Economic Indicators, Stock Market & Investment Reports

9.30.2008

Home prices tumbling at record annual rate in July

Home prices in 20 major U.S. cities tumbled at a faster pace in July, sending home values down a record 16.3percent from the year-ago period, according to the Standard & Poor's Case-Shiller home price index released Tuesday.

July's prices dropped 0.9percent, an uptick from a 0.5percent drop in June.

Prices fell in 13 of the 20 cities tracked in the index during July, but prices in all 20 metropolitan areas were lower in July than they were a year earlier. Las Vegas and Phoenix remained the weakest cities, falling nearly 30percent in the past year. Prices in Las Vegas sank 2.8percent in July, while prices in Phoenix dropped 2.7percent.

The Case-Shiller's smaller 10-city index plunged 1.1percent in July and by 17.5percent over the past year, its biggest decline in its 21-year history.

Price is expected to decline further, especially if financial crisis continue to be unsettled and credit remains tight.

Prices are down 19.5percent from the peak in July 2006

9.29.2008

Stocks free-fall as House knocks down bailout plan

Stocks plunge and Dow falls more than 777 at lows as financial bailout plan fails in House vote.

Wall Street's worst fears came to pass Monday, when the government's financial bailout plan failed in Congress and stocks plunged precipitously, hurtling the Dow Jones industrials down nearly 780 points in their largest one-day point drop ever.

The Dow index passed by far its previous record for a one-day drop, 684.81, set in the first trading day after the Sept. 11, 2001, terror attacks.

The $700 billion plan's failure means no one knows how the financial sector hobbled by hundreds of billions of dollars in bad mortgage bets will recover. While Wall Street didn't believe that the plan was a panacea, understanding that it would take months for its effects to be felt, most investors and analysts believed it was a start toward setting the economy right after a credit crisis that began more than a year ago and that has spread overseas.

Before trading began came word that Wachovia Corp., one of the biggest banks to struggle due to rising mortgage losses, was being rescued in a buyout by Citigroup Inc.
According to preliminary calculations, the Dow fell 777.68, or 6.98 percent, to 10,365.45. Still, in percentage terms, the decline remained well below the more than 20 percent drops seen on Black Monday of October 1987 and the Depression.

Broader stock indicators also tumbled. The Standard & Poor's 500 index declined 106.85, or 8.81 percent, to 1,106.42.

The technology-heavy Nasdaq composite index fell 199.61, or 9.14 percent, to 1,983.73.

9.26.2008

WaMu failure: Largest bank collapse in U.S. history

In the largest bank failure in U.S. history, Washington Mutual Inc. (WaMu), with $307 billion in assets, was seized by federal regulators; and its asset was swiftly acquired by J.P. Morgan Chase for $1.9 billion Thursday.

The federal Office of Thrift Supervision said it closed WaMu on Thursday and appointed the Federal Deposit Insurance Corp. as receiver. The FDIC in turn conducted the bidding process that led to the purchase by J.P. Morgan.

J.P. Morgan purchase included all of WaMu's deposits, assets and some liabilities. All deposit accounts with Washington Mutual Bank have been transferred to J.P. Morgan Chase Bank. Those deposit accounts include checking, savings, money market, CDs and retirement accounts. J.P. Morgan purchase excluded senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks. J.P. Morgan said it would not be acquiring any assets or liabilities of the bank's holding company.

After the purchases of WaMu and the investment bank Bear Stearns Cos. in March, JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch.


WaMu is expected to declare bankruptcy as soon as Friday, putting stock holders at the end of a long line of claimants and leaving them empty handed.

On Wednesday, a Standard & Poor's ratings downgrade further pushed the bank toward collapse. Its stock price had plummeted some 95% to its close of $1.69 a share Thursday.

Seattle-based WaMu, which was founded in 1889, is the largest bank failure in U.S. history with $307 billion in assets. The magnitude surpasses the $40 billion of Continental Illinois National Bank & Trust, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July 2008.

