Stocks End Up With A Gain

Stocks climbed Thursday, as investors bet that a big drop in new home sales and a weak reading on GDP growth will make the Federal Reserve more likely to cut interest rates further. However, gains were limited by surging oil prices and some anticipation about Friday's economic reports.

The Dow Jones industrial average added 0.3 percent, ending about 82 points away from its all-time high above 14,000, which it hit in July. The Broader S&P 500 index added 0.4 percent and the tech-fueled Nasdaq composite added 0.4 percent. Treasury prices jumped, lowering the corresponding yields, also on bets that the Fed is likely to keep cutting interest rates. Oil and gold prices rose.

Friday morning brings readings on personal income and spending - and the PCE deflator, the report's inflation component. After the start of trading, the consumer sentiment index from the University of Michigan is due, along with the read on construction spending and the Chicago PMI, a regional manufacturing report.

Stocks have been rising since the Federal Reserve cut interest rates last week for the first time in four years, and that optimism has continue to put a floor under the market this week. The bullish underlying tone seemed to put investors back in the "bad news is good news" camp regarding economic news, with weaker reports speaking to hopes that the Fed will have reason to keep cutting interest rates going forward.

But that assumes that the reports don't suggest higher inflationary pressures or a big drop in consumer spending. Thursday's reports seemed to hug the line between supporting hopes for further Fed cuts and raising the red flag about the consumer and the economy.

New home sales fell to a 795,000 annual unit rate in August, the lowest level in seven years, from an 867,000 unit rate in July. It was a steeper-than-expected decline. The weak report wasn't surprising. The trend in the sector isn't going to correct itself until late next year.

GDP growth was revised down to 3.8 percent in the second quarter from a previous read of 4.0 percent. A separate report Thursday showed a surprise drop in weekly jobless claims last week.Friday's personal income and spending reports will be the next indicators of how the consumer - whose spending fuels more than two-thirds of economic growth - is holding up. As long as consumer spending continues to accelerate, stocks should be able to keep pushing higher

Stocks rose Wednesday after GM and its workers' union reached a deal that ended a two-day strike. Also boosting stocks: news that Bear Stearns is talking with Warren Buffett and other investors about buying a stake in the company. But after surging more than 9 percent Wednesday, GM stock was down about 3 percent Thursday. Bear Stearns was down 1.5 percent Thursday after its big run-up on Wednesday.

But other company news released Thursday was less positive. KB Home reported a steep third-quarter loss that was worse than what analysts were expecting. The homebuilder also warned that the housing market is likely to worsen through 2008.

Market breadth was positive. On the New York Stock Exchange, winners beat losers 2 to 1 on volume of 1.18 billion shares. On the Nasdaq, advancers beat decliners by 4 to 3 as 1.77 billion shares changed hands.

U.S. light crude oil for November delivery rose $2.58 to settle at $82.88 a barrel on the New York Mercantile Exchange.

Last week, the October contract settled at a record high of $83.32. However, the record price remains below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

Treasury prices rose, lowering the yield on the 10-year note to 4.56 percent from 4.62 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading the dollar fell versus the euro and also dipped versus other major currencies.

COMEX gold for December delivery rose $4.40 to settle at $739.90 an ounce.

The Othe Extreme In Housing

from Crain's Chicago Business:

Condo atop Chicago Spire to list for $40 million
(Crain’s) — It's going to cost top dollar — $40 million to be exact — for a place atop the Chicago ...

How Weak Is Housing? Has It Bottomed?

I believe that a picture is worth 1,000 words.

MBA mortgage applications slipped 2.8% in the week ending September 21, following three straight weeks of increases. The decline was led by purchase applications which tumbled 7.3% on the week - the largest weekly decline since January 19 when they fell 8.4%. This is just another indication of potentially very weak home sales in September. Refinancing applications continued to pour in, rising 3.3%, as ARM resets continue to loom. Indeed, refinancing now makes up 46.4% of total loans, which is up from 36.2% just two months ago. The problem we see is just how few of these applications are actually being underwritten, with lending standards so tight. Lending rates picked up in the latest week, with the 30-year fixed rising nine bps to 6.38% and the 15-year ticking up seven bps to 6.06%.
Today's mortgage application data is no exception.

The disparity between different parts of the country is remarkable.

Glut of Unsold Homes Rises To 18-year High

Home prices falling at fastest pace in 16 years

In a sign that the housing slump is far from over, home resales slipped for the sixth month in a row in August as the credit squeeze forced many sales to fall through, the National Association of Realtors reported Tuesday. With sales of existing homes falling 4.3% to a five-year low seasonally adjusted annual rate of 5.50 million in August, inventories of unsold single-family homes rose to an 18-year high.

The drop in sales was close to expectations. The glut of unsold homes on the market will put further pressure on prices and new construction. Prices will likely have to fall further to bring the rising supply and weakening demand back into balance.

Inventories of unsold existing homes on the market rose by 0.4% to 4.58 million, representing a 10-month supply at the August sales rate, the realtors said. For single-family homes alone, the inventory represents a 9.8-month supply, the most since May 1989.

