Up & Down

Friday, September 14, 2007

ECONOMIC DATA / NEWS

Watch your head.  Sales are falling.  Overall retail sales may have risen by .3% last month, but they were down .4% excluding auto sales.  This intensifies the likelihood of a coming recession.  Retail sales make up about half of consumer spending, which in turns makes up two-thirds of GDP.  Back to school shopping may have kept the numbers higher than they otherwise would have been.  We expect sales to worsen, at least until November when they may get a boost from holiday shopping.

Credit markets around the world are facing tough times.  Similar to Countrywide’s scenario, English bank, Northern Rock, has said they plan to borrow an undisclosed amount of money from the Bank of England to assuage liquidity issues.  Despite the fact that Northern Rock holds $226 billion in assets, their CEO said that they preferred to open the lending option with the BoE now, because they don’t know how long the “credit crisis” might last.  However, their supposed strength did not prevent their stock from dropping by 25%, nor did it stop depositors from making a run on the bank.  Hundreds of people lined up at the branches to withdraw substantial amounts of cash out of the bank.  As their CEO said, they do have the assets that should prevent any disastrous situation.  Unfortunately, the withdrawals will eat into the bank’s liquidity, which could force them to borrow even more money than they had planned.  It is somewhat of a double edged sword.

And while most countries are looking for ways to keep interest rates lower, China’s Central Bank voted to raise their rate by .27%.  They have been attempting to cool off their exploding economy, so they don’t face a potential sharp downturn.  The other goal is to fight inflation, which tends to flare up in times of economic prosperity.  On the flip side though, more expensive Chinese goods could equal bad news for the rest of the world, who already buys the vast majority of their goods from China.  It might also bring about more balanced trade, but the cost may be greater than the reward.

TECHNICAL ANALYSIS

This morning’s rally, which was completely out of control, disappeared just as quickly as it materialized.  The FNMA 30-year 6.0% was up 25bp at one point this morning, but it is now down 6bp to yesterday’s low of 100.19.  The 200-day moving average at 100.12 is our first support, and we feel that it will hold for the next two days while traders await the Fed rate decision.  After next Tuesday, prices could start making their way toward 101.06 again.

The 10-year Treasury yield closed above the downward trend channel yesterday, and it also broke resistance at 4.45%.  The yield looked like a kid on a trampoline, as it jumped off the previous resistance, but bounced higher off the downward trend line.  The yield has quickly risen back to 4.47%.  Even the next resistance at the 25-day moving average is a weak one at best.

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