WaMu, long one of the nation's largest mortgage lenders, was hit hard by the subprime crisis that has widened to threaten U.S. financial markets and led to the current financial crisis.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage (Option ARM) loans. Option ARM loans were offered to borrowers for very low introductory payments. Those loans often included the option to defer some interest payments until later years or to pay only interest, which caused the borrowers debt to grow with each payment, becoming negative amortization loans.

When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to big losses for WaMu and others who had extended the credit or purchased securities based on the credits. The bank stopped originating those loans in June.

9.22.2008

The Darkest Week of Wall Street

A dramatic, shocking series of events that forever changed the U.S. financial markets.

In the past week Wall Street's landscape was transformed and the U.S. government made an unprecedented intervention to bolster chaotic financial markets. The following is a chronology of key events in probably Wall Street's most tumultuous week in U.S. financial history since the Great Depression.


Rescue Attempt [Friday Sept 12]

Lehman Brothers was on the brink of collapse and scrambling for a buyer first surfaced.

The New York Federal Reserve Bank president, Timothy Geithner, convenes an emergency meeting with Treasury Department officials and top executives at all the major Wall Street banks, including Citigroup, JP Morgan & Chase, Merrill Lynch, in an attempt to rescue ailing investment bank Lehman Brothers. A sticking point is the government's reluctance to provide financial support for a deal.


Survival Fights [Saturday, September 13]

Discussions continue at the New York Fed's Lower Manhattan building, and British bank Barclays plc emerges as a leading contender to buy Lehman, even as other major banks drop out of the running.

A few blocks away, troubled insurer American International Group, which insured billions of dollars worth of collateralized debt obligations, begins talks with New York State's insurance superintendent as it fights for its survival.


Trouble Gathered Force [Sunday, September 14]

There were still no suitors for the 158-year-old investment bank, and Lehman Brothers bankruptcy seemed inevitable.

Bank of America unleashed the news that it would pay $50 billion to buy Merrill Lynch, another iconic Wall Street name. Merrill was forced into the deal because of fears that it might also fail because of a loss of investor confidence. The fears center on toxic debt remaining on Merrill's balance sheet and its difficulty in raising new capital.

As if that weren't enough, American International Group, the nation's largest insurer, said that it planned to sell some of its troubled assets in order to raise cash and boost investor confidence.

Concerns about the credit crisis grew increasingly dire, even though the government had already pledged to backstop Fannie Mae and Freddie Mac up to $200 billion just one week ago, and six months earlier engineered JP Morgan's purchase of Bear Stearns with a $29 billion guarantee.

But it looked like that wouldn't be enough, so Sunday afternoon the Federal Reserve, along with a group of 10 global banks and securities firms, including JP Morgan Chase and Goldman Sachs, announced a $70 billion pool of funds that they can tap to help ease a credit shortage and to aid troubled financial firms. The U.S. central bank also loosened its lending restrictions.


The Collapse [Monday, September 15]

As Just after midnight, in Monday's early hours, 158-year-old Lehman files for Chapter 11 bankruptcy.

The Dow Jones Industrial Average tanked more than 500 points in its biggest drop since Sept 17, 2001, the first day of trading following the 9/11 attacks. This is the worst day on Wall Street in seven years after Lehman Brothers' epic collapse and the buyout of Merrill Lynch. Meanwhile the FTSE 100 fell to its lowest level since June 2005.

By night, AIG was in fact hit with a downgrade, as Fitch bumped the insurance group down a notch. With $1.1 trillion in assets and 74 million clients in 130 countries, investors feared AIG's collapse would severely hurt consumers and further tighten already strangled credit.

Also news cropped up that the nation's largest savings bank, Washington Mutual, was in search of a white knight.


The Intervention [Tuesday, September 16]

Several rock-solid money market funds began to falter, dipping below the $1 per share benchmark, which is known as “break the buck”.

In the afternoon meeting, the central bank chose not to succumb to panic and unanimously decided to hold rates steady at 2%.

Markets cheered the decision, and the Dow jumped 140 points at the close after sharp drop in morning as worries mounted that the financial system was broken beyond repair. Investors poured money into bonds resulted in the yield on the benchmark 10-year Treasury note fell to a 5-year low.

After the bell, British bank Barclays agreed to buy up $2 billion worth of Lehman's prime assets, including its Manhattan skyscraper and North American investment banking and capital markets businesses.

