Market Update - by Steven M. Cain

It was another good week for the markets with fresh signs of economic recovery.  But the skeptics are not backing down, claiming that the incredible run in the markets can’t last forever and that, hidden beneath some of the good economic reports are some harsher truths about the state of the economy.

Focusing on the good news – and there was a lot of it last week – Federal Reserve Chairman Ben Bernanke all but predicted the end of the recession at the annual Fed conference last Friday in Jackson Hole, Wyoming.  While he cautioned that the recovery would be lengthy, he nevertheless suggested that “the prospects for a return to growth in the near term appear good.”

Seeming to back up Bernanke’s claim, several economic reports last week showed improvements in both the industrial and housing sectors.  The Philadelphia Fed’s general economic index for August registered a positive 4.2, up sharply from negative 7.5 in July, and the first positive reading in almost a year.  In another widely heralded report, the National Association of Realtors announced that sales of existing homes in the US jumped 7.2% in July to the highest level in almost two years.  This was the largest percentage increase since records started being kept in 1999, and suggested that the inventory of unsold homes could be down to just over a nine month supply if the current pace of sales can be sustained (a 7-month supply represents a balanced market).  All this buzz made the markets jump.  The Dow Jones closed above 9,500 on Friday for a weekly gain of almost 185 points, its best close in nine months.  The Dow is up again this morning, the fifth consecutive day of gains.

The good news aside, a lot of observers continue to feel uneasy about the current state of affairs.  Their concerns are many, but tend to revolve around the greatly weakened state of the American consumer and job-market.  For a few examples, consider the following:

·    In residential housing, sales may be increasing, but so are foreclosures.  Countering the NAR’s report about increases in residential sales, the Mortgage Bankers Association reported last week that the percentage of mortgages that are at least one payment past due increased to 13% in the second quarter, an all-time high.

·    Commercial real estate is also suffering, with values way down and the prospects for obtaining new financing severely constrained.  The prospects for a blood-bath in commercial real estate foreclosures was a prime reason the Fed and Treasury decided last week to extend the TALF program from the end of this year through June of 2010, to provide some measure of liquidity for the refinancing of highly-rated CMBS loans that will be coming due during that time.

·    Perhaps the biggest concern is the ever-growing level of Federal spending that has propped up the economy.  Warren Buffet wrote a piece in the Op-Ed section of the New York Times, praising the spending as a necessary evil in the face of the financial melt-down, but cautioning that it can’t continue forever.  Here’s the link:  http://www.nytimes.com/2009/08/19/opinion/19buffett.html?scp=2&sq=Warren%20Buffet&st=cse

The good performance on the stock markets lead to a decline in demand for Treasuries, pushing the yield on the 10-Year Treasury up from a week ago (it opened at 3.58% this morning), and leading to an increase in our fixed rates.  The Fed is set to auction $109 billion in Treasury notes over the next three days, starting tomorrow.  The demand (or lack thereof) for these Notes will certainly be a key factor in determining where rates go from here.

Steven M. Cain

Senior Loan Consultant

Chase Commercial Term Lending

10 S. Dearborn Street, 18th Floor

Chicago, IL 60603

Mail Code IL 1-0353

Direct 312.732.6012

Fax 312.732.6409

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