The credit-market freeze in August no doubt contributed to the decline in sales. Many loans that had been committed to fell through, so the sales couldn't close. An informal survey of real estate brokers showed about 10% of jumbo loans were failing to close.

The increase in inventories was driven mostly by lower sales, not by more supply hitting the market. In unadjusted terms, 596,000 homes were listed for sale for the first time in August, the fewest listings for any August in seven years. In recent years, about 700,000 or 800,000 homes would be listed in a typical August.

The median sales price was $224,500, up 0.2% since August 2006. Single-family median prices were unchanged year-over-year at $223,900. Prices are still holding on. The median price is affected by the mix of homes sold, so the bigger drop in the more-expensive West region could be masking actual price declines.

Earlier Tuesday, Standard & Poor's said the Case-Shiller home-price index for 20 major cities fell 3.9% compared with a year earlier. For the 10-city index, the 4.5% price drop in the past year is the biggest since 1991. The Case-Shiller index is not affected by the mix of homes sold in a period, since it compares sales prices of the same homes over time.

Prices are lower in 15 of the 20 cities compared with a year ago, according to Case-Shiller. The worst declines are the Rust Belt and in the formerly boom towns along the coasts. Prices are holding up in the Pacific Northwest and in areas of the South. Prices are down 9.7% in Detroit, 8.8% in Tampa, 7.8% in San Diego, 7.3% in Phoenix, 7.2% in Washington and 6.4% in Miami. Prices are up 6.9% in Seattle, 6% in Charlotte and 3.8% in Portland.

There are few signs of a bottom in the market. The home builders' confidence matched its lowest level ever in September. Housing starts fell to a 12-year low in August, an indication that builders are pulling back. However, foreclosures are rising, bringing even more must-sell supply on the market.

The Commerce Department will report on August new-home sales on Thursday. Economists surveyed by MarketWatch expect sales to fall to 825,000 annualized from 870,000 in May. It would be the slowest sales in seven years.

Dollar Dips To New Low

Dollar hits record low for the fourth consecutive day after troubling consumer confidence, home sales reports; interest rate speculation

The dollar resumed its fall against the euro Tuesday, the fourth consecutive day of record lows, after a pair of economic reports pointed to the possibility of further interest-rate cuts by the Federal Reserve.

The euro rose to its fourth consecutive record high, $1.4153, after worrying consumer confidence and home sales data were released Tuesday morning. By late afternoon in New York, the 13-nation euro was at $1.4146 compared with $1.4087 late Monday.

The New York-based Conference Board said worries about jobs and the economy drove the U.S. Consumer Confidence Index for September to 99.8, below analysts' expectations. The index is at its lowest level since November 2005.

U.S. economic concerns were compounded by two housing reports. Sales of existing homes fell for a sixth straight month in August, pushing sales to the lowest point since 2002 because of turmoil in credit markets, a second report showed. U.S. home prices declined in July, posting their steepest drop in 16 years.

The declines may cause the Federal Reserve to lower its benchmark interest rate further, said David Jones, chief markets analyst at CMC Markets in London.

"It's clearly still too soon for last week's rate cut by the Fed to be taking any effect, but the question is now what happens at the two remaining meetings this year," he said.

It was a half-point interest rate cut to 4.75 percent by the U.S. central bank last week that dragged the dollar down. That came in response to the market turbulence in the fallout from the subprime mortgage crisis, and many analysts see more rate cuts ahead.

Lower interest rates, used to jump-start an economy, can weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.

A weaker dollar makes vacations in Europe more expensive for U.S. travelers and could make European-made products more expensive for American consumers. But the lower dollar versus the euro also makes U.S. exports more competitive in Europe, which could benefit American manufacturers.

In other New York trading, the dollar slipped to 114.55 yen from 114.88 yen after Yasuo Fukuda, who has promised to bring stability and moderation to Japan's political scene, was elected prime minister.

The dollar rose against the British pound, to $2.0180 from $2.0214.

The dollar fell against the Swiss franc, from 1.1730 late Monday to 1.1661, and it rose slightly against the Canadian currency, to 1.0014 from 1.0011.

Fed Surprises Market With A 50 Basis Point Rate Cut

Wow, is everyone surprised. The geniuses said a quarter point cut and some said the Fed would do nothing (not as many). Maybe the Fed is more worried than we thought. In a surprising move, the FOMC unanimously cut the fed funds rate by 50 bps to 4.75%.

The market surged on this news, with financials leading the way. The banks and broker index were both up +3.75%. The DOW surged +335 points.

We think the Fed felt it needed to throw a lifeline to the housing/mortgage market, and if they were just going to cut again in a couple of months, why not do a full 50 bps right now?

Of course, sentiment has been terrible, and the put/call ratios have continue to soar. So you can bet that a lot of this fuel we are seeing in buying power is due to a healthy dose of short-covering. Not a fun day for the bears.