Later that night AIG was taken over by the federal government by taking a 79.9 percent stake in the company in exchange for a staggering $85 billion bailout revolving loan it has two years to pay off. New York state would lead a task force to oversee AIG's sale of assets as it pays off that loan


The Free Fall [Wednesday, September 17]

Investors gave an enormous rebuff to the AIG news, sending stocks plummeting, while traders piled funds into safer havens. The Dow dropped 450 points by the end of the day, dragged down by bank stocks in a tail-spin. Despite reporting better-than-expected results, Goldman Sachs shares slipped by 14 percent, dipping below $100 a share for the first time since 2005. Morgan Stanley took a tumble 24 percent as well, as rumors circulated that it would merge with troubled bank Wachovia.

Gold rose $70, a new record. Oil rose $6, its second-largest jump ever. And the yield on the three-month Treasury sank to 0.02%, the lowest level since 1940.

The U.S. Securities and Exchange Commission stepped in and banned naked short selling. Many Wall Street analysts blamed the stock market's collapses on so-called "naked" short sellers, who short stocks without ever buying the security.


The Bailout [Thursday, September 18]

The Fed convinced five other central banks around the world to invest a total of $180 billion in global financial markets.

Meanwhile, AIG was tossed out of the Dow Jones Industrial Average and replaced with food giant Kraft.

U.S. Treasury Secretary Henry Paulson shopped around a plan to Congress that would create an independent federal agency similar to the Resolution Trust Corporation, which was created in 1989 to absorb bad debt in the Savings and Loan. The fund would likely acquire hundreds of billions of dollars of toxic mortgage debt off of bank balance sheets.

The move helped the U.S. stock market to rise 3.9 percent, recover from three-year lows.


The Confidence Boost [Friday, September 19]

The U.S. Securities and Exchange Commission took what it called "emergency action" and temporarily banned investors from short-selling 799 financial institutions to calm the financial markets. The measure was set to end on October 2, but can be extended by another 10 days. Market watchdogs in France, Portugal and Ireland take similar steps to crack down on short-selling.

The Treasury also said it would insure up to $50 billion in struggling money market fund investments at financial companies, guaranteeing that the funds' value will not fall below the standard $1 a share. The Fed also said it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds.

In a press conference, Treasury Secretary Paulson outlined the government's plan to put up hundreds of billions of dollars to help stem the crisis, saying "the financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing".

Investors cheered the moves, sending stocks soaring throughout the day. The FTSE rises 8.8 percent, its biggest surge ever.

SmartInMoney.com

9.20.2008

Rescue plan seeks $700B to buy bad mortgages

The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.

The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.

- AP -

9.17.2008

Remarkable rescue of U.S. largest insurer, AIG

The U.S. government late Tuesday agreed to rescue insurer American International Group (AIG) with an $85 billion loan from the New York Federal Reserve in exchange for a nearly 79.9 percent stake in the nation’s largest insurer. The rescue came just two days after the government refused to save Wall Street icon Lehman Brothers, which filed for bankruptcy on Monday, and is the latest in a series of government and private sector steps that have remade the U.S. financial system.

The government's deal dilutes current shareholders by giving the government a 79.9percent stake in the insurance company, with the power to veto asset sales and payment of dividends to shareholders. The line of credit to AIG comes with steep interest rate of 3-month Libor plus 8.5percent. AIG has two years to pay back the loan, and is likely to sell assets. An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale.

The effort was aimed to stave off a bankruptcy that many feared would spark a global financial chaos. A disorderly failure of AIG could have caused unprecedented global ripple effects since AIG has $1.1 trillion in assets and 74 million clients in 130 countries. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.

The insurer has been hit hard by the housing crisis and credit crunch because its sales of credit default swaps and its subprime mortgage-backed securities holdings. Its derivatives unit sold guarantees on mortgage-related securities known as collateralized debt obligations, or CDOs, using credit-default swaps. As house prices fall and the credit crunch deepens, the market for these CDO exposures is disappearing, forcing AIG to report big write-downs of the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year. It also has had to write down the value of its mortgage-backed securities. The company has lost more than $18 billion in the past nine months as it wrote down these exposures and has seen its stock price fall more than 91percent so far this year.

