U.S. stocks expressed the bipolar nature of this market environment yet again yesterday as the major indices began the session substantially higher, reversed course mid-morning to turn meaningfully lower, only to rally after lunch enough to get us back to the cut line.

What appeared to erase the mid-morning slide was a presentation by STL Fed Bank President James Bullard titled “The Seven Faces of The Peril” in which he overtly announced the next round of quantitative easing (the QE2 we’ve been talking about) is coming if the economy weakens further. 

On top of that Morgan Stanley issued a paper titled “Slam Dunk Stimulus” offering the idea that the GSEs and FHA could refi the 40% of mortgages that currently don’t meet LTV and FICO requirement by simply easing the rules, or eliminating the rules is more like it.  Oh, behind the fact that you just can’t snap your fingers and make what’s wrong with the housing market and economy right, you have this little problem of holders of mortgage-backed securities getting smashed by prepayment speeds.  No worry though, they recommend that the Fed backstop these buyers of MBS.  Snap-the-finger policy.  Is there such thing as rules anymore?

Man, for an economic recovery in which many expect to turn into an actual expansion, it sure requires quite the unprecedented level and degree of monetary, fiscal and ancillary action – which, of course (although not so clear to current policy makers), will do nothing in the intermediate term, except delay a real and lasting economic revival.

Anyway, schizophrenic Mr. Market said forget all of this talk (QE2, insaniac ideas from Morgan Stanley) and turned back down in the final minutes to close negative.

Market Activity for July 29, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 11,000 to 457,000 last week (expected to come in at 460K).  The four-week average fell 4,500 to 452,500. 

The four-week average is still being influenced by the dip to 427K in initial claims during the week of July 10, but unless we get another move below 450K then this four-week average is going up a couple of weeks out.  I wouldn’t be surprised to see initials make a run back to the 480K level as the figure will be distorted by the seasonal adjustment – that is, it may be held down (even as the current level is already elevated) due to the fact that auto plants shut down and retooled for new models earlier than they usually do.  As this distortion runs its course over the next two-three weeks, it will result in higher readings if a burst of job growth fails to quickly ensue. 

Continuing claims were mixed. The standard issue of claims (those traditional length of benefits that last 26 weeks) rose 81,000 to 4.565 million.  EUC claims (those extensions to the standard length of benefits) fell another 269,000 to 3.3 million.  These claims have slid roughly 2.6 million since late March when those extensions ran out.  By the way, we’ve seen the effect on retail sales (2.6 million people without their $290/week on average) as this artificial means of income has evaporated.   But these claims will rebound over the next few weeks as those extensions have been reinstated.  It will put money in people’s pockets again, but just temporarily – and it will drive deficits deeper and continue to contribute to the long-term unemployment figures.

Foreclosure Filings – Not Just a Problem for the Housing Market

During the first half of the year foreclosure filings jumped in 75% of U.S. metro areas, according to RealtyTrac via their National Real Estate Trends release.  We’ve talked about this for some time, namely in touching on the monthly foreclosure filings that have run at a rate of 300,000-plus for 16-straight months through June.  But this latest report is most recent

According to RealtyTrac, “foreclosures are spreading beyond areas that had been hardest hit” as the market deals with persistent and acute labor-market weakness, not just unsustainable prices and bad loans (poor or non-existent lending standards). 

As we’ve mentioned many times now within our commentary on new and existing-home sales data, rising foreclosure rates will hamper the housing market for some time to come.  And the ramifications extend beyond housing as banks appear to expect delinquency rates will only get better as they reduce loan-loss provisions – a decision that boosts bank earnings now but is likely to lead to further credit contraction over the next 12-18 months. 

Efforts to prevent foreclosures by offering loan modification to borrowers who had no chance of keeping current even with sweeter terms have only delayed the inevitable – the pipeline of distressed properties that must eventually hit the market is looking pretty fat.

Have a great weekend!

Brent Vondera, Senior Analyst