BLS Jobs Data, Bush’s ARM Bailout, Bill Gross & Mish on the Fed, and More!

• December 7th, 2007
• 5 Min Forecast
• Daily Issue, Issue

by Addison Wiggin & Ian Mathias

• Bush and Paulson unveil subprime bailout plan… fumbling incompetence begins immediately
• Jobs report exceeds expectations… will the Fed change its mind on the latest employment data?
• Bill Gross versus Mish Shedlock in a FOMC funding rate cage match
• The 5 examines inflation since 2003… sure you still want a December rate cut?
• Mortgage payment delinquencies and foreclosures hit new highs… readers chime in with who’s to blame

Yesterday, the White House announced a big, bad voluntary bailout program for subprime borrowers about to get smacked with ARM resets. They very publicly included a toll-free number to call if you think you qualify for assistance… unfortunately, they gave out the wrong number.

“It was a hotline and it was toll-free,” reports the UPI, “but it was a hotline to the Freedom Christian Academy, a Texas-based group that provides Christian education materials suitable for home schooling,”

Oops. Convenient accident, wasn’t it?

“If there was any justice in this world,” retorted our feisty sidekick upon hearing the news, “it would have been some S&M sex line, or maybe Hillary Clinton’s donation hotline… or a combination of the two.”

Under the terms proposed by President Bush and Treasury Secretary Hank Paulson, subprime borrowers who are in danger of losing their homes during the next wave of rate resets could be eligible for a five-year rate freeze.

The White House claims this sweet spot of qualified candidates could entail up to 1.2 million homeowners. Analysts from Barclays and the Center for Responsible Lending estimated yesterday that only between 145,000-240,000 borrowers will qualify for the freeze.

Markets swooned on the news. Major indexes gained between 1.2-1.4%. The Bush proposal sent just about every financial and housing stock into positive territory.

And in spite of the wall of worry surrounding retailers, yesterday’s earnings action revealed a glimmer of hope for some of the big-name retailers: Wal-Mart, Costco, Macy’s and Nordstrom all reported strong Novembers.

But we’re not holding our breath.

The Labor Department announced this morning that 94,000 jobs were added in November, just a bit higher than analyst expectations of 90,000. With a mere 64,000 private jobs added, today’s BLS report is barely one-third of the 189,000 private sector jobs that the ADP estimated on Wednesday. Unemployment stood still at 4.7%.

“I believe the euphoria surrounding the growth of jobs in November to be readily out of line,” opines a reader. “Have people forgotten that November is when all the retailers fortify their staffs with seasonal help for Christmas? We shall see what the report says in January.”

We’ve attested to the gross margins of error and historical inaccuracy of this report before. But like it or not, the jobs report moves markets. Much like the September and October BLS reports, the jobs numbers are serving as one last economic indicator before the FOMC makes their rate decision next week.

“Stand by for a tumultuous 2008,” Bill Gross, the U.S.’ most famous bond investor, this morning, agrees.

“As the market struggles to move from the shadows back into the sunlight of sounder banking and financial management, accompanied by fed funds levels at 3% or lower,” Gross writes, “as the commercial paper market shrinks by hundreds of billions a month, central banks worldwide are facing a giant stress test of the modern-day shadow banking system….

(For more on the commercial paper market, check today’s Rude Awakening … we don’t have the time to unpack an issue this big)

“The publicized and photographed overnight ‘runs’ on Countrywide and the U.K.’s Northern Rock in mid-August were nothing compared with what’s taking place in the shadows of the real banking system.

“Chairman Bernanke and his divided band of governors will have to feel their way along this treacherous path with canes in hand — not totally blind, but significantly hampered by a lack of historical context that might point the way to the ideal rate via precedent, as opposed to feel.

“It is logical to me, therefore, to assume that 1.5% is the neutral rate required to keep the future shadow oiled and properly functioning. If so, then 2% core inflation and 1.5% real fed funds require a drop to at least 3.5% just to maintain current momentum. To restart a near-recessionary economy, we may need to eventually go down to 3% or lower…”

“I do not think the Fed, Bill Gross,” comments The Survival Report’s Mish Shedlock, “or anyone else knows what neutral is. What will a return to 3% accomplish? Will 3% create jobs, reinflate the housing bubble or reignite commercial real estate? Will it do anything at all for wages?