Shares of AIG plunged more than 40percent Wednesday after the government's takeover of the insurance giant failed to assuage investors' fears about its troubles or soothe broader concerns about the health of the financial markets.

Related story:
Nightmare on Wall Street following AIG rescue


9.16.2008

Consumer prices first monthly decline in nearly two years

As energy prices falling sharply, U.S. consumer prices decreased 0.1percent in August, the first decrease in nearly two years, as a slowing global economy cut energy costs and relieved some inflation pressures, the Labor Department reported Tuesday. With the decline in August CPI, the overall inflation has risen 5.4percent over the past 12 months.

The 0.1 percent drop in consumer prices in August was the first monthly decline since prices fell by 0.5 percent in October 2006, another time where energy prices took a big decline.

The cost of gasoline and other fuels have plunged, reflecting big drops in crude oil prices. Energy prices plunged by 3.1 percent in August, the biggest one-month drop since October 2006. Gasoline prices fell by 4.2 percent, natural gas slid 5.8 percent and home heating oil prices dropped by 9.6 percent.

The core consumer price index, which excludes food and energy prices, rose slight 0.2percent in August after rising 0.3percent the previous two months. On a year-over-year basis, the core inflation has risen 2.5percent over the past year, the same as in July.

The CPI report showed inflation was still hot in several sectors. Food prices continued to surge upward in August, increasing 0.6percent, resulting in 6.1percent overall increase over the past year. The hot sectors include also apparel and recreation as their prices rose 0.5percent.


9.15.2008

Lehman's bankruptcy sent financial earthquake around globe

Shocking Lehman Brothers' bankruptcy news sent financial earthquake around globe and pulled down financial stocks around the world. Stock markets tumbled in Europe and Asia on Monday the blow from Lehman's bankruptcy news. Europe's major central banks moved quickly to provide liquidity by pumping billions into the financially system.

Lehman, a 158-year-old Wall Street firm, on Monday filed for bankruptcy protection with the Bankruptcy Court of the Southern District of New York. The failure came as the fallout from the U.S. housing collapse and global credit crunch intensified more than a year after the problem fist surfaced.

Lehman said the filling would affect only the parent, Lehman Brothers Holdings, and that its subsidiaries would continue to operate and customers could make trades. It will continue business while it explores the sale of it's business units and other alternatives, Lehman Said.

The shocking news came after frenzied search for buyer falls short. During the last minutes negotiations over the weekend, potential acquires backed away from a deal and federal officials balked at committing taxpayer money to rescue the Wall Street titan.

Federal officials are anxious not to commit any more taxpayers fund after the massive bailout of mortgage giants Fannie Mae and Freddie Mac last week and the guarantees provided to facilitate the bailout of Bear Sterns last spring.

The bank was a fixed-income powerhouse and the largest mortgage underwriter. It was the third-largest U.S. Brokerage firm after Morgan Stanley and Goldman Sachc. Before the filing, it had total assets of $639 billion against total debts of $613 billion provided by more than 100,000 creditors.

Lehman enjoyed a lot of profit from its' mortgage business during the past housing booming. The same mortgage business ironically dragged the firm down as home prices slumped, foreclosure surged and the commercial real estate market cracked. Its latest quarter report revealed a net loss of almost $4 billion after more than $5 billion of new write-downs, mostly on soured mortgage exposure.

Related story:
Wall Street worst day in seven years following Lehman bankruptcy & Merrill sale


9.07.2008

Historic U.S. government takeover of Fannie and Freddie

Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency on Sunday unveiled an extraordinary takeover of twin mortgage buyers, Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back. The sweeping plan places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under the plan, the FHFA will assume the power of the board, and the two firms' cheif executives will resign after a transitional period.

Fannie and Freddie, which were created by the U.S. government, have been badly hurt in the last year by the sharp decline in home prices as well as rising mortgage delinquencies and foreclosures.

