Friday, October 31, 2008

7.5 million homeowners 'underwater'

At least 7.5 million Americans owe more on their mortgages than their homes are currently worth, according to a real estate research firm's report released Friday.

In other words: If they sold their homes today, they'd have to bring a check to the closing. Ouch.

Another 2.1 million people stand right on the brink, according to the report by First American CoreLogic. Their homes are worth less than 5% more than the mortgages they're paying on them.

The technical term for this phenomenon is negative equity; more colloquially, these borrowers are often referred to as being "underwater."

"Being underwater leaves homeowners vulnerable to foreclosure," said Mark Fleming, CoreLogic's chief economist.

That's because these borrowers are left with no home equity to tap - via refinancing or a home equity loan - if they run into financial trouble. Negative equity has contributed much to the soaring increase in foreclosures over the past year.

The report on the growing problem of negative equity is a conservative estimate. Some organizations, including Moody's, estimate that as many as 12 million borrowers may be underwater.

"Being underwater doesn't necessarily mean that you can't pay your bills," said Fleming, "but it's a necessary condition of default."

Borrowers who are underwater but have enough income to pay bills can keep up with their mortgages - even if they don't like paying more to live in a home than it's currently worth. On the other hand, anyone who runs into trouble paying their bills but has positive equity in their home can avoid foreclosure by either borrowing against their home or simply selling it.
Hardest hit

Nevada, where home values plunged by more than 30% during the past 12 months, according to the latest home price report from S&P Case-Shiller, tops the list of states with the highest numbers of underwater borrowers. A full 48% of homeowners there have negative equity.

Home values in Nevada and some other states rose particularly high during the real estate bubble - and are now plummeting. So even those who put 20% down when they bought their home don't stand a chance.

In many bubble markets, home prices got so high that the only way that many buyers could get a loan was by using what Fleming called "affordability products." These included adjustable rate mortgages with rates that were set artificially low for a few years, until resetting much higher, as well as mortgages that required little or no down payments.

These loans left buyers with little equity to begin with, and when prices dipped, they quickly found themselves underwater.

Other bubble states with high levels of negative equity include Arizona (29.2%), Florida (29.2%) and California (27.4%).

The second group of states that have a lot of underwater borrowers are in the rust belt region, including Michigan, where 39% of homeowners have negative equity, and Ohio, where that rate stands at 22%.

These regions are in trouble because of severe economic reversals and large-scale job losses, rather than inflated home values. And now prices have fallen far enough to put many borrowers in negative territory. Some of them may have already tapped their equity to tide them over in hard times, and have little cushion left.

The third group of states where many borrowers owe more on their homes than they are worth are in trouble mainly because, according to Fleming, they've experienced a large influx of immigration.

Newcomers in states like Texas (16.5%), Georgia (23.2%), Arkansas (16.3%), and Tennessee (15%) bought homes recently and simply didn't have much time to build up equity before prices started to fall he says.

The markets with the fewest underwater borrowers include New York, where only 4.4% of homeowners have negative equity, as well as Hawaii ( 5.6%), Pennsylvania (5.7%) and Montana (6.9%).

Stocks mixed at end of gloomy month

Stocks fought to rise Friday morning, with investors struggling at the end of one of the worst months in Wall Street history.

The Dow Jones Industrial average (INDU) gained 0.5% around 45 minutes into the session. The Standard & Poor's 500 (SPX) index added a few points as well. The Nasdaq composite (COMP) lost a few points.

Stocks rallied Thursday as investors welcomed improved lending rates and a report showing that the economy shrank at a slower pace than expected in the third quarter.

But markets were mixed Friday, with blue chips managing to stabilize after a weak open, and technology shares remaining in the red.

A variety of economic reports were released, including readings on personal income and spending, regional manufacturing and consumer sentiment.

Oil prices slipped and the dollar gained versus other major currencies. Bond prices rallied, lowering the corresponding yields.

Stocks are up sharply this week: As of Thursday's close, the Dow is up 8.7%, the S&P 500 8.8% and the Nasdaq 8.6%.

But the advance did little to change October's status as one of Wall Street's worst ever. (For details, click here).

Despite the gains this week, investors pulled more money out of equity mutual funds than they did in the previous week, according to Trim Tabs. Withdrawals from stock mutual funds in the week ended Oct. 29 rose to 9.2 billion from 6.5 billion the previous week.

Other markets: The dollar gained against the euro and the yen.

U.S. light crude oil for December delivery fell 80 cents to $65.16 a barrel on the New York Mercantile Exchange.

Gasoline prices fell another 4.3 cents overnight, to a national average of $2.504 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 44th consecutive day that prices have decreased. During that time, prices have fallen by $1.35 a gallon, or 35%.

Lending rates: The credit market continued to improve, with Libor, the overnight bank-to-bank lending rate, falling to 0.41% from 0.73% Thursday, according to Dow Jones. The 3-month Libor fell to 3.03% from 3.19% Thursday. (Full story)

The TED spread, the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed slightly to 2.64% from 2.82% Thursday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, slipped to 0.39% from 0.4% late Thursday, with investors preferring to take a small return on their money than risk the stock market.

Last month, the 3-month yield reached a 68-year low around 0% as investor panic hit its highest level.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.85% from 3.97% Thursday. Treasury prices and yields move in opposite directions.

A brutal month: Stocks have bounced back this week, finding some momentum at the end of a wretched October.

Yet, despite the recovery, October will go down in the history books as one of Wall Street's worst months of all time.

As of Thursday's close, the Dow had lost 1,670 points, the Dow's worst month ever, according to Stock Trader's Almanac info going back to 1901. On a percentage basis, the decline of 15.4% doesn't rank in the top ten.

The S&P 500 lost nearly 212 points, or 18.2% in the month, and is currently on track to post its worst month ever on a point basis and ninth worst ever on a percentage basis, going back to 1930.

The Nasdaq dropped 384 points, or 18.4% in October, tracking its seventh-worst month ever on a point basis and its sixth-worst month on a percentage basis, going back to its inception in 1971.

Money-market fund returns first $26B to investors

A money-market mutual fund that "broke the buck" amid a rush of orders to pull out cash has begun returning an initial $26 billion to investors who had been unable to access their money for more than a month.

The first in an unspecified number of distributions from the Reserve Primary Fund began Thursday with checks being mailed to retail-direct shareholders, Reserve Management Co. said. Payments to all other shareholders will be made by wire on Friday.

Each investor is getting about half their current account balance, the company said. It said all investors are being treated the same, whether or not they tendered redemption orders, and that the payout is being done on a pro-rata basis.

"This distribution marks a significant step in the process of liquidating the Primary Fund and distributing money back to shareholders," Reserve Management Co. President Bruce R. Bent said in a statement. "We are committed to making future distributions when more cash becomes available."

The fund had total assets of about $51 billion as of Sept. 30. It held $64 billion in assets on Sept. 12, before a soured investment in Lehman Brothers debt triggered a rush of institutional investors pulling out cash.

On Sept. 16, the rapid sell-off of assets caused the value of fund assets to fall to 97 cents for each investor dollar put in -- the first instance in 14 years of a money-market mutual fund "breaking the buck," or having its per-share value fall below $1.

Reserve Management froze redemption orders. That led institutional investors to pull out cash from that fund and others, creating fears about the safety of the $3.4 trillion in assets held in money-market funds, and a new temporary government money fund guarantee program.

Reserve Management said it is "focused on liquidating the fund's holdings at amortized cost as quickly as possible."

Thursday, October 30, 2008

Exxon Mobil: Biggest profit in U.S. history

Exxon Mobil Corp. set a quarterly profit record for a U.S. company Thursday, surging past analyst estimates.

Exxon Mobil (XOM, Fortune 500), the leading U.S. oil company, said its third-quarter net profit was $14.83 billion, or $2.86 per share, up from $9.41 billion, or $1.70, a year earlier. That profit included $1.45 billion in special items.

The company's prior record was $11.68 billion in the second quarter of 2008.

The latest quarter's net income equaled $1,865.69 per second, nearly $400 a second more than the prior mark.

The company said its revenue totaled $137.7 billion in the third quarter.

Analysts had expected Exxon to report a 40% jump in earnings to $2.38 per share, or net income of $12.2 billion, and a 28% surge in revenue to $131.13 billion, according to a consensus of estimates compiled by Thomson Reuters.

Exxon's stock price slipped by nearly 1% in morning trading.

The company's earnings were buoyed by oil prices, which reached record highs in the quarter before declining. Oil prices were trading at $140.97 a barrel at the beginning of the third quarter, and had fallen to $100.64 at the end.

Compare that to 2007, when prices traded at $71.09 a barrel at the beginning of the third quarter, and rose to $81.66 by the end.

Exxon's special charges include the gain of $1.62 billion from the sale of a German natural gas company. It also includes the $170 million charge in interest related to punitive damages from the Valdez oil spill off the Alaskan coast in 1989.

The Irving, Texas-based company said it lost $50 million, before taxes, in oil revenue because of Hurricanes Gustav and Ike. The company expects damages related to these hurricanes to reduce fourth-quarter earnings by $500 million.

Despite the surge in profit, Exxon said oil production was down 8% in the third quarter, compared to the same period last year.

The company also said it is spending more money to locate new sources of oil. Exxon said it spent $6.9 billion on oil exploration in the third quarter, a jump of 26% from the same period last year.

