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Farrell: This Holiday Brings Us Perspective

Last Thursday- Christmas Eve- was at least two food comas ago.

I love the Holiday's. You are supposed to over eat. How good does life get? But there was some news last Thursday that needs to be noted/remembered as it was encouraging. Initial unemployment claims fell 28,000 to 452,000 which is the lowest level since September of 2008. The four week moving average also fell by 2,750 to 465,250 and that is also the lowest since September of 2008. The four week number is the 16th week in a row that has declined. Look for jobs to actually be created if not on January 8th when the next Bureau of Labor Statistics summary is released, then the month after.

Durable goods- those intended to last more than three years- were also announced last Thursday and increased by .2%. But exing out the volatile transportation sector saw a gain of 2%. The past six months headline durable goods are up at a 5.2% annual rate reports Brian Wesbury of First Trust Advisors. Ex the transportation, orders are up at a 13% annual rate over the same time period. These numbers, and the initial unemployment claims number, has prompted Macro Economic advisors to raise their fourth quarter estimate for Gross Domestic Product to 4.7%. Capital Economics, based in Toronto, is staying with their 5% estimate for Q4 GDP.

The other Christmas Eve announcement was not so uplifting. The Treasury Department snuck out a late pronouncement that the government will be responsible for any and all losses suffered by Fannie Mae and Freddie Mac from now through 2012. Previously, the government had been on the hook for $200 billion for each of them. A senior Treasury official said he didn't expect either company to need the additional authority. If that's so, why did they grant it? Why did they sneak it out late at night just before Christmas? To rub salt into this particular wound, it was announced last week that the senior execs at both companies are in line for multi-million dollar pay days. To get paid millions with an unlimited loss guarantee is good work if you can get it.

The piper might be coming close to getting paid. This coming week, the Treasury is going to auction $118 billion in two-, five-, and seven-year notes. This is just part of the estimated $1.4 trillion that will need to be raised this fiscal year. Last week the yield on the two-year note went from .79% to .96%. The five-year went from 2.27% to 2.53% and the seven-year from 3.03% to 3.29%. The ten-year also moved up and finished the week at 3.80%, which is up over 60 basis points in just a few weeks. Part of the reason for the back-up in yields would be the anticipation of continued good economic news. But the other part would be fear of inflation and the enormous amount of debt that has to be financed. The 30 year conforming fixed rate mortgage finished the week at 5.05%. But with the ten year at a 3.8% yield look for mortgage rates to go higher. The historic spread between the ten year Treasury and the 30 year mortgage has been 160 basis points. That would imply a 5.4% 30 year mortgage. Still low historically, but enough to kill off refinancings.

The Paterson-Pew Commission on budget reform estimates that debt as a percent of GDP will be 85% by 2018, versus 53% now. By 2022, they estimate that debt will be 100% of GDP. If the government wanted debt to be 60% of GDP in 2018, the commission estimates spending cuts and/or tax increases of $300 billion would be needed in that year.

Quote of the week from Senator Harry Reid: "I don't know if there is a Senator that doesn't have something in this [health care reform] bill that was important to them. And if they don't have something in it important to them, then it doesn't speak well of them." That is one hell of a way to run a country. Happy New Year!

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