailout for the auto industry. But pessimism prevailed once again and the indices moved sharply lower late in the session to close near their lows of the day. Treasuries kept their safety appeal throughout the session and prices soared.

In late trading, the 10-Year Treasury Note was up by 2-22/32, lowering its yield by 31 basis points to 3.01%; the Dow was down by 444.99 points to 7,552.29; and the Nasdaq was down by 70.30 points to 1,316.12.

Today's economic news was uniformly bearish. The level of initial jobless claims hit a sixteen-year high last week and the level of continuing claims in the preceding week was the highest in almost twenty-six years.

The Index of Leading Economic Indicators fell more than expected last month. Lastly, the Philadelphia Fed Index on the region's manufacturing sector for this month revealed the strongest contraction of activity in eighteen years.

While stocks were hit by the economic data, some support came from talk that a bailout of the auto industry might be at hand. But later word was that a rescue was not assured and that the uncertainty would not be resolved until sometime next month at the earliest.

Oil futures declined again today on the weak economic news that further dimmed demand estimates for the commodity. Though lower prices are an economic stimulant, the reason behind the decline constituted another bearish indicator. The decline also specifically hurts the energy sector of the stock market.

In today's action, the price of a barrel of light, sweet crude oil for next month delivery fell by $4.00 on the New York Mercantile Exchange to settle at $49.62. In the last five sessions, it has fallen by $8.62 and today's close was the lowest for a front-month contract since May of 2005. The contract expired at the end of trading today and the one for January delivery becomes the front-month contract tomorrow.

By the end of stock trading, the Dow had lost 5.56%; the Nasdaq, 5.07%; and the S&P 500, 6.71%. The Dow and Nasdaq closed at their lowest levels since March of 2003 and the S&P 500 closed at its lowest level since April of 1997.

The stock market's loss has been the bond market's gain. In the last five trading sessions, the yield of the benchmark 10-Year Note has fallen by 84 basis points (yield moves inversely to price) and today's close was the lowest in decades. The 30-Year Bond yield closed at 3.49%, 4 basis points lower than where the 10-Year Note yield closed two days ago.

There are no major economic releases slated for tomorrow so technical factors will exert a greater influence on the markets. Today's late drop in stocks will likely send a chill through overseas markets in overnight trading. Whether traders see bargains tomorrow is the question. Bond traders may also be inclined to cash in some of their recent gains but further losses in stocks could extend the rally in Treasuries.

10:30 AM EST : More bad news on the economy has pushed stocks lower and the investment flow is being drawn to the safe haven of the Treasuries market. The rise in bond prices has pulled the yield of the benchmark 10-Year Note down to levels not seen in five years.

All of today's economic releases were worse than expected. In the first release, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 27,000 to 542,000.

The jump was somewhat of a surprise following an increase of 31,000 the week before (originally 32,000), though last week's figures may have been distorted by the Veteran's Day holiday. Nevertheless, the latest claims level was the highest since July of 1992. The four-week moving average, which smoothes out some short-term volatility, rose by 15,750 last week to 506,500.
Any initial claims reading over 400,000 is considered an indication that layoffs are outpacing hiring and the recent figures suggest that job losses are accelerating. For the forty-six weeks of the year to date, the average weekly reading has been 403,630. For the same period last year, the average was 318,435.

The report said that the level of continuing claims rose by 109,000 to 4.012 million in the week ending November 8 (continuing claims must be at least a week old). This was the highest level since December of 1982. The four-week average rose by 71,250 to 3.867 million. For the first forty-five weeks of the year, the average continuing claims reading has been 3,186,400. For the same period last year, the average was 2,533,222.

Later, the Conference Board, an independent research firm, released its Index of Leading Economic Indicators for last month. The report said that the index fell by 0.8%, a larger contraction than the 0.6% that analysts were predicting. In addition, September's originally reported increase of 0.3% was revised to a rise of just 0.1%. The largest contributors to October's decline were the drop in stock prices, the decline in the rate of building permit issuance, and the pessimistic consumer expectations index.

The news release indicated that the situation has deteriorated over the last twelve months. It said, "Between April and October 2008, the leading index declined 2.4 percent (a -4.7 percent annual rate), falling considerably faster than the 1.2 percent decrease (a -2.3 percent annual rate) over the previous six months. In addition, the weaknesses among the leading indicators have remained widespread in recent months."

The final release of the day and week was the manufacturing index data on the Philadelphia Fed region. It came in at -39.3 this month, down from October's -37.5 and below consensus predictions of a -30.0 reading. Any reading below 0.0 reflects a general contraction of activity relative to the preceding month and the latest reading was the worst since October of 1990. The index has been negative in eleven of the last twelve months with the average reading being -18.6.
The report said that the prices paid index, a gauge of inflation, came in at -30.7, the first negative reading since July of 2003 and the largest in the history of the data series going back to May of 1968 . . .

Wednesday, November 19th Market Update

2008-11-19T14:03:00.000-08:00

Wednesday: 11/19/08 10:30 AM EST:
Market Update:

The inflation news released today was a plus for both stocks and bonds but the news on the housing sector was bearish and favored bonds. Currently, the stock indices are in negative territory amid choppy trading action. Treasuries are up but the prices have also seen a couple of abrupt moves this morning.

In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, declined by 1.0% last month. This was the largest decline in the history of the data series going back to 1947. Analysts had been predicting a decline of about 0.8%.

As expected, a sharp drop in oil prices pulled the energy price index down by 8.6%. This was the largest monthly contraction in this data series going back to 1957.

Another volatile category is food and its price index rose in October by 0.3%, the smallest increase since March. But even excluding the categories of energy and food, the so-called core index declined by 0.1%, the first decline since November of 1982.

Of the non-core components, the energy-related category of transportation saw the biggest drop with a decline of 5.4%, the largest in the history of the data series going back to 1947. But energy was not the whole story behind the PPI data. The index for apparel fell by 1.0%, the biggest drop since last March. The housing price index was flat (0.0) after two months of 0.1% declines. The largest increase outside of food was a 0.3% rise in the miscellaneous category of "other goods and services."

On a year-over-year basis, the CPI was up by 3.7% but this was the best Y/Y margin since the preceding October. The core index was up by 2.2%, also the best margin in a year. The energy price index was still higher by 11.5% but this was the best margin since September of last year. Not all of the Y/Y figures were positive: the index for food was up by 6.3%, the highest margin since March of 1990.

In the other major release of the day, the Commerce Department said that the seasonally adjusted rate of housing starts declined in October by 4.5% to 791,000 from an upwardly revised pace of 828,000 in September (originally reported as 817,000). Though the latest rate was higher than the 780,000 that analysts had predicted, it was still the lowest in the history of the data series going back to 1959.

The report indicated a 31.0% drop in the starts pace in the Northeast and a 13.7% drop in the Midwest. There were some bullish details. The largest regional contributor, the South, saw an increase of 1.5% and the second largest contributor, the West, saw an even bigger increase of 7.5%.

But the outlook for the near term remains bleak. The report said that the seasonally adjusted, annualized rate of building permit issuance fell by 12.0% last month to 708,000. This was the lowest pace in the history of the data series going back to 1960.

In related news, the Mortgage Bankers Association of America reported this morning that its mortgage application index fell last week by 6.2% despite a decline in average fixed mortgage rates. The decline in rates spurred some additional refinance activity and its index rose by 2.6%. Refinances accounted for 49.9% of all application activity, an increase from the previous week's 45.1%. But the purchase index fell by 12.6% to its lowest level since December of 2000.
Registrations for adjustable rate mortgages edged up to 2.6% of all applications versus 2.3% the week before.

This afternoon, the Federal Reserve will release the minutes of last month's monetary policy meetings (an emergency meeting held on the 8th and the regular meeting on the 28th and 29th). The minutes are expected to indicate deep concerns over the financial market and the economy. But even if they turn out less hawkish than anticipated, the weak economic and low inflation indicators released since then point to more rate cuts next month.

Tuesday, 11/18/08 : Tuesday was another volatile day for stocks but the urge to pick up what were perceived to be bargains overcame ongoing worries about the economy. Treasuries rallied on tame inflation data and confidence that the Fed would cut rates in December. An afternoon slide by stocks (though reversed in the last hour of trading) helped keep Treasuries elevated.

In late trading, the 10-Year Treasury Note was up by 1-00/32, lowering its yield by 12 basis points to 3.53%; the Dow was up by 151.17 points to 8,424.75; and the Nasdaq was up by 1.22 points to 1,483.27.

The big news of the day was a record drop in the Producer Price Index for October. The headline overshadowed the fact that the core index rose more than expected and was up from a year earlier by the largest amount in nineteen years.

Low inflation is a good thing for both stocks and bonds. But the congressional testimony by Henry Paulson and Ben Bernanke kept the faltering economy in focus and stocks began to decline at around noon Eastern Time.

More bad economic news came in the afternoon. The National Association of Home Builders Housing Market Index came in at 9 for the month, down from 14 in October. A reading below 50 indicates more negative than positive responses from home builders regarding the state of the market for single home sales. November's reading was the lowest in the history of the data series going back to 1985.

At their low of the day, the Dow was down by 168.14 points or 2.03%, the S&P 500 was down by 2.81%, and the Nasdaq was down by 3.52%. But the late-session rally allowed the Dow to close with a 1.83% gain for the day. The S&P 500 finished with a gain of 0.98% and the Nasdaq made a nominal advance of 0.08%.

In the last three sessions, the yield of the benchmark 10-Year Treasury Note fell by 32 basis points and yesterday's close was the lowest level since October 7 (yield moves inversely to price).
Oil futures moved lower again yesterday. A barrel of light, sweet crude for next month delivery lost $0.56 on the New York Mercantile Exchange to settle at $54.39, the lowest close for a front-month contract since January of last year. The price was down by $90.90 per barrel from the record close of $145.29 posted on July 3 . . . .