The move marks Washington's most dramatic attempt yet to shore up the nation's housing market, which is suffering from record foreclosures and falling prices. Paulson said that the cost to taxpayers would largely depend on the future financial performance of Fannie and Freddie.

For more than a decade Fannie Mae and Freddie Mac have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s, and they usually pay better. The trillions in securities issued by Fannie and Freddie and backed by American mortgages were never explicitly guaranteed by the U.S government, but foreign and domestic investors alike have always believed that the guarantee would be backed up if it were tested.

About one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies, some $1.5 trillion worth, were held by foreign investors at the end of March. One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States. Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures.

The bulk of investments related to Fannie and Freddie are in the form of mortgage-backed securities, often called agency securities or agency paper. This agency paper is considered of much higher quality than securities backed by sub-prime loans because Fannie and Freddie generally lend to borrowers with good credit histories and require higher down payments.



9.06.2008

Unemployment rate the highest in nearly five years

U.S employment report delivered bad news about the economic outlook on Friday, renewing fears of a recession.

The shocking news came in the form of the unemployment rate for August, which soared to 6.1% from 5.7% in July. This unemployment level is the highest in nearly five years and is beyond what policy makers had forecast in July. In their regular report to Congress then, the central bank’s official expectation for the unemployment rate had it ranging between 5.5% and 5.7% this year, and between 5.3% and 5.8% next year.


The rate has steadily climbed this year from a cycle low of 4.4% and now sits just below the peak of 6.3% seen during the last recession. The job less-rate jump reflected how energy prices and problems in the housing and financial sectors have radiated outward to slow overall economic activity.

Nonfarm payrolls decreased by 84,000, after revised net declines of 60,000 in July and 100,000 in June, the Labor Department reported. This marked the eight straight monthly drop in payrolls. That brought net job losses so far in 2008 to more than 600,000.

The factory sector, especially the auto industry, shed jobs in August. Factory payroll losses accelerated, dropping by 61,000, their eighth straight monthly decline, while construction jobs fell by 8,000 in August. Both of these sectors haven't experienced job gains in more than a year. Employment services, considered a bellwether of future labor-market trends, also had sharp losses. Temporary-help jobs fell by 37,000. Only government and education and health care added workers.

The weak labor market is sure to rekindle fears of an incipient recession among investors and consumers alike. Economists have been warning that the economy appeared to be stalling, but Wall Street was dazzled late last month by the strong 3.3% growth reported in the government's first revision of its estimate for gross domestic product during the April-June quarter.

The weak report should postpone any Fed rate hike. Although some Fed officials have been agitating for a tightening sooner rather than later, most analysts believe it will be difficult for the Fed to justify raising rates in face of labor market weakness.

The primary test for policy makers as time moves forward is how much weakness they’ll be willing to tolerate before deciding to act. Key in all of this will be the inflation outlook. Most policy makers expect already uncomfortable price measures to worsen a bit more, and then move toward more favorable levels as the decline in oil prices and slower growth leave their mark.

Lower inflation gives the Fed the latitude to cut rates. But it remains unclear how weak the economy would have to get before officials decide monetary policy needs to offer more support to the economy, in the form of lower rates.


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9.01.2008

Small-Cap Stocks Poise to Lead in Market Recovery

From: myvoiceoflife.com

Sooner or later the market will turn from the current tumultuous bear-market as shown by recent small-cap rally. Since the end of the second quarter the Russel 2000 has gained 6.92 percent in the first two months, while the S&P 500 didn’t go anywhere.


This latest small caps rally is the first tiptoeing of investors back in to the market. When the credit crisis hit, there was a flight to safety. Small-cap stocks were liquidated without regard to fundamentals and valuations, causing them to stumble badly. Because of their size, it does not take much money to drive small caps up when investors buy in, especially during the accumulation phase of market cycle.

Small caps refer to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.


Sometimes you have to buy stocks on the way down when companies are undervalued, because you don't want to be caught under-invested and miss the upswing. The best thing to do is build positions in companies that look cheap. Current valuations are as attractive as have been seen in a decade.


In the current turbulent market, we need a stabilization of the financial sector for the market to really rally. When we get moderation in energy prices and a deceleration in the decline in housing prices, we'll get some stabilization.