Friday, November 28, 2008

European unemployment soars

Unemployment in the 15 nations that share the euro shot up to 7.7% in October - the highest level in two years - as growth dropped sharply, the EU statistics agency Eurostat said Friday.

Prices also plunged with the annual inflation rate sinking to 2.1% in November from 3.2% in October, Eurostat said. Lower inflation gives the European Central Bank more room to reduce interest rates, which would help stoke growth.

The euro area officially went into a recession in spring and summer this year when growth shrank in the second and third quarters, as a financial crisis curbed global demand.

In real terms, this means job losses - lots of them and more to come.

Eurostat said some 225,000 more people were seeking work in October from the previous month. That means some 12 million people in the euro area were out of work last month. It also said unemployment in September was worse than it had first estimated, revising the rate upward to 7.6% from the 7.5% it reported last month.

Across all the EU's 27 states, some 17 million people were job-hunting in October, 290,000 more than a month earlier. The EU jobless rate was 7.1% in October, up from 7% in September.

The EU's executive Commission forecasts that the labor market will get even worse next year, with the euro-zone rate climbing to 8.4% in 2009 from a decade-low of 7% at the end of 2007. This will see an extra 2 million people out of work.

Unemployment is highest in Spain, at 12.8%. The bursting of a housing bubble has put builders out of work just as the tourism industry has been hurt by the global economic downturn.

The European Commission this week called on EU governments to pay out $258 billion in tax cuts, soft loans to industry and credit guarantees to encourage growth.

Tumbling exports have hurt Europe's manufacturing industry - particularly in Germany, the world's largest exporter - which had helped drive economic growth this year even as household spending froze.

But one of the most important tools to manage the economy is out of the hands of most European governments - the independent European Central Bank decides on borrowing costs for euro nations and until recently was slow to cut interest rates while inflation was high.

The price index is a calmer 2.1% this month, the lowest since September 2007. It is also close to the ECB's guideline of just under 2%. Oil prices have dropped by more than half since July while retailers are slashing prices in the key Christmas shopping season.

The bank's mandate is to tackle inflation, which it has repeatedly stressed was too high this year, but the lower figure released Friday will allow it to move more aggressively to slash rates and kickstart the economy.

In recent days, bank governors have spoken out in favor of lowering its key interest rate - now 3.25% - to tackle the slowing economy. They next meet to decide rates is on Dec. 4 in Brussels.

Marco Valli, an economist at Unicredit, said he expected the ECB to make a "shy cut" next week to bring the interest rate to 2.75% next week. Bank of America's Gilles Moec said he thought the bank might gun for a more dramatic cut to 2.5%.

Lower borrowing costs can tempt businesses and households to borrow more - as long as banks pass on the cuts to customers.

That isn't always the case in the current climate of tight credit. Banks are more fearful about taking on risks in the wake of the financial crisis and are finding it harder and more expensive to borrow money on credit markets that they lend on to customers.

In Britain, the government has pressured banks to pass on hefty interest rate cuts to hard-pressed homeowners and small businesses. Some banks prefer to freeze their rates to claw back profit and shore up their reserves.

Wednesday, November 26, 2008

Consumer spending drops 1%

Consumer spending fell dramatically in October, according to a government report released Wednesday, in another woeful sign that the economy will continue to contract.

The Commerce Department said spending by individuals fell by 1% last month, after declining 0.3% in September. It was the biggest decline since September 2001 and worse than the 0.7% drop economists surveyed by had forecast.

Falling consumer prices contributed heavily to the decline in overall spending. The so-called core PCE deflator rose by just 2% in the past 12 months, down from 2.2% by that measure in September.

This key reading, which measures prices paid by consumers for goods and services other than food and energy, is now in the 1% to 2% inflation window the Federal Reserve is generally believed to want, and it echoes a Labor Department report released last week that showed consumer prices fell by the highest amount since 1947.

But the report showed spending still fell by 0.5% when prices were not taken into account.

That's an ominous sign ahead of the holiday shopping season. It's particularly worrisome for the economy since consumer spending accounts for about two-thirds of the nation's gross domestic product.

Personal income, however, rose 0.3% in October, following a 0.2% rise in the previous month. Economists had expected a 0.1% rise.

The rise in personal income far outpaced the change in prices, leading to a 1% rise in real income in the period, the most since September 2005.

Because income gains outpaced spending, consumers posted a savings rate of 2.4% in the month compared with just 1% in September. That means the average household saved $2.40 on every $100 of after-tax income.

Rough start on Wall Street

Stocks slumped Wednesday morning as a barrage of weak economic reports exacerbated fears of a prolonged recession.

The Dow Jones industrial average (INDU), the Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all slumped in the early going.

Overseas markets were down, with the exception of Hong Kong. London's FTSE index and Frankfurt's Dax were down more than 2%, and the CAC in Paris fell more than 3%. The Nikkei fell 1.3% in Tokyo, though the Hang Seng surged 3.8%.

Economy: Investors were hit by a wave of gloomy reports.

The biggest disappointment was the Commerce Department's report on durable orders, which fell 6.2% in October, a retraction in manufacturing that was much worse than expected. Durable orders were expected to slide 2.5%, according to a consensus of economists surveyed by This follows an decline of 0.2% the prior month.

The Labor Department's report on jobless claims was not as bad as expected, though it provided little cause for celebration ahead of the holidays. Jobless claims totaled 529,000 in the week ended Nov. 22, the department said, which was less than the 537,000 expected by a consensus of economists surveyed by

The Commerce Department said personal income rose 0.3%, which was better than the 0.1% projected in economist consensus provided by This is compared to an increase of 0.2% in the prior month.

Personal spending slipped 1% in October, the department said, which was not as bad as the 0.7% decline expected by's consensus of economists, but was still the biggest gain since the September 11 attacks on New York and Washington. There was a decline of 0.3% the prior month.

Peter Cardillo, analyst for Avalon Partners, said, in an interview before the economic reports were released, that weak economic data could put further pressure on stocks.

At 10:45 a.m. ET, President-elect Barack Obama is expected to announce his appointment of former Federal Reserve Chairman Paul Volcker to lead a special council aimed at battling the economic crisis.

After three straight days of gains in the Dow Jones industrial average, Cardillo said a positive reaction to Obama's announcement is the best potential market-driver on the day before Thanksgiving.

"I think Mr. Obama's press conference just might steer us towards a fourth day of gains," said Cardillo.

Cardillo said the bulk of Wednesday's trading volume will take place in the early part of the session, before traders take off for the Thanksgiving holiday.

U.S. financial markets will be closed Thursday, with only a half-day of trading scheduled Friday.

Oil and money: Crude prices steadied after the previous session's drop. U.S. crude for January delivery rose $1.71 to $52.48 a barrel on the New York Mercantile Exchange.

The dollar edged higher versus the euro and the British pound, but fell versus the yen.

China rate cut: On Wednesday, China's central bank cut its key interest rate by a hefty 1.08 percentage points. The move is aimed at boosting the country's slowing economic growth.

Tuesday, November 25, 2008

Fed bets $800 billion on consumers

The Federal Reserve and Treasury Department on Tuesday unveiled hundreds of billions more in money they are pumping into the struggling U.S. economy, trying to jumpstart lending by the nation's banks for mortgages and consumer debt.

Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation's banks and Wall Street firms.