Wednesday, November 12th Market Update

2008-11-13T07:30:00.000-08:00

Wednesday: 11/12/08 5:00 PM EST :
Market Update

Stock traders were rattled today by news of companies seeking federal bailout funds and news that the government will not be buying bad mortgage assets from financial institutions. The major stock indices took a nosedive and Treasuries made hefty gains.

In late trading, the 10-Year Treasury Note was up by 25/32, lowering its yield by 9 basis points to 3.65%; the Dow was down by 411.30 points to 8,282.66; and the Nasdaq was down by 81.69 points to 1,499.21.

Stocks were pressured from the opening bell and comments by Treasury Secretary Henry Paulson sent the market lower. He said today that the government would not be buying bad mortgage debt from financial institutions at this time.

Though the Treasury had intended to do this as a way of unclogging credit flows, Mr. Paulson explained that, "Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP [Troubled Assets Relief Program] funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources, in helping to strengthen our financial system and support lending."(PAULSON STATEMENT)

The financial sector was also hit by word that American Express is seeking government backing of $3.5 billion. This comes after Monday's news that the Federal Reserve was allowing the company to become a bank holding company, thus making it eligible for bailout funds. Morgan Stanley (also now a bank holding company) announced today that it would be cutting ten percent of its employees.

The auto sector was still feeling the effects of an analyst warning earlier this week that General Motors is quickly running out of money. Congress is currently considering a bailout plan for the entire industry and a hearing on the matter has been scheduled for next Wednesday.
The gloomy economic picture continued to pull oil prices down, thus putting pressure on the energy sector. A barrel of light, sweet crude oil for next month delivery fell by $3.50 on the New York Mercantile Exchange to settle at $56.16. This was the lowest closing price for a front-month contract since January 29, 2007.

Along with recent, bearish economic data and poor earnings reports, today's news sent investment flows out of stocks. By the end of stock trading, the Dow had lost 4.73% on the day; the S&P 500, 5.19%; and the Nasdaq, 5.17%. On October 27, the Dow and S&P 500 closed lower, but today's close for each index was the second lowest since April and March of 2003 (respectively). The Nasdaq's close today was the lowest since May of 2003.

A good portion of it went to Treasuries as a safe haven. And the allure of bonds made for a moderately successful 10-Year Note auction today despite its large size. Bids exceeded the $20 billion offer amount by 2.20 to 1, down from the bid-to-cover ratio of 2.61 in the last initial offering in August. But individual investor demand was strong with noncompetitive bids totaling $199 million, the highest amount since May of 2004. Foreign demand was good but not great. Indirect competitive bids received 35.5% of the issue, up from their award portion of 33.8% in August's auction.

Tomorrow, the employment situation gets reviewed once again in the jobless claims report. In last Thursday's report, the Labor Department saidthat the seasonally adjusted level of initial claims for state unemployment benefits declined the week before by 4,000 to 481,000. But the originally reported level of 479,000 for the week of October 25 was revised up by 6,000 to 485,000. The four-week moving average, which smoothes out some short-term volatility was unchanged at 477,000.

Despite the latest decline, the claims level has been trending higher throughout the year. Any reading over 400,000 is considered a sign that layoffs are outpacing hiring activity. For the first forty-four weeks of the year so far, the average weekly reading has been 297,886. For the same period last year, the average was 317,659.

The report also said that continuing claims jumped by 122,000 in the week ending October 25 (continuing claims must be at least a week old) to 3.843 million. This was the highest level in twenty-five years. For the first forty-three weeks of the year, the average continuing claims reading has been 3,150,791. For the same period last year, the average was 2,530,884.
Also out tomorrow morning is the report on international trade for September. In August's report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $59.1 billion. The deficit was somewhat smaller than analyst predictions of $60.0 billion. Moreover, July's originally reported trade gap of $62.2 billion was revised to $61.3 billion.
The value of exports fell by 2.0% in August from July's record high. But there was a 2.4% decline in the larger category of imports due primarily to a drop in oil prices.

With oil prices continuing to decline in September, the balance of trade is expected to show a narrower deficit of about $57.0 billion. This would be the lowest in six months. Even if the report shows a slightly larger deficit, steeper declines in oil prices last month will likely show up in October's report in the form of a smaller deficit.

Tomorrow brings more supply as the Treasury will be reopening August's issue of 29-year and 9-month securities (making Thursday's 29-year and 6-month maturities). The offer amount is $10 billion, the same amount as August's initial issue. That auction drew strong demand. The bid-to-cover ratio was 2.40, the highest ratio for an initial offering since February of 2007 (reopenings of the bond have often produced higher ratios since their offer amounts were relatively small -- not the case in tomorrow's offering).

Noncompetitive bids totaled around $39 million, the largest amount for either an initial or reopening sale since February of 2006 -- the first auction in the current issuance cycle. And foreign demand was also strong. Indirect competitive bids garnered 42.7% of the offering, which was also the largest award portion for the bond since February 2006.

The supply issue will be further emphasized tomorrow afternoon by the release of last month's Treasury budget figures. October is the first month of the government's fiscal year and it usually starts out with a deficit; that is, greater outlays than receipts. In October of 2007, the deficit was $56.8 billion.

Due in part to increased bailout activity for the financial sector, last month's deficit is expected to be around $90 billion. The 2008 fiscal year, which ended in September, produced a record high deficit of $454.8 billion. High deficits mean that more Treasuries will have to be issued to meet debt obligations and keep government operations running.

10:30 AM EST : Stocks are continuing to slide this morning. The decline, combined with losses suffered yesterday is spurring a shift into the safety of Treasuries. The stock flow is currently trumping any defensive positioning ahead of today's sale of new 10-Year Notes. There are no major economic releases scheduled for release.

The economic news released last week was weak -- especially the highly-influential employment figures. Though the employment report did not initially have an impact on the stock market (it rallied on Friday), a number of bad corporate news items this week has triggered a substantial retreat so far this week.

Today, negative guidance from electronics retailer, Best Buy, is weighing on the market. The news follows word on Monday that Circuit City, the second largest electronics retailer, was filing for bankruptcy protection.

Oil futures are also continuing to fall in price this morning as the bleak economic outlook suggests there will be less demand for the commodity. In recent trading, the price of a barrel of crude oil for next month delivery was down by $1.62 to $57.71.

The government is trying to provide more economic stimulus by addressing the mortgage finance crisis. This morning, the Treasury, the Federal Insurance Deposit Insurance Corporation, and the Federal Reserve issued a statement urging banks to keep credit flowing to businesses and consumers and to work with their home finance borrowers to prevent defaults. This follows yesterday's announcement by the Federal Housing Finance Agency of a plan to modify loans for eligible mortgagees.(INTERAGENCY STATEMENT)

So far, however, stock traders are seeing these measures as more evidence of how dire the situation is.

The retreat from equities is providing strong support for Treasuries, though bond traders are facing more supply today. The Treasury is auctioning $20 billion in 10-Year Notes. The offer amount is up from $17 billion in the last initial offering in August. Last month, in an uncommon move, the Treasury reopened four old 10-Year issues with a combined face value of $40 billion. The high offer size of today's issue and last month's extra supply may have an impact on the auction results.

August's auction met with relatively strong demand. Bids exceeded the offer amount by 2.61 to 1, the highest bid-to-cover ratio for an initial 10-Year issue in four years. Noncompetitive bids, a gauge of individual investor demand, totaled about $118 million. This was down from the $149 million in the preceding initial offering in May but it was above the average of $94 million for the twelve initial offerings preceding August's.

Foreign demand was decent. Indirect competitive bids, which include those from foreign central banks, received 33.8% of the issue, up from May's award portion of 27.8% but down slightly from the twelve-auction average of 36.3%.

Today's deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon. More supply will be hitting the market tomorrow when the Treasury will be auctioning $10 billion in 30-Year Notes (actual maturity: 29-years and 6-months) . . . .

Monday, November 10th, 2008 Market Update

2008-11-10T09:59:00.000-08:00

Monday: 11/10/08 12:45 PM EST:
Market Update

Treasuries are getting a bid as stocks have given up their early gains and are now in negative territory.

China announced its stimulus plan to maintain the country's economic momentum. The move adds to the growing string of countries that have enacted such measures and it helps ease concerns of a deep, global recession. The Asian stock markets closed generally higher on the news with Japan's Nikkei index up by 5.81% and Hong Kong's Hang Seng up by 3.52%. Most of Europe's markets are currently in the green, as well.

Also helping support U.S. stocks was news that the government is providing AIG with more loans that, in combination with those already made, total more than $150 billion. AIG's stock has surged on the news. Word of higher than predicted sales at McDonalds was also welcome news.
But stocks still face recent bearish economic indicators and expectations of more to come. In addition, not all of today's corporate news was positive. Fannie Mae reported a record loss for last quarter and Circuit City has filed for bankruptcy protection. Negative analyst guidance on General Motors is also pressuring the market.

There are no major economic reports scheduled for release today and bond trading will close early today ahead of tomorrow's Veterans Day closure of the market. The stock market will remain open tomorrow and since bond traders will not be able to react to any moves there, defensive positioning is likely to characterize today's trading action. However, a plunge in stocks could result in a safe-haven shift into government-backed debt securities (Treasuries).

This week's events calendar is weighted toward the end of the week but it is punctuated with new supply offerings. Today, the Treasury will be auctioning $25 billion in 3-Year Notes. The issue was discontinued in 1998 and reinstituted in 2003. It was discontinued again last year and was recently reinstituted. The last offering of this maturity was in May of last year. That issue met with mixed demand and the offer amount was only $14 billion. Bids exceeded the amount by 2.39 to 1, down from the 2.97 bid-to-cover ratio in the preceding auction in February of last year. Non-competitive bids, a gauge of individual investor demand, were solid, totaling $391 million versus the $303 million in the preceding auction.