Phil Weiss, analyst for Argus Research, said he doesn't expect Exxon to break any more profit records in future quarters.

"I don't expect the fourth quarter to be nearly as good as the third because of lower oil prices," said Weiss.

He also said that demand for gasoline is falling, which could impact Exxon and other oil companies.

Earlier Thursday, Europe's leading oil company, Royal Dutch Shell PLC (RDSA), reported a 22% gain in net profit for the third quarter, to $8.45 billion. The company said sales rose 45% to $132 billion.

Exxon is the second-largest company in the Fortune 500 in terms of annual sales, behind Wal-Mart Stores (WMT, Fortune 500).

Exxon's stock price has fallen about 20% so far this year, The S&P 500, of which it is a member, has fallen about 36%. To top of page

Government near home loan bailout

The government is considering a plan that would help around 3 million homeowners avoid foreclosure, sources briefed on the matter said.

A final deal had not been reached as of Wednesday afternoon and negotiations could still fall apart, but government agencies were contemplating using around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages.

The plan could include loan modifications that would lower interest rates for a five-year period, according to two people briefed on the plan, who asked not to be identified because details were still being worked out and the plan was not yet public.

The plan would be the most aggressive effort yet to limit damages from the U.S. housing recession, which has shaken global credit markets.

More than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 had started the foreclosure process, according to the most recent data from the Mortgage Bankers Association.

The government's program would be run by the Federal Deposit Insurance Corp. The agency's chairman, Sheila Bair, said last week she was working "closely and creatively" with the Treasury Department on such a plan, but revealed few details.

Andrew Gray, an FDIC spokesman, said it would be "premature to speculate about any final framework or parameters of a potential program."

Treasury Department spokeswoman Jennifer Zuccarelli called details of the loan modification plan "simply inaccurate." She said the Bush administration "is looking at ways to reduce foreclosures, and that process is ongoing," but has not decided on a final approach.
Criticism growing

Borrower frustration is growing over the government's existing assistance programs, which critics say have been too slow and small in scope to have much impact on soaring foreclosures.

On Wednesday, about 100 demonstrators marched in front of the headquarters of Fannie Mae (FNM, Fortune 500), and forced a mid-afternoon meeting with the company's chief executive, Herbert Allison.

Some held signs that read "Restructure our loans now," "Fannie Mae destroys lives" and "Foreclose on Fannie Mae."

Bruce Marks, chief executive of the Boston-based Neighborhood Assistance Corp. of America, called on Fannie Mae to adopt a program similar to the one the FDIC put in place at failed IndyMac Bank of Pasadena, Calif. Borrowers there are getting interest rates of about 3 percent for five years.

After the meeting, which included Allison and other top managers, company spokeswoman Amy Bonitatibus said "we agreed to continue to meet with them and work together on foreclosure prevention." Allison and other top executives

Over the past 10 weeks, Fannie Mae says it has received more than 40,000 defaulting loans and stopped 80 percent of them from going into foreclosure.

After meeting with Allison, Marks said the chief executive "understands the issue of making these mortgages affordable over the long term."

Last month, the government seized control Fannie Mae and Freddie Mac (FRE, Fortune 500), the two biggest U.S. mortgage finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

It was unclear Wednesday what role Fannie and Freddie would play in the government's sweeping plan to help millions of American homeowners. But lawmakers on Capitol Hill want the companies to take a more aggressive approach.

Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee said in a statement that "federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes."

By guaranteeing millions of mortgages, the government could help restore confidence in the market for securities backed by mortgage loans. That was where the global credit crisis started, leading to this month's dramatic stock market plunge.

As a surprising number of homeowners began defaulting on their loans, investors could no longer put a value on the securities which were backed by pools of mortgages. So trading of these securities froze, sending shock waves through the financial industry.

Wednesday, October 29, 2008

Bonds bet rate cut won't help

U.S. Treasurys rose early Wednesday ahead of an anticipated rate cut by the Federal Reserve, as investors worried that the government's intervention may not be enough to stave off a recession.

Economists expect the Fed to cut its key funds rate by a half percentage point to 1% at the conclusion of its two-day meeting Wednesday afternoon. With the U.S. economy embroiled in a a dire and expensive credit crisis, some even predict a cut to 0.75%, which would mark the lowest level for the fed funds rate in its 53-year history.

The Fed cuts rates to boost the economy. Treasurys usually sell off when rate cuts are expected, as they tend to be inflationary. But with commodity prices plummeting and an economy that is in or entering a recession, inflation fears have subsided.

The benchmark 10-year note rose 5/32 to 101-15/32, and its yield fell to 3.82% from 3.84% late Tuesday. Bond prices and yields move in opposite directions.

The 30-year bond gained 6/32 to 105 14/32, and its yield sank to 4.18%, down from 4.21%.

The 2-year note gained 5/32 to 99-27/32, and its yield fell to 1.59% from 1.66% late Tuesday.

In order to finance more than $1 trillion in financial bailouts and corporate debt purchases, the Treasury auctioned off $34 billion in 2-year notes Tuesday, and will auction $24 billion in 5-year notes on Thursday.

The yield on the 3-month bill fell to 0.72% from 0.74% on Tuesday.

The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle money into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.

Treasurys were much lower Tuesday as global stocks reversed their recent downward trend and a late day rally on Wall Street sent the Dow surging 889 points.
Signs of improvement

Many economists are calling for the Fed to cut rates to historic lows, because lending to and from financial institutions remains tight. But early indications show the Fed's other attempts to ease financing concerns for financial institutions were working.

On Monday, the Fed's effort to boost short-term financing concerns for companies was reflected in a record amount of commercial paper issued.

The Fed said commercial paper issued Monday with maturities of more than 80 days rose to $67.1 billion from $7.4 billion on Friday and $3.6 billion on Thursday. It was the largest amount of long-term corporate debt purchased in one day since the Fed began maintaining records in 2001.

Commercial paper is short-term debt that big businesses and financial institutions sell primarily to money-market fund managers and other institutional investors. The companies use the loans to fund day-to-day business operations, but the market dried up, particularly for three-month paper, after the collapse of Lehman Brothers in mid-September.
Lending rates

The Fed is offering competitive rates in its commercial paper program. Many analysts, including Bill Gross, the chief investment officer for Pimco, have said the Fed's offer of low 3-month commercial paper rates will help nudge other rates lower, including 3-month Libor rates. That would be a major boost for the strangled credit market, as more than $350 trillion is assets are tied to Libor.

The 3-month Libor rate nudged lower to 3.42% from 3.47% on Tuesday, and the overnight Libor rate fell for the third-straight day to 1.14% from 1.24% on Tuesday, according to Dow Jones.

Lending rates have been trending downward for nearly two weeks. Libor is a daily average of what 16 different banks charge other banks to lend money in London.

As rates fell, two key indicators of risk sentiment showed that confidence in the market was rebounding.

The "TED spread" fell to 2.69 percentage points from 2.71 points on Tuesday. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The lower the spread, the more willing investors are to take risks.

Another indicator, the Libor-OIS spread, eased to 2.58 percentage points from 2.61 points Tuesday. The spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending

Stocks tip-toe higher

Stocks churned Wednesday morning, as investors digested the previous session's massive rally and geared up for an expected interest rate cut from the Federal Reserve.

A surprise jump in durable goods orders, Procter & Gamble's better-than-expected results and GM's weak global sales report were also in the mix.

The Dow Jones industrial average (INDU) added a few points around 45 minutes into the session. The Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) both posted declines.

On Tuesday, the Dow surged 889 points, its second-best single-day point gain ever, as investors scooped up a variety of shares hit in the recent retreat. In percentage terms, the advance of 10.9% was the sixth biggest ever. The S&P 500 jumped 10.8% and the Nasdaq composite jumped 9.5%.

The big advance occurred Tuesday as the two-day Federal Reserve meeting got underway, with a decision on interest rates expected Wednesday afternoon at around 2:15 p.m. ET.

Policymakers are widely expected to cut the fed funds rate, a key short-term interest rate, by half a percentage point to 1.5%. The Fed issued an emergency half-point interest rate cut on Oct. 8th as part of its efforts to calm roiling financial markets and get banks to start lending to each other again.

Meanwhile, the credit market continued to improve, with Libor, the overnight bank-to-bank lending rate, falling to 1.14% from 1.24% the previous day, according to Dow Jones. The 3-month Libor fell to 3.42% from 3.47%. (Full story)

Treasury prices slipped, raising the yield on the benchmark 10-year note yield to 3.81% from 3.77% late Tuesday. Treasury prices and yields move in opposite directions.

Economy: Ahead of the Federal Reserve decision, investors mulled a better-than-expected durable goods orders report.

The Commerce Department said new orders for big-ticket items - including cars and appliances - rose 0.8% in September versus forecasts for a drop of 1.1%. Orders fell a revised 5.5% in August.

Results: A variety of companies were reporting quarterly results as the third-quarter reporting period hit its midpoint.

Dow component Procter & Gamble (PG, Fortune 500) reported higher quarterly sales and earnings in the fiscal first-quarter that topped estimates. However, the consumer products maker also said that full-year earnings could be weaker than previously expected. P&G fell 3%.

Fellow Dow component General Motors (GM, Fortune 500) reported a steep drop in global third-quarter sales. North American sales fell 19% in the quarter versus a year ago. GM shares rose 3.5%.

Another Dow component, Kraft Foods (KFT, Fortune 500), said third-quarter profit more than doubled due to a one-time gain resulting from its $2.6 billion sale of its Post cereals unit.

