Sigalert for the 450 continues indefinitely…….

March 9, 2007


I was recently interviewed by CPA Selwyn Gerber on my views for the US economy, real estate and interest rates. Click here to listen to this podcast.

In Southern California a freeway sigalert is defined by the Highway Patrol as an unscheduled lane closing for more than 30 minutes and the 405 freeway near Wilshire Blvd. has the record for the most sigalerts. For history buffs the sigalert was created in the mid-1950′s by the former co-owner of KMPC radio Loyd Sigmon. The 1950′s were a calm period for interest rates as William McChensey Martin was in the early years of his 19 year term that ended in 1970.

Last Friday we found the 10-year US Treasury note resting at the KEY 4.50% level with the world (and homeowners) hoping for a move lower forcing the Fed to lower the Funds rate by 25 basis points to 5.00%. The 4.50% level is the equivalent of a sigalert to the Fed and every trip to this low rate land is followed by Fed speakers urging us to remember that the Fed fears inflation and a strong economy despite the woes coming from the mortgage market.

Job growth?

This morning’s Labor department news that 97,000 jobs were created in February sent the 10-year soaring to the 4.59% level. It’s all about expectations and the consensus for job growth had been lowered to around 75,000 due to an ADP forecast on Wednesday of 57 thousand. The interesting part of this is that the ADP number does not include government jobs and if you subtract the new 39,000 govt. jobs you arrive at 58,000 private jobs, almost perfect for ADP. Bottom line for the jobs number is that the market was caught long (lower rates) and everyone tried to exit the game at the same time this morning.

The fact that the unemployment rate fell to 4.5% from 4.6% helped erase Fed easing bets but when we dove into the actual report we found the rate drop was due to a decline of 190,000 in the labor force not a pickup in employment. Unfortunately for the ninth consecutive month the Labor Dept. revised the previous two months jobs upwards by 55,000 which again calls into question the government’s inability to create a reliable economic statistic. Lastly, I found it interesting that the average work week fell for the second month in a row by 0.1 hours. If corporations were hiring the work week would be expanding and overtime would be increasing.

Yes, these are real quotes

It has been quite a week for perusing the press and I will share a few of the most remarkable quotes that may eventually find the 2007 hall of fame.

We begin in Charlotte, North Carolina where this morning Fed Governor Susan Bies (retiring March 30th) told a risk management forum that “this is not the end, this is the beginning” of a wave of teaser-rate loans that are coming into full pricing.” This is significant because she is a Fed governor and is in stark contrast to the comments from Chairman Bernanke last week that everything was under control in the home mortgage business and well under control. I wonder if Ms. Bies wasn’t leaving the Fed in a few weeks if her remarks would have been as forthcoming.

On Tuesday Countrywide CFO Eric Sieracki told a Raymond James Financial conference in Florida that “60% of Countrywide’s customers using hybrid adjustable-rate mortgages (arms) such as “2-28″ loans would FAIL to qualify under the new underwriting guidelines by regulators where lenders must use the borrower’s ability to repay the loan at the highest possible rate during the life of the loan.” If they wouldn’t qualify under the soon to be higher reset rates, how does Countrywide expect them to make the monthly payment?

Louise Gissendaner, senior vice president at Cleveland’s Fifth Third Bancorp, the 10th largest US bank, said “We have found neighborhoods with abandoned homes, 200 at a shot.” Hasn’t everyone been telling us that the real estate bubble was only a problem in the areas that saw the most appreciation like Florida, California and Nevada?

The last quote comes from Jacksonville, Florida where Duval County ranks seventh in the country in number of home foreclosures with one out of 133 changing ownership.

Finally I found an interesting statistic on the frequently quoted 2.11% delinquency rates for real estate loans in the fourth quarter of 2006. This only includes mortgages currently held by US banks and not any of the loans securitized and sold to CDO’s (collateralized debt obligations). US banks are forced (we hope) by regulators to set aside reserves for non-performing loans. Pools of mortgages held by investors/hedge funds don’t have anyone overseeing the management and risk taking policies and we may see some earthquakes from this area later in 2007.

Chinese stock market

The 8% drop in the Chinese stock market was used as a reason for last week’s fall in the US market. It’s doubtful that this market’s gyrations would have any impact on global markets but it made for good press. Last Saturday’s Toronto Globe & Mail (I read 27 newspapers every day) interviewed a China investor, Li Daquing, who said that the Chinese market “is worse than a casino” but then added that at least a casino has rules where the Chinese market is controlled by the government. If you are considering investing in China you must read this story.

Summary

My forecast for lower long-term US interest rates is unchanged and it is NOT dependent on an easing of Fed policy. Fed chief Bernanke wants to follow the market and until we see the US 10-year drop below 4.50% for at least two weeks he will have no reason to move off the current 5.25% Fed Funds rate. Next week’s news will center on the yen/dollar level (currently 118) and Tuesday’s retail sales (consumer demand weakening) and Friday’s CPI (lower inflation). Patience will be rewarded for those waiting, needing or betting on lower interest rates and higher sugar prices.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.