Foreign demand was weak, however. Indirect competitive bids, which include those from foreign central banks, received just 18.9% of all accepted competitive bids and 18.3% of the entire issue. This was the lowest award portion for indirect competitive bids in the 2003-2007 issue cycle.
The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

On Wednesday, there are no major news releases scheduled but there will be the usual minor ones: the index data from the Mortgage Bankers Association on application activity for last week and the report on oil inventories.

But more supply comes to market on Wednesday as the Treasury will be auctioning its initial offering of 10-Year Notes. The offering will have a face value of $20 billion, up from $17 billion in the last initial offering in August. In October, the Treasury, in an uncommon move, reopened four old issues of 10-Year issues with a combined face value of $40 billion. The high offer size of this week's issue and last month's extra supply may have an impact on Wednesday's results.
August's auction met with relatively strong demand. The bid-to-cover ratio was 2.61, the highest for an initial 10-Year issue in four years. Noncompetitive bids totaled about $118 million. This was down from the $149 million in the preceding initial offering in May but it was above the average of $94 million for the twelve initial offerings preceding August's.

Foreign demand was decent. Indirect competitive bids received 33.8% of the issue, up from May's award portion of 27.8% but down slightly from the twelve-auction average of 36.3%.
On Thursday, the employment situation will be revisited in the jobless claims report. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits declined the week before by 4,000 to 481,000. But the originally reported level of 479,000 in the week of October 25 was revised up by 6,000 to 485,000. The four-week moving average, which smoothes out some short-term volatility was unchanged in last Thursday's report at 477,000.

Despite the latest decline, the claims level has been trending higher throughout the year. Any reading over 400,000 is considered a sign that layoffs are outpacing hiring activity. For the first forty-four weeks of the year so far, the average weekly reading has been 297,886. For the same period last year, the average was 317,659.

The report also said that continuing claims jumped by 122,000 in the week ending October 25 (continuing claims must be at least a week old) to 3.843 million. This was the highest level in twenty-five years. For the first forty-three weeks of the year, the average continuing claims reading has been 3,150,791. For the same period last year, the average was 2,530,884.
Also out on Thursday morning is the report on international trade for September. In August's report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $59.1 billion. The deficit was somewhat smaller than analyst predictions of $60.0 billion. Moreover, July's originally reported trade gap of $62.2 billion was revised to $61.3 billion.
The value of exports fell by 2.0% in August from July's record high. But there was a 2.4% decline in the larger category of imports due primarily to a drop in oil prices.

With oil prices continuing to decline in September, the balance of trade is expected to show a narrower deficit of about $57.0 billion. This would be the lowest in six months. Even if the report shows a slightly larger deficit, steeper declines in oil prices last month will likely show up in October's report in the form of a smaller deficit.

Thursday brings more supply as the Treasury will be reopening of August's issue of 29-year and 9-month securities (making Thursday's 29-year and 6-month maturities). The offer amount is $10 billion, the same amount as August's initial issue. That auction drew strong demand. The bid-to-cover ratio was 2.40, the best bid-to-cover ratio for an initial offering since February of 2007 (reopenings of the bond have often produced higher ratios since their offer amounts were relatively small -- not the case in this week's offering).

Noncompetitive bids totaled around $39 million, the largest amount for either an initial or reopening sale since February of 2006 -- the first auction in the current issuance cycle. And foreign demand was also strong. Indirect competitive bids garnered 42.7%, which was also the largest award portion for the bond since February 2006.

The supply issue will be further emphasized on Thursday afternoon by the release of last month's Treasury budget figures. October is the first month of the government's fiscal year and it usually starts out with a deficit; that is, greater outlays than receipts.

In October of 2007, the deficit was $56.8 billion. Because in part to increased bail-out activity for the financial sector, last month's deficit is expected to be around $90 billion. The 2008 fiscal year, which ended in September, produced a record high deficit of $454.8 billion. High deficits mean that more Treasuries will have to be issued to meet debt obligations and keep government operations running.

On Friday, the major economic release will be the report on retail sales for last month. Consumer spending, which constitutes the bulk of all economic activity, has been extremely weak since June. In that month, the seasonally adjusted level of retail sales rose by just 0.1%. This was followed by a 0.6% decline in July, a 0.4% decline in August, and a 1.2% decline in September.

Sales excluding the large but volatile auto sector have not been much better. They rose by 0.7% in June and by 0.1% in July, but they fell by 0.9% in August and by 0.6% in September.
For October, an overall decline of between 1.5% and 2.0% is anticipated. Excluding the auto sector, sales are expected to have fallen by between 1.0% and 1.3%. Some of the weakness in the forecast is due to falling gasoline prices but the report is expected to show a broad-based underlying weakness as well. Moreover, rising job losses are likely to continue reining in buying activity.

Another early release on Friday is the report on import and export prices. In September's report the Labor Department said that its index of import prices fell by 3.0%, the largest decline since April of 2003. The impact was blunted somewhat by the revision of August's originally reported decline of 3.7% to a still impressive 2.6% contraction.

Most of September's drop came in the petroleum products category. Its index fell by 9.0%, the largest decline since October of 2006. But even excluding the category, import prices were down by 0.9%, which, as in the case of the overall index, was the biggest drop since April of 2003.
The report said that export prices fell by 1.0% in September following a 1.7% drop in August. A large but volatile category of exports is agricultural products. Its price index fell by 0.3% following a huge, 9.6% decline in August. But excluding the category, export prices fell by 1.0% following a 0.7% decline in August.

Lower petroleum import prices are expected to result in another decline in overall imports. The latest forecast is for a drop of 2.0% or more.

The report on business inventories for September will be released a little later. In August's report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.3%, a slightly weaker gain than the 0.4% that analysts predicted. The increase was the smallest in five months but it followed a jump in July of 1.1%, the largest increase in four years.

As expected, the report indicated a sharp drop in sales. They fell by 1.8%, the largest drop since September of 2006. This pushed the inventory-to-sales (I/S) ratio up from July's 1.24 to a six-month high of 1.27. The I/S ratio is the value of remaining inventory divided by the value of sales for the month. It indicates how many months it would take to deplete the stocks on hand. Rising ratio figures mean that pressure on production is easing.

The latest factory orders report indicated that manufacturers' inventories fell by 0.7% in September, the first decline since August of last year and the largest decline since July of 2003. Today's report on wholesale inventories showed a 0.1% decline -- the first in twenty-one months. The only unknown is the retail category and it has averaged only a slight gain in the last twelve months. Consequently, the overall reading may show a slight contraction (which would be the first in a year-and-a-half) or it could show just a slight expansion.

And sales (inventory outflows) are expected to have fallen steeply in September. This will have pushed the I/S ratio up to what will probably be its highest level since early in 2007.
The final release of the week is the preliminary read on consumer sentiment for November from the twice-monthly surveys authorized by the University of Michigan. The final sentiment index for October was 57.6. This was down sharply from September's final reading of 70.3. In fact, it was the largest monthly drop in the history of the data series going back to 1978. The index was slightly higher than June's 28-year low of 56.4.

For the first part of this month, the recent forecast for the index was 57.0 but considering Friday's weaker than expected employment data, the reading could be considerably lower.

Friday, November 7th, 2008

2008-11-07T10:00:00.000-08:00

Friday: 11/07/08 10:30 AM EST :
Market Update:

The markets are not reacting to today's economic news as one might have expected. Stock traders were bracing for an awful employment report and there fears were fulfilled this morning. But with that out of the way, the market opened on a positive note as traders picked up what they perceived as bargains following two days of exceptionally steep losses. The move has undercut bonds and the decline there has been augmented by profit-taking following price gains in the last four sessions.

In the major economic release of the day, the Labor Department reported that the seasonally adjusted level of nonfarm payrolls declined in October by 240,000. This was a larger decline than the 200,000 that forecasters had predicted. In addition, September's originally reported decline of 159,000 was revised to a drop of 284,000, the biggest decline since November of 2001. August's previously reported decline of 73,000 was revised to a drop of 127,000. While the figures were worse than predicted, many market participants had suspected that this might be the case.

The report indicated that job losses were broad-based. In the goods producing sector, construction payrolls fell by 49,000, a sixteenth consecutive contraction. Manufacturing payrolls lost 90,000 jobs. This was the twenty-eighth consecutive decline and the largest in five-and-a-half years.

In the services sector, the business and professional category shed 45,000 from its payroll figure. Retail sales payrolls fell by 38,000, financial activities payrolls lost 24,000, and leisure and hospitality payrolls fell by 16,000. The only major private sector category to see a significant gain was education and health services. Payrolls there rose by 21,000. Government payrolls expanded by 23,000.

The biggest changes to September's originally reported data was a 16,000 decline in education and health instead of a gain of 25,000, and a 41,000 decline in government payrolls instead of a 9,000 increase.

Besides the larger than expected loss in payrolls, the report said that the unemployment rate -- the percentage of the active workforce without jobs -- jumped from 6.1% in September to 6.5% in October. This was the highest reading since March of 1994.

In other news, the Commerce Department reported that the seasonally adjusted level of wholesale inventories declined in September by 0.1%. This was the first contraction since December of 2006. August's previously reported increase of 0.8% was also trimmed to 0.6%. The level of sales also decline in September, falling by 1.5% after a 1.6% drop in August. This pushed up the inventory-to-sales (I/S) ratio to 1.12 from August's 1.10.

The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean decreasing pressure to replace supplies. September's reading was the highest in a year.

In addition to the stock flow and profit-taking, bonds are also being pressured by the approach of a heavy influx of new supply next week. On Monday, the Treasury will offer a new 3-Year Note issue having a face value of $25 billion. The security was discontinued after an offering in May of last year but was just reinstated because of increased government borrowing needs.

A new 10-Year Note issue with a face value of $20 billion will be offered on Wednesday. Since new issues will have greater liquidity, traders avoid buying the soon-to-be off-the-run issue. Traders who will be bidding at the auction avoid buying the old issue since they want to keep yield levels high (bids are for yield). And many traders take to the sidelines until they learn how well the new issue has been received.

There will also be a $10 billion, 30-Year Bond offering on Thursday; but it will be a reopening of last August's issue, which actually had a maturity of 29-years and 9-months. Thursday's securities, then, will have a maturity of 29-years and 6-months.

Thursday, November 6th, Market Update

2008-11-07T07:02:00.000-08:00

Thursday: 11/06/08 5:00 PM EST :
Market Update

Interest rate cuts by a number of foreign central banks helped the short end of the bond market today while the long end (with the exception of the 30-Year Bond) got a mild boost from a shift away from stocks.

In late trading, the 10-Year Treasury Note was up by 3/32, lowering its yield by 1 basis point to 3.69%; the Dow was down by 443.48 points to 8,695.79; and the Nasdaq was down by 72.94 points to 1,608.70.

Stocks found no support from today's economic news. The jobless claims report said the level of initial claims slipped slightly last week but the previous week's figure was revised up and the latest level of continuing claims was the highest in twenty-five years. The news underscores the proximity of tomorrow's employment report and expectations that it will be weak.

Another report this morning said that nonfarm business productivity decelerated in the third quarter and unit labor costs rose sharply. Negative guidance from Cisco and reports of slow sales at major retailers also weighed on stocks.

Oil futures fell again today with the price of a barrel of light, sweet crude for next month delivery dropping by $4.53 on the New York Mercantile Exchange to settle at $60.77. This was the lowest closing price for a front-month contract since March of 2007. Lower energy prices are an economic stimulant since they leave businesses and consumers with more money to spend on other things, but the reason prices are falling is that demand is expected to continue falling as the global economy cools. Falling oil prices also hurt energy-related stocks.

By the end of stock trading, the Dow had lost 4.85% for the day; the Nasdaq, 4.34%; and the S&P 500, 5.03%. In the last two days the Dow has fallen by 929.49 points or 9.66%, the Nasdaq has fallen by 9.63%, and the S&P 500 has fallen by 10.03%.

The rate cuts overseas gave Treasuries a boost in early trading but profit taking following recent gains sent prices lower at the intermediate and long end of the market. But as stocks continued to decline, the losses were pared and the note sector ultimately made progress on the day.
Tomorrow, the major event of the day is the release of the employment report for last month. In September's report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls fell that month by 159,000. Not only was this a much larger decline than recent forecasts of 90,000 to 100,000, but it was the largest since March of 2003.

The weakness was broad-based, hitting both the goods producing and services sectors. While the payroll figure was weaker than anticipated, the unemployment rate, as expected, came in at 6.1%, matching August's reading. However, it was still the highest since September of 2003. The unemployment rate is the percentage of those in the active workforce without jobs.
Analysts feel that October's report will be bleak. They are predicting that payrolls fell by 200,000. They are also predicting that the unemployment rate rose to 6.3%. If the employment rate prediction is true, it would be the highest since June of 2003.

A couple of minor releases also are slated for tomorrow. The report on pending home sales will provide some insight on upcoming sales activity. The report for August surprised observers by showing a substantial pickup in contract activity. The National Association of Realtors reported that its index of sales rose by 7.4%. The rise was corroborated in the latest report on existing home sales which also showed a surprising rise in September. Though the sector continues to struggle, the latest sales data suggests that falling home prices are generating increased buying interest.
Another second-tier release tomorrow is the report on wholesale inventories for September. In August's report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.8%. Though twice as large as analysts had predicted, latest gain was the weakest in five months.

Rising inventories can be seen as bullish if they are perceived as resulting from preparation for increased demand. But August's report said that the level of sales fell in August by 1.0%. This was the largest decline since January of 2007 and July's previously reported decline of 0.3% was revised to a decline of 0.8%.

The monthly changes resulted in an inventory-to-sales (I/S) ratio for August of 1.10 and July's previously reported 1.07 ratio was revised up to 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Rising turnover times mean increasing pressure to replace supplies. The ratio is still low by historical standards, however. June's 1.06 reading was a record low.

For September, the inventory level is expected to make another small increase but the sale level is expected to have declined again.

The wholesale inventory data is dated. The report is also considered second-tier since it provides only one piece of the inventories picture. A more comprehensive report -- including the manufacturing, wholesale, and retail sectors -- will be released a week from tomorrow.

Thursday Morning 10:30 AM EST :
Morning Market Update

Treasuries are lower this morning on profit-taking following three winning sessions that has trimmed 26 basis points off the yield of the benchmark 10-Year Note (yield moves inversely to price). The retreat comes despite another decline in stocks this morning.
The employment news released this morning was somewhat deceptive. The Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits declined last week by 4,000 to 481,000.

But the previous week's originally reported level of 479,000 was revised up by 6,000 to 485,000. The four-week moving average, which smoothes out some short-term volatility was unchanged at 477,000.

Despite the latest decline, the claims level has been trending higher throughout the year. Any reading over 400,000 is considered a sign that layoffs are outpacing hiring activity. For the first forty-four weeks of the year so far, the average weekly reading has been 297,886. For the same period last year, the average was 317,659.

Moreover, today's reports said that continuing claims jumped by 122,000 in the week ending October 25 (continuing claims must be at least a week old) to 3.843 million. This was the highest level in twenty-five years. For the first forty-three weeks of the year, the average continuing claims reading has been 3,150,791. For the same period last year, the average was 2,530,884.
The claims news spotlights the approach of tomorrow's employment report for last month, even though the data collection periods for the two reports did not coincide. A weak report is expected tomorrow and this may be adding pressure on stocks.

In the other economic release of the day, the Commerce Department said that, according to preliminary data, the seasonally adjusted level of nonfarm business productivity (average output per worker per hour) grew at an annualized rate of 1.1% in the third quarter of the year relative to the second. This was the slowest pace of the year so far and the previously reported increase of 4.3% in the second quarter was revised to 3.6%.

A deceleration had been anticipated, however. Last week's initial estimate of gross domestic product for the third quarter showed a 0.3% contraction following a 2.8% expansion in the second quarter. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). They grew by 3.6% in the third quarter following a 0.1% decline in the second (revised from the previously reported decline of 0.5%).

Now that today's data has been released, technical factors will take on added significance. Though bonds are currently lower, a significant sell-off in stocks would make Treasuries more attractive. Bonds may also get support from a lower interest rate environment. Earlier this week, Australia cut a key rate and today the Bank of England, the European Central Bank, the Swiss National Bank, and the Czech Republic National Bank cut rates. The Federal Reserve, which cut rates twice in October, is expected to cut again next month.

While these items are positive for Treasuries, traders are also positioning for $55 billion in new supply next week apart from the weekly bill offerings. This activity constitutes a negative influence on the market . . . .

Wednesday, November 5th, Market Update

2008-11-05T09:42:00.000-08:00

Wednesday: 11/05/08 10:30 AM EST :
Market Update

Weak economic data keeps mounting and today's news is putting pressure on stocks. Treasuries are generally higher but the approach of new supply coming next week is capping the upside for the market.

In the major news release of the day, the Institute for Supply Management (ISM) reported that its index of activity in the non-manufacturing (services) sector of the economy came in at 44.4 in October, down sharply from September's reading of 50.2. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.

The current services index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. October's reading is the lowest in the data series so far.
Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for October came in at 44.2, down from September's 52.1. It was the lowest reading since last January's 41.9 and the second lowest since October of 2001 when it came in at 40.5.

On Monday, the ISM released its index on the manufacturing sector for last month and it came in at 38.9, the weakest reading since September of 1982.

Additional bad news came in a minor report this morning. The employment services firm, Automatic Data Processing, said that according to its records, private (non-government) payrolls fell by 157,000 jobs last month. This was the largest decline in the report's history since November of 2002. September's originally reported decline of 8,000 was also revised to a larger decline of 26,000.

In comparison with the Labor Department's recent figures, the ADP numbers have been much more bullish. While the ADP data shows a 26,000 drop in September, the Labor Department said non-government payrolls fell by 168,000.

The employment report for October will be released on Friday morning. Recent predictions call for a decline in payrolls of about 200,000. If that estimate is accurate, it would be the largest decline since March of 2003. The unemployment rate is expected to have jumped from 6.1% to 6.3%, the highest rate since June of 2003.

Another minor report this morning brought more bad news regarding the status of home financing. The Mortgage Bankers Association of America reported that its index of mortgage application activity fell last week by 20.3% as average fixed mortgage rates increased. The refinance sector was hit the hardest with a decline in its index of 27.8%. The purchase index declined by 13.9%. Refinances accounted for 42.9% of application activity, down from 46.9% the week before.
While the indices have been swinging back and forth over the past several weeks, the underlying trend has been down. The latest indices of overall activity and purchase activity were the lowest since the last week of 2000. The refinance index was the sixth lowest since that time. Registrations for adjustable rate mortgages edged up to 2.5% of total application activity from 1.9% the week before.

The accumulation of bearish data is currently giving stock traders a reason to take back some of yesterday's profits. A retreat was not unexpected considering the approach of the monthly employment report.

