Don't think about the markets today. Go to something else -- anything else except economics.
Fed Pours Huge Sums Into Foreign Bank Coffers
22 minutes ago
Consumers, battered by a slumping housing market and a credit crunch, slowed the growth in spending to the smallest amount in four months.
The Commerce Department reported Friday that consumer spending edged up 0.2 percent in October, the weakest showing since a similar increase in June. Individual incomes grew by just 0.2 percent last month, the poorest showing in six months.
Personal income increased $21.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $14.0 billion, or 0.1 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $23.8 billion, or 0.2 percent. In September, personal income increased $50.4 billion, or 0.4 percent, DPI increased $43.2 billion, or 0.4 percent, and PCE increased $33.0 billion, or 0.3 percent, based on revised estimates.
How has the economic picture changed in the month since that meeting? As is often the case, the incoming economic data have been mixed. In the market for residential real estate, indicators of construction and home sales have continued to be weak. In contrast, the labor market remained solid in October, with some 130,000 new jobs added to private-sector payrolls and the unemployment rate remaining at 4.7 percent. Claims for unemployment insurance have drifted up a bit in recent weeks, although, on average, they have remained at a level consistent with moderate expansion in employment. We will, of course, have the labor market report for November next week, and in the coming days we will continue to draw on anecdotal reports, surveys, and other sources of information about employment and wages. Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending.
With respect to household spending, the data received over the past month have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting. I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.
Core inflation--that is, inflation excluding the relatively more volatile prices of food and energy--has remained moderate. However, the price of crude oil has continued its rise over the past month, a rise that will be reflected in gasoline and heating oil prices and, of course, in the overall inflation rate in the near term. Moreover, increases in food prices and in the prices of some imported goods have the potential to put additional pressures on inflation and inflation expectations. The effectiveness of monetary policy depends critically on maintaining the public’s confidence that inflation will be well controlled. We are accordingly monitoring inflation developments closely.
The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.
The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.
Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help.
The combined value of two leading sources of credit — outstanding commercial and industrial bank loans, and short-term loans known as commercial paper — peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.
Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975; at other times such declines tended to occur in conjunction with an economic downturn.
Policy makers at the Federal Reserve are growing increasingly alarmed about the problem, which is an outgrowth of the woes of the housing and mortgage industries. Just yesterday, the Fed’s vice chairman, Donald L. Kohn, said that the latest market turbulence appeared to be reducing credit to businesses and consumers, hinting that the central bank, in response, was prepared to cut interest rates further.
``The credit crunch began in earnest back in July, but what you're seeing now is it's deepening and spreading out,'' said Kathleen Bostjancic, an economist in New York at Merrill Lynch & Co., which expects the Fed's target lending rate to fall to 2 percent by the end of the second quarter of 2009. ``You're seeing a tremendous flight to quality.''
``Certainly it feels a lot like the Long-Term Capital Management crisis,'' said Vincent Boberski, senior vice president of portfolio strategies in Chicago at FTN Financial.
Reports on retail spending were downbeat in general, with several significant exceptions. Most Districts characterized sales as weak or indicated that they had softened, with a few reporting that the volume of sales had fallen relative to the preceding survey period or a year earlier. However, the Boston, Philadelphia, Minneapolis, and Kansas City Districts highlighted a pickup in retail sales relative to the preceding survey period. Among product categories, several Districts noted continued solid growth in sales of consumer electronics, while a few also noted that demand for luxury goods continued to rise at a healthy pace. By contrast, sales of automobiles and light trucks were flat to down, with contacts from several Districts expecting declines going forward.
Reports on nonfinancial services generally were consistent with expanding economic activity, with the primary exception of transportation services. Several Districts pointed to continued strong demand growth for health-care services, while the Richmond, St. Louis, and Minneapolis Districts noted an ongoing expansion for providers of legal and other professional services. The Dallas District reported steady demand for legal services but noted a shift toward litigation related to bankruptcy filings, which may signal a slowing economy. In the San Francisco District, demand for advertising services was held down by weak demand from sellers of automobiles and home furnishings. Providers of temporary staffing services saw strong demand in the Richmond District as well as a pickup from the legal and financial industries in New York City, but demand for temp workers was reported as "sluggish" overall by Dallas.
