WEEK IN ADVANCE

Very little economic data is due out in the coming week so there may be some carry-over of the disappointing jobs report today. Actions by the lame duck Congress will be watched keenly as the Treasury sets to auction another $66 billion in notes and bonds. Interest rates may fall under downbeat data, policy and supply concerns.

Economic Highlights for the Week Ending December 3, 2010

MONDAY, November 29th

Along with a full slate of economic releases this week, the lame duck Congress reconvenes for their final session. Many weighty issues have been left for decisions during this time including the Bush tax cuts, set to expire January 1 and extension of unemployment benefits for nearly 2 million workers. Some form of relief is likely in both cases. Funding the budget and more importantly, reducing the deficit are also on the agenda. A stronger economy will help broaden the tax base and naturally reduce the need for federal spending. Additionally, deficit reduction will require sacrifices in the form of higher taxes and deep spending cuts in many programs that could impact many Americans.

TUESDAY, November 30th

The S&P/Case-Shiller 20-city home price index fell 0.8% in September the third straight monthly decline. Home prices are now only 0.6% above their year ago level. As recently as May, home prices were up 4.7% year over year. Sharply lower home price gains in the past four months is reflective of soft existing home sales during the period combined with a high percentage of distressed sales. Larger home price declines can be expected going forward as foreclosure inventories work through the market next year.

The consumer confidence index increased to 54.1% in November from a level of 49.9% in October. The gain was led by a higher expectation score though present situation ratings were up slightly as well. Nevertheless, confidence remains mired in recessionary territory as consumers wait for stronger job creation and faster growth.

WEDNESDAY, December 1st

The MBA mortgage applications index dropped 16.5% to 608.8% for the week ending November 26. The purchase index increased 1.1% on the week as the refinance index plunged 21.6%. The refinance index is trending sharply lower over the past several weeks while it appears that purchase activity may finally be recovering from its post-tax credit correction. Currently rates remain near historic lows and credit markets continue to thaw which should encourage homeowners to refinance. Home sales and purchase activity remain dependent on a substantial turnaround in job and income growth.
The ISM manufacturing index slipped to 56.6 in November from 56.9 in October. Manufacturing activity nationwide is holding up well; the level of the index indicates continued expansion in manufacturing activity nationwide with mild expansion in the broader economy.
Motor vehicle sales maintained an elevated 12.3 million unit annual pace in November, matching the highest sales level since September 2008, with the exception of the cash-for-clunkers program in August 2009. Despite the improvement, vehicle sales remain well below their longer running average of 16 million units per year. Sales are not expected to return to that pace for another year or two.

The Fed's beige book summary of economic conditions in their 12 banking districts during October and early November showed that the economy continued to improve on balance in most all areas of the country. Consumer spending, manufacturing and jobs growth were slightly stronger while inflation and wage pressures remained subdued. The housing market and commercial construction remained the weak spots. The report, compiled in preparation for the December 14 FOMC meeting, indicates the fed funds rate will be maintained close to zero for an extended period.

THURSDAY, December 2nd

Jobless claims jumped by 26k to 436k for the week ending November 27. Even with the gain, initial claims are trending lower and maintaining a range below 450k suggesting the pace of layoffs has slowed again. Other data from the labor market however suggests the pace of hiring has yet to pick up in earnest.

The pending home sales index rose 10.4% in October to 89.3%. The rise in the index over the last few months could result in stronger existing home sales in November and December. However, any improvement in home sales will be from a very low level.

FRIDAY, December 3rd

Payroll employment grew by 39,000 in November much less than an expected job gain of 145,000. The government shed 11k jobs while private sector jobs rose by 50k. Upward revisions in the prior two months resulted in a net gain of 38k additional jobs which provided some offset to weaker-than-expected private sector job growth. So far this year the private sector has created 1.171 million jobs; employment is still 7.412 million below its December 2007 peak level. Separately, the unemployment rate rose to 9.8% last month from 9.6% in October.

Illegible Tea Leaves

With the credit markets reacting frostily to the Fed's QE2 program of buying up gobs of Treasury securities (roughly $75 billions worth each week until the middle of next year, unless economic changes—or intense political pressures—dictate a change to that schedule), interest rates showed an upward trend over the week. The average rate on the Freddie Mac 30-year FRM, in particular, climbed from the prior week's record low of 4.17% to a startling 4.39%. Measured from Wednesday through the following Thursday each week, this average mortgage rate should have our full attention.

Interest rates were buoyed by a few rather positive economic indicators as well.

Keeping in mind that the main thing needed by the real estate market to stimulate sales is that consumer confidence rise because of better job formation in America and by increasing retail sales. Thus, the slight decline in unemployment insurance claims—that is, in the 4-week average of new claims—gains a certain significance. In reality, new claims actually rose by 2,000 in the volatile weekly data. But the 4-week average showed a loss of 4,000, and that took the number total claims to 443,000, which is the lowest level since the first week of September, 2008.

