Mel's Blog

As recently as March, when all the economic indicators were pointing downhill, the stock market was in the limelight exhibiting free-fall at a breathtaking pace. Now, in a matter of a few months, new "green shoots" are emerging, bringing hope for a quicker economic revival. A relatively quiet bond market took over the center stage as the new "mover and shaker." Treasury bonds and mortgage markets fell sharply last week, and the corresponding sharp rise in rates over a two-day period served as a reminder that even the private markets are able to shake up the Fed's plan of keeping mortgage rates at modest levels. It wasn't completely clear what sparked the rout, but there was speculation that a combination of unclear goals in Federal Reserve quantitative easing programs, floods of new government debt and renewed concerns on inflation all led to the sell-off. Another possible reason for the sell off could be that Chinese investors are moving away from buying treasuries and instead are moving their money into taking a stake in the Cleveland Cavaliers The announced move could be interpreted as yet another attempt to retain LeBron James in Cleveland... at the expense of treasuries. On the other hand, stock investors are enjoying the benefits of a global rally.

Who says that the bond market is boring? After remaining sidelined for a while under the government-supported lower rate regime, yields on the influential 10-year Treasury bond had risen by just more than a half a percentage point over the course of a few days, rising from the lower 3 percent range to the upper3 percent range and dragging mortgage rates along for the ride. Consequently, the benchmark Conforming 30-year fixed rate mortgage jumped from a low 5 percent on Tuesday, to the mid 5 percent's later in the week. The Federal Reserve is buying MBS securities to keep rates lower, but the purchases proved inadequate to contain the significant increase in bond rates.. Fed gross purchases of MBS for the period May 21st through May 27th totaled $33.4 billion. Total purchases by the Fed to date total $507.1 billion, or 41 percent of the $1.25 trillion purchase planned for 2009. This run-up in mortgage rates has affected new locks, as lenders are locking less than half of their average volume.

Since March 2009, oil and the Indian stock market seem to be competing in the race for the biggest rally. The Indian stock market has had a run-up of almost 70 percent, while the oil price is still leading the race in excess of a 90 percent gain. Oil traders are betting on better economic times ahead as prices rose to nearly $68 a barrel on Monday, hitting a new high for the year. This is almost double March prices of just under $35 a barrel, as world stock markets rally and investors bank on hopes that the global recession is easing. It seems like only yesterday that oil had sunk to $30 a barrel (oil traded near $30 on Dec. 22.) But, with the temperatures heating up and the summer driving season upon us, crude oil prices are on the rise. Who knows, those who skipped hitting the road during the Memorial Day weekend may have to skip the 4th of July weekend, too. The reason attributed to the rally is the forward-looking nature of the markets, weakening dollar and the fall in crude inventory.

This recession has humbled many a big stalwart and in that series, another giant "bites the dust." General Motors Corp., the world's largest carmaker until its 77-year reign ended last year, filed for bankruptcy protection in the U.S. with a plan to create a 21st-century company that can compete in world markets. Detroit-based GM is the largest manufacturer to file for bankruptcy, surpassing Chrysler LLC. The carmaker plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. Meanwhile, some of the weak brands such as Hummer, Saab, Saturn, and Pontiac would in all likelihood be liquidated and sold to the highest bidder. All of those brands are already for sale, except for Pontiac, which will be shut down.

Whether or not that optimism about the future is unfounded will be seen in the weeks and months ahead. As markets move further away from near panic emergency stances, and as brighter news of economic improvement appear, we could continue to see positive market reaction in the form of adjusted projections, however premature it may sound. One such bit of optimistic news -- which may have fueled the bond market rout -- was the Conference Board's measure of Consumer Confidence. The Confidence index rose strongly in May, with a reading of 54.9, blowing well past forecasts. Perhaps the perception that the economy appears to have bottomed out is the cause for the sunnier outlook. The second revision, made to the first-quarter GDP, left us with a milder -5.7 percent decline in the nation's output, a slight improvement over the 6.1 percent drop seen in the fourth quarter of 2008. The back-to-back contractions still rank among the steepest since the Great Depression. One bright spot seen in the revision was that corporate profits did in fact rebound, posting their first increase since Q2 07. Profitability is the key to getting us moving forward again.

This week the market will be focused on Friday's unemployment report, expected to show payrolls continuing to fall sharply and the unemployment rate rising to a 26 year high of 9.2 percent. Another important indicator being released on Wednesday is Factory orders.

Mel

Info provided by Amtrust Capital Bank