Early friday morning the BLS (Bureau of Labor Statistics) announced that the US had created 110,000 new jobs in September (100,000 was expected) but revised August to +89,000 from -4,000 and July to +93,000 from +68,000. They also quietly told us that job growth for the 12-month period ending March 2007 was revised down 297,000. The stock market roared to new highs as all news is good news in equity land but bonds fell hard with the 10-year rising 12 basis points to end the day at 4.64%. As usual there is a lot more to the story than just the headlines which confirm that the government has no idea of how to count those working during the preceding month. The BLS uses a birth/death model which is similar to the seasonal adjustment we see with most economic indicators but the monthly revisions are often greater than the initial estimates. The government should delay the release at least a month or stop counting and begin throwing darts as they would find more success. People invest billions of dollars based on a number that always changes as time goes on and many times in a different direction. The birth/death model has accounted for over 68% of all job growth in the past year.
Analyzing the report, it is very curious that temporary help payrolls fell 20,000 in September and a total of 74,000 over the past 12 months. If the economy was booming and firms hiring wouldn't they be hiring temps before taking on permanent workers? One of the other important parts of the jobs report is the diffusion index. This is the percentage of industries showing job growth and in a strong growing economy will frequently be above 60%. Todays report saw a 2007 low of 52.5% which means that 47.5% of industries saw no job growth last month. Finally the unemployment report rose to 4.70% a high for 2007. The low was 4.40% in March of this year and this is one the most important reference tools for the Fed and usually a .5% increase from the low is followed by a recession. Look for a 5.0% rate in the next few months.
A couple of questions must be answered after last friday's jobs report. The first is upcoming Fed policy and whether the Fed is done easing for this cycle. Let's start with an important point that it is very doubtful the Fed knows where it is going at this point other than the next FOMC meeting will take place on October 30th & 31st. A speech given last friday morning by Fed Vice Chairman Donald Kohn sounded very much like it could have been written by Chairman Bernanke. http://www.federalreserve.gov/newsevents/speech/kohn20071004a.htm A couple of quotes confirm an observation and since the Fed was caught flat-footed this summer by economic events they seemed to miss they will be keenly observing the economy and financial markets before considering any action at their upcoming meeting. The first quote is: "Pending further evidence, a 50 basis point easing (9/18) was not an unreasonable FIRST approximation of what might be required to keep the economy on a sustainable growth path." Those waiting for more easing will hang on that quote until they see another Fed cut. The second quote is for the bears that believe the Fed is done for this cycle. " With news on inflation relatively favorable of late and with inflation expectations seemingly well anchored, look for an offset cut in the federal funds rate- if it turned out to be LARGER than needed - in time to preserve price stability. Next week's important data point will be Friday with the release of retail sales which should show little, if any, growth. The following week CPI will show a steady 2.0% inflation rate and for those that believe the actual inflation rate would be higher if the government included more items please read Thursday's Dallas Fed Pres. Fisher. His research department created an inflation indicator called the "trimmed mean" which includes everything except the one item that rose the most last month and the one item that declined the most last month. It is also growing at a 2% annual rate. http://dallasfed.org/news/speeches/fisher/2007/fs071004.cfm The problem facing the Fed remains the level of the three month Libor rate which stubbornly holds at 5.24%. This is 49 basis points above the current Funds rate and very close to the level it traded at before the Fed lowered the Funds rate to 4.75%. Most of the variable rate loans in the residential mortgage market are tied to the Libor rate and the Fed told us they eased to help the lack of liquidity in the mortgage market. They are worried about the Libor rate but also must be wondering what would occur if they eased again; Would the Libor rate fall? Would long term rates rise? Uncertainty is never good for any market and the Fed is clearly confused as to its next move and this is causing greater than normal volatility in global money markets.
The 10-year reached its low (4.32%) for the year on September 10th, eight days before the Fed lowered the Funds rate to 4.75%. At 4.64% (today) we have risen 32 basis points or 33.3% of the move down from 5.26% reached on June 12th. The rally in rates has come from an increase in inflation expectations of 19 bp and 13bp from the real rate of interest. This is a lot of numbers but nothing more than a normal reaction to a 96 bp move down in rates that took three months. Inflation is not a worry for the market even though the recent price rise in gold and decline in the dollar have many concerned about an increase in import prices. The US economy is in the early stages of a consumer led recession due to a contraction in the availability of borrowing outlets. Seasonal trends are a very important part of analysis in a very favorable time for lower interest rates. During the first half of this year you read here that we would see much lower rates after July 1st and that is exactly what occurred. With long rates rocketing higher today and a fear of inflation looming it is only natural to wonder if the low for the year has been seen in the 10 year. Reviewing 29 out of the last 32 moves down in rates in the 2nd half of the year did not reach bottom until October, November or December. The exceptions were 1999, 1988 and 1978. 2007 could be #4 with its September 10th low but their could be another move down in long rates as the market realizes the summer mortgage problems have not gone away. This week we saw many brokerage firms take huge write-offs from their mortgage and structured product departments and their stocks soared as investors are convinced that the good old days are back again. The commercial mortgage backed securities (CMBS) market remains in a chill with larger than normal spreads does not send a message that storm clouds have gone away. A move above 4.80% along with the seasonal trends you can look for lower long rates before the end of the year.
Thursday the House subcommittee on Commercial and Administrative Law created bill HR 3609 ( http://www.earlywarningwire.com/h3609.pdf ) which would allow bankruptcy judges to modify the terms of a mortgage in Chapter 13. It would allow judges to make changes to the maturity, interest rate, amortization, etc. of a mortgage. If this ever passes Congress with current language the mortgage lending business would come to a quick halt as the risk to the lender would skyrocket as they would never know what could happen in the future. When Congress gets involved with something the end result is frequently not what anyone would desire. This bill might have a better chance than many believe as it appears that very few sub-prime mortgages are being renegotiated. According to Moody's just one percent of these loans have seen terms eased by lenders and I'm sure Congress will use that as ammunition for this bill. ( http://www.ft.com/cms/s/0/3cfb843e-7214-11dc-8960-0000779fd2ac.html )
If you want to rent a house or condo why not go where there is a glut of unsold homes. How about Desoto County, Florida where owners are having trouble finding renters at any amount. ( http://www.sun-herald.com/Newsstory.cfm?pubdate=100407&story=tp1ch6.htm&folder=NewsArchive2 )
If you want to buy a house at a bargain price why not go where the supply far exceeds the demand? Flagler County, Florida has one of every five homes for sale but the city of Celebration has 50% of their homes for sale. You might even be able to buy the entire city for a reasonable price as the other 50% not for sale are probably wishing they could move. ( http://www.wesh.com/consumernews/14263316/detail.html )
If it wasn't so sad it would be funny, but this week the legislature in Michigan voted to raise the income and sales taxes in a futile attempt to balance its budget. Michigan has used this solution before and yet they still have not learned that a weak economy (car manufacturing) and high tax rate rates are not a good reason for businesses to move to your state. For those with an appetite for undervalued real estate and a lot of patience you will be rewarded when this state hits bottom (they all do, remember New York's problems in the 80's) ( http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_levin&sid=a9A0vwtCxHzw ).
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