Treasuries also rallied yesterday and the gains could prompt some profit-taking. At present, however, the market is getting some support from a shift out of stocks. But upcoming supply does present some resistance. The Treasury announced this morning that next week's refunding auctions will consist of a $25 billion offering of 3-Year Notes on Monday, a $20 billion offering of 10-Year Notes on Wednesday, and a $10 billion offering of 30-Year Bonds on Thursday
Tuesday, 11/04/08 : Stocks caught a bid yesterday and Treasuries were penned in for much of the day by the situation. But stocks fell back in afternoon action and this spurred a rally in bonds that sent them out with hefty gains. Stocks then regained their footing and rose again in the last hour of trading, leaving the indices near their highest levels of the day.

In late trading, the 10-Year Treasury Note was up by 1-17/32, lowering its yield by 19 basis points to 3.72%; the Dow was up by 305.45 points to 9,625.28; and the Nasdaq was up by 53.79 points to 1,780.12.

Yesterday's economic data was certainly not a catalyst for the stock rally. The level of new factory orders fell more than expected in September and the key sub-categories also exhibited weakness.
A jump in oil futures was also largely a negative influence on stocks. With a cut in oil production by the Organization of Petroleum Exporting Countries taking effect this month, futures prices jumped by the largest amount since late September. The price of a barrel of light, sweet crude for December delivery rose by $6.62 on the New York Mercantile Exchange to settle at $70.53.
However, though higher energy prices are detrimental to stocks in general (they divert money from other purchases), they are a plus for energy-related stocks. And traders were still picking up bargains following a steep fall-off over the last two months.

Though stocks took a breather on Monday, they had been on the rise in the last week. In the last six sessions, the Dow gained 1,449.51 points or 17.73%. In Tuesday's action, the Dow gained 3.28%; the Nasdaq, 3.12%; and the S&P 500, 4.08%. The Dow and S&P 500 closed at their highest levels since October 6 and the Nasdaq at its highest level since October 13.

The yield of the benchmark 10-Year Note closed at its lowest level of the last six sessions (yield moves inversely to price) . . . .

Tuesday, November 4th, 2008 Market Update

2008-11-05T06:54:00.000-08:00

Tuesday: 11/04/08 5:00 PM EST :
Market Update

Stocks caught a bid today and Treasuries were penned in for much of the day by the situation. But stocks fell back in afternoon action and this spurred a rally in bonds that sent them out with hefty gains. Stocks then regained their footing and rose again in the last hour of trading, leaving the indices near their highest levels of the day. In late trading, the 10-Year Treasury Note was up by 1-17/32, lowering its yield by 19 basis points to 3.72%; the Dow was up by 305.45 points to 9,625.28; and the Nasdaq was up by 53.79 points to 1,780.12.

Today's economic data was certainly not a catalyst for the stock rally. The level of new factory orders fell more than expected in September and the key sub-categories also exhibited weakness. A jump in oil futures was also largely a negative influence on stocks. With a cut in oil production by the Organization of Petroleum Exporting Countries taking effect this month, futures prices jumped by the largest amount since late September. The price of a barrel of light, sweet crude for December delivery rose by $6.62 on the New York Mercantile Exchange to settle at $70.53. However, though higher energy prices are detrimental to stocks in general (they divert money from other purchases), they are a plus for energy-related stocks. And traders were still picking up bargains following a steep fall-off over the last two months.

Though stocks took a breather yesterday, they have been on the rise in the last week. In the last six sessions, the Dow had gained 1,449.51 points or 17.73%. In today's action, the Dow gained 3.28%; the Nasdaq, 3.12%; and the S&P 500, 4.08%. The Dow and S&P 500 closed today at their highest levels since October 6 and the Nasdaq at its highest level since October 13. The yield of the benchmark 10-Year Note closed today at its lowest level of the last six sessions (yield moves inversely to price). But today's price gains were on light trading volumes so they may be vulnerable to profit-taking tomorrow.

The major economic release tomorrow is the index on the non-manufacturing or services sector of the economy from the purchasing managers survey conducted by the Institute for Supply Management (ISM). The current services index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. In September, the index came in at 50.2, down from August's 50.6. Any reading over 50.0 indicates a general expansion for the month.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for September came in at 52.1, up from August's 51.6 and the highest reading since May.

Nonetheless, the highest NMI reading this year so far has only been 52.0 and the average has been 49.5. This suggests that the sector is basically idling. The latest consensus forecast for October's index is a reading of about 47.0. This would be the weakest reading in nine months. Rounding out the economic picture: yesterday's index on the manufacturing sector indicated that activity there contracted sharply last month.

10:30 AM EST :
Tuesday Morning Market Update:

Despite more bad economic news, stocks are rallying this morning following on the heels of strong gains in overseas markets. Treasuries are feeling the pressure from the flow toward equities; however, prices in the bond market are currently hugging unchanged levels.

In today's only major economic release, the Commerce Department reported that the seasonally adjusted level of new factory orders fell in September by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.

A smaller decline had been anticipated because of a stronger than expected report on durable goods orders that was released last week. It said the order level rose by 0.8% and today's report revised that up to 0.9%. But today's report revealed a 5.5% drop in nondurable goods orders, the largest decline in two years.

All of the key sub-categories also saw sizeable declines in September. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August.

September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.
Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December. Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

The demand on the manufacturing sector is weak and the effect was evident in yesterday's ISM Index. Tight credit conditions and contracting demand from businesses and consumers are seen as the main reasons for the decline.

But with extraordinary rescue measures enacted by the Federal Reserve and Treasury, stock traders are hopeful that increased confidence and looser credit conditions will spur the economy. It should be noted, though, that upcoming economic news is likely to continue to paint a bleak picture that will test stocks and prompt some safety shifts into bonds. The markets have been extremely volatile in the last two months and will probably remain so for awhile . . . .

Tuesday, November 4th, 2008 Market Update

2008-11-05T06:52:00.000-08:00

Tuesday: 11/04/08 5:00 PM EST :
Market Update

Stocks caught a bid today and Treasuries were penned in for much of the day by the situation. But stocks fell back in afternoon action and this spurred a rally in bonds that sent them out with hefty gains. Stocks then regained their footing and rose again in the last hour of trading, leaving the indices near their highest levels of the day.

In late trading, the 10-Year Treasury Note was up by 1-17/32, lowering its yield by 19 basis points to 3.72%; the Dow was up by 305.45 points to 9,625.28; and the Nasdaq was up by 53.79 points to 1,780.12.

Today's economic data was certainly not a catalyst for the stock rally. The level of new factory orders fell more than expected in September and the key sub-categories also exhibited weakness.
A jump in oil futures was also largely a negative influence on stocks. With a cut in oil production by the Organization of Petroleum Exporting Countries taking effect this month, futures prices jumped by the largest amount since late September. The price of a barrel of light, sweet crude for December delivery rose by $6.62 on the New York Mercantile Exchange to settle at $70.53.
However, though higher energy prices are detrimental to stocks in general (they divert money from other purchases), they are a plus for energy-related stocks. And traders were still picking up bargains following a steep fall-off over the last two months.

Though stocks took a breather yesterday, they have been on the rise in the last week. In the last six sessions, the Dow had gained 1,449.51 points or 17.73%. In today's action, the Dow gained 3.28%; the Nasdaq, 3.12%; and the S&P 500, 4.08%. The Dow and S&P 500 closed today at their highest levels since October 6 and the Nasdaq at its highest level since October 13.
The yield of the benchmark 10-Year Note closed today at its lowest level of the last six sessions (yield moves inversely to price). But today's price gains were on light trading volumes so they may be vulnerable to profit-taking tomorrow.

The major economic release tomorrow is the index on the non-manufacturing or services sector of the economy from the purchasing managers survey conducted by the Institute for Supply Management (ISM). The current services index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. In September, the index came in at 50.2, down from August's 50.6. Any reading over 50.0 indicates a general expansion for the month.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for September came in at 52.1, up from August's 51.6 and the highest reading since May.

Nonetheless, the highest NMI reading this year so far has only been 52.0 and the average has been 49.5. This suggests that the sector is basically idling. The latest consensus forecast for October's index is a reading of about 47.0. This would be the weakest reading in nine months. Rounding out the economic picture: yesterday's index on the manufacturing sector indicated that activity there contracted sharply last month.

10:30 AM EST :
Tuesday Morning Market Update:

Despite more bad economic news, stocks are rallying this morning following on the heels of strong gains in overseas markets. Treasuries are feeling the pressure from the flow toward equities; however, prices in the bond market are currently hugging unchanged levels.

In today's only major economic release, the Commerce Department reported that the seasonally adjusted level of new factory orders fell in September by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.

A smaller decline had been anticipated because of a stronger than expected report on durable goods orders that was released last week. It said the order level rose by 0.8% and today's report revised that up to 0.9%. But today's report revealed a 5.5% drop in nondurable goods orders, the largest decline in two years.

All of the key sub-categories also saw sizeable declines in September. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August.

September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.

Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December.
Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

The demand on the manufacturing sector is weak and the effect was evident in yesterday's ISM Index. Tight credit conditions and contracting demand from businesses and consumers are seen as the main reasons for the decline.

But with extraordinary rescue measures enacted by the Federal Reserve and Treasury, stock traders are hopeful that increased confidence and looser credit conditions will spur the economy. It should be noted, though, that upcoming economic news is likely to continue to paint a bleak picture that will test stocks and prompt some safety shifts into bonds. The markets have been extremely volatile in the last two months and will probably remain so for awhile . . . .

Friday, October 31st Market Update

2008-10-31T09:27:00.000-07:00

Friday: 10/31/08 10:30 AM EDT :
Weak economic data and some profit-taking are weighing against stocks this morning, but the indices are resisting the pressure and are currently narrowly mixed. Treasuries are sharply higher as traders pick up what they feel are bargains following three days of losses.