Here are some of the highlights from the FOMC release:

* FOMC cuts fed funds by 50 bps to 4.75%
* Fed cuts discount rate by 50 bps to 5.25%
* Fed says inflation readings have 'improved modestly'
* Fed says rate cut to 'forestall' harm to broader economy
* Fed says financial conditions increase uncertainty to outlook
* Fed says tightening of credit conditions has potential to intensify housing correction, restrain growth

Slower Inflation And Weaker Housing Will Support Rate Cut

It won't matter to the Federal Reserve, but the economic data in the coming week will largely support the Fed's expected decision to cut interest rates. The data are expected to show reduced inflation and a much weaker housing sector. Aside from a few minor numbers, all the big news will come out after the Federal Open Market Committee concludes its meeting Tuesday afternoon, when the committee is widely expected to knock a quarter point off the federal funds target rate and signal further cuts in the fall.

The only two major monthly indicators of the week will be released Wednesday morning when the Labor Department releases the August consumer price index and the Commerce Department estimates housing starts for August. Under the usual procedures, Fed officials won't know the contents of either report when they meet on Tuesday.

Lower gasoline prices should keep overall inflation flat to negative. Numbers on home building could well show further deterioration, even before the recent disruptions to mortgage markets are fully reflected.

One other piece of news will hit the wires just about the time the FOMC breaks for lunch (but before the news release comes out): The home builders are likely to report that builders' confidence reached another new low in September. There will be plenty of other distractions. Alan Greenspan's book will finally be published, giving the former Fed chairman plenty of opportunities to go on national television day after day after day and explain how he didn't see one of history's greatest bubbles inflating right before his eyes. Current Fed Chairman Ben Bernanke, meanwhile, will face yet another congressional grilling on the housing mess on Thursday at Barney Frank's House Financial Services Committee, with Treasury Secretary Henry Paulson at his side.

The consumer price index is expected to be unchanged for August, as falling energy prices offset modest gains elsewhere. Energy prices are expected to fall 2.8%, while food prices should grow at a slower pace of about 0.2%. The core rate (which excludes food and energy prices) is expected to rise 0.2%. The core rate will be restrained by new incentives on new cars, and moderation in shelter prices. Higher prices will be seen for apparel, used cars, education and medical care. If there is a surprise, the odds distinctly favor a downtick to 0.1% over an upward movement.
If the median forecast is right, then the year-over-year gain in the CPI would fall to 2% from 2.4%, while the year-over-year gain in the core CPI would remain at 2.2%.
At 2.2%, the core CPI is probably just inside the Fed's comfort zone. But we all know that the Fed's comfort band gets a lot wider when they are cutting interest rates to boost growth.

Starts of new homes probably fell again in August to a seasonally adjusted annual rate of 1.36 million from 1.38 million in July. It'd be the lowest since 1997.
Building permits probably dropped to 1.34 annual pace from 1.39 million. That would be the lowest since 1995. As bad as the August housing numbers are, remember that they won't reflect the full impact of the massive tightening in mortgage lending that's taking place. Everyone expects construction to slow further; there's little reason to expect a quick turnaround in building. Inventories are already bloated, while foreclosures and adjustable-rate mortgage resets are likely to put even more houses on the market in the coming months. Cancellations remain high, and mortgages are more expensive and more difficult for some buyers to obtain.

The home builders have grown increasingly pessimistic. Their sentiment index fell to a 16-year low of 22 in August. While only a few economists forecast this number, the median forecast is calling for the index to drop to 20, matching the record-low set in January 1991. At 20, the index would show that only a fifth of builders nationwide are confident in the market. The home builders' index will be released at 1 p.m. on Tuesday, just 75 minutes before the Fed meets.

Hedge funds show big losses in August

Hedge fund investors have grown used to huge returns. No longer.

Last month's market volatility has caused the $2.4 trillion industry to suffer its only losses of the year. Hedge funds collectively posted declines of about 1.3 percent in August, according to industry tracker Hedge Fund Research.

The deep-pocketed investors that infuse these funds with capital are now bracing for the most disappointing progress reports seen in years, with the risk of even worse to come in weeks ahead.

"For those that suffered from declines, it is still fairly early to provide any kind of concrete results," said Joel Schwab, managing director of Channel Capital Group, which tracks hedge fund performance. "The books may still be adjusted, numbers may still decline, and estimates could be revised downward."

Citigroup's flagship Old Lane Partners LP told investors in a letter sent out on the weekend that it suffered a 5.9 percent decline in August. Pirate Capital, the hedge fund managed by Thomas Hudson, told its backers that assets in two of its activist funds lost almost 80 percent of their value in the past year.
Hedge funds hit in August

More letters are expected as hedge funds - especially those that invest heavily in illiquid or high-risk assets like mortgage-backed securities - finish tabulating results for the month.

Hedge funds, which are typically privately run investment vehicles that attract wealthy individuals and institutions, were squeezed as stock markets were roiled this summer. Rising delinquencies on mortgages made to people with bad credit forced two hedge funds managed by Bear Stearns to file for bankruptcy earlier this summer.

A whole slew of others reported similar distress because they could not properly value their holdings, or because investors were rushing to get their money back in fear of a market collapse.

