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Anthony Hood

Equity Investment Capital

Office: 949-891-0067

Email: tony@equityinvestmentcapital.com

website: www.equityinvestmentcapital.com

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Thursday, September 23, 2010

Prior to 8:30 this morning treasuries were better on weakness in economic data from Europe. Markets remain convinced the Fed will do more easing even though the Fed said it would if "necessary" to keep the economy from slipping. More evidence this morning that added to the belief; weekly jobless claims. Claims were widely expected unchanged from last week but increased 12K to 465K and last week claims were revised higher, to 453K from 450K----not much. That weekly unemployment claims don't decline below the 450K area suggests no improvement in job markets. Continuing claims last week were revised from 4.48 mil to 4.573 mil; this week continuing claims at 4.49 mil. The weaker claims drove the 10 yr note price higher, at 9:00 +20/32 at 2.48% very near the lowest yields seen on August 25th before the recent spike higher.

Stocks in Europe were already lower before the weekly claims after a survey showed a bigger than expected decline in business sentiment in September. The monthly purchasing managers index, or PMI - a closely watched gauge of business activity fell to 53.8 in September from 56.2 in August. The consensus in the markets was for a far more modest decline to 55.7. The grabber is that the figures showed that growth in Germany, Europe's economic engine, has moderated far more rapidly than anticipated - Germany was the main driver behind the 1.0% quarterly growth posted in the euro zone in the second quarter of the year.

At 9:30 the DJIA opened down 82, the 10 yr +17/32 at 2.49% -6 bp and mortgage prices +5/32 (.15 bp).

At 10:00 August existing home sales, expected to have increased 5.3%, increased 7.6% to an annualized 4.13 mil. Unsold inventory 3.98 mil units, at the present sales rate, an 11.6 month supply. The medians sales price $178,600.00. Nothing to shout about in the report, although higher than expected it was still the second lowest level since 1997. Treasuries and mortgage prices backed down a title on the data and August leading indicators.

August leading economic indicators, expected to have increased 0.1%, jumped 0.3%; better but like housing it isn't trending higher.

Three weeks ago when treasuries rapidly reversed and rates made a quick move higher we were of the mind that the end had come for the decline in interest rates; although we were not looking for substantially higher rates. Since then economic decline based on data points and the Fed FOMC meeting wherein the members confirmed the Fed is increasingly concerned the economy might slip has changed the outlook somewhat. The volatility in treasury markets and the belief the Fed will do another easing move, buying more treasuries has driven the benchmark 10 yr note down 25 basis points in less than four sessions, moving to test the low yields. It has mostly been in treasuries but mortgage markets are trailing along within a much narrower range and less declines in rates. Safety moves on weaker European data, weak US economic outlook and if the Fed is worried then investors increase their concern; it is all about safety and liquidity that leads directly to treasuries and less to the less liquid mortgage markets.

For the past six months we have not wavered in our view that the US and global economies would not rebound in any significant way for a very long time; likely two to three more years. While we saw nothing on the horizon that encouraged optimism, at the same time we didn't believe the economy would fall off the cliff. We still hold to that, however in the unfolding drama of recession (we still believe by our definition the economy remains in recession) and now with the Fed admitting it has over estimated the recovery, the outlook for interest rate markets is improving. Lower interest rates, always something we want to see, in this recessionary environment it doesn't matter in terms of fueling any recovery. The level of interest rates is not going to stimulate consumers or the recovery.

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