In today's economic news, the Labor Department reported that personal income, the fuel for consumer spending, rose in September by 0.2%. Though this was slightly stronger than the 0.1% increase that analysts had predicted, August's originally reported increase of 0.5% was revised to 0.4% and July's previously reported decline of 0.6% was revised to a drop of 0.8%.
The data series was jolted last May by the government rebate checks distributed under the economic stimulus package. This caused average income to jump by 1.9%, the largest increase since September of 2005 when the data was skewed by the impact of Hurricanes Katrina and Rita.
Since May, income gains have been meager and July's decline was the largest since August of 2005.

A more bearish aspect of today's report was a 0.3% decline in personal consumption expenditures (consumer spending). Forecasters had predicted a flat reading (0.0%). August's consumption level was unchanged and July's level was revised in today's report from a 0.1% increase to unchanged.
Also out this morning was the Employment Cost Index (ECI). The index is a more comprehensive gauge of labor costs than the wage data contained in the monthly employment reports because it also incorporates salaries and employer costs for non-cash employee benefits.

The news showed tame inflation pressure but the figures were not unexpected. The Commerce Department said the index rose by 0.7% in the third quarter. This matched the growth rates in the first and second quarters and it matched analyst predictions. The readings have been the lowest since the first quarter of 2006. The index of wages and salaries rose by 0.7% and the index of benefit costs rose by 0.6%.

On a year-over-year basis, the ECI was up by 2.9% -- also the lowest increase since the first quarter of 2006.

One of today's news releases dealt with the manufacturing sector and it was much more bearish than anticipated. The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management) released its Purchasing Managers Index (PMI) this morning. The index is a measure of manufacturing activity in the highly-industrialized region and it came in at 37.8 this month. Any reading below 50.0 generally reflects a decrease in activity relative to the preceding month.

Not only was October's reading down from September's 56.7, it was the lowest reading since May of 2001. Forecasters had predicted a reading of about 51.5. The index suggests that Monday's ISM index will also show a hefty contraction of activity at the national level.

The final economic release of the day was the final read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. The indicator was bearish but it offered no surprise. The overall index came in at 57.6, up slightly from the preliminary reading of 57.5. Despite the fact that there was little change between the preliminary and final index figures, the reading was down sharply from September's 70.3. In fact, the extent of the decline was the largest in the history of the data series going back to 1978.

The index bolsters the huge decline in the Conference Board's Consumer Confidence Index for the month to its lowest reading in the history of the data series going back 41 years

Why Interest Rates Remain High

2008-10-30T10:36:00.000-07:00

Special Update:

The activity in MBS markets - and other financial markets - has been very unusual this month. The Fannie Mae Required Net Yield has already made two round trips from about 5.70% to 6.60% over the past few weeks, displaying a level of volatility rarely seen. Under normal market conditions, the vast majority of the significant rate movements are the result of fresh economic news. This month, however, it has been common to see large rate movements unconnected to any news announcements, for reasons discussed below.

One reason is that the credit crisis has forced many investment funds and financial institutions to reduce their leverage and raise capital. In many cases, these big holders of MBS are selling assets across their portfolios.

This explains why MBS, stock, oil, and other markets have frequently all been falling on the same days. The fundamental economic data clearly supports lower mortgage rates. Global economies are slowing, oil prices are down, and expectations for future inflation are moving lower. As long as these investment funds are forced to sell assets, however, there will continue to be upward pressure on mortgage rates. How long it will last is one of the biggest questions facing investors today.

A second factor is that many investors are seeking to reduce the level of risk in their portfolios. They are buying Treasuries, mostly shorter-term, which are considered the safest and most liquid investment. These investors are generally not turning to MBS, and MBS prices have performed worse than Treasuries this month, meaning that the spread between mortgage rates and Treasury rates grew wider. Agency MBS might appear to be a safe alternative to Treasuries. Investors seem to be fairly comfortable with the guarantee that the US government backs Fannie Mae and Freddie Mac MBS, as they are now trading very close in price to Ginnie Mae MBS. One fundamental concern remains, however. The question is not whether investors will get their money back, but rather when they will get it back. MBS yield more than comparable Treasuries because MBS have prepayment risk and Treasuries do not. The recent volatility and uncertainty in financial markets makes it more difficult to evaluate the prepayment risk, so investors are demanding higher yields.

Thursday, October 30th, 2008 Market Update

2008-10-30T09:14:00.000-07:00

Thursday: 10/30/08 10:30 AM EDT:
Market Update on Interest Rates

The economic data released today was not as bad as feared. This and the bullish implications of yesterday's Fed rate cut have spurred a rally in the stock market this morning. The rise has diminished the allure of Treasuries and they are currently sharply lower. Positioning for more supply is also weighing against bonds.

It should be noted, however, that the markets have been highly volatile in the past several weeks and additional, abrupt price swings would not be too surprising.

In today's major economic release, the Commerce Department reported that, according to its initial calculations, gross domestic product (GDP) declined at a 0.3% annualized rate in the third quarter. This was the first decline since the fourth quarter of last year and the largest decline since the third quarter of 2001. GDP grew by 2.8% in the second quarter.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. Today's report was based on incomplete data and a revised, preliminary report will be released next month. A final report will be released in December.

Today's report indicated that consumer spending declined by 3.1% last quarter, the steepest contraction since the second quarter of 1980. The category represented a 2.25% subtraction from the GDP calculation.

A negative inflation indicator in the report was a 4.2% increase in the price index. This was the largest rise since the first quarter of 1991. The price index for core personal consumption expenditures (consumer spending minus food and energy) rose by 2.8% in the third quarter, the biggest increase since the second quarter of 2006.

But not all of the news was bad. Most analysts were actually anticipating a decline in GDP of between 0.5% and 1.0%. Net exports were a strong point, adding 1.13% to the GDP calculation. A somewhat more equivocally positive contribution came from a 5.8% expansion in government spending. This was the largest increase since the fourth quarter of 2001 and it represented a 1.15% addition to the GDP calculation.

In the other news release of the day, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits was unchanged last week at 479,000. The lull comes following large swings that saw the level increase by 16,000 in the week ending October 18 following two weeks of declines totaling 36,000 following three weeks of increases totaling 54,000. The four-week moving average, which smoothes out some of the short-term volatility, declined by 5,000 to 475,500.

The claims level remains elevated. Any reading over 400,000 suggests that layoffs are outpacing hiring. Despite the tame readings in the last two weeks, the trend has been up. For the first forty-three weeks of the year so far, the average claims reading has been 395,814. For the same period last year, the average was 317,512.

The report said that continuing claims fell by 12,000 to 3.715 million in the week ending October 18 (continuing claims must be at least a week old). The decline was the first in six weeks. The four-week average rose by 28,000 to 3,709,500, the highest reading since May of 2003. For the first forty-two weeks of the year so far, the average continuing claims reading has been 3,134,167. For the same period last year, the average was 2,529,476.

More supply comes to market today as the Treasury will be conducting its monthly auction of 5-Year Notes. Last month's issue met with modest demand but, once again, the offer amount was exceptionally high. The face value was $24 billion, the highest since February of 2003. Bids exceeded the offer amount by 1.91 to 1, the lowest bid-to-cover ratio in four months. The average for the twelve auctions preceding September's was 2.26.

Noncompetitive bids, a gauge of individual investor demand, totaled about $105 million. Though this was above the twelve-auction average of $93 million, it was down from August's $124 million and as a percentage of the offer amount was the smallest of the last five auctions.
Foreign demand was so-so. Indirect competitive bids received 26.6% of the issue, down from August's award portion of 29.6% but in line with the twelve-auction average of 26.7%.
Today's offering also has a face value of $24 billion.

Wednesday, October 29th, Market Update

2008-10-30T06:07:00.000-07:00

Wednesday: 10/29/08 5:00 PM EDT :
Market Update:

The latest Federal Reserve rate cut initially gave a boost to Treasuries and sent stocks into negative territory. But stocks rebounded and looked as if they were going to post more strong gains following yesterday's impressive rally. This took the wind out of the bond market's sails -- at least at the long end of the maturity spectrum -- and prices wound up mixed. Bond trading closed before traders could react to a late-session fall in stocks that also resulted in a mixed finish. In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield by 2 basis points to 3.85%; the Dow was down by 74.16 points to 8,990.96; and the Nasdaq was up by 7.74 points to 1,657.21.

Both markets were generally subdued prior to the Fed announcement. The economic news of the day was not a market-mover in any case. The level of durable goods reportedly rose last month. While observers had anticipated a decline, August's drop was revised to the largest in twenty-two months. In addition, key subcategories (ex-transportation, ex-defense, and ex-defense capital goods minus aircraft) showed a second consecutive month of contractions.

At about 2:15 PM Eastern Time, the Fed released its policy statement. As predicted, the FOMC voted to cut its target for the fed funds rate by 0.5% from 1.50% to 1.00%. The last time the rate was as low was between June of 2003 and June of 2004.

The committee also cut the discount rate by 0.50% from 1.75% to 1.25%. The statement acknowledged the economic slowdown and turmoil in the financial markets. Though the Fed has done much to address the problems, it admitted that there are still downside risks to the economy, thus leaving the door open for more rate cuts if necessary.(FOMC STATEMENT)

Although the action was well-anticipated, a sizeable market response was not too surprising since some bond traders may have unwound defensive positions taken prior to the announcement and some stock traders who bought on the expectation may have felt it wise to sell on the news. But a rate cut also helps stocks by lowering borrowing costs for businesses and consumers. Stocks quickly recovered their footing and moved sharply higher.

During the afternoon rally, the Dow was up by as much as 296.92 points or 3.28%. But the late-session plunge left it with a loss for the day of 0.82%. The S&P 500 had been up by 3.10% but finished down by 1.11%. The Nasdaq was able to finish with a gain of 0.47% but it had been up by as much as 3.40%.

