S&P 500 day trading and Economy - labor-unemployment-

The economy declined in the third quarter the most since 2001. New home sales expectedly rose 2.7 percent in September(fast inovators getting in before the final drop) , before credit markets froze, up from a drop of 12.6 percent in August, according to Commerce Department reports.

It is estimated that a Labor Department report on Nov. 7 will show payrolls shrank by 200,000 workers last month. The unemployment rate may jump to its highest level in more than five years.

And in case you are wondering why mortgage yields are higher again, here is a little background provided by our President(can you believe it) that will help you answer any questions you may have. Here are the main drivers:


1) International selling. A variety of factors - including some recent confusion over the semantics of whether the GSEs are "explicitly" or "effectively" guaranteed by the government - have created a new wave of MBS selling around the world. The general "flight-to-quality" has become so intense that investors are now carefully differentiating between degrees of government support and the fact that the GSE backing is considered "effective" but not "explicit" is actually very meaningful to investors in agency corporate debt as well as agency MBS.

2) Unintended consequences of the FDIC guaranteeing more forms of senior bank debt. As more and more investment alternatives become explicitly guaranteed by the government, the new abundance of risk-free investment choices has caused FNMA/FHLMC corporate debt costs to increase. As the GSEs' cost to finance MBS increases, holding MBS in their portfolios becomes less economical and the market expects them to be less involved in purchasing MBS.

3) Similar to #2 above, as sovereign debt issuers around the world issue debt at increasing yields, these investment alternatives also siphon-off potential demand for FNMA/FHLMC corporate debt and force the agency's funding costs higher making additional portfolio growth uneconomical to the GSEs.

4) De-leveraging continues across the investment community and is made worse at the moment since some dealers have year-ends in Nov and are not anxious to dramatically increase positions at this time.

5) Some investors are reallocating money back to stocks and out of MBS. This back-and-forth will obviously continue as the economic story plays-out.

Housing and the Economy

I have been asked how the market looks for housing.

Consider this, summer is seasonally the time when most home purchases occur. This uptick from month to month is not a relavent figure. Sales normally increase in July and August. There are too many problems even with prime borrowers. This latest uptick is the worst.

Now, even "prime" quality borrowers are falling behind on payments at a record pace. The delinquency rate on prime mortgages hit 3.71% in the first quarter of this year, according to the Mortgage Bankers Association. That's the highest since the MBA started splitting out subprime and prime borrowers back in 1998. The overall delinquency figures go much farther back — to 1979. They show the same thing: A record high delinquency rate of 6.35%.



Home prices are way down, but they show little signs of bottoming out just yet. How Many families can afford 48,000 a year to own a home in Orange County. Yes, intrest rates % are down but how much of a persons income will housing take, 50% or more, this is the fundamental problem. Figures from S&P/Case-Shiller reflect that home prices down 15.8% in May from the same month a year earlier. That's the largest drop on record. Prices fell in all 20 metropolitan areas the firm tracks. Las Vegas (-28.4%), Miami (-28.3%), Phoenix (-26.5%), and multiple markets in California (-24.6% in L.A., -23.2% in San Diego, and -22.9% in San Francisco) are leading the way.

Treasury could buy Fanniew Mae and Freddie Mac

Treasuries gained as stocks fell, led by financial companies, highlighting rising concern that problems for the U.S. banking system may be worsening. U.S. stocks fell, sending financial shares to their lowest level since October 1998, on heightened concern that bank failures will spread. Washington Mutual Inc. posted its biggest drop ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that more regional banks may be short of capital.

Treasuries initially declined, pushing the yield on the 10- year note to the highest in almost two weeks, after Treasury Secretary Henry Paulson put a plan before Congress to provide support to Fannie and Freddie, the government-sponsored enterprises that purchase or finance almost half of the $12 trillion of U.S. mortgages.

There are some that feel that the U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an unmitigated disaster and the largest U.S. mortgage lenders are basically insolvent. Some bet that Fannie Mae shares will keep tumbling. Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

Over priced homes a world wide problem

Overvalued homes a worldwide problem.

WHERE are house prices most overvalued? As the rest of the world watches the bursting of America's housing bubble, that question should be at the top of everyone's mind. The answer is not comforting: many countries have had far hotter housing markets than America and are also suffering from tightening lending conditions thanks to the credit crisis.

In the latest World Economic Outlook, Roberto Cardarelli of the IMF calculates the share of the increase in real house prices between 1997 and 2007 that cannot be accounted for by fundamental factors such as lower interest rates and rising incomes. This “house-price gap” is greatest for Ireland, the Netherlands and Britain, where prices are about 30% higher than can be justified by fundamentals. France, Australia and Spain have house-price gaps of around 20%. In America, where prices were already falling in 2007, the gap is just over 10%.

No secondary market for Loans.

According to Inside Mortgage Finance, an unbelievable 99% of all new mortgages that were securitized in April went through Fannie Mae, Freddie Mac or Ginnie Mae. That compares to an "Agency" market share of less than 50% one year ago, proving that there's simply no secondary market for non-agency product at this time. That is an amazing statistic. NO secondary market..

Expect more volatility in interest rates this week. Today we have the LEI (index of Leading Economic Indicators), with the PPI report (wholesale inflation) due out tomorrow. Neither of these reports are expected to have a big impact on rates unless they miss expectations by a wide margin.

The most important news item on the calendar this week will be the FOMC Minutes, released on Wednesday. Traders will comb through these minutes to look for confirmation that The Fed has changed its posture toward interest rate cuts going forward.

Jobless claims up, single family housing down.

Jobless Claims continue high, U.S. Industrial Production (factories, mines, and utilities) was -0.7%, twice as weak as anticipated by economists, and capacity utilization, which measures the proportion of plants in use, fell to 79.7 percent, the lowest since September 2005. Lastly yesterday we had the Philadelphia Fed Index come out at -15.6 in May, better than forecast, from -24.9 in April. ( Readings less than zero signal contraction.)

Today we had Housing Starts increase by 8.2%, but the increase is entirely due to multi-family homes, up by 36%. In contrast, single family starts fell by another 1.7%, albeit from an upward-revised base. This follows the large decline last month, when starts fell by 13.8%, and year-over-year starts are down 30.6% - no surprise given the inventory levels that are out there. Building Permits were up, and single family permits rose by 4.0%, the first rise in a while. After it we have the 10-yr sitting at 3.87%.

Worst housing slump in a quarter century

U.S. Treasuries were little changed, with 10-year yields close to the highest level since February, before the government sells $15 billion of the maturity today. The Treasury Department's auction today will be the biggest for 10-year notes in four years. The government will also sell $6 billion of 30-year bonds tomorrow as part of its quarterly refunding program.

The head of government bond trading for Standard Chartered quoted that he expects the Fed to be aggressive in the take back of all of the easings. According to him, we may see an increase of 75 to 100 bps in the Fed Funds rate a lot quicker than most people think. Well, the Fed giveth and the Fed taketh away I suppose.

Pending home sales fell 1 percent in March after a revised drop in February of 2.8 percent that was bigger than previously reported, according to the National Association of Realtors. Recent reports indicate the worst housing slump in a quarter of a century is far from abating. Purchases of new homes plunged in March to the lowest level in almost 17 years, while the median price fell the most in almost four decades, according to the Commerce Department.