Financial institutions like Goldman Sachs, BNP Paribas, and UBS have all reported steep losses to their hedge funds in the past few months. Meanwhile, some dozen other investment managers were forced to shutter funds or suspend investor redemptions to stave off bankruptcy.

Investors in Old Lane's funds received a letter dated Sept. 7 that outlined the performance of its $4.4 billion worth of assets. The multistrategy fund focused on a mix of stocks, bonds and commodities.

The 5.9 percent August drop still left Old Lane with a 1.9 percent gain for 2007. That return trails the 6.2 percent advance made by the industry for the year to date, according to Hedge Fund Research.

Citigroup, the biggest U.S. bank, paid about $800 million for Old Lane in July. Though some criticized the deal as being too expensive, one big reason behind the takeover was that it brought on board a prized team of former Morgan Stanley executives led by Old Lane founder Vikram Pandit.

Meanwhile, Pirate Capital - whose founder Hudson was formerly a Goldman Sachs trader - said in a recent letter that investors could not withdraw money from its two Jolly Roger Activist funds. Those investors won't get access to their investments until the holdings of the funds are sold.

In a letter to investors obtained by the Associated Press, Hudson blamed prior redemptions and the effects of market turmoil as the reasons for the move. The activist hedge funds have investments in four companies, according to a Securities and Exchange Commission filing.

The Norwalk, Conn.-based hedge fund is known for acquiring stakes in companies and pushing management to pump up their lagging stock prices. Hudson is currently a board member with Brink's Co., and has been calling for it to split into two companies.

But, as investors wait for the next shoe to drop, there is some hope that August might have been the bottom for hedge funds. With the Federal Reserve expected to cut interest rates next week, there has been some optimism that the markets will soon begin to reverse course and become more favorable to investors - though that could take a number of months.

"There's been stabilization in the fixed income market, less volatility in equities, and credit spreads improved a bit," said Ken Heinz, president of Hedge Fund Research. "You may see a more stable environment moving forward."

The mystery behind surging oil prices

What's driving the run-up in oil prices to Wednesday's record $80 a barrel?

Some short-term factors are plain to see. There's the big drop in crude inventories and a reported shutdown of nearly 200,000 barrels from Alaska's North Slope - a fourth of the region's total output - and a gathering storm in the Atlantic.

Yet at the same time, crude inventories, while declining recently, remain above average for this time of year. And the United States has seen a string of weak economic numbers over the last several weeks, so weak that nearly all analysts expect the Federal Reserve to cut interests rates at their next meeting.

Add to this the end of summer driving season and the rise of oil prices to eight times what they were in the late 1990s remains something of a mystery.
Oil tops $80 a barrel, an all-time high

Experts explain the increase in prices by pointing to industry fundamentals. Take inventories, for example. In its weekly inventory report Wednesday, the Energy Information Administration said crude stocks plunged by 7.1 million barrels last week.

There have been concerns that OPEC production cuts from earlier this year and rising demand for oil have diminished crude supplies worldwide. Still, EIA said crude inventories in the United States remain above average for this time of year.

But traders are focusing on the fact that crude inventories are below last year. Plus they say that while summer driving season sparks big demand for gasoline, it's actually winter that sees the largest demand for crude as people worldwide use heating oil and power plants burn oil to provide electric heat.

Another factor pushing up crude prices was renewed confidence in the economy as markets have stabilized after August's subprime-induced roller coaster.

How confident should people be that economic growth will remain strong?

A report released Monday by the National Association for Business Economics puts the growth of gross domestic product at 2 percent for this year, the weakest since 2002.

"Based on the economy, I think demand growth will be slower than people think," said Halff, who still has a target price of $73 for crude in the fourth quarter and said he may even raise that to $75.

But it's not just the U.S. economy that influences the price of oil.

Indeed, while countries like India, China and Brazil still use much less oil than the developed nations, especially on a per capita basis, they are responsible for much of the growth in global demand for crude. This has led to projected strong demand for crude over the next few years, and concerns that supplies will not be able to keep up.

Already that has created a tight supply and demand scenario, where the difference between what the world produces and what it consumes has narrowed. That of course magnifies the effects of geopolitical events, as there is less extra oil to cover demand if supplies get disrupted.

Hicks also said the declining value of the U.S. dollar, which oil is priced in, has helped push prices higher. OPEC is less likely to boost production if the value of their product is falling with the dollar. And consumers overseas are less likely to conserve if the price spikes aren't as pronounced.

As for whether speculative investors are driving up the cost of oil, Hicks said that interest in commodities has certainly increased over the last several years. This year alone, an estimated $100 billion was put into commodities funds by everyone from hedge funds to state pension plans. But he said its impact on prices has been marginal. "There are sound fundamentals behind rising oil prices," he said. Top of page

Bernanke Mum On Interest Rates

Wall Street tuned into a Tuesday speech from Federal Reserve Chairman Ben Bernanke hoping for indications of an interest rate cut. Bernanke, however, steered clear of the issue and instead focused on the United States' swelling current account deficit.

Wall Street rose today as investors grew more confident that the Federal Reserve will lower interest rates next week. Despite Bernanke giving no clues about the central bank's intentions. The Dow Jones industrials rose 180 points.

