Wednesday October 7, 2009

Wednesday, October 07, 2009
In our current economic climate we continue to see very diverse opinions in terms of where our economy is headed.....
Each day seems to bring a new set of economic indicators that lead 'experts' to predict either the end of the economic malaise or that there is more yet to come....
So, which is the appropriate path to consider?
I believe that there is still more stress in the economic pipeline and with the continued 'tampering' by our government in the name of 'fiscal health' it will continue to hamper our country's return to solid economic growth.
prb


Stone & Youngberg Portfolio Strategy Group
Subject: PSG Morning Market Update for Wednesday October 7th

* Although some economists/analysts are touting the end of the recession and a possible "V" shaped recovery; recent financial news continues to suggest the downturn may be protracted. The Federal Reserve revealed it is extremely concerned that declining property values and a protracted economic slowdown will require a new round of write downs in banks' commercial mortgage loans. Since commercial mortgage lending is the bread and butter for many banks both large and small; ongoing weakness in this sector will undoubtedly precipitate many more bank failures. The Fed warned that too many banks were vastly under reserved given the magnitude of the growing problems in commercial real estate.

* Underscoring the growing threat depressed commercial real estate poses for banks is a report by a property research firm Reis, Inc. which shows the US office vacancy rate rose to a five year high of 16.5% in the 3rd quarter. The report also went on to say that rental rates have declined in most areas of the country. Unlike the residential real estate market which has shown some signs it is turning around, the same cannot be said of commercial real estate. The Reis report states: "We have yet to observe clear systematic evidence that the office market is bottoming out."

* Further darkening the gloomy forecast is a report by the National Retail Federation that 2009 holiday sales are expected to be down -1% from 2008.
It should also be noted that 2008 was an extremely poor year with holiday sales posting a -3.4% decline from 2007. Obviously economic uncertainty makes the consumer apprehensive and consequently they are extremely cautious about spending

* Yesterday's (10/6) $39 billion 3 year Treasury note auction went reasonably well. Demand was apparently brisk producing a bid to cover ratio of 2.76. The coupon was set at 1.375% and the yield was 1.445%. Today (10/7) the
Treasury intends to sell $20 billion in 10 year notes and tomorrow (10/8) they will auction $12 billion in 30 year bonds.

* Later today, Wednesday October 7, the Federal Reserve releases the change in consumer credit for August. (This report includes most short and intermediate term credit extended to individuals, excluding real estate.) The consensus is projecting a -$10 billion decline in credit for the month.
Consumer credit has shrunk -$109 billion over the past year. Although many
point to an overextended consumer as the proximate cause of the current economic downturn; regardless, the US economy is dependent on a consumer who borrows in order to spend. In effect, contraction in consumer credit constrains potential economic growth.

* In the absence of any economic data, the Treasury market has rebounded from a modest selloff yesterday (10/6) and is noticeably stronger this morning. The 10 year UST yield (when issued) in advance of today's auction is -3 basis points to 3.22%. The 30 year bond is up about +½ a point in price and the yield, also when issued, is right at 4.00%. The 2 year UST yield is down slightly on the open to 0.88%.