August 24th, 2011 9:42 AM by Mel Samick
Two weeks into the "Downgrade", the shaking and the jumping continues. We have entered a new era in the financial world, before we even realized. After the scary swings at the start, the financial markets seemed to re-enter their stable path, up until the end of this past week. The Standard and Poor's opinion of the U.S. debt still stands alone. Not only Warren Buffet, who gained an unofficial title of the "Oracle of Omaha" for his exceptional investment intuition, assigned quadruple-A rating to the U.S. Treasury securities, no major rating agency ventured to support S&P. The Fitch Rating Agency reconfirmed triple-A status of the U.S. sovereign bonds this past week. Riding the wave of debt concerns, Warren Buffet has supported raising taxes for the rich. His proposals include an increase in taxes on income over $1 million including dividends and capital gains with potentially even higher rates when income exceeds $10 million.
Continuous issues around European debt and weak economic data in the U.S. as well as extreme volatility in the Capital Markets, sparked fear of a global recession. The magnitude of Dow swings this past week reached 800 points between a high of 11,550 on Wednesday and a low of 10,749 on Friday. As benchmark 10-year Treasury note yields fell below 2%, a level not seen for at least the prior 50 years, the already ridiculously high price of gold jumped through the roof, almost reaching the unfathomable mark of $1,900 as investors fled to safety. Markets in the U.S. reopened on a much more positive note today, despite the weak start to the trading day in Asia.
Unemployment benefits claims increased in count this week by 9,000 and reached a seasonally adjusted 408,000 for the week that exceeded expectations. The prior week's claims number has been revised upwards as well. At the same time, the four-week moving average, which measures claims in a smoother manner, avoiding jumps due to gaps in processing or other technical reasons, fell 3,500 to 402,500. The total number of people claiming unemployment benefits was slightly down, 143,737 making up a total of 7.43 million. The news of President Obama looking to intensify a job-creation effort was promising, except for the details of the plan, where we witness quite abstract tax cuts and government-supported construction jobs. The great heritage of FDR who had pulled the country out of the Great Depression and created a basis for the decades of growth, may not be overstated. We live, however, about a century later and the instruments of that time may not necessarily apply to the current environment with the same success rate. The infrastructure certainly needs updates, on a nice-to-have basis, but roads to prosperity are not built of cement and asphalt these days. It would be truly nice to see a well-defined initiative from the world of modern technology in the government-supported jobs plan.
The Housing Market Index that represents Builder Confidence was reported at an unchanged low level on Monday. Housing starts for July came out on Tuesday at 3.2 percent lower level than in previous month, but 3.8 percent higher than in July of the last year. Existing Home Sales fell 3.5 percent in July to their 2011 low level. As Treasury yields plunged, mortgage rates dropped to the lowest level in history to 4.15 percent on a 30-year fixed rate mortgage and 3.36 percent on 15-year last Thursday.
Inflation related indicators were reported mostly on the higher levels this past week. U.S. Import Prices increased, while Export Prices decreased slightly. Producer price index rose 0.2 percent in July and the Consumer Price Index increased 0.5 percent for the month. Industrial activity readings remained weak. While the Industrial Production index by the Board of Federal Reserve increased 0.9 percent in July, the Business activity index based on the Philadelphia Fed's survey fell to the lowest level since March 2009. Leading indicators that rose 0.5 percent in July failed to outweigh the fears sparked in the markets by the Philadelphia Fed survey along with other signs.
Information provided by NYCB Capital Markets