“I propose it will do none of the above. For starters, a 3% fed funds rate will likely to do little for housing, given that so many are underwater on their houses and default risk is increasingly being priced into mortgage rates.

“In addition, 3% rates will not stop global wage arbitrage, the deflationary effects of outsourcing, or cure rampant overcapacity in darn near everything including Home Depots, Pizza Huts, strip malls, nail salons, and Wal-Marts. Nor will 3% rates strengthen neglected infrastructure, which may mean higher state taxes.

“While 2008 is likely to be tumultuous, Bernanke, the Fed, the Treasury and Congress are all doing everything in their power to avoid the sunlight of free market forces. We are closely following the footsteps of Japan, even though history has warned us that path leads nowhere.”

Not to mention, the “I” word: inflation.

This morning, The N.Y. Times is lamenting the cost of living in NYC at the behest of the rapidly diminishing buying power of the U.S. dollar:

If the Fed returns to 3% or less by mid-2008, you can expect to see the middle class really starting to get hurt by rising prices.

More than one in 10 of the world’s population admitted to paying some sort of bribe in 2007, says a study released this morning by Transparency International. Surprisingly, the world’s poor were the most frequent bribers in 2007.

Over 70% of those surveyed in nations such as Cameroon, Cambodia, Albania and Kosovo admitted to bribing this year. According to the stewards of the survey, 2007 marks the most corrupt year in the study’s five-year history.

The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter, reports the Mortgage Bankers Association today. An incredible 5.59% of all homes loans in the U.S. are at least 30 days late on one or more monthly payments, the worst delinquency rate since 1986. One in five subprime ARMs had a late payment during the quarter. Yikes.

According to the same survey, new foreclosures hit yet another all-time high in the third quarter. 0.78% of all U.S. homes entered foreclosure from July-September.

The government of Panama is approving legislation to force Panamanian public schools to teach Mandarin Chinese to all students. Legislators have given conditional approval to a bill that would, essentially, begin the process of making Mandarin the second language of Panama.

China is the biggest single user of the Panama Canal, and has about $1 billion in commercial links with the country.

“I’ve been an active real estate investor for 50 years,” writes a reader commenting on yesterday’s reader mail temper tantrum. “I can count on the fingers of one hand the number of realtors I’ve encountered whom I think were honest and told me the whole truth. I’ve never met an honest car salesman — new or used. But is has always been ‘buyer beware’ in all areas of our economy.

“Today’s problem is that no one is willing to accept responsibility for their decisions. If they make a correct decision, they think they’re geniuses. If they make a wrong decision, it couldn’t possibly be their fault and all they have to do is find the ‘guilty’ person and then sue. I’ve watched our society go from being reasonably adult to a spoiled brat in just a few generations.”

“Hey, wait a minute, guys,” insists a reader, defending the profession. “My wife is a realtor, not a financial adviser. Her role is to represent individuals who are interested in selling or purchasing real estate. The information she assembles regarding the prices of homes isn’t massaged to provide a ‘rosy’ or ‘gloomy’ picture. Only the facts. It’s still the responsibility of the buyer to negotiate the best price possible. The buyers and sellers have to make the agreement, not the agent.”

The 5 responds:
Ostensibly, that’s the role of a stock broker, too.

Have a nice weekend,

Addison Wiggin
The 5 Min. ForecastP.S. Today marks the beginning of a rare opportunity.
For the next month, we open the doors to the Agora Financial Reserve. The exclusive membership entitles you to the highest level of investment advice and economic commentary we provide… at a highly discounted rate.

We’re kicking off our AFR offering with a special bonus… follow this link and learn how you can get our $995 options service free with your membership.

P.P.S. And another program note. If you’re interested in joining us for the world premiere of our film I.O.U.S.A. at the Sundance Film Festival, these are the dates, times and locations of the screenings:

Tickets are not easy to come by, even for the writers and producers of the film. You must first register at this link: http://www.sundance.org/festival/boxoffice/individual_tickets.asp

The organizers of the festival will e-mail you a time to log in and purchase blocks of tickets for the showtimes you like. Hope you can come out and support us! If you can’t, it’s, obviously, understandable. We’ll keep you posted right here in The 5.