By putting that money in the hands of holders of consumer and mortgage loan securities, the government hopes more money will flow to consumers than has occured so far in previous bailout plans.

But the program to make $200 billion available for a range of consumer loans - including credit cards and car loans - likely won't be up and running until February. Government officials briefing reporters couldn't say how much additional credit the program might make available to consumers in time to feed purchases for the holiday shopping season.

That $200 billion aimed at spurring consumer borrowing will come from the Federal Reserve Bank of New York, which will lend that money to holders of securities backed by consumer debt, such as credit card debt.

The statement from Treasury said that while roughly $240 billion of those kinds of securities were issued by the nation's financial institutions in 2007, the issuance of those securities essentially came to a halt in October.

"This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy," said Treasury Secretary Henry Paulson at a press conference.

Treasury will allocate $20 billion to back that lending by the New York Fed, an attempt to cover any losses that the New York Fed might suffer as a part of the program.

But the $200 billion under this program, and an additional $600 billion being made available to increase mortgage lending, will come from an increase in reserves by the Fed. Essentially, the central bank is creating more money to cover that lending.

The Treasury, which oversees the $700 billion approved by Congress last month to help financial institutions, has been reluctant to make a major commitment of those funds to this new effort. Thus it allocated only $20 billion, or the same amount it invested in troubled banking giant Citigroup (C, Fortune 500) in a move announced Sunday.

So it was left to the Federal Reserve of New York, which is headed by Timothy Geithner, the man nominated by President-elect Obama to take Paulson's place, to come up with the funds to try to restart consumer lending.

The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation's economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.

In addition, the Federal Reserve, the nation's central bank, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and closely held Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," said the statement from the Fed.

The financial crisis has frozen lending markets, making it nearly impossible for consumers and businesses to borrow money.

Treasury originally had planned to use the $700 billion bailout to buy troubled mortgage assets. But it has shifted gears and focused mostly on injecting capital into banks.

The last capital injection into Citigroup was part of a broader rescue package under which Treasury and another U.S. agency, the Federal Deposit Insurance Corp., announced it would guarantee losses on more than $300 billion of Citi's troubled assets.

But once again, Treasury is not using the $700 billion in bailout funds for that guarantee, as it tries to keep those funds available for future capital needs by the nation's financial institutions.

Problem banks rise to 13-year high

The government's watch list of problem banks grew staggeringly in the third quarter, according to a government report on the embattled financial sector released Tuesday.

The Federal Deposit Insurance Corp. reported that the number of firms on its so-called problem bank list grew to 171 during the third quarter - the highest since 1995 when there were 193 banks on the list. There were 117 banks on the list in the second quarter.

"We've had profound problems in our financial markets that are taking a rising toll on the real economy," said Sheila Bair, FDIC chairman, at a press conference. "Today's report reflects these challenges."

Though the FDIC does not reveal the names of the banks on the list, it said the total assets of these institutions rose to $115.6 billion in the third quarter from $78.3 billion in the previous three months, the first time since 1994 in which the assets of problem banks exceeded $100 billion.

Since home prices began to decline late last year, banks have faced strong headwinds as the value of their mortgage-backed securities declined sharply in value. Those assets became "toxic" holdings on their balance sheets, resulting in a lending freeze, soaring borrowing costs and large writedowns.

"Banks got caught in a vicious cycle mainly of their own developing," said Matt McCormick, analyst at Bahl & Gaynor Investment Counsel. "The lowest common denominator turned out not to be their best client; for all their brilliance, they flunked Economics 101."

Still, just 2% of FDIC-regulated banks are now on its watch list, compared to about 10% in the late 1980s and early 1990s during the savings and loan crisis. The government identifies problem banks as institutions on the brink of failure, facing severe financing difficulties and management issues. But few banks typically reach that point - just 13% of banks on the FDIC's problem list have failed on average.

"Most banks remain well-capitalized, profitable and sound," said Bair. "We believe the overall majority of them will not fail."

Three more banks failed on Friday, bringing the total to 22 failed banks so far this year - compared to just three in 2007. Nine banks failed in the third-quarter alone, including the collapse of savings and loan Washington Mutual, the largest bank failure in history.

This was the highest number of failures in a quarter since the third quarter of 1993 but pales in comparison to the more than 1,000 banks that failed during the savings and loan crisis. Still, the failures in the third quarter forced the FDIC to draw down $10.6 billion from its deposit insurance fund.

That number could rise substantially if there are more bank failures. Beginning in October, the FDIC began insuring interest-bearing accounts up to $250,000 (the previous limit was $100,000) and has issued unlimited guarantees on non-interest-bearing accounts and newly issued unsecured bank debt as part of the government's financial rescue initiatives.
Ugly profits

Toxic assets continued to weigh on the industry's profits, which fell 90% to $1.7 billion in the quarter from $28.7 billion a year ago. That was the second-lowest quarterly net income for banks since 1990, the FDIC said. About one in five banks reported a net loss in the quarter, compared just to one in eight during the same period last year.

Much of that decline was due to loan-loss provisions, which totaled $50.5 billion in the quarter after banks set aside $50.2 billion in the previous quarter. That's more than three-times the $16.8 billion in loan-loss provisions from the fourth quarter of 2007.

"Loan performance problems are spreading to a much wider range of lenders and category of loans," said Bair. "This trend is linked to a weaker economy and uncertainty in the financial markets."

Also contributing to damaged profits were loan losses, which rose for the seventh consecutive quarter. Net charge offs, or loans banks don't think are collectable, rose to $27.9 billion in the quarter, up from $17 billion during the same period a year ago, and its highest level since 1991.

In a sign that credit remained tight, banks borrowed $162.5 billion from the Federal Reserve's emergency lending window, up 4.8% from the same period a year ago. In its so-called "discount window," the Fed offers overnight funding for commercial banks at a rate slightly higher than its targeted funds rate.

Bair said smaller community banks with assets of less than $1 billion are also beginning to feel the stress of the weak economy, even though they remain better capitalized than the industry average.

As a result, Bair said it is essential that those banks take part in the Treasury Department's capital purchase program and the FDIC's new temporary liquidity program to stay afloat.

But there were some bright spots in the report. One of the government's early liquidity programs, which provided support to money market mutual funds by funding banks' purchases of asset-backed corporate debt led to a 2.1% boost of banks assets in the quarter. And banks' net interest income rose 4.9% to $4.4 billion as borrowing costs rose.

"It's important to emphasize that banks in large part still made money in the third quarter, which was a very difficult one," said Gary Townsend, president of the Chevy Chase, Md.-based Hill-Townsend Capital. "The fourth quarter is likely to be worse, but last quarter they paid forward a lot of loan losses."

Bair said the poor credit conditions will persist for some time, as it will take a while for sentiment to improve and for the numerous government liquidity programs to take effect.

She added she will continue to work with President-elect Obama's administration beginning Jan. 20 to help stabilize the financial sector.

Sunday, November 23, 2008

Obama expected to tap Geithner for Treasury

President-elect Barack Obama is expected to nominate New York Federal Reserve President Timothy Geithner for Treasury Secretary.

Two sources close to the transition told CNN on Friday that Geithner is "on track" to be offered the post. An announcement is expected within days.

Geithner has played a central role in the government's efforts to wrangle the credit crisis, which has damaged markets and economies worldwide. While a number of those efforts have been controversial, Geithner remains a well-regarded figure from Wall Street to Washington.

