Rising Rates: Modern Day Version of Sisyphus

Judging from Wednesday’s data, a weak employment situation persists, borrowers find rising mortgage rates discouraging, factory orders are bottoming, and the service industries remain in contraction mode, albeit at slower rates. Energy supplies were unexpectedly up; the Baltic Index continues to surge; and Fed Chairman Bernanke was cautiously optimistic on the recovery while concerned about the rising federal deficit.

Notes & Comments for June-03-2009

• Housing Data: For the week of May-29-2009, the Mortgage Bankers Association (MBA) Purchase index, a leading indicator for single family home sales and housing construction, rose 4.3% to 267.7 vs. last week’s 256.6 reading. The steepening yield curve is blunting demand as 30 year mortgage rates bumped up 44 bps to 5.25, their largest weekly increase since mortgage rates rose 48 bps in October 2008. The refinance index component declined -24.1% to 2953.6 from 3890.4. While the recent pending home sales report was a much welcomed green shoot, rising mortgage rates could potentially choke off this new growth. Should rates continue to rise, consumers looking to refinance their ARMs and generate more cash flow may not get the relief they need or seek. In the big picture, this is a drag on consumer spending and adds to the risks of more foreclosures. No worries… Helicopter Ben sent the Fed posse into the bond market to scoop up another $7.5bn worth of treasuries (with maturities between 2016 - 2019) in Wednesday’s trading. This is the modern day version of the myth of Sisyphus. The problem of rising rates stems from the ever-increasing supply of government debt and this occurs in almost every instance where the Fed comes to the rescue of the economy or some private sector company. Not to pick on GM, but $30bn is being allocated to rescue it (with the issuance of new debt). Go figure… Related Securities: XHB; HD; LOW; TLT
• Employment Data: For the month of May-2009, the Challenger Job-Cut Report showed some signs of improvement as layoffs declined to 111,182 vs. last April’s 132,590. The report revealed most of the damage coming from state and local government employees as their respective agencies are beseiged with budget cuts across the board. Not included in the report are the soon to be announced casualties from auto dealerships forced to close as a result of Chrysler & GM bankruptcies. Related Securities: XLY; XLP; RTH; ADP; MWW
• Employment Data: For the month of May-2009, the ADP Employment Report estimates a -532k decline in payrolls vs. previous month's 491k. This number throws ice water on hopes for a month-to-month improvement in job losses. Related Securities: XLY; XLP; RTH; ADP; MWW
• Manufacturing Data: For the month of April-2009, Factory Orders were up +0.7% vs. last month’s -0.9% decline. This number came in slightly below consensus expectations of +1.1%, but marked the 2nd increase in a 3 month period and could be indicative of a bottom.
• Services Data: For the month of May-2009, the ISM Non-Manufacturing Survey index improved to 44.0 vs. consensus estimates of 45.0 and previous month's 43.7. Employment was the weakest link in the report with a reading of 39.0 vs. April’s 37.0. The index appears to have troughed back in October 2008, but still reflects overall weakness in the most important economic base for the U.S. economy and as long as readings remain below 50, business conditions will continue to weaken.
• Baltic Dry Index: This shipping rate index is up another +185 points to 4291. Related Securities: SEA
• Energy: For the week of May-29-2009, the EIA Petroleum Status report indicated crude oil inventory unexpectedly rose 2.9mm barrels to 366mm. Oil prices are retreating on the news. Related Securities: USO; XLE; OIH; UUP
• Fed Watch: Chairman Bernanke spoke before the Congressional Budget Committee Wednesday on the "Current Economic and Financial Conditions and the Federal Budget". Uncle Ben sees recovery towards the end of 2009 and housing in the process of making a bottom, but also tempered his remarks by acknowledging rising unemployment. He views the risks for inflation and wage pressures as very minimal. The biggest takeaway from his discussion was a warning to reduce the Federal deficit which he sees as unsustainable and noted that federal debt to GDP ratio will hit 70% by 2011. Of course, taxpayers want to know when they can expect repayment on TARP loans and the Fed Chairman intends to release a list of banks that are financially stable enough to repay these funds. Related Securities: IEF; TLT; UUP

That’s all for Wednesday’s economic data and related news events. Now that Treasury Secretary Tim Geithner’s trip to China (a vocal leader and member of the bond vigilante clan) has served its purpose of publicly dressing down the U.S., all eyes will look to the Administration and the Fed’s stimulus policies going forward. After watching some of Wednesday’s Congressional Budget Committee hearings, I think politicians and the Fed are both starting to get the message. Now it remains to be seen if America has the political will to follow through.

