2/4/2009

MMG Update - Thursday, February 5, 2009 10:48am ET
Current Trend Direction: Lower
Risks favor: Floating into Jobs Report
Current Price of FNMA 4.5% Bond: $100.62, +3bp
The unemployment line is growing longer - Initial Jobless Claims came in at
626,000, a good bit higher than estimates of 580,000 and the highest level in 26
years. This is an ugly labor market reading on the eve of tomorrow's Jobs Report -
let's recap the rest of this morning's headlines, and then lay out our strategy headed
into tomorrow's important release.
Productivity in the 4th Quarter increased at a 3.2% annualized rate, which was quite
a bit better - meaning more productivity - than the 1.5% increase expected. US
companies are cutting back their employees working hours at a faster pace than
output is slowing, thus keeping productivity growth rising faster than expected. And
it makes sense - more is being expected out of fewer people, working fewer hours.
The bad news here is that the cut in working hours did lower Output in the 4th
Quarter by -5.5%, the largest decline in 26 years.
This morning, the Bank of England cut their benchmark interest rate from 1.5% to
1%, its lowest since being founded in 1694, some 315 years ago. The ECB left
their interest rates unchanged at 2%.
Last night, the Senate voted to include a $15,000 tax credit in the new stimulus
plan, up from the previous figure of $7,500, in hopes of revitalizing the slumping
housing market. The proposal would allow a tax credit of 10% of the value of new
or existing residences, up to a $15,000 limit. The details are not yet known, but
we'll be watching for more information that you can share with your clients and
referral partners. The stimulus bill is still working its way through Congress after
being voted on in the House last week. We understand that the road back to
economic prosperity must include shoring up the housing market - but a tax credit
may not help someone who is worried about keeping his job. We are looking for
this stimulus package to do something special to create jobs, thereby providing the
much needed boost in consumer confidence to get people thinking about investing
in a home.
Jobs Report Strategy
Tomorrow's Jobs Report is going to be just plain bad, with economists expecting a
half million jobs lost. We think the number will be even worse, maybe even as high
as 600,000 and also look for revisions to prior months, escalating the already high
number of Jobs lost. Plus adding further pain to the report will be yet another uptick
in the Unemployment Rate. Last month's 7.2% unemployment should be easily
eclipsed to a significantly higher rate of unemployment. Now for the bad news...the
Jobs numbers we have been getting are a bucket of sunshine and roses compared
to what is really happening. We have often spoken of how the birth death ratio
understates true job losses but the seasonally adjusted element of the report are
masking a much more troublesome picture. The real number of jobs lost is likely
hundreds of thousands higher, with the true rate of unemployment close to 10%.
Check bls.gov for some sobering information.
We've watched Mortgage Bonds continue to drift significantly lower since peaking
on Jan 9th. This sets up a nice potential rally off tomorrows Jobs Report. The risks
favor floating, which we advise into tomorrow - but lenders may not be as generous
in giving us what the market offers, as they are still loaded with volume