In the wake of the Geithner news, stocks soared in late-day trade on Friday. The Dow closed nearly 500 points higher, pushing back above 8,000, after a dismal week.

Many believe the post of Treasury Secretary will be the most important in the next administration's cabinet. And indeed, Geithner would inherit one of the toughest jobs in Washington.

Geithner would be charged with restoring stability to the financial markets, the banking system and the housing sector through oversight of the controversial $700 billion financial rescue package, of which about half is still available for use at the discretion of the Treasury Secretary.

He would also be chief overseer of the international push to reform the regulatory regime for the financial system, which, like a sputtering lemon on the autobahn, has been severely outrun by 21st century developments in financial practices and products.

His overarching task: Ensure that what happened to world markets and economies in the fall of 2008 never happens again.

In the span of just two months, Americans and investors around the world have lost trillions in wealth, economies have fallen into recession like dominoes and the current prospects for recovery are insufficient to offer comfort. All the while, the foreclosure beat goes on, with roughly 165,000 more Americans losing their homes in September and October, bringing the total to 936,000 since August 2007.

Expect Geithner, if nominated, to roll up his sleeves and get busy even before his confirmation hearings with Congress, which could come before Inauguration Day.

Henry Paulson, the current Treasury Secretary, has indicated that he's reserved office space for his successor so that the Bush and Obama Treasury teams can work closely to insure a smooth transition during what has become the most tumultuous period for the U.S. financial system and economy in recent history.
What Geithner brings to the job

Often described as brilliant but modest, Geithner, 47, has held for the past five years one of the most powerful, if little known, jobs in the country as president of the New York Federal Reserve. His post at the New York Fed is essentially one of Wall Street watchdog. He also sits on the Federal Open Market Committee, which sets the country's monetary policy.

"His reputation is excellent," said former Federal Reserve Governor Lyle Gramley, who adds he doesn't know Geithner personally.

Geithner was the U.S. Federal Reserve's point person on the rescue of Bear Stearns and American International Group (AIG, Fortune 500) as well as in the failed talks to keep Lehman Brothers out of bankruptcy.

Lehman's demise is blamed by many for the freeze up in global credit markets that followed immediately afterwards.

He is typically cited as one of the few people on or off Wall Street who can begin to untangle the murky and unregulated market of credit default swaps, the so-called "side bets" that felled AIG. He has pushed for greater transparency and the creation of a central clearinghouse where credit default swaps could be recorded and secured. And, according to Fortune, he has gotten informal promises from banks that they would participate.

Prior to joining the Fed, he served as director of policy development and review at the International Monetary Fund. Before that, he was the under secretary of the Treasury for international affairs under Treasury Secretaries Robert Rubin and Lawrence Summers.

His is an international background, which would come in handy at a time when G-20 governments have pledged to coordinate efforts to dig out their economies and markets. Geithner has lived in China, Japan, Thailand, India and East Africa. He got his bachelor's from Dartmouth in government and Asian studies and his master's in international economics and East Asian studies from Johns Hopkins School of Advanced International Studies.

Indeed, during his years at the Treasury, he played a central role in the agency's handling of international crises. A profile of him in The New Republic asserted that without his influence "the '90s might have looked very different ... [His role made him] Treasury's first-responder to foreign-currency emergencies, like the kind that plagued East Asia throughout the decade."

Gas prices continue to fall

Gasoline prices continued to sink, falling for the 67th day in a row, according to a national survey of gas station credit card swipes released Sunday.

The average price of gas in the United States fell to $1.929 a gallon, shedding 2.4 cents from the previous day, motorist group AAA said.

Gas prices have shed $1.926 over the past 67 days, and have fallen more than 50% since hitting a record average price of $4.114 in mid-July.

Gas has already dipped below an average of $2 a gallon in 36 states, and continues to sell below $3 on average in all states. Even in Alaska - which has the most expensive gas in the country - the average fell below $3 a gallon on Sunday. Gas was cheapest in Missouri at an average of $1.624, according to AAA.

Diesel: The price of diesel fuel, which is used to power most trucks and commercial vehicles, fell to a national average of $2.848 a gallon from $2.868 a day earlier, according to AAA.

Diesel prices have fallen more than 40% since hitting a high of $4.845 in July.

Prices at the pump have been falling along with the price of crude oil, the main ingredient in all petroleum fuels. Crude investors have been concerned that as the global economy slows, demand for fuel will fade worldwide.

Oil prices on the open market have fallen more than 60% since mid July. On Friday, oil futures settled at their lowest levels since May 2005.

Ethanol: Meanwhile the price of E85, an 85% ethanol blend made primarily corn, has also fallen to $1.673 a gallon from $1.681, according to AAA.

E85 can be used as a gas substitute in special configured "flex-fuel" vehicles. However it is difficult to find outside of the corn-producing Midwest region, and it is not sold at the pump in some states.

The AAA figures, compiled by Oil Price Information Services, are state-wide averages based on credit card swipes at up to 100,000 service stations across the nation. These are state-wide averages, and individual drivers may see lower fuel prices in different areas of each state.

Friday, November 21, 2008

Citigroup stock down again despite sales talk

Shares of Citigroup enjoyed a brief bounce Friday morning before heading lower once again, falling 16% despite reports that the beleaguered bank may be looking to raise more capital or even sell the whole firm.

Citigroup executives were set to meet Friday morning to discuss their options, including selling off pieces of the company or even the entire bank, both The Wall Street Journal and The New York Times reported late Thursday.

Calls to Citigroup (C, Fortune 500) to confirm the reports were not immediately returned.

It has been a rough week for the New York City-based bank. The company announced Monday that it would be cutting more than 50,000 workers.

The stock plunged 26% Thursday to $4.71, its lowest level in more than a decade, even though the bank's largest individual shareholder, Saudi Prince Alwaleed Bin Talal, said he would increase his stake in Citigroup to 5%.

On Friday morning, the stock sank below $4.

Citigroup has been one of the hardest hit financial firms since the mortgage market first started to unravel in the fall of 2007. Over the past four quarters, the company has recorded close to $21 billion in losses.

Gas prices sink below $2

It took gas prices more than three years to rise from $2 to a record high of $4.11, but just four months to plummet all the way back again - and then some.

For the first time since March 9, 2005, the average price of gasoline fell below $2 a gallon, according to a report from motorist group AAA.

The nationwide average price dropped to $1.989 a gallon, down from $2.02 on Thursday. The survey bases its information on credit card swipes from up to 100,000 service stations across the nation.

"It's almost an embarrassment of riches after what we saw earlier this year," said Peter Beutel, president of New Canaan, Conn.-based energy risk management firm Cameron Hanover. "This is absolutely the most amazing year I've ever seen in energy."

Beutel said that he expects the nationwide average to keep falling to about $1.75.

"I think in some of these very low-cost areas like New Jersey or Texas, you might even see it come down to $1.65," said Beutel.

The plunge in the nationwide average price comes as welcome news to Americans who are traveling for the Thanksgiving holiday.

Still, the motorist group AAA is expecting a decline in Thanksgiving travel this year for the first time since 2002, when Americans were still reeling from the previous year's terrorist attacks. About 41 million Americans will travel at least 50 miles for the Thanksgiving holiday weekend, a decline of 600,000 people, or 1.4%, from last year, said AAA.

