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Equity Investment Capital

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Thursday, August 19, 2010

Treasuries and mortgages opened weak again this morning prior to weekly jobless claims at 8:30. Weekly unemployment claims were expected to have declined by 4K to 6K frm last week; as reported claims were up again to 500K filings for unemployment last week, the highest weekly filings since Nov 14th 2009. Last week's claims were revised higher, from 484K to 488K. Unemployment claims have been climbing for the past month as economic optimists remain convinced the economy is recovering. Recovery! What recovery? The economy needs jobs but jobs are being lost; the claims this morning have been met with the usual smoke that the data is skewed because of summer lay-offs. Continuing unemployment claims declined a little, to 4.478 mil frm 4.49 mil last week as more are losing entitlements. The 4 week moving average of claims increased to 4.825 mil frm 4.745 mil. The market reaction was not what many would have expected; the 10 yr note didn't rally, the key stock indexes didn't sell off but lost early gains. By 9:00 this morning the 10 yr note traded down 7/32 at 2.66% +2 BP and mortgage prices were 2/32 weaker (.06 bp) frm yesterday's close.

At 9:30 the DJIA opened -35, the 10 yr note at 9:30 -3/32 2.65% +0.5% and mortgage prices holding key technical levels +2/32 (.06 bp).

At 10:00, a few minutes ago, the Philadelphia Fed released its business index; expected to have increased from 5.1 to 7.0, took a huge hit falling to -7.7; new orders component fell to -7.1 frm -4.3, employment fell to -2.7 frm +4.0 and prices pd fell to 11.8 frm 13.1. The report was a huge surprise to those remaining economic bulls and sent the stock market down, from -77 prior to the report to -137 in two minutes. Any of the index readings under zero is contraction. The data today should send rates lower and stock indexes lower. We continue to warn that there is no recovery, now after manufacturing has run its course of cost cutting, inventory building and job cuts there isn't anything more that can be expected.

Also at 10:00 July leading economic indicators expected to have increased 0.1% was right on at +0.1%, it held little interest however with the Philly fed taking all the attention.

More Treasury borrowing next week, at 11:00 Treasury will announce the specifics for next week's bi-weekly borrowing to fund the deficit. 2 yr, 5 yr and 7 yr notes up; last month the total of the three auctions was $104B, should be the same next week.

Later today the Congressional Budget Office will release recent data on the budget deficit with its estimate for this year's deficit. Estimates are for the US 2010 fiscal deficit at $1.3T to 1.4T. The Obama Administration and the late days of the Bush Administration along with Congress panicked when the sub prime meltdown occurred and spread money around like fertilizer to save the banks and Wall Street firms that were at the epicenter of the causes that broke the economic back of the US, setting off massive firings and a collapse of the housing industry that is still in deep depression. The perfect storm; politicians saving their friends in NY, passing a health care bill in the midst of the crisis that has and will continue to hamper any recovery, and made only feeble attempts to create jobs.

Breathing a sigh of relief after the 10:00 data rallied the mortgage prices; as note previously, the 4.0 FNMA coupon has not traded below its 20 day average since mid-April; this morning on the open it traded slightly below it but the continued weak economic data has sent mortgage prices up and back above the 20 day, saving the market's bullish trend. By 10:10 mortgage prices jumped 8/32 (.25 bp) frm 9:30 levels.

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