Traders had been hoping Fed Chairman Bernanke would give some indication during his speech to Germany's Bundesbank about the Fed's next move. Wall Street is looking for a rate cut to help bolster the U.S. economy and help problems caused by tightening credit availability.

Instead, Bernanke talked about the need for countries around the globe to cooperate toward economic stability. He said "global imbalances" occur when countries run up trade deficits or produce big trade surpluses.

Ben didn't really say anything about interest rates, but at this point the feeling on Wall Street is that it's mandatory.

The stock market has been volatile since midsummer. The sluggish housing market and debt aversion causing a standstill in the credit markets and damaging the economy. Last Friday's jobs report, which showed the first monthly payrolls decline in four years, aggravated those concerns.

Investors nervous about the U.S. economy slipping into recession got a bit of relief from the Commerce Department's report on the U.S. trade deficit. The trade gap narrowed modestly in July to $59.2 billion from $59.4 billion in June, thanks to record exports of farm goods, autos and other products. Many economists had anticipated a widening of the deficit.

The Dow rose 180.54, or 1.38 percent, to 13,308.39.

The Standard & Poor's 500 index rose 19.79, or 1.36 percent, to 1,471.49, while the Nasdaq composite index rose 38.36, or 1.50 percent, to 2,597.47.

Bonds fell as investors withdrew money to buy stocks, pushing the 10-year Treasury note's yield up to 4.37 percent from 4.27 percent late Monday. The dollar weakened against the euro and British pound, while gold moved higher.

Joe G was heard explaining "the Fed is between a rock and a hard place," he said. "If they lower interest rates, the dollar will keep getting crushed. If they don't, the subprime mess will get worse and hurt the housing market."

The Dow was helped today from strong gains in McDonald's Corp. shares. The fast food chain, which is one of the 30 companies that make up the Dow, rose $1.61, or 3.2 percent, to $51.76 after reporting that global sales at restaurants open at least a year rose 8.1 percent in August.

Boeing Co. also helped the blue chips advance after it was awarded a $1.1 billion U.S. Air Force contract. Shares picked up $2.11, or 2.2 percent, to $97.44.

General Motors Corp. rose $1.33, or 4.6 percent, to $30.54 as investors got a glimpse of new models at the Frankfurt Auto Show.

Crude oil rose 74 cents to $78.23 after OPEC agreed to boost its crude output by 500,000 barrels a day in an effort to calm markets unnerved by high energy prices and worried that supplies could grow tight by the end of the year. It was expected that OPEC would keep current output targets in place, although Saudi Arabia was said to be pushing for a production increase.

Advancing issues outnumbers decliners about 2 to 1 on the New York Stock Exchange, where volume came to 1.26 billion shares, compared to 1.1 billion on Monday.

The Russell 2000 index of smaller companies was up 12.46, or 1.62 percent, at 782.27.

Overseas, Japan's Nikkei stock average added 0.71 percent. Britain's FTSE 100 rose 2.13 percent, Germany's DAX index rose 1.02 percent, and France's CAC-40 rose 1.69 percent.

Markets Rise Ahead Of Jobs Report

Stocks rose Thursday, recovering a bit after the previous session's big selloff, but gains were limited ahead of Friday's big monthly jobs report. The Dow Jones industrial average and the broader S&P 500 index both gained 0.4 percent. The Nasdaq Composite gained 0.3 percent. Treasury prices fell, raising the corresponding yields. The dollar was mixed versus other major currencies. Oil and gold prices rose.
Wall Street braces for jobs report

The major gauges had been on both sides of unchanged throughout the session as investors mulled upbeat August retail sales, volatile oil prices and the day's economic news, ahead of Friday's labor market report.

Employers are expected to have added 110,000 jobs to their payrolls in August after adding 92,000 in July. A number that is strong, but not too strong, would be best for market participants, said Dan Romanoff, research analyst. If the number is too strong, "it will make people think the Fed won't cut rates," he said.

Investors are looking for economic news to add to bets that the Federal Reserve can cut interest rates at its next policy meeting, and strong economic reports would seem to lessen the likelihood of the Fed stepping in.

On Thursday, the ADP employment report, which measures hiring in the private sector, showed surprisingly weak job growth, and could be a harbinger for Friday's broader national report. But other recent economic reports were more positive, including Thursday's readings on weekly jobless claims, productivity and the services sector of the economy. Meanwhile, another report Thursday showed a record number of homes entered the foreclosure process in the second-quarter, reflecting the ongoing problems in subprime and housing.

Market breadth was positive. On the New York Stock Exchange, winners topped losers 5 to 3 on volume of 1.28 billion shares. On the Nasdaq, advancers topped decliners 4 to 3 on volume of 1.56 billion shares.

In corporate news, Wal-Mart Stores reported that August sales at stores open a year or more, a retail measure called same-store sales, rose a better-than-expected 3.1 percent. Shares of Wal-Mart (up $0.31 to $42.76), a Dow component, inched higher.