Gas prices vary widely from state-to-state.

Alaska has the most expensive statewide average for unleaded, at $3.077 a gallon, while Missouri is the cheapest, at $1.690, according to AAA.

Here are AAA's averages for some of the most populous states: $2.239 in California, $2.371 in New York, $2.038 in Florida, $2.003 in Illinois, $1.923 in New Jersey and $1.858 in Texas.
Fast fall

Prices have come full circle since this summer's gas crunch. Expensive fuel made the term "staycation" the new buzz word, as motorists opted to vacation close to home rather than make the costly trek to relatives and friends in other parts of the country.

U.S. automakers witnessed a plunge in sales of pickups and sport utility vehicles, which became a headline issue in the presidential campaign.

The nationwide average price of unleaded hit its all-time high of $4.114 a gallon on July 17, 2008, provoking widespread public outrage.

But that was when crude oil prices were $145 a barrel. It was before the credit crisis and before economists said the country is likely in a deep and lengthy recession.

Expensive fuel and a weakening economy cut into demand for oil beginning in mid-July, sending the price of oil - and petroleum products like gasoline - into a tailspin.

Crude prices have now fallen below $50 for the first time in three and a half years. With a faltering economy that economists expect will get worse before it gets better, oil and gas prices may still have further to fall.

"This summer, we thought [gas for $2 a gallon] was impossible, and now we have crossed the threshold," said Ben Brockwell, director of data and pricing services for Oil Price Information Services. "It's an important psychological barrier."

Of course, lower gas prices will help drivers, but Americans are suffering from a troubled economy marked by mounting job losses and rising unemployment.

"I think the American consumers are afraid that this is a mirage," said Brockwell.

Wednesday, November 19, 2008

Stocks dip in early trade

Stocks opened lower Wednesday amid more grim economic data and uncertainty surrounding a possible bailout of the ailing auto industry.

The Dow Jones industrial average (INDU) slid 0.1% shortly after the opening bell. The Standard & Poor's 500 (SPX) index was 0.1% lower and the Nasdaq composite (COMP) both retreated 0.3%.

Wall Street managed to hold gains Tuesday, ending in positive territory for only the second time in 10 trading days, as the debate over a bailout of the auto industry remained inconclusive.

Economic reports released early Wednesday cast a pall over the market, highlighting weakness in the housing market and anemic consumer spending.

Housing: More bad news emerged from the housing sector Wednesday as readings on housing starts and building permit sank to historic lows during the month of October.

The Commerce Department said housing starts fell to an annual rate of 791,000 last month, down from the revised reading of 828,000 in the prior month. That represents the lowest level since the department began tracking starts in 1959.

Economists surveyed by were expecting a reading of 780,000 for the month.

And building permits plunged 12% last month to an annual rate of 708,000, breaking the previous low of 709,000 in March 1975. The annual rate for September was revised to 805,000, the government said.

Concerns about the housing slump pressured stocks a day earlier after a survey of homebuilders showed sentiment fell to yet another low in November.

But U.S. stocks managed to finish the day in positive territory. The Dow gained 1.8%, the S&P 500 index rose 1% and the Nasdaq composite ended little changed.

Overseas markets weren't buoyed, however, by the gains on Wall Street. Asian markets finished Wednesday's session lower and European stocks tumbled in morning trading.

Consumer prices: Consumer prices also plunged by a record amount in October, the Labor Department reported.

Its Consumer Price Index fell 1% last month, representing the biggest one-month decline in prices at the consumer level. Economists surveyed by anticipated a reading of 0.8% in October.

The core CPI, which excludes the volatile food and energy prices fell 0.1% during the month. Economists had expected a 0.1% rise after a 0.1% jump in September.

On Tuesday, the government reported that the wholesale price of goods fell 2.8% in October, a record drop that was steeper than expected.

Big Three: Still, investors are expected to be paying close attention to what happens with the nation's Big 3 automakers.

The CEOs of Ford (F, Fortune 500), General Motors (GM, Fortune 500) and Chrysler head back to Capitol Hill to plead with House lawmakers for a bailout.

The industry has been lobbying hard for a $25 billion loan from the $700 billion bailout slated for the finance sector.

Their case for a bailout came under sharp scrutiny Tuesday when the auto executives testified before the Senate Banking Committee.

"The problem is the real specter of what we do on the GM front," said Art Hogan, chief market strategist at Jefferies & Co. "It's really hanging over the market right now. It's the 400-pound gorilla."

Hogan said the failure of General Motors "would be catastrophe for the economy." But he said the industry faces a serious challenge in creating "fuel-efficient and in-demand" vehicles in an economy with "too many cars and not enough buyers."

Fed minutes: At 2 p.m. ET, the Fed releases the minutes from its Oct. 29 meeting. The central bank cut a key short-term interest rate by a half-percentage point to 1% at that meeting.

Companies: Stocks to watch include Boeing (BA, Fortune 500). The company is delaying jet deliveries by as much as 10 weeks as it attempts to recover from a strike by its machinists, according to a report in the Wall Street Journal.

Oil and money: The dollar displayed some weakness, falling in the face of the euro, the yen and the British pound. Oil prices fell 19 cents a barrel to $54.20 in electronic trading.

Housing starts, permits at record lows

Housing starts and permits, both of them key measurements of home construction, hit record lows in October, the Commerce Department reported Wednesday.

Housing starts reached an annual rate of 791,000 last month, the lowest level since the department began tracking starts in 1959. The rate tumbled 4.5% from the revised reading of 828,000 in September.

Building permits fell 12% to an annual rate of 708,000 in October, breaking the previous low of 709,000 in March 1975. The annual rate for September was revised to 805,000.

"Housing starts were a little better than expected, but unfortunately the expectations were so low, the bar was easy to cross," said Art Hogan, chief market strategist at Jefferies & Co. "I don't think there's anybody in the free world who doesn't know we've got a problem with real estate."

An annual rate of 780,000 housing starts was expected for October, according to a consensus of economist opinions from Building permits were expected to fall to an annual rate of 772,000 in October.

Concerns about the housing slump pressured stocks Tuesday after a survey of homebuilders showed sentiment fell to yet another low in November.

The National Association of Home Builders (NAHB)/Wells Fargo housing market index for November fell to a seasonally adjusted reading of 9, the lowest recorded level since the index began in 1985. That was worse than expected. Economists surveyed by Thomson/IFR expected the index to remain at 14, the previous record low set in October.

A reading below 50 indicates that builders who think home-sales conditions are poor outnumber those who think the environment is positive for sales.

Tuesday, November 18, 2008

Wholesale prices in record plunge

Wholesale prices fell by a record amount in October as energy costs continued to decline, government figures showed Tuesday.

The Labor Department's Producer Price Index (PPI) decreased 2.8% in October, after easing 0.4% in September. It was the sharpest one-month decline on record and much more than the 1.8% decline that economists surveyed by had expected.

The so-called core PPI number, which excludes food and energy prices, rose 0.4% - more than the 0.1% increase analysts had forecast.

"Needless to say this is all about energy prices," said Ian Shepherdson, chief economist at High Frequency Economics.

Energy prices plummeted 12.8% in the month after falling 2.9% in September. It was the largest one-month decline since July 1986 when energy prices fell 14%. That includes a 24.9% drop in gasoline prices, which fell 0.5% a month earlier.