Manufacturing activity was mixed across subsectors but appeared to be largely stable on balance. Demand remained weak or fell further for machinery and manufactured materials related to home construction, such as lumber and concrete, and automakers have scaled back their production activities this year. By contrast, demand rose solidly for various other types of capital goods, such as non-automotive transportation equipment, information technology products, and machinery used in the agriculture, energy extraction, and mining industries. Chicago reported that steel production increased, in part because of reduced import competition of late, but Cleveland characterized steel shipping volumes as "flat" in that District. Among nondurable products, several Districts noted continued robust demand for food and significant gains for paper and plastics. However, Dallas reported "stable" demand for food and a drop in sales of corrugated boxes, and St. Louis noted that food manufacturers plan to lay off workers in that District. The reports generally indicated that increases in demand were especially strong for products and firms with significant export markets, for which sales have been boosted in part by the lower exchange value of the U.S. dollar.
Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown. Most Districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers. Consequently, prices on new and existing homes sold were reported to be down on a short-term or year-earlier basis in most Districts. The pace of homebuilding remained very low in general, and builders continued to shelve projects and lay off workers in many areas; contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest. Among scattered positive signs, however, co-op and condo sales in New York City picked up during the survey period, Richmond reported favorable readings on home sales in a few areas, and Kansas City reported that home inventories fell a bit in the Denver metro area. Weak home demand had mixed effects on conditions in rental markets: Chicago reported that builders' conversions of new homes to rental property put downward pressure on rents, while Dallas noted that demand for apartments picked up, in part because some potential homebuyers are unable to qualify for mortgages.
Lending to businesses generally was at high levels, but the reports suggested a slower rate of growth than in previous survey periods. Commercial and industrial lending activity changed little or declined in the Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco Districts, although it increased noticeably in the Philadelphia District and continued to show modest growth according to Chicago. Lending standards for construction projects and commercial real estate transactions tightened further in the New York and St. Louis Districts, and they remained tight more generally and reportedly held down the volume of lending for these categories in the Boston District. The reports indicated slight increases in delinquencies on commercial and industrial loans and slightly larger increases for commercial mortgages in many areas.
Reports on the natural-resources sector indicated further growth from very high levels of activity. High oil prices have stimulated expanded drilling in the Atlanta and Dallas Districts; Minneapolis reported increased activity in the energy and mining sectors since the last report; and Kansas City reported that "energy activity remained robust." However, Cleveland reported a slight decline in production of natural gas.
There is still a ton of bad news out there. Today's home price release is just one of the many problems we are seeing which is driving the market lower. But no market moves down forever. The daily charts all show some type of reversal formation, short-term technical indicators are oversold and the SPYs and IWMs have been moving down for some time. All of these factors indicates a reversal might be in the cards.
Now, I'm not saying we're going to have a rebound with 100% certainty. Chart reading is not an exact science by any stretch of the imagination. And the market will do its best to make an ass out of you at all times -- and the market has plenty of resources to do that.
Purchases of existing homes dropped 1.2 percent to an annual rate of 4.97 million, the fewest since the National Association of Realtors began keeping the records in 1999. Orders for items made to last several years fell 0.4 percent, the Commerce Department said today in Washington.
New orders for manufactured durable goods in October decreased $0.9 billion or 0.4 percent to $214.5 billion, the U.S. Census Bureau announced today. This was the third consecutive monthly decrease and followed a 1.4 percent September decrease. Excluding transportation, new orders decreased 0.7 percent. Excluding defense, new orders decreased 0.9 percent.
Charles Biderman, the proprietor of TrimTabs Investment Research, asserts the latest Labor Department numbers showing continued growth in payrolls is wildly overblown. That's without getting into the contentious argument over the Bureau of Labor Statistics' birth-death assumptions, which magically conjure phantom jobs.
Biderman, a Barron's alum who toiled for the magazine in the 1970s, tracks real-time data about the stock market and economy, including employment. Biderman's modest proposal -- follow real-time, real-world data, such as withholding and self-employment taxes, and ask payers of those taxes how many workers they employ. He also tracks employment indicators such as online help-wanted ads, and not just those on commercial sites.
This gives a better picture of the labor market because increasing numbers of people aren't on payrolls. It isn't just the eBay entrepreneurs touted by Dick Cheney. Lots of professionals have been laid off by corporations and then work for their old employers as "consultants," Charles observes. But, being hidebound bureaucrats and academics, the BLS resists utilizing these data.