Other markets: The dollar tumbled versus both the euro and the yen.

U.S. light crude oil for December delivery rallied $3.84 to $66.57 a barrel, after ending the previous session at a 17-month low.

Gasoline prices fell another 4 cents overnight, to a national average of $2.589 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 42nd consecutive day that prices have decreased. During that time, prices have fallen by $1.26 a gallon, or nearly 33%.

COMEX gold for December delivery rallied $22 to $762.50 an ounce

Tuesday, October 28, 2008

Election: Your health insurance at stake

Both presidential candidates want to turn employer-sponsored health insurance on its head. A principal goal: to make sure more Americans get coverage.

But in helping the 45 million uninsured, both Republican nominee John McCain and his Democratic rival Barack Obama could prompt radical changes in on-the-job insurance, which currently covers 164 million people.

"Both McCain's and Obama's plans would move coverage in ways that changes the nature of the employer-sponsored system," said James Klein, head of the American Benefits Council, which represents larger employers.

McCain and Obama take very different paths to what they say is the same endpoint - reforming health care.

As part of McCain's plan, employees would lose the tax exemption for company-sponsored health insurance. Instead, taxpayers would get a refundable tax credit of $2,500 for single filers, or $5,000 for families, to cover the costs of insurance bought on the job or on their own in the individual market.

By doing this, McCain would level the playing field between those who get insurance on the job, where benefits aren't taxed, and those who buy it their own, where it is subject to tax. The tax credit would let more of the uninsured afford coverage.

Obama, on the other hand, is promising to push employers to cover more Americans as part of his health care proposal. He would require larger companies provide insurance to employees or contribute toward the cost of a national plan, while giving small businesses a tax credit to entice them to offer coverage to their workers.

The plans of both candidates raise the concerns of employers and experts, who say the proposals could wind up undermining the nation's employer-based health insurance system.

Most workers still depend on their employers for health benefits, but the system is already under stress. Only 62.9% of Americans under age 65 had employer-based coverage in 2007, down from 68.3% in 2000, according to the Economic Policy Institute. This means more than three million fewer people had on-the-job coverage in 2007 than seven years earlier.
McCain's tax proposal

Under McCain's plan, employees would get taxed on the value of their health insurance, which on average costs $12,680 per year for a family, according to the Kaiser Family Foundation. Workers pay an average of $3,354 in premiums, while their employers cover the rest.

Most employees have their premiums deducted from their paychecks without paying tax on them. So, if you make $50,000, you are likely paying tax on only $46,646 of income.

Under McCain, your taxable income would rise to $59,326. If you were in the 25% tax bracket, it would mean an additional $3,170 in taxes.

But this increase would be knocked back by the $5,000 tax credit. So in the end, you'd actually have $1,830 to put in a health savings account, which could be used to cover premiums and other medical expenses.

Experts, however, fear that eliminating the tax advantage of employer-based coverage would prompt younger, healthier workers to leave their office plans. If that happened, costs for the remaining workers could skyrocket. Companies may drop coverage altogether.

"If companies know their employees have the tax credit, it relieves them of the burden of providing coverage," said Sara Collins, who directs a health insurance program at the Commonwealth Fund. McCain's plan "moves people out of the employer system and to the individual market."

Some 74% of companies said that eliminating the tax exclusion would have a "strong negative impact on their workforce," according to a September survey by the American Benefits Council.

Estimates vary, but the Tax Policy Center estimates that 20 million people would lose their employer-based coverage by 2018. Roughly the same number would gain insurance through other means. But, overall, McCain's plan would do little to reduce the number of uninsured.

Also of concern, experts say, is the fact that the $5,000 tax credit would be indexed to inflation. As a result, it would not keep up with the swiftly rising cost of health care, which was soaring as much as 13% a year in the middle of this decade.

McCain advisers counter these concerns. Changing the tax treatment wouldn't hurt the employer-sponsored system and would allow more of the uninsured to buy their own coverage, they say. Also, his advisers say a McCain administration would keep an eye on the credit to make sure it didn't lag behind the cost of coverage, while also working to lower the rate of medical inflation.

Younger, healthier workers likely wouldn't abandon their company-sponsored plans, said Douglas Holtz-Eakin, McCain's senior economic policy adviser.

"Why would they leave?" said Holtz-Eakin. "What they are getting from their employer is way better than what they could get with the credit."
Obama's employer coverage expansion

Obama's approach is very different. The Democrat would require larger companies to provide "meaningful coverage" for their staffs under a "pay or play" system. If they don't provide insurance, they would have to subsidize the cost of a national plan.

Small businesses, which would be exempt from this provision, would receive a new refundable tax credit of up to 50% of the premiums paid on behalf of their employees. They could also join a new National Health Insurance Exchange, which Obama envisions would provide public and private plans to individuals and small employers.

This could entice smaller employers to provide coverage, said Jennifer Tolbert, principal policy analyst at the Kaiser Family Foundation.

Currently, only 49% of small businesses provide health care coverage, down from 57% in 2000, according to the Commonwealth Fund.

Workers who already have health insurance at their jobs won't see much of a change, though Obama says he could lower their annual medical costs by as much as $2,500 a year by improving technology, increasing competition and stressing prevention and better management of chronic diseases.

Obama's policy advisers say they want to expand the employer-based system since they believe it works well.

"We need to build on success, not tear them down and try to build new plans," said David Cutler, senior health care adviser to Obama.

The Tax Policy Center estimates that an additional five million people would gain coverage by requiring employers to extend coverage, but it finds Obama's plan lacking details on nearly everything else.

"The numbers aren't supported by anything," said Robertson Williams, principal research associate at the Tax Policy Center.

Among the big questions many have is how Obama decides which small businesses would be eligible for the credit and how larger employers would have to pay into the national system. Also unclear is exactly how he'd save workers as much as $2,500 a year.

Businesses fear the mandates under Obama's plan would tax their resources at a time when many are struggling because of the economic downturn. Some 46% of companies said requiring employers to "pay or play" would have a "strong negative effect on their workforce," according to the American Benefits Council.

Companies are also wondering how Obama will define "meaningful coverage" and whether their plans are acceptable, experts said.

"It could limit employers' flexibility in the type of plan they provide because it may not meet the standards," said the council's Klein.

Will the Fed go below 1%

The Federal Reserve is widely expected to cut interest rates again this week. But could the Fed soon go where it has never gone before and bring them below 1%?

The Fed lowered its federal funds rate, the benchmark overnight lending rate at which banks lend to one another, by a half-percentage point to 1.5% in an emergency announcement Oct. 8.

Many investors believe the central bank will cut rates by at least another half-percentage point following the end of a two-day meeting on Oct. 29.

In fact, the fed funds futures on the Chicago Board of Trade are now pricing in a 26% chance that the Fed will cut rates by three-quarters of a percentage point to 0.75% by that meeting.

Fed Chairman Ben Bernanke has said in recent weeks that economic weakness is likely to continue into next year, despite rate cuts and other recent moves taken by the Fed and Treasury Department to try and fix the credit crisis.

Last week, Bernanke pushed Congress to consider a new stimulus plan to spur the economy.

"Everyone at the Fed has pretty much told you they're going to cut," said Rich Yamarone, director of economic research at Argus Research. "They're in a kitchen sink mode right now. Rate cuts, fiscal stimulus, bailouts - they're throwing everything they can at this right now."

Still, would the Fed really consider lowering interest rates below 1%? The last time rates were at 1% was between June 2003 and June 2004.

Rate cuts have been a key tool the central bank has used in the past to boost a weak economy. A variety of lending rates, including credit cards and home equity lines, as well as the prime rate used to set many business loan rates, are pegged to the fed funds rate.

So lower rates usually lead to cheaper credit, thus spurring businesses and consumers to spend money more freely.

But in the current credit crisis, with banks afraid to make loans due to worries about their firms' own need for cash in the near term, already relatively low short-term rates have done little to get credit flowing. (The Fed cut rates seven times between September 2007 and April before holding them at 2% for several months.)

Some economists argue that another rate cut may be the least important step the Fed can take in its effort to solve the crisis.

"It's window dressing, only a psychological weapon," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Right now, the problem isn't the cost of the Fed's money, it's that the existing money supply is not circulating. The pipelines are clogged."

Even Fed Vice Chairman Donald Kohn seemed to acknowledge that rate cuts aren't as important as they once were. In an Oct. 15 speech, Kohn said the coordinated global cut the previous week had already been "overwhelmed ... by the further erosion in confidence."

Still, many economists say that fear and uncertainty in the markets is so great right now that the Fed can't risk leaving rates unchanged. And they say anything that can be done to spur lending is a positive.

"It's not irrelevant, even if it's not as important as usual," said David Wyss, chief economist with Standard & Poor's.

Wyss said that if the U.S. credit and financial markets remain in crisis, a cut below 1% could come later this year or early next year.

To be sure, some have pointed to rates being at 1% for as long as they were as a factor in the housing bubble earlier this decade. It was the plunge from those inflated home values that sparked the credit crisis now dogging markets.

Low rates can also feed inflation. But that might be a sacrifice the Fed has to make.

"Inflating our way out of this mess is the Fed's only option at this point," said Peter Boockvar, market analyst of Miller Tabak, in a note Friday morning.

With the global economy slowing down, there are few economists talking about the threat of inflation. And the continued decline in home prices has negated most fears of low rates leading to another housing bubble.