The decline comes as crude oil prices have fallen more than 60% to roughly $55 a barrel since the summer's all-time high above $147 a barrel.

The index for residential natural gas slid 5.9% and prices for home heating oil moved down 9.6% in the month.

Meanwhile, food prices declined 0.2% after climbing for the last 5 months.

The 0.4% increase in core PPI was driven by a sharp 2.6% jump in light truck prices, which include sport utility vehicles, and higher prices for other capital goods.

Stocks headed for a drop

U.S. stocks appeared set for an opening decline Tuesday, as investors remained worried about the fate of the Big Three automakers and awaited testimony from Treasury Secretary Henry Paulson about the government's $700 billion financial bailout plan.

At 8:47 a.m. ET, Dow Jones industrial average, Standard & Poor's 500 and Nasdaq 100 futures were all lower.

U.S. stocks were volatile Monday, with the major gauges all ending the session down more than 2%.

The slump sparked losses overseas. Asian markets finished in negative territory and European shares fell in morning trading.

"Hopefully, we can bounce off the lows," said Peter Cardillo, analyst for Avalon Partners.

But Cardillo said the continually weak stock market could have a tough time pulling out of its slump so long as the question of a bailout for the Big Three is left unanswered.

"It's certainly going to give the market the jitters," said Cardillo, referring to the debate over an automaker rescue package.

Big Three: The CEOs of automakers Ford (F, Fortune 500), General Motors (GM, Fortune 500) and Chrysler are all headed to Capitol Hill to testify before the Senate Banking Committee.

The hearing comes as Congress is debating whether to bail out the hard-hit industry with an additional $25 billion in support on top of the $25 billion the Big Three have already received.

Wall Street bailout: The money for the automakers would come from the $700 billion bank bailout plan, which is also in focus Tuesday as the House Financial Services Committee holds a hearing regarding oversight of the plan.

Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair are among the speakers scheduled to testify.

Paulson is expected to face tough questions after announcing last week that the reach of plan would be broadened to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.

In an interview Monday, Paulson told the Wall Street Journal that the financial system is stabilizing, and that he doesn't plan to use what remains of the rescue fund to launch new programs.

Home Depot: In another sign of consumer weakness and an abysmal housing market, home improvement retail giant Home Depot (HD, Fortune 500) said its third-quarter profit fell by nearly one-third, to $756 million, or 45 cents per share, from nearly $1.1 billion, or 60 cents per share, during the same period in 2007.

The company still managed to beat expectations. Analysts had expected a profit of 38 cents per share, according to a consensus of projections from Thomson Reuters.

The medical device maker Medtronic (MDT, Fortune 500) reported that profit fell in its most recent quarter to $571 million, or 51 cents per share, from $666 million, or 58 cents per share, in the year-ago quarter. The company blamed a charge from a patent dispute with Johnson & Johnson (JNJ, Fortune 500) for the fall in profit.

Yahoo: Jerry Yang is stepping down as chief executive of Yahoo (YHOO, Fortune 500), the company said late Monday. The company said a search for a new CEO is being led by its chairman, Roy Bostock, and the executive recruitment firm Heidrick & Struggles.

Deflation: The Labor Department released its monthly Producer Price Index, which showed that the wholesale price of goods fell 2.8% in October, a steeper fall than expected.

Prices were expected to decrease by 1.8% in October, according to a consensus of economist projections from, after declining 0.4% in September.

The core PPI, which does not include volatile food and energy prices, increased by 0.4% in October, after increasing 0.4% the prior month. Economist consensus from was calling for an increase of only 0.1% in core PPI. Energy prices plunged 12.8% in October.

On Wednesday, the Labor Department will release its monthly report on the Consumer Price Index and the Commerce Department will release its report on housing starts.

Oil and money: The dollar rose against the yen, but fell versus the euro and the British pound. Oil prices were virtually flat, edging up 16 cents a barrel to $55.11 in electronic trading.

Monday, November 17, 2008

Auto bailout: Showdown

For more than a century, the U.S. auto industry has been at the center of the American industrial economy. Events over the next month could determine if that remains the case.

This week, Congress will consider whether to cough up billions of dollars to bail out the troubled companies.

There are loud advocates with strong arguments on both sides.

Proponents of a bailout say that the industry is a victim of the global financial crisis. Wall Street has been bailed out, so why not Detroit?

They say millions of jobs could be lost and more than $100 billion in wages sliced out of an already-fragile U.S. economy.

"It would be a travesty for the irresponsible, reckless behavior of Wall Street to result in the sweeping away of the American automobile industry," said Mike Jackson, CEO of Autonation, the nation's largest auto dealership group. "If indeed it came to bankruptcy, it's going to make what happened with Lehman Brothers and all the consequences of that a nice day."

On the other side are those who feel just as strongly that the automakers' problems are their own doing, born of bad business decisions, uncompetitive labor agreements and vehicles that Americans have decided are second-rate.

They say a bailout will only postpone the inevitable, and that the failure of one or more of the companies is necessary if the economy is to work properly.

"The Big Three's financial straits are not the product of our current economic downturn, but instead are the legacy of the uncompetitive structure of their manufacturing and labor force," said Sen. Richard Shelby, R-Ala., the ranking member of the Senate Banking Committee. "I do not support the use of U.S taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers."

Indeed, opposition to a bailout is widespread. GM and the other Detroit automakers are trying to win support from an American public that has largely turned their back on them. Sales by the U.S. companies account for only 47% of domestic sales this year, according to sales tracker Autodata.

Whatever Congress decides, it'll have to act fast. General Motors (GM, Fortune 500) has warned that by the end of the year it will have run down down its cash close to the minimum amount needed to operate. The status of Ford Motor (F, Fortune 500) and Chrysler LLC aren't as precarious, but both have joined their larger rival and the United Auto Workers union in asking for help for the industry.
What's on the table

An automaker rescue will be at the top of the lame-duck session of Congress. The Senate Banking Committee will hold a hearing on the issue on Tuesday and the House Financial Services Committee on Wednesday.

The battle lines are clear.

House Speaker Nancy Pelosi, D-Calif, and Senate Majority Leader Harry Reid, D-Nev., have said they want the government to help the companies and that the funding should come out of the $700 billion bailout plan passed by Congress last month.

The Bush administration, led by Treasury Secretary Henry Paulson, has steadfastly resisted calls to use the bailout funds for the automakers. The White House wants to use money from a $25 billion loan program aimed at helping automakers convert production to more fuel-efficient vehicles.

"We want to see legislation passed at this week's lame-duck session that uses existing funds intended for the automakers that will help them become viable for the long run," White House spokeswoman Dana Perino said Saturday. "We need to conserve the [$700 billion bailout] money for its intended purpose, stabilizing and strengthening our financial system."

GM executives say the $25 billion loan money would come with enough strings attached to it that they are not sure it can be used to solve their cash crisis.

It's unclear how the issue will play out on Capitol Hill. The current Congress is a holdover - it's not the one that will be made up of lawmakers that won in a Democratic landslide on Nov. 4. President-elect Barack Obama has voiced his support for the automakers, but he has not signaled specifically how he thinks such help should take shape.

And GOP opposition to a bailout is strong. Republican House members defeated the Wall Street bailout on its first vote in September, despite strong support from Republican leadership and the Bush administration. Even some leading Democrats who back help for the automakers sounded pessimistic about chances for an aid package.

