History > 2007 > USA > Economy (IV)

Andy Singer

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Cagle

31 October 2007

White House Issues

Upbeat Economic Forecast

November 29, 2007
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, Nov. 29 — The White House issued an economic forecast today that calls for “solid growth” through next year, a prediction that is more optimistic than that of the Federal Reserve and far more optimistic than those of many analysts on Wall Street.

The administration predicted that the economy will expand by 2.7 percent in 2008, that unemployment would remain below 5 percent and that the outlook would be even better in 2009. By contrast, Fed officials are predicting “subpar” growth through next year, starting with a sharp slowdown over the next six months. The “central tendency” of forecasts by Fed policy makers is for growth to slow to between 1.8 percent and 2.5 percent next year.

The White House was closer to the Fed on its estimate about unemployment, predicting that it would average 4.9 percent next year — up only slightly from 4.7 percent. But many analysts think the Fed’s unemployment forecast is itself too optimistic, because it is inconsistent with its forecast for slower growth.

“We are forecasting solid growth for 2008 of 2.7 percent, and that is good solid growth,” said Edward Lazear, chairman of the White House Council of Economic Advisers, in a conference call with reporters. He said the healthy growth was “especially significant,” given that the administration expects the housing market to be a drag on the overall economy throughout next years.

The administration did reduce its forecast for growth next year by about four-tenths of a percentage point. Mr. Lazear said the downward revision reflected the unexpectedly steep drop in the housing market as well as earlier downward revisions of growth in previous years.

“Obviously the housing market has been softer than people expected,” he said. “We are not the only ones who were surprised by that. For the most part, our revisions are in line with other revisions.”

White House Issues Upbeat Economic Forecast, NYT, 29.11.2007, http://www.nytimes.com/2007/11/29/business/29cnd-forecast.html

U.S. Says China Agrees

to End Some Subsidies

November 29, 2007
The New York Times
By STEVEN R. WEISMAN

WASHINGTON, Nov. 29 — Bowing to American pressure on the eve of high-level talks to reduce economic tensions, China agreed today to end a dozen subsidies that promote exports and discourage imports of steel, wood products, information technology and other manufactured goods.

The Chinese actions affect exports by companies that have foreign investment or are joint ventures with foreign companies. Nearly 60 percent of Chinese exports are produced by these companies.

While the intent is to help American companies compete against China, some of the loss of subsidies would be borne by companies that export goods to the United States and owned at least in part by Americans.

Susan C. Schwab, the United States trade representative, announced the agreement by China, signed earlier in the day at the World Trade Organization in Geneva. She hailed the action as “a victory for U.S. manufacturers, producers and workers” and a vindication of using negotiations to resolve trade disputes.

Ms. Schwab said she could not identify any names of American or other companies affected by the new agreement without their permission.

The agreement came only two weeks before Ms. Schwab is to join Treasury Secretary Henry M. Paulson Jr. and other Cabinet members for a high-level meeting of the “strategic economic dialogue” with China that Mr. Paulson launched last year to reduce tensions with China.

The dialogue is aimed at resolving tensions that have mounted along with the trade deficit, which soared to $232 billion last year and is likely to go significantly higher this year.

Ms. Schwab said there was no immediate information on how many exports would be affected, in part because China was eliminating a set of 12 different subsidy and loan laws on its books, and it was not clear how many companies had actually taken advantage of them.

The agreement by China left intact other subsidies of exports that the United States is still challenging in certain kinds of steel products, heavy-duty tires, paper and chemicals. These challenges are to subsidies and government assistance that American laws deem unfair and subject to duties imposed on imports.

Also unresolved are American complaints that China is using regulations and other practices to favor exports and discourage imports on a broad array of manufactured goods, as well as separate complaints that China has done little to crack down on piracy and counterfeit goods of software, videos and consumer products.

Nor does it affect the principal complaint that the Chinese are keeping the value of their currency, the yuan, artificially low to promote exports.

The Chinese have been irate over American actions challenging their economic practices at the World Trade Organization, and this has aggravated efforts to resolve the disputes through negotiations.

But Ms. Schwab said the agreement on subsidies today vindicated the administration’s approach of using negotiation to resolve disputes, and to oppose punitive legislation that is pending in Congress.

    U.S. Says China Agrees to End Some Subsidies, NYT, 29.11.2007, http://www.nytimes.com/2007/11/29/business/worldbusiness/29cnd-trade.html?hp

Daryl Cagle        MSNBC.com        Cagle        29 November 2007

U.S. says home prices are falling,

first time in 13 years

29 November 2007
By Marcy Gordon, AP Business Writer
USA Today

WASHINGTON — U.S. home prices marked a quarterly decline for the first time in 13 years in the third quarter, according to government data released Thursday that provide fresh evidence of the housing market slump.

Home prices dipped 0.4% nationwide in the July-September period, compared with the previous quarter, the Office of Federal Housing Enterprise Oversight said.

Compared with the third quarter of 2006, U.S home prices posted an increase of 1.8%, but it was the smallest year-over-year increase since 1995, according to the agency, which oversees the big mortgage-finance companies Fannie Mae and Freddie Mac.

"While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country," agency director James Lockhart said in a statement. Prices declined in more than 20 states, he said.

According to OFHEO's data, many of the cities and states experiencing the sharpest declines in the quarter were the same areas that had posted the sharpest increases a couple of years ago during the housing boom.

Price declines were steepest in California (down 3.6%), Massachusetts (2.3%), Michigan (3.7%), Nevada (2.4%) and Rhode Island (2.2%).

"Rising inventories of for-sale properties are clearly having a material impact on home prices," said Patrick Lawler, the agency's chief economist.

U.S. says home prices are falling, first time in 13 years, UT, 29.11.2007, http://www.usatoday.com/money/economy/housing/2007-11-29-ofheo-q3_N.htm

US Foreclosure Filings Up in October

November 29, 2007
Filed at 11:52 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

LOS ANGELES (AP) -- U.S. foreclosure filings nearly doubled in October from the same month last year, the latest sign many homeowners are falling behind on mortgage payments and increasingly losing their homes, according to a mortgage research company.

A total of 224,451 foreclosure filings were reported in October, up 94 percent from 115,568 in the same month a year ago, Irvine-based RealtyTrac Inc. said Thursday.

The number of filings in October rose 2 percent from September's 223,538.

The U.S. had one foreclosure filing for every 555 households in October, RealtyTrac said.

The filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.

In all, 45 states saw an increase in foreclosure filings over last year.

While the number of filings is still up year-over-year, it has leveled off in the last two months after hitting a high for the year in August.

Efforts by lenders under pressure to modify loan terms for at-risk borrowers could explain the slower sequential increase in filings, but the trend is likely more a result of a lag in filings after interest rate changes on adjustable-rate mortgages, said Rick Sharga, RealtyTrac's vice president for marketing.

''What we probably did was come out of a reset cycle, but (the filings) have leveled off at a much higher level than before we got this point,'' Sharga said.

It typically takes two to three months after a rate reset before a borrower who fails to make payments is considered in default.

Tighter lending standards and the ongoing housing slump are making it harder for homeowners who can't afford their mortgage payments to sell their homes or refinance.

Many homeowners with adjustable-rate mortgages are also facing steep monthly payment hikes. Experts estimate some 2 million of the loans are due to reset at higher rates in the next eight months, which could lead to more foreclosures.

One alarming trend in October was an increase in the number of homes that were repossessed by lenders after they failed to sell at trustee auctions.

''About 35 percent of the total filings we collected this month were notices of bank repossession,'' Sharga said. ''Historically, on average, that number is more like 20 percent.''

That means more borrowers who entered foreclosure ended up losing their homes.

The trend was particularly evident in Ohio, where 45 percent of all foreclosure filings during the month were notices of bank repossessions. The repossessions represented 46 percent of all filings in Missouri and 37 percent in Michigan.

Economic woes and job losses have exacerbated the housing slump in the Midwest.

Nevada, California, Florida and Ohio had the highest foreclosure filing rates in the country last month, RealtyTrac said.

Nevada reported one foreclosure filing for every 154 households, earning the state the highest rate in the nation for the 10th month in a row. The state had 6,618 filings in October, up 20 percent from September and nearly triple from October 2006.

California's rate was one filing for every 258 households. The state reported the most foreclosure filings of any single state with 50,401, down 2 percent from September but more than triple the number from October of last year.

The state's foreclosures were primarily driven by adjustable mortgages resetting to sharply higher monthly payments, RealtyTrac said.

Florida had one foreclosure filing for every 273 households. The state reported 30,190 foreclosure filings last month, down more than 9 percent from September, but up nearly 165 percent from October 2006's total.

Ohio reported one foreclosure filing for every 290 households. The state had 17,276 filings last month, up nearly 10 percent from September and 136 percent from October 2006.

Rounding out the states with the top 10 foreclosure filing rates in October were Georgia, Michigan, Colorado, Arizona, Indiana and Illinois.

------

On the Net:

RealtyTrac Inc.: http://www.realtytrac.com

US Foreclosure Filings Up in October, NYT, 29.11.2007, http://www.nytimes.com/aponline/us/AP-Foreclosure-Rates.html

White House Lowers

'08 Economic Forecast

November 29, 2007
Filed at 11:42 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) --The White House on Thursday lowered its forecast for economic growth for next year and said unemployment will likely rise as the housing slump and tight credit stunt business expansion.

Under the administration's new forecast, gross domestic product, or GDP, will grow by 2.7 percent next year. Its old projection called for a stronger, 3.1 percent increase.

''The housing market decline has been more significant that we expected,'' Edward Lazear, chairman of the White House's Council of Economic Advisers, told reporters in a conference call. That more pronounced housing slump -- along with the expectation that problems will persist into next year -- was a big factor in the administration's downgrade of its economic growth forecast for 2008.

With the projection of slowing economic growth, the unemployment rate is projected to move up to 4.9 percent next year. That's up from a previous forecast of a 4.7 percent jobless rate but still would be considered fairly low by historical standards. The unemployment rate last year dipped to 4.6 percent, a six-year low.

Inflation, however, should improve. The White House expects consumer prices to increase by 2.1 percent next year, a moderation from a previous forecast of a 2.5 percent rise. That's encouraging news as oil prices have marched past $92 a barrel.

''While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the U.S. economy has many strengths, and I expect the expansion to continue,'' said Treasury Secretary Henry Paulson.

The odds of a recession have grown this year. But the Bush administration, Federal Reserve officials and others remain hopeful that one can be avoided.

The big worry for economists is that consumers and businesses will cut back on spending and investing, sending the economic growth into a tailspin. Spending by consumers and businesses is the lifeblood of the country's economic activity.

The White House's economic forecasts are issued twice a year. The projections were developed mainly by a team from the Council of Economic Advisers, the Treasury Department and the Office of Management and Budget. The administration's projections are in line with those offered by private analysts.

    White House Lowers '08 Economic Forecast, NYT, 29.11.2007, http://www.nytimes.com/aponline/us/AP-Bush-Economic-Forecast.html

Op-Ed Contributor

Penny Foolish

November 29, 2007
The New York Times
By ERIC SCHLOSSER

THE migrant farm workers who harvest tomatoes in South Florida have one of the nation’s most backbreaking jobs. For 10 to 12 hours a day, they pick tomatoes by hand, earning a piece-rate of about 45 cents for every 32-pound bucket. During a typical day each migrant picks, carries and unloads two tons of tomatoes. For their efforts, this holiday season many of them are about to get a 40 percent pay cut.

Florida’s tomato growers have long faced pressure to reduce operating costs; one way to do that is to keep migrant wages as low as possible. Although some of the pressure has come from increased competition with Mexican growers, most of it has been forcefully applied by the largest purchaser of Florida tomatoes: American fast food chains that want millions of pounds of cheap tomatoes as a garnish for their hamburgers, tacos and salads.

In 2005, Florida tomato pickers gained their first significant pay raise since the late 1970s when Taco Bell ended a consumer boycott by agreeing to pay an extra penny per pound for its tomatoes, with the extra cent going directly to the farm workers. Last April, McDonald’s agreed to a similar arrangement, increasing the wages of its tomato pickers to about 77 cents per bucket. But Burger King, whose headquarters are in Florida, has adamantly refused to pay the extra penny — and its refusal has encouraged tomato growers to cancel the deals already struck with Taco Bell and McDonald’s.

This month the Florida Tomato Growers Exchange, representing 90 percent of the state’s growers, announced that it will not allow any of its members to collect the extra penny for farm workers. Reggie Brown, the executive vice president of the group, described the surcharge for poor migrants as “pretty much near un-American.”

Migrant farm laborers have long been among America’s most impoverished workers. Perhaps 80 percent of the migrants in Florida are illegal immigrants and thus especially vulnerable to abuse. During the past decade, the United States Justice Department has prosecuted half a dozen cases of slavery among farm workers in Florida. Migrants have been driven into debt, forced to work for nothing and kept in chained trailers at night. The Coalition of Immokalee Workers — a farm worker alliance based in Immokalee, Fla. — has done a heroic job improving the lives of migrants in the state, investigating slavery cases and negotiating the penny-per-pound surcharge with fast food chains.

Now the Florida Tomato Growers Exchange has threatened a fine of $100,000 for any grower who accepts an extra penny per pound for migrant wages. The organization claims that such a surcharge would violate “federal and state laws related to antitrust, labor and racketeering.” It has not explained how that extra penny would break those laws; nor has it explained why other surcharges routinely imposed by the growers (for things like higher fuel costs) are perfectly legal.

The prominent role that Burger King has played in rescinding the pay raise offers a spectacle of yuletide greed worthy of Charles Dickens. Burger King has justified its behavior by claiming that it has no control over the labor practices of its suppliers. “Florida growers have a right to run their businesses how they see fit,” a Burger King spokesman told The St. Petersburg Times.

Yet the company has adopted a far more activist approach when the issue is the well-being of livestock. In March, Burger King announced strict new rules on how its meatpacking suppliers should treat chickens and hogs. As for human rights abuses, Burger King has suggested that if the poor farm workers of southern Florida need more money, they should apply for jobs at its restaurants.

Three private equity firms — Bain Capital, the Texas Pacific Group and Goldman Sachs Capital Partners — control most of Burger King’s stock. Last year, the chief executive of Goldman Sachs, Lloyd C. Blankfein, earned the largest annual bonus in Wall Street history, and this year he stands to receive an even larger one. Goldman Sachs has served its investors well lately, avoiding the subprime mortgage meltdown and, according to Business Week, doubling the value of its Burger King investment within three years.

Telling Burger King to pay an extra penny for tomatoes and provide a decent wage to migrant workers would hardly bankrupt the company. Indeed, it would cost Burger King only $250,000 a year. At Goldman Sachs, that sort of money shouldn’t be too hard to find. In 2006, the bonuses of the top 12 Goldman Sachs executives exceeded $200 million — more than twice as much money as all of the roughly 10,000 tomato pickers in southern Florida earned that year. Now Mr. Blankfein should find a way to share some of his company’s good fortune with the workers at the bottom of the food chain.
 

Eric Schlosser is the author of “Fast Food Nation” and “Reefer Madness.”

    Penny Foolish, NYT, 29.11.2007, http://www.nytimes.com/2007/11/29/opinion/29schlosser.html

Editorial

Spreading the Misery

November 29, 2007
The New York Times

The nation’s foreclosure crisis is metastasizing, and communities are in harm’s way as property values and tax bases decline and crime increases.

In the third quarter, there were 635,000 foreclosure filings, a 30 percent increase from the previous quarter and nearly double from a year ago, according to RealtyTrac, a national real estate information service. That works out to one for every 196 households. Michigan and Ohio, which were hit early and hard by a combination of economic weakness and reckless lending, continue to reel. Foreclosures rose last year in Colorado, Georgia and Texas and are now surging in California, Nevada, Arizona and Florida. In those states unsustainable mortgages are at the root of the problem.

The Bush administration has been far too slow to respond, with some officials apparently worried that helping today’s troubled borrowers might encourage future borrowers to take on too much debt. That misses a critical point: much of this crisis can be traced to lenders’ failure to vet borrowers and the government’s failure to regulate the industry. And it misses an even bigger point: unless something is done quickly, whole communities, not just people who lose their homes, will suffer.

Foreclosed properties damage the value of nearby homes and the tax bases of municipalities. There is also a strong correlation between foreclosures and crime. For every one percentage point increase in a neighborhood’s foreclosure rate, violent crime rises 2.3 percent, according to a recent study by Dan Immergluck of the Georgia Institute of Technology and Geoff Smith of Woodstock Institute, a research and advocacy organization in Chicago.

Reports from Cleveland, Atlanta and the sprawl around Los Angeles and Sacramento — from low-income city neighborhoods to middle-class suburbs — all tell a similar story: when vacancies appear, so do looters, vagrants, prostitutes and drug dealers. In Cleveland’s inner city, it takes 72 hours for a vacated house to be looted, a community activist told CNN recently, with lootings often followed by violent crime. In the suburbs, the descent may be slower, beginning with graffiti and vandalism and moving to gang activity and other crime.

Police departments may not be able to keep up, in part because foreclosures are projected to strain municipal budgets. Neighborhood watch groups are quickly overwhelmed. The United States Conference of Mayors met this week to discuss the impact of foreclosures. Based on the mayors’ experience, their estimates of the number of coming foreclosures, and the damage inflicted on community life, were grimmer than projections from the federal government and the housing industry. The question is whether their concerns will be heeded.

As more foreclosures take their toll, the need becomes ever more obvious for a comprehensive, national effort to avert evictions. Last week, Treasury Secretary Henry Paulson Jr. wisely shifted his position on loan modifications, endorsing the idea that some at-risk loans should be modified en masse rather than on an inefficient one-by-one basis. If Mr. Paulson backs up his new stance with a plan of action, the socio-economic costs of foreclosures may yet be contained.

    Spreading the Misery, NYT, 29.11.2007, http://www.nytimes.com/2007/11/29/opinion/29thu1.html

Lenders’ Belt-Tightening

Stifles Growth in Economy

November 29, 2007
The New York Times
By PETER S. GOODMAN

Credit flowing to American companies is drying up at a pace not seen in decades, threatening the creation of jobs and the expansion of businesses, while intensifying worries that the economy may be headed for recession.

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.

Mr. Kohn’s unexpected pledge that the Fed would pursue “flexible and pragmatic policy making” that might help counter the trend and shore up the economy spurred a rally on Wall Street that sent stocks soaring. The Dow Jones industrial average jumped 331 points, to 13,289.45, while the broader Standard & Poor’s 500 index climbed 2.86 percent, to 1,469.02.

For now, though, the situation is looking bleaker for many businesses. Already, companies in everything from furniture manufacturing to Web site design are tightening their belts, delaying expansion and scrambling for other sources of cash.

“This is a very big deal,” said Andrew Tilton, a senior economist in the United States Economic Research Group at Goldman Sachs. “You’re basically crimping the growth of the more vulnerable companies. If they can’t borrow the money, their options are much more limited. They’d have to have less ambitious hiring plans, buy less machinery and cancel projects.”

Two years ago, in what now seems like another era, Carmen Murray easily borrowed $100,000 from a local bank to finance her company, Rodeo Carpet Mills, which makes high-end rugs in an industrial stretch near Los Angeles. Getting a check was as simple as returning a mass-mailed flier.

Today, Ms. Murray is seeking a fresh loan from the bank to finance an expansion to supply Las Vegas hotels with floor coverings. She needs new machinery and 15 more workers, bringing the total work force to 45. If she manages to get the money, it will not come easily.

“They want this; they want that,” Ms. Murray sighed. “I got the sense that I have to start all over again. They need to know who I am and all about my business.”

A survey of bank loan officers conducted by the Federal Reserve in October found that about one-fifth of lenders had tightened lending requirements for commercial and industrial loans for large and midsize businesses over the previous three months. A slightly smaller proportion reported tightening lending to small companies.

By themselves, commercial bank loans have actually surged: large companies have tapped prearranged lines of credit to weather the financial chaos that has accompanied the unraveling of the American real estate market.

But this source of finance has been nowhere near enough to compensate for the virtual shutdown of the short-term commercial paper market. Much of this debt had been pledged against the value of mortgages, making them effectively radioactive in markets around the globe.

In recent years, a lot of commercial lending was inspired by an upward spiral of enrichment: banks made new loans, then swiftly sold them off for profit, using the proceeds to extend still more. But with much of the financial world unnerved by the mortgage meltdown, buyers for commercial loans are scarce.

“Since the resale market went away, major banks have had much less availability to make loans,” said Mark A. Sunshine, president of First Capital, a private commercial lender. “Absolutely, credit is much less available.”

Some of the drop reflects the subsiding in the run of mergers, diminishing the demand for credit by companies buying other companies. Some can be explained by what many economists view as a healthy return to the skeptical scrutinizing of prospective borrowers by banks. But lenders and borrowers from northern Virginia to southern Arizona confirm that the credit tightening has already begun to cut money reaching healthy companies as well, affecting their spending and hiring.

What loans are being extended are going primarily to companies with longstanding relationships with banks. Lenders are reluctant to bet their increasingly scarce capital on riskier, less-established companies in a time of economic anxiety. That leaves many of those companies on a limb.

“Small businesses are just inherently more risky, and banks are going to be more conservative in protecting their assets,” said Jody Keenan, who chairs the board of the Association of Small Business Development Centers in Burke, Va. “We’re starting to see a tightening already, particularly for very small companies. We’re talking about real impacts in local communities.”

A slowdown among smaller companies could be especially costly to the economy in terms of jobs. More than half of American jobs are at companies with fewer than 100 workers, according to Moody’s Economy.com.

In recent months, smaller companies have been adding jobs even as larger firms have been shedding workers, according to the ADP National Employment Report, which tracks changes at companies with payrolls overseen by ADP. From May to October, 276,000 of the 378,000 jobs added were at companies with fewer than 50 employees, the report found.

To be sure, the strongest companies with property to put up as collateral and years of profits they can point to are still able to borrow, often at increasingly favorable terms.

The downturn in the housing market has made banks reluctant to sink money into anything related to real estate, from title companies to bathroom tile manufacturers.

But lenders have sought refuge in more vibrant areas — notably agriculture, which has benefited from the rise in global demand and the sudden boom in ethanol production.

Richard Brown, president and chief executive of the Krause Corporation, which makes soil-tilling equipment at its factory in Hutchinson, Kan., relies upon lines of credit from banks to smooth out the seasonal nature of the business. Though it sells its products mostly in the spring and fall, the company must make them year-round.

Mr. Brown said banks had been calling him relentlessly to offer new loans.

“They’re trying to maintain their business and get past the subprime debacle, and where can they go?” Mr. Brown said. “Agriculture in this country is very strong.”

But in other parts of the economy, notably the auto industry, access to credit has tightened considerably, as banks steer their limited capital away from companies with declining sales.

A year ago, when he needed new machinery, Doyle Hayes, president and chief executive of Pyper Products, an auto parts maker in Battle Creek, Mich., went back to the local branch of Comerica bank, where he has been doing business for years. He borrowed $300,000.

Last week, when Mr. Hayes needed $140,000 for a new robot, he did not even bother to inquire at the bank. “We knew what the answer was going to be,” he said, meaning the bank would have turned him down. “When the auto industry goes down, anything that has four wheels becomes suspect.”

Still, Mr. Hayes did not put off the purchase. “You can’t save yourself into prosperity,” he said. He managed to borrow the money instead from Battle Creek Unlimited, a nonprofit economic development arm of the city.

In Arizona, Dennis Long, president of Enterprise Resource Group, which manages computer networks for businesses in the Phoenix area, is keen to expand, particularly by picking up work from the federal government. But that requires hiring a sales representative, and he lacks the capital to go beyond his $100,000 line of credit from Wells Fargo Bank.

“The bank says we’re maxed out,” Mr. Long complained. “It just seems like before they were a little more ‘Let me see what I can do,’ where today I just get ‘no.’”

In Los Angeles, Ms. Murray, too, has grown accustomed to a less-than-exuberant reception from the bank. Having started at the rug factory as a receptionist some 25 years ago, she now owns the company. A Mexican-American entrepreneur, she hopes to capture contracts that are set aside for minority-controlled companies.

She may eventually try an alternative source of finance aimed at small lenders, with the state guaranteeing her loan. Curiously, at one such institution in Los Angeles, Pacific Coast Regional Small Business Development Corporation, the volume of lending has slowed considerably in recent months, said Mark Robertson, the firm’s president and chief executive.

It may be that the effects of the credit tightening are still unfolding, he suggested. Eventually, a parade of would-be borrowers may show up at his door. His business tends to move in the opposite direction of the economy: when times are bad, more people need help to qualify for a loan. Perhaps things just have not gotten bad enough.

But Mr. Robertson thinks another factor may be at play. Business prospects are so uncertain that smaller entrepreneurs have lost their nerve for risk.

“Any business owner that is experiencing less traffic to their establishment is not willing to take on more debt,” Mr. Robertson said. “Everybody has kind of a wait-and-see, hold-off sort of attitude.”

Floyd Norris and Eric Dash contributed reporting.

    Lenders’ Belt-Tightening Stifles Growth in Economy, NYT, 29.11.2007, http://www.nytimes.com/2007/11/29/business/29lend.html?hp

Stocks Soar

on Signal of ‘Flexible’ Fed Policy

November 28, 2007
The New York Times
By MICHAEL M. GRYNBAUM

A top Federal Reserve official appeared to open the door this morning for additional interest rate cuts, pledging to follow “flexible and pragmatic policy making” as the central bank decides how to cope with the current financial crisis.

Stock markets soared on investors’ hopes that the unusually candid remarks, made by the Fed’s vice chairman, Donald L. Kohn, signal serious consideration of a rate cut at the Fed’s Dec. 11 meeting.

At 11 a.m., the Dow Jones industrials were up 219.08 points, or 1.7 percent, at 13,177.52. The broader Standard & Poor’s 500-stock index was up 2 percent, and the Nasdaq composite index gained 2.6 percent.

European markets were also up sharply, with the major stock indexes in Paris, London and Frankfurt all gaining about 2.5 percent.

The Fed has its benchmark interest rate by three-quarters of a point since September to ease the fallout from the subprime mortgage crisis.

But recent anxiety in the credit markets has made banks and mortgage companies less eager to lend, leading many investors on Wall Street to call for another slash in interest rates that would make it easier for banks and consumers to borrow money.

In his speech this morning, delivered to the Council on Foreign Relations in New York, Mr. Kohn pledged that the Fed “will act as needed” to address the volatility of the current economic situation.

“Uncertainties about the economic outlook are unusually high right now,” he said. “In my view, these uncertainties require flexible and pragmatic policy making.”

Mr. Kohn noted that “the increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October.” And pointing to “heightened concerns about larger losses at financial institutions now reflected in various markets,” he said the results could be “a more defensive posture in granting credit, not only for house purchases, but for other uses as well.”

Mr. Kohn, who will vote at the bank’s policy meeting on Dec. 11, acknowledged the “moral hazard” debate that has clouded recent discussions over Fed policy, referring to the bank’s reluctance to reinforce investors’ poor decisions by lowering interest rates. Some analysts argue that this approach effectively rewards banks for poor investments.

But Mr. Kohn said that “when the decisions do go poorly, innocent bystanders should not have to bear the cost.”

“We should not hold the economy hostage to teach a small segment of the population a lesson,” he said, suggesting that a rate cut would be justified

Mr. Kohn’s rate-cut remarks were strongly worded, but Fed officials still appear deeply divided on the issue. The bank issued a statement last month that suggested it would be reluctant to lower rates again before next year. Less than two weeks ago, Randall S. Kroszner, the president of the St. Louis Fed, said that “the current stance of monetary policy should help the economy get through the rough patch during the next year.”

Ben S. Bernanke, the bank’s chairman, has also hinted in speeches and Congressional testimony that he is skeptical of an additional rate cut, citing the threat of inflation and underlying strength in the economy.

But this morning’s economic data suggests that strength may be weakening. Businesses appear more cautious about spending as they anticipate a drop-off in demand over the coming months, and new orders of durable goods — major consumer products like appliances, airplanes and machinery — declined in October by 0.4 percent, the Commerce Department said.

A major indicator of spending — orders of nonmilitary capital goods including appliances and home computers, but excluding aircraft — fell 2.3 percent, suggesting slower spending by consumers. It was the first decline in the category since June, but orders are still down 1.2 percent from last October.

Inventories at businesses ticked up 0.2 percent, following a 0.3 percent uptick in September. The rise could suggest declining demand and a gloomier outlook for business activity.

Meanwhile, existing-home sales dropped for the eighth consecutive month as mortgage availability dries up amid the continuing credit crunch. Sales fell 1.2 percent in October to a 4.97 million annual pace, down from 5.03 million in September, the National Association of Realtors said today. Inventories of homes also rose last month, by 1.9 percent.

    Stocks Soar on Signal of ‘Flexible’ Fed Policy, NYT, 28.11.2007, http://www.nytimes.com/2007/11/28/business/28cnd-econ.html?hp

Fed Official Warns About Wall St Turmoil

November 28, 2007
Filed at 10:14 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- If a fresh bout of turmoil on Wall Street persists, it could further crimp the flow of credit to people and businesses, raising risks to economic growth, a Federal Reserve official said Wednesday.

Donald Kohn, the No. 2 official at the Fed, said the increased turbulence in recent weeks ''partly reversed some of the improvement in market functioning'' seen in late September and in October. The credit crunch had taken a turn for the worse in August, causing stocks to nosedive. Fresh worries about troubles in the housing and credit market have unnerved Wall Street once again.

''Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses,'' Kohn said in remarks to the Council on Foreign Relations in New York. A copy of his speech was made available in Washington. Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed stock prices and could induce lenders and other financial companies ''to adopt a more defensive posture in granting credit, not only for house purchases but for other uses as well,'' Kohn warned.

The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to the economy. The odds of a recession have grown this year. Still, many economists remain hopeful the country will be able to weather the financial storm.

Against the backdrop of such uncertainty about how forces will play out with consumers and businesses, Kohn once again said Federal Reserve policymakers must remain ''nimble.'' In his view, ''these uncertainties require flexible and pragmatic policymaking,'' Kohn said.

Wall Street viewed Kohn's comments as hinting that additional rate cuts could be forthcoming.

The Fed has sliced interest rates twice this year -- in September and late October -- to prevent the ill effects of the housing collapse and credit crunch from throwing the economy into a recession. Fed Chairman Ben Bernanke and his colleagues at the October meeting signaled that further rate reductions may not be needed to help the economy through its rough spots. Since then, however, financial markets have suffered through another period of turmoil.

    Fed Official Warns About Wall St Turmoil, NYT, 28.11.2007, http://www.nytimes.com/aponline/us/AP-Fed-Economy.html

Steve Sack

Minnesota        The Minneapolis Star-Tribune        Cagle

28 November 2007

Existing home sales fall again,

biggest price drop ever

28 November 2007
USA Today
By Martin Crutsinger, AP Economics Writer

WASHINGTON — Sales of existing homes fell for the eighth consecutive month in October, with median home prices falling a record amount.

The National Association of Realtors reported that sales of existing single-family homes and condominiums dropped 1.2% last month to a seasonally adjusted annual rate of 4.97 million units.

The sales pace was the lowest since the realty trade group began tracking both single-family and condo sales jointly in 1999.

The median price of a home sold last month declined to $207,800, a drop of 5.1% from a year ago, the biggest year-over-year price decline on record.

Analysts blamed the October weakness on the fallout from a serious credit crunch that roiled financial markets in August. Banks and other lenders have tightened credit standards in response to a soaring level of defaults, especially on subprime mortgages, loans provided to borrowers with weak credit histories.

The worry is that the credit crisis and a deepening housing slump could be enough to push the country into a recession.

By region of the country, sales were unchanged in the Northeast and the South and down 1.7% in the Midwest and 4.4% in the West.

Lawrence Yun, chief economist for the Realtors, said the big drop in the West reflected the fact that the market for so-called "jumbo mortgages," loans higher than $417,000, tightened considerably this summer. California, with its high home prices, depends heavily on the availability of jumbo loans.

"Temporary mortgage problems were peaking back in August when many of the sales closed in October were being negotiated," Yun said. "We continue to see the biggest impact in high-cost markets that rely on jumbo loans."

Yun said he believes the drop in sales, which left activity in October 20.7% below the level of a year ago, was nearing its end. He said a greater willingness of lenders to start offering jumbo loans again and the use of Federal Housing Administration-insured loans in place of subprime mortgages will help generate a rebound.

However, other economists are predicting housing could remain depressed for many months to come as sellers face high inventories of unsold homes.

Contributing: Reuters

    Existing home sales fall again, biggest price drop ever, UT, 28.11.2007, http://www.usatoday.com/money/economy/housing/2007-11-28-existing-homes_N.htm

Existing Home Sales Fall

for 8th Straight Month

November 28, 2007
Filed at 10:12 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Sales of existing homes fell for the eighth consecutive month in October, with median home prices falling by a record amount. Analysts blamed the worsening housing slump on the credit crunch that hit in August.

The National Association of Realtors reported that sales of existing single-family homes and condominiums dropped by 1.2 percent last month to a seasonally adjusted annual rate of 4.97 million units.

The median price of a home sold last month declined to $207,800, a drop of 5.1 percent from a year ago, the biggest year-over-year price decline on record.

Analysts blamed the October weakness on the fallout from a serious credit crunch that roiled financial markets in August. Banks and other lenders have tightened credit standards significantly in response to a soaring level of defaults, especially on subprime mortgages, loans provided to borrowers with weak credit histories.

The worry is that the credit crisis and a deepening housing slump could be enough to push the country into a recession.

In another sign of spreading economic weakness, the Commerce Department reported Wednesday that orders to factories for big-ticket manufactured goods declined by 0.4 percent in October. It was the third straight drop, the longest stretch of weakness in nearly four years.

    Existing Home Sales Fall for 8th Straight Month, NYT, 28.11.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

Orders for Durable Goods Fall 0.4%

November 28, 2007
Filed at 8:36 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Orders to factories for big-ticket manufactured goods fell in October for a third straight month, the longest stretch of weakness in nearly four years.

The Commerce Department reported that orders for durable goods declined 0.4 percent last month, a weaker showing than expected. The October decline followed even bigger decreases of 1.4 percent in September and 5.3 percent in August, raising worries that the steep plunge in housing is beginning to drag down other sectors of the economy.

While economic growth roared ahead at a rate approaching 5 percent in the summer, many economists believe growth has slowed dramatically in the current quarter from the combined blows of the most severe housing slump in more than two decades, a serious credit crunch and rising energy prices.

    Orders for Durable Goods Fall 0.4%, NYT, 28.11.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

Cyber Monday unwraps

online shopping season

26 November 2007
USA Today

NEW YORK — Retailers are hoping last week's strong start to the holiday shopping season at malls and stores translates into a busy buying season online, which officially begins Monday.

The Monday after Thanksgiving, tagged "Cyber Monday" by the National Retail Federation, marks the first big online shopping surge for many merchants as consumers return to their work computers.

A number of retailers are hosting one-day sales or special offers for the occasion. Internet research firm comScore Inc. estimated online sales may exceed $700 million online on Monday.

As for brick-and-mortar outlets, ShopperTrak RCT Corp., which tracks total sales at more than 50,000 retail outlets, reported late Sunday that sales on Friday and Saturday combined rose 7.2% to $16.4 billion from the same two-day period a year ago.

The biggest draw was electronics, benefiting chains like Best Buy and discounters such as Wal-Mart Stores and Target Corp. Popular-priced department stores including J.C. Penney and Kohl's Corp. drew in crowds with good deals.

Toy stores like Toys "R" Us Inc. fared well too. Still, apparel sales appeared to be mixed at mall-based clothing stores, though a cold weather snap helped spur sales of outerwear and other winter-related items.

"This was a really good start," said Bill Martin, co-founder of ShopperTrak. "There seemed to be a lot of pent-up demand."

Now the attention moves online. Toys "R" Us will hold a one-day online sale and rival eToys.com will launch a two-day sale. Wal-Mart Stores will begin five days of online-only sales.

Online jeweler Blue Nile will give customers 20% off purchases paid through PayPal, eBay's electronic payment division. Target Corp., Circuit City Stores, Sears Holdings Corp., Crate & Barrel, the Discovery Store and Overstock.com are among dozens of retailers offering free shipping that day.

"The online community is getting more competitive as the amount of new customers slows," according to Scott Silverman, executive director of Shop.org, an online arm of the National Retail Federation. "Add to that the concerns about the economy, and promotions and sales provide a great way to get people excited."

Silverman said the number of retailers offering free shipping with no conditions, such as a minimum purchase, has jumped to 41.4% from 36% last year.

Nearly one-third of retailers are also having special one-day sales for Cyber Monday. About 42% plan some kind of promotion, according to the NRF's annual survey.

In fact, the number of retailers hosting online deals on the Monday after Thanksgiving has surged to 72% of those polled from 42% just two years ago.

Despite a decent showing, many shoppers interviewed said they planned to curb their spending. Earl Lee, a mechanic from Live Oak, Fla., who was shopping in Tallahassee, said that he was planning on spending less this holiday season.

"Gas prices, everything's so high," he added.

John Muller, of Clifton, N.J., who was standing outside Macy's Herald Square in Manhattan on Sunday, said he plans to spend only about $500 this year, half as much as a year ago, because of higher expenses and worries about the economy.

This year, "we are mostly buying for the kids," said Muller, who has two children, ages 3 and 7.

    Cyber Monday unwraps online shopping season, UT, 26.11.2007, http://www.usatoday.com/tech/products/2007-11-26-cyber-monday_N.htm

Retail Sales Rise,

but Stores Relied on Discounts

November 26, 2007
The New York Times
By MICHAEL BARBARO

Black Friday was big — but with a big caveat.

With stores dangling steep discounts and consumers worried about the economy, retail sales surged on the day after Thanksgiving, yet the amount of money each shopper spent fell, according to two reports released yesterday.

The reports suggest that jittery consumers are flocking to rock-bottom prices and to little else — a boon for discount stores like Wal-Mart and Best Buy and trouble for higher-end chains, like Nordstrom and Abercrombie & Fitch, which are averse to discounting.

Sales rose 8.3 percent on Friday compared with last year, the biggest increase in three years, according to ShopperTrak, a research company. On Friday and Saturday combined, sales rose 7.2 percent.

But shoppers did not splurge, spending an estimated $348 each over the holiday weekend, down from $360 last year, a survey conducted for the National Retail Federation found.

“American consumers are trying to outsmart the stores and wait for desperation discounts,” said Burt Flickinger, a retail consultant.

Retailers’ performance over the Thanksgiving weekend is closely watched because it accounts for up to 8 percent, or roughly $40 billion, of all holiday sales, which are expected to reach $475 billion this year, according to the National Retail Federation, the industry trade group.

Over all, retail sales growth this season is predicted to be the weakest since 2002, with spending pinched by rising energy costs, falling home prices and a tight credit market.

As expected, cost-conscious consumers favored discount chains over costlier stores this weekend, according to the survey, conducted by BIGresearch.

Of those surveyed, 55 percent said they had shopped at bargain chains like Wal-Mart and Target, up from 50 percent last year. The percentage who made a purchase at traditional department stores, like Macy’s, fell slightly.

That shift appeared to confirm suspicions that shoppers would “trade down” this season, largely bypassing full-price stores to save money. That is a reversal from previous years when shoppers eagerly traded up to luxury outlets like Ralph Lauren.

Deanna Babikian, 42, had no plans to trade up on Friday, arriving at Target in Framingham, Mass., by 6:30 a.m. to buy a 42-inch television for $798. “You have to go then. You can’t get these kinds of deals any other time,” she said.

Higher gas prices, and a reluctance to drive to stores, may be behind the big rise in the percentage of people who shopped online, 32 percent, up from 23 percent in 2006, the survey found.

Bill Martin, the co-founder of ShopperTrak, said the stronger-than-expected sales on Friday should leave stores “breathing a sigh of relief.”

But why did individual spending fall, if sales rose? One explanation is that the most heavily promoted — and discounted — products this holiday season cost less than those of last year.

In electronics, for example, two best sellers on Friday were Kodak digital photo frames (for about $100 to $250) and a KitchenAid mixer (for $130), rather than flat-screen televisions, last year’s must-have gift.

“It takes a lot of $130 stand mixers to add up to a $1,000 high definition TV,” said Ellen Davis, a spokeswoman for the National Retail Federation.

The retail federation’s survey found that earlier store hours lured more shoppers. About 2.6 percent of those surveyed shopped at stores with midnight openings on Black Friday, up from 1.3 percent a year ago.

The discounting in brick-and-mortar stores will spill over onto the Web starting today.

In a departure from tradition, dozens of Web retailers will offer free shipping, no matter how small the order, for Cyber Monday, as the Monday after Black Friday is now called (at least by nickname-adoring marketing executives.)

An estimated 25 percent of online retailers will offer the promotion, like Joann.com, the Web site of Jo-Ann Fabrics and Crafts; HSN.com, the home shopping network Web site; and Giftcertificates.com, a site that sells gift cards from hundreds of stores.

Most retailers provide free shipping only for orders of $50 or higher. But merchants have observed that, although consumers historically flocked to retail Web sites today after spending the weekend browsing at stores, they were still reluctant to buy.

“It’s people coming into browse,” said William Lynch, general manager of HSN.com, who added that the purchases on Cyber Monday in 2006 “were not as high as we wanted.”

With free shipping, he said, “we want to convert browsers into buyers.”

ComScore, a research company, predicted that online sales might surpass $700 million today, a record for a single day.

Katie Zezima contributed reporting from Boston.

    Retail Sales Rise, but Stores Relied on Discounts, NYT, 26.11.2007, http://www.nytimes.com/2007/11/26/business/26retail.html

Retailers Post Robust Start to Holidays

November 25, 2007
Filed at 7:49 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- The nation's retailers had a robust start to the holiday shopping season, according to results announced Saturday by a national research group that tracks sales at retail outlets across the country.

According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4 percent to 5 percent.

''This is a really strong number. ... You can't have a good season unless it starts well,'' said Bill Martin, co-founder of ShopperTrak, citing strength across all regions. ''It's very encouraging. When you look at September and October, shoppers weren't in the stores.''

In a separate statement released Saturday, J.C. Penney Co. reported ''strong performance across all merchandise categories,'' including fine jewelry, outerwear, and young men's and children's assortments.

But the department store chain cautioned, ''while we are encouraged by our strong start, it is still early in the holiday season, and we are mindful of the headwinds consumers are facing.''

J.C. Penney, Wal-Mart Stores Inc. and other major retailers are expected to report same-store results for November on Dec. 6. Same-store sales are those at stores opened at least a year and are considered a key indicator of a retailer's strength.

The upbeat reports were encouraging since merchants have been struggling with anemic sales in recent months, as shoppers, particularly in the middle and lower-income brackets, were becoming more frugal amid higher gas and food prices and an escalating credit crunch.

In an apparent sign of desperation, the nation's stores ushered in the official start of the holiday shopping season on Friday with expanded hours, including midnight openings, and a blitz of early morning specials that were more generous than a year ago. J.C. Penney and Kohl's Corp. opened at 4 a.m., an hour earlier than a year ago.

The strategy appears to have worked, as shoppers jammed stores in record numbers for early morning deals on Friday. Martin noted that judging by the strong figures on Friday, stores were able to sustain strong sales throughout the day. He said he's counting on strong traffic throughout the weekend as many stores, including Macy's Inc., are continuing with special deals.

While Black Friday -- so named because it was traditionally when the surge of shopping made stores profitable -- starts holiday shopping, it is not considered a bellwether for the season. However, merchants see Black Friday as setting an important tone to the overall season: What consumers see that day influences where they will shop for the rest of the year.

Last year, retailers had a good start during the Thanksgiving weekend, but many stores struggled in December, and a shopping surge just before and after Christmas wasn't enough to make up for lost sales.

This year, the Washington-based National Retail Federation predicted that total holiday sales would be up 4 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002. Holiday sales rose 4.6 percent in 2006 and growth has averaged 4.8 percent over the last decade.

    Retailers Post Robust Start to Holidays, NYT, 25.11.2007, http://www.nytimes.com/aponline/business/AP-Holiday-Shopping.html

Housing woes have domino effect


25 November 2007
USA Today

If you haven't yet felt the impact of the nation's credit crisis, just wait. Chances are, you won't have to wait long.

So far, the turmoil may feel a bit remote for average people: Failed mortgage lenders. Gargantuan write-downs by banks. Foreclosures for people who couldn't really afford the mortgages they got.

As the credit crisis seeps into farther-flung corners of the economy, more of us will find it harder — and costlier — to borrow money. The value of the funds in our retirement accounts could shrink. People with subpar credit will likely find it more difficult to qualify for auto and home-equity loans. Even consumers who make the cut may need higher credit scores and more documentation.

With loans harder to get, people will hesitate to buy cars, boats and other big-ticket items. The gravest fear? That weak consumer spending — along with surging energy prices, a long housing slump and sluggish job growth — will plunge the economy into a recession.

Even if a recession doesn't occur, "We're going to be in for a rough ride," says Robert Kuttner, a senior fellow at Demos, a New York policy organization. "With job creation slowing down, credit standards being tightened and housing values not going up anymore, the consumer is under pressure to tighten his or her belt."

Becki Carr, 28, of Detroit, says she's growing gloomier about the economy. Her reasons: rising home foreclosures in Detroit, rising heating and gasoline prices and a cloud of insecurity over the area's job market. As a result, Carr says, she's watching her money more closely.

"Pretty much everyone around me is unemployed or they are having to travel down South to do contract work," she says. And "Every other house on our street is for sale, and they've been for sale for the last year and a half. … It makes me double-check my costs and things."

Tighter credit and falling home prices top the reasons why the economy could slip into a recession, according to 50 economists surveyed in late October and early November by the National Association for Business Economics.

Most economists still don't foresee a recession. But the risk of a downturn is growing with each bout of bleak news. About 18% of economists who responded to NABE's survey put the probability of a recession starting within the next 12 months at 50% or greater. That's up sharply from the 11% of economists who said so in August.

A recession would inflict pain on a majority of Americans as unemployment rose and the stock market sank further. In a recession, "Investors have to be prepared to absorb a 20%-plus decline in the value of their portfolios," says Ed Yardeni, president of Yardeni Research, an investment research firm in Great Neck, N.Y.

The benchmark Standard & Poor's 500-stock index hit an all-time high of 1565.15 on Oct. 9, but since then, it's fallen nearly 8% to 1440.70. The S&P index, which tracks large-company stocks and accounts for about 75% of the market's value, is up 1.6% for the year.

What's managed to help prop up the stock market so far is the sinking dollar, which has nourished companies that depend on foreign sales, says Gregory Peters, chief credit strategist at Morgan Stanley.

Peters says the indicator he's watching most closely, to gauge the likelihood of further economic deterioration, is the labor market. Job growth has clearly slowed but has still held up "reasonably well," he says. U.S. employers created an average 118,000 jobs in the three months through October, down from 142,000 during the first three months of 2007, the Labor Department says. The jobless rate last month was 4.7%, up slightly from the recent low of 4.5% in June but far below the 6.3% of June 2003.

Still, what began as a housing industry downturn more than a year ago has widened into a broader financial industry crisis. Too many risky mortgages were made to people who eventually couldn't afford their payments. Many such mortgages were bundled into securities that were sold to investors who were often unaware of the risk they were absorbing.

Every week, more bad news

The initial low rates on adjustable-rate mortgages are resetting to higher rates. And with housing prices in many markets falling, overextended buyers can't refinance. Delinquencies and foreclosures are rising. Banks and other investors holding downgraded securities tied to risky mortgages are writing down their values billions of dollars at a time.

Each week brings fresh evidence of how the credit crisis is causing damage. Last week, for example, the stock market fell after Goldman Sachs downgraded the nation's largest bank, Citigroup, to a sell. Goldman said the bank would likely have to write down $15 billion over the next two quarters, mainly because of its exposure to risky mortgage securities.

And darker days probably lie ahead: Mortgage-related losses industrywide are likely to mount through 2009 and further bruise financial institutions, says Mark Zandi, chief economist at Moody's Economy.com.

Such losses eat away at banks' capital reserves. That means they can't lend as much money. Goldman Sachs analysts predict that, overall, banks' exposure to risky mortgages could reduce the credit available to consumers and businesses by a staggering $2 trillion.

Even the $2.5 trillion muni bond market hasn't escaped the credit crunch's damage. Muni bonds are issued by cities and states to raise money for projects such as schools, highways and airports. Historically, they've been relatively safe investments because it's rare that governments default on their debts.

But worries about the companies that insure hundreds of billions of dollars in muni bonds are rippling through to muni bonds and rattling investors. The insurers, which have exposure to risky mortgages, could see their credit ratings reduced. If that happened, the muni bonds they guarantee would be downgraded, too. Cities and states would find it harder to raise money. Projects would be delayed. Taxpayers could face higher taxes.

Miami-Dade County and Puerto Rico have postponed bond issues totaling $1.5 billion in recent weeks because of credit concerns.

In the housing market, tightening credit has shrunk the pool of potential buyers for homeowners such as Glynnis Fairbanks, who wants to sell her four-bedroom home in Broward County, Fla.

Fairbanks had a deal to sell her home in May; she thought the sale would be finished by August. But the buyers, she says, had to back out because their lender, Countrywide, tightened its standards on their subprime loan. She's cut her price to $325,000 from $348,000. But only one other potential buyer has peeked at the house.

By the end of 2008, more than 1 million homeowners with adjustable-rate mortgages will see their rates reset higher. Meantime, many people who want to refinance can't because they lack the credit scores or the home equity to meet lenders' tighter standards. This is especially true in neighborhoods where prices are falling. Some people who bought homes with little or no down payment now owe more than their homes are worth.

Investors, too, have been unnerved by the turmoil. Take Doug Breitenbach, 63, who pared back on his investments in financial services this month because of banks' exposure to risky loans.

Since June, "I have lost on paper about $18,000 in my 401(k) fund," says Breitenbach, a retiree in Silver Spring, Md. Though his portfolio is still up for the year, "I'm quite concerned about future drops."

As mortgage-related distress spooks the markets, lenders are becoming "more sensitive" to the risks of other loans, says James Chessen, chief economist of the American Bankers Association. Banks may require higher credit scores now to qualify for loans, he notes.

At the moment, though, many businesses say the credit crunch still feels a little remote. In an October survey of small-business owners, only 6% said loans had become harder to get, in line with survey results over the past two years, according to the National Federation of Independent Business. Only 3% said credit availability and interest rates were their top concerns.

A Federal Reserve survey last month showed little change in banks' lending standards for small businesses. But the same survey also detected a more ominous sign: On most consumer loans, 14 of the 50 banks surveyed had tightened their standards by October. That was up sharply from six out of 50 banks in July. Banks are starting to do the same with credit cards.

Gary Perlin, Capital One's chief financial officer, said at an analysts' conference this month that the company has become more selective about granting credit cards and auto loans. And JPMorgan Chase says it's being more careful about issuing home-equity credit lines and auto loans, mainly for consumers with poor credit.

"When there's less credit extended," says Jack Malvey, chief global fixed-income strategist at Lehman Bros., "it reduces world economic growth and puts the U.S. at risk of recession. The real damage of that could be measured in hundreds of billions of dollars and, depending on what happens to the world economy, it could be $1 trillion."

Discover Financial has jacked up the rate it charges to risky new credit card customers and has raised late fees for all customers. Some banks are likely to consider raising fees or rates on credit cards — one of their most profitable products — because they're under "that much more pressure" in an uncertain economy to recoup mortgage losses, says Edward Woods, senior analyst at Celent, a market research firm.

That means that even those with pristine credit aren't likely to escape the spreading credit crisis. Curtis Arnold, founder of CardRatings.com, says he's seeing more credit card issuers shrinking consumers' credit lines.

"They try to lower it typically where it's within $100 or $200 of your balance," Arnold says. "If you're revolving a balance, you're vulnerable. Just because you have a good credit score, you're not out of the woods."

Eddie Ward of North Little Rock worries that any change in his credit card terms would make it harder for him to pay back $20,000 in debt. "I haven't seen much change yet, but I'm sure there will be over the next few years," says Ward, 31.

Credit bureau TransUnion's TrueCredit.com division has begun recommending that consumers maintain a credit score of at least 680 to qualify for prime rates. For years, TransUnion had recommended a score of only 650 or above.

Its rival Equifax has introduced a service to analyze a lender's portfolio to figure out the probability that existing customers or new applicants have adjustable-rate mortgages. Based partly on this factor, lenders could decide to withhold, or to increase, credit to certain consumers.

That service helps lenders "understand where the (potential) problem is," says Dann Adams, president of Equifax Consumer Information Solutions.

As credit tightens, "The most overextended borrowers are going to be affected the most, and the hardest, then people on the cusp," says Peters, the Morgan Stanley credit strategist. But even low-risk borrowers face "tougher times," he says.

In recent years, consumers have borrowed record-high amounts from credit cards. Revolving balances on credit cards are at an all-time peak, with U.S. households owing a monthly average of $6,960 in the year that ended in September 2007, up 41% from four years ago, according to Synovate, a research firm in New York.

The danger is that households that rely heavily on credit "could get into trouble" as the economy slows, says Andrew Davidson, a vice president at Synovate. "Their incomes are low on average, and they're more likely to get hit with late and over-the-limit fees."

'Wages are squeezed'

Consumers who pulled money out of their homes as the market soared in recent years will also be in for a shock as home prices fall during the worst real estate recession since the Great Depression.

Kuttner says he believes that consumers' recent "reliance on home equity and credit card loans isn't because middle-income people are going on shopping sprees, but because wages are squeezed."

Home-equity withdrawals accounted for up to $324 billion a year in consumer spending from 2004 to 2006, according to estimates from Federal Reserve economist James Kennedy, based on a paper he wrote with former Fed chairman Alan Greenspan. These withdrawals and related consumer spending plunged in the first half of this year as the housing market weakened, according to updated estimates from Kennedy.

In many parts of the country, home prices are expected to drop through next year, with the biggest discounts in Florida, California, Nevada and Arizona. Those declines will curb consumer spending.

By the time the housing slump bottoms out, $1.7 trillion in housing wealth will have been lost, economic consulting firm Global Insight estimates. For each dollar that a home falls in value, consumer spending falls by 4 cents to 9 cents, Fed Chairman Ben Bernanke recently told Congress. That could lead to a drop in consumer spending of as much as $153 billion over several years. While that's no pittance, it's only a fraction of the $9.2 trillion that consumers spent in 2006.

Consumers, in turn, are likely to have difficulty gaining access to money. Peters, the Morgan Stanley credit strategist, says the "virtuous cycle of packaging and selling credit has turned vicious."

"The impact on the economy and consumers has yet to fully play out," he says. "We're still in the early stages."

    Housing woes have domino effect, UT, 25.11.2007, http://www.usatoday.com/money/economy/2007-11-25-credit-crunch_N.htm

Have We Seen Worst of Mortgage Crisis?

November 24, 2007
Filed at 1:36 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Fort Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting ''For Sale'' signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

''We haven't faced a downturn like this since the Depression,'' said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

''Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth,'' he said. ''It does keep me up at night.''

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

''It's been said a lot of people have been using their homes as ATM machines,'' said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. ''The risk has a lot of tentacles.''

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

''It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution,'' he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have ''destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

''But many people in my neighborhood didn't get help, and some have literally just walked away from their homes,'' said Colombo. ''There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't.''

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: ''We're nowhere close to the end of the collapse,'' said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

''I just assumed banks could stomach these kind of losses,'' said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. ''I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen.''

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

''What really makes this a doomsday scenario is where would you even start with a bailout?'' housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

''There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle,'' Schumer said. ''You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem.''

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

''We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it,'' said Lawler, who was once chief economist for Fannie Mae.

''We've never been in this situation before.''

    Have We Seen Worst of Mortgage Crisis?, NYT, 24.11.2007, http://www.nytimes.com/aponline/business/AP-Doomsday-Scenario.html

Retail Desperation

on Display in Early Hours

November 23, 2007
The New York Times
By MICHAEL BARBARO

Bleary-eyed shoppers descended on suburban malls and downtown shopping centers across the country this morning in an annual retail ritual that appeared to break records for consumer sleep deprivation.

Several major chains, like J.C. Penney and Kohl’s, opened at 4 a.m., an hour earlier than last year, dangling half-price discounts and coupons offering $10 off to lure customers out of bed.

Most discount chains, like Wal-Mart, Best Buy, Circuit City, Target, Toys R Us and Sears, opened at 5 a.m., with department stores such as Macy’s waiting until 6 a.m. and Saks Fifth Avenue holding off until 7 a.m.

The extreme hours highlight how desperate stores are to win over consumers this holiday season, which is expected to be the weakest in five years because of rising energy prices, falling home values and a tight credit market.

“The gloves are off,” said John D. Morris, a retail analyst at Wachovia Securities. “Stores are using every weapon they can to reach consumers.”

Already, analysts have christened this the “trade down” holiday season, because higher-end labels like Ralph Lauren, Nordstrom and Coach are warning of a falloff in business as customers flock to budget brands.

Donna Lhopitault, 38, stood in line at the Toys R Us in Times Square for four hours this morning to secure a deeply discounted Nintendo Wii video game system for $250 — more than half the price she has seen it online.

In the past, Ms. Lhopitault, a financial adviser with two kids, has splurged at high-end stores like FAO Schwarz. “But this year, I am sticking with Best Buy, Toys R Us and Target,” she said. “That’s where the deals are.”

Bill Dreher, an analyst Deutsche Bank Securities said “the economic slowdown is gravitating up the economic chain. People are cheaping out and sticking with the essentials.”

And they are looking for bargains.

Technology buffs skipped Thanksgiving dinner and began lining up outside CompUSA stores at 5 p.m. last night to secure deeply discounted hard drives, GPS navigation systems and flat-screen televisions.

At the CompUSA at Fifth Avenue and 37th Street in Manhattan, store staff handed out individual pumpkin pies, served on red paper plates, to compensate for missed Thanksgiving desserts. As the clock struck 9 p.m., the doors flung open and hundreds of shoppers dashed inside, ransacking displays and overwhelming the staff. Fifteen minutes later, the employees began delivering the bad news: the best deals had sold out.

“No more GPS, sorry,” said one manager. “Those laptops are gone,” yelled another.

Exasperated consumers left the store in anger. “They are toying with the public,” said Syed Sha, 52, who drove to the store two hours before it opened to buy a Sony laptop — regularly $800, on sale for $549 — for his college-age son.