So even a cut to nearly 0%, a rate where the Bank of Japan left rates for much of the 1990's, is not out of the question, given the unprecedented nature of credit problems.

"There's a hesitation to do it because it looks like desperation. But they're getting desperate," said Wyss.

Sunday, October 26, 2008

Gas prices fall again

Gasoline prices fell again, tumbling to the lowest price in a year, according to a daily survey of credit card swipes released Sunday.

The average price of unleaded regular fell to $2.699 a gallon, down three and six-tenths of a cent, according to the Daily Fuel Gauge Report issued by motorist group AAA. Prices have fallen $1.15, or 30%, in the last 39 days.

The current national average is $1.41, or 34.3%, off the record high price of $4.11 that AAA reported July 17.

The decline comes as hurricane season winds down and oil prices drop over concerns that a prolonged economic slump would curb demand for energy.

The last time the average price for a gallon of regular unleaded gasoline was close to this price was October 18, 2007, when the price averaged $2.795.

Alaska has the most expensive gas with prices averaging $3.76. The cheapest gas is found in Oklahoma with prices averaging $2.30.

Insurers jump on bailout speculation

While the rest of Wall Street got clobbered again Friday, a handful of insurance stocks rallied sharply on speculation that the Treasury Department may soon invest in companies in the battered industry.

After being down most of the morning, shares of MetLife (MET, Fortune 500) ended the day up 7%. Hartford Financial Services Group (HIG, Fortune 500) jumped 16% at the end of Friday's session after being down in the morning session. Prudential (PRU, Fortune 500) closed more than 6% higher after starting the day lower.

And Aflac (AFL, Fortune 500), the health and life insurance company that reported Thursday that its earnings had tumbled 76% in the fiscal third quarter, gained 7% by the end of the trading session Friday.

Shares of these insurance companies surged after the Washington Post and the Wall Street Journal both reported that the Treasury Department was considering extending funds from the $700 billion bank bailout, or Troubled Asset Relief Program (TARP), to the battered insurance group.

Steven D. Schwartz, a life insurance analyst at Raymond James, said that the rally in insurance stocks "had a lot to do with" the published reports.

Another analyst echoed that sentiment. "It was all about some of the headlines that started to come across," said John Nadel, senior insurance analyst at Sterne, Agee & Leach.

"It looks like there is now at least the potential that there could be [another] source of capital for the insurance companies," said Nadel.

However, both analysts expressed reservations as to whether the insurance industry actually needs a lifeline from the government, as the banking industry did.

"The balance sheet of the life insurance industry is significantly better than either the balance sheets of the investment or commercial banks," said Schwartz.

Stock prices of insurance stocks have declined "out of fear that the life insurance industry is next, that the life insurance industry is primed to have a number of failures" said Schwartz. "That is not going to happen."

Nadel said that the status of life insurance companies depends on how the credit crisis is resolved. "Whether insurance companies and life insurance companies in particular need to be part of the program is going to be determined in large part by how corporate credit behaves," said Nadel.

Insurance companies depend on longer termed investment securities for their funding than banks do, explained Nadel.

"So long as the insurance companies are positioned to be able to hold through a tumultuous market, so long as these securities recover in value, then they should be fine," he said.

The insurance firms have all been hit hard as the value of many of their investments in the financial industry and other stocks have evaporated during the credit crisis.

Aflac suffered from investments in Lehman Brothers and Washington Mutual as well as struggling automaker Ford and warned that its fourth quarter results would be hurt due to exposure to Icelandic banks.

Other insurers have also had exposure to mortgage financing giants Fannie Mae and Freddie Mac as well as insurer AIG.

A lot of uncertainty in the market remains, however. MetLife, Hartford and Prudential, which have already warned that third quarter results will be worse than expected, are all set to report their quarterly reports next Wednesday afternoon.

Throwing the bathroom sink at the economy

Governments and central banks of the world's leading nations have taken unprecedented coordinated actions in the past month to help out battered financial markets and economies around the globe.

Yet, the global meltdown in stocks continued Friday. And this lack of confidence and sense of panic has left experts wondering what can be done next to assure investors and get banks to operate normally once again.

"They've already thrown the kitchen sink at the problem," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute. "I guess the next step is the bathroom sink."
Rates going to zero?

More rate cuts by central banks seem to be almost a certainty at this point. But there's only so much farther the Federal Reserve can go. The federal funds rate is now 1.5% and many investors think the Fed will lower it to 1% after its two-day meeting that ends next Wednesday.

Some investors are even betting the Fed will cut rates by three-quarters of a percentage point to 0.75%, which would mark the first time rates were ever below 1%.

There is also more talk than ever before of the U.S. central bank lowering rates to 0% if financial markets do not improve soon. But economists suggest that a cut to 0% would do little to get credit flowing when compared to the moves already made by the Fed.

"The Fed's intention is very clear. They're prepared to flood the economy with money," said Sung Won Sohn, economics professor at Cal State University Channel Islands.

The Bank of Japan cut its benchmark rate to just about zero and left it there for much of the 1990s. But that did little to end a decade-long economic slump there. Rates in Japan today are 0.5% so Japan also has little room to cut.

The European Central Bank's rate is 3.75%, while the Bank of England's rate stands at 4.5%. If both cut rates next week in coordination with the Fed, it's possible they could follow with additional cuts of their own the following week.
More loans to businesses

The Fed has stepped up its lending to banks through a relatively new program known as the term auction facility and is now allowing Wall Street firms to borrow directly from the Fed through its discount window.

It has also tried to get credit flowing by announcing plans to lend perhaps $1 trillion or more to major businesses through the use of commercial paper, the primary form of borrowing those large companies use to fund their day-to-day operations.

Some economists say what's needed next are direct Fed loans to an even broader range of businesses that are not large enough to issue commercial paper.

Former Federal Reserve Governor Lyle Gramley has suggested the Fed could do so by guaranteeing a wide range of loans to small and large businesses with liberal underwriting standards.

Robert Brusca of FAO Economics said the Fed's district banks could make their own direct loans to businesses.

"When you tell businesses you're going to be there for them, you're also telling banks 'There's not that much risk for you,'" said Brusca.

Of course, the Fed alone can't fix the struggling U.S. economy. Congress is holding hearings to discuss a new round of economic stimulus, which could include loans or other help to state and local governments that are facing layoffs due to sudden budget short falls.

The Treasury Department has authority from Congress to pump $700 billion into the financial sector and it has already used that newly-passed law to make $125 billion in investments in nine of the nation's largest banks.

According to published reports Friday, the Treasury Department is close to announcing that other banks will soon receive investments and is also said to be considering taking equity stakes in insurance companies.

Other experts argue that the government will also soon have to bail out the nation's cash-starved automakers in order to save that industry.
Weaker economies will need help

American banks, insurers and other industries aren't the only ones around the world in need of assistance either. The credit crisis is now clearly a global phenomenon.

The International Monetary Fund, which is essentially funded by the United States, Europe and Japan, is in talks to provide loans to help prop up the currencies and economies of Hungary, Iceland, Pakistan, and Ukraine.

The IMF also disclosed Wednesday that it was about to start discussions with Belarus.

Jay Bryson, international economist at Wachovia, said more countries are likely to need help from the IMF. And he added that the size of these rescues are also probably going to be much greater than in the past.

"[The IMF has] already said [it] would allow countries to borrow up to four times their previous quotas," he said.
Time for a market holiday?

One of the most radical ideas to help end the credit crisis was suggested by Nouriel Roubini, professor of economics at the Stern School of Business at New York University.

Roubini gave a speech in London Thursday suggesting that world financial markets might need to be shutdown for a week or two to stem the ongoing panic.

On Friday morning, he added that Russia's decision on Friday to shut down the Moscow stock market until Tuesday was a sign that shutting markets was no longer an unthinkable option.

"We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and - much worse - on the real economies," he wrote in a note Friday morning. "So it is time to think about more radical policy actions and government interventions."

Other experts said such a step is unlikely to be taken. But they conceded it was far more of a possibility than they would have thought until very recently.

"If you had said this four weeks ago, we all would have laughed. But clearly a lot of things have happened over the last four weeks," said Bryson. "Now the most I can say is it's a measure of last resort."

But other economists say it's not clear the fall in global stocks and problems in financial markets can be stopped any time soon, regardless of what actions the Fed and other central banks take in the next few days.

That's because the damage already done by the credit crisis will lead to tighter credit and a drop in corporate earnings and stock prices. Further declines in U.S. home prices are also likely, which will only create more losses in the financial sector.

"There's room for another 30% fall in the stock market given the forecasts on earnings," said Christian Nenegatti, lead analyst for RGE Monitor, a New York economic research and analysis firm. "It doesn't look like you can be bearish enough in this environment."

Friday, October 24, 2008

Existing home sales jump, prices sink

Sales of existing homes rose in September, according to the latest reading on the battered housing market by an industry trade group released Friday.

The National Association of Realtors reported that sales by homeowners jumped in September to an annual pace of 5.18 million, up 1.4% from a year ago. It was the first time that sales rose compared to a year earlier since November 2005.

September sales were up 5% from the August reading of 4.91 million, marking the largest month-to-month increase since July 2003. Economists surveyed by had expected the report to show existing home sales rose to an annual pace of 4.95 million.

