Tuesday, August 19, 2008

Anyone had enough of the Economic Ride we’re on?

As much as I would love to opine about the bottoming out of our economy and how now is the time to jump back into equity investing and home purchasing, I continue to shake my head in disbelief as I see a systematic dismantling of precious economic levels which have been supporting our economy over the past eight years. Above and beyond the obvious issues plaguing our economy (gas at $3.50+ a gallon, rising unemployment, inflation creeping to well over 1% a month, depressed or negatively convexed housing values) is the continued hammering and stress our financial markets are taking from overseas participants. Like it or not we live in a global economy. The US does not have the financial wherewithal to operate independently of the world. The economies of scale working with global partners allows our financial system to be much more efficient, in turn passes the savings on to us… the consumer. The stress I am eluding has been most publically seen in the Godfather and Godmother of our housing markets; Fannie Mae and Freddie Mac.
The Government Subsidized Entities (GSE), as Fannie and Freddie are known for rely heavily in foreign investment to keep the capital wheels well greased. With US government backing, foreign governments have traditionally purchased up to two-thirds of every multi-billion dollar note offering these two companies release of Mortgage Backed Securities (MBS). Last week? Central banks bought only 37 percent, down from 56 percent in May. Last week may be an anomaly, but considering the deficient our country presently has outstanding, and the unknown to what exactly the level of participation and to who’s detriment US government will bail these two behemoths is causing for quite stir. There are some who might argue against my next statement; but in my mind, there is no doubt that the US economy is a highly agile and fluid economy. Our capital markets and national diversified industries allow intellectual know-how to adapt very quickly to market pressures and demands both within the US and globally. That said, this economy will rebound with housing playing its’ part. Note: I did not say leading or significant part. However, should MBS bonds continue to trade poorly, Fannie and Freddie will be forced to raise rates to spur interest in their products. This will be like coming down with the flu while battling cancer….possibly deadly. As mentioned above, add an already increasing inflationary environment and we have a very, very painful period for everyone in every segment of the US economy. That includes Housing, Banking, Food, Energy, Technology, Consumer Spending, Finance, Public Services, and just about every supply or demand curve business.

Hand on kids… this ride isn’t nearly over yet.



This week’s economic releases

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis


Mon. Aug. 18
Tue. Aug. 19, 8:30 a.m. ET
July Housing Starts &
Building Permits
-9.9%
-13.8%
These numbers are distorted by changes in the New York City building code that pulled June starts and building permits sharply higher as builders scrambled to get projects underway before the code changes took effect on July 1st. Excluding the northeast multifamily figures, housing starts probably slipped 4.0% lower last month. It really doesn’t matter all that much, investors have already priced in lower starts and permits figures for July – so a number a little higher or lower than expected won’t likely mean much in terms of its impact on the direction of mortgage interest rates today.

Tue. Aug. 19, 8:30 a.m. ET
July Producer Price Index
Core rate
+0.6% vs. last +1.8%
+0.2% vs. last +0.2%
Ugh oh!!! 1.2% is NOT what the Dr. Ordered. At this juncture, even a hint of building non-energy related inflation pressure will likely be enough to induce mortgage investors to defensively nudge mortgage interest rates higher.. and well expect them to have a serious movement.. if you know what I mean.

Wed. Aug. 20,
Nothing Listed

Thurs. Aug. 21, 8:30 a.m. ET
Initial jobless claims for the week ended 8/16
Down 7,000
This report has been skewed for the past several weeks by the impact of a federal program that extends the benefit period for many claimants. One way or the other, the story is the same – the labor sector remains weak – a factor that investors have already priced into current rate sheets. This report will likely have little, if any impact on direction of mortgage interest rates today.

Thurs. Aug. 21, 10:00 a.m. ET
July Leading Indicators
-0.2% vs. last -0.1%
This index is a composite of 10 different statistics ranging from building permits to the Gross Domestic Product figures – and is designed to foretell economic activity levels six to nine months hence. Its accuracy factor is not particularly high but a negative reading today (indicating slower economic growth ahead) will tend to support steady to fractionally lower mortgage interest rates.

Fri. Aug. 22, 10:00 a.m. ET
Fed Chairman Bernanke speaks on financial stability at Kansas City Fed symposium. My initial thought was that Bernanke will likely hold to the “company” line – talking up the Fed’s commitment to inflation fighting while talking down the likelihood the Fed will find it necessary to take any action in that regard. With the latest inflation numbers released today, I anticipate a little more calming of the waters talk than what may have been originally expected. Depending on what is said this event will likely have little or a lot to do with the trend trajectory of mortgage interest rates.

Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction.