Bernanke: Not The Bottom Yet

Comments from the Federal Reserve chairman, soaring oil prices, and earnings from some major companies were all having negative impact on Wall Street Tuesday.

Speaking in New York Monday evening, Fed Chairman Ben Bernanke said he has been pleased with the impact of the Fed’s Sept. 18 rate cuts, but he cautioned that the struggling U.S. housing market has not reached bottom yet and will be a significant drag on the economy into 2008.

Other than Bernanke’s remarks, soaring oil prices were the big story on Monday. As crude soared to new highs above $86 per barrel, there appears to be confusion in the market as to how much of an impact the rising cost of oil is having on the U.S. economy. Speculation that $100 crude may be around the corner has been rampant.

Oil companies such as Exxon Mobil have been rising on the news, but transportation stocks had been falling. Airlines were one industry that has been hurt by the rising price of oil.

In one speech he makes more than he made in a year

Greenspan sees slowing economic growth

Former Federal Reserve chairman sees strong third quarter, says home prices will fall and economic growth will continue to slow through the beginning of 2008.

While U.S. economic data look good in the third quarter, the growth rate will continue to slow and the housing market will weaken further, former U.S. Federal Reserve chairman Alan Greenspan said Wednesday.

Economic growth should continue to slow through the rest of the year and into the first quarter of 2008, while home prices have further to drop, Greenspan said, speaking before attendees at the World Business Forum, held Wednesday and Thursday at Radio City Music Hall in New York.

"The critical question is the price level of homes in the United States, which are almost certainly going to fall," Greenspan said, as the hefty inventory of unsold homes continues to drive down prices. "What we don't know at this stage is whether, in fact, the decline in home prices will be a large one or a modest one," he said.

Given the current climate, the odds that the United States will skirt a recession now look better than 50/50, Greenspan said. In March, he put the odds of a recession over the next six to nine months at one-third, but that could be offset by stock market prices if they continue to rise, he said.

Greenspan also addressed the credit crisis that roiled markets this summer, noting that credit market adjustments were "an accident waiting to happen" given the low level of credit spreads for such a long period of time.

"History always suggests that that does not last," Greenspan said. "If it wasn't subprime, it would have been something else."

The United States came into the credit crisis amid a "fairly strong" global economic upswing, and talking about the U.S. economy without the worldwide context is "no longer relevant," he said.

Turning to China, Greenspan said growth there has been "quite remarkable," adding that "nobody is fully cognizant or understands why they have done so well for so long." China has moved dramatically toward capitalism, he said, and even though its economy appears to be "overheating," the country continues to progress.

Greenspan also said rising Chinese inflation was of little significance, noting that much of the increase was due to rising food prices.

But, he added, "at some point, they've got to slow down" and other areas of eastern Asia could begin to successfully compete with the country. At least through the Olympics, however, China "should do very well," he said.

More On The Fed And Interest Rates

I think it speaks for itself. A lot of commentary suggests the Fed in the Sep 18 meeting left the door "wide open" for more rate cuts, which I suppose is accurate but for the full context read the Fed minutes yourself. The concluding paragraph reads:


The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors.

Justices To Hear High-Profile Investor Lawsuit Case

With the Supreme Court back in session, Wall Street is looking with anticipation to a controversial case the justices will hear on Tuesday that could decide how far shareholders can go in seeking damages after being defrauded by companies.

At issue is "scheme liability," which would allow shareholders to sue third parties like investment banks, accountants and lawyers who helped companies deceive investors. A ruling in shareholders' favor by the Supreme Court could open the door for more such suits -- something banks and others would like to avoid.

This is one of the most important securities-related decisions that the Supreme Court will have handed down in a very long time. If it were to go the way of the petitioners you'd see a substantial increase in the amount of securities litigation.

The case -- Stoneridge Investment Partners v. Scientific-Atlanta Inc. -- has split the Bush administration and is the subject of intense political and industry-group interest. It also follows a spate of pro-business decisions from the high court.Moreover, the outcome of the case could affect a separate case pending at the court involving Enron shareholders' claims against big Wall Street banks. Those banks would basically be off the hook if the court rules in the defendants' favor in the Stoneridge case

The White House sided with investment banks and other parties in a brief in the Stoneridge case last summer, going against an argument from the Securities and Exchange Commission that shareholders should be allowed to sue third parties. Meanwhile, groups including the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association have urged the high court to toss the case out, arguing that a victory for the plaintiffs would weaken U.S. competitiveness and jack up companies' litigation costs.

Top Democrats like Senate Banking Committee Chairman Christopher Dodd of Connecticut and House Financial Services Committee Chairman Barney Frank of Massachusetts have argued that plaintiffs should have the right to seek compensation from the third parties.

A ruling against the plaintiffs would continue a string of disappointments for investors.

In June, the justices ruled 8-1 that class action plaintiffs be required to show convincing evidence of fraud before initiating a lawsuit against a corporation. The case was Tellabs v. Makor Issues and Rights. Also in June, the high court sided with Wall Street banks in a case involving investors' ability to sue them for alleged antitrust behavior during the dot-com bubble of the 1990s. Investors alleged that banks including Credit Suisse Group manipulated initial public offerings of tech companies. Plaintiffs objected to the way banks shared information during the offering periods and said that they broke antitrust law. Justices disagreed, saying in a 7-1 ruling that allowing such suits would threaten the efficient functioning of the securities market.

A decision in the Stoneridge case is expected by the end of the year or early next year.

China in Perspective

Here are some facts found in the Economist that help put China in perspective.

For “several years”, emerging markets have been contributing to global growth more than the USA. So what we are seeing unfold in 2007 is really nothing new.
This year, China will end up being responsible for more of global GDP growth than the USA – for the first time ever.

The American consumer may be 4x the size of the Indian and Chinese consumer put together, but so far this year they have contributed more to global GDP growth than the former has.
How vulnerable are China and India to a US consumer slowdown? Some, perhaps (article suggests that every 1% slowing in US consumer spending results in as much as a 0.5% loss to China’s real GDP growth). But China and most Asian countries now export more to the EU than they do to the USA. And over the past year, China’s exports to the USA have only run at +14%; and to the Eurozone that comparable is closer to 40%.

Many Asian governments are running balanced budgets and as a result will have leeway to stimulate fiscally if need be. China, for example, has just an 18% public sector debt-to-GDP ratio, versus 75% in the industrialized world.

As long as Asian growth remains intact, look for commodity prices to remain firm. After all, emerging Asia accounted fully for two-thirds of the rise in world energy consumption over the past five years.

Exports to account for 40% of China’s GDP, but domestic demand is also so solid that without the foreign trade sector, China’s real GDP would still be 9% so far this year (as opposed to the actual +11.9%).

The Chinese stock market has not entered a bubble … yet, anyway (definition of a bubble is a stock I don’t own). Even though share prices have surged 400% in two years, the trailing P/E is 50x and the forward on '08 estimates is around 30x. P/Es in other classic bubbles like Japan and the NASDAQ breached 100x. The market cap is 35% of GDP compared with 180% in the USA at the 2000 peak. Equities represent 20% of Chinese financial assets versus a 50% share in the USA.

The article downplays inflation risk in China: almost all the inflation is in food; excluding food, inflation is running at +0.9%. To be sure, food is one-third of the price index, but at least the data suggest that the inflation is mostly supply-side led, not demand led. The Economist article takes issue with the labor cost issue -- while wages are up 15% in the past year, unit labor costs apparently are still going down due to still-robust productivity gains.

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.