Though the numbers were encouraging, they do not yet suggest the problems in the housing market are behind us. September's numbers reflect contracts signed in July or August - before the mid-September credit crunch tightened the stranglehold on lending and sent confidence in the economy crashing.

Furthermore, September 2007 was also a particularly disastrous month for the housing market, as the then-emerging credit crunch resulted in a steep dive in sales of existing homes.
Prices fall sharply

Sales ticked up last month as prices continued to fall. The median price of a single-family home fell 8.6% from a year ago to $190,600.

The median price of all homes sold during the month - including single-family homes, townhomes, condominiums and co-ops - fell to $191,600, down 9% from $210,500 a year ago. Before the start of the current housing slump, it had been 11 years since prices fell compared to a year earlier.

The rate of existing home sales rose in every region of the country except the Northeast, where sales slipped by a seasonally adjusted 1.2%. Sales in the South rose 2.2%, while the Midwest saw an increase of 4.4%. The West saw the largest jump in sales, up a whopping 16.8%, as prices fell by 18.5% in that region.

Prices in the Northeast declined 5.4%, while the South saw a dip of 4.1%. Prices in the Midwest ticked 7.9% lower.

But the report offered the encouraging news that the excess supply of homes on the market fell in September. Realtors estimated that there are now 4.3 million homes available for sale, which represents a 9.9 month supply. That is down from the 10.6-month supply in August.

Thursday, October 23, 2008

Oil rises on expected OPEC cut

Oil prices rebounded from a 16-month low Thursday as many investors anticipated a large production cut from OPEC at its emergency to deal with falling demand in the slowing economy.

U.S. crude for December delivery rose $2.38 to $69.13 a barrel in electronic trading, rebounding from a settlement of $66.75 a barrel the day before.

Oil fell $5.43 on Wednesday after the Energy Department revealed a larger-than-expected increase in crude inventories - a sign that demand for crude in the United States, the world's largest oil consumer, was low.

Possible OPEC cut: The Organization of Petroleum Exporting Countries, whose member nations control about 40% of the world's oil, pushed up an emergency meeting, originally scheduled for Nov. 18, to Friday as slowing demand sent crude oil prices plummeting.

Falling demand has helped drive oil prices down more than 50% since they rose to a record high of $147.27 a barrel in mid-July, which has alarmed many of the nations whose economies depend on oil exports.

"I think (non-OPEC) Russia's desperate, and it's breakeven for (Venezuelan president Hugo) Chavez," said Tom Orr, head of research for Weeden & Co. in Connecticut.

"On the one hand, they want the price of oil up, but they don't want to be the ones to have to trim a lot of production," said Orr.

Russia, which is not an OPEC member, attends the organization's meetings as an observer.

OPEC officials have expressed concern that record high oil prices, followed by global economic stagnation, may have permanently impaired demand for crude products.

OPEC president Chakib Khelil told reporters last weekend that any production cut could be "substantial," adding that the organization would try to stabilize prices between $70 and $90 a barrel.

Iran's oil minister, Gholamhossein Nozari, told reporters Thursday that OPEC needed to cut production by about 2 million barrels a day.

Because the higher viscosity and sulfur content of Iranian oil makes it less desirable to refiners than oil from other OPEC nations, such as Saudi Arabia, the country has tended to try and keep overall prices higher.

However, analysts were split on the long-term benefits of a large OPEC cut.

Too large a cut, with the global economy already strained, could cause consumption to fall further, since oil would be harder to obtain, according to Phil Flynn, senior market analyst with Alaron Trading in Chicago.

"If they (OPEC) overreact to this selloff in the price of oil, it could hurt them more than it helps them," said Flynn.

If OPEC cuts too much, it could "destroy businesses, kill the economic growth in China," added Flynn. "They have to send a message to the market that they realize that the global economy has to heal right now."

On the other hand, a cut of about 2 million barrels a day could lend some stability to the oil markets, according to Orr.

"I think that's what the market needs," said Orr.

"By the end of the day, I think (a cut of) 2 million will probably be priced into the market," he added.

Gasoline: As belts get tighter, energy spending is often one of the first things consumers and businesses cut back on.

In the U.S., gasoline prices have fallen from a high of $4.114 a gallon on average since July, according to motorist group AAA. By Thursday, the average U.S. price had fallen to $2.822 a gallon, AAA said.

But despite the fall in prices, gas caps remained tight as Americans became used to using less.

According to the Energy Department, gasoline consumption for the last four weeks averaged 8.8 million barrels a day, or 4.3% lower than the same period last year.

And last week, gasoline demand was down 6.4% compared to the same week a year ago, according to a MasterCard survey of credit card swipes. It was the 26th consecutive week in which gasoline demand had declined on a year-over-year basis.

New foreclosure plan on tap

One of the country's top banking regulators said Thursday that the government is working on a plan to do more to help troubled homeowners.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that her agency and the Treasury Department are working closely to find ways to prevent avoidable foreclosures. The plan would use the Treasury Secretary's new authority under the Emergency Economic Stabilization Act to provide guarantees to mortgage lenders.

"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "Specifically the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."

That way, she said, "unaffordable loans could be converted into loans that are sustainable over the long term."

Americans have made it clear they are not happy that the $700 billion financial rescue package is focused so heavily on financial institutions and less so on helping homeownwers directly.

"Now that the administration has taken strong measures to stabilize financial institutions, it is imperative that we apply the same sharp and urgent focus to help the individual homeowners whose plight is at the root cause of this crisis," said Senate Banking Committee Chairman Christopher Dodd, D-Conn.

Bair, who worked with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke in crafting the financial rescue law, has been a longtime advocate of streamlining the modification process for homeowners who realistically have a chance of affording their mortgages once modified.

After the FDIC became conservator of mortgage lender IndyMac this summer, Bair instituted a loan modification process for loans that were 60 days or more past due and which IndyMac either owned directly or serviced. About two-thirds of the 60,000 loans under IndyMac's umbrella are considered potentially eligible for the new program, she said.

"Through this week, IndyMac Federal has mailed more than 15,000 modification proposals to borrowers and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures," Bair said. So far, more than 3,500 have accepted the offers and others are being "processed."

The modifications on average have cut borrowers' monthly payments by more than $380, Bair said.

Not all foreclosures are preventable since some homeowners still won't be able to afford their homes, even under modified loan terms. Bair said the loans being modified at IndyMac must provide "improved value" for the bank or for the investors who own the loans.

She added that she hoped the IndyMac modification program will serve as a "catalyst" for more loan modifications around the country.

Other witnesses at Thursday's hearing include Neel Kashkari, the Treasury's interim assistant secretary for financial stability; Brian Montgomery, the assistant secretary for housing at the Department of Housing and Urban Development; James Lockhart, director of the Federal Housing Finance Agency; and Elizabeth Duke, a member of the Federal Reserve Board of Governors.

Kashkari is leading the Treasury's efforts under the $700 billion bailout to buy mortgage-backed securities and invest in banks. He said Thursday that Treasury "will look for every opportunity possible to help homeowners" as it carries out the plan.

Lockhart said mortgage finance companies Freddie Mac and Fannie Mae - which own or back trillions of dollars in home loans - are pushing hard to help homeowners.

"We have already been working with Fannie Mae and Freddie Mac to find new ways to prevent foreclosures," Lockhart said. For example, he said the companies have boosted resources and staff aiming at assisting companies that service loans.

Wednesday, October 22, 2008

Bank stocks look tempting, but be wary

The worst of the market downdraft may be over, the convulsing may be easing up and a few brave investors - most notably Warren Buffett - are scooping up bargains.

If the whole modus operandi of investing is to buy low and sell high, then this would seem like the perfect time to do the former.

And if so, what group has been more beaten down than banks and other financial companies?

But before you take out a margin loan to buy these stocks (yikes!), you need to take heed of this simple advice: Be very, very careful.

Yes, it's true that Buffett bought pieces of Goldman Sachs (GS, Fortune 500) and GE (GE, Fortune 500) (which gets more than 40% of its profits from its finance subsidiary), but remember he did it on terms that are unavailable to the rest of us, through a series of preferred stock yielding 10%.

And just because a stock like Citigroup (C, Fortune 500) is at $14, down from over $55 in late 2006, doesn't make it cheap. Actually it's difficult to know what to make of C right now.

The banking giant has racked up billions of dollars of losses this year, so the price of its stock relative to earnings (yep, the ol' P/E ratio) is more guesswork than anything else. For the year analysts are predicting a loss of $1.87 per share, and coincidently a gain of $1.87 per share for 2009. How much faith do you have in those numbers?

On the other hand, over at JP Morgan (JPM, Fortune 500) another pitfall lurks. Widely considered to be in better shape than Citi, JPM trades around $39 down from the low $50s. A mark of confidence to be sure, but that means that Morgan's stock trades for 18 times trailing earnings - which is hardly a bargain considering all the questions surrounding the banking biz. It should be noted that other large banks thought to be relatively healthy, i.e., Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), sport similarly pricey P/Es.
Whitney: "I'm fearful"

But doesn't the $700 billion federal bailout - part of which is to be invested directly in these financial institutions - mean that risk has been mitigated, making them buys?

Not hardly, says Meredith Whitney, Oppenheimer & Co's Delphic analyst. "The economic train is already off the tracks, so the bailout will not stop that damage," she told me. "Solvency concerns are off the table for now, but earnings weakness is not. Stocks are still very expensive on a real earnings basis."