In any case, nobody fudges their taxes to inflate the numbers. And based on those numbers, while the consensus was looking for a slowdown for the past couple of years, Biderman's real-world data showed the U.S. economy was cooking. That is, until a couple of months ago.
For instance, the official tally showed a 130,000 gain for nonfarm payrolls for October. By Biderman's reckoning, payrolls actually were down 30,000 for the month, which would jibe with the 250,000 decline in last month's household survey.
To be sure, the household numbers bounce around from month to month. But over the past three months, household employment has declined by 34,000 a month. Over the past 12 months, this measure has grown a paltry 56,000 a month, or about half what's needed to absorb new entrants into the labor force.
Part of the discrepancy between the BLS payroll numbers and reality is because a huge number of people in real-estate-related businesses are independent contractors. That includes construction workers, realtors, mortgage brokers, home inspectors and assessors, among others. They're not on an employer's payroll, so they don't get counted in that tally. Nor are they eligible for unemployment insurance, so they also don't get counted in the jobless claims data.
The BLS has shown a net gain of jobs added to new businesses in both construction and financial activities nine consecutive months from February through October.
The BLS is assuming not only that jobs were added, but that new unaccounted construction businesses were created in this environment where business capex spending has been weak, housing has been horrid, and over 170 lenders have gone out of business or stopped writing loans since last December as per the Mortgage Lender Implode-O-Meter.
Clearly this is reporting from an alternate universe.
A note of caution: One cannot take the birth death adjustments and subtract them from the reported numbers because one set of numbers is seasonally adjusted and the other is not.
U.S. benchmark crude dropped sharply yesterday, falling $3.28 a barrel, or 3.4%, to $94.42 in futures trading on the New York Mercantile Exchange. But analysts stopped short of calling the shift a correction. The market remains unusually volatile and could easily shoot upward again -- even breaking the $100 mark -- if the Organization of Petroleum Exporting Countries doesn't follow through on talk of a production increase or if Western stockpiles dip unexpectedly. Oil prices hit an intraday record of $99.29 a barrel last week. Oil reached its inflation-adjusted high of $102 a barrel in April 1980.
Topping the list is the sluggish U.S. economy, which some economists say is heading toward a recession as the meltdown of the U.S. subprime-mortgage market crimps lending. That would damp oil demand in the U.S., the world's largest oil consumer. It could also prompt a slowdown in other economies, including in China, now the fastest-growing consumer of oil.
Signs have also emerged of increased crude supplies from the Middle East as OPEC lives up to an agreement in September to raise output by 500,000 barrels a day as of the beginning of this month.
A big factor driving down prices yesterday was mounting expectations that OPEC ministers will move to increase output by an additional 500,000 barrels a day when the group meets in the United Arab Emirates next week. The oil cartel satisfies about 40% of world demand, which hovers around 85 million barrels a day.
Countrywide Financial, the largest U.S. mortgage lender, moved to reassure investors Tuesday that it is not borrowing too much and will not be constrained in its ability to provide home loans.
"We said it back in August, we said it in September, we said it last week, we'll say it until we turn blue in the face, but we have ample liquidity to fund our growth and operational needs," David Bigelow, managing director of investor relations, said at an FBR Capital Markets conference in New York.
Bigelow rejected criticism that Countrywide has threatened the soundness of the Federal Home Loan Bank system by borrowing excessively. He also said Countrywide does not expect issues affecting Freddie Mac and Fannie Mae to materially hurt its ability to make home loans.
Sen. Charles Schumer, a New York Democrat and member of the Senate Banking Committee, accused Countrywide Monday of treating the FHLB system "like its personal ATM," having borrowed $51.1 billion as of Sept 30.
NEW YORK (Reuters) - Prices of existing U.S. single-family homes slumped 4.5 percent in the third quarter from a year earlier, matching a record decline from the previous period as the housing downturn deepened, according to a national home price index on Tuesday.
The S&P/Case-Shiller National Home Price Index fell 1.7 percent since June, marking the largest quarterly decline in the index's 21-year history, S&P said in a statement.
The composite month-over-month index of 20 metropolitan areas fell 0.9 percent to 195.62 in September from August, bringing the measure down 4.9 percent from a year earlier.