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.