Yes there are still great unknowns, never mind fear in the banking sector. Check out this exchange between Whitney and JP Morgan CEO Jamie Dimon on JPM's earnings' call last week:

Dimon: "[W]e are not going to say, 'yahoo this is over, extend credit like we did without fear.' If you are not fearful, you're crazy."

Whitney: "I'm fearful."

Dimon: "We know you are. We're waiting for you to reverse your position."

What about the folks that make a living buying these stocks, as in portfolio managers of financial stock mutual funds? What do they see? Not a pretty picture. "Armageddon," is how one of them describes it.

That's not surprising. According to Morningstar this group of funds is down 38% year to date, with a good many off 50% and even 60%.
Hunting smaller game

There are a few one-eyed men though, like David Ellison, who runs FBR Small Cap Financial, the top performer in the group, off only 6% this year. Ellison has cut his exposure to stocks; some 26% of his portfolio has been in cash.

And he owns stocks you've probably never heard of. Like Hudson City Bancorp (HCBK), up 17% this year. And TCF Financial (TCB), up 3% year to date. And Bank Mutual (BKMU), which has climbed 11%.

Though these are among Ellison's most recent largest holdings, he is quick to warn, "those are the ones that [could be] down next week."

Still he says he is "trying to buy the simplest balance sheets and the simplest income statements, where you have companies where you understand the types of loans they're making. You want to own very traditional underwriters that are lending locally and that tends to focus you on the smaller companies."

Hudson, which is based in Paramus, N.J., and was founded in 1868, seems to fit that bill. The AP says that "Hudson City prides itself on never having issued a subprime, option adjustable-rate or Alt-A mortgage."

Hudson isn't exactly small potatoes; it has 136 branches, $44 billion in assets and a market cap of $8.4 billion. Just be advised that this is not a cheap stock either.

Bank Mutual out of Milwaukee is far smaller with only $3.4 billion in assets, while TCF Financial - is that TCB ticker for 'taking care of business'? - based in Wayzata, Minn., was recently cited by Sean Ryan, analyst with Sterne, Agee & Leach, as being a Midwest bank that was likely not vulnerable to further weakness. Hardly a glowing recommendation, but in this environment, that makes TCF stand out.

Remember these banks could all still be hit by the unforeseen, and Ellison warns that non-performing assets are still rising and "when NPAs are rising, you generally don't want to be in the group."

Anton Schutz, who runs the Burnham Financial Services and the Burnham Financial Industries fund, two other top dogs in the group, down 10.4% and 14.7% this year (and remember that's way above average), is playing some of the same notes as Ellison. Schutz has a slug of his money in cash and the rest in no-names such as TFS Financial (TSFL), a mutual holding company which is partially owned by the public and partly owned by depositors.

Here's Schutz's take: "What's really neat here is that they have too much capital. They're buying a lot of their own stock back, and buying well below its fully converted book value. That means if the company were ever to go fully public, every share they buy makes the fully converted book value rise. Beautiful math. I feel very good about their credit quality, their capital ratios and their creation of value for shareholders."

He also likes mortgage REIT American Capital Agency (AGNC). Says Schutz: "What they buy is some of the most, to me, best value in the market today -Fannie, Freddie, and Ginnie mortgage-backed securities. And who's guaranteeing those? The U.S. government."

The market is undervaluing those securities in the current climate of fear, Schutz argues, creating the opportunity for big gains as investors start to regain confidence. In the meantime, says Schutz, American Capital isn't taking much credit risk, "because that paper's all really good paper."

Schutz also owns JP Morgan, but it wasn't the first stock he wanted to talk about.
The housing lesson

Last fall after we were several months into the housing crunch, some suggested that home-builder stocks like Lennar, Pulte, Centex and D.R. Horton, which had already seen huge declines and looked cheap relative to earnings estimates, were screaming buys.

And sure enough in the first few months of this year they were super-star stocks, as it looked to some that the housing market had bottomed. Instead the business tanked even further, and now those shares have fallen by another 50%.

The bottom line is that two of the better fund mangers in the banking neck of the woods are for the most part hunting and pecking in the little names and have big chunk of their change in cash. Something to consider if you are inclined to take a flier in financial stocks right now.

Wachovia suffers nearly $24 billion loss

Wachovia reported a massive loss of nearly $24 billion Wednesday, in what was expected to be its last quarter as an independent company.

The struggling Charlotte, N.C.-based bank, which agreed to be acquired by Wells Fargo earlier this month, reported a net loss of $23.9 billion, or $11.18 a share, which included a whopping $18.8 billion impairment charge partly related to the planned merger.

Just a year ago, the company reported a profit of $1.62 billion, or 85 cents a share.

Despite the recent turmoil in financial markets, analysts were actually expecting the company to report a third-quarter profit of $547 million, or 2 cents a share.

Wachovia (WB, Fortune 500) shares fell 1.6% in early NYSE trading.

Wells Fargo execs, including CEO John Stumpf, said Wachovia's results were about as dreary as they expected after poring over the company's books and agreeing to buy the bank earlier this month.

"Wachovia's third-quarter results were very much in line with our expectations," Stumpf said in a statement.

Like many of its peers, Wachovia was hit hard this quarter by issues of credit and bad bets on the U.S. mortgage market, most notably its 2006 purchase of the California mortgage lender Golden West Financial Corp.

Over the last three months, the company said it set aside $4.8 billion for loan losses, as the economy showed increasing signs of weakness and the housing market continued to deteriorate in already hard-hit parts of the country such as California and Florida.

Wachovia added Wednesday that non-performing assets, or loans that are not collecting interest or principal payments, increased five-fold from a year earlier to just over 3% of all loans.

Still, much of the blame for Wednesday's results was the $18.8 billion impairment related, in part, to the tie-up with Wells Fargo.

Morgan Keegan analyst Robert Patten said the charge represented just how hard the two companies were working to clean up Wachovia's books before proceeding with the merger.

"You want to set up '09 to look as good as possible," he said.
Moot earnings

Assuming the company's anticipated merger with Wells Fargo (WFC, Fortune 500) comes off without a hitch, Wachovia's latest quarterly numbers will prove largely moot.

Still, the results offer a glimpse into just how badly the company was faring when investors seemed all but certain that Wachovia was destined to collapse.

Fears about Wachovia's ultimate demise first took hold in mid-September following the collapse of Lehman Brothers and shortly after Lehman rival Merrill Lynch was forced into the arms of Bank of America (BAC, Fortune 500).

Speculation continued to swirl about the 129-year-old bank in the days that followed, including rumors of a possible merger with with investment bank Morgan Stanley (MS, Fortune 500).

Even as Wachovia's consumer customers remained relatively calm about the bank's fate in the days that followed, Wednesday's results revealed that commercial depositors feared that the bank could be next. In just one quarter, the amount of commercial core deposits plunged by a colossal 24% from the previous quarter to $83.4 billion.

(Big customers flee)

Regulators finally interceded on Wachovia's behalf the last weekend in September, helping broker a $2.2 billion purchase of Wachovia's banking assets by Citigroup (C, Fortune 500).

Wachovia had a change of heart just days later, as it agreed to a sweetened offer from San Francisco-based Wells Fargo for all of Wachovia's operations.

After some legal wrangling, Citigroup eventually walked away, leaving Wells Fargo in control of Wachovia in a deal worth $11.7 billion.

Wachovia shareholders have yet to approve the deal, although they are widely expected to do so by year's end.

The combination of the two firms would transform Wells Fargo into a major player in the U.S. banking industry, with approximately $1.4 trillion in assets, a footprint in 39 states and the nation's second-biggest retail brokerage network.


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Tuesday, October 21, 2008

Why the U.S. needs China

The United States has sneezed. And while it may be too strong to say that China has now caught a cold, it has, at the very least, come down with a bit of a runny nose.

And that's not an encouraging sign for the U.S. economy.

China's government reported on Monday that its economy grew 9% in the third quarter. That is, of course, still robust expansion by any measure.

But it is a cause for concern considering that China's gross domestic product increased at a greater than 10% clip in the first two quarters of this year and has been growing at a double-digit pace annually since 2002.

The Chinese economy was expected to slow a bit following the Olympics in Beijing this past summer. But this is clearly more than a post-Olympic pullback.

It's even more troubling when you take into account the fact that China is a big investor in U.S. stocks and bonds. The Chinese sovereign wealth fund China Investment Corp. has stakes in U.S. financial firms Morgan Stanley (MS, Fortune 500), Visa (V) and Blackstone (BX), for example.
Talkback: Should the U.S. be concerned that China's economy is slowing?

And as I pointed out last week, foreign purchases of U.S. securities - with the notable exception of Treasurys - is starting to slow.

Simply put, a slowing Chinese economy is not good news for the United States. Consider another reason: China is an important customer of U.S. goods.

According to figures from the U.S. Department of Commerce, exports to China increased 18% last year. And China is now the country's third-largest export market. China surpassed Japan in 2007 and trails only Canada and Mexico.

Christian Broda, an economist with Barclays Capital, said in a research report last week that China helped keep the U.S. economy from slipping into a deeper recession in 2001 since it was just beginning to become a more active trading partner with the rest of the world at that time.

China was only added to the World Trade Organization in December 2001.

But Broda pointed out that China's exposure to the global economy is now double what it was in 1998-2002 because of its more active role as an importer and exporter. In other words, it's now too big to be immune from the financial crisis.