This bears watching, of course. (Keep the corks in the champagne bottles.) But a feeling of greater optimism may be justified.

Earlier in the week, we learned that retail sales last month reached their highest level since August, 2008. This may be a harbinger of better-than-expected holiday sales and may foretell better economic growth.

It's good news, but as the frequent reader of this and other economic updates knows, such good news often translates into slightly higher interest rates. So here we have the source of yet more upward pressure on rates.

This is brings in the credit markets a great many borrowers who want to grab a low rate before rates rise still further.

So what are the inevitable "on-the-other-hands" these days? First, there are tremendous worries about the viability of the QE2 plan. Foreign critics seem worried primarily that America is trying to sneak an advantage for its exports by reducing the exchange-rate value of the dollar (and thus making our products less expensive to foreign importers). Needless to say, Fed officials have been vociferous in denying that they have this intention—though QE2 may possibly produce this result (among others). American critics worry about the level of inflation it may create.

Second, in any case, is the worry produced by Ireland's obvious fiscal problems. If you think the problem of getting Republicans and Democrats to agree on the same solutions to our debt woes is nearly impossible to overcome, consider what it's like when the challenge includes agreement among more than a dozen different nations. So, as The Economist notes this past week, the countries are making a mess of it. What we sense in the larger economic world is a huge sigh of relief whenever—as happened last week—it seems that a bail-out is being achieved…followed by fear and gnashing of teeth as it later becomes apparent that more needs to be done or, in the case of Greece, genuine economic recovery is much further away than most are willing to say.

Then there's the matter of China's rising inflation rate, and the possibility of price controls to keep it under control. More on that later.

With such counterforces, it's difficult to assume rates will continue to rise in a steady pattern. Nonetheless, the downward slide—and the Fed's ability to keep it in place—seem to have been at least temporarily broken.

by: Bill Fisher

Al Gore admits ethanol is stupid

"First generation ethanol I think was a mistake. The energy conversion ratios are, at best, very small."

This quote doesn't come from a Stansberry analyst... It's from the godfather of clean energy, Al Gore. Speaking at a green energy business conference in Athens, Greece, Gore admitted how stupid ethanol is.

The U.S. ethanol industry will consume around 41% of the U.S. corn crop this year and 15% of the world's crop, according to Goldman Sachs. And it takes far more energy to produce ethanol than the fuel provides... It's a net negative energy product.

If you believe consuming fossil fuels is bad for the planet, you must believe ethanol is terrible for the planet. In addition to whatever damage it does to the environment, ethanol consumes massive amounts of corn that should be used for food (corn is the single-most important commodity for the world's food supply). Gore even admitted ethanol has "an impact on food prices."And why did Gore support this absurd mission in the first place? Because he was running for president:
One of the reasons I made that mistake is I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president. So Al Gore jeopardized the environment and caused people to starve all because he wanted to become president.

China's central bank raises reserve-ratio requirement by 50 basis points

List of Fed's enemies grows longer as bond market carnage spreads

It's always gratifying when the mainstream media picks up on a theme you've been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we've seen in recent days:

"Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase" —

Wall Street Journal, November 15

"Under Attack, Fed Officials Defend Buying of Bonds" —

New York Times, November 16

"Fed officials defend $600bn stimulus" —

Financial Times, November 16

"Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits" —

Wall Street Journal, November 16

The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.

Key policymakers are giving rare, on-the-record interviews about QE2's benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.

Fed Fighting a Losing BattleDefending the Undefendable!

My take? The Fed is right to worry. I say that because its QE2 program isn't just

not helping. It's actually

hurting the markets.

Take long-term Treasury yields ...

As I've been pointing out recently, they've been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.

Then there's the mortgage market ...

Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed's policy helping homeowners.

And then there's the municipal bond market ...

It has completely imploded in the past several days. Take a look at this chart of the

iShares S&P National AMT-Free Municipal Bond Fund (MUB). It's one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.

You can see it's in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it's made in the past 15 months ... in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!

The move doesn't stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields ...

Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They're also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.

But clearly, the cost of borrowing is now not only going up for Uncle Sam. It's also rising for governments all over the country, and mortgage borrowers. And it's starting to inch higher for corporate debtholders.

Opposition Rising in Washington —and Everywhere Else

As interest rates surge, the opposition to Bernanke's policy intensifies.
Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it's too late?

The group, which includes Michael Boskin, a former chairman of the President's Council of Economic Advisors ... Douglas Holtz-Eakin, a former director of the Congressional Budget Office ... and Kevin Hassett, a former senior economist at the Fed itself, said:

"We subscribe to your statement in

The Washington Post on November 4 that 'the Federal Reserve cannot solve all the economy's problems on its own.' In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

"We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

"The Fed's purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems."

The rising opposition to the Fed is further evidence that the global money war I've been worried about is intensifying. It's proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.

We'll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.

By Mike Larson

U.S. benchmark 30-year mortgage rate at highest point since August