The world's largest retailer was one of many chain stores reporting strong August sales. The relative strength was a relief for investors worried that the turmoil in the housing market and spike in commodities prices would drag on consumer spending.

Coca-Cola (up $0.97 to $54.66) said it will cut 100 to 125 jobs, or less than four percent of U.S. employees, by the end of the year as part of a broader restructuring. Shares of the Dow component rose.

Merck (up $1.07 to $50.47) shares rose after the N.J. Supreme Court ruled that health insurers' lawsuits against the company - over its withdrawn painkiller Vioxx - can't be combined into a big class-action lawsuit, reversing the decision of two lower courts.

Apple (down $1.75 to $135.01) CEO Steve Jobs said that the company will give a $100 credit to certain early buyers of the iPhone, after the company announced a price reduction for the product Wednesday.

Among other movers, gold prices rose, giving a lift to a variety of mining and metal stocks. The Amex Gold Bugs index gained 6.6 percent.

Thursday morning brought a number of economic reports, most of which topped the estimates of economists surveyed by Briefing.com. The revised reading on second-quarter productivity rose to a 2.6 percent annual growth rate from an initial reading of 1.8 percent, the government reported. Meanwhile, unit-labor costs, which measure wage inflation, slowed to an annual growth rate of 1.4 percent from an initial reading of 2.1 percent. A separate report showed a drop in weekly jobless claims last week. The Institute for Supply Management's August report on the services sector of the economy, released after the start of trade, stood at 55.8, unchanged from the previous month and more robust than what economists were expecting.

Treasury prices slipped a bit after Wednesday's big rally, raising the yield on the 10-year note to 4.50 percent from 4.46 percent late Wednesday. Bond prices and yields move in opposite directions. In currency trading, the dollar fell versus the euro and inched higher against the yen. U.S. light crude oil for October delivery rose 56 cents to $76.29 a barrel on the New York Mercantile Exchange. Oil prices were volatile after the weekly inventory report showed a drop in crude supplies and a big rise in distillates, which are used to make heating oil.
Subprime: begin the finger-pointing

Stocks slumped Wednesday after reports showed weak pending home sales, anemic private sector employment and the latest woes for the financial sector. Additionally, the Federal Reserve's 'beige book' report on the economy showed enough growth to dampen hopes that the central bank will cut interest rates later this month. The slew of strong economic reports Thursday morning may have added to worries that the Federal Reserve will not cut interest rates, as stock investors have been betting.

The central bank said Thursday that it had added $31.25 billion of temporary reserves to the banking system in three installments. While the Fed regularly adds funds to the system, it has joined banks around the world in increasing its efforts of late, as a means of keeping liquidity flowing.

This has been both a comfort and a concern to stock investors, in that it has added to bets that the Federal Reserve won't cut interest rates, but will instead help soothe credit market turmoil through these infusions.

In mid-August, the central bank cut the discount rate, which affects bank loans, by a half-percentage point, as a means of restoring stability to financial markets that had been rocked by worries about tightening credit and the subprime mortgage mess. Stock investors have been betting that the Fed will also cut the fed funds rate, a key overnight bank lending rate that affects consumer loans, when the policy-makers meet on Sept. 18.

Same News, Different Day For Wall Street

Bad subprime news is nothing new, but, even after months of awareness, reminders of it have yet to lose their sting.

After opening low, the Dow Jones industrial average closed down 1.1%, or 143.39 points, to 13,305.47, and the Standard & Poor’s 500 index was down 12%, or 17.13 points. The Nasdaq Composite index, a traditional measure of technology stocks, was down 0.9%, or 24.29 points, to 2,605.95.

According to research analyst Mike Stelmacki, for the most part today’s trading performance is a reflection of the market giving back some of the gains it had made on Tuesday.

Mike added that, “pretty much all of the big moves we’ve had recently are related to the subprime issues, that continues to plague the markets as it proves it isn’t quite over.”

Although the National Association of Realtors announced on Wednesday that pending sales of existing homes fell in July to the lowest level in almost six years, the declines during the day have more to do with Citigroup lowering its third quarter estimates for Lehman Brothers and Morgan Stanley as well as Lehman Brothers’ view that European investment banks are also going to experience a hit on their earnings.

“Primarily you have sort of continuing headline risk—as soon as someone comes out and says something on the subject, it reignites the flame for some people,” Mike said.

For the S&P 500, financial and telecommunication stocks were being hit the hardest, although Rueckert noted AT&T and Verizon which fell 1.4% and 1.7% respectively, effectively comprise 75% of the sector.

Mike pointed out that because financial stocks “by far carry the largest amount of weight in the index,” their fall can also influence the index’s performance.

“I’ve been maintaining that this is going to continue at least until we see earnings from financial companies which comes in two weeks,” Mike contended, “because that will give a strong indication to people about what’s going on.”

Continuing, he said “I think that’s going to be the turning point, whether it’s going to be up or down I’m not sure.”

Although financial companies like Citigroup closed down 2.6%, energy companies like Exxon Mobil and Chevron finished with barely a drop, as they only fell 0.01% and 0.4% respectively.