"I'm not sure the votes are there next week," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee.
What happens if there's no bailout

General Motors has the most at stake. There seems little doubt that GM will file for bankruptcy without a large cash infusion by the end of the year. The company ended the third quarter with about $16 billion on hand, but it needs $11 billion to $14 billion to continue normal operations. It burned through $7 billion in the third quarter.

What happens after a bankruptcy is a topic of debate.

GM executives, while refusing to discuss the chance of a bankruptcy filing, say that buyers would be unwilling to buy from a bankrupt automaker because of fears about resale value and warranties.

The company, along with credit analysts, has also questioned whether it could get financing to reorganize while in bankruptcy.

If GM were unable to pay its bills, it could be forced to liquidate and sell off assets rather than reorganize. And if it can't pay its creditors, auto parts suppliers would suffer and many would likely fail.

"The domino effect would be immense," said Deborah Thorn, a bankruptcy attorney who represents auto parts makers. "You can't afford to produce parts if you're not being paid."

And because the automakers have so much overlap in their supplier base, a closure at one parts maker could cause GM rivals to shut plants as well.

The Center for Automotive Research, an Ann Arbor, Mich., think tank pushing for a bailout, estimates a loss of nearly 2.5 million jobs if just half of the Big Three manufacturing capacity were shuttered - a possible scenario if GM files for protection.

About 240,000 of those job losses would be at the automakers, while 800,000 would be at various suppliers and dealerships. The other 1.4 million job losses would be at businesses that rely on automaker spending.

For example, the Big Three have made deep cuts in their advertising budgets. That is already fueling media industry layoffs. Reduced spending by auto company employees who lose their jobs would hurt stores and other businesses in cities where plants are located.

But some bailout critics argue that bankruptcy is the best solution. They believe that despite tight credit markets, GM should be able to find the financing it needs to stay in business, even after a bankruptcy. They say that consumers could be convinced to buy a car from a bankrupt company as long as the warranty is backed by a third party.

And they point out that other companies, such as airlines and steelmakers, have survived bankruptcy.

Still, bankruptcy would be tough. It would mean shedding numerous brands and probably thousands of dealerships, and entail closing plants and laying off tens of thousands of hourly workers.

The advocates of a bailout insist that the risk of failure is too great - that even the best case scenario for bankruptcy would be too great a shock to the struggling U.S. economy. The critics of federal help say a bailout would be throwing good money after bad - something the government can't afford to do after already promising close to a trillion dollars for other bailouts. Stay tuned.

Oil below $56 on Japanese recession

Oil prices fell below $56 a barrel Monday in Asia as news that Japan fell into recession highlighted investor fears of a global economic slowdown that will hurt crude demand.

Light, sweet crude for December delivery was down $1.11 to $55.93 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract fell $1.20 Friday to settle at $57.04.

Japan, the world's second-largest economy, said Monday it slid into a recession for the first time since 2001 after gross domestic product contracted at an annual pace of 0.4% in the third quarter after a shrinking 3.7% in the second quarter. Japan now joins the 15-nation euro-zone in a recession, defined as two straight quarters of GDP contraction.

"Markets are very worried about the international economic outlook, about oil consumption," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "As data is released in the U.S., Europe and other countries, investors get a reminder of the economic problems in the developed world."

Oil prices have tumbled about 62% since peaking at nearly $150 a barrel in mid-July.

Comments Sunday from OPEC President Chakib Khelil, downplaying the possibility that the group could cut production at a meeting this month, also weighed on prices.

On Saturday, Iran called on the Organization of Petroleum Exporting Countries to reduce output quotas by up to 1.5 million barrels a day a meeting later this month. But Khelil said OPEC, which accounts for about 40% of world crude supply, hasn't yet fully enforced previous quotas and the group needs more data before it decides to cut production.

Iran's call for more cuts is a "wish," Khelil said. OPEC, which cut quotas 1.5 million barrels a day last month, plans to meet on Dec. 17.

"The short-term trend for oil prices is possibly still to the downside," Moore said. "But as the OPEC cuts start to take surplus out of the market, this tightening will eventually give support to the oil price."

A stronger U.S. dollar also helped push oil prices down. Investors often buy oil futures as a hedge against inflation and a weaker dollar and sell when the dollar gains.

The euro fell to $1.2561 Monday from 1.2602 on Friday while the dollar was steady at 97.22 yen.

"The firm U.S. dollar is certainly a factor in why the oil price is lower," Moore said.

In other Nymex trading, gasoline futures fell 1.54 cents to $1.22 a gallon. Heating oil dropped 1.83 cents to $1.81 a gallon while natural gas for December delivery rose 6.38 cents to fetch $6.38 per 1,000 cubic feet.

In London, December Brent crude fell 52 cents to $53.72 on the ICE Futures exchange.

Sunday, November 16, 2008

The bear market goes global

Is the international investing game over?

In hindsight, it's easy to see why investors have been putting so much money to work abroad. Investing, by definition, is about looking ahead. And until recently you couldn't help but marvel at how much brighter the economic future looked beyond our shores.

Nor could you ignore the fact that stock markets in China, India and even Pakistan had been routinely trouncing ours.

What's more, shifting a big chunk of your portfolio overseas was supposed to be good defense. After all, if a recession or bear market were to strike Wall Street, having a healthy dose of your money in international stocks would offer you shelter in the storm.

As it turns out, your foreign investments haven't protected you at all. In a year in which the S&P 500 has dropped by around 40%, international equities have suffered even steeper losses. The credit crisis that began in the U.S. now threatens to turn the global economic boom into a bust.

The wreckage has been widespread: European stocks have lost more than 50% of their value so far this year, Chinese and Indian stocks are down nearly 70%, and Russia's market has plummeted just about 80%.

In many cases these losses have all but wiped out the edge that foreign equities enjoyed in recent years. In fact, over the past 10 years - the so-called lost decade for U.S. stocks - you would have done slightly better investing in a plain old S&P 500 index fund than in Chinese stocks.

This global bear came as an unprecedented shift in thinking was taking place. Investors who grew up adhering to the Peter Lynch school of "invest in what you know" were starting to get comfortable putting big chunks of their retirement savings in countries they'd never been to.

As an investor, you were told not only that you should deploy money abroad but that you must. Last year, Burton Malkiel, author of "A Random Walk Down Wall Street" and a chief proponent of passive, buy-and-hold investing, declared that "every portfolio ought to have some exposure to China."

Pimco co-chief executive Mohamed El-Erian, in his recent book "When Markets Collide," went so far as to argue that long-term investors should consider keeping nearly two-thirds of their stock portfolio overseas. (Recently in Money we've reported that advisers recommend investing between 20% and 40% of your stock portfolio in international shares.)

It's no wonder that more than 80¢ of every dollar that flowed into stock funds last year went into portfolios that invest overseas. That bet has proved costly. Now that the world is apparently cooling off, it's time to rethink your world view - and reconstruct your global portfolio.
What went wrong

Why have international stock markets behaved so badly? A recovering dollar is partly to blame. Globalization may be here to stay, but the U.S. is still the world's financial safe haven. Amid the recent crisis, global investors have been piling into ultrasafe U.S. Treasuries, propping up the dollar after five years of weakness. While the falling dollar boosted the value of foreign stocks held by Americans earlier this decade, today's strengthening buck is a head wind for foreign shares.

