Market Update – December 14, 2009

 According to Fed Chairman Bernanke, the Fed still expects the labor market to improve very slowly, so they are reluctant to remove monetary stimulus by raising rates. Fed officials believe that inflation will remain low for the next couple of years, meaning that there is little short-term pressure to raise rates. But mortgage rates are not set by the Fed, or their thoughts on inflation – they’re set by “the market”.
Hats off to Citigroup, who announced it has struck a deal with the government to return $20 billion in bailout money to taxpayers through a combination of stock and debt, the bulk of which would come from a $17 billion common stock offering. Citigroup received $45 billion of bailout money, and then the government converted $25 billion of its preferred-stock stake in the company into common stock over the summer. That effectively gave U.S. taxpayers a 34% stake in the company. It is nice to see some of “our” investments paying off. This pretty much leaves Wells Fargo as the largest mortgage investor still owing without a plan.

 Abu Dhabi, one of the seven United Arab Emirates, will be giving Dubai, another one of the seven, a $10 billion “lifeline” to head off a bond default. This action has helped overseas stocks, since it should enable Dubai World to repay a $4.1 billion Islamic bond its property developer unit Nakheel was due to pay today. I am not quite sure if this is like Atlanta giving Miami a loan, or Delaware giving New Jersey a loan, or Mexico giving Canada a loan, but it is similar.

 Well, traders on Friday saw the usual cast of characters in buying mortgages: the Fed, banks, and hedge funds & money managers. But based on recent auction demand, investors appear to believe that there is little risk of higher inflation in the short-term, and are comfortable buying short term fixed income securities. But the demand for the 10-yr and 30-yr auctions was very disappointing: gee, you don’t want to earn 3.5% for 10 straight years? To top it all off, on Friday the University of Michigan Consumer Sentiment Survey was higher than expected.

What do we have to look forward to this week? It will be a busy pre-Christmas week for economic news. For one, the Fed meeting on Wednesday is expected to have no change for rates but, as usual, investors will be closely watching the language. The Producer Price Index (PPI) comes out tomorrow, as does Industrial Production and Capacity Utilization, and the Empire State Manufacturing Index. This is followed by the Consumer Price Index (CPI) and New Residential Construction on Wednesday. Housing Starts comes out Wednesday. Jobless Claims, Leading Economic Indicators, and the Philly Fed are on Thursday. This morning we find rates (10-yr at 3.54%) and mortgage prices about unchanged from Friday afternoon’s levels.
On todays date: December 14…

1984: Howard Cosell retires from Monday Night Football  

1946: U.N. General Assembly votes to establish United Nations HQs in New York City

1819: Alabama admitted to Union as 22nd state  

The last word:

“Money is better than poverty, if only for financial reasons.” – Woody Allen