(These notes and comments are not intended to be a comprehensive analysis, but instead merely highlight current themes and events for the convenience of readers and encourage them to make and share their own conclusions.)

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[metricon:]

"Not to pick on GM, but $30bn is being allocated to rescue it (with the issuance of new debt). Go figure…"

So true. Especially when cars can be manufactured abroad for a fraction of what they cost here. That money could have gone to increasing America's educational base.

Yes, America's children are falling behind. Freshman classes are getting dumber and dumber and more difficult to teach. Rather than learning, kids come to class to text each other about what they are wearing, and where they went the previous night. Worse is that educators are forced to pass these kids. While this may be ok in a class like music appreciation, when this is done in a class like calculus, it is like stabbing America in the heart with pins. America is falling behind very fast, and no place is more obvious than in the American elite college campuses.

Jun 04 06:54 AM

[Lies and Da...:]

> Yes, America's children are falling behind. Freshman classes are
> getting dumber and dumber and more difficult to teach. Rather than
> learning, kids come to class to text each other about what they are
> wearing, and where they went the previous night. Worse is that educators
> are forced to pass these kids. While this may be ok in a class like
> music appreciation, when this is done in a class like calculus, it
> is like stabbing America in the heart with pins.
At the risk of going off topic..
I don't agree with the fact that the intellectual capacity of students is decreasing with every passing year (e.g becoming more dumb).
My take on the situation is that politicians are getting involved in the educational process and they want ..err DEMAND higher graduation percentages. This places enormous pressure on the schools to pass students who shouldn't be passed.
The students quickly, very quickly, realize that they will be passed regardless of what they do. Since the consequences of poor study habits disappear, students no longer have incentives to try at school - they will pass, no matter what.

I see a similar behavior on the national level - risk takers are rewarded for taking risk, but when their losses become too great their losses are cushioned by the federal government.

Positive feedback cycle of reward for ever increasing risk until the next collapse becomes too large for the government to absorb.

At this point I'll throw in the over-used, paraphrased and probably mangled quip,
"A democracy will last only until its people realize that they can vote themselves money out of the treasury"

Jun 04 08:41 AM

[notsosmart:]

dumb & dumber! been saying it for years.throwing money @ the system wont help.actually nothing will help.too late.

Jun 04 09:06 AM

[ebworthen:]

Students are becoming expert at cut and paste, and have difficulty being creative, problem solving, and thinking analytically.

They want to be entertained more than educated.

The hurdles are set low so no one fails or has to try very hard.

The schools lack the ability to enforce discipline so it becomes an exercise in herding them from paddock to paddock versus driving them to higher pastures.

By the time they get to college they expect to be entertained and given a good grade for paying their tuition and showing up (60% of the time often).

Jun 04 11:54 AM

[John Lounsbury:]

JC - - -

Excellent summary.

Lies, and damned lies; ebworthen - - -

You both are highlighting a major problem. Our educational system has become a mass production system. The philosophy has been most recently represented by rhe "No Child Left Behind" slogan. (I can't really call it a program.) My paraphrase of the "program" or slogan was "No Child Gets Ahead".

We have been beguiled into the feel good posture of believing that evry child should reach the same objective. That is a false objective. If 99% of all children can walk a mile in 30 minutes does that mean we should never ask any children to try to walk that mile in 15 minutes? We have created a nation of slow walkers.

An effort to challenge the below average to strive for average should not allow the above average to settle for average, yet that is what has happened over the last few decades. Most metrics I have seen now rank the quality and effectiveness of our educational system (K-12) way down the world list (in the 20's?).

The fact that our universities still rank very high in the world is tha result of two factors: (1) Some of the best and the brightest from abroad still come here to study; and (2) The natural intelligence of our brightest overcome the mediocre K-12 experience and manage to flourish when eventually challanged at the university level. Unfortunately, many more who could accomplish great entellectual development in our universities have been diverted from that path to mediocrity.

Until we get back to challenging the brightest children in our public schools to reach beyond the average, we will fail to be the again the promising country we once were.

Jun 04 01:07 PM

[h2oworks:]

So glad as a parent I can pass off any failure of my children onto the city, state, teachers, too much money in the system, too little money, etc.etc. blah! blah! blah!.

You are all right. Just do not point a finger at me.

Jun 05 07:06 AM