08/13/2009

It's been another exciting morning and Mortgage Bonds are on the plus side after
starting the day lower. But don't touch that dial, because another day of Treasury
auctions may cause pricing to change quickly.
Interestingly, Germany and France have both declared that their recession is over.
We don't quite understand how they can confidently be beating the drum on this,
but time will tell. On the news, Mortgage Bonds drifted lower and were pushed
lower still after Wal-Mart beat earnings estimates for the 2nd Quarter. But this
didn't jive with the Retail Sales report, which was worse than expectations. And a
disappointing Initial Jobless Claims numbers soured the Stock market and helped
boost Mortgage Bonds.
Initial Jobless Claims rose by 558,000 in the latest week, above the 545,000 that
was expected. The recent trend of Claims readings does show some
improvement. After 22 consecutive weeks of readings over 600K, we have seen
three successive readings under 600k, so Claims have dropped a bit. But have
people found Jobs or have they just fell off the extended claims benefits? This is
tough to gauge - but based on what you see in the economy - is there a lot of hiring
going on? We feel it may be more likely that Claims benefits are expiring.
Retail Sales dropped in July by 0.1%, well below the 0.8% gain that was expected.
This report negated the better than expected Wal-Mart report and signals that
consumers are still saving more than spending. This brings up a little known and
rarely discussed but critical facet of the economy...the velocity of money. In simple
terms, if you bought a pair of shoes and the owner of that shoe store takes that
profit and buys a big screen TV, then the TV store owner buys something else, etc.
- the same dollar passes through the economy over and over again causing growth
and jobs as well as ultimately inflation. But the latest Retail Sales report tells us
that the velocity of money is stagnant. Once the velocity of money increases,
inflation will likely follow.
More Bonds coming to market. Once again the Treasury is going to unleash more
Bond supply, this by way of $15B in 30-year Bonds. Yesterday's 10-year Note
auction showed so-so results with anemic foreign participation, thereby causing a
swift selloff in Mortgage Bonds. Stay tuned for the results of this auction at 1pm
today as we may see some more volatility yet. Some good news - there are no
auctions scheduled for next week aside from the usual T-Bill offerings, so Mortgage
Bonds may be able to improve somewhat from current levels.
Yesterday's volatility was expected and today we are likely to see some more - we
will float for now, but be ready to take the action later today should the markets
move on the auction findings.