“ I called ahead and they told me they had at least 14 in the store,” he said. “How could they sell out?”

The shortages appeared to create a business opportunity for a lucky few. The first customers in line received vouchers that promised steep savings on products like a Magellan Maestro portable GPS system— a voucher that could, hypothetically, be auctioned off to another shopper.

“You want the GPS?” asked one young man in the store at 9:30 p.m. “I have the voucher. But you have to give me $20 for it.”

The importance of the day after Thanksgiving — known as Black Friday — within the holiday season is expected to be bigger than usual because shoppers are so cost-conscious.

“The customer has been holding back and waiting,” the chief executive of Toys R Us, Gerald L. Storch said in an interview from atop the Times Square store. “There is a lot of uncertainty out there.”

Mr. Storch, sitting before a computer that calculated sales from Toys R Us stores around the country beginning at 5 a.m., said lines were unusually long this morning. “They are bigger than last year, for sure.”

An aggressive marketing campaign might explain why. The chain advertised 101 doorbuster discounts, four times as many as last year.

    Retail Desperation on Display in Early Hours, NYT, 23.11.2007, http://www.nytimes.com/2007/11/23/business/shopWEB.html?hp

Stocks & Bonds

Stocks Plummet

on ‘Ugly Week’ for Investors

November 22, 2007
The New York Times
By MICHAEL M. GRYNBAUM

A late sell-off sent stock markets down sharply yesterday, with the Dow Jones industrial average closing at its lowest level since April. The plunge came as investors remain frightened and uncertain about a credit crisis that does not show any signs of easing.

“Sentiment just keeps getting more and more bleak,” said James W. Paulsen, chief investment strategist at Wells Capital Management. “This week it’s been all about fear overtaking greed.”

Widespread worries about expensive oil, a sagging dollar and a gloomy outlook for economic growth took a toll on investors, who fled to the safety of relatively stable government bonds.

Oil prices flirted with the symbolic number of $100 a barrel, and markets in Asia and Europe dropped as investors wondered if the United States economy would slow more than expected. And the dollar fell to yet another record low against the euro.

The Dow Jones industrials, off less than 100 points shortly before 3 p.m., finished down 211.10 points, to 12,799.04, a 1.6 percent decline. It was the lowest close since April 19. The index fell even below the low ebb of trading during the summer’s credit crisis, when it finished at 12,845.78 on Aug. 16.

The Standard & Poor’s 500-stock index, a broad measure of the equity market, is now down 0.11 percent for the year. The index fell 22.93 points yesterday, or 1.6 percent, to 1,416.77.

“This is an ugly week,” Mr. Paulsen said.

The Dow has lost 2.9 percent of its value in the last three days alone. The problems stem from broad uncertainty among investors, said Howard Silverblatt, senior index analyst at S.& P.

With banks announcing new write-downs from bad bets on mortgage-backed securities and even venerable firms like Freddie Mac starting to share the pain, the fallout from the housing and credit turmoil is still making its way across the broader economy.

“Where do you put your money today?” Mr. Silverblatt asked. “You don’t know when the other shoe is going to drop.”

Stocks dropped at the opening bell and never made it out of the red. Ailing financial shares were hit again, with the major brokerage firms all recording deep losses.

Crude oil futures briefly rose above $99 in overnight trading, and an Energy Department report showed that inventories fell slightly last week. That left investors wondering how soon oil will be nudged above its inflation-adjusted record high of $102, in 1980. Oil settled in New York trading at $97.29, down 74 cents.

The yield on Treasuries — a traditional safe haven for investors — hit two-year lows yesterday; the yield on the 10-year note dropped below 4 percent in midday trading, closing at 4.01 percent at 5 p.m.

“People don’t know where to put their money at this point, so they’re basically giving it to the government,” said Dennis Davitt, who oversees equity derivative trading for Credit Suisse. “You’ll pay the government to hold your money because it’s the only place people trust.”

Economic data released yesterday reinforced the sense of gloom. Consumer sentiment fell to its lowest level since October 2005, according to a survey by the University of Michigan and Reuters. An index that tracks economic indicators declined as well, the Conference Board said.

The reports dovetail with a shaky economic outlook released by the Federal Reserve on Tuesday that predicted a slowdown in growth over the coming months.

Meanwhile, in what vendors hope will not be a bad omen for Black Friday, the retail giant Limited Brands posted a 48 percent drop in third-quarter earnings and lowered its end-of-year outlook. The company owns Victoria’s Secret, Bath & Body Works and other shopping mall mainstays. Shares of Limited dropped sharply but later recovered to close up 2.4 percent, at $17.95.

Some market watchers suggested that lower trading levels during a holiday week might make the market more volatile, but at least one analyst disputed that notion. “I don’t know of anyone taking a day off,” said Mr. Davitt, of Credit Suisse. “Not in these conditions.”

The dollar closed above $1.48 against the euro, still shy of the $1.50 milestone. But nothing suggests the dollar will be able to muster a sustained comeback anytime soon.

Investor confidence took a direct hit on Tuesday after Freddie Mac, considered a backstop for the mortgage industry, said it lost $2 billion last quarter after a rise in foreclosures tied to subprime mortgage defaults.

Aftershocks of the announcement were still being felt yesterday. An overnight rout in foreign markets reflected a growing sense that the besieged housing market, which once helped American consumers buy the world’s products and services, has not hit bottom.

In foreign markets, credit market anxiety has increased in recent weeks as banks hoard cash in anticipation of year-end obligations. Dollar and euro-based borrowing benchmarks in London have edged upward, raising the cost of short-term credit.

“It’s getting worse,” said Stephen Jen, global head of currency strategy at Morgan Stanley in London. “In reality we know things are getting worse, and expectations of the U.S. economy and the credit markets are getting revised down.”

Mr. Paulsen of Wells Capital, a perennial bull, offered a contrary view. He said that much of the crisis had affected only a small portion of the population, namely Wall Street.

“This thing hasn’t been about people losing their jobs and their incomes,” he said. “It’s been more about C.E.O.’s getting fired, banks writing off hedge fund losses and a showdown between Wall Street and the Fed.”

Still, Mr. Paulsen acknowledged that the recent stock sell-off might have a psychological impact on the public.

“Every day the market goes down,” he said, “it just adds to whatever worries you have.”

Carter Dougherty contributed reporting.

    Stocks Plummet on ‘Ugly Week’ for Investors, NYT, 22.11.2007, http://www.nytimes.com/2007/11/22/business/22markets.html?hp

Oil holds firm after surge above $99

Wed Nov 21, 2007
8:23am EST
Reuters
By Jane Merriman

LONDON (Reuters) - Oil held above $98 a barrel on Wednesday, after closing in on the $100 milestone as the dollar hit new lows and cold weather in the United States, the world's biggest fuel consumer, stirred anxiety over winter supplies.

U.S. light crude surged to a record $99.29 early in the session, but then edged down from this peak to stand at $98.39, up 36 cents at 8:04 a.m. EST.

Prices blasted past the previous $98.62 record, extending a rally that has lifted oil by 45 percent since mid-August as speculative investment rises, supplies tighten and the dollar weakens.

"It's firing on its own momentum -- do or die to reach $100," said Jonathan Barratt, of Australia's Commodity Broking Services.

London Brent crude was up 28 cents at $95.77.

Oil's strength is in part a result of the weakness of the dollar, which has spurred buying of relatively cheap dollar-denominated commodities.

The dollar sank to a new record low against the euro and versus a basket of currencies on Wednesday after the U.S. Federal Reserve cut its growth outlook for next year, boosting chances of another interest rate cut in December.

High oil prices could add to pressures on the fragile U.S. economy, which could ultimately impact demand for oil.

The rising cost of oil, for example, could force more than three-quarters of Americans to tighten their budgets by cutting fuel use or by slashing spending elsewhere, according to a Reuters/Zogby poll.

Some 32.5 percent of people surveyed said they would drive less if oil prices kept rising, while 20.8 percent said they would try to conserve energy at home and 22.8 percent said they would cut spending on retail and entertainment.

Gold and platinum have also rallied in response to the falling dollar, although copper and zinc have slumped to multi-month lows on concerns the U.S. mortgage crisis could slow economic growth and demand.

The next signal for oil markets will come from U.S. weekly inventory data for release at 10:30 a.m. EST.

"The mythical $100 a barrel is of course within reach for today with or without the help of the weekly statistics," said Olivier Jakob of Petromatrix.

U.S. weekly distillate stocks -- which include heating oil -- were expected to have declined by 300,000 barrels last week, according to a Reuters poll of analysts ahead of Wednesday's data.

Crude stocks were predicted to have risen by 600,000 barrels and gasoline stocks by 800,000 barrels.

Even with another expected increase in crude stocks, U.S. Energy Secretary Sam Bodman has said producers need to pump more to bring prices down from levels that are close to a record in nominal and inflation-adjusted terms.

But the Organization of the Petroleum Exporting Countries, which meets on December 5 in Abu Dhabi to chart supply policy, has said the market is well-supplied and it is up to consumer countries to curb speculation through regulation.

(Additional reporting by Angela Moon in Seoul, Fayen Wong in Sydney, Peg Mackey in London)

    Oil holds firm after surge above $99, R, 21.11.2007, http://www.reuters.com/article/newsOne/idUSSP21758220071121

FACTBOX:

Why oil prices are at a record high

Wed Nov 21, 2007
7:49am EST
Reuters

(Reuters) - U.S. crude oil hit a record high of $99.29 a barrel on Wednesday.

Strong demand for crude and a weak dollar have fuelled the rally from a dip below $50 at the start of the year.

Adjusted for inflation, oil is still below the $101.70 peak hit in April 1980, according to the International Energy Agency, a year after the Iranian revolution.

DOLLAR WEAKNESS

The fall in the value of the dollar against other major currencies has helped drive buying across commodities as investors view dollar assets as relatively cheap.

It has also reduced the purchasing power of OPEC's revenues and increased the purchasing power of some non-dollar consumers.

OPEC oil ministers have noted that although prices are rising to record nominal levels, inflation and the dollar have softened the impact.

Some analysts say investors have been using oil as a hedge against the weaker dollar.

FUNDS

Since the Federal Reserve cut U.S. interest rates in mid-August and central banks pumped billions of dollars into financial markets to ease a credit crunch, oil and gold have risen.

Investment flows from pension and hedge funds into commodities including oil have boomed, as has speculative trading. At the same time, the credit crunch has brought some other markets, such as the U.S. asset-backed commercial paper market, to a virtual standstill.

Some of that money has found its way into energy and commodities, analysts say.

DEMAND

While previous price spikes have been triggered by supply disruptions, demand from top consumers the United States and China is a main driver of the current rally.

Global demand growth has slowed after a surge in 2004 but is still rising and higher prices have so far had a very limited effect on economic growth.

Analysts say the world is coping well with high nominal prices because, adjusted for exchange rates and inflation, they are lower than during previous price spikes and some economies have become less energy intensive.

OPEC SUPPLY RESTRAINT

The Organization of the Petroleum Exporting Countries, source of more than a third of the world's oil, started to reduce oil output in late 2006 to stem a fall in prices.

Fewer OPEC barrels entering the market helped propel this year's rally and consumer nations led by the International Energy Agency for months urged OPEC to pump more oil.

At a meeting in September, OPEC agreed to increase oil output by 500,000 barrels per day from November 1.

Few in the group believe there is much they can do to tame a market they say defies logic.

NIGERIA

Supply of crude from Nigeria, the world's eighth-largest oil exporter, has been cut since February 2006 because of militant attacks on the country's oil industry.

Oil companies have detailed about 547,000 bpd of shut Nigerian production due to militant attacks and sabotage.

IRAN

Oil consumers are concerned about supply disruption from Iran, the world's fourth-biggest exporter, which is locked in a dispute with the West over its nuclear program.

Western governments suspect Iran is using its civilian nuclear program as a cover to develop nuclear weapons. Iran denies this, saying it wants nuclear power to make electricity.

On October 25, Washington slapped new sanctions on Iran and accused its Revolutionary Guard of spreading weapons of mass destruction.

IRAQ

Iraq is struggling to get its oil industry back on its feet after decades of wars, sanctions and underinvestment.

Exports of Kirkuk crude from the country's north are sporadic as sabotage and technical problems have mostly idled the pipeline since the U.S.-led invasion of Iraq in March 2003, preventing exports returning to the pre-invasion rate.

REFINERY BOTTLENECKS

Refiners in the United States, the world's top gas guzzler, struggled with unexpected outages which drained inventories ahead of the summer, when motor fuel demand peaks.

    FACTBOX: Why oil prices are at a record high, R, 21.11.2007, http://www.reuters.com/article/newsOne/idUSL2166824420071121

Stocks Down Sharply Overseas

November 21, 2007
The New York Times
By THE ASSOCIATED PRESS

Asian markets tumbled today and shares fell across Europe as crude oil flirted with $100 a barrel.

Hong Kong shares fell sharply and Japan’s benchmark index dropped to its lowest level in 16 months, while in Europe, the top indexes were also lower in midday trading.

France’s CAC 40 fell 2.1 percent, London’s FTSE 100 dropped 1.6 percent and Germany’s DAX was down 1.8 percent.

United States stocks were poised to drop sharply, with investors reacting to a tumble in stocks overseas and preparing for disappointment ahead of more economic and earnings reports.

The Nikkei 225-stock index in Tokyo sank 373.86 points, or 2.46 percent, to 14,837.66 points — its lowest point since July 24, 2006. Since the start of November, the index has dropped 13.1 percent.

In Asia and Europe, investors remained bearish over the murky outlook for the United States economy, an important export market, amid problems in the housing and banking industries. Wild swings yesterday in the Dow Jones industrial average — which ultimately closed flat — fanned that anxiety.

“That seems to reflect unsettled prospects for the market,” said Masayoshi Okamoto, general manager at Jujiya Securities in Tokyo.

Asian markets have also been volatile recently. Indexes in Tokyo, Hong Kong and Singapore all bounced back yesterday after plunging early, but they resumed their recent slide today.

“It’s hard to predict at this moment when the market will bottom out,” said Castor Pang, a strategist at Sun Hung Kai & Company in Hong Kong. “The local market will continue to consolidate as investors’ risk appetite is low, weighed down by worries about the outlook of the U.S. economy.”

Hong Kong’s benchmark Hang Seng index tumbled 1,153.02 points, or 4.15 percent, to 26,618.19, with only two of the index’s 40 companies bucking the downward trend.

In Seoul, the Korea Composite Stock Price Index fell 65.25 points, or 3.5 percent, to 1,806.99, to a three-month low.

    Stocks Down Sharply Overseas, NYT, 21.11.2007, http://www.nytimes.com/aponline/business/21cnd-stox.html?hp

Crude oil prices break $99

on winter supply concern

21 November 2007
USA Today

Crude oil prices rose above a record $99 per barrel Wednesday as worries about inadequate winter supplies in the Northern Hemisphere and news of refinery problems stoked bullish sentiment.

The declining U.S. dollar and speculation that the U.S. Federal Reserve will again cut interest rates also boosted prices. Some investors put their money into oil contracts, betting that gains in their price will offset dollar weakness.

"The market is now really looking at $100 a barrel as the next target to hit," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The fact that we are having this surge in pricing in this short trading week underscores the strength of this bull run for oil."

Light, sweet crude for January delivery rose as high as $99.29 a barrel in electronic trading after the New York Mercantile Exchange closed, breaking the previous intraday record of $98.62 set last week. The contract was trading at $98.04 a barrel — up 1 cent on Tuesday's close — at midday in Europe. Brent crude for January delivery was little changed at $95.88.

The contract surged $3.39 during the floor session Tuesday in New York to a record close of $98.03 a barrel. The Nymex will be closed on Thursday for Thanks giving and close early on Friday.

"There were strong gains in almost all commodities (Tuesday), hence we will view the rise of the oil markets in that global context," said Olivier Jakob at Petromatrix in Switzerland. "The mythical $100 per barrel is of course within reach for today with or without the help of the weekly statistics."

Energy futures got a boost on news of problems at two oil facilities Tuesday. A Valero Energy Corp. refinery in Memphis, Tennessee, that processes 180,000 barrels of crude a day has shut down for 10 days of unplanned maintenance. Also, a Royal Dutch Shell PLC plant that converts bitumen from Alberta's oil sands region into 155,000 barrels a day of synthetic crude oil was temporarily shut down due to a fire.

Beyond these temporary concerns, investors are anxious that as global demand for energy grows, fueled by China and India's rapid development, oil supplies won't be able to keep up.

Currently, oil producers are turning out about 85 million barrels a day, while the U.S. Department of Energy says consumption is between 85 million and 86 million barrels a day.

"The long-term underlying trend is that demand is powering forward and the supply situation looks tight," said Jeff Brown, managing director and chief economist at FACTS Global Energy in Singapore.

Oil prices also got support after the Fed said it thinks U.S. economic growth will slow next year to between 1.8% and 2.5%, less than the Fed's previous projections. It also projected that U.S. inflation should fall next year to between a 1.8% and 2.1% increase.

That could mean the Fed will cut interest rates further, and that could weigh on the dollar. On Tuesday, the euro hit an all-time high against the dollar, breaking through the $1.48 mark.

"When the U.S. dollar hit a record low, oil also surged ahead. It's been an inverse relationship," Shum said. "Also, the Fed indicating worries about the U.S. economy has caused worry that the Fed will cut interest rates."

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

Oil product prices also fell back from higher level earlier Wednesday. December heating oil futures were down 0.01 cent at $2.6900 a gallon after closing in New York at $2.6901 a gallon, a record settlement. Gasoline prices were unchanged at $2.4715 a gallon.

Natural gas futures gained 0.1 cents to $7.478 per 1,000 cubic feet.

Traders were also closely watching for the release of Wednesday's petroleum inventory report from the U.S. Energy Department's Energy Information Administration.

Analysts surveyed by Dow Jones Newswires, on average, predict that crude oil inventories rose by 800,000 barrels last week, while refinery use grew by 0.4 percentage point to 88.1% of capacity.

Gasoline likely grew by 700,000 barrels, the analysts predicted, while inventories of distillates, which include heating oil and diesel fuel, fell by 400,000 barrels.

    Crude oil prices break $99 on winter supply concern, UT, 21.11.2007, http://www.usatoday.com/money/industries/energy/2007-11-21-oil-wednesday_N.htm

Freddie Mac Posts a $2 Billion Loss

November 20, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Turmoil in the housing sector continued to reverberate today across several parts of the industry, reinforcing the mood among investors that the downturn has not yet reached its bottom.

Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments. The company has been battered by a rising wave of foreclosures tied to subprime mortgage defaults and is now “seriously considering” cutting its stock dividend.

Freddie’s misfortune is particularly rattling because the company is considered to be protected by an implied government guarantee. There was no mention in this morning’s earnings release about an infusion of federal capital, though the company said it would seek counsel from Goldman Sachs and Lehman Brothers for its short-term efforts to shore up its reserves.

Shares of the company plummeted 32 percent to $25.43, its lowest level in 11 years. Shares of its sister firm, Fannie Mae, dropped 25 percent.

“Without doubt, 2007 has been an extremely difficult year for the country’s housing and credit markets,” Richard F. Syron, the chairman and chief executive of Freddie Mac, wrote in a statement.

Mr. Syron was not alone in his lament. D. R. Horton, the nation’s largest home builder, reported a $50.1 million loss in its fiscal fourth quarter as the housing downturn pummeled its inventory, goodwill and land-use contracts. Lower demand and tighter lending standards have cut back the company’s business and caused many clients to cancel contracts.

“We expect the housing environment to remain challenging,” Donald R. Horton, the company’s chairman, said in a statement.

The subprime debacle also claimed another high-profile casualty: H&R Block’s chairman and chief executive, Mark Ernst, who said today he would resign amid the company’s difficulties with subprime exposure. Mr. Ernst had come under fire for the bungled sale of Option One Mortgage Corporation, a company subsidiary that took heavy losses on risky loans.

His replacement as chairman will be Richard C. Breeden, the former chairman of the Securities and Exchange Commission, who was recently elected to H&R Block’s board after sharply criticizing Mr. Ernst. The chief executive slot will be temporarily filled by Alan M. Bennett, a former top executive at Aetna, the insurance company.

Home building data released today suggested that housing troubles will only worsen. Groundbreaking permits fell 6.6 percent in October to their lowest level in over 14 years, a sign that builders are cutting back on residential home projects. Permits have dipped nearly 25 percent since last October, to a seasonally adjusted 1.18 million annual rate, the Commerce Department said.

New residential construction grew slightly last month, rising 3 percent, to a 1.23 million annual pace. It was the first increase in four months, but the increase came mostly from a 44 percent leap in multi-family homes, like condominiums.

Construction of single-family homes dropped again last month, and over all, housing starts remain near the lowest level since the recession of the early 1990s. “With mortgage financing further constrained and inventories of unsold homes quite high, the near to medium term outlook for housing starts is not good,” wrote Joshua Shapiro, chief United States economist for MFR, in a research note.

That would be unfortunate for Freddie Mac, whose mortgage-related securities rapidly lost their value as the subprime market began to collapse. The company was forced to write down about $2.7 billion in assets related to credit guarantees and derivatives. Freddie lost $3.29 a share in the third quarter, compared with a loss of $1.17 a share a year earlier. The company also said it did not expect earnings to improve in the fourth quarter.

“We’re not happy about this,” Mr. Syron told investors and shareholders on a conference call today. “We don’t expect you to be happy about it.”

    Freddie Mac Posts a $2 Billion Loss, NYT, 20.11.2007, http://www.nytimes.com/2007/11/20/business/20cnd-housing.html?hp

Oil Resumes Rise,

Surpassing $97 a Barrel

November 20, 2007
The New York Times
By THE ASSOCIATED PRESS

Oil prices rose sharply today, once again approaching $100 a barrel as futures drew strength from a declining dollar and news of refinery problems. Gasoline prices, meanwhile, extended their decline at the pump.

Oil futures, which offer a hedge against a weak dollar, picked up momentum as the greenback fell to a new low against the euro. Light, sweet crude for January delivery rose $2.68 to $97.32 a barrel on the New York Mercantile Exchange.

Gasoline fell 0.5 cent overnight, retreating further from their most recent spike above $3. At a national average of $3.09 a gallon, according to AAA and the Oil Price Information Service, gasoline prices have fallen 2.2 cents in a little less than a week. Last week, many analysts predicted prices would instead rise another 10 to 15 cents a gallon to catch up with surging oil prices.

Prices will “probably hold steady through the end of the year,” said Fred Rozell, retail pricing director at the Oil Price Information Service. “But that doesn’t mean you’re going to see relief in terms of lower prices.”

Because gasoline prices are closely tied to the price of crude, pump prices could start rising again if crude does reach $100 a barrel, or higher. Oil peaked last week at $98.62 a barrel before pulling back to the low to mid $90s.

Many analysts cite speculative investing fueled by the weak dollar as a key reason for oil’s fall rally.

“Expectations of interest rate cuts by the Federal Reserve are sending the dollar lower and this is once again drawing buyers” into the crude oil market, said Addison Armstrong, an analyst at TFS Energy Futures in Stamford, Conn., in a research note.

However, the rising cost of energy could also persuade the Fed to either leave rates stable or raise them — the latter would likely lend support for the dollar and could pull oil prices back down.

Energy futures received an additional lift from word of problems at two oil facilities Tuesday. A Valero Energy refinery in Memphis, Tenn., that processes 180,000 barrels of crude a day has shut down for 10 days of unplanned maintenance and a Royal Dutch Shell plant that converts bitumen from Alberta’s oil sands region into 155,000 barrels a day of synthetic crude oil was temporarily shut down due to fire.

Oil product futures surged on the news. Gasoline futures for December delivery rose 5.24 cents to $2.434 a gallon, while December heating oil futures climbed 6.95 cents to $2.6737 a gallon.

“When you get this kind of problem in this kind of environment, prices will rise,” said Phil Flynn, an analyst at Alaron Trading in Chicago.

Economic reports gave investors more reasons to buy, analysts said. China’s economy will likely grow at a rate of 11.5 percent in 2007, state media quoted Premier Wen Jiabao of China as saying today. And in the United States, the Commerce Department said housing construction rose by 3 percent in October, the first increase after three months of declines and the biggest since last February.

Growing demand from China is another reason oil prices have risen in recent years. And signs of significant economic growth in the United States support prices because energy investors believe a strong economy will demand more oil and gasoline.

Natural gas futures fell 21.2 cents to $7.575 per 1,000 cubic feet on the Nymex. Natural gas inventories are at record levels, and several recent forecasts have predicted a warmer than normal winter.

In London, January Brent crude futures rose $2.69 to $94.97 a barrel on the ICE Futures exchange.

Traders were also anticipating Wednesday’s petroleum inventory report from the Energy Department’s Energy Information Administration. Analysts surveyed by Dow Jones Newswires, on average, predict that crude oil inventories rose by 800,000 barrels last week, while refinery use grew by 0.4 percentage point to 88.1 percent of capacity.

Gasoline inventories likely grew by 700,000 barrels, the analysts predicted, while inventories of distillates, which include heating oil and diesel fuel, fell by 400,000 barrels.

While oil supplies likely rose last week, prices were being supported Tuesday by concerns there would be a bullish surprise in the EIA report, such as an unexpected decline in inventories.

    Oil Resumes Rise, Surpassing $97 a Barrel, NYT, 20.11.2007, http://www.nytimes.com/aponline/business/apee-oil.html

Fed Forecasts Slower Growth

November 20, 2007
Filed at 2:03 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The Federal Reserve reported Tuesday that it expects slower economic growth and a slight bump up in unemployment next year due to the housing slump and a credit crunch. The board also said, however, that it thinks inflation will remain moderate.

The fresh assessment of the country's future economic performance was issued by the Fed in the first of its quarterly reports to the nation.

On the growth side, the Fed said it believes that business growth will slow next year, with the gross domestic product (GDP) coming in between 1.8 percent and 2.5 percent. That would be weaker than how the Fed expects the economy to perform this year and would mark a downgrade to a previous projection released in the summer.

The downgrade was due to a number of factors, including "the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data and rising oil prices," the Fed explained.

The credit crunch has both made it more costly and more difficult for people and companies to borrow money. The worst carnage has taken place in the market for "subprime" home loans -- those made to people with spotty credit histories. Credit problems started there and have spread to more creditworthy borrowers including those that are looking for home loans of more than $417,000, so-called jumbo loans.

The overriding worry is that these housing and credit problems will make people less inclined to spend, putting a damper on economic growth.

That concern is on the Fed's radar, too.

    Fed Forecasts Slower Growth, NYT, 20.11.2007, http://www.nytimes.com/aponline/business/AP-Fed-Forecast.html

Stocks and Bonds

New Worries About Credit Drive Down Stock Markets

November 20, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Where will it end?

Stock markets plummeted yesterday on a fresh round of questions about Citigroup and the financial sector. The Dow Jones industrial average fell more than 200 points, to reach its lowest close since the depths of this summer’s subprime woes.

Traders are beginning to wonder just how long the sell-off will last.

“The market can’t buy good news right now,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “It leaves people wondering, ‘What’s the catalyst to buy? How are we going to get out of this?’”

There were few answers among investors, who could only watch as the financial sector dragged down the Standard & Poor’s 500-stock index, which dipped 1.8 percent to 1,433.27. The Dow closed down 218.35 points, or 1.7 percent, at 12,958.44. And the Nasdaq composite index declined 43.86 points, to 2,593.38.

The retreat began after Citigroup was hit by a sell rating from a Goldman Sachs analyst, who warned that the bank would incur an additional $4 billion in write-downs in the first quarter tied to complex debt instruments, beyond as much as $11 billion in charges taken before the end of the year.

The report reignited fears among investors of credit problems as the financial giants struggle to dig out from poor bets on securities tied to subprime mortgages.

Citigroup’s shares dipped 5.8 percent to a four-year low. The stock has dropped more than 40 percent in the last year.

In his report, the Goldman analyst William F. Tanona wrote that Citigroup would “feel the pain of worsening consumer credit” in its retail and credit card businesses, adding to problems stemming from its exposure to troubled subprime investments.

He said the bank might be forced to sell assets, issue equity or cut its dividend to shore up precariously low capital levels.

“We do not expect there will be a ‘quick fix’ to some of Citi’s issues,” Mr. Tanona wrote. He also noted that the bank’s current lack of leadership could hurt its performance as it seeks a successor for Charles O. Prince III, who resigned as chairman and chief executive this month.

For market watchers, the report was one more sign that the bottom of the subprime crisis has not yet been reached. Investors have lost confidence in the financial companies, many of which had indicated that the worst was over only to announce new charges weeks later.

Swiss Re, the world’s biggest reinsurer, was the latest example. The company said yesterday that it had taken a $1.07 billion write-down on the value of some derivatives backed by mortgage securities. The announcement came two weeks after the company said its exposure to problems in the American subprime mortgage market would be limited.

“It’s going to take time for investors to get their confidence back in the sector,” said Russ Koesterich, senior portfolio manager at Barclays Global Investors.

“There’s not one silver bullet that’s going to get the stocks moving,” Mr. Koesterich said. “I don’t see necessarily what the light is in the near term.”

Investors were also reminded yesterday that the housing market remains deeply troubled. Shares of Lowe’s, the home improvement retailer that competes with Home Depot, dropped 7.6 percent, to a three-year low, after the company announced a 10 percent drop in third-quarter profit and lowered its annual earnings forecast.

