Thursday, August 23, 2007
Trendy, Tranched and Intransigent
Treasury yields have stabilized to a degree. Everyone expects the Fed to cut, and is just debating how much the cut will be. Commercial paper has taken a determined step down and is staying there. Asset-backed is definitely last year's fad, and the trendy traders of today wouldn't be caught dead in it. Look at the outstanding commercial paper chart. That is a whole, whole lot of money that's got to come from somewhere:
Citi bought into Countrywide, and that seems to have infused the stock markets with hope. A measly 2 billion doesn't go very far in light of the graph above. The realization that the Fed is waiting for those who created the problem to fix the problem also seems to be settling in. That will tend to curb market enthusiasm. I may be wrong, but whenever I think of the year to come, I feel a deep certainty that the need to invest retirement savings will prevent stocks from collapsing very severely. Weaker companies could take very severe hits, but cash-flowing decent enterprises are almost bound to do well. In comparison to say, housing, they'll look pretty good.
On the lower level, down where real people live, things look a little rougher. The estimate is that about 40,000 people just lost their jobs. More are sure to come. Lending does seem to be tightening up quite a bit for some smaller businesses, which is not a good sign for jobs.
We won't see the events of the last week show up in the initial claims report for another couple of weeks. The current one is for the week ending August 18th, and for continuing claims, the week ending August 11th. The continuing claims component has showed further signs of weakening over the last few weeks, and SA initial claims have been gradually inching up for weeks. They stayed at 303,000 for two weeks, then have gone 309,000 > 316,000 > 322,000 > 322,000. Over the same period the four week moving average (SA) for continuing claims has barely moved, although it remains almost 100,000 over last year's average. Continuing claims are a better assessment of employment conditions than initial claims, especially in an economy in which non-covered employment has become so common. There could be tons of non-covered jobs out there which are absorbing covered layoffs, so until the continuing claims number breaks out from the present range I am not going to see initial claims rise as significant.
Last week's advance initial claims was 322,000, the same as this week's. But last week's was revised up to 324,000. The four week continuing claims average has been running about 95,000 more than last year's for over a month, and we probably will see that break out and move up further in early September.
The reason I expect a rise in continuing claims is that the money that's coming out of asset-backed and other commercial paper has got to come from somewhere, so the money that a lot of businesses rely on is going to evaporate in the short-term. If you haven't got it, you aren't going to advance it. This economy was too narrowly balanced not to feel the effects.
We'll see. I hope I'm dead wrong. One positive is that the non-financial is feeling it less, so working credit for some of the manufacturers looks stable.