Thursday, January 24, 2008

Jobless Claims Still Low, Continuing Claims Fall Substantially, Existing Home Sales Fall, Home Inventories Decline

- Initial Jobless Claims for this week fell to 301K versus estimates of 320K and 302K the prior week.

- Continuing Claims fell to 2672K versus estimates of 2720K and 2747K prior.

- Existing Home Sales for December fell to 4.89M versus estimates of 4.95M and 5.0M prior.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits unexpectedly dropped for a fourth straight week, indicating companies may be in better shape than believed, Bloomberg reported. The four-week moving average fell to a three-month low of 314,750 versus 328,750 the prior week. The unemployment rate among those eligible to collect benefits, which tracks the US unemployment rate, fell to 2% from 2.1% the prior week and remains at historically low levels. The recent decline in jobless claims is a major positive and they are no where near the 360,000+ usually associated with recessions, notwithstanding the overwhelming majority of pundits that claim we are already in one. CNBC just asked why so many talk as if we are already in a recession when the data clearly do not indicate such. It is due to the record number of stock market participants that perceive it is in their own political and financial interest to see a bear market and recession. We are in an election year with historically bitter political rhetoric. As well, there has been an explosion in the number of low correlation/negative correlation investment funds and all the businesses that cater to them since the bursting of the internet bubble and bear market of 2000-2003. These vocal individuals perceive a strong secular bull market as their enemy and they are the main reason for the current “US negativity bubble” and the parabolic rise in short interest, in my opinion. They believe the more they talk as if a recession and a bear market are inevitable the more likely they become as scared consumers, businesses and investors retrench. Many are quick to dismiss any positive analysis from long only managers, saying they are just talking their book. However, one could make the same argument regarding the analysis of investment managers that benefit from a poor market and economy. I continue to believe the job market will remain healthy over the intermediate-term, notwithstanding slower economic growth, as companies remain very slow to let go of workers before the historic exodus of baby boomers from the labor force over the coming years.

Sales of existing homes in the US fell slightly more than forecast in December and inventories fell, Bloomberg reported. For all of last year, prices of existing homes fell 1.8%. Over the prior six years, the Case-Shiller home price index rose 103.3%. The number of homes for sale at the end of December fell 7.4% to 3.91 million. At the current sales pace, that equates to 9.6 months’ supply, down from 10.1 months in November. Builders broke ground in December on the fewest new homes since 1991. I continue to believe the recent plunge in mortgage rates and pent-up demand will lead to a modest unexpected bounce in home sales over the coming months, which should bring down inventories meaningfully as builders continue to break ground on fewer homes. Fed fund futures now imply a 64.0% chance for a 50 basis point rate cut and 36% chance for a 25 basis point rate cut at the January 30th FOMC meeting. According to data released today, the average 30-year fixed mortgage rate is 5.48%, down 21 basis points over the last week and down 126 basis points from June 07 highs.

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