A Short Week of Trading Resulted with the Markets Finishing Lower

For the week of September 6, 2011 through Friday, September 9, 2011

• Standard & Poor’s 500 Index: -1.68%
• Dow Jones Industrial Average: -2.21%
• NASDAQ Composite: -0.50%

Sunday marked the 10^th anniversary of the September 11, 2001 terrorist attacks on America that struck the World Trade Center and Pentagon.  Thank you to all the servicemen and women for your service to our country.

Yields on two-year Greek bonds rose to more than 50% this week. Fears of a default by Greece caused a sell-off in Europe as investors fled to safe haven assets, which caused U.S. Treasury yields to fall. On this side of the pond, the labor market continues to struggle with a slight uptick in initial jobless claims. On the bright side, the service sector improved slightly. This came as a surprise, since the manufacturing index showed a contraction a few weeks ago. The Federal Reserve’s Beige Book showed that the economy was growing, but only modestly.

Economic Data

• ISM Services Index
  • The index for August was released this week showing an improvement last month to 53.3 from 52.7.
  • New orders rose to 52.8 from 51.7
  • Export orders jumped to 56.5 with a 7.5 point increase, and imports climbed to 53.5 from 47.5.
  • Backlogs remained below the 50 level showing no gains for the third strait month.
  • These numbers indicate the economy is growing, however at a slow pace.
• Federal Reserve Beige Book
  • Data from mid-July to the end of August confirm growth in economic activity.
  • However, growth is not spread evenly across the country.
  • The Federal Reserve has indicated that it is considering the possibility of more quantitative easing and will discuss the subject at the September meeting.
• Jobless Claims
  • Initial claims rose to 414,000 from 412,000, which was more than expected.
  • The four-week average rose to 414,500 from 411,000.
  • Continuing claims fell 30,000 to 3.717 million.
  • The employment market has not shown any significant signs of improvement and awaits the plan President Obama will announce.

Interest Rates

• The two-year Treasury yield of 0.19% is one basis point above the all-time low of 0.18% set last week.
• The five-year Treasury rose to 0.87%, only 1 basis point above the all-time low of 0.86% set this week.
• The 10-year Treasury yield barely moved up to 1.99% from 1.98%.
• The 30-year Treasury yield rose half a basis point to 3.30%, but has dropped more than 1% in the past few months.

Economic Prescription

• A Sept. 6, 2011 article in The Wall Street Journal, “Economic Rx: More Refinancing” by Nick Timiraos proposed an interesting scenario:
  • “If three-quarters of all borrowers with government-backed loans with rates above 4.5% were to refinance, that would deliver $70 billion in annual savings to as many as 30 million homeowners.”
• We feel that most Americans, when they sign a contract, intend to live up to their obligation.
  • Many of these people have been making their mortgage payments on time and have good credit scores;
  • The value of the underlying collateral has decreased in value, but the utility of the home is the same, and
  • If all they are lacking is collateral for the loan, what should it matter—they do not have the collateral for the existing loan.
• We agree that people should be able to refinance the same amount at a lower interest rate.
  • It would not cost the government money in the form of a stimulus;
  • However, it would potentially put $3,000 in annual savings per year for homeowners.
• We feel this would also stop the community banks from having to take write downs on distressed properties.
  • We believe the government could simply decide to let the banks amortize losses over the next 10 years, and
  • Perhaps they could begin to loan money again.
• We realize the plan might be too simplistic, and perhaps violate contract law.
  • There are credit default swaps where a person is on the other side betting that the bank’s bonds will default.
  • However, we feel the government can do what they want.

Disclosures

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