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Farrell: Beware of Greeks Taking Gifts

Friday, 23 Apr 2010 | 5:05 PM ET

I ripped that headline directly from a report written by Mike Fitzpatrick of MF Global, one of the best oil guys around. Thanks, Mike. I couldn't resist it. It so says it all. As late as Thursday afternoon of last week I was still reading reports that hoped Greece would not have to ask for financial aid. I don't know how you could come to that position.

This time last year the Greek government was estimating the deficit to be under 4% of GDP. After several revisions, including one less than a week ago, the estimate is now 13.6% of GDP. And why believe that? The markets are highly skeptical of the rescue package as the Greek 10 year bond is still well above 8.5%.

Goldman Sachs, yes that Goldman Sachs, issued a report saying Greece is likely to cut/delay bond payments soon and seek to restructure their debt. [And, as an aside, Jason Trennert's sharp-eyed guys at Strategis saw a Rasmussen report that found 73% of those surveyed think Goldman Sachs committed fraud. That paves the way to a financial reform bill a little smoother.]

The risk here is twofold: the aid to Greece proves to be insufficient and gets repeated next year, or they attempt to repeat the aid, or Greece defaults/restructures. And the second risk is one of contagion. Portugal and Spain could well be on the bubble. How many countries can get bailed out?

The bond market is starting to pick on Portugal. Its 10 year bonds are up sharply in yield to almost 5%. Nowhere near Greece's level, but the deterioration has been swift. Just a few weeks ago Portugal was trading about 60 basis points over Germany. They are now roughly 200 over. Best for Greece to default/restructure now and stop pretending this can be contained. Greece has been in default half of the time since 1800 so it seems like a national pastime. I am negative on the Euro vs. the dollar still.

Economic reports in the US flowed in last week, and let me review just a few. Headline producer prices rose .7% which puts the year over year gain at a 17 month high of 6%. But the core PPI, which is the Fed's preferred measure, increased just .1%. That measure is up only .9% year over year and could raise deflation fears. Initial claims for unemployment fell (thankfully) to 456,000.

We continue above the generally accepted level of 400,000 claims which would be consistent with stable payrolls. Job growth will show a sudden jump soon in that over 1.5 million census workers need to hired. But there will be a surge in job growth beyond the census numbers in that the number of temporary jobs created are disproportionately high relative to the economic rebound.

It could be natural hesitancy after the financial meltdown caused employers to turn to the temp market and mistrust the better (not good, but better) business environment. Or it could have been the health care debate caused a pause to see what benefits might cost. Either way, I think we will see strong job growth soon.

But the unemployment rate will stay high. As jobs are created, discouraged job seekers rejoin the workforce, so the denominator changes. Since the U-6 measure of unemployment (this measures out of work, part time looking for full time, and discouraged people who have stopped looking for work) is almost 17%, look for the rate of unemployment to stay above 9% for the rest of this year.

Existing home sales jumped nicely to 5.35 million units. But the coming expiration of the tax credit probably contributed to the move as buyers were anxious to get in by the deadline. Also, mortgage rates have dropped back to close to 5%, if you can get a mortgage. Even at that, this sales level is only about 1/3 of what had been the peak. The inventory of homes for sale declined to 8 months from 8.5 months.

That would represent more than 3 million homes. The big debate is over the "shadow" inventory. Those would be homes where the owner has defaulted but has yet to be evicted. The WSJ had an article last week saying "foreclosure filings hit a record in March of 367,000 and there are 5.5 million additional homes in the foreclosure pipeline."

It makes sense that a bank would hold off on foreclosing a defaulted mortgage since they would rather have an occupied home over a vacant one. Other estimates for the number of such "shadow" homes range from 1.5 to 5 million. I haven't a clue.

But if we have 8 months of inventory and that is a bit over 3 million homes, figure we really have a year plus of homes for sale, at least, and it could be a lot more than that. I hope that the housing market is bottoming in price,. The median price of a home last month rose a few thousand dollars to $170,000. Housing is trying to dig in and form a bottom.

The situation is not as dire as the above numbers might imply, though, in that about 1.25 million new households are formed in the US every year. Yes, Mom and Dad, those post college lumps on the couch will someday move out. New home starts are in the dump so if the economy continues its recovery, existing home sales could pick up.

What is astonishing to me is that the "strategic" defaulters are spending what would have been the mortgage payment for life style. Estimates are that over $100 million of consumer cash being spent is sourced from this clearly temporary fountain. Sooner or later the piper gets paid. The recent strength in consumer spending and the positive same store sales comparisons may well be partially misleading.

March durable goods orders released last Friday made for good reading. Ignore the headline of a decline of -1.3% for the month. That was caused by a drop of almost 70% in the highly volatile commercial aircraft component. Which, by the way, had been up 150% the past two months. Ex that, the core order book rose a healthy 2.8%. Non-defense capital goods (and I am so sorry for the obvious attempt to put you to sleep) rose by 4%. This is 'capital expenditures' made by businesses, and the reason I mention it is job growth tends to follow this number.

The market seems to take it all in stride. Companies reporting good earnings are rewarded and vice versa. The news from Europe or the Goldman Sachs surprise provides a temporary blip, but only temporary. You have got to be impressed.

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