A contributing factor to the sharp drop at the end of the day was the release of negative earnings guidance from General Electric. Its stock fell from a better than 2.5% gain to a loss of 1.49% in fifteen minutes.

Another factor may have been a rise in oil prices. Though increases benefit the energy sector of the stock market, they also increase production and transportation costs. The Energy Information Administration reported today that inventories of crude oil edged up last week by 493,000 barrels (one barrel equals forty-two gallons). The increase was a fifth consecutive expansion but the smallest of them. Yet, the latest level (311,873,000 barrels) was the highest since mid-May and supplies were 1.2% above where they stood a year earlier -- the highest Y/Y margin since August of last year.

The report also said that inventories of distillates, which include diesel and heating fuel, rose by 2.3 million barrels. Supplies were still 5.8% below year-ago levels, though this was the best Y/Y margin in six weeks.

Of particular concern was a 1.5 million barrel decline in gasoline inventories following four weeks of increases. The inventory level was 2.0% below where it was a year earlier. By the end of futures trading, the price of a barrel of light, sweet crude oil for December delivery had risen by $4.77 on the New York Mercantile Exchange to settle at $67.50. The jump was the largest since September 22.

Tomorrow brings the jobless claims report and another glimpse of the employment situation. In last Thursday's report, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose the week before by 15,000 to 478,000. The report revised the previous week's figure of 461,000 up by 2,000 to 463,000 and for the week ending October 4, the previously reported figure of 477,000 was revised up 4,000 to 481,000. The latest reading was the fourth highest since March of 2002.

But the latest increase followed two weeks of declines totaling 36,000 which followed three weeks of increases totaling 54,000. The four-week moving average, which smoothes out some short-term volatility, declined by 4,500 to 480,250, but this was still the third highest reading since October of 2001.

For the first forty-two weeks of the year, the average weekly claims reading has been 393,810. For the same period last year, the average was 317,167.

The report said that continuing claims declined by 4,500 to 3.720 million in the week ending October 11 (continuing claims must be at least a week old). This was the second highest reading since June of 2003. The four-week average rose by 44,250 to 3.680 million, the highest reading since July of 2003. For the first forty-one weeks of the year, the average continuing claims reading was 3,119,854. For the same period last year, the average was 2,527,804.

Also out tomorrow morning is the advance report on gross domestic product (GDP) for last quarter (Q3: July - September). GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

According to the final report for the second quarter, GDP grew at a 2.8% rate, a downward revision to the preliminary report of 3.3%, but up from the advance report of 1.9%. It was still the strongest reading in three quarters.

But recent economic data suggests that GDP fell last quarter and forecasters are predicting a reading between -0.5% and -1.0%. Some optimists are calling for a flat reading (0.0%). More supply comes to market tomorrow as the Treasury will be conducting its monthly auction of 5-Year Notes. Last month's issue met with modest demand but, once again, the offer amount was exceptionally high. The face value was $24 billion, the highest since February of 2003. Bids exceeded the offer amount by 1.91 to 1, the lowest bid-to-cover ratio in four months. The average for the twelve auctions preceding September's was 2.26.

Noncompetitive bids, a gauge of individual investor demand, totaled about $105 million. Though this was above the twelve-auction average of $93 million, it was down from August's $124 million and as a percentage of the offer amount was the smallest of the last five auctions.

Foreign demand was so-so. Indirect competitive bids received 26.6% of the issue, down from August's award portion of 29.6% but in line with the twelve-auction average of 26.7%. Tomorrow's offering also has a face value of $24 billion.

Wednesday Morning Update10:30 AM EDT:
The financial markets are in a holding pattern as traders await the outcome of the Fed's monetary policy meeting. The stock indices are down in early trading but losses are slight so far -- a possible sign of strength given the likelihood of some profit-taking following yesterday's strong rally.

Treasuries are currently narrowly mixed with the long end of the market down from earlier highs.
The major economic release of the day was more bullish than anticipated but it contained some bearish details. The Commerce Department reported that the seasonally adjusted level of durable goods orders rose last month by 0.8%.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

September's advance was a stronger than the 1.0% decline that analysts had predicted. But August's previously reported decline of 4.8% was revised to a deeper contraction of 5.5%, making it the biggest decline since October of 2006. A major contributor to last month's improvement was a 6.3% jump in transportation orders, the largest increase since last February. Orders for commercial aircraft rose by 29.7%, the largest increase in a year. Orders for motor vehicles also saw a 3.0% increase following an 8.8% decline in August.

But excluding the large but volatile transportation category, orders fell in September by 1.1% following a 4.1% decline in August. August's drop was the largest since January of 2002. Another closely watched category is orders outside of the defense sector since defense orders are not governed by standard market forces. Ex-defense orders declined by 0.6% following a 6.0% drop in August. Defense orders rose by 22.8% in September.

The category of ex-defense capital goods minus commercial aircraft is another key category as it is seen as a gauge of core business demand. The order level fell last month by 1.4% following a 2.2% decline in August.

In industry news this morning, the Mortgage Bankers Association of America said that its mortgage application index rose last week by 16.8%. This followed a decline the week before of 16.6%. The purchase index rose by 8.5% following a decline of 10.9% and the refinance index jumped by 28.5% following a plunge of 23.5%. Refinances accounted for 46.9% of all application activity last week, up from 42.6% the week before. Applications for adjustable rate mortgages represented just 1.9% of applications, down from 2.7% a week earlier.

Of course, the major event of the day is the conclusion of the Fed's two-day, monetary-policy meeting. On the eighth of this month, the policy committee cut its target for the overnight borrowing rate between banks (fed funds rate) by 0.50%. It also made a same-sized cut to the rate charged to banks for loans directly from the Fed (the discount rate). Since August of last year, the discount rate has been cut ten times for a total of 4.00% from 6.50% to 1.75%. Since September of last year, the fed funds target has been cut eight times for a total of 3.75% from 5.25% to 1.50%. In addition, the Fed has also instituted numerous new programs designed to keep credit flows moving.

Despite all of these measures, most observers believe that the committee will vote to cut rates once again by 0.50%. If the prediction is true, it would likely move the markets since traders are likely calculating an uncertainty factor into their pre-statement positioning. But any different outcome from the meeting would have an even greater impact on the markets.

The policy statement will be released at around 2:15 PM Eastern Time. The results will be posted here when they become available . . . .

October 2008 S&P/Case-Shiller Home Price Indices

2008-10-29T06:53:00.000-07:00

National Trend of Home Price Declines Continues into the Second Half of 2008

According to the S&P/Case-Shiller Home Price Indices
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_102831.pdf

New York, October 28, 2008 – Data through August 2008, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, shows continued broad based declines in the prices of existing single family homes across the United States, a trend that prevailed throughout the first half of 2008 and has continued into the second half.

The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Once again, the indices have set new records, with annual declines of 17.7% and 16.6%, respectively. However, the acceleration in decline was only moderate in August. The July data reported annual declines of 17.5% and 16.3%, respectively.

“The downturn in residential real estate prices continued, with very few bright spots in the data,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “The 10-City Composite and the 20-City Composite reported record 12-month declines. Furthermore, for the fifth (5th) straight month, every region reported negative annual returns. This started when Charlotte, NC, was the last region to turn negative back in April 2008. Both the 10-City and 20-City Composites have been in year-over-year decline for 20 consecutive months. Of the 20 regions, 13 of them had their annual returns worsen from last month’s report. As seen throughout 2008, the Sun Belt markets are being hit the most. Phoenix and Las Vegas are both reporting annual declines in excess of 30%, and Miami, San Francisco, Los Angeles and San Diego are all in excess of 25%.”
Nine of the 20 regions have record annual declines. Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets- Los Angeles, San Francisco, and San Diego- are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.

For the August/July period only 2 regions, Cleveland and Boston, had positive returns. Cleveland returned +1.1% and Boston returned +0.1%. Boston has had positive monthly returns for each of the past five months. Dallas and Denver’s streaks of 4+ straight positive returning months ended in August. San Francisco was the biggest decliner for the month returning -3.5%. This worsened from its July/June return of -1.8%. From August 2007 to August 2008, Dallas and Charlotte have the best relative performance. Dallas is down 2.7% over the year and Charlotte is down 2.8%.

The table below summarizes the results for August 2008. The S&P/Case-Shiller Home Price Indices are revised for the 24 prior months, based on the receipt of additional source data. More than 20 years of history for these data series is available, and can be accessed in full by going to www.homeprice.standardandpoors.com

The S&P/Case-Shiller Home Price Indices are published on the last Tuesday of each month at 9:00 am ET. They are constructed to accurately track the price path of typical single-family homes located in each metropolitan area provided. Each index combines matched price pairs for thousands of individual houses from the available universe of arms-length sales data. The S&P/Case-Shiller National U.S. Home Price Index tracks the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly. The S&P/Case-Shiller Composite of 10 Home Price Index is a value-weighted average of the 10 original metro area indices. The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices. The indices have a base value of 100 in January 2000; thus, for example, a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the subject market.

These indices are generated and published under agreements between Standard & Poor’s and Fiserv, Inc.
The S&P/Case-Shiller Home Price Indices are produced by Fiserv, Inc. In addition to the S&P/Case-Shiller Home Price Indices, Fiserv also offers home price index sets covering thousands of zip codes, counties, metro areas, and state markets. The indices, published by Standard & Poor's, represent just a small subset of the broader data available through Fiserv.

About Standard & Poor’s Index Services
Standard & Poor's Index Services, the world’s leading index provider, maintains a wide variety of investable and benchmark indices to meet an array of investor needs. Its family of indices includes the S&P 500, an index with $1.5 trillion invested and $4.85 trillion benchmarked, and the S&P Global 1200, a composite index comprised of seven regional and country headline indices. For more information, please visit www.standardandpoors.com/indices.