The real problem, though, is that underlying economies abroad have become a drag. As Wall Street's credit crisis spreads around the world, global economies are on the verge of slipping into a simultaneous recession. Economies in the U.S., Europe and Japan are expected to contract by 1% at the very least in 2009.

This will have major ramifications for the emerging markets - the developing economies of Asia, Latin America and Eastern Europe. "Just as prosperity in the Shanghais of the world helped juice the Shreveports, so too will the pain in Boston impact Beijing," says Bob Markman, president of Markman Capital Management in Edina, Minn.

Industrial economies like China and India are particularly at risk. Not only is demand for their manufactured goods softening because of the slowdown in the developed world, but borrowing costs have in some cases tripled.

No one is predicting outright contraction. Economic growth in China is expected to slow, but from 12% in 2007 to around 8% next year and roughly 7% in the next decade. Still, for China, slipping to 7% growth "is like a recession," says Nariman Behravesh, chief economist for IHS Global Insight.

Finally, as a global slowdown depresses demand for natural resources, it's looking as if the rallies in some markets, like oil-rich Russia and commodity-laden Latin America, resembled speculative bubbles more than self-sustaining growth.
The risk ignored

When the global economy was booming, even casual investors flocked to high-return markets like Russia and Latin America. "People got carried away with this rhetoric about global growth," says Wendell Perkins, chief investment officer for Optique Capital Management in Milwaukee, "but we forgot the connection between higher returns and higher risk."

Investing isn't just about the prospect of growth - it's also about stable, reliable growth. For an example of the price you can pay when reliability evaporates, consider Russia. With an economy that was expected to expand more than three times as fast as the U.S., Russian stocks gained around four times as much as the S&P 500 in 2006 and 2007. But as forecasts for Russian economic growth have come down significantly, those shares have lost twice as much as the S&P in recent years.

This risk doesn't mean you should ignore opportunities abroad. The world economy is still expected to grow 15% to 20% faster than the U.S. in the decade to come. But be judicious. How much of your stock portfolio should be overseas? In recent years, one popular theory would have you invest 50% or more of your equities in foreign shares because more than half of the world's stock market capitalization resides outside the U.S.

But market capitalization isn't always the best way to allocate a global portfolio. If it were, you would have invested 40% of your money in Japanese stocks in 1990 - just in time for a two-decade-long bear market.

The investment research firm Standard & Poor's studied the performance of domestic and international markets going back to 1970 and concluded that with a 25% stake in foreign stocks, you'll get most of the diversification benefit of global investing.

If you have the urge to make a bigger bet - and can withstand severe short-term losses - you can boost that figure, says Alec Young, S&P's equity strategist. But even for aggressive investors, S&P recommends putting only about a third of your equity holdings overseas.

History says you won't be surrendering much by sticking to 25%. T. Rowe Price recently found that a 75% U.S./25% foreign asset-allocation strategy produced average annual returns of 11.2% between 1970 and 2007. With a riskier 50% stake in foreign shares, you would have increased your returns only slightly - to 11.3% a year.
Your best moves now

So how should you fill out that 25% foreign allocation? The vast majority of this money belongs in shares of companies based in Western Europe and Japan, money managers say. Not only is there political and financial stability in these regions, but along with North America they collectively account for nearly three-quarters of the world's output. They're also expected to recover from recession and re-accelerate sooner than the rest of the world.

Today you can buy European and Japanese shares at significantly lower prices than you would have paid a year ago. European stocks are trading at a 70% discount to their recent average, based on price/earnings ratios. As for Japanese shares, they're at a stunning 26-year low, and the P/E ratio for the MSCI Japan index has fallen to around 14, which is a fifth of Japan's average this decade.

For a solid international fund that invests the bulk of its assets in Europe and Japan, consider Dodge & Cox International (DODFX), which is in our Money 70 list of recommended funds. If you feel comfortable with the risks of emerging markets, you should favor countries with a growing middle class, such as China and South Korea, which can probably withstand a global recession better than commodity-driven nations like Russia.

For a Money 70 fund that's heavy in such regions, go with Vanguard Emerging Markets Stock (VEIEX). It counts Korea, China and Taiwan among its top five countries.

Whatever you do, you should invest in emerging markets only modestly - no more than around 5% of your stocks. Yet last year investors plowed nearly as much into emerging markets stock funds as they invested in U.S. blue-chip funds. "That's what I would call a warning flag," says Vanguard founder John Bogle. Alas, investors didn't heed the warning.

Who benefits from the new Fannie-Freddie plan

Mortgage giants Fannie Mae or Freddie Mac may back 30 million mortgages. But that doesn't mean that the new foreclosure prevention program announced this week by the Bush administration will rescue every troubled borrower on their books.

The Federal Housing Finance Agency (FHFA), which took control of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) in September, together with Hope Now, the coalition of lenders, servicers, investors and community groups, designed the plan to help some of the most at-risk homeowners.

"Foreclosures hurt families, their neighbors, whole communities and the overall housing market," said James Lockhart, director of FHFA in a release. "We need to stop this downward spiral."

The plan, which begins on Dec. 15, is open to borrowers with loans owned or backed by Fannie and Freddie who are at least 90 behind with their mortgage payments. But in reality, qualifying for the program will probably be a lot more complicated than meeting these two requirements. In the end, it's probable that only a relatively narrow swath of people will benefit from the initiative.

About 1.22% of Freddie's 12 million loans are 90 days or more late, while 1.7% of Fannie's 18 million loans are that far past due. That's a total of more than 450,000 borrowers, however it's unlikely that all or even most of them will get help.

"Some people may be technically eligible but not practically eligible," due to factors like an extremely low income, according to Keith Gumbinger, of mortgage research firm HSH Associates. "I wish someone would get a clear handle on how many people it could actually help," he said.
Who gets help

Fannie and Freddie are only targeting homeowners who are more than three months past due on their loans in order to ensure that the most troubled borrowers get help immediately.

Beyond that, borrowers will have to write what's called a "hardship letter" to illustrate that they fell behind for a good reason - whether it's a a job loss, divorce or a medical problem. If they can't show that, they don't get a fix.

Another condition: Borrowers cannot have too much equity in their homes. If their home's current market value exceeds their mortgage balance by more than 10%, they're considered too well off to participate. Instead, these borrowers have the option to tap that home equity, either by refinancing or taking out a home equity loan, to get current with their payments.

And some borrowers are simply too far gone to help according to Brad German, a spokesman for Freddie Mac. Those with a mountain of debt and little income may need a much more drastic modification than any lender would be prepared to issue.

"Borrowers have to have some income," said Faith Schwartz, director of Hope Now. "The property has to [provide] cash flow somehow for the lender."

But Schwartz cautions that even borrowers in very bad shape should contact their lenders. They may not qualify for a loan workout, but a bank may be willing to do a short sale or a deed in lieu of foreclosure. In a short sale the lender agrees to let the borrower sell the property for less than what the mortgage is worth and forgive the difference. In a deed in lieu of foreclosure the borrower essentially gives the house back to the bank.

Either of these options will do a lot less damage to a borrower's credit score.

Finally, not everyone who could benefit from the program will chose to participate. Surprisingly, many borrowers who are in trouble just don't do anything; they don't contact their banks and they ignore their lender's phone calls and letters.