In a statement, Lowe’s chief executive, Robert A. Niblock, cited “an even steeper decline in housing turnover, falling home prices in many markets, and a near record inventory of homes for sale.”

His remarks echoed a separate report yesterday that showed record-low confidence among home builders. An index of builders’ sentiment measured by the National Association of Home Builders held steady at 19, on a scale where readings below 50 signal a poor outlook.

Profit-taking may also have played a role in the sell-off yesterday. Analysts said that investors might be selling to protect the annual return on their portfolios.

“A lot of people are nervous and are just looking to close their books,” said Brian Gendreau, an investment strategist at ING Investment Management. They “don’t want to lose it all in the last two months because of the funny stuff going on in the financial sector.”

The Dow has closed below 13,000 only three times since surpassing the mark in late April. Its lowest point came on Aug. 16, when it closed at 12,845.78. Markets have been extremely volatile in recent weeks, with the S.& P. hitting a record high in mid-October and then losing 7 percent of its value in November alone.

“During a volatile period, any nervousness means sell now, and ask questions later,” said Quincy Krosby, chief investment strategist at The Hartford financial firm.

At least one analyst saw a seasonal explanation for the sell-off.

“There’s an old saying that the bears have Thanksgiving and the bulls have Christmas,” said Sam Stovall, chief investment strategist at Standard & Poor’s. “This week could be a challenging one.”

At Citi, triage efforts were in full swing. On Friday, Citigroup announced that Jorge A. Bermudez would take over as Citigroup’s chief risk officer, succeeding David Bushnell.

Mr. Bermudez, 56, has lived in College Station, Tex., for the last several years where he has run Citigroup’s commercial banking unit. Mr. Bermudez intends to move to New York, but his lack of familiarity with Wall Street has fueled speculation that he will be an interim head rather than a permanent replacement.

The move will also leave Citigroup without a chief administrative officer after Mr. Bushnell leaves in December. Mr. Prince promoted Mr. Bushnell to that position in early September, just weeks before Citigroup announced billions of dollars in losses.

Christina Pretto, a Citigroup spokeswoman, said, “The interim management does not plan to appoint a C.A.O., and it will be the job of the new C.E.O. to determine the structure of the corporate office going forward.”

Following are the results of yesterday’s Treasury auction of three- and six-month bills:

Eric Dash contributed reporting.

    New Worries About Credit Drive Down Stock Markets, NYT, 20.11.2007, http://www.nytimes.com/2007/11/20/business/20stox.html

Goldman Sachs Rakes in Profit in Credit Crisis

November 19, 2007
The New York Times
By JENNY ANDERSON and LANDON THOMAS Jr.

For more than three months, as turmoil in the credit market has swept wildly through Wall Street, one mighty investment bank after another has been brought to its knees, leveled by multibillion-dollar blows to their bottom lines.

And then there is Goldman Sachs.

Rarely on Wall Street, where money travels in herds, has one firm gotten it so right when nearly everyone else was getting it so wrong. So far, three banking chief executives have been forced to resign after the debacle, and the pay for nearly all the survivors is expected to be cut deeply.

But for Goldman’s chief executive, Lloyd C. Blankfein, this is turning out to be a very good year. He will surely earn more than the $54.3 million he made last year. If he gets a 20 percent raise — in line with the growth of Goldman’s compensation pool — he will take home at least $65 million. Some expect his pay, which is directly tied to the firm’s performance, to climb as high as $75 million.

Goldman’s good fortune cannot be explained by luck alone. Late last year, as the markets roared along, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan.

At that point, the holdings of Goldman’s mortgage desk were down somewhat, but the notoriously nervous Mr. Viniar was worried about bigger problems. After reviewing the full portfolio with other executives, his message was clear: the bank should reduce its stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses, a person briefed on the meeting said.

With its mix of swagger and contrary thinking, it was just the kind of bet that has long defined Goldman’s hard-nosed, go-it-alone style.

Most of the firm’s competitors, meanwhile, with the exception of the more specialized Lehman Brothers, appeared to barrel headlong into the mortgage markets. They kept packaging and trading complex securities for high fees without protecting themselves against the positions they were buying.

Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable.

When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products that Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying.

“If you look at their profitability through a period of intense credit and mortgage market turmoil,” said Guy Moszkowski, an analyst at Merrill Lynch who covers the investment banks, “you’d have to give them an A-plus.”

This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust.

In turn, Goldman’s stock has significantly outperformed its peers. At the end of last week it was up about 13 percent for the year, compared with a drop of almost 14 percent for the XBD, the broker-dealer index that includes the leading Wall Street banks. Merrill Lynch, Bear Stearns and Citigroup are down almost 40 percent this year.

Goldman’s secret sauce, say executives, analysts and historians, is high-octane business acumen, tempered with paranoia and institutionally encouraged — though not always observed — humility.

“There is no mystery, or secret handshake,” said Stephen Friedman, a former co-chairman and now a Goldman director. “We did a lot of work to build a culture here in the 1980s, and now people are playing on the balls of their feet. We just have a damn good talent pool.”

That pool has allowed Goldman to extend its reach across Wall Street and beyond.

Last week, John A. Thain, a former Goldman co-president, accepted the top position at Merrill Lynch, while a fellow Goldman alumnus, Duncan L. Niederauer, took Mr. Thain’s job running the New York Stock Exchange. Another fellow veteran trader, Daniel Och, took his $30 billion hedge fund public.

Meanwhile, two Goldman managing directors helped bring Alex Rodriguez back to the Yankees, a deal that could enhance the value of Goldman’s 40 percent stake in the YES cable network — which it is trying to sell — while also pleasing Yankee fans. The symmetry was perfect: like the Yankees, Goldman, more than any other bank on Wall Street, is both hated and revered.

Robert E. Rubin, a former Goldman head, is the new chairman of Citigroup. In Washington, another former chief, Henry M. Paulson Jr., is the Treasury secretary, having been recruited by Joshua B. Bolten, the White House chief of staff and yet another former Goldman executive.

The heads of the Canadian and Italian central banks are Goldman alumni. The World Bank president, Robert B. Zoellick, is another. Jon S. Corzine, once a co-chairman, is the governor of New Jersey. And in academia, Robert S. Kaplan, a former vice chairman, has just been picked as the interim head of Harvard University’s $35 billion endowment.

Since going public in 1999, Goldman has been the No. 1 mergers and acquisitions adviser, globally and in the United States, with two exceptions: in 2005 it came in second in the United States rankings, and in 2000 it lost the top spot globally. In both instances, Morgan Stanley took the lead, according to Dealogic.

Goldman, of course, has made its share of mistakes. It took among the most serious write-downs in the third quarter on loans that were made to private equity firms, totaling $1.5 billion. The firm runs one of the largest hedge fund operations in the world, but its flagship funds — funds whose investors include marquee Goldman clients and employees — have had two years of abysmal performance. Clients are expected to redeem billions of dollars of capital at the end 2007.

But Goldman’s absence from the mortgage debacle and the strong performance of its other businesses made up for the write-down associated with the loans. The firm reported $2.85 billion in profit in the third quarter, up 79 percent. Mr. Moszkowski estimates that investment and commercial banks in the United States have taken $50 billion in write-downs related to mortgages, with more coming; Mr. Blankfein said at a conference last week that he expected to take none.

Goldman’s business is built on taking risks, both for itself and its clients. In recent years, Goldman has established the largest private equity and real estate fund complexes in the world. That has led to natural tensions with private equity clients who sometimes complain, but never publicly, about Goldman’s common insistence to team up with them for a piece of the deal.

“Goldman has done the best job of any firm in the U.S. or world competing with their clients but doing business with them,” said one client who asked not to be named because he does business with the firm. “They’ve managed to get their clients to live with it.”

Still, this bottom-line approach has turned off some Goldman veterans and clients. They see the firm’s desire to advise, finance and invest — a so-called triple play — as antithetical to Goldman’s stated No. 1 business principle of putting clients first.

And there is little question that its success in trading, investment banking and servicing hedge funds — many of the traders come right from Goldman — allows the firm a bird’s-eye view on trends and capital flows in the market.

Numerous Goldman investment bankers, former and current, voice the view that Mr. Blankfein’s approach — using Goldman’s investment banking business to develop principal investment opportunities for the firm — creates a brand intended to feed Goldman’s profits rather than relationships. But this harking back to the firm’s golden days as a pure advisory firm does not find much sympathy at Goldman these days.

“I have little patience for these people who talk of the last days of Camelot,” Mr. Friedman said. “Principal investing has been an important and useful business. If you want to be relevant you have to anticipate where the world is going.”

Mr. Blankfein, at the conference last week, echoed that sentiment. “While the integration of our investment banking operations with our merchant bank was somewhat controversial at the time, we felt these businesses were mutually reinforcing,” he said.

Money soothes a lot of concerns, of course, and Goldman has had plenty to spread around. Through the third quarter, Goldman’s $16.9 billion compensation pool — the money it sets aside to pay its employees — was significantly bigger than the entire $11.4 billion market capitalization of Bear Stearns.

Goldman executives and analysts assign much of their success to smart people and a relatively flat hierarchy that encourages executives to challenge one another. As a result, good ideas can get to the top.

But the differentiator that has become clearest recently is the firm’s ability to manage its risks, a tricky task for any bank. Checks and balances must be in place to turn off a business spigot even as it is still making a lot of money for a lot of people. In a world where power gravitates to the rainmakers, that means only management can empower the party crashers.

At Goldman, the controller’s office — the group responsible for valuing the firm’s huge positions — has 1,100 people, including 20 Ph.D.’s. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation. The bank says risk managers swap jobs with traders and bankers over a career and can be paid the same multimillion-dollar salaries as investment bankers.

“The risk controllers are taken very seriously,” Mr. Moszkowski said. “They have a level of authority and power that is, on balance, equivalent to the people running the cash registers. It’s not as clear that that happens everywhere.”

For all its success on Wall Street, it is Goldman’s global reach and political heft that inspire a mix of envy and admiration. In the race for president, Goldman Sachs executives are the top contributors to Barack Obama and Mitt Romney, and the second highest contributor to Hillary Rodham Clinton. Mr. Blankfein has held a fund-raiser for Mrs. Clinton in his apartment and has come out publicly in her favor.

Another member of Goldman’s influential diaspora is Philip D. Murphy, a retired executive who is the chief fund-raiser for the Democratic National Committee.

All of which has made Goldman a favorite of conspiracy theorists, columnists and bloggers who see the firm as a Wall Street version of the Trilateral Commission.

One particular obsession is President Bush’s working group on the markets, an informal committee led by Mr. Paulson that includes Ben S. Bernanke, the chairman of the Federal Reserve; Christopher Cox, the chairman of the Securities and Exchange Commission; and Walter Lukken, the acting chairman of the Commodity Futures Trading Commission.

The group meets about once a quarter — privately, with no minutes taken — to ensure that government agencies are briefed on market conditions and issues. The group is currently examining the extent to which the packaging and distribution of mortgage loans contributed to the crisis. It also recently completed a study recommending that hedge funds not be subject to further regulation; the group’s fund committee was led by Eric Mindich, a former Goldman trader who now runs a successful hedge fund.

There is no evidence that the conduct of the group is anything but above board. But to some, the group’s existence adds more color to the view that Goldman is indeed everywhere — much as J. P. Morgan was in the early years of the 20th century.

“Goldman Sachs has as much influence now that the old J. P. Morgan had between 1895 and 1930,” said Charles R. Geisst, a Wall Street historian at Manhattan College. “But, like Morgan, they could be victimized by their own success.”

Mr. Blankfein of Goldman seems aware of all this. When asked at a conference how he hoped to take advantage of his competitors’ weakened position, he said Goldman was focused on making fewer mistakes. But he wryly observed that the firm would surely take it on the chin at some point, too.

“Everybody,” he said, “gets their turn.”

    Goldman Sachs Rakes in Profit in Credit Crisis, NYT, 19.11.2007, http://www.nytimes.com/2007/11/19/business/19goldman.html

Editorial

Keeping Americans in Their Homes

November 19, 2007
The New York Times

The nation’s housing market is in a deep recession, and further declines in new construction, sales and prices are imminent. By the end of next year, falling home values, combined with rising payments on adjustable mortgages, tighter lending conditions and, in all probability, a faltering job market, will have unleashed mass foreclosures — estimated at several hundred thousand to two million — unless something is done to help keep Americans in their homes.

The Bush administration has no relief plan that is up to the frightening scale of this problem. And no one in the administration seems to feel much urgency. Administration officials often lowball the number of imminent foreclosures and question the significance of statistics on the housing downturn.

In a speech last week extolling the economy’s strength, President Bush made just one reference to the battered housing market, calling it “challenged,” and asserted that we can “deal with it” and other economic uncertainties, “particularly if we keep the taxes low.”

Fortunately, some members of Congress do have a plan to help.

Senator Richard Durbin, Democrat of Illinois, recently introduced a bill that would allow bankruptcy courts to modify repayment terms on mortgages for primary homes. That could keep an estimated 600,000 troubled borrowers in their homes, paying off their mortgages, albeit over longer terms, at lower interest rates or on lower principal balances.

The bill also undoes a longstanding injustice. Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection. Owners of vacation homes, farms and commercial property can modify those debts in bankruptcy court. But not your everyday homeowner. Under any circumstances, that double standard should not be allowed. With a foreclosure debacle unfolding, it must be rectified.

There are worrying signs that the White House will oppose the reform. Opponents will likely argue that modifying troubled mortgages in bankruptcy may pose a threat to the legal sanctity of other contracts. That makes no sense. Contracts are modified every day in bankruptcy court. A mortgage on a primary home is not significantly different from other secured debt.

The mortgage industry is already warning that granting bankruptcy protection to most mortgages would raise borrowers’ costs. That doesn’t make much sense either. The total economic costs of foreclosure are much greater than bankruptcy-associated costs. The cost of making sound loans could drop if the Durbin bill became law.

Senator Durbin’s reform bill must move through the Judiciary Committee, which has jurisdiction over bankruptcy issues. The committee’s chairman, Senator Patrick Leahy of Vermont, should schedule a full committee hearing as soon as Congress returns from the Thanksgiving break. There is no time to lose.

    Keeping Americans in Their Homes, NYT, 19.11.2007, http://www.nytimes.com/2007/11/19/opinion/19mon1.html

Stocks Fall Amid Banking Concerns

November 19, 2007
Filed at 11:06 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks slid further Monday as Wall Street absorbed a gloomy outlook for the banking sector and anticipated bleak news from the National Association of Homebuilders. The Standard & Poor's 500 index and the Dow Jones industrial average each lost more than 1 percent.

Setting the tone was Goldman Sachs' downgrade of large banks, and its estimate that Citigroup Inc. would have to write down $15 billion due to its exposure to risky debt over the next two quarters.

The worry on Wall Street is that the housing market is getting so weak that it will crimp consumer spending, which until now has helped keep the economy afloat. Ahead of the holiday shopping season, any signs that Americans are pulling back could prevent a December rally.

Later Monday, the NAHB releases its November housing forecast. Economists polled by Thomson/IFR expect the index to hold at 18, having dropped to that level in October after eight consecutive months of declines.

''I think that a lot of folks are digesting the news from last week and they're worried about the economy and the ability to grow earnings at the larger companies in America,'' said Rob Lutts, chief investment officer at Cabot Money Management Inc. in Salem, Mass.

In late morning trading, the Dow industrials fell 160.96, or 1.22 percent, to 13,015.83.

Broader stock indicators also declined. The S&P 500 index fell 19.66, or 1.35 percent, to 1,439.08, and the Nasdaq composite index fell 24.41, or 0.93 percent, to 2,612.83.

The Russell 2000 index of smaller companies fell 16.91, or 2.20 percent, to 752.59. Investors often view smaller companies as more likely to get hit in a slowing economy because they can't as easily get by on thin profit margins as some big companeis with overseas operations that can pad results.

Stocks have fallen in six of the last eight sessions. Last week, stock finished higher after a string of volatile sessions. The Dow ended up 1.03 percent for the week, while the S&P 500 index ended up 0.35 percent, and the Nasdaq finished up 0.35 percent.

Government bond prices rose Monday as stocks fell. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.13 percent from 4.15 percent late Friday. The dollar fell against other major currencies, while gold fell.

Crude oil futures for January delivery fell 36 cents to $93.48 per barrel on the New York Mercantile Exchange.

In corporate news, Citigroup, which said earlier this month it would likely write down $8 billion to $11 billion in the fourth quarter, fell $1.73, or 5.1 percent, to $32.28 after the Goldman downgrade to a ''sell'' rating.

Lowe's Cos. posted a 10 percent decline in third-quarter profit Monday, slightly better than expected. But the home improvement retailer lowered its forecast in anticipation of further deterioration in housing. Lowe's fell $1.80, or 7.2 percent, to $23.21.

Celgene Corp.'s announcement late Sunday that it agreed to buy Pharmion Corp. for $72 a share in a cash-and-stock deal worth $2.9 billion failed to bring much enthusiasm to Wall Street. Celgene rose 20 cents to $65.10, while Pharmion jumped $16.88, or 34 percent, to $66.16.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 398.1 million shares.

Stock markets overseas slumped. In Asian trading, Japan's Nikkei stock average fell 0.74 percent, while Hong Kong's Hang Seng index decreased 0.56 percent. In European trading, Britain's FTSE 100 declined 1.87 percent, Germany's DAX index dipped 1.16 percent, and France's CAC-40 slid 1.30 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Fall Amid Banking Concerns, NYT, 19.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

As Owners Feel Mortgage Pain,

So Do Renters

November 18, 2007
The New York Times
By JOHN LELAND

LAS VEGAS — In the foreclosure crisis of 2007, thousands of American families are losing their homes without ever missing a payment. They are renters in houses whose owners default on their mortgages — a large but little noticed class of casualties.

Some live in big apartments, others in houses owned by small investors who got in over their heads.

There are no exact figures for how many renters have been evicted because of foreclosures, but a survey taken this year by the Mortgage Bankers Association found that one in eight foreclosures was non-owner-occupied. This figure probably underestimates the problem, according to the association, because buildings receive tax benefits if they are registered as owner-occupied. More than one million properties are expected to enter foreclosure this year.

Many renters say they never even knew their buildings were heading for foreclosure.

“This is an explosion,” said Judith Liben, a lawyer at the Massachusetts Law Reform Institute. “This isn’t business as usual. These are investors that overleveraged themselves, and the renters are collateral damage in the mortgage crisis.”

Here in Nevada, which has one of the highest foreclosure rates in the country, 28 percent of mortgages that were in default earlier this year were for homes not owner-occupied, more than twice the national average, according to the bankers group. Arizona and Florida, both leaders in foreclosures, are also well above the national average. In California, 22 percent of the properties lost to foreclosure this year were not owner-occupied, according to ForeclosureRadar.com, which tracks California foreclosure auctions.

Foreclosing lenders typically evict tenants in order to sell the property, said Vicki Vidal, senior director of loan administration and government affairs at the Mortgage Bankers Association.

“Banks don’t want to be landlords,” Ms. Vidal said. “They’re in the business of making mortgages. You need to recoup the money to keep the process moving.”

Unlike owners who lose their houses, renters do not stand to forfeit years of equity. And many can find comparable rentals.

Lara and Louie Northern, who live in a home that is in foreclosure in a new subdivision here, far from the Strip, say they have never been late on a rent payment. But each day in their four-bedroom house, they wonder whether this will be the day they get an eviction notice telling them they have 72 hours to leave the property.

Though the Northerns’ lease runs until January 2009, a few weeks ago they packed all nonessential items in their garage — everything but clothes, linens, cookware and furniture — in case they have to leave in a hurry.

“It’s not normal to live like this,” said Mr. Northern, 36, a mail carrier, standing amid empty bookshelves and bare walls. “And the worst part is not knowing if we’re going to have a note on the door tonight, tomorrow or the next day.”

The House on Thursday passed a broad mortgage act that includes protections for renters. The House act, which the lending industry has opposed, would require new owners to continue the leases of tenants for up to six months after foreclosure.

Senator Christopher J. Dodd, Democrat of Connecticut, who introduced similar legislation in the Senate, said in a statement, “A foreclosure doesn’t differentiate between a homeowner and a renter residing in a defaulting property.” Currently, most state or local laws do not provide this protection.

In a statement, the White House said it opposed a number of provisions in the House mortgage bill, but did not single out protection to renters.

Clark County, which includes Las Vegas, has been an epicenter of foreclosures, with nearly 30,000 defaults in the first nine months of this year, up from about 14,000 in the same period in 2006, according to the county recorder’s office.

The county more than doubled in population since 1990, to nearly 2 million from 800,000. That growth, along with rising home prices, made it a magnet for speculators, including small investors who took advantage of low, teaser mortgage rates to buy rental properties for less than they would cost in California.

“A lot of the investors were subprime, but the market was so great they could keep refinancing and make the mortgage payments with no problem,” said Anna Marie Johnson, the director of Nevada Legal Services, whose clients increasingly include displaced tenants.

Homeless shelters in Las Vegas said they had not seen an influx of displaced renters. In St. Louis, Karen Wallensak, director of Catholic Charities Housing Resource Center, said that “about a dozen” displaced renters had come for help, though none had applied for a place in the organization’s homeless shelters. “We’ve had calls from people literally as the sheriff is at the door changing the locks, and they had no idea they had to move,” she said.

The pressure is particularly acute here because of the prevalence of small speculators and the high rate of foreclosure, exacerbated by a depressed market.

Many renters, like the Northerns, feel blindsided by the news that they could be evicted, especially if they have been diligent in their rent payments. “I don’t know what we could have done differently,” Mr. Northern said.

The couple’s struggle now is to find a new house for themselves and their three children. Like many renters in their position, they suddenly need cash, not just for moving expenses, but for a deposit on a new rental property, which generally means first and last month’s rent. Mr. Northern, who earns $46,000 a year plus overtime, said they did not have this money, which he estimated at more than $3,000. He questioned whether they would get their security deposit back from their landlord.

The House bill calls for new owners — usually lenders — to give tenants a 90-day notice before foreclosure, then continue leases for up to six months after. Renters without leases would have 90 days to leave the property. In Clark County, renters who receive federal housing subsidies and have valid leases continue their arrangement with the new owner. Others get three-day notices to vacate.

But even these renters do not have to leave right away, said Robert Gronauer, the county constable. “Usually they can stretch it out for two weeks to two months,” but some go longer, he said.

Wendy Whitman, 45, a divorced mother of two, had planned to move out of her rented house in a gated community called Canyon Mist Estates in September. She had been living without a lease since March and wanted something cheaper to heat and cool. The owner offered to cut her rent and begged her to stay, she said. “I thought I was helping him out,” she said.

Then on Oct. 3 she got a phone message from a credit agency, thinking she was the owner, telling her that a notice of default had been filed and offering to help her save the house. She said this was how she found out the house was in foreclosure. “My mouth hit the floor,” Ms. Whitman said. (Lenders must post notices of default for four consecutive weeks before foreclosing on a property; these notices, in local newspapers, attract both legitimate credit services and scam artists, said lawyers who work with displaced homeowners and tenants.)

Ms. Whitman said she had not told her daughters, 9 and 7, that they would have to leave.

“Renting a house, I should have rights like everybody else,” she said. “I paid my rent. That should entitle me to some security, right?” She added, “I hate the fact that I’m put in the position where I may not have a choice of where my kids go to school.”

Maj. Matt Belmonte, a space and missile operations officer at nearby Creech Air Force Base, has leased a house in North Las Vegas until June 2008, when he expects to be deployed overseas. He dealt only with a management company and never knew the owner, he said. Then when he requested a signed copy of his lease, the management company said it had not heard from the owner in a while. Major Belmonte, suspicious, searched on the Web site foreclosures.com and found his house.

Even then, the bank and management company would not tell him when the house would be repossessed because he was not the owner, he said. On Oct. 9, he watched as it sold at foreclosure auction. So far, he has refused an offer of $500 from the mortgage company to move out quickly.

Now, as he searches for a new home, he worries that he will have the same problem again, and have to move again in three months.

“You’re really unprotected in who you rent from,” he said. “You don’t know how overextended they are, or how well they’re managing their finances. It didn’t work out for me. These folks gambled on interest rates and lost. And now I lost, too.”

Edmund L. Andrews contributed reporting.

    As Owners Feel Mortgage Pain, So Do Renters, NYT, 18.11.2007, http://www.nytimes.com/2007/11/18/us/18renters.html?hp

Inflation Was Tame in October

November 16, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Inflation remains contained despite high oil prices and a record low dollar, a government report showed today, offering some reassurance to the Federal Reserve as it considers lowering interest rates at its next meeting.

Consumer prices grew 0.3 percent last month, holding steady from September, the Labor Department said today. The closely watched core index, which excludes the prices of volatile food and energy products, rose 0.2 percent for the fifth consecutive month.

Core inflation has risen 2.2 percent over the last 12 months, a slightly higher pace than the Fed would prefer but far from a sign of imminent price pressures. Lower interest rates can stimulate the economy but lead to rising prices, leaving the Fed wary of any inflation threats.

Over all, the Consumer Price Index is up 3.5 percent over the last year, its fastest annual pace in 14 months. But soaring energy prices account for most of that gain, with gasoline costing consumers 1.4 percent more in October. Home mortgages and rent, which make up more than half of the index, rose only 0.2 percent, keeping pace with previous months.

Economists remain wary that consumers will be less willing to spend over the holiday season as expensive gasoline puts a pinch on pocketbooks. A sales report released yesterday showed that consumers have started to cut back on retail purchases and the spending power of the dollar remains at a record low against the euro.

With the housing market in recession and the recent hiccups in the stock market, many analysts have painted a bleak economic picture for the fourth quarter.

But today’s mild inflation numbers — coupled with the Producer Price Index, which showed yesterday that prices were contained at the producer level as well — signal that higher commodity costs have not yet bled into the broader economy. Crude oil futures rose nearly $3 yesterday, to settle at $94.09 a barrel in New York.

Slower price growth leaves room for the Fed to lower interest rates, if it wants, although central bankers have hinted in recent remarks that they are inclined to hold rates steady at their next meeting on Dec. 11.

Still, if there is a drastic downturn in the economy over the next few weeks, low inflation could placate the hawks on the Fed’s board of governors. Investors who bet on the Fed’s actions predict a quarter-point cut to its benchmark overnight lending rate after next month’s meeting.

A separate report today showed that manufacturing activity in New York State slowed slightly in November. But analysts had expected a steep sharp in the index, which is measured by the Federal Reserve Bank of New York. Shipments nudged up and inventories dropped, sending the index to 27.37 after a 28.75 reading in October, a three-year high.

Inflation Was Tame in October, NYT, 16.11.2007, http://www.nytimes.com/2007/11/16/business/15cnd-econ.html

The Economist - North America Edition        Nov 17th 2007

http://www.economist.com/printedition/index.cfm?d=20071117

  America's vulnerable economy        E        15.11.2007

http://www.economist.com/opinion/displaystory.cfm?story_id=10134118

Recession in America

America's vulnerable economy

Nov 15th 2007
From The Economist print edition


Recession in America looks increasingly likely. Can booming emerging markets save the world economy?

IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort. Our latest assessment (see article) suggests that the United States may well be heading for recession.

Granted, GDP grew by a robust 3.9%, at an annual rate, in the third quarter. Granted also, revisions may well push this figure up. But that was the past. More timely signs suggest that the economy could stall in this quarter. By early next year, output and jobs could be shrinking. The main cause is the imploding housing market. Experts said that house prices could never fall nationwide. But fall they have, by 5% in the past 12 months. Residential investment has collapsed, but a glut of unsold homes means that prices have much further to drop. Americans' spending is likely to be dented much more by a fall in house prices than it was in 2001 by the stockmarket's collapse. With house prices lower and credit conditions tighter as a result of the subprime crisis, households can no longer borrow against capital gains to support their spending.

Dearer oil is set to squeeze households further (this week's drop in crude prices notwithstanding). Consumer confidence has already fallen sharply. It cannot be long before consumer spending stumbles, which in turn would hurt companies' profits and investment. The weak dollar will boost exports, but at only 12% of GDP, exports are too small to make up for a weakening of consumer spending, which accounts for 70%.



I want to break free

Will an American recession drag the rest of the world down with it? The economies of Europe and Japan rebounded strongly in the third quarter, but look likely to slow down. Although both should be able to keep chugging along, neither is likely to set any great pace. Strengthening currencies will hurt exporters in both places. Europe's own housing hotspots are cooling, and some of its banks have been sideswiped by America's subprime ills.

The best hope that global growth can stay strong lies instead with emerging economies. A decade ago, the thought that so much depended on these crisis-prone places would have been terrifying. Yet thanks largely to economic reforms, their annual growth rate has surged to around 7%. This year they will contribute half of the globe's GDP growth, measured at market exchange rates, over three times as much as America. In the past, emerging economies have often needed bailing out by the rich world. This time they could be the rescuers.

Of course, a recession in America would reduce emerging economies' exports, but they are less vulnerable than they used to be. America's importance as an engine of global growth has been exaggerated. Since 2000 its share of world imports has dropped from 19% to 14%. Its vast current-account deficit has started to shrink, meaning that America is no longer pulling along the rest of the world. Yet growth in emerging economies has quickened, partly thanks to demand at home. In the first half of this year the increase in consumer spending (in actual dollar terms) in China and India added more to global GDP growth than that in America.

Most emerging economies are in healthier shape than ever (see article). They are no longer financially dependent on the rest of the world, but have large foreign-exchange reserves—no less than three-quarters of the global total. Though there are some notable exceptions, most of them have small budget deficits (another change from the past), so they can boost spending to offset weaker exports if need be.

This does not mean emerging economies will grow fast enough to make up for the whole of a fall in America's output. Most of them will slow a bit next year: for instance, China's growth rate may dip to “only” 10%. So global growth will ease—which, after five years at an average of almost 5%, close to its fastest pace ever, it needs to do. But thanks to the vigour of the new titans, it will stay above its 30-year average of 3.5%.



A tale of two prices

The rising importance of the world's new giants will not only boost growth. It will also shift relative prices, notably those of oil and the dollar. And the consequences of this will be less comfortable for developed countries, especially America.

The oil price has risen mainly because of strong demand in emerging economies, which have accounted for as much as four-fifths of the total increase in oil consumption in the past five years. In past American recessions the oil price usually fell. This time it is likely to hold up. That will not only hurt the finances of Western consumers, but may also make the jobs of their central bankers harder, by combining inflationary pressure with economic slowdown.

The enfeebled dollar—lately in sight of $1.50 to the euro—would be weaker still without enormous purchases by central banks in emerging economies. This support is now waning. China and others are putting a smaller share of increases in reserves into the American currency. And Asian and Middle Eastern countries with currencies linked to the dollar are facing rising inflation, but falling American interest rates make it harder to tighten their own monetary policy. They may have to let their currencies rise against the sickly greenback, meaning they will need to buy fewer dollars. More important, as international investors wake up to the relative weakening of America's economic power, they will surely question why they hold the bulk of their wealth in dollars. The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done.

The vigour of emerging economies is good news for the world economy: for its growth, it has much less need of a strong America. The bad news for America is that this, in turn, may mean that the world also has less need of the dollar.

    America's vulnerable economy, E, 15.11.2007, http://www.economist.com/opinion/displaystory.cfm?story_id=10134118

Stocks Fall on Concern

About Consumer Spending

November 15, 2007
Filed at 10:44 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street fluctuated Thursday as investors grappled with concerns about the strength of consumer spending but were also cheered by data showing companies might be having an easier time winning financing for short-term debt.

The Labor Department's Consumer Price Index rose 0.3 percent in October on high energy and foods costs, in line with September's increase and analysts' forecast. Investors are concerned that rising inflation -- especially due to higher fuel prices -- could move consumers to cut back their overall spending and also prevent the Federal Reserve from lowering interest rates further in the coming months.

In addition, the market for U.S. short-term corporate debt known as commercial paper decreased by $3.6 billion in the week ended Wednesday, well below the $15.6 billion contraction seen a week earlier. The Federal Reserve figures appeared to boost investor sentiment about the state of the credit markets, which has been tight in recent months amid concerns about bad mortgage debt.

And J.C. Penney Co. reported a 9 percent drop in fiscal third-quarter profit on weak sales and cut its fourth-quarter outlook, indicating that housing market problems are taking a toll on shoppers, as well.

Investors also reacted to a Barron's report late Wednesday that a General Electric Asset Management bond fund has suffered losses in mortgage-backed securities. The General Electric Co. unit is offering investors the option to redeem their holdings in the short-term institutional bond fund at 96 cents on the dollar. The losses in the bond fund raised concerns that the squeeze on credit markets could spread and hurt small investors.

Barclays Capital became the latest financial institution to record a writedown on losses stemming from turbulent credit markets. The unit of Barclays Group PLC took a $2.7 billion charge in the third quarter but the also said Thursday its profit beat last year's strong performance.

In midmorning trading, the Dow Jones industrial average rose 2.60, or 0.02 percent, to 13,233.61.

Broader stock indicators also dipped. The Standard & Poor's 500 index fell 1.57, or 0.11 percent, to 1,469.01. The Nasdaq composite index rose 0.57, or 0.02 percent, to 2,644.89.

Government bond prices rose. The yield on the 10-year Treasury note, which moves opposite its price, slid to 4.23 percent from 4.25 percent late Wednesday.

Oil prices slipped on the New York Mercantile Exchange, where a barrel of light, sweet crude dipped 43 cents to $93.66. Gold prices fell as the dollar strengthened.

In other economic news, the number of laid off workers filing claims for unemployment benefits rose last week by 20,000 to 339,000, double what economists expected.

Investors also looked to corporate news, Tyco International Inc. said its fiscal fourth-quarter profit slid 85 percent due to costs related to restructuring and the spin-off of the former conglomerate's health care and electronics units. For the full year, Tyco swung to a loss of $1.74 billion compared with a profit of $3.6 billion last year.

Tyco fell 96 cents, or 2.5 percent, to $38.34.

Ralcorp Holdings Inc., a maker of private-label cereals, said it will buy Kraft Food Inc.'s Post cereals division for $1.65 billion plus $950 million in debt.

Kraft fell 21 cents to $32.77, and Ralcorp rose $4.31, or 7.8 percent, to $59.78.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 174 million shares.

The Russell 2000 index of smaller companies fell 4.93, or 0.63 percent, to 777.54.

Major stock indexes overseas slumped. Britain's FTSE 100 declined 1.46 percent, Germany's DAX index fell 1.76 percent, while France's CAC-40 shed 1.13 percent.

Japan's Nikkei stock average closed down 0.67 percent and Hong Kong's Hang Seng index fell 1.42 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Fall on Concerns About Consumer Spending, NYT, 15.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Bear Stearns

to Take $1.2 Billion Write-Down

November 14, 2007
Filed at 9:05 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Investment bank Bear Stearns Cos. will take a $1.2 billion writedown in the fourth quarter related to weakness in its credit portfolios, Chief Financial Officer Samuel Molinaro Jr. said Wednesday.

Molinaro said the writedown will lead the company to post a loss during its fiscal fourth quarter, which ends Nov. 30.

Molinaro, presenting at the Merrill Lynch Banking and Finance Conference in New York, said Bear Stearns latest round of writedowns should "suffice" in accurately valuing products such as subprime mortgages and collateralized debt obligations. The $1.2 billion writedown is net of any hedging gains, Molinaro added.

Bear Stearns has been "working hard" to reduce its exposure to the subprime mortgage and collateralized debt obligation markets, Molinaro said.

CDOs are complex financial instruments that combine slices of varying assets and debt. Many CDOs are backed by subprime mortgages -- loans given to customers with poor credit history. As those mortgages have increasingly defaulted, banks are being forced to write down the value of bonds and CDOs backed by the loans.

As of Nov. 9, Bear Stearns had about $884 million in exposure to CDOs remaining on its books, and negligible exposure to subprime mortgages, Molinaro said.

Bear Stearns took about $850 million in writedowns during its fiscal third quarter, as banks took more than $40 billion in total writedowns in quarter. The fourth quarter is shaping up to be as bad or worse than the previous quarter, as banks already have announced billions more in writedowns.

Britain's HSBC Holdings PLC said Wednesday it would take a writedown of $3.4 billion for its exposure to the U.S. mortgage market.

Shares in Bear Stearns rose $6.63, or 6.6 percent in premarket trading, to $107.50.

    Bear Stearns to Take $1.2 Billion Write-Down, NYT, 14.11.2007, http://www.nytimes.com/aponline/business/AP-BearStearns-Writedown.html

Stocks Rise as Credit Concerns Wane

November 14, 2007
Filed at 9:58 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street rose modestly Wednesday as investors grew more optimistic that the worst of the credit crisis is over and as the government released tame October inflation data.

The stock market was relieved after Bear Stearns Cos. Chief Financial Officer Sam Molinaro said Wednesday the investment bank's leveraged finance business is improving. He said the company expects to take a $1.2 billion writedown during the fourth quarter, which eased concerns that the losses might be much higher.

Wednesday's news followed reassuring comments from Goldman Sachs Group Inc.'s chief executive about its own credit exposure that sent stocks climbing and helped propel the Dow Jones industrials up nearly 320 points.

Britain's HSBC Holdings PLC did say Wednesday it would have to write down a further $3.4 billion from its U.S. business during the third quarter because of exposure to subprime loans, but the market had been anticipating the move.

The Dow rose 15.04, or 0.11 percent, to 13,322.13.

Broader stock indicators also gained. The Standard & Poor's 500 index rose 3.90, or 0.26 percent, to 1,484.95, while the Nasdaq composite index rose 2.38, or 0.09 percent, to 2,676.03.

Treasury bonds fell as investors felt more secure about stocks. The 10-year Treasury note's yield, which moves in the opposite direction of its price, rose to 4.29 percent from 4.26 percent late Tuesday.

The Labor Department reported wholesale prices registered a slight gain in October, held down by a drop in energy costs. The moderation in inflation could be temporary, however, with oil prices surging to fresh records in early November.

A barrel of light sweet crude rose $1.85 to $83.02 on the New York Mercantile Exchange, after plunging Tuesday by $3.45.

And while the wholesale price report suggests the Fed could afford to lower rates further when it meets on Dec. 11 to calm the shaky markets, the central bank did indicate after its Oct. 30-31 meeting -- where it cut rates by a quarter-point -- that it was satisfied with the current state of the economy and still concerned about rising inflation.

Meanwhile, the Commerce Department reported retail sales managed a small increase in October as consumers struggled to cope with a steep slump in housing, tighter credit conditions and soaring energy costs. It was the weakest showing since August and represented a significant slowdown from September sales.

Overseas, Japan's Nikkei stock average closed up 2.47 percent and Hong Kong's Hang Seng index rose 4.90 percent. In afternoon trading in Europe, Britain's FTSE 100 added 1.37 percent, Germany's DAX index rose 0.55 percent, while France's CAC-40 rose 1.79 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Rise as Credit Concerns Wane, NYT, 14.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Stocks Rebound on Retail News

November 13, 2007
Filed at 12:21 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street rebounded Tuesday after Wal-Mart Stores Inc. posted better-than-expected earnings and Goldman Sachs Group Inc. reassured investors by saying it didn't expect a significant hit from the subprime turmoil. The Dow Jones industrials climbed more than 150 points.

The rally held up even after Bank of America Corp. announced plans to book $3 billion in pretax charges on its collateralized debt obligations. Goldman, meanwhile, indicated it would not be taking any significant writedowns on its exposure to the subprime mortgage market.

Goldman Chief Executive Lloyd Blankfein, speaking at a conference held by Merrill Lynch, said the bank has a short position in the subprime mortgage market and won't be taking any significant charges to write off losses. But Bank of America joined other big financial companies including Citigroup Inc. and Merrill Lynch & Co. in announcing heavy writedowns; BofA said it will record $3 billion in pretax writedowns in the fourth quarter.

Investors have been anxiously waiting to see how much fallout there would be from months of credit market problems, so they were heartened by Goldman's news.

The good news from Goldman helped calm some investor uncertainty about the extent of the banking industry's writedowns, said Todd Leone, managing director of equity trading at Cowen & Co.

''People just want to know what's out there,'' he said. ''They want to feel like they're being told the truth.''

Investors also were pleased when Wal-Mart, the world's largest retailer, reported third-quarter profit that surpassed projections and hinted that consumer spending might be stronger than anticipated this holiday shopping season. The results also showed that heavy discounting during the period did not hurt margins, which the company said bodes well for the fourth quarter.

The report gave investors a reason to buy a day after a turbulent session pushed the Dow Jones industrial average below 13,000 for the first time since August. The advance snapped a four-day losing streak for the blue chip index.

''Over the last week there has ben so much bloodshed on the Street, it's finally enticed people back to the market,'' said Ryan Larson, senior equity trader at Voyageur Asset Management. ''At some point, it's hard to turn your head when all these issues become so cheap.''

In midday trading, the Dow rose 167.29, or 1.29 percent, to 13,154.84 after earlier being up more than 200.

Broader indexes were also higher. The Standard & Poor's 500 index jumped 18.26, or 1.27 percent, to 1,457.44, and the Nasdaq composite index was up 48.75, or 1.89 percent, at 2,632.88.

Bonds fell as investors moved back into stocks. The yield on the benchmark 10-year Treasury note rose to 4.26 percent from 4.22 percent late Friday. The market was closed Monday in observance of Veterans Day.

Lower energy prices also encouraged Wall Street. Oil prices dropped after the International Energy Agency reduced its expectations for demand in the fourth quarter and next year and said crude supplies are growing. A barrel of light, sweet crude slid $3.65 to $90.97 on the New York Mercantile Exchange.

Gold prices fell $11.20 to $796.50 an ounce on the Nymex. The dollar was mixed.

Investors were expected to position their portfolios ahead of key economic data out during the week. Two key barometers of inflation and the economy will be released, with the Labor Department's Producer Price Index on Wednesday and the Consumer Price Index on Thursday.

Wall Street will also receive new data on the slumping housing sector Tuesday. The National Association of Realtors will issue its September reading of an index that tracks pending U.S. home sales, and release an update on the housing market forecast for 2007 and 2008. The reports, due out at 3 p.m. EST, are expected to show housing hit another record low during the month.

Goldman shares gained $14.31, or 6.7 percent, to $229.02, while Bank of America added $1.48, or 3.4 percent, to $45.46.

Wal-Mart spiked $2.82, or 6.5 percent, to $46.14 after the retailer said quarterly profit rose 8 percent as it heads into the holiday shopping season. Chief Executive Officer Lee Scott said it has been a tough year for consumers, but that the company's new focus on pricing is paying off.

TJX Cos. -- the operator of T.J. Maxx and Marshalls -- reported third-quarter profit rose 13 percent. Results, which missed Wall Street expectations, were hurt by unseasonably warm early fall weather. Shares added $1.63, or 5.6 percent, $30.95.

Home Depot Inc., the world's largest home improvement chain, reported third-quarter results fell 26.8 percent because of the continuing slump in the housing sector. Shares rose 16 cents to $28.62.

Troubled lender Countrywide Financial Corp. said total mortgage origination volume fell 48 percent in October due to continued weakening of the mortgage market and the company's decision to cut down on its subprime lending operations. However, shares rose 10 cents to $13.29 after Countrywide said it significantly reduced some of its riskier loans that triggered recent financial problems.

The Russell 2000 index of smaller companies rose 10.39, or 1.35 percent, to 777.48.

Advancing issues led decliners by about 3 to 1 basis on the New York Stock Exchange, where 610.5 million shares were traded.

Overseas, Japan's Nikkei stock average closed down 0.46 percent and Hong Kong's Hang Seng index rose 0.50 percent. In afternoon trading in Europe, Britain's FTSE 100 rose 0.39 percent, Germany's DAX index fell 0.38 percent, while France's CAC-40 added 0.06 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com 

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Rebound on Retail News, NYT, 13.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Stocks Waver

As Investors Stay Cautious

November 12, 2007
Filed at 10:16 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks fluctuated Monday as investors moved back into banking stocks but remained cautious, expecting more fallout from the ongoing credit crisis.

The market was waiting to see if there would be more announcements from financial companies of write-downs of mortgage-backed securities and other debt instruments that have plunged in value since the summer. Late Friday, E-Trade Financial Corp. said deterioration in the value of its mortgage-backed securities has fallen significantly. The online brokerage said the weakness will lead to bigger-than-expected write-downs in the fourth quarter.

Meanwhile, troubled home lender Countrywide Financial Corp. said in a U.S. regulatory filing it could be ''severely'' limited if its credit rating drops into junk status. And Britain's HSBC Holdings PLC was seen as the next major financial institution to write down losses from exposure to the debt markets, according to a report from The Times of London. The bank will announce a $1 billion charge to its portfolio of high-risk subprime mortgages when it reports third-quarter results from its U.S. division, according to the report.

Trading was expected to be light because of Veterans Day, with the government bond markets closed. This also could lead to higher volatility as institutional traders take positions ahead of economic reports, including readings on inflation. later in the week.

In midmorning trading, the Dow Jones industrial average fell 20.73, or 0.16 percent, to 13,022.01 after falling 4.06 percent last week.

The Standard & Poor's 500 index fell 4.12, or 0.28 percent, to 1,449.58, while the Nasdaq composite index fell 15.00, or 0.57 percent, to 2,619.94.

Light, sweet crude fell $2.28 to $94.04 on the New York Mercantile Exchange. The drop came on reports that OPEC would discuss increasing its output at an upcoming meeting in a bid to cool record crude prices.

In corporate news, E-Trade plunged $4.37, or 51 percent, to $4.22, while Countrywide fell 16 cents to $13.67.

Citigroup Inc. led a recovery in bank stocks after last week's sell-off and was the biggest gainer among the 30 stocks that make up the Dow industrials. Citi rose $1.11, or 3.4 percent, to $34.31.

Tyson Foods Inc. fell 70 cents, or 4.8 percent, to $14.05 after the world's largest meat company forecast earnings for this year that were below what analysts were expecting.

Declining issues outnumbered advancers by about 8 to 7 on the New York Stock Exchange, where volume came to 236.1 million shares.

The Russell 2000 index of smaller companies rose 0.71, or 0.09 percent, to 773.09.

Overseas, Japan's Nikkei stock average closed down 2.48 percent and Hong Kong's Hang Seng index dropped 3.88 percent. In afternoon trading in Europe, Britain's FTSE 100 fell 0.01 percent, Germany's DAX index fell 0.35 percent, while France's CAC-40 shed 0.43 percent.

--------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Waver As Investors Stay Cautious, NYT, 12.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Stocks & Bonds

Another Steep Plunge

Ends Harsh Week for Stocks

November 10, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Stocks came tantalizingly close to a flat close yesterday before plunging in the final minutes, ending a painful week in the markets on a low note.

All of the usual recent anxieties flared again yesterday. Another large bank said it would write down the value of some of its assets, reigniting fears of a credit squeeze. Technology stocks — for weeks a calm spot amid the subprime storm — sank as investors grew uneasy on gloomy fourth quarter estimates. Some traders simply chose to pull out profits before the next batch of bad news hit.

When the bell rang, the Dow had lost 1.69 percent, or 223.55 points, nearly half of that in the last 30 minutes of trading. The index is down nearly 8 percent from the record high it set a month ago.

The Nasdaq composite index, heavy with technology shares, lost 6.5 percent for the week, its worst five-day performance since the tail-end of the tech bubble in 2002.

The market remains wracked by uncertainty, analysts said, as traders fear that fallout from the summer’s subprime mortgage crisis will continue to batter banks and businesses in the coming months.

“We’re not sure if this is the end of it or not, or how much more of this is going to continue,” said Robert Dye, senior economist at PNC Financial. “That is clearly spooking financial markets.”

Stocks dropped sharply early in the day but began to climb back in the afternoon before ending near their lows for the session. A pair of quarterly statements, filed by JP Morgan and Bank of America late in the day, may have unnerved investors after both banks mentioned billions of dollars in leveraged loan commitments.

The broader equity market has lost 4.38 percent in the last three days, as measured by Standard & Poor’s. The S.& P. 500-stock index dipped 1.43 percent yesterday, or 21.07 points, to close at 1,453.70. For the week, the average was down 3.7 percent.

Yesterday’s sell-off began after Qualcomm, the wireless company, said it expected business to drop in the fourth quarter, underscoring fears that technology companies will be hurt by an expected slowdown in the economy over the next few months. The report came on top of a similarly grim outlook from Cisco Systems, the networking giant, that led to a technology sell-off on Thursday.

Technology shares had been virtually unscathed by the recent market turmoil, but the reports sent traders scrambling to take profit out of the market.

Blue-chip technology shares extended their declines yesterday, with Apple, Google, I.B.M. and Oracle all closing the week deep in the red. The Nasdaq composite index finished down 68.06 points, or 2.5 percent, at 2,627.94.

In the financial sector, Wachovia said it would lose $1.1 billion on bad bets on mortgage-backed securities. That added to the $1.3 billion in losses and write-downs the bank announced last quarter, making Wachovia the latest prominent victim of the collapse in the subprime loan market.

The bank’s shares dipped nearly 4 percent before regaining their losses and posting a slight gain.

Financial stocks briefly rallied but fell back in late trading, though shares of Citigroup increased for the first time in over a week.

The bad news out of Wachovia was particularly jarring for investors. Banks have been forced to announce more write-downs as they try to calculate the value of infected assets related to home loans, leaving investors uneasy about the credit market.

William Rhodes, chief investment strategist at Rhodes Analytics, said the recent string of bank write-downs had given rise to a “cockroach theory”: one in the kitchen means others in the wall.

“People are afraid that they’re not finished,” Mr. Rhodes said. “That’s really what it boils down to. They look at this and go, ‘Holy cow, you wrote off this much this quarter? How much are you going to haul off next quarter?’”

Some analysts said profit taking spurred the week’s declines, after many market watchers, including Ben S. Bernanke, the Federal Reserve chairman, said they expected a noticeable slowdown over the next few months as rising energy prices hurt consumer spending and a weak dollar hurts business.

“Will Rogers once said that sometimes the return of your money is more important than the return on your money,” said Marc Chandler, who directs currency strategy at Brown Brothers Harriman. “This is one of these times.”

Turmoil in the equity market, while separate from broader financial indicators, can take its toll on the larger economy.

“If your stock portfolio is less, you’re not going to go out and buy that new car,” said Mr. Dye of PNC.

But he noted that the sell-off may spur banks to address the uncertainty by calculating the precise value of the complex financial instruments that were ravaged by the subprime collapse.

“In the long run this is a healthy process,” Mr. Dye said. “In the short run this is very painful.”

Crude oil futures rose 86 cents yesterday, to $96.32 a barrel, after a nominal record on Tuesday. Oil prices were up 0.4 percent for the week. The euro was at a record.

In credit markets the 10-year Treasury note yielded 4.21 percent, down from 4.28 percent late Thursday and the price, which moves inversely to the yield, rose 18/32 to 100 9/32.

    Another Steep Plunge Ends Harsh Week for Stocks, NYT, 10.11.2007, http://www.nytimes.com/2007/11/10/business/10markets.html

The Energy Challenge

Fuel Without the Fossil

November 9, 2007
The New York Times
By MATTHEW L. WALD

DENVER — Mitch Mandich proudly showed off his baby, a 150-foot contraption of tanks, valves, hoppers, augers and fans. It hissed. It gurgled. An incongruous smell wafted through the air, the scent of turpentine.

Mr. Mandich’s machine devours pine chips from Georgia and turns them into an energy-rich gas, a step toward making liquid fuels. His company, Range Fuels, is near the front of the pack in a technology race that could have an impact on the way America powers its automotive fleet, and help ameliorate global warming.

“Somebody’s going to hit a home run here,” Mr. Mandich said. “We want to be first.”

For years, scientists have known that the building blocks in plant matter — not just corn kernels, but also corn stalks, wood chips, straw and even some household garbage — constituted an immense potential resource that could, in theory, help fill the gasoline tanks of America’s cars and trucks.

Mostly, they have focused on biology as a way to do it, tinkering with bacteria or fungi that could digest the plant material, known as biomass, and extract sugar that could be fermented into ethanol. But now, nipping at the heels of various companies using biological methods, is a new group of entrepreneurs, including Mr. Mandich, who favor chemistry.

They believe techniques borrowed from oil refining and other chemical industries will allow them to crack open big biological molecules, transforming them into ethanol or, even more interesting, into diesel and gasoline. Those latter fuels could be transported in existing pipelines and burned in existing engines without fuss. Advocates of the chemical methods say they may be flexible enough to go beyond traditional biomass, converting old tires or even human waste into clean transport fuel.

In Madison, Wis., a company called Virent Energy Systems is turning sugar into gasoline, diesel, kerosene and jet fuel, with the long-range plan of obtaining the sugars from biomass. In Ontario, Dynamotive Energy Systems is turning biomass into a form of oil, and in Chicago, a Honeywell subsidiary called UOP is doing something similar. In Irvine, Calif., BlueFire Ethanol is using acid to break down organic material for conversion to fuel.

Possibilities like these are coming to the fore at a time when rising oil prices have created an incentive to develop substitute fuels. Making them from biomass would be environmentally friendly in that, unlike standard gasoline or diesel, the fuels would not take long-stored carbon from underground and dump it into the air as carbon dioxide.

And unlike making ethanol from corn kernels, these techniques do not require significant amounts of natural gas or coal. Carbon dioxide, emitted in large volume when people burn fossil fuels, is the primary culprit in global warming.

Lately, these factors have resulted in a flood of investment capital into both biological and chemical techniques for using biomass. Experts consider both approaches promising, and they say it is too early to tell which will win.

“It’s not obvious, and I don’t think it will be obvious for a very long time,” Andrew Karsner, the assistant secretary of energy for energy efficiency and renewable energy, said in Washington. His department is awarding grants to support both approaches.

Experts say it is possible that more than one type of plant will reach commercial success, with the ideal technique for a given locale depending on what material is available to convert to fuel.

Range Fuels favors pine chips and other waste from softwood logging operations, largely because there is so much of it. Logging in Georgia, for instance, leaves behind about a quarter of the tree. “Bark, needles, cones, we use all of it,” said Mr. Mandich, chief executive of Range.

Range is a privately held company whose chief scientist, Bud Klepper, has been working on the two problems, creating gas from biomass and then converting it to liquid fuel, since the 1980s. The company is heavily backed by Vinod Khosla, a Silicon Valley venture capitalist who has turned his focus to energy investments.

Range broke ground this week on the first full-scale biomass-to-fuel plant in the United States, in Soperton, Ga. “Today marks the beginning of a new phase of our effort to make America more energy secure,” the secretary of energy, Samuel Bodman, said at the event. The plant, its cost not publicly disclosed, is expected to produce 20 million gallons of ethanol a year, with more capacity to be added later.

In Georgia alone, enough waste wood is available to make two billion gallons of ethanol a year, Mr. Mandich said. If all that material could be captured and converted to fuel, it could replace about 1 percent of the nation’s gasoline consumption.

Biomass of various types is abundant in every state, some of it gathered daily by garbage trucks. A study two years ago by the Oak Ridge National Laboratory found that enough biomass is available in the United States to replace more than a third of the nation’s gasoline consumption, assuming the economics can be made to work.

The Bush administration is counting on biofuels to help limit the growth of petroleum demand, and environmentalists routinely include such fuels in their forecasts as a way to reduce carbon dioxide emissions. But to date, no one has shown that fuels from biomass can be made profitably, even when competing with gasoline at $3 a gallon.

Daniel M. Kammen, director for the renewable and appropriate energy laboratory at the University of California, Berkeley, said, “I suspect we will have a trickle” of fuels from biomass in the next few years. But it will be only a trickle unless the government adopts quotas or offers additional support, he said.

Companies like Range that are trying to convert biomass by chemical methods follow one of two broad approaches. The first is to mix the material with steam to produce a gas known as synthesis gas, consisting of hydrogen and carbon monoxide. With additional processing, that gas can be converted to liquid fuels. The second technique does not break the material down as far, creating a product that resembles oil that can then be refined into liquid fuel.

Research papers and patents are flying these days as scientists struggle to improve these methods. As with oil refineries, the final stages typically produce a variety of chemicals, of varying value, and the trick is to maximize production of the desirable chemicals. “Everybody is dealing with a byproduct they don’t want,” said Arnold Klann, the chief executive of BlueFire.

Range Fuels is one of the companies that turn biomass into a gas before converting it to liquid fuel. The company wants to make ethanol, a form of alcohol, but its technique produces less valuable varieties of alcohol as well. Company scientists are tweaking their approach to maximize the ethanol yield.

The other day, laboratory technicians grabbed samples of a yellow liquid emerging from the machinery and swirled it like a suspect vintage of chenin blanc. An expensive chemical analyzer called a gas chromatography machine stood in the corner. By using it, engineers can calculate what changes in temperature, pressure and flow rates would work best to produce ethanol in a full-scale commercial venture.

Overseeing the operation, Mr. Mandich radiated confidence. “You can’t have so many people at bat without hitting something,” he said.

As the nation seeks to develop new types of fuel, Congress has leaned heavily toward ethanol made from corn kernels, and it is the only alternative fuel available today in large volume. Ethanol benefits from a tax break and a mandate that a significant amount of it be blended into gasoline.

Turning biomass into gasoline would be simpler, requiring no changes in the nation’s cars or pipelines, but federal policy is tilting many research programs toward ethanol.

Range, for instance, could make any of several types of fuel from its pine chips. Asked whether the company chose ethanol for the 51-cent-a-gallon tax break, Mr. Klepper declared: “It’s the American way.”

    Fuel Without the Fossil , NYT, 10.11.2007, http://www.nytimes.com/2007/11/09/business/09fuel.html

Wachovia Sets $1.1 Billion

in October Losses

November 9, 2007
Filed at 11:00 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

CHARLOTTE, N.C. (AP) -- Wachovia Corp. said Friday the value of securities it owns that are backed by loans sank by about $1.1 billion in October, making it the latest major financial institution to warn of continuing losses in the credit markets.

The nation's fourth largest banking company also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in the housing market in certain regions. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.

Wachovia shares dropped $1.43, or 3.6 percent, to $38.87 in morning trading Friday after falling to a new 52-week low of $38.05.

The news heightened fears that the fallout from the subprime turmoil is spreading deeper into credit markets. It also raised questions about the bank's October 2006 acquisition of adjustable-rate mortgage lender Golden West Financial Corp. of Oakland, Calif.

''We believe the company is trying to get ahead of likely higher future mortgage losses in California,'' Deutsche Bank Securities analyst Mike Mayo wrote in a client note. ''Per Golden West, it now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle.''

The weakening markets -- which Wachovia estimates could get worse over the last two months of the quarter -- cut the value of the bank's so-called collateralized debt obligations by more than 60 percent.

As of Sept. 30, Wachovia had $1.8 billion in CDO exposure; after the latest writedowns, the exposure is now $676 million.

CDOs are complex instruments that combine slices of different kind of risk. CDOs are often backed, in part, by subprime mortgages -- loans given to customers with poor credit history. As those mortgages have increasingly defaulted, the value of the CDOs has plummeted.

Wachovia has an additional $2.1 billion of exposure to more traditional subprime mortgage-backed bonds. The value of those holdings remained steady in October as hedging strategies offset losses.

In a regulatory filing with the Securities and Exchange Commission, the financial services provider said the market in November so far remains ''extraordinarily volatile.''

Analysts polled by Thomson Financial, on average, were forecasting earnings of $1.08 per share for Wachovia before the writedown announcement.

Friedman Billings Ramsey analyst Gary B. Townsend predicted Friday that Wachovia's shares ''will remain under pressure until real estate markets and nonperforming assets levels stablize.''

Last month, Merrill Lynch & Co. took $7.9 billion in subprime mortgage-related writedowns for the third quarter, less than three weeks after saying it losses would only amount to about $4.5 billion. Merrill blamed further October market deterioration for the increased loss.

Mortgage-related writedowns across the banking industry eclipsed $40 billion during the third quarter, and the fourth quarter is already shaping up to be just as bad, if not worse.

Wachovia is the third national financial institution to announce fourth-quarter writedowns eclipsing $1 billion. Citigroup Inc. said it will likely take between $8 billion and $11 billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.

    Wachovia Sets $1.1 Billion in October Losses, NYT, 9.11.2007, http://www.nytimes.com/aponline/business/AP-Wachovia-Writedowns.html

Fannie Mae Posts $1.4 Billion Loss

November 9, 2007
Filed at 10:51 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Fannie Mae's third-quarter loss more than doubled to $1.4 billion, reducing year-to-date profits by more than half, as credit losses and mounting mortgage delinquencies sour its outlook into 2008, the company said Friday.

Shares of Fannie Mae, the largest U.S. buyer and backer of home loans, sank more than 9 percent in morning trading.

Fannie Mae posted a loss equivalent to $1.56 a share, in the tumultuous July-September quarter, compared with a loss of $629 million, or 79 cents per share, a year earlier.

Fannie Mae said it expects the housing downturn to continue into 2008, shrinking home prices by 4 percent and decreasing demand for mortgages.

Fannie Mae's results clearly showed the ravages of the collapse in high-risk mortgages and ensuing credit crisis of last summer, which rattled global markets, forced more than 50 lenders into bankruptcy and recently battered Wall Street powerhouses Merrill Lynch & Co. and Citigroup Inc.

The results also marked a significant milestone for Fannie Mae: They brought the company current in its financial reporting for the first time since 2004, when a massive accounting crisis tarnished its reputation and swept the top executives from office.

From January through September, the government-sponsored company said it earned $1.17 a share from January through September, down from $3.45 billion, or $3.16 a share, in the same period last year. Credit-related expenses, including set-asides to account for bad loans, jumped by $1.6 billion, to $2 billion.

The company earned $961 billion, or 85 cents a share, in the first quarter, beating analysts' forecasts of 79 cents a share, and $1.9 billion, or $1.86 a share, in the second quarter, exceeding forecasts of 99 cents a share.

The nine months' results reflected the deterioration of the housing market and volatility in the credit markets in the third quarter, Fannie Mae said. Its credit losses, said to have been at historic lows in the three years prior to 2007, jumped by $477 million, to $799 million. The losses mainly were driven by declines in home prices nationwide and continued economic weakness in the Midwest.

Fannie Mae's net interest income, the difference between the cost of borrowing and the amount it receives from loans, fell by $2 billion, to $3.4 billion.

''While we're pleased to have current results, they arrive in the midst of one of the most challenging mortgage and housing markets in recent history,'' company President and Chief Executive Daniel Mudd said in a statement.

Fannie Mae shares fell $4.56, or 9.2 percent, to $45.23 in morning trading Friday.

    Fannie Mae Posts $1.4 Billion Loss, NYT, 9.11.2007, http://www.nytimes.com/aponline/business/AP-Earns-Fannie-Mae.html

A Real Estate Speculator

Goes From Boom to Bust

November 9, 2007
The New York Times
By JOHN LELAND

ST. CHARLES, Mo. — The home foreclosure business was very good to Todd Haupt. He started buying and flipping foreclosed houses in 1994, when he was 20, and by 2000 he graduated to building homes.

At 32, with just one semester of community college, he owned a BMW, a Corvette and a 5,000-square-foot house worth $1.2 million. He was a creation of the boom. “I was on top of the world,” Mr. Haupt said recently.

Then, last May, the real estate market stopped booming.

Now Mr. Haupt’s house is in the hands of his creditors, as are the cars, three small office buildings and 89 lots he bought in a subdivision in neighboring Lincoln County.

He owes about $6 million in personal and business debt, and as Mr. Haupt’s fortunes soured, so have those of plumbers, electricians, framers, landscapers, supply stores and others that relied on his business, which he estimated at $300,000 per month.

“And that’s just little bitty me,” he said.

Mr. Haupt is one of thousands of Americans who jumped into the raging housing market of the last decade, which was heralded in stories of neighbors’ windfalls and reality television shows like “Flip That House,” “Flip This House” and “Flipping Out.”

Driving past his empty house recently, Mr. Haupt considered how things had crashed so fast.

“I feel like, yes, I overextended myself,” he said. “But when do you know not to overextend yourself? If I had a crystal ball, I never would have built my house. But when do you know? That’s why we’re speculators.”

He added, “If the banks had a crystal ball, they might not be in this mess either.”

St. Charles County, an affluent, fast-growing neighbor of St. Louis, was a natural incubator for speculators like Mr. Haupt, with a construction boom that doubled the population from 1980 to 2001.

Subdivisions with names like Crimson Meadows, Spring Mill and Barton Creek, pushed the suburban frontier ever farther from St. Louis. For a young builder, the low price of credit drove down the costs of building and drove up the homes’ sale prices.

As long as the market kept going, Mr. Haupt felt he could not lose.

His million-dollar house now sits forlorn and unattended, a dead spot in an expensive subdivision that was once all cornfields. Asked to identify the architectural style, he said, “I call it ‘Bank Repossession’ now.”

He now rents a small house for $1,275 a month. He became a born-again Christian in February, after his business and his marriage collapsed.

Mr. Haupt, whose parents work for a local supermarket, got into the real estate business after attending a seminar on how to buy property with no money down.

At 20, taking a mortgage that required no income check (also called a stated income or liar loan), he bought a house for $20,000, then flipped it for a quick profit of $4,000 or $5,000.

It was less than he had hoped, but more than he was making at UPS. He was hooked. By 2000, he was carrying as many as 25 foreclosed houses at a time, renovating them and selling at a profit of $10,000 to $15,000 each. With his success, he was able to establish lines of credit with eight commercial banks. He never thought about the homeowners who had lost the houses that he flipped.

“It’s a fine line,” he said. “You’re making money off what they lost. Is that wrong? Now that I’m in that position today, losing my house, I see that it’s just business.”

As the price of foreclosed houses rose, reducing his profits, Mr. Haupt shifted to building houses in subdivisions in Lincoln County, a less affluent area slightly farther from St. Louis. That required heavier borrowing but brought higher profits.

For the price of a longer commute to work, buyers got new homes that promised to go up in value as development continued around them. By last May Mr. Haupt owned 65 lots and had a contract to buy 20 more, for about $650,000.

Then gasoline prices spiked, and the longer commute became a deal-breaker.

Mr. Haupt had never questioned the ability of buyers to afford the increasingly expensive homes, or how far the boom could continue. “I never did any homework on the home buyers; I just built the houses,” he said. “My feeling was, if they’re approved, they’re approved, I’m going to build them a house.”

By February, he said, he was sitting in his 5,000-square-foot house with no money, a quarter tank of gas, and too much pride to accept money from his family or friends. “I couldn’t put the key in the ignition because I didn’t know where I’d get my next tank of gas,” he said.

On a recent afternoon, Cort Schneider, a St. Charles real estate agent, pointed out foreclosed properties on a drive through the area — new houses in new subdivisions, just old enough for their adjustable rate mortgages to reset beyond the owners’ means.

Lori Henderson, a vice president at First Advantage Bank, who arranged loans for Mr. Haupt since 2001, said that until the market turned, he was a good risk. “Todd performs,” Ms. Henderson said. But when she advised him not to buy more lots last year, he simply went to other lenders.

“People were upset about the war, gas prices were up, people were backing out of contracts,” she said. “It wasn’t the time for a small builder to take on two and a half years’ worth of inventory.”

Despite its fast growth, St. Charles County has been spared the precipitous ups and downs of the housing markets on the coasts, said Mark Stallman, chief executor of the St. Charles County Association of Realtors.

But for builders like Mr. Haupt, who were heavily leveraged, the slowdown — especially in Lincoln County — was catastrophic.

“It’s a bad time to be a builder,” Mr. Stallman said. “But it’s a good time to buy a house.”

In a county where one in 10 workers is employed in construction, twice the national average, the slump has taken its toll. Ron Vogt, an electrical contractor who often worked for Mr. Haupt, said his business had fallen to 15 percent of its former level, which in a good year did $700,000 worth of work. The 89 lots in Lincoln County have left what Mr. Haupt called a “ghost town” effect for the homeowners in the unfinished development.

“I can see why they’re upset,” he said. “When they moved in, they thought the neighborhood was going to be built up.” Mr. Haupt now works for a company that sells bottled water and energy drinks, and drives an orange pickup truck covered with logos for Tahitian Noni water.

He picks up money from side jobs, including finding houses for speculators still in the market.

Colleagues who became wealthy when he did are in the same situation, he said. “I asked one guy, ‘What are you doing today?’” he said. “He said, ‘I’m going to cut the grass, then my wife is going to make me eggs.’”

A Real Estate Speculator Goes From Boom to Bust, NYT, 9.11.2007, http://www.nytimes.com/2007/11/09/us/09speculate.html

Trade Gap Narrowed in September

November 9, 2007
Filed at 11:10 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The U.S. trade deficit fell to the lowest level in 28 months as a falling dollar spurred U.S. exports to an all-time high. The deficit with China jumped to the second highest level on record as imports of toys and other goods surged despite a rash of safety recalls.

The Commerce Department said Friday that the deficit for September dipped by 0.6 percent from the previous month -- to $56.5 billion. That was the narrowest trade imbalance since May 2005 and took economists by surprise. They had been forecasting the deficit would rise.

The improvement came from a 1.1 percent jump in U.S. exports, which climbed to a record $140.1 billion. The dollars' decline against many major currencies has made U.S. goods cheaper and more competitive in foreign markets. For September, sales of American-made cars, computers and farm products including corn, cotton, wheat and soybeans were all up.

Imports also rose in September, climbing by 0.6 percent to $196.6 billion, the second highest level on record. Imports of foreign-made cars, televisions and clothing were all up. Oil imports, however, fell by 0.8 percent to $10.5 billion, an improvement that is likely to be temporary given the recent surge in oil prices to close to $100 per barrel.

The deficit with China rose 5.5 percent to $23.8 billion, second only to a $24.4 billion deficit in October 2006. Imports surged to the second highest level on record, pushed up by big gains in imports of Chinese-made televisions, cell phones, computers and toys as retailers stocked their shelves for Christmas.

Those gains were occurring despite a string of high-profile recalls of Chinese products this year -- everything from toys with lead paint to defective tires and chemical-tainted toothpaste and pet food ingredients.

Through September, the trade deficit is running at an annual rate of $703.4 billion, down by 7.4 percent from last year's $758.5 billion. Analysts believe that surging exports from a weaker dollar will lead to a narrowing of the deficit for the full year, breaking a string of five consecutive records.

Critics of President Bush's trade policies say that even with the narrowing of the deficit this year, the imbalances are still running at unsustainable levels, forcing the United States to depend more and more on foreigners' willingness to hold dollars to finance the imbalances.

While a falling dollar is good for exports, it raises worries that at some point foreigners will be less willing to purchase dollar-denominated investments such as U.S. stocks and bonds. Such a change in sentiment could send stock prices plunging and push up U.S. interest rates.

The administration scored its first congressional victory on trade this week when the House passed a free trade agreement with Peru. However, approval of three other deals with Panama, Colombia and South Korea are expected to face tougher challenges in Congress.

For September, America's foreign oil bill dropped by 0.8 percent to $10.5 billion reflecting a drop in volume. The average price for a barrel of imported crude rose to a record $68.51 in September and is expected to climb even higher with the recent spike in spot oil prices, which traded this week near $100 per barrel.

The imbalance with the European Union dropped a sharp 37.1 percent to $6.4 billion. The dollar has fallen to record lows against the 13-nation euro currency, which means that U.S. products are cheaper in those markets while European goods are more expensive for American consumers.

The deficit with Canada, America's largest trading partner, dropped by 3.2 percent to $4.9 billion while the imbalance with Mexico fell 9.3 percent to $6.3 billion.

    Trade Gap Narrowed in September, NYT, 9.11.2007, http://www.nytimes.com/aponline/business/AP-Economy.html?ref=business

Stocks Open Lower

on Deepening Credit Worries

November 9, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Stocks slid sharply in early trading today after another large bank said it would write down the value of some of its assets, reigniting fears of a credit squeeze. The Dow Jones industrial average opened down 160 points, or 1.2 percent, and remained lower at 10 a.m.

Wachovia said today that it would lose $1.1 billion on bad bets on mortgage-backed securities and that it would set aside up to $600 million for loan losses in the fourth quarter. That adds to the $1.3 billion in losses and write-downs the bank announced last quarter, making Wachovia the latest prominent victim of the collapse in the subprime loan market. The bank’s shares dipped nearly 4 percent, to $38.83, the lowest level since 2003.

Technology stocks, which suffered one of their first significant sell-offs in months yesterday, dropped another 2 percent minutes after the opening bell. Qualcomm, the wireless company, said last night that it expected business to drop over the coming months, underscoring fears that technology companies will be hurt by an expected slowdown in the economy over the next few months. Cisco Systems, the networking giant, ignited yesterday’s sell-off with a similar report. The Nasdaq composite index, heavy with technology shares, was down 40 points, or 1.5 percent, to 2,655.88.

Technology shares had been virtually unscathed by the recent market turmoil, but profit-taking and the gloomy fourth-quarter outlook have started to cut into their elevated prices.

Shares of Qualcomm were off more than 7 percent in early trading.

Apple, Google, and Oracle all extended their losses from yesterday.

The bad news out of Wachovia is sure to rile shaky investors, who have sent the Dow down nearly 3 percent over the last week. Banks have been hit particularly hard as analysts fear further fallout from the summer’s subprime-mortgage collapse. Shares of all the major Wall Street brokerage firms were down in early trading.

Many market watchers, including Ben S. Bernanke, the Federal Reserve chairman, expect a substantial slowdown in the economy over the next few months as rising energy prices put pressure on consumers’ willingness to spend and a weak dollar hurts business activity.

The trade deficit narrowed in October more than analysts had anticipated, a ray of sunny economic news amid a cloudy morning. But the change was attributed to the weakening dollar, which remains at record lows against the euro. Foreign buyers have been briskly buying American exports.

The rising cost of oil sent import prices up substantially in October, up 1.8 percent after a 0.8 percent rise in September. Discounting fuel, import prices only rose 0.3 percent last month. Exports are more expensive, too, up 0.9 percent in October and 5.6 percent for the year, the Labor Department said.

    Stocks Open Lower on Deepening Credit Worries, NYT, 9.11.2007, http://www.nytimes.com/2007/11/09/business/09cnd-stox.html?hp

Wide worries over oil prices

Analysts say burden could spur recession

November 8, 2007
The Boston Globe
By Robert Weisman, Globe Staff

The price of crude oil is poised to cross the $100-a-barrel threshold, raising the prospect that the burden on consumers and businesses could be the final straw to tip the US economy into a recession.

How the oil market got to this historic milestone - with prices nearly doubling from their 2007 low of $50.48 and more than tripling since 2003 - is a twisting tale of hurricanes, speculators, refinery constraints, and geopolitical jitters. Many fear the fallout, long cushioned by robust growth, soon may be felt in everything from rising gasoline and heating bills to higher air fares to reduced corporate earnings.

"This is definitely a major threat to the economy," said Brian Bethune, economist for Global Insight, a research firm in Waltham, who warned that sustained per-barrel oil prices in triple digits could shave as much as 0.5 percent off an already slowing gross domestic product next year. "We're getting down to a critical stall speed."

That could mean consumers scaling back on holiday shopping to offset soaring prices at the gas pumps, or businesses hiring fewer workers and passing higher energy prices on to customers.

Bad weather, which drives up energy demands, or international tensions that put oil supplies in jeopardy could send prices even higher - and make a downturn even more likely, said Jim Burkhard, managing director of Cambridge Energy Research Associates. "If we get a cold winter, we could see $110 a barrel," Burkhard suggested. "In our view, if prices stayed at that level for six months to a year, that would contribute to a significant economic slowdown."

Oil closed at $96.37 a barrel on the New York Mercantile Exchange yesterday, down 33 cents, after climbing to an all-time high of $98.62 earlier in the day. The mixed reaction from investors followed release of a government report that showed oil inventories shrinking, though less than expected. Analysts said it was only a matter of time before the crude price hits $100 a barrel.

"This ship will right itself at some point," said Sarah Emerson, managing director at Wakefield consulting firm Energy Security Analysis, who said the severity of the economic impact will depend on the duration of the run-up. "But in the meantime we'll be dealing with very high prices."

Gasoline prices, which have lagged crude oil increases in recent weeks, are expected to move up as the holiday travel season approaches. And increases in home heating prices are likely to disproportionately hurt Northeastern states like Massachusetts, which burn more oil and natural gas than other parts of the country.

The state's commercial sector may be less vulnerable than elsewhere, however, because of its concentration of energy-efficient financial services and other white-collar industries. "Massachusetts is frugal in terms of the energy it consumes," said Phil Guidice, commissioner of the state Division of Energy Resources. "We're not a heavy industrial economy anymore." Guidice said high oil prices could have the beneficial long-term effect of spurring conservation and more investment in alternative energies, like solar, wind, and biomass.

Oil's spurt toward triple digits comes as the Federal Reserve board struggles to stimulate the economy through interest rate cuts to avoid a recession, defined as a significant decline in the gross domestic product and other economic measures lasting more than a few months. But the economy faces multiple challenges which, in addition to surging oil prices, include a weakening dollar and problems in the housing and subprime mortage markets that have taken a toll on low-income homeowners and Wall Street financial firms.

Breaking the $100-a-barrel barrier may be "an inevitable rite of passage," as Bethune put it, at a time when developing countries such as China and India are importing record usage of oil to feed their rapid industrial expansions. But this year's spike in prices, the largest in percentage terms since they quadrupled in the early 1970s, was driven by a mix of factors more complex than simple supply and demand.

Oil refineries, squeezed by narrower profit margins, have been reducing capacity worldwide even as demand has grown, leaving the supply chain much tighter than it has been in the past. "There's very little buffer in the system," Emerson said. "We're in a situation where we're running refineries harder and we've outgrown our capacity."

The situation was aggravated last spring when refineries on the Gulf Coast were closed for maintenance delayed by their efforts to recover from Hurricane Katrina. And aware that traders are sensitive to any global event that threatens the flow of oil, from the standoff over Iran's nuclear ambitions to the saber rattling of Venezuela president Hugo Chavez, speculators have contributed to the price run-up by snapping up oil futures, essentially betting that prices will rise.

Hitting $98.37 put the crude oil price in sight of $100 a barrel. Adjusted for inflation, that level remains slightly below the peak attained in 1980, which would be equivalent to $101.70 today.

The fact that the US economy has withstood the impact of rising prices so far "highlights in dramatic fashion how different the oil market and the whole world economy is today compared to the last two decades," said Burkhard at Cambridge Energy Research Association.

Because of production efficiencies and a more diverse global economy that includes India and China, Burkhard said it takes only six-tenths of a barrel of oil to produce $1,000 in real economic output today, versus nine-tenths of a barrel in 1980. "We simply need less oil to produce the same economic output today," he said.

A. Denny Ellerman, a senior lecturer on energy economics at the Massachusetts Institute of Technology's Sloan School of Management, said he anticipates oil prices will retreat from the $100 level as production increases, demand drops, and capacity is expanded, following the same cyclical pattern that sent prices tumbling after oil shocks in the 1980s. "In real terms, $100 is about where we were in the peak year of 1980," said Ellerman.

Others say the oil price trajectory will depend on a range of factors, including weather, changing demand in global markets, and developments in the Persian Gulf. "I don't know if $100 is a target we bounce off of or a target we sit on for a while," Emerson said.

Bethune said oil traders have built a "geopolitical risk premium" of $20 to $25 a barrel into the current price of crude oil, reflecting their calculation of the likelihood that instability in hot spots like Iran or Turkey could interrupt oil supplies. "We don't think this price is sustainable, but that doesn't take away the short-term pain," he said.

    Wide worries over oil prices, BT, 8.11.2007, http://www.boston.com/business/globe/articles/2007/11/08/wide_worries_over_oil_prices/

Airline stocks down sharply

amid market decline

Thu Nov 8, 2007
2:22pm EST
Reuters

CHICAGO (Reuters) - Shares of US Airways Group (LCC.N: Quote, Profile, Research) led major U.S. airline stocks lower on Thursday as the sector matched a steep decline in the broader market.

Calyon Securities analyst Ray Neidl said there was no fundamental reason unique to the airline industry responsible for the decline.

"US Air and UAL Corp (UAUA.O: Quote, Profile, Research) (parent of United Airlines) tend to be more volatile then their peers," Neidl said.

Airline shares been in a steep decline since late October, largely on spikes in the price of oil, which impacts the price of jet fuel.

US Airways shares were down 8.54 percent at $20.67 in afternoon trade on the New York Stock Exchange after declining more than 10 percent earlier in the session.

The Amex airline index (.XAL: Quote, Profile, Research), which has fallen 15 percent since October 31, was down 4.73 percent.

The Nasdaq Composite Index was down 2.62 percent.

(Reporting by Kyle Peterson; editing by John Wallace)

    Airline stocks down sharply amid market decline, R, 8.11.2007, http://www.reuters.com/article/hotStocksNews/idUSN0823948220071108

Stock Market Continues Downhill

November 8, 2007
The New York Times
By MICHAEL M. GRYNBAUM

It isn’t over yet.

Hopes for a market rebound dimmed today as shares stayed in the red, extending yesterday’s 360-point swoon. Today, however, it was the technology giants and retail chains that disappointed investors as well as a grim fourth-quarter forecast from the Federal Reserve chairman, Ben S. Bernanke.

The Dow Jones industrials dipped almost 200 points, or 1.5 percent, led by steep declines from Cisco Systems, I.B.M. and clothing retailers. The benchmark index is now off more than 4 percent from Tuesday’s close. The broader market also fell 1.5 percent, as measured by Standard & Poor’s.

Sinking technology stocks battered the Nasdaq composite index, which fell 3.3 percent to its lowest level since September. Cisco, the networking company, reported a 37 percent increase in earnings but did not surpass analysts’ expectations. The market’s punishment was swift: shares of Cisco dropped 8 percent, with similar losses hitting I.B.M. and Oracle.

Investors are clearly skittish about economic troubles, from a lack of confidence in the credit market to the global ramifications of a weakening dollar and rising oil prices. The concerns have sent stock markets plummeting, with large banks feeling the brunt of the damage.

“It’s a hackneyed expression that the market needs certainty,” said Quincy Krosby, chief investment strategist at The Hartford financial firm. “There’s a reason it’s hackneyed.”

Mr. Bernanke, in testimony this morning to the Joint Economic Committee in Washington, offered few reassurances for investors. He told members of Congress that the economy is likely to slow substantially in the months ahead, as the housing recession and higher energy prices start to put pressure on consumers’ willingness to spend.

Mr. Bernanke predicted gloom, but hinted that the Fed would be reluctant to cut its interest rates again before the end of the year. A rate cut stimulates the economy by making it easier for businesses and consumers to borrow money. Instead, Mr. Bernanke said that expensive oil and a weak dollar could nudge prices higher, raising the risk of inflation. (The Fed is wary that lower interest rates will exacerbate the problem of higher prices.)

Big retail chains also reported a second month of weak sales growth this morning, citing economic clouds that show no signs of lifting before the end of the year.

Sales rose1.9 percent in October, below industry estimates, according to Retail Metrics, a research firm, which said 70 percent of the retailers it tracks fell below their forecasts.

Crude oil futures were up slightly today, to $96.60 a barrel. The euro rose modestly against the dollar.

In a sign that the recent market turmoil is bleeding into the larger economy, shares of Sotheby’s plunged 36 percent to a 52-week low. The auction giant held a disappointing sale of Impressionist and Modern art last night that fell short of expectations, leading some to predict a tapering-off of the so-called art bubble.

In Asia, the Hang Seng index fell 3.2 percent, while the Nikkei 225 in Tokyo dropped 2 percent. Shares in China tumbled the most sharply, with the CSI 300 index off 4.8 percent.

    Stock Market Continues Downhill, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08cnd-stoxsub.html?ref=business

Wall Stree Opens Lower After Sell-Off

November 9, 2007
The New York Times
By MICHAEL M. GRYNBAUM
and PETER S. GOODMAN

Stocks opened lower today after a heavy sell-off yesterday, following declines in Europe and Asia on worries about rising oil prices and the prospect of an economic slowdown in the United States.

Just after 10 a.m., the Dow Jones industrial average was down 72 points, or 0.5 percent. The Standard & Poor’s 500-stock index was down 0.3 percent, and the Nasdaq composite was off more than 1 percent.

The likely direction for interest rates in the United States will be closely watched as the Federal Reserve chairman, Ben Bernanke, testifies today before the congressional Joint Economic Committee. His assessment of the turmoil in credit markets and the slide in the value of the dollar will be examined for clues to how the central bank will act in coming months.

In Asia, the Hang Seng index fell 3.2 percent, while the Nikkei 225 in Tokyo dropped 2 percent. Shares in China tumbled the most sharply, with the CSI 300 index off 4.8 percent.

After a relatively strong summer, consumer spending in the United States is expected to tighten, and business profits slow in the months ahead, analysts said. The dollar sank to a record low against the euro.

“We are experiencing among our clients an awakening that the United States is in big trouble,” said Erik Nielsen, chief Europe economist at Goldman Sachs.

The rise in oil prices, which briefly traded yesterday above $98 a barrel before settling at $96.37, now appear to be pushing up the cost of gasoline, heating oil and jet fuel as well. Today, oil was trading above $97 a barrel. That only intensified concern that American consumers may no longer be able to sustain their spending on other goods and services, particularly the large numbers of gas-guzzling vehicles still being turned out by the Detroit automakers.

The most immediate trigger for the sell-off in the dollar, traders said, was a jarring signal that suggested China might shift some of its enormous hoard of foreign currency reserves — worth more than $1.4 trillion, primarily in dollars and dollar-denominated assets — into other currencies to get a better return on its money.

“We will favor stronger currencies over weaker ones, and will readjust accordingly,” Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress told a conference in Beijing on Wednesday. A Chinese central bank vice director, Xu Jian, said the dollar was “losing its status as the world currency,” according to Bloomberg News.

Mr. Cheng later told reporters he was not saying China would buy more euros and dump dollars. But as markets opened across Europe, those words echoed as an invitation to sell the American currency.

The dollar fell to its lowest level against the Canadian dollar since 1950, the British pound since 1981, and the Swiss franc since 1995. The euro rose to a new record, $1.4729, before retreating.

While the reaction to the Chinese statements appeared to have been overblown, analysts said the larger forces assailing the dollar and the stock market were more deep-seated: uncertainty about the magnitude of the mortgage-related credit crisis, and the growing sense that, sooner or later, the unraveling of the American housing market must color the larger economy.

Recent weeks have featured a string of unpleasant reckonings for major Wall Street banks, with several slashing billions of dollars from balance sheets to account for losses in the mortgage market. Yet investors fret that there is more pain to come, with no way to know how much or where, given the spider’s web of financial deals that propelled the housing boom.

“What it all comes down to beneath the surface is the perception of credit-related problems, and the perception that this is spreading in ways that cannot be anticipated,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Though the losses from the subprime mortgage crisis are frequently estimated at $200 billion, only about half of this money has been accounted for, Mr. Ruskin said, with the markets forced to guess where the next batch of bad holdings will emerge.

“A lot of people do the math and there still seems to be a big hole there,” he said.

Amid the carnage, though, there were still several signs that the economy remains healthy. Productivity — a measure of how much the country produces for each worker — expanded more than expected in the summer, the Labor Department said, suggesting that the economy still has the ability to grow without stoking too much inflation.

But stocks dropped from the opening bell. The Dow closed down 2.64 percent, at 13,300.02. The Standard & Poor’s 500-stock index tumbled 44.65 points, or 2.9 percent, to 1,475.62. The Nasdaq composite index fell 76.42 points, or 2.7 percent, to 2,748.76.

The market was also reacting to news from General Motors that it would write down $38.6 billion in future tax benefits after a string of poor sales in North America and Germany, logging its biggest quarterly loss ever. The company’s stock price dropped 6.1 percent, to $33.95 a share.

The uncertainty about the credit markets pushed financial stocks down nearly 5 percent.

“The mood is dreadful,” said Brian Gendreau, an investment strategist at ING Investment Management. “People are saying, ‘Well, is that all? If they were that wrong about so much, is it possible they’re still wrong?’”

As the economic implications of the mortgage crisis filtered out, the recriminations went on. New York Attorney General Andrew M. Cuomo said he would subpoena records from Fannie Mae and Freddie Mac, the government-backed lenders, as he continued to look into whether banks had inflated the value of homes.

The euro’s rise is being propelled by differing approaches to interest rates on opposite sides of the Atlantic. The Federal Reserve has been cutting rates to ease strains on the American economy. The European Central Bank is likely to hold rates steady when it meets today.

“There will be a natural flow of money toward countries where interest rates are going to be holding,” said Stuart A. Schweitzer, managing director of global markets at JPMorgan Asset and Wealth Management.

For Americans, the ramifications of a weak dollar are varied. World travelers feel the pinch as the price of European hotels and restaurants soar in dollar terms. At home, the prices of imported goods like German-made cars and French wine inch up. Some fret that a further weakening in the dollar could sow inflation, as the impact of higher-priced imports — oil in particular — filters through the economy.

Indeed, some now see the dollar and the price of oil as intertwined: As the value of the currency falls, sellers of oil demand more dollars for the same barrel. And as oil prices climb, this impedes American growth, making the dollar less attractive.

Many see a weaker dollar as an unavoidable means of shrinking the United States trade deficit, which last year exceeded $800 billion. A weaker dollar helps make American goods cheaper on world markets.

Exports have been surging, giving companies in the United States a source of growing profits as sales soften at home.

“We’re in an unsustainable situation in terms of accumulating enormous deficits,” said Clyde Prestowitz, a former trade negotiator in the Reagan administration, and now president of the Economic Strategy Institute. “The only way out of that is through a weaker dollar.”

Still, some say fears about a flight from the dollar are exaggerated; China and Japan depend on the purchasing power of Americans for their exports. They, along with the oil producers, hold so many dollars that they are loath to do anything to cause a precipitous fall.

But investors keep worrying about another surprise.

“You’ve basically got capital market jitters about the United States,” said William R. Cline, a senior fellow at the Peterson Institute for International Economics in Washington.
 

Carter Dougherty in Frankfurt and Vikas Bajaj in New York contributed reporting.

    Wall Street Opens Lower After Sell-Off, NYT, 9.11.2007, Mis en ligne le 8.11.2007, http://www.nytimes.com/2007/11/09/business/08cnd-stox.html?ref=business

Wall Street Opens Higher After Sell-Off

November 8, 2007
Filed at 10:42 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks fluctuated Thursday after Federal Reserve Chairman Ben Bernanke warned he expects a raft of economic troubles will cause business growth to slow while inflation risks continue in coming months.

Bernanke, appearing before Congress' Joint Economic Committee with the Fed's economic forecast, said in prepared remarks the central bank is tracking developments closely but didn't offer solid evidence the bank is prepared to further cut interest rates though some investors -- based on movements in the Treasury markets -- appeared to sense a rate cut was more likely.

The market's search for direction comes a day after stocks tumbled amid concerns about continuing credit woes, a weakening dollar and rising oil prices.

Some investors hunted for bargains in the first minutes of trading, but the biggest gains soon evaporated. Good news, including a narrower-than-expected third-quarter loss at Ford Motor Co. and word of a buyout offer in the mining sector, was unable to sustain higher prices.

The market had fresh reason for concern about toxicity within the credit markets. Morgan Stanley issued a detailed accounting of its exposure to subprime debt, pleasing investors by eliminating some of the uncertainty that has wracked Wall Street to varying degrees in recent months. But Morgan said late Wednesday its fourth-quarter profit could be reduced by $2.5 billion in write-downs related to troubles in the credit market, a reminder of the widespread damage from soured loans.

In the first hour of trading, the Dow Jones industrial average fell 22.52, or 0.17 percent, to 13,277.50. The Dow, for the third time in a month, dropped more than 350 points Wednesday, offering the latest sign of how jittery many investors remain.

Broader stock indicators were mixed Thursday. The Standard & Poor's 500 index rose 0.28, or 0.02 percent, to 1,475.90, and the Nasdaq composite index fell 24.45, or 0.89 percent, to 2,724.31.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 413.4 million shares.

Government bonds showed little change after spiking Wednesday. The yield on the 10-year Treasury note, which moves opposite its price, stood at 4.30 percent -- flat with where it stood in late trading Wednesday.

The dollar was lower against other major currencies, while gold prices rose.

The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the ''fear index,'' which jumped nearly 24 percent Wednesday, fell 1.9 percent.

Some of Bernanke's comments could have helped pacify some investors' concerns. Bernanke acknowledged the market's recent jitters but said he believes the economy will rebound from recent problems by the second half of next year.

Bernanke said rising prices for oil and other commodities had stoked concerns about inflation and repeated the Fed's assessment made last week that monetary policy seemed well-balanced to allow for growth while curtailing inflation.

Light, sweet crude rose 88 cents to $97.25 on the New York Mercantile Exchange.

While investors parsed Bernanke's comments for clues about the Fed's plans, they also looked to mixed corporate news.

Ford posted a narrower third-quarter loss than Wall Street expected. Stripping out items that analysts typically exclude, the loss came to a penny a share. This was far less than the 46 cent-a-share loss analysts had been expecting on average, according to a Thomson Financial poll. Ford rose 12 cents $8.36.

News of possible dealmaking also appeared to hearten some corners of Wall Street. Mining company BHP Billiton PLC confirmed speculation it would go after rival Rio Tinto PLC, according to Dow Jones Newswires. While Rio Tinto rejected the offer, the notion that BHP would make a buyout offer given recent uncertainty in the world's markets seemed to please investors. BHP Billiton fell $3.36, or 4.2 percent, to $76.99, while Rio Tinto surged $93.70, or 26.2 percent, to $451.20.

Cisco Systems Inc. reported first-quarter sales and earnings Wednesday that topped Wall Street's expectations. However, investors were displeased that the company didn't boost its long-term growth targets. Cisco fell $2.13, or 6.5 percent, to $30.62.

And some well-known soft spots in the economy continued to show signs of distress. Luxury homebuilder Toll Brothers Inc. fell 14 cents to $20.89 after reporting its revenue and backlog in the fourth quarter fell sharply amid a supply glut.

The Russell 2000 index of smaller companies rose 4.68, or 0.60 percent, to 780.64.

Overseas, Japan's Nikkei stock average closed down 2.02 percent and Hong Kong's Hang Seng index fell 3.19 percent. In afternoon trading, Britain's FTSE 100 rose 0.22 percent, Germany's DAX index rose 0.16 percent, and France's CAC-40 fell 0.85 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Wall Street Opens Higher After Sell-Off, NYT, 8.11.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Cisco Shares Fall on Sluggish US Orders

November 8, 2007
Filed at 10:53 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

SAN JOSE, Calif. (AP) -- Cisco Systems Inc. shares fell more than 6 percent Thursday amid worry that fluctuations in U.S. business orders are hampering its growth.

The world's largest networking supplier posted first-quarter earnings that beat Wall Street estimates after the markets closed Wednesday. It also reaffirmed its long-term target for a revenue growth rate of 12 to 17 percent and its expectation that sales will grow 16 percent in the second quarter.

But its shares fell $2.12, or 6.5 percent, in morning trading Thursday. Cisco stockholders have still benefited from a rapid run-up in the share price that has created more than $30 billion in shareholder wealth since the start of the year.

''Our business is across every major country in the world, and it's across all product lines, and it's really across all customer segments,'' Cisco Chief Executive John Chambers said in an interview.

He dismissed concern over orders from large U.S. corporations growing in the mid-single-digit range, down from 20 percent early last year, saying sales to U.S. enterprises make up ''only 40 percent of our total U.S. business.''

''The other two major U.S. customer segments -- service provider and commercial -- are very strong,'' Chambers said.

Routers and switches that direct Internet traffic accounted for more than half of Cisco's total sales in the first quarter, with both segments growing steadily over last year -- 18 percent and 8 percent, respectively.

Its fastest growth came in its advanced technologies division, which includes online meeting company WebEx Communications, cable set-top box maker Scientific-Atlanta and the Linksys home networking unit, among other technologies. That division contributed $2.4 billion in sales, a quarter of Cisco's total revenues and 24 percent more than last year.

San Jose-based Cisco is expanding to reap more profits from booming demand for advanced networking gear and other technologies to handle voice, video and data traffic over the Internet.

Recent acquisitions include the $3 billion takeover of WebEx and $7.1 billion purchase of Scientific-Atlanta.

The company reported first-quarter sales and profits Wednesday that surpassed Wall Street's predictions.

Cisco said its net income was $2.2 billion, or 35 cents per share, for the three months ended Oct. 27. That compares with $1.6 billion in profit, or 26 cents per share, in the year-ago period.

Stripping out one-time charges, Cisco earned 40 cents per share, 4 cents more than the average estimate of analysts polled by Thomson Financial.

Cisco's sales in the first quarter were slightly higher than analysts' forecast -- $9.55 billion compared with a prediction of $9.54 billion. Sales were up 17 percent over the $8.2 billion recorded in the same period last year.

    Cisco Shares Fall on Sluggish US Orders, NYT, 8.11.2007, http://www.nytimes.com/aponline/technology/AP-Earns-Cisco.html

Jobless Claims Down for Last Week

November 8, 2007
Filed at 10:53 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The number of laid-off workers filing claims for unemployment benefits dropped last week to the lowest level in a month, even though wildfires added to the unemployment rolls in California.

The Labor Department reported that 317,000 applicants filed for jobless claims last week, down by 13,000 from the previous week. It was the lowest level since Oct. 9.

The bigger-than-expected improvement came even though benefit applications were boosted by almost 3,000 in California as a result of the wildfires that struck that state. Last week's increase brought to almost 4,000 the number of layoffs in California attributed to the adverse effects of the fires.

Even with last week's decline in overall claims, the four-week average for claims edged up to 329,750, the highest level since mid-April.

Economists are looking for the unemployment rate, currently at 4.7 percent, to rise to 5 percent in coming months as the economy is buffeted by the effects of a housing recession, a severe credit crunch and record-high oil prices, which this week briefly touched $98 per barrel.

Because of these forces, analysts believe the economy, which recorded a solid 3.9 percent growth rate in the July-September quarter, will slow significantly in coming quarters.

Some analysts believe growth will be less than 2 percent in the current quarter and even weaker in the first three months of next year, the period in which they see the maximum danger that the country could slip into a recession.

Federal Reserve officials cut a key interest rate for the second time in two months last week but signaled that at the moment they don't see a need for further rate cuts. However, that view could change if turmoil in the stock market, which has seen sharp price declines in recent days, becomes more severe.

Federal Reserve Chairman Ben Bernanke will address Congress' Joint Economic Committee on Thursday on the Fed's current views about the economic outlook.

The concern is that the slump in home sales and prices and surging gasoline costs will rattle consumer confidence and cause shoppers to curtail their spending. That could seriously affect overall growth since consumer spending accounts for two-thirds of total economic activity.

The nation's big retail chains reported Thursday that they had disappointing results in October because of shoppers' ongoing worries about the housing slump and higher energy prices.

Mall-based apparel stores like Limited Brands Inc., Pacific Sunwear of California Inc., and Wet Seal Inc. all turned in sluggish sales figures. Wal-Mart Stores Inc., the world's largest retailer, reported sales that were below expectations, despite its aggressive discounting heading into the holidays.

Analysts said that milder weather also affected sales, wiping out consumers' appetite for winter wear.

For the week ending Oct. 27, three states had increases in claims of 1,000 or more, led by a gain of 3,525 claims in Pennsylvania, an increase attributed to higher layoffs in the mining, food, petroleum and furniture industries.

    Jobless Claims Down for Last Week, NYT, 8.11.2007,http://www.nytimes.com/aponline/us/AP-Economy.html

Retailers Report Weak October Sales

November 8, 2007
The New York Times
By MICHAEL BARBARO

The holiday shopping outlook just got even grimmer.

From discounters like Wal-Mart to luxury emporiums like Nordstrom, the nation’s big retail chains reported a second month of weak sales growth this morning, blaming economic clouds that show no signs of lifting before the end of the year.

Sales rose just 1.9 percent in October, below industry estimates, according to Retail Metrics, a research firm, which said 70 percent of the retailers it tracks fell below their forecasts.

The poor results for October — which followed a dismal September — suggest that this will be a tough season for retailers and a deeply-discounted one for consumers.

Wal-Mart Stores, the nation’s largest retailer and a bellwether for the industry, said sales at stores open at least a year rose a meager 0.4 percent last month, even after the company lowered prices on toys and electronics to drum up business.

Even more worrisome: Wal-Mart predicted sales growth could be flat for November.

Mid-priced department stores did not fare much better. Sales fell 1.8 percent at J.C. Penney and 3.8 percent at Kohl’s.

Even higher-end stores struggled. Sales fell 1.5 percent at Macy’s and 2.4 percent at Nordstrom.

“The carnage was worst in the department store industry,” said Ken Perkins, the president of Retail Metrics.

As for mall stores, sales fell 3 percent at American Eagle Outfitters, 6 percent at Limited, 8 percent at Gap and 11 percent at Chico’s FAS, the adult women’s clothing chain.

The chief executive of J.C. Penney, Myron Ullman, summarized the plights of shoppers this morning. “Our customers are clearly facing head winds that are impacting both sentiment and discretionary spending levels, including weak housing market conditions, high energy prices and uncertainty in the mortgage and credit markets.”

And he does not expect the conditions to improve anytime soon. “We expect the challenging retail environment to continue for the foreseeable future,” he said.

Several retailers, like Wal-Mart and Kohl’s, cited unseasonably warm weather around the country, which has hurt sales of cold-weather clothing.

The discounter Target said sales rose 4.1 percent, suggesting consumers are still shopping, but looking for bargains. The store said sales of higher-priced merchandise, like clothing, was weak for the second month in a row.

    Retailers Report Weak October Sales, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08cnd-shop.html?ref=business

Fed Chairman Sees

Period of Slow Growth

November 8, 2007
Filed at 10:43 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke said Thursday that a host of economic problems, including the severe housing slump, will cause business growth to slow noticeably in coming months.

Bernanke told Congress' Joint Economic Committee that the central bank is watching developments closely, but gave no signal that it's prepared at the current time to cut interest rates even further.

Fed policymakers last week cut a key interest rate for the second time in two months, but disappointed Wall Street by discouraging expectations that it would follow with further rate cuts.

Bernanke said he and his colleagues believe economic activity will ''slow noticeably in the fourth quarter'' compared to the 3.9 percent pace of the third quarter.

''Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction begin to wane,'' Bernanke said in his prepared remarks to the JEC.

Many economists believe the economy's maximum point of danger of falling into a recession will occur in the early part of next year.

A variety of problems from the steepest housing downturn in more than two decades to a severe credit crunch, surging oil prices and a falling dollar have roiled Wall Street in recent days, triggering big plunges in stock prices.

The Dow Jones industrial average plunged by 360.92 points on Wednesday, the second drop of that magnitude in the past week.

Much of that anxiety stems from a steady stream of bad company news as corporate giants such as General Motors, Merrill Lynch and Citigroup have reported huge losses.

Bernanke acknowledged the recent market turmoil, but he generally took a more upbeat view of things, saying the Fed believes the economy should rebound from the current problems by the second half of next year.

He also repeated worries the Fed expressed last week: recent increases in oil and other commodities could raise the threat of inflation.

The Fed last week said the threats from weak growth and higher inflation seemed roughly in balance. Such a view, which Bernanke repeated on Thursday, will likely mean that the central bank plans no further interest rate cuts.

''All told, it was the judgment of (Fed policymakers) that, after its action on Oct. 31, the stance of monetary policy roughly balanced the upside risks to inflation and the downside risk to growth,'' Bernanke said.

However, members of the congressional panel said they believed a much more aggressive response was needed.

''I think we are at a moment of economic crisis,'' Sen. Charles Schumer, D-N.Y., told Bernanke. ''I am not surprised to hear experts such as your predecessor, Alan Greenspan, warn about the threat of a recession. I have begun to worry about it to.''

    Fed Chairman Sees Period of Slow Growth, NYT, 8.11.2007, http://www.nytimes.com/aponline/us/AP-Bernanke-Economy.html?hp

    Related > http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

Fed Chairman Sees

Period of Slow Growth

November 8, 2007
Filed at 10:01 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke said Thursday that a host of economic problems will cause business growth to slow noticeably in coming months.

Bernanke told Congress' Joint Economic Committee that the central bank is watching developments closely, but gave no signal that it's prepared at the current time to cut interest rates even further.

Fed policymakers last week cut a key interest rate for the second time in two months, but disappointed Wall Street by discouraging expectations that it would follow with further rate cuts.

    Fed Chairman Sees Period of Slow Growth, NYT, 8.11.2007, http://www.nytimes.com/aponline/us/AP-Bernanke-Economy.html

Global Markets Down

After U.S. Sell-Off

November 8, 2007
The New York Times
By MICHAEL M. GRYNBAUM
and PETER S. GOODMAN

Stocks in Europe and Asia declined today on worries about rising oil prices and the prospect of an economic slowdown in the United States. But American shares were poised to move upward today, after a heavy sell-off on Wednesday spurred by fears that the problems in housing were likely to persist into next year.

Futures contracts tied to the Dow Jones Industrial Average were up 0.4 percent in early trading today, reaching 13,412, after the index dropped 360 points on Wednesday on fears that troubles in housing will continue well into next year. But a major European index declined 0.2 percent despite a decision by the Bank of England to leave interest rates steady.

The likely direction for interest rates in the United States will be closely watched as the Federal Reserve chairman, Ben Bernanke, testifies today before the congressional Joint Economic Committee. His assessment of the turmoil in credit markets and the slide in the value of the dollar will be examined for clues to how the central bank will act in coming months.

In Asia, the Hang Seng index in fell 3.2 percent, while the Nikkei 225 in Tokyo dropped 2 percent. Shares in China tumbled the most sharply, with the CSI 300 index off 4.8 percent.

After a relatively strong summer, consumer spending in the United States is expected to tighten, and business profits slow in the months ahead, analysts said. The dollar sank to a record low against the euro.

“We are experiencing among our clients an awakening that the United States is in big trouble,” said Erik Nielsen, chief Europe economist at Goldman Sachs.

The rise in oil prices, which briefly traded yesterday above $98 a barrel before settling at $96.37, now appear to be pushing up the cost of gasoline, heating oil and jet fuel as well. That only intensified concern that American consumers may no longer be able to sustain their spending on other goods and services, particularly the large numbers of gas-guzzling vehicles still being turned out by the Detroit automakers.

The most immediate trigger for the sell-off in the dollar, traders said, was a jarring signal that suggested China might shift some of its enormous hoard of foreign currency reserves — worth more than $1.4 trillion, primarily in dollars and dollar-denominated assets — into other currencies to get a better return on its money.

“We will favor stronger currencies over weaker ones, and will readjust accordingly,” Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress told a conference in Beijing on Wednesday. A Chinese central bank vice director, Xu Jian, said the dollar was “losing its status as the world currency,” according to Bloomberg News.

Mr. Cheng later told reporters he was not saying China would buy more euros and dump dollars. But as markets opened across Europe, those words echoed as an invitation to sell the American currency.

The dollar fell to its lowest level against the Canadian dollar since 1950, the British pound since 1981, and the Swiss franc since 1995. The euro rose to a new record, $1.4729, before retreating.

While the reaction to the Chinese statements appeared to have been overblown, analysts said the larger forces assailing the dollar and the stock market were more deep-seated: uncertainty about the magnitude of the mortgage-related credit crisis, and the growing sense that, sooner or later, the unraveling of the American housing market must color the larger economy.

Recent weeks have featured a string of unpleasant reckonings for major Wall Street banks, with several slashing billions of dollars from balance sheets to account for losses in the mortgage market. Yet investors fret that there is more pain to come, with no way to know how much or where, given the spider’s web of financial deals that propelled the housing boom.

“What it all comes down to beneath the surface is the perception of credit-related problems, and the perception that this is spreading in ways that cannot be anticipated,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Though the losses from the subprime mortgage crisis are frequently estimated at $200 billion, only about half of this money has been accounted for, Mr. Ruskin said, with the markets forced to guess where the next batch of bad holdings will emerge.

“A lot of people do the math and there still seems to be a big hole there,” he said.

Amid the carnage, though, there were still several signs that the economy remains healthy. Productivity — a measure of how much the country produces for each worker — expanded more than expected in the summer, the Labor Department said, suggesting that the economy still has the ability to grow without stoking too much inflation.

But stocks dropped from the opening bell. The Dow closed down 2.64 percent, at 13,300.02. The Standard & Poor’s 500-stock index tumbled 44.65 points, or 2.9 percent, to 1,475.62. The Nasdaq composite index fell 76.42 points, or 2.7 percent, to 2,748.76.

The market was also reacting to news from General Motors that it would write down $38.6 billion in future tax benefits after a string of poor sales in North America and Germany, logging its biggest quarterly loss ever. The company’s stock price dropped 6.1 percent, to $33.95 a share.

The uncertainty about the credit markets pushed financial stocks down nearly 5 percent.

“The mood is dreadful,” said Brian Gendreau, an investment strategist at ING Investment Management. “People are saying, ‘Well, is that all? If they were that wrong about so much, is it possible they’re still wrong?’”

As the economic implications of the mortgage crisis filtered out, the recriminations went on. New York Attorney General Andrew M. Cuomo said he would subpoena records from Fannie Mae and Freddie Mac, the government-backed lenders, as he continued to look into whether banks had inflated the value of homes.

The euro’s rise is being propelled by differing approaches to interest rates on opposite sides of the Atlantic. The Federal Reserve has been cutting rates to ease strains on the American economy. The European Central Bank is likely to hold rates steady when it meets today.

“There will be a natural flow of money toward countries where interest rates are going to be holding,” said Stuart A. Schweitzer, managing director of global markets at JPMorgan Asset and Wealth Management.

For Americans, the ramifications of a weak dollar are varied. World travelers feel the pinch as the price of European hotels and restaurants soar in dollar terms. At home, the prices of imported goods like German-made cars and French wine inch up. Some fret that a further weakening in the dollar could sow inflation, as the impact of higher-priced imports — oil in particular — filters through the economy.

Indeed, some now see the dollar and the price of oil as intertwined: As the value of the currency falls, sellers of oil demand more dollars for the same barrel. And as oil prices climb, this impedes American growth, making the dollar less attractive.

Many see a weaker dollar as an unavoidable means of shrinking the United States trade deficit, which last year exceeded $800 billion. A weaker dollar helps make American goods cheaper on world markets.

Exports have been surging, giving companies in the United States a source of growing profits as sales soften at home.

“We’re in an unsustainable situation in terms of accumulating enormous deficits,” said Clyde Prestowitz, a former trade negotiator in the Reagan administration, and now president of the Economic Strategy Institute. “The only way out of that is through a weaker dollar.”

Still, some say fears about a flight from the dollar are exaggerated; China and Japan depend on the purchasing power of Americans for their exports. They, along with the oil producers, hold so many dollars that they are loath to do anything to cause a precipitous fall.

But investors keep worrying about another surprise.

“You’ve basically got capital market jitters about the United States,” said William R. Cline, a senior fellow at the Peterson Institute for International Economics in Washington.

Carter Dougherty in Frankfurt and Vikas Bajaj in New York contributed reporting.

    Global Markets Down After U.S. Sell-Off, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/09econ.html?hp

Markets and Dollar Sink

as Slowdown Fear Increases

November 8, 2007
The New York Times
By MICHAEL M. GRYNBAUM
and PETER S. GOODMAN

Stock markets plummeted and the dollar sank to a record low against the euro yesterday as investors worldwide grew skittish over rising oil prices and the prospect of a substantial economic slowdown in the United States.

The Dow Jones industrial average fell 360 points and the broader stock market dropped nearly 3 percent, driven down by fear that the troubles in housing are likely to continue well into next year, contributing to further losses in credit markets and spreading pain to the rest of the economy. After a relatively strong summer, consumer spending is expected to tighten and business profits slow in the months ahead, analysts said.

“We are experiencing among our clients an awakening that the United States is in big trouble,” said Erik Nielsen, chief Europe economist at Goldman Sachs.

The rise in oil prices, which briefly traded yesterday above $98 a barrel before settling at $96.37, now appear to be pushing up the cost of gasoline, heating oil and jet fuel as well. That only intensified concern that American consumers may no longer be able to sustain their spending on other goods and services, particularly the large numbers of gas-guzzling vehicles still being turned out by the Detroit automakers.

The most immediate trigger for the sell-off in the dollar, traders said, was a jarring signal that suggested China might shift some of its enormous hoard of foreign currency reserves — worth more than $1.4 trillion, primarily in dollars and dollar-denominated assets — into other currencies to get a better return on its money.

“We will favor stronger currencies over weaker ones, and will readjust accordingly,” Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress told a conference in Beijing on Wednesday. A Chinese central bank vice director, Xu Jian, said the dollar was “losing its status as the world currency,” according to Bloomberg News.

Mr. Cheng later told reporters he was not saying China would buy more euros and dump dollars. But as markets opened across Europe, those words echoed as an invitation to sell the American currency.

The dollar fell to its lowest level against the Canadian dollar since 1950, the British pound since 1981, and the Swiss franc since 1995. The euro rose to a new record, $1.4729, before retreating.

While the reaction to the Chinese statements appeared to have been overblown, analysts said the larger forces assailing the dollar and the stock market were more deep-seated: uncertainty about the magnitude of the mortgage-related credit crisis, and the growing sense that, sooner or later, the unraveling of the American housing market must color the larger economy.

Recent weeks have featured a string of unpleasant reckonings for major Wall Street banks, with several slashing billions of dollars from balance sheets to account for losses in the mortgage market. Yet investors fret that there is more pain to come, with no way to know how much or where, given the spider’s web of financial deals that propelled the housing boom.

“What it all comes down to beneath the surface is the perception of credit-related problems, and the perception that this is spreading in ways that cannot be anticipated,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Though the losses from the subprime mortgage crisis are frequently estimated at $200 billion, only about half of this money has been accounted for, Mr. Ruskin said, with the markets forced to guess where the next batch of bad holdings will emerge.

“A lot of people do the math and there still seems to be a big hole there,” he said.

Amid the carnage, though, there were still several signs that the economy remains healthy. Productivity — a measure of how much the country produces for each worker — expanded more than expected in the summer, the Labor Department said, suggesting that the economy still has the ability to grow without stoking too much inflation.

But stocks dropped from the opening bell. The Dow closed down 2.64 percent, at 13,300.02. The Standard & Poor’s 500-stock index tumbled 44.65 points, or 2.9 percent, to 1,475.62. The Nasdaq composite index fell 76.42 points, or 2.7 percent, to 2,748.76.

The market was also reacting to news from General Motors that it would write down $38.6 billion in future tax benefits after a string of poor sales in North America and Germany, logging its biggest quarterly loss ever. The company’s stock price dropped 6.1 percent, to $33.95 a share.

The uncertainty about the credit markets pushed financial stocks down nearly 5 percent.

“The mood is dreadful,” said Brian Gendreau, an investment strategist at ING Investment Management. “People are saying, ‘Well, is that all? If they were that wrong about so much, is it possible they’re still wrong?’”

As the economic implications of the mortgage crisis filtered out, the recriminations went on. New York Attorney General Andrew M. Cuomo said he would subpoena records from Fannie Mae and Freddie Mac, the government-backed lenders, as he continued to look into whether banks had inflated the value of homes.

The euro’s rise is being propelled by differing approaches to interest rates on opposite sides of the Atlantic. The Federal Reserve has been cutting rates to ease strains on the American economy. The European Central Bank is likely to hold rates steady when it meets today.

“There will be a natural flow of money toward countries where interest rates are going to be holding,” said Stuart A. Schweitzer, managing director of global markets at JPMorgan Asset and Wealth Management.

For Americans, the ramifications of a weak dollar are varied. World travelers feel the pinch as the price of European hotels and restaurants soar in dollar terms. At home, the prices of imported goods like German-made cars and French wine inch up. Some fret that a further weakening in the dollar could sow inflation, as the impact of higher-priced imports — oil in particular — filters through the economy.

Indeed, some now see the dollar and the price of oil as intertwined: As the value of the currency falls, sellers of oil demand more dollars for the same barrel. And as oil prices climb, this impedes American growth, making the dollar less attractive.

Many see a weaker dollar as an unavoidable means of shrinking the United States trade deficit, which last year exceeded $800 billion. A weaker dollar helps make American goods cheaper on world markets.

Exports have been surging, giving companies in the United States a source of growing profits as sales soften at home.

“We’re in an unsustainable situation in terms of accumulating enormous deficits,” said Clyde Prestowitz, a former trade negotiator in the Reagan administration, and now president of the Economic Strategy Institute. “The only way out of that is through a weaker dollar.”

Still, some say fears about a flight from the dollar are exaggerated; China and Japan depend on the purchasing power of Americans for their exports. They, along with the oil producers, hold so many dollars that they are loath to do anything to cause a precipitous fall.

But investors keep worrying about another surprise.

“You’ve basically got capital market jitters about the United States,” said William R. Cline, a senior fellow at the Peterson Institute for International Economics in Washington.

Following are the results of yesterday’s auction of 10-year Treasury notes:

Carter Dougherty in Frankfurt and Vikas Bajaj in New York contributed reporting.

    Markets and Dollar Sink as Slowdown Fear Increases, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08econ.html?hp

Asia Markets Fall

on Wall Street Decline

November 8, 2007
Filed at 3:29 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

TOKYO (AP) -- Asian markets fell Thursday after Wall Street posted its second big drop in a week as investors worried about the extent of fallout from the global credit crisis.

Japan's benchmark index sank 2 percent, while Hong Kong's market tumbled 3.7 percent. China's benchmark Shanghai Composite Index tumbled 4.9 percent in biggest one-day decline in four months.

Shares also fell in Australia, India, South Korea and the Philippines.

''There has been renewed concern about the U.S. subprime loan problem amid reports that losses at U.S. and European financial institutions are expanding, which increases uncertainty,'' said Koji Takeuchi, senior economist at Mizuho Research Institute in Tokyo.

Jitters have grown since Citigroup Inc. said Sunday it needed to take an additional $8 billion to $11 billion in writedowns.

Additional concerns about weakness in the U.S. dollar, soaring oil prices and a record loss at General Motors Corp. on an accounting adjustment sent the Dow Jones industrial average down 360.92, or 2.64 percent, Wednesday to 13,300.02. It was the third time in a month the U.S. blue chip index has dropped by more than 350 points.

Some investors are worried that global markets could repeat their plunge in August, when the subprime problems first came to the attention of the broader market.

''What happened in August could happen (again),'' said Takeuchi.

That anxiety spilled over to Japan, where investors dumped financial and real estate shares such as Mizuho Financial and Mitsubishi Estate. The Nikkei 225 index fell 325.11 points, or 2.02 percent, to close at 15,771.57 points.

A steadily strengthening yen against the dollar also hurt exporters like Toyota Motor Corp. and Sony Corp.

In Hong Kong, the benchmark Hang Seng index was down 3.1 percent in afternoon trading, with property shares falling sharply.

Analysts warned that the market, which has surged this year, could fall further.

''There's no rush to buy stocks on dips as further downside may be imminent. It's riskier to buy now,'' said Conita Hung a director at Delta Asia Financial Group.

Oil prices, meanwhile, fell back Thursday after rising above $98 a barrel Wednesday. Light, sweet crude for December delivery lost 43 cents to $95.94 a barrel in Asian electronic trading on the New York Mercantile Exchange.

    Asia Markets Fall on Wall Street Decline, NYT, 8.11.2007, http://www.nytimes.com/aponline/business/AP-World-Markets.html

Unseasonably Higher,

Gas Prices Add to Strain

on U.S. Consumers

November 8, 2007
The New York Times
By CLIFFORD KRAUSS

HOUSTON, Nov. 7 — Most years, the shorter days and lower temperatures of autumn mean falling gasoline prices, as demand eases from the busy summer travel season.

But this year, high oil prices are upsetting that seasonal rhythm. Prices at the pump are climbing fast, bringing back memories of summertime gasoline bills.

The national average for regular gas surpassed $3 a gallon this week, and drivers could be paying record prices this holiday season, experts said. The timing of such an unusual jump could crimp consumer spending at a vital time for retailers.

“Usually Americans have more money to spend each holiday season because gasoline prices tend to give up 25 percent of their value after summer,” said Tom Kloza, an analyst with the Oil Price Information Service. “But this year there is a second coming of the gasoline rally that may be the Grinch that stole Christmas.”

Barring some unexpected development like a big drop in the price of oil, Mr. Kloza and other experts said, gas could be headed toward $4 a gallon by spring. Gasoline prices have trailed surging oil prices, but they are starting to catch up as crude oil nears $100 a barrel. Oil settled down slightly yesterday, at $96.37 a barrel.

On Wednesday the national average gas price for unleaded regular reached $3.04 — an increase of nearly 28 cents in the last month, according to AAA, the automobile club. Average gasoline prices in November had never exceeded $3 a gallon before this year. A year ago, the average price at the pump was $2.20, meaning it costs roughly $12.50 more today to fill a car with a 15-gallon tank.

In some states the average price motorists are paying is much higher. In California, for example, the price on Wednesday averaged $3.31.

For now, prices are well below the record of $3.23 a gallon, set during a spike last May. But recently they have been rising by 2 cents a gallon every day. Motorists are feeling the pain across the nation.

Jim Lunn, 48, wore a sweatshirt bearing the name of his favorite football team, the Cleveland Browns, as he filled the tank of his red Dodge pickup this week at a station in Avon Lake, Ohio. He said he liked going to games, but these days, he often stays home on game day.

“With gas prices being what they are, I can’t afford to drive all the way downtown,” he said. “So I just watch the games at home. It’s nowhere near as fun.”

If gasoline prices are causing motorists to drive less over all, it is not evident in the national statistics. Americans have consumed an average of 9.3 million barrels of gasoline a day so far this year, an increase of 0.6 percent from last year, according to the Energy Department.

One reason many consumers have shaken off the gasoline price increase may be that gasoline expenditures claim less than 4 percent of after-tax personal income today, compared with more than 6 percent in 1981 when gasoline prices were also high, according to a recent study by the Federal Reserve Bank of Dallas.

But there are signs that many Americans are feeling the pinch, and business economists are worried that rising gasoline prices will cut consumer spending this holiday season.

Michael P. Niemira, chief economist for the International Council of Shopping Centers, said that average weekly earnings of American households over the last year have outpaced increased expenditures for gasoline. But he added, “With the expectations of higher gasoline prices and home heating expenses this winter, the potential exists that consumers will have less discretionary purchasing power.”

He noted that over the last couple of years consumers have been consolidating their shopping trips to save on gas. Meanwhile, lower-income drivers are especially unhappy with prices at the pump.

At a gas station in Norwalk, Ohio, where gasoline was selling on Tuesday for $3.09, drivers said the cost was crimping their lives.

“Generally, I go out less now,” said Janet LaVigne, 51, who fills her 1994 Mazda Protégé daily to deliver newspapers in communities outside Cleveland. “I do my job and come home. I used to go out to the movies, sometimes to restaurants, but now I can’t afford the gas.”

Sara Scheerer, a 17-year-old high school senior, said the high cost of fueling her 1999 Ford Explorer to drive to basketball team practices and school had forced her to get a salesclerk job at Walgreens. “I can’t spend as much money on other stuff like clothes,” she added.

Energy experts see few signs that gasoline prices will ease soon.

Geoff Sundstrom, a spokesman for AAA, projected that average regular gasoline prices nationwide would be at least $3.20 by Christmas. Amanda Kurzendoerfer, a commodities analyst at Summit Energy Services Inc., an energy manager for large users of oil and natural gas, predicted a price as high as $3.50 by Christmas — which would be a record for any time of year.

“If you look at gasoline prices relative to oil, it’s low right now,” she said. “Oil fundamentals are tight and tightening through the end of the year, demand has continued to be strong, non-OPEC supply is not keeping up and OPEC appears to not be eager to boost production.” She was referring to the Organization of the Petroleum Exporting Countries, the oil cartel.

Ms. Kurzendoerfer predicts that while oil prices could exceed $100 a barrel in the near term, they will average $75 to $80 in 2008. Still, she said gasoline prices would most likely be higher in the spring when refiners have to produce more expensive blends for warmer weather and the heavy summer driving season begins.

William R. Veno, an expert on gasoline at Cambridge Energy Research Associates, an energy consulting firm, also projects lower crude prices next year. But he warned that gasoline inventories could drop in the coming months as refiners expect to produce more profitable heating oil for the winter, leading to further pressure on gasoline prices.

“We could enter the springtime with unusually low inventories,” he said, “which would add further to very high gasoline prices in the spring.”
 

Christopher Maag contributed reporting from Ohio.

    Unseasonably Higher, Gas Prices Add to Strain on U.S. Consumers, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08gas.html

Morgan Stanley

Takes a Hit on Mortgages

November 8, 2007
The New York Times
By LANDON THOMAS Jr.

Morgan Stanley, its stock buffeted in recent days by speculation of high credit losses, said yesterday that it would take a $3.7 billion charge for nonperforming assets tied to subprime mortgages.

The figure was broadly in line with what analysts had been forecasting, and it underscored the extent to which the tight credit market was affecting even peripheral players in the mortgage market.

Unlike its rivals Citigroup and Merrill Lynch, which together have written down close to $30 billion, Morgan Stanley ranked low as an underwriter of collateralized debt obligations, the pools of complex securities tied to plummeting subprime mortgages.

But, in a conference call yesterday, the chief financial officer of Morgan Stanley, Colm A. Kelleher, said that most of the write-down was a result of trading positions that went wrong as opposed to C.D.O.’s that the firm had underwritten but could not sell.

In his comments, Mr. Kelleher said that Morgan Stanley’s net subprime-related exposure had declined to $6 billion at the end of October from $10.4 billion at the end of August.

Another brokerage firm, Merrill Lynch, said yesterday that the Securities and Exchange Commission had begun an inquiry into how the firm valued its subprime portfolio. The firm said it was cooperating with the inquiry.

Morgan Stanley’s write-down occurred on its proprietary trading desk, which suffered a $480 million loss over the summer in its quantitative trading unit. The latest loss there shows that the aggressive increase in risk that produced a string of good quarters for the chief executive, John J. Mack, has come back to haunt him, at least for the time being.

Subprime mortgages was one of the investment areas identified by Mr. Mack when he returned to the firm in the summer of 2005. Under his predecessor, Philip J. Purcell, mortgages did not receive any strategic emphasis.

Mr. Kelleher said the large trading loss was a result of a bet taken by several traders that the subprime market would worsen.

The traders were right in predicting that the market for subprime securities would deteriorate, but they did not foresee the severity of the decline in September and October. Because of the complexity of the trade, what had been a money-making short position turned quickly into a money-losing long trade, in which the firm suddenly found itself holding billions of dollars of illiquid C.D.O.’s that were plummeting in value.

The loss came as a surprise to analysts who were led to believe that the firm’s low rank as an underwriter of C.D.O.’s would not lead to a major write-down. And questions remained as to why traders would take on such an aggressive C.D.O.-related trade while the firm’s broad commitment to the area was not as deep as that of its peers.

Still, the disclosure that the firm had only $6 billion left in C.D.O. exposure should come as a relief to investors; the figure was much less than that at other banks. In his conference call, Mr. Kelleher said that only in the worst possible situation would the firm expect to lose that entire amount, an outcome that would probably result in an after-tax write down of about $4 billion.

Morgan Stanley would not disclose the names of the traders involved, and a person with knowledge of the trades said that they no longer worked at the firm.

The firm’s shares, which fell $3.32, to $51.19, in regular trading, rose as high as $52.20 in after-hours trading.

In an interview, Mr. Kelleher said that the losses, while “horrible,” did not reflect a broad breakdown in risk controls.

“We are not happy,” he said, “but our risk management let us navigate through this.”

In light of the shifting nature of write-downs at Merrill Lynch and Citigroup, Mr. Kelleher was asked how confident he was of Morgan’s number.

In response, he showed a hint of the world-weariness that is seen more often than not these days in chief financial officers grappling with an increasingly severe credit squeeze. “I am confident that this number is accurate as of today,” he said. “My crystal ball is not working well — it is what it is.”

    Morgan Stanley Takes a Hit on Mortgages, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08morgan.html

Homeowners

Feeling the Pinch of Lost Equity

November 8, 2007
The New York Times
By PETER S. GOODMAN

RENO, Nev., Nov. 5 — As his wedding day approached last spring, Marshall Whittey found that his money could not keep pace with the grandiosity of his plans. But rather than scale back, he chose instead, like millions of homeowners across the country, to borrow against the soaring value of his home.

He and his bride, Holly Whittey, exchanged vows on the grounds of a sumptuous private estate in the Napa Valley. They spent their honeymoon at a resort in Tahiti.

But now, in an ominous portent for the national economy, Mr. Whittey has grown tight with his money. His home is worth far less than it was a year ago, and his equity has evaporated. And like many other involuntary adopters of a newly economical lifestyle, he can borrow no more.

“It used to be that if I wanted it, I’d just go and buy it and finance it,” Mr. Whittey, 33, said. “I’m feeling the crunch, and my spending is down significantly.”

The Whitteys and others like them are at the center of deepening worries that the economy is headed for a substantial slowdown, possibly even a recession, as the artery of cash from Americans borrowing against the value of their homes has sharply narrowed.

“Everybody was basically using their house as an A.T.M. machine,” said Dave Simonsen, a senior vice president for NAI Alliance, an industrial real estate firm in Reno. “Now they are upside down on their house without that piggy bank to go back to.”

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data.

This summer, the size of withdrawals fell even more sharply to about one-third below the level of late last year, according to Mark Zandi, chief economist at Moody’s Economy.com.

“This slide in equity withdrawal is very recent,” Mr. Zandi said, “so you wouldn’t expect the drop in spending to occur until now, or Christmas.”

Only a year ago, money taken out of houses was still more than 9 percent of the nation’s disposable income, Mr. Zandi calculated, using a sampling of Equifax credit reports to supplement Fed data. By this fall, it had dropped to about 5 percent, a difference of about $350 billion a year.

Much of the attention in the recent collapse of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages. But the broader effect on the economy is likely to come from the much larger group of homeowners who can no longer count on rising home values to bolster their wealth.

Consumer spending accounts for about 70 percent of all economic activity in the United States, or about $9.8 trillion, so even a slight dip in home borrowing takes huge amounts of money out of the flow. The prospect of a slowdown, combined with the squeeze on households from higher oil costs, is sending shivers through the retail world, as apparel merchants, furniture dealers and electronics stores brace for the possibility that the all-important holiday shopping season will disappoint. Automakers are bemoaning sluggish sales.

“A fall of 2 percent in consumption would be big enough to trigger a recession,” said Christian Menegatti, lead analyst for RGE Monitor, a consulting firm in New York.

Many a premature obituary, of course, has been written for the American consumer — only to see spending continue apace. Just last week, the Commerce Department announced the economy grew a healthy 3.9 percent during the summer, largely on the back of growing consumer spending.

Other forces, like increased exports and continued gains in jobs and incomes, may compensate enough for the loss in home borrowing to avoid an economic downturn next year. But many economists say a slowdown in spending is overdue as Americans are forced to curb their appetite for goods to restore balance to an off-kilter global economy.

The United States has for years been running huge trade deficits while borrowing heavily from China and Japan. This makes Americans vulnerable to the possibility that foreigners could slow purchases of American debt, sending the dollar plummeting and forcing the Fed to raise interest rates. Some say the best way to avoid such a situation is for Americans to start saving more and spending less.

“If you take the 10-year view,” cutting consumption is “the least bad outcome,” said Robert A. Barbera, chief economist at research firm ITG.

In the near term, though, any dip in consumer spending is likely to sow pain. Strong sales for American companies abroad may keep the United States out of a full-fledged recession even if spending slips at home, Mr. Barbera said, but nonetheless “it will feel like a recession.”

Sprawled across desert flats and framed by the rugged peaks of the Sierra, Reno encapsulates, in concentrated form, the forces at work on American consumers. In Nevada, and in neighboring California, home equity finance was about 20 percent of all disposable income at the end of last year, according to Economy.com. This September, it was down to about 9 percent.

While best known for its gambling, Reno has in recent years diversified, using low taxes to entice major companies like Cisco Systems and Microsoft. With land cheap, the area has been a magnet for Californians who sold homes for spectacular gains, then moved here to buy more space for less money. The metropolitan area’s population has swelled to 409,000, up 50,000 since 2000.

Many of the newcomers settled in developments on the edge of town. Ranch land that less than a decade ago was still a moonscape of sun-baked soil dotted with sagebrush has been transformed into golf courses and Spanish-style houses on streets with names like Painted Vista Drive and Rio Wrangler.

Free-flowing credit and rampant speculation drove residential sales. From May 2002 to September 2005, home prices in Reno and the adjacent city of Sparks more than doubled, according to First American LoanPerformance.

Since then, however, the median house price has slipped 15 percent.

Local businesses are already suffering the effects of consumers who are less inclined to buy. A Volkswagen dealership downtown said sales were down two-thirds from a year ago. At the Flowing Tide, a bar and restaurant in south Reno, the co-owner Justin Moscove said business was down 10 to 15 percent.

At the Meadowood Mall, near the airport, shoppers were scarce. “We’re dead,” said Cendy Rodriguez, manager at Lane Bryant, the plus-size women’s clothing store, who said business was down 25 percent over the last two months. “I don’t think it’s going to be nowhere near the Christmas we had last year.”

At Sierra Nevada Spas and Billiards, Ezra O’Connor, the sales manager, complained that not even drastically lower prices were attracting shoppers. “We’re way down, 35 percent down from last year,” Mr. O’Connor said. “People just aren’t wanting to spend.”

Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” Mr. Whittey could live in such fashion because his company was making good money and his house was appreciating.

But today, the value of his own home, which reached $500,000, has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.

“We used to go out to eat three or four nights a week,” Mr. Whittey said. “Now, we don’t go out at all.”

Even among those who indulged lightly in the credit bonanza, tightness is increasing.

Stephanie Lerude, her husband and their two boys have lived for five years in their ranch house on a quiet street in an older part of Reno. Wicker furniture sits on porches, basketball hoops dot driveways and orange leaves crown the tops of cottonwood trees.

Three years ago, Ms. Lerude and her husband, a lawyer, opened an $80,000 home equity line to invest in three commercial properties. She uses one as the office for her company, which provides gift baskets for real estate offices.

Their payments are manageable, and their house is worth about $540,000, about $100,000 more than they paid for it. Still, they are limiting purchases and postponing a kitchen renovation because of what they see happening all around them.

“I’m just not a big consumer,” Ms. Lerude said. “We’re trying to do less.”

    Homeowners Feeling the Pinch of Lost Equity, NYT, 8.11.2007, http://www.nytimes.com/2007/11/08/business/08borrow.html?hp

Borrowers Face

Dubious Charges in Foreclosures

November 6, 2007
The New York Times
By GRETCHEN MORGENSON

As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers.

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of Iowa.

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.

Ms. Porter’s analysis comes as more homeowners face foreclosure. Testifying before Congress on Tuesday, Mark Zandi, the chief economist at Moody’s Economy.com, estimated that two million families would lose their homes by the end of the current mortgage crisis.

Questionable practices by loan servicers appear to be enough of a problem that the Office of the United States Trustee, a division of the Justice Department that monitors the bankruptcy system, is getting involved. Last month, It announced plans to move against mortgage servicing companies that file false or inaccurate claims, assess unreasonable fees or fail to account properly for loan payments after a bankruptcy has been discharged.

On Oct. 9, the Chapter 13 trustee in Pittsburgh asked the court to sanction Countrywide, the nation’s largest loan servicer, saying that the company had lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure from December 2005 to April 2007.

The trustee, Ronda J. Winnecour, said in court filings that she was concerned that even as Countrywide misplaced or destroyed the checks, it levied charges on the borrowers, including late fees and legal costs.

“The integrity of the bankruptcy process is threatened when a single creditor dishonors its obligation to provide a truthful and accurate account of the funds it has received,” Ms. Winnecour said in requesting sanctions.

A Countrywide spokesman disputed the accusations about the lost checks, saying the company had no record of having received the payments the trustee said had been sent. It is Countrywide’s practice not to charge late fees to borrowers in bankruptcy, he said, adding that the company also does not charge fees or costs relating to its own mistakes.

Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent.

Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, “a borrower’s default can present a servicer with an opportunity for additional profit,” Ms. Porter said.

The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year.

But these are not the only charges borrowers face. Others include $145 in something called “demand fees,” $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.

“We’re talking about millions and millions of dollars that mortgage servicers are extracting from debtors that I think are totally unlawful and illegal,” said O. Max Gardner III, a lawyer in Shelby, N.C., specializing in consumer bankruptcies. “Somebody files a Chapter 13 bankruptcy, they make all their payments, get their discharge and then three months later, they get a statement from their servicer for $7,000 in fees and charges incurred in bankruptcy but that were never applied for in court and never approved.”

Some fees levied by loan servicers in foreclosure run afoul of state laws. In 2003, for example, a New York appeals court disallowed a $100 payoff statement fee sought by North Fork Bank.

Fees for legal services in foreclosure are also under scrutiny.

A class-action lawsuit filed in September in Federal District Court in Delaware accused the Mortgage Electronic Registration System, a home loan registration system owned by Fannie Mae, Countrywide Financial and other large lenders, of overcharging borrowers for legal services in foreclosures. The system, known as MERS, oversees more than 20 million mortgage loans.

The complaint was filed on behalf of Jose Trevino and Lorry S. Trevino of University City, Mo., whose Washington Mutual loan went into foreclosure in 2006 after the couple became ill and fell behind on payments.

Jeffrey M. Norton, a lawyer who represents the Trevinos, said that although MERS pays a flat rate of $400 or $500 to its lawyers during a foreclosure, the legal fees that it demands from borrowers are three or four times that.

A spokeswoman for MERS declined to comment.

Typically, consumers who are behind on their mortgages but hoping to stay in their homes invoke Chapter 13 bankruptcy because it puts creditors on hold, giving borrowers time to put together a repayment plan.

Given that a Chapter 13 bankruptcy involves the oversight of a court, the findings in Ms. Porter’s study are especially troubling. In July, she presented her paper to the United States trustee, and on Oct. 12 she outlined her data for the National Conference of Bankruptcy Judges in Orlando, Fla.

With Tara Twomey, who is a lecturer at Stanford Law School and a consultant for the National Association of Consumer Bankruptcy Attorneys, Ms. Porter analyzed 1,733 Chapter 13 filings made in April 2006. The data were drawn from public court records and include schedules filed under penalty of perjury by borrowers listing debts, assets and income.

Though bankruptcy laws require documentation that a creditor has a claim on the property, 4 out of 10 claims in Ms. Porter’s study did not attach such a promissory note. And one in six claims was not supported by the itemization of charges required by law.

Without proper documentation, families must choose between the costs of filing an objection or the risk of overpayment, Ms. Porter concluded.

She also found that some creditors ask for fees, like fax charges and payoff statement fees, that would probably be considered “unreasonable” by the courts.

Not surprisingly, these fees may contribute to the other problem identified by her study: a discrepancy between what debtors think they owe and what creditors say they are owed.

In 96 percent of the claims Ms. Porter studied, the borrower and the lender disagreed on the amount of the mortgage debt. In about a quarter of the cases, borrowers thought they owed more than the creditors claimed, but in about 70 percent, the creditors asserted that the debt owed was greater than the amounts specified by borrowers.

The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.

Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors.

Michael L. Jones, a homeowner going through a Chapter 13 bankruptcy in Louisiana, experienced such a discrepancy with Wells Fargo Home Mortgage. After being told that he owed $231,463.97 on his mortgage, he disputed the amount and ultimately sued Wells Fargo.

In April, Elizabeth W. Magner, a federal bankruptcy judge in Louisiana, ruled that Wells Fargo overcharged Mr. Jones by $24,450.65, or 12 percent more than what the court said he actually owed. The court attributed some of that to arithmetic errors but found that Wells Fargo had improperly added charges, including $6,741.67 in commissions to the sheriff’s office that were not owed, almost $13,000 in additional interest and fees for 16 unnecessary inspections of the borrowers’ property in the 29 months the case was pending.

“Incredibly, Wells Fargo also argues that it was debtor’s burden to verify that its accounting was correct,” the judge wrote, “even though Wells Fargo failed to disclose the details of that accounting until it was sued.”

A Wells Fargo spokesman, Kevin Waetke, said the bank would not comment on the details of the case as the bank is appealing a motion by Mr. Jones for sanctions. “All of our practices and procedures in the handling of bankruptcy cases follow applicable laws, and we stand behind our actions in this case,” he said.

In Texas, a United States trustee has asked for sanctions against Barrett Burke Wilson Castle Daffin & Frappier, a Houston law firm that sues borrowers on behalf of the lenders, for providing inaccurate information to the court about mortgage payments made by homeowners who sought refuge in Chapter 13.

Michael C. Barrett, a partner at the firm, said he did not expect the firm to be sanctioned.

“We certainly believe we have not misbehaved in any way,” he said, saying the trustee’s office became involved because it is trying to persuade Congress to increase its budget. “It is trying to portray itself as an organ to pursue mortgage bankers.”

Closing arguments in the case are scheduled for Dec. 12.

    Borrowers Face Dubious Charges in Foreclosures, NYT, 6.11.2007, http://www.nytimes.com/2007/11/06/business/06mortgage.html

Payrolls Grew by 166,000 in October

November 2, 2007
Filed at 8:56 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Employers boosted payrolls by a surprisingly strong 166,000 in October, the most in five months, an encouraging sign that the nation's employment climate is holding up relatively well against the strains of a housing collapse and credit crunch.

The Labor Department's report, released Friday, also showed that the unemployment rate held steady at 4.7 percent for the second month in a row. It's a figure that is considered low by historical standards.

Job gains were logged for professional and business services, education and health care, leisure and hospitality, and for the government. Those employment increases more than offset jobs losses in manufacturing, construction and retail -- casualties of the problems plaguing the housing market.

The latest snapshot of employment conditions around the country was better than economists were anticipating. Economists were forecasting payrolls to grow in October by about half the pace seen -- around 80,000. They did correctly predict the unemployment rate would be unchanged.

Still, the trend this year has been toward softer job growth. And, that is beginning to show up in wages.

Average hourly earnings rose to $17.58 in October, a modest 0.2 percent increase from September. Economists were forecasting a slightly larger, 0.3 percent increase. Over the past 12 months, wages were up 3.8 percent.

Wage growth supports peoples' spending, a major shaper of overall economic activity.

A faltering job market can crimp wage growth. That could lessen people's appetite to spend, raising trouble for the economy.

The state of the nation's employment climate is a crucial factor determining whether the economy will, in fact, weather the financial storm. So far, decent job creation and solid wage growth have helped to offset some of the negative forces hitting some individuals from the housing slump, weaker home values and harder-to-get credit.

To be sure, problems challenging the economy are hitting some industries and workers hard. The construction industry cut 5,000 jobs, factories slashed 21,000 positions and retailers eliminated nearly 22,000 in October.

But strength in hiring elsewhere blunted those losses. Professional and business services added 65,000 jobs, education and health care industries expanded employment by 43,000. Leisure and hospitality added 56,000 positions and the government boosted payrolls by 36,000.

The economy, which grew at a brisk 3.9 percent annual rate in the third quarter, is expected to slow to about half that pace or less in the current October-to-December quarter. The toll of the housing collapse and credit crunch are expected to catch up to consumers and chill their spending.

''The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction,'' Federal Reserve policymakers said Wednesday as they decided to lower their key interest rate again.

The Fed sliced its key rate by one-quarter percentage point to 4.50 percent to protect the economy from undue economic weakness in the months ahead. It was the second rate reduction in six weeks. At the same time, the Fed hinted that it may not need to cut rates again for a while.

As economic growth slows, the unemployment rate probably will creep up to around 5 percent by the end of this year or early next year, economists say.

Many analysts believe the country will be able to avoid a recession but they warn that the odds of one occurring have grown since the beginning of this year.

Complicating the outlook and the Fed's job: surging energy prices. Oil prices have hit record highs in recent days and are hovering past $95 a barrel.

If high oil prices boost the costs of many other goods and services, inflation can spread through the economy. High energy prices also can cause people and businesses to cut back on other types of spending, putting another damper on economic growth.

    Payrolls Grew by 166,000 in October, NYT, 2.11.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

Consumer Spending

Slows in September

November 1, 2007
Filed at 8:47 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed spending growth in September to the weakest performance in three months.

The Commerce Department reported Thursday that consumer spending rose by 0.3 percent in September, slightly lower than the 0.4 percent increase that analysts had been expecting. Incomes grew by 0.4 percent, matching the August gain, and in line with analysts' forecasts.

Economists are worried that consumers, the main support for the economy, may cut back on their visits to the malls in coming months as they struggle with the housing slowdown, tighter credit and now record-high oil prices.

The Federal Reserve on Wednesday cut a key interest rate for the second time in six weeks in an effort to make sure the economy does not tumble into a recession. However, the central bank also expressed concerns that surging oil prices could fan inflation pressures. Oil prices have soared to record highs in recent days.

The news about inflation from the consumer spending report was good. Prices paid by consumers on the Fed's preferred inflation gauge rose a moderate 0.2 percent in September, excluding food and energy. This measure is up 1.8 percent over the past 12 months, inside the Fed's comfort zone of increases in core inflation of between 1 percent and 2 percent.

In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 6,000 last week to a total of 327,000. That was a bigger drop than analysts had been expecting.

Analysts are looking for the unemployment rate to rise slightly in coming months, reflecting a slowing economy. For September, economists believe the jobless rate remained at 4.7 percent with businesses creating a modest 80,000 new jobs. The government will release that data on Friday.

Consumer Spending Slows in September, NYT, 1.11.2007, http://www.nytimes.com/aponline/us/AP-Economy.html