About Standard & Poor’s
Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With approximately 8,500 employees, including wholly owned affiliates, located in 23 countries and markets. Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com.

For more information contact: David Blitzer
Chairman of the Index Committee
Standard & Poor’s
212 438 3907
david_blitzer@standardandpoors.com

David Guarino
Communications
Standard & Poor’s
212 438 1471
dave_guarino@standardandpoors.com

Tuesday, October 28th Afternoon Market Update

2008-10-29T06:28:00.000-07:00

Tuesday: 10/28/08 5:00 PM EDT :
A technical bounce in stocks turned into a major rally today as the ascent forced out short positions, thereby adding more upward momentum. The gains came despite more bad economic news. Treasuries suffered from the rise in stocks and bonds finished down steeply.

In late trading, the 10-Year Treasury Note was down by 1-06/32, raising its yield by 14 basis points to 3.83%; the Dow was up by 889.35 points to 9,065.12; and the Nasdaq was up by 143.57 points to 1,649.47.

Following deep losses that left the indices at their lowest levels in over five years at yesterday's close, stocks rebounded this morning as traders picked up what they felt were bargains. Similar activity in foreign markets overnight encouraged this morning's buying. Signs of improvements in short-term borrowing conditions and expectations of a Fed rate cut tomorrow also helped spur the market.

The economic news of the day was not a decisive factor in today's market action. The Consumer Confidence Index hit an all-time low this month and the S&P / Case-Shiller indices (10-city and 20-city) of home prices showed record year-over-year declines in August.

The news caused stocks to momentarily retreat toward unchanged levels but the bargain hunting pushed them forward once again. As already noted, short-covering added fuel to the rally which picked up steam in the last two hours of trading. Stocks had a bigger rally on the 13th, but today's was the second largest. By the end of the session, the Dow had gained 10.88%; the S&P 500, 10.79%; and the Nasdaq, 9.53%.

Oil futures continued to slide today with a barrel of light, sweet crude for December delivery falling by $0.49 on the New York Mercantile Exchange to settle at $62.73. This was the lowest closing price for a front-month contract in almost a year-and-a-half.

The drop in price since a record closing high of $145.29 in early July is not good for the energy sector of the stock market and the reason for the decline -- reduced demand projections -- constitutes a bearish economic indicator. But lower energy prices also mean that businesses and consumers will have more money to spend on other things and that is a plus for the general economy.

With regard to the Treasury market, today's 2-Year Note auction was well-received. Bids exceeded the $34 billion offer amount by 2.49 to 1, the highest bid-to-cover ratio in the last four offerings and above the 2.35 average for the twelve auctions preceding today's.

Noncompetitive bids, a gauge of individual investor demand, were relatively soft, however. They totaled $539 million, the lowest amount in the last eight auctions. The twelve month average was $637 million.

But foreign demand for today's issue was strong. Indirect competitive bids, which include those from foreign central banks, garnered 41.3% of the issue, the highest award portion in the last twenty auctions. The twelve-month average was only 25.8%.

However, bond traders are not only looking at another Treasury auction on Thursday, but new 10-Year and 30-Year issues will be sold in two weeks. With the bailout bill and other debts mounting, the Treasury will be increasing its issuance in the future and those securities will compete with those already in the market.

Tomorrow morning, the report on durable goods orders for last month will be released. In August's report, the Commerce Department said the seasonally adjusted level of orders fell in August by 4.5% and this was subsequently revised in the factory orders report to a decline of 4.8%. This was the largest contraction since January of 2007.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

Another decline of about 1.0% is anticipated for September. Several key categories will also be closely scrutinized. Order levels excluding the volatile category of transportation will be reviewed as will the level outside the defense sector (not governed by standard market forces). A third key sub-category is orders excluding defense and excluding commercial aircraft orders. The category is seen as a gauge of core business demand. It fell in August by 2.4%, the largest decline in nineteen months.

The major event tomorrow will be the conclusion of the Fed's two-day, monetary-policy meeting. On the eighth of this month, the policy committee cut its target for the overnight borrowing rate between banks (fed funds rate) by 0.50%. It also made a same-sized cut to the rate charged to banks for loans directly from the Fed (the discount rate). Since August of last year, the discount rate has been cut ten times for a total of 4.00% from 6.50% to 1.75%. Since September of last year, the fed funds target has been cut eight times for a total of 3.75% from 5.25% to 1.50%. In addition, the Fed has also instituted numerous new programs designed to keep credit flows moving.

Despite all of these measures, most observers believe that the committee will vote to cut rates once again by 0.50%. If the prediction is true, it would likely move the markets since traders are likely calculating an uncertainty factor into their pre-statement positioning. But any different outcome from the meeting would have an even greater impact on the markets.

Friday, October 24th Market Update

2008-10-24T09:42:00.001-07:00

Friday: 10/24/08 10:30 AM EDT :
Stocks opened down sharply, following the lead of overseas markets as pessimism over global economic conditions deepens. The retreat from risk benefiting Treasuries and yields are lower across the maturity spectrum, though a round of profit-taking has trimmed earlier price gains.

Bearish sentiments are also being reflected in the commodities market and oil futures are steeply lower despite a production cut announced by the Organization of Petroleum Exporting Countries (OPEC).

Asian stock markets closed sharply lower. The Japanese Nikkei index finished down by 9.60% and Hong Kong's Hang Seng index closed with an 8.30% loss. European markets are currently down as well. In recent trading, the British FTSE index was off by 6.74%, the German DAX by 7.68%, and the French CAC-40 by 6.16%. All three had been even lower earlier.

Helping to stir up the current wave of economic anxiety was negative earnings guidance from Sony, Toyota, and Daimler, and news that Britain's economy shrank by a larger than expected 0.5% in the third quarter.

But the domestic economic release of the day was actually much more bullish than expected. The National Association of Realtors reported that the seasonally adjusted, annualized rate of existing home sales rose by 5.5% last month to 5.18 million from August's rate of 4.91 million. The increase was the largest since February of 2006 and the pace was the highest since August of last year.
The bulk of the increase came in the West where the rate rose by 16.8% in September, the largest increase in the region since January of 2002. The Midwest saw an increase of 4.4% and the rate rose by 2.2% in the South. Only the Northeast saw a contraction with a decline of 1.2%.
Inventories of homes on the market (adjusted, annualized) fell by 1.6% to 4.266 million. At the prevailing sales pace, this represented 9.9 months of sales, the lowest turnover time since February.

Though more home buying activity is a plus for the economy, it also reflects the weakened state of the housing market since the pickup in pickup in buying interest was prompted by a sharp decline in home prices. The average price fell by $10,700 in September or 4.4% to its lowest level since April of 2004.

The median price was down by $11,500 or 5.7% to its lowest level since February of 2005. On a year-over-year basis, the average home price was down by $22,600 or 8.8% and the median price was down by $18,900 or 9.0%.

The declining prices are due to lack of demand and from the increase in inventories earlier this year. The lower home values decrease personal wealth, further dispiriting consumers who are also watching their stock investments plummet.

Stocks are also feeling pressure in the financial sector. Insurance giant, American International Group (AIG) said that it has now borrowed more money from the government than the total in the original bailout package. And bank consolidation continues as PNC Financial Services Group intends to buy National City Corp.

In other news, OPEC announced in Vienna today that it was cutting its production limit beginning in November by 1.5 million barrels per day in an effort to support crude prices. Prices have fallen by over 50.0% since they peaked in early July. But despite the news, in recent trading, the price of a barrel of crude oil was down by $3.47 at $64.37. It had been down by over $4.00 earlier, however.

Multiline Mortgage

2008-10-22T10:01:00.000-07:00

Multiline Mortgage First Blog

Welcome to Multiline Mortgage's first blog. Please check come back to the blog each day to get the latest market news and updates.

Wednesday, 10/22/08 :

Stocks fell sharply yesterday on fears that earnings for last quarter will fall short of expectations. Treasuries benefited from the exodus from equities and gains were posted across the maturity spectrum.

In late trading, the 10-Year Treasury Note was up by 1-06/32, lowering its yield by 15 basis points to 3.59%; the Dow was down by 514.45 points to 8,519.21; and the Nasdaq was down by 80.93 points to 1,615.75.

A rise in the value of the dollar versus foreign currencies, rising inventories, and declining demand pushed oil futures lower on Wednesday. The price of a barrel of light, sweet crude oil for December delivery fell by $5.43 to settle at $66.75 on the New York Mercantile Exchange. This was the lowest close for a front-month contract since June of last year.

Though low energy prices often provide support for stocks, the falling demand for oil suggests a bleak economic outlook. The per-barrel front-month futures price has fallen by $78.54 or 54.06% since its record high of $145.29 posted on July 3.

By the end of stock trading, the Dow had lost 5.69%; the S&P 500, 6.09%; and the Nasdaq, 4.77%. The pessimistic economic outlook, disappointment with several key earnings reports in the last couple of days, and some lowered projections from other companies weighed the market. In the last two days, the Dow has fallen by a total of 746.22 points or 8.06%, the Nasdaq lost 8.72%, and the S&P 500 lost 8.99%.

On the 10th of the month, the Dow closed lower but yesterday's close was the second lowest since May of 2003. The S&P 500's close was the lowest since April of 2003 and the Nasdaq's close was the lowest since June of 2003.

The bond market has also been volatile this month. The yield of the benchmark 10-Year Note fell in the first four sessions of October by 37 basis points (yield moves inversely to price). It then rose by 62 basis points in the next five sessions. With the exception of a 1 basis point gain last Thursday, the yield has fallen over the last six sessions for a net decline of 48 basis points. Yesterday's closing yield was the lowest in the last ten sessions . . . .