There were other developments on Wednesday, including the Federal Reserve's release its Beige Book, which describes economic conditions in regions around the country. Wall Street could be disappointed if the Beige Book’s findings don’t help make the case for a rate cut, which Wall Street has hoped for.

Macroeconomic Advisers also announced on Wednesday the smallest increase in non-farm private employment since June 2003.

In another development, the U.S. economy will slow sharply this year and fall behind growth rates in most of the world, according to forecasts in a U.N. report released Wednesday.

Woes in the housing market will drag U.S. gross domestic product for 2007 to a modest 2% growth, compared with 3.3% last year, the U.N. Conference on Trade and Development said in its flagship annual report.

For the first time since 2001, both the European Union, at 2.8%, and Japan, 2.3%, are predicted to have higher gross domestic product growth than the United States.

China, at 10.5%, and India, 8.5%, should experience economic growth rates similar to the last three years, the report said.

Global growth, meanwhile, is pegged at 3.4%, down from 4% in 2006, largely because of the U.S. slowdown, the report said.

For now, the world economy is going through a "golden period," Supachai Panitchpakdi, the former World Trade Organization chief now heading the U.N. agency, told reporters in Geneva.

High commodity prices continue to boost growth in developing countries, which accounted for a 37% share of global trade last year, the report said. A decade ago their share of trade was 29%.

Economies in Africa are predicted to grow by 6%, Latin America and the Caribbean by 4.7%, and ex-Soviet bloc states still outside the European Union by 7%.

"There might be some downward revision," Supachai said.

"All this depends on the degree of adjustments coming out of the U.S. economy," he said. Further economic turmoil from risky lending practices—like subprime mortgages for borrowers with weak credit histories—was possible, Supachai said.

The Associated Press contributed to this article.

Fed: credit crunch effects limited

In its 'Beige Book' report, Federal Reserve says effect of turbulent markets has been confined to housing.
September 5 2007: 2:34 PM EDT

WASHINGTON (AP) -- A painful credit crunch is taking its worst toll on the already ailing housing market, while its impact on the rest of the national economy at least so far seems limited, the Federal Reserve reported Wednesday.

The Fed's survey of business conditions around the country was anxiously awaited by Wall Street and Main Street for further clues about what the central bank will do with interest rates on Sept. 18, its next regularly scheduled meeting.

A growing number of economists believe the Fed will lower a key interest rate now at 5.25 percent by at least one-quarter percentage point to protect the economy from any ill effects of the credit crisis. The Fed hasn't lowered this rate in four years.

"Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited," according to the Fed's report. The survey is based on information that the Fed's 12 regional banks collected before Aug. 27.

Credit problems - which started out with "subprime" mortgages held by people with spotty credit histories or low incomes - have spread to some more creditworthy borrowers. These problems intensified in August, unnerving Wall Street and investors around the globe. To stabilize the situation, the Fed has pumped tens of billions of dollars into the financial system and has sliced an interest rate its charges banks for loans.

Fed Chairman Ben Bernanke, in a speech last Friday, pledged the central bank would "act as needed" to limit any fallout on the economy from the credit crunch. He made clear, though, that the Fed's decision would be driven by what is best for the economy. The Fed would not bail out investors and lenders "from the consequences of their financial decisions," he said.

In Wednesday's survey, the Fed said most banks reported that the recent developments in financial markets had led to more restrictive lending standards for people wanting to obtain home mortgages. That "was having a noticeable effect on housing activity," the Fed said. "The reduction in credit availability added to uncertainty about when the housing market might turn around," according to the report.

The Fed said that several banks noted that commercial real estate markets had also experienced "somewhat tighter credit conditions." However, a number of banks said "credit availability and credit quality remained good for most consumer and business borrowers."

Credit is the economy's life blood. It enables people to finance big-ticket purchases such as homes and cars and can help businesses bankroll expansions and other things that can boost hiring. If it becomes more difficult to obtain, people and companies might spend and invest less, slowing overall economic activity.

In the Fed's report, retail sales were "generally positive." But several Fed regions described automobile and furniture sales as slow. Similarly, manufacturing expanded across most Fed regions, although there were reports of "softening demand for building materials and autos."

Bernanke, in last week's speech, said the Fed would pay especially close attention to the "timeliest indicators" as well as information gleaned from businesses and banks around the country. Economic data taken before the credit markets tightened up in August will be much less useful to policymakers to assess the country's economic health, he explained.

On the jobs front, the Fed said that "nearly every district reported at least modest increases in employment during the survey period." The lone exception was the Chicago region, which characterized employment conditions as mixed.

With regard to inflation, outside a burst of higher food costs, "most districts reported little change in overall price pressures." A subdued inflation climate would give the Fed more leeway to cut rates if it needs to.

"The weakness in the housing market deepened across most districts, with sales weak or declining and prices reported to be falling or flat," the Fed said.

After a five-year boom, the housing market went bust last year. Higher interest rates and weaker home values clobbered homeowners, especially higher-risk subprime borrowers with adjustable-rate mortgages. Foreclosures and late payments have soared. Lenders have been forced out of business and hedge funds and other investors in mortgage securities have taken a big financial hit. The carnage has rocked Wall Street, ricocheting stock prices in the process.

