On and On

This morning, many market participants are practically giddy over the Initial Jobless Claims report which indicated that the number of new applicants for unemployment insurance dipped below 600,000 to 565,000. The airwaves have been filled with optimistic chatter this morning declaring that the recession and the job market may finally be turning a corner. What about replacement do they not understand?

A dead give away as to the impairment of the job market can be found in the continuing claims data. Continuing claims increased by 159,000 to 6.88 million. Why the disconnect? It is really quite simple. The economy is approaching (or is at) replacement levels of activity. In other words, employers are running out of workers to lay off. If Continuing Claims were to start dropping I would be cautiously optimistic, but only if the economy began adding jobs soon after. However, we are not there yet. Face it, the economy is mired in an economic tar pit.

What does this mean for the second half of 2009? The impaired economy will go on and on. Remember, unlike Non-Farm Payrolls and the Unemployment Rate, which are lagging indicators, Jobless Claims are coincidental indicators. Also, keep in mind that last week was a shortened work week due to the Independence Day holiday. Government offices were closed on Friday July 3rd. This may have prevented some displaced workers from filing claims.


Further evidence that fixed income investors believe that the global economy will be impaired for a protracted period of time was yesterday's very strong 10-year U.S. treasury auction. Among the buyers were foreign central banks. The bond market has historically been a better predictor of future economic condition than the stock market. The bond market is telling us to manage our expectations and to be prepared to a long march out of this deep economic valley.

There are reports this morning that some owners of pools of mortgages are selling homes at far lower prices than where banks are willing so sell foreclosed homes. The media pundits are bemoaning that this will depress the housing market. Au contraire mes amis.

Selling homes at fire sale prices will further depress home prices, but it could speed a recovery in the housing sector as it moves the huge excess supply of homes more quickly. What it does hurt are the banks. Remember, banks have been reluctant to mark mortgages held on their balance sheets to market, preferring to value them on a hold to maturity basis. If homes are being sold at huge discounts, the drive the values of the impaired loans being held by banks lower. This is true whether one uses a current market or hold to maturity valuation. Why does it affect the hold to maturity value. Many banks are trying to sell the properties securing the impaired loans on their balance sheets. When an impaired property is sold, the outstanding mortgage is settled for however many dollars the property was sold. If home prices are driven lower because of aggressive selling and lower prices, hold to maturity values will decline. Maybe the government should hurry up and configure a plan to handle the dissolution of a large financial institution?