Although the program may not have a massive impact, according to Schwartz it's still a welcome supplement for the many other plans - FHA Secure, Hope for Homeowners and programs from individual lenders - already in place.

And officials hope that it will provide an easy-to-apply template for other modification programs.

"It's an important step forward for the industry to establish clear-cut guidelines, that make it easier for servicers to act on modifications and for borrowers to understand what is involved," said Schwartz.
How it works

Lenders will look at their portfolios for borrowers who qualify, and then send out letters informing them that help is available and asking the borrowers for financial information, such as pay stubs and bills, as well as hardship letters.

Then the banks will use that information to determine if they can keep a borrower in their home by reducing their monthly payment to no more than 38% of their gross income. To do that, they can lower interest rates to as little as 3%, extend the length of the loan or defer some of the loan principal.

"The big thing is reaching the agreed-upon affordability target [of 38% of income]," said Schwartz. "However you have to get there to solve the mortgage delinquency by hitting that benchmark, that's what you do.

After borrowers complete their workout and make three payments at the lower level, the fix becomes permanent.

Schwartz urges at-risk borrowers to call their lenders as soon as possible rather than waiting for the Dec. 15 start date. The longer borrowers wait, the more they fall behind on their payments, the harder it is to help them.

"We should not discourage anyone from contacting their lenders for help," she said.

Even if you don't qualify for this plan, there may be another way your lender can help you, she added. It never hurts to ask.

Friday, November 14, 2008

Euro-zone economy falls into recession

The 15 countries that use the euro are officially in a recession, the European Union said Friday, as their economies shrank for a second straight quarter because of the world financial crisis and sinking demand.

EU statistics published Friday show the euro zone shrank by 0.2% in both the third and second quarters compared to the quarter before. Two successive quarters of negative growth is the usual definition of a recession.

From a year ago, the euro-zone grew 0.8% in the third quarter and 1.4% in the second.

The entire 27 countries of the EU have so far escaped recession thanks to growth in eastern Europe. But they shrank 0.2% in the third quarter after zero growth in the second quarter-on-quarter. From a year ago, third-quarter growth was 1.7% and second-quarter growth was 0.8%.

Two of the region's largest economies -- Germany and Italy -- are in recession, Eurostat said, while France narrowly escaped, growing just 0.1% in the third quarter after shrinking in the second quarter.

The spending slowdown and tight credit conditions are starting to hurt: carmakers said Friday that sales are slumping even as euro-zone inflation calms from record highs. So far, euro economies have not seen the jobless rate surge -- but the EU executive Commission estimates that it will rise steadily over coming months.

Business and consumer confidence figures show business and consumers are worried, with companies readying to make cutbacks and households trying to save more as they worry about job losses. Both are hurt by tighter credit conditions that raise the cost of borrowing money.

It is the first recession since the euro currency was launched in 1999, when the European Central Bank took control of interest rates. That is the major lever of economic growth because changing borrowing costs can stoke or cool growth.

"It will be the biggest recession since the '80s" and will last through to the first half of next year, said Christoph Weil, an economist with Commerzbank AG in Frankfurt. He expects the pickup to be triggered by rising global demand for European goods and a fall in the value of the euro currency.

The last major recession to hit European economies was in 1993 when each country controlled its own monetary policy and could react individually to economy problems. Euro-zone nations face more trouble in acting alone now and must consult the EU executive before launching major programs to kickstart the economy with state subsidies.
Countries in decline

Germany, the largest euro economy, shrank 0.5% in the third quarter as its main source of growth -- exports -- dropped and it could no longer rely on household demand to power the economy. Italy was also down 0.5%. Both now have two quarters of negative growth.

They join Ireland, in recession since growth dropped in the first and second quarters. Spain also shrank in the third quarter but is not yet officially in recession.

Outside the euro area, EU members Estonia and Latvia -- until recently part of the Baltic boom -- are in recession.

Britain and Hungary also contracted in the third quarter, remaining a quarter short of official recession. British unemployment is rising, with telecommunications firm BT saying Thursday it would cut 10,000 jobs by March, and the country is bracing for a deep downturn amid a collapsed housing market.

The spending slowdown is hitting major purchases hard with car sales across Europe slumping by 14.5% last month, EU carmakers said Friday. The European carmakers' association ACEA said car sales in October dropped for the sixth month in a row from a strong year in 2007.

Ireland and Spain -- both suffering badly from the bursting of a housing bubble -- saw dramatic falls with Irish sales halving and Spanish sales down 40%. Europe's biggest car market, Germany, was down 8.2% from weak sales a year ago. France was down 7.4%, Britain dropped 23% and Italy 18.9%.

Fast-growing eastern European nations that had pulled in bumper sales are no longer doing so with overall sales in the 10 EU newcomer states down 3.3%despite an increase in Poland.

But there is some good news for shoppers as plummeting oil prices brought yearly inflation down to 3.2% in October, Eurostat said, confirming an Oct. 31 first estimate.

The rate of price increases has been gradually falling from a record high of 4% in June and July but is still well above the European Central Bank's guideline of just under 2% that it looks to when it considers hiking or lowering interest rates.

Bernanke hints at rate cut

Warning that financial markets remain under "severe strain," Federal Reserve Chairman Ben Bernanke pledged Friday to work closely with other central banks to fix global financial problems and left open the door to a fresh interest rate cut to help brace the sinking U.S. economy.

"The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain," Bernanke said in remarks prepared for a central banking conference in Frankfurt, Germany. "For this reason, policymakers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant."

The Fed chief's remarks appeared to reinforce the view of Wall Street investors and economists that the Fed probably will lower interest rates again on Dec. 16, its last regularly scheduled meeting this year. The Fed's key rate is now at 1%.

Although the Fed has ratcheted down rates and taken a flurry of unprecedented actions to arrest the worst financial crisis since the Great Depression, deep problems remain. Credit is still not flowing normally in the U.S. and overseas, hobbling not only the domestic economy but also the global economy, which many believe is edging toward recession.

Bernanke's remarks come as President George W. Bush and other world leaders descend on Washington for an extraordinary summit to explore options for economic relief and develop plans to prevent a repeat of the type of housing, credit and financial crises now endangering the world economy.

Wednesday, November 12, 2008

Oil slips below $59 on global growth pessimism

Oil prices slipped below $59 a barrel Wednesday as investors grappled with the prospect that global growth next year will slow more than originally feared, cutting demand for gasoline and other crude products.

Expectations that a snapshot of the U.S. inventories will also show reduced consumption of oil and derivatives also acted as a drag on the market.

Light, sweet crude for December delivery was down 99 cents to $58.34 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract overnight fell $3.08 to settle at $59.33, the lowest closing price since March 2007. Oil prices have fallen about 60% in four months, plunging from a record $147.27 in mid-July.

"We have a pretty good idea that global growth is going to be pretty awful next year and probably not much better in 2010," said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne. "There was clearly a bubble scenario in all commodities and that bubble has burst."

Investors are pricing in slowing crude demand growth from China, whose economy, the world's fourth largest, was once thought to be a counterweight to weakening demand from the U.S. and Europe. U.S. bank Morgan Stanley earlier this week cut its 2009 forecast for Chinese economic growth to 7.5% from 8.2%. The bank expects Asia outside of Japan to grow 5.5% next year, the U.S. economy to shrink 1.3% and Europe to contract 0.6%.

"China