Against this backdrop, the economy, which grew at a brisk 4 percent pace in the April-to-June period, is expected to slow to half that pace in the current July-to-September quarter.

Avoid the UGMA Kiddie Tax for 18 to 23 years olds by taking action prior to January 1, 2008

Due to a recent tax change, UGMA account owners between the ages of 18 to 23 years old will be subject to the Kiddie tax (i.e., will be taxed at their parents’ tax rate) for unearned income in excess of $1,700 beginning in 2008. [This is provided that they are full-time students under age 24 whose earned income does not exceed one-half of their support]. If you or someone you know falls into this situation, you could be well advised to sell appreciated investments prior to January 1 in order to ensure the resulting capital gains are taxed at the child’s presumably lower tax rate. We recommend that you consult an independent legal or tax advisor for specific advice about your individual situation.

Letter From Hedge Fund Guy

I came across this satirical letter and thought it was pretty funny (in a perverse way)--

Aug. 16 (Bloomberg) --

Dear investor, we'd like to take this opportunity to update you on the recent performance of our hedge fund, Short-Term Capital Mismanagement LLP.

As you know, market selection for the entire fund is guided by a proprietary investing tool we like to call "a dartboard.'' Once the asset classes are decided, individual security selections are generated by digitizing our unique hexagonal cuboid models.

Unfortunately, it transpires that our hexagonal cuboids are not as unique as we thought. Hundreds of other hedge funds possess identical dice. The technical term for this is a "crowded trade.'' You may also see it referred to as "climbing on a bandwagon already headed for the wall.''

As our alpha generation collapses, our beta has turned negative, our delta hedging has gone toxic and, trust me, you do not want to hear about our gamma. We can't even find our epsilons in the dark with both hands.

You will appreciate that accurate pricing is essential for evaluating our investment strategies. This has proven to be extremely challenging in recent days. Previously, we have relied on Bob, the sales guy at Hokey-Cokey Bank. Bob assured us the securities were still worth 100 percent of face value, so everything was cool. Bob sold the collateralized debt obligations to us in the first place, so he knows what he's talking about.

Bob, however, appears to have had a nervous breakdown, judging by the maniacal laughter that greeted our requests for price verification this week. Our efforts to implement an in- house CDO valuation framework, using a technique the ancients knew as "making things up,'' proved unsatisfactory.

Where's the Bid?

Currently, all of the portfolios we manage are undergoing a rigorous screening known as "crossing our fingers and praying that we don't have to try and find a bid in the market.'' This is supplemented by a cross-market statistical analysis originally developed by the U.S. military called "don't ask, don't tell.'' This "unmarking-to-unmarket'' procedure has been the benchmark for the hedge-fund industry for the past, ooh, 72 hours.

We have, of course, been in touch with the rating companies to update our default-probability scenarios, particularly on the AAA rated investments we own. They recommended a forecasting method using stochastics to regress the drift-to-downgrade timescales for the past 100 years and throw them forward for the next five minutes. The technical term for this is "induction,'' though those of you of a less quantitative bent may know it as "guessing.''

AAA or Toast?

We are pleased to report that, contrary to what current market prices might suggest, all of our top-rated securities remain absolutely AAA. Provided, that is, the future performance of the underlying collateral is identical to its history. Otherwise, the rating companies say our investments are likely to be reclassified as "toast.''

We have also been checking our back-up credit lines with our friends in the investment-banking world. As soon as they return our calls, we'll be able to update you on our emergency liquidity position. We are sure they are fine.

Some of you have written to us asking for your money back, citing clauses in the fund documentation called redemption rights. Frankly, we never expected you to actually read that prospectus, which came prepackaged when we bought the Microsoft Hedge-Fund Guy software. We certainly have no idea what all those long words mean.

We have filed your letters in a special drawer in the filing cabinet marked "trash'' for now. Do you have any idea how much trouble you all would be in if we actually sold this stuff in the market today? At these crazy prices? Fuhgeddaboudit. You'll thank us later.

Not a Rescue

Speaking of crazy prices, we know you'll be thrilled to learn that we've invited a bunch of our rich pals into the fund to participate in this once-in-a-lifetime opportunity. But this is not a rescue. Do not even think the word rescue. This is an opportunity. Not a rescue. An opportunity.

In fact, we think this is such a fantastic opportunity, we've agreed to forgo our usual management fee, and we'll only take half our usual slice of the profits. Provided there are any profits to slice. You, of course, are absolutely invited to participate in this offer by sending us yet more of your money on exactly the same revised terms as our rich pals.

Finally, a word for all of you who have been kind enough to inquire about my personal financial situation. I am relieved to report that my directors and officers insurance is fully paid up.

Furthermore, my Bentley Continental was paid out of the 2 percent fee we levied when you wrote your first check to us, so I will still be able to trundle into the parking lot each morning in an open-necked shirt to ignore your telephone calls and emails.

Yours, Hedge-Fund Guy.