"The days of precipitous declines are doneand revenues are beginning to look healthier." So said Rupert Murdoch in announcing News Corp.'s earnings. I have no axe on News Corp., but I like the headline. I wonder if: a) it's accurate; and/or b) if we will be seeing more such announcements in the near future. If you take just today's unemployment claims numberas a guide, you would be encouraged.
Initial unemployment claims were down 34,000 from last week to 601,000. That is still a staggering number that represents more personal heartache than should exist, but it is down. And the four-week moving average was also down 15,000 to 623,500. This is the fourth week in a row of declining numbers. It will take a little more to convince anyone the recession is over, as it has been a decline of more like 40-50,000 from the peak that has marked the end of recessions. The auto mess is likely to spike claims up again, but we should be able to factor that into our analysis over the next few weeks.
Other stuff going on this week has been on the positive side as well. The government bond auction the other day for three-year notes was well received, and yesterday's 10-year auction was especially good to see. The government sold a larger-than-usual amount, and it was well-overbid, with a cover of 2.47 times, and the average over the past few years has been 2.3 times. Thursday's 30-year auction was also well-received, with a bid to cover ratio of 2.14 to 1.0, which is above-average for the 30-year. The fact that the demand is so relentlessly large is good news for future funding needs.
Libor is lower than ever at 0.96%, and the three-month Treasury is skewed at 0.19%, but even at that, the TED spread is 77 basis points. If the Treasury reverts to a more normal level — as I think it will after the stress test — then we should approach the long-term TED spread average of 50 basis points. Clearly, the intrabank lending market is healed.
Baa bond yields are down below 8.10%, and it's apparent that the huge hoard of cash sitting in money funds and bank accounts is starting to move to better-yielding vehicles. The spread between Baa and Treasuries is around 480 basis points, which is more than twice the normal, but it is improving, as is the spread between jumbo mortgages (at around 6.5%) and Treasuries. That spread has historically been around 215 basis points and is now a bit north of 300 basis points. But that is almost close enough to plan a holiday dinner together and is an enormous improvement. I think the 30-year jumbo rate is a critical indicator of credit availability. A 30-year jumbo can't be sold to Fannie or Freddie. It can't be securitized since that market doesn't exist. So for a bank to make the loan, it's with the knowledge they will keep it on the books. Lower jumbo rates will be a solid indication of credit availability.
The wonderful run we have had in the market makes me a bit nervous. From an intraday low of 666 on the S&P in early March to 900-plus has been on light volume and poor breadth. Far too many low-priced stocks have been the volume leaders, and I continue to think it would be very healthy if we could correct a bit and take a rest.
The lower 800's would be my target over the next few weeks.