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Thursday, July 28, 2011

Tomorrow, GDP, Today - Some Good News

Good news we like. On initial claims, not only did we report in a week below the 400K mark, but the four week moving average fell to 413,750. That is a very big improvement and a most welcome sign. Continuing claims in the regular six-month series have essentially been stable for weeks, and this did not change this week.

Continuing claims in all programs rose 320K, and I have to look into that. Last week's claims were upwardly revised again from 418K to 422K.

The lower initial claims this week are not just an artifact of seasonal adjustments - they are real. This is the summer week when we shift from a positive to a negative adjustment (see weekly claims for the factors in the table), so the next couple of weeks may show a different pattern. I'm tempted to theorize here but I better not!

Moving to pending home sales, they rose. There is no telling what this really means, because as this very nice CNBC article discusses, the pending home sales report has gotten a lot less predictive of existing home sales recently. This is somewhat odd, because although FHA closings are more detailed and tend to take longer, FHA has been dominating the market for a while, and we still have a lot of cash sales, which are by far the quickest and easiest to close.

So that's a firm "I don't know what pending home sales means" on my part, and I am going to stand firm on that analysis, daring, innovative and bold as it may be. I have a hunch that appraisal values may be part of the discrepancy; if that is true then those sales may go through later. Alternatively it may be flat unqualified buyers, and if that is true, then those sales were never real sales.

I am still expecting something of a surge in the mid-to-upper market sales that would be affected by conforming loan limit adjustments this fall. This should produce some motivated sellers willing to deal on price, because if you can't sell when it's conforming at your price, your odds of doing so when it drops out of conforming are very low.

But consider what that means for creditors. You may be writing loans on homes that are going to take 100K-150K drop on comparables in six months. I would expect some caution in the underwriting market for these homes due to that factor alone. Also some hopeful sellers should be dealing hard this summer, which produces quite a challenge for appraisers, and does tend to through collywobbles into the sales market.

There is currently a movement afoot in DC circles to stop the adjustment in conforming loan limits due to take place this fall. I think it is a bad idea. New homes are the most important factor for the economy. The new home market won't adjust up until the existing home market is cleared, and the only way to clear the existing home market is to let the market work by ceasing our expensive and ultimately counter-productive efforts to reinflate the slashed tire.

Crude inventories yesterday was less rosy:
Total products supplied over the last four-week period have averaged just under 18.8 million barrels per day, down by 2.9 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 9.1 million barrels per day, down by 3.3 percent from the same period last year. Distillate fuel product supplied has averaged just about 3.5 million barrels per day over the last four weeks, down by 3.5 percent from the same period last year. Jet fuel product supplied is 0.3 percent higher over the last four weeks compared to the same four-week period last year.
Despite all the yammering about debt, Treasuries are showing little signs of stress. That may change in a few weeks. There's a lot going on, but the trajectory of the US economy will affect longer term Treasuries and tomorrow's GDP release has the potential to move the market one way or another.

Italian sovereign bonds continue dicey and weakening. I have no idea what Europe is going to do next, but they should try to do it quickly. The very real turmoil in Europe is masking some risk here in the States.

"Despite all the yammering about debt, Treasuries are showing little signs of stress."

For what it is worth, I'm having a field day. Least worst option for the win apparently.

(At some point the stock market has to figure out that the debt market is what is holding it up. That day won't be pretty. Just an opinion of course.)

Word verification: wingieg

Grieg's Hall of the Mountain King carnival comes to mind. Everyone's sure to be a winner! Step right up. Just need to get the oversized basketball into the undersized hoop! Sigh.
I sit in long-term treasuries (inflation protected).

I expect downgrades from AAA at some point (perhaps soon).

I intend to ride it out. If there is pain in treasuries then I would suggest that it will be dwarfed by the pain elsewhere.

Credit Bubble Stocks has an interesting link on what tends to happen to yields after debt downgrades and this would match my own anecdotal evidence and gut beliefs.
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