"We don't expect China to provide a buffer this time," Broda wrote. "As growth decelerates in the developed world, there is unlikely to be a region in emerging markets that will act as a natural countervailing force."

To be sure, China's economy is not going to grind to a halt. But even a marginal slowdown could hurt large U.S. firms. Many of them have been able to offset sluggish growth in the United States with sales to China and other developing markets.

And it's not certain that China's economy will continue to keep expanding at such a rapid pace in the next few years if this credit crunch continues to persist for much longer.

"This enormous shock to the worldwide banking business, which was really magnified in mid-September, should probably lead to a reduction of 2.5% in the growth for all global economies next year. So if you thought China would grow 10% in 2009, you now have to figure it will grow 7.5%," said Alexander "Sandy" Cutler, CEO of Eaton, a Cleveland -based manufacturer of industrial equipment.

Cutler said he expected China to remain a big growth opportunity for the company. Still, Eaton (ETN, Fortune 500) warned Monday that its fourth-quarter results would be lower than expected in large part due to slowing demand around the globe.

Construction equipment giant Caterpillar (CAT, Fortune 500) also hinted that China's economy would slow down next year when it reported slightly lower-than-expected results for the third quarter Tuesday.

Stuart Hoffman, chief economist of PNC Financial Services in Pittsburgh, said it would not be a surprise if China's slowdown affected other industrial companies, as well as tech firms that have increasingly looked to China as a growth market.

However, he added that there is one piece of good news worth mentioning - China is now the world's second-largest importer of oil. So the sharp decline in crude prices could help keep China spending more than other countries.

And since China doesn't rely as heavily on oil production as other developing nations - Russia being the most notable - it is unlikely to experience as much economic hardship due to falling oil prices.

Still, it's crucial for the health of the U.S. economy that China's doesn't suffer a severe meltdown.

To that end, Treasury Secretary Henry Paulson is giving a speech in New York on Tuesday night about China and the global economy. It will be very interesting to hear what he has to say.

There is already some evidence to suggest that the two nations may need to work together to avert more global economic pain.

When the Fed announced a coordinated interest rate cut on Oct. 8 with banks in Europe and Canada, China's central bank also lowered interest rates that day.

The Fed's announcement didn't mention the Chinese rate cut and China's central bank didn't acknowledge the rate cuts in the United States and Europe. But does anyone honestly think that the United States and China coincidentally decided on the same day to lower interest rates?

Make no mistake. The two countries clearly realize they need each other and that economic hardship suffered by the other is not good for either. China may not have the exact problems that the U.S. does but its third-quarter GDP slowdown is definitely a sign that the credit crunch is hitting China as well.

"This is proof positive that the world is very much interconnected and not decoupled. The U.S. is not the only locomotive for growth. China's growth is likely to continue slowing down," Hoffman said.

Monday, October 20, 2008

Bailout interest 'broad' - Paulson

Banks of all sizes are interested in a piece of the federal government's $250 billion fund to recapitalize financial institutions, Treasury Secretary Henry Paulson said Monday.

"We have received indications of interest from a broad group of banks of all sizes," he said.

The capital infusion is among the government's latest attempts to strengthen the teetering United States financial system. The funds come from the $700 billion bailout package passed by Congress in early October and follows similar moves by European governments.

Many America banks, however, were initially lukewarm to the idea of having the government take an equity stake when the program was announced a week ago. The head of the American Bankers Association last week praised the program for being voluntary and noted the strong capital position of many institutions.

Banks must apply for funds by Nov. 14, Paulson said. They must consult with their primary federal regulator before applying.

Banks could start receiving money soon after they apply, regulators said. The government won't wait until the deadline to release the funds.

Under guidelines released Monday, an eligible institution will be able to sell the government an equity stake of up to 3% of its risk-weighted assets. The aid will take the form of preferred stock.

Nine of the nation's largest banks have already agreed to participate in the program and will receive half the funds. They are: Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500), Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500), State Street (STT, Fortune 500) and Bank of New York Mellon (BK, Fortune 500).

Any bank, savings association, bank holding company or savings and loan holding company established and operating in the United States is eligible. Institutions controlled by foreign companies are not.

However, banks in serious financial trouble may not qualify for the capital injections, regulators indicated. When pressed, they declined to specify why a bank would be deemed too unhealthy to participate. Among the criteria regulators are examining are an institution's health, lending ability, possibility of outside capital raising and merger opportunities.

Being involved in a merger could make an otherwise unhealthy bank eligible for an infusion, they said.

The government investments will be considered Tier 1 capital, which supports a bank's lending operation.

There is enough money to go around, Paulson said.

"Sufficient capital has been allocated so that all qualifying banks can participate," Paulson said. "Let me be clear that this program is not being implemented on a first-come-first-served basis."

However, he cautioned banks against keeping the money in-house. One of the main problems in the weakening economy is that banks are afraid to lend.

"Our purpose is to increase confidence in our banks, so that they will deploy, not hoard, their capital," Paulson said. "And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people."

Oil rises on OPEC rhetoric

The price of oil rose Monday as investors weighed a potential OPEC supply cut against longer-term concerns about weakening demand.

Light, sweet crude for November delivery settled up $2.40 to $74.25 a barrel on the New York Mercantile Exchange. Oil has fallen sharply from recent highs, losing roughly half its value since it topped $147 in July.

Retail gasoline prices, meanwhile, continued to come down. The national average price for a gallon of regular gasoline fell more than 3 cents overnight to $2.923, according to a survey by the American Automobile Association.

Gas prices have retreated about 30%, or $1.19, from the all-time high of $4.114 that AAA reported in July.

While falling gas prices are a boon for cash-strapped consumers, they come largely as a result of crude's staggering decline, which has prompted some hand-wringing on the part of producers.

Members of the Organization of Petroleum Exporting Countries will meet Friday to discuss a possible production cut aimed at preventing the price of crude from falling further.

The cartel, which controls two-thirds of the world's oil supplies, is reportedly considering a cut of up to 1.5 million barrels per day.

The oil market shrugged off OPEC's decision last month to cut output by about 520,000 barrels a day. At that time, concerns that a global economic recession would severely undermine energy demand were outweighing supply concerns.

But some analysts say the price of oil has been pushed too low and that the market is "oversold."

Recent signs of a tentative thaw in the credit markets and a few days of relative stability in the world's stock markets have led some investors to believe that economic conditions could improve and energy demand may rebound.

"This week's trade in crude oil is expected to rebound slightly from recent oversold levels," wrote Tom Pawlicki, oil analyst at MF Global in Chicago, in a recent research note.

"Signs of strength in the stock market" and "recent rhetoric from OPEC" could drive the price of oil to $90 over the next week or two, Pawlicki said.

Still, Pawlicki counts "weakening demand for oil" among the long-term factors that will pressure the oil market.

Bernanke: It's time for stimulus plan

Federal Reserve Chairman Ben Bernanke testified Monday that Congress should consider passing a new stimulus package to try to jump start the economy.

Bernanke, speaking before the House Budget Committee, came just short of an outright endorsement of a package to pump tax dollars into the economy. But he clearly said the economy needs additional help from Congress.

"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," he said.

Experts said Bernanke's testimony gives an important lift to the chances that Congress will pass some sort of stimulus package, perhaps in a lame duck session after the November election and before the new Congress takes office in January.

"Effectively, the Fed chairman is giving Congress a green light to go ahead with an additional fiscal stimulus package," said Brian Bethune, chief U.S. financial economist for research firm Global Insight.

Earlier this year, Congress approved a $170 billion plan - nearly $100 billion in payments to tax filers - to boost consumer and business spending. Talk has grown louder in recent weeks in Washington and on the presidential campaign trail for further steps including an extension of unemployment benefits, infrastructure spending and other measures.

Bernanke's comments were cheered by House Speaker Nancy Pelosi, D-Calif.

"Chairman Bernanke added his voice to the chorus of economists, experts and policymakers who insist that America needs a job-creating recovery package to get our economy back on track and to restore consumer and investor confidence," said a statement released by her office.

The Bush administration said it was open to discussing a new stimulus package with lawmakers but said it did not see Bernanke's statements as a blanket endorsement of any plan proposed so far by Congress.

"I think we just need to wait and see," said White House spokeswoman Dana Perino. "We're open to ideas and we'll take a look at what comes our way."
Recession or not?

Bernanke, who with Treasury Secretary Henry Paulson has led the government's extraordinary efforts in recent weeks to stem the financial crisis, was asked by Rep. Rosa DeLauro, D-Conn., whether the economy is in a recession.

"We are in a serious slowdown," Bernanke said, refusing to give the yes-or-no answer DeLauro said she wanted.

He said "recession" is a technical description of economic conditions. "Whether it's called a recession or not is of no consequence," Bernanke said.

Some economists saw Bernanke's comments as his most dire assessment yet of the U.S. economy.

"The Fed has accepted that the rate cuts and actions, even if they are of help to the financial sector, will not be adequate to stabilize the economy," said Arpitha Bykere, economic analyst for RGE Monitor.

Most of Bernanke's nearly 90-minute appearance focused on economic stimulus. He said that Congress should consider another measure but nonetheless declined to say how much money should be spent. He said that's a decision for Congress, not the Federal Reserve.

Bernanke suggested Monday that any stimulus program should be activated as quickly as possible to boost the economy when it is facing its greatest period of weakness.

In addition, Congress should weigh whether to make credit more available to consumers, homeowners, businesses and other borrowers, Bernanke said. He said that loan guarantees and direct lending by government are among the ways lawmakers can get credit flowing again.

