U.S. stocks lost ground yesterday after beginning the session higher, pretty much a mirror image of Wednesday’s session when the broad market reversed early losses via an afternoon rally.  A couple of issues that likely invoked the sell off were Bernanke’s speech today and an issue with tax collections in Spain. 

The market awaits Bernanke’s comments as he presents the latest economic assessment at the annual economic symposium in Wyoming – to what degree will he acknowledge their forecast was too rosy and will he provide clarity on the coming second iteration of QE.  There was also word that a Spanish court ruled some of that govenrment’s tax collection methods are illegal, causing concern their fiscal deficit woes would multiply.  The Euro sovereign debt story is far from over even though we haven’t heard much on it over the past several weeks. 

Nine of the 10 major industry groups declined yesterday, led by tech and energy shares – that’s two session in a row for energy.  Basic material shares bucked the trend to post a slight gain. 

Market Activity for August 26, 2010

Rip Van Wells Fargo

Bloomberg News ran an article Wednesday afternoon touching on a research report from Wells Fargo.  The note explained that ultra-low bond yields cut both ways – as we’ve talked about for a long time now, it’s one of the most harmful aspects of Bernanke’s ZIRP. 

The interest-rate environment certainly helps corporations refinance debt, but the corollary is that investors reach for yield.  Yields don’t even come close to compensating investors for the risk they’re accepting (or is it ignoring?).  While it’s about impossible to convince most people of these dangers, it will be one of the areas in which investors get most clobbered.  This situation has been pretty obvious for at least a year now, so it’s a bit strange Wells would issue this report now.  Better late than never I guess – back to sleep old boy.  

Jobless Claims

The Labor Department reported that initial jobless claims fell 31,000 to 473,000 from an upwardly revised 504,000 (previously estimated at 500K) in the prior week.  Suddenly, 473K is looking like a good level to the market as expectations have been lowered – the consensus estimate was for a drop down to 490K. 

The four week average of initial claims rose 3,250 to 486,750.

The trend in continuing claims remains the same.  The standard issue of claims (those that last for 26 weeks) fell 62,000 to 4.456 million as they expire for more people.  While these claims haven’t fallen consistently, they have slowly declined over the past three months.  It shows that those who are unemployed continue to be, but additional layoffs are probably mild.   Conversely, the emergency level of benefits, those temporary extensions to the traditional 26 weeks of bennies, continue to jump.  These claims rose another 301,000 last week. 

It’s also important to point out that the previous reading on initials, the one that shot up to 504,000, was for the week that coincided with the August employment survey.  It suggests we won’t only get the third-straight monthly decline in total payrolls (which has been affected by the census firings) but that private payrolls may also fall, which would mark the first drop in seven months.

Mortgage Delinquencies

The second-quarter mortgage delinquency data was both good and bad.

The good: Loans either in the foreclosure process or at least 30 days late fell to 14.42% of all mortgage loans, down from 14.69% in the first quarter.   Of all mortgage loans, 9.85% were at least 30 days late, with 4.57% in the foreclosure process.

Also, loans seriously delinquent (90 days late or in foreclosure) improved to 9.11% from 9.54%% in the first quarter.

The bad: New delinquencies (those just 30 days late) rose to 3.51% from 3.45% in the first quarter -- the highest level since the third quarter of 2009, and likely to drive foreclosures higher.  

A factor in these new delinquencies were re-defaults on modified loans, so they really aren’t “new” at all.  The attempt to curtail foreclosures has just delayed the inevitable.  A skeptic may also surmise that recent modifications artificially pushed the seriously delinquent percentage lower, as most of these borrowers will be back in default 6-9 months down the road you can expect the 90 days late figure to rise again. 

Jackson Hole

Central bankers’ annual conference in Jackson Hole begins today and we’ll be listening to whether they push the outlook for economic growth lower yet again, do some cheerleading in the hopes of buoying stocks, or a combination of both.  Certainly there should be an expectation their outlook will have deteriorated – Bernanke termed the environment “usually uncertain” last month (a Fed Chairman doesn’t say such things unless the state of the economy is abnormal) and the past eight weeks of data have become increasingly sallow.  The market awaits clarification on how they’ll proceed with the inevitable QE2, but I don’t think they’ll provide it just yet -- should make for an interesting day.

This morning we’ll get the first revision to second quarter GDP, which will be revised down to at least 1.5%; it was previously estimated at 2.4%.  The economic transition to the back-half of the year is feeble.

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900