Lack of foreign investment in U.S is a real issue.

Friday, November 16, 2007

ECONOMIC DATA / NEWS

September was the second straight month that foreign investors were pulling their money out of U.S. investments.  $14.7 billion dollars moved out of the U.S. in September, adding to the $163.0 billion that spilled out the previous month.  So, after nine years of positive net flows, we have now seen two consecutive month of negative cash flow.  Sharp declines in the value of the dollar have led many investors to put their money into euro denominated investments.  And, as the Fed has cut their rates, the spread between the return on U.S. and foreign investments has shrunk, which also makes foreign securities more desirable.  This is another statement of how weak the U.S. economy is viewed, despite the past two quarters GDP readings, which were relatively strong.

When retail sales came out earlier this week, we pointed out that weather is often blamed disappointing data.  Well, it’s taking another knock today.  This time it responsible for much weaker than expected industrial production.  The warmer weather lessened the need for as much gas and electricity, causing industrial production to fall by .5% last month.  Capacity utilization dropped as well, since fewer resources were needed.  The index, which generally doesn’t move more than one tenth at a time, plunged from 82.2 to 81.7.

TECHNICAL ANALYSIS

MBS prices have settled down after a shocking 21bp gain yesterday.  The FNMA 30-year 6.0% has given back 6bp, bringing the price to 100.84.  Rallies have consistently fizzled out over the last three months every time they get close to 101.00.  Prices are getting squeezed between support at 101.06 and the upward trend line, which are now only separated by about 50bp.  When prices breakout of this large right triangle, it should set off a strong move in the direction of the breakout.

Treasuries made an insane move yesterday as concerns about the state of the economy have increased.  The 10-year yield tumbled to 4.14%, marking a new two year low.  It popped back up to 4.19% prior to the data coming out, but the weak reports had investors ducking for cover in bonds.  There should be psychological support at 4.10%, but the next major support is 3.98%.  We’ve been forecasting the 10-year would fall to at least the high 3.00% range by the end of this year, and it’s looking like a good possibility right now.

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