Democrats have been pushing for a second stimulus package for months. Among the proposals they've put forward: extend jobless benefits, increase food stamps, invest in infrastructure projects and impose a requirement for a foreclosure moratorium.

Republicans have made their own proposals, which focus more on tax breaks than direct payments. Among them, reduce or suspend the capital gains tax and offer a bigger tax break for home buyers.

The presidential candidates, whose crisis-related stimulus plans largely differ from one another, nevertheless both call for suspending the income tax on unemployment benefits and temporarily exempting seniors over 70-1/2 from having to make withdrawals from their IRAs and 401(k)s.

At Monday's hearing, Rep. Brian Baird, D-Wash, pushed Bernanke about the value of spending on infrastructure projects, such as roads and water projects. Such projects have economic value, but it generally takes a long time for spending on such projects to get into the system, Bernanke said. Baird responded that in his district and across the country there are many projects ready to go and lacking only funding.

Lawmakers also questioned Bernanke about the need to help state and local governments avoid budget cuts. The federal government could loan states money at significantly lower rates than available in the financial markets, he said.

Friday, October 17, 2008

Oil rebounds after selloff

The price of oil rose Friday, after slumping to a 13-month low in the previous session, as investors viewed rising stock prices as a positive sign for energy demand.

Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange. That's down 50% from crude's July peak settlement price of $145.29 a barrel.

On Thursday, the contract settled at $69.85, the lowest level since Aug. 23, 2007.

The oil market has been dominated by concerns that a prolonged economic slowdown would curb demand for energy. But some traders now say the price of oil has been driven down too far.

"The market is very oversold," said Peter Beutel, oil industry analyst at Cameron Hanover in Connecticut. "Now that we're out of the meltdown phase, the market is starting to look ahead."

Meanwhile, stock markets in Europe and Asia rose Friday. On Wall Street, the Dow Jones industrial average was up nearly 1% with about one hour left in the session.

Many oil traders see rising stock prices as a sign that economic conditions are improving and that energy demand may recover.

At the pump, gasoline prices fell another 4 cents overnight to a national average price of $3.04 a gallon. Gas is down more than 25% after soaring to an average of $4.11 in July.

As gas prices retreat, households should have more money to spend on discretionary items. That could help speed an economic recovery since consumer spending makes up two-thirds of the nation's gross domestic product.

OPEC: The market was also digesting a surprise move Thursday by the Organization of the Petroleum Exporting Countries to hold an emergency meeting earlier than it had originally planed.

OPEC member countries control two-thirds of the world's crude supplies, and analysts say its decision belies a desire to put a floor under the rapidly declining price of crude.

"OPEC is starting to panic," Beutel said. The cartel is expected to cut production by as much as 1 million barrels a day, he added.

But Beutel thinks a production cut by OPEC will not have a significant impact on the price of oil given the current outlook for supply and demand fundamentals.

"They're going to fail at keeping the price where they want it," he said.

Credit thaw: Recent signs of progress in the credit market have also helped improve the outlook for energy demand, said Tom Pawlicki, energy analyst at MF Global in Chicago.

Credit markets have seized up as banks have become wary of lending to each other and businesses given the uncertainty about the health of the global economy.

In response, governments worldwide have stepped up efforts to reestablish confidence in the financial system and get money flowing freely again.

"There's a bit more confidence in the credit situation," Pawlicki said. "That's helping the stock market and boosting the oil market."

The overnight Libor rate fell to 1.67% from 1.94% Thursday, according to the British Bankers' Association. The key bank-to-bank lending rate is now at its lowest level since Sept. 20, 2004, when the rate was 1.66%.

Last Thursday, overnight Libor reached 5.09% and had spiked as high as 6.88% after the U.S. $700 billion bailout bill was signed into law on Oct. 3.

Funds: The oil market is also experiencing an exodus of large institutional investors.

Open interest in the market for crude futures has declined recently, suggesting that the market is seeing "a blow out of large funds," Pawlicki said.

Big firms that oversee large sums of money, including hedge and pension funds, were blamed for inflating the price of oil during the summer's run-up.

While futures markets rely on a certain degree of speculation, these funds were criticized for "excessive speculation" by government regulators and industry watchdogs.

But as the credit crunch has weighed on the financial system, many of these funds are now pulling money out.

Credit squeeze loosens

Bank-to-bank lending rates dipped again Friday, an indication that government moves to juice the economy with money supply was having an effect.

The overnight Libor rate fell to 1.67% from 1.94% Thursday, according to the British Banker's Association. The very short-term lending rate is at its lowest level since Sept. 20, 2004, when the rate was 1.66%, according BBA.

Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages. The higher the rate, the tougher it could be for homeowners to pay those mortgages.

What a difference a week makes. Last Thursday, overnight Libor reached 5.09% and had spiked as high as 6.88% after the U.S. $700 billion bailout bill was signed into law on Oct. 3.

The U.S. government has worked with central banks around the globe to cut interest rates, increase currency exchange programs and backstop bank-to-bank lending in an effort to unclog the credit pipelines. The sharp drop in the overnight Libor rate is a sign that some confidence is returning, at least in the short term.

In fact, for the overnight bank lending rate is now just above the rate that the federal banks charge banks - a sign of normalcy returning to the credit markets, according to Steve Van Order, chief fixed income strategist at Calvert Funds. The federal funds rate is at 1.5% and as of Friday, the overnight lending rate now stands at 1.67%.

The overnight Libor rate has come down as central banks pump dollars into the system. "On the short term basis, there is confidence for banks to lend to each other," added Van Order.

Longer-term lending still tight: The 3-month Libor marched lower for the fifth day in a row, falling to 4.42% from 4.50% Thursday, according to, but they still remain at elevated levels.

Just last week, the 3-month Libor had surged to 4.82% - the highest since mid-December 2007. By comparison, it was only 2.82% a month ago.

"Things have improved from the doomsday scenario that we saw last week, but it is by no means suggesting that it is ok," said Michael Cheah, senior portfolio manager at AIG Sun America.

While banks had already tightened their lending amid the housing implosion last summer, the markets got really squeezed after Lehman Brothers collapsed last month. The fear was that if one major investment bank was having trouble, then so were others. Translation: banks were fearful of lending to institutions that might not be there tomorrow to repay the loan.

So, while the libor rates continue to come down, it will still take some time before the credit squeeze is loosened.

"Until you start to see the 3-month Libor rate see a more pronounced move, I don't think we are out of the woods," said said Kenneth Naehu, managing director and head of fixed income at Bel Air Investment Advisors. "But we are seeing signs of improvement."

Longer term lending rates should fall further as central banks continue to get dollars pumped into the system on a longer-term basis, said Van Order. In addition, on Oct. 27, when the Fed begins actually purchasing commercial papers, providing short-term funds for businesses, that should also work to ease credit markets.

One analyst said that a key component to seeing the credit markets showing longer-term relief was for home prices to stop falling. "Falling home prices would continue to make the consumer unhappy and make the banks unwilling to lend money," said Cheah. Falling home prices make banks unwilling to lend money to consumers because the bank's collateral for the loan looses value.

But, with mortgage rates still elevated, that will take some time. The average 30-year fixed-rate mortgage was up at 6.46% from 5.94% the week earlier, according to a report issued by Freddie Mac (FRE, Fortune 500) on Thursday.

Market gauges: Two market indicators showed signs of improvement for the credit market.

The "TED spread" declined to 3.52% from 4.11% Thursday, signaling some modest optimism. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks. The spread was 1.04% just a little over a month ago and reached a record high of 4.65% last Friday.

Another indicator, the Libor-OIS spread, also edged lower to 3.28% from 3.39% Thursday. The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.

Treasurys: Government bond prices fluctuated Friday, reflecting the same market uncertainty and volatility that has been seen in the equity markets recently.

The Dow Jones industrial average briefly turned positive and was down only 30 points after tumbling more than 250 points earlier Friday. The Dow had a similar ride on Thursday, surging some 401 points, after having fallen as much as 380 points in the late morning.

Treasury prices are reacting partly to investor anxiety and partly to an influx of supply as the Treasury Department seeks to fund its various bailout initiatives.

On Friday, the Treasury is offering $30 billion worth of 74-day bills and another $30 billion worth of 94-day bills. The $60 billion worth of notes the government plans to auction Friday are part of the Supplementary Financing Program that the government announced Sept. 17 to "provide cash for use in the Federal Reserve initiatives," according to a statement on the Treasury Web site.

The $60 billion worth of notes auctioned Friday follows $70 billion worth of cash management bills that were auctioned Thursday.

"Typically, when you have a lot of supply in the short term, the market would sell off," added Cheah. The result of the two sentiments are keeping prices gyrating Friday.

The benchmark 10-year note was down 8/32 to 100-3/32 and its yield rose to 4% from 3.94% late Thursday. Bond prices and yields move in opposite directions.

The 30-year bond fell 1-20/32 to 102-16/32, and the yield rallied to 4.35% from 4.24% Thursday.

The 2-year note fell 5/32 to 100-18/32 and its yield rose to 1.71% from 1.56%.

The yield on the 3-month bill rallied to 0.90%, up from 0.39% Thursday, as the price fell. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle funds into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.

The late-day jump in the yield on the 3-month yield was another sign of confidence for the credit markets. "Everything that has been rolled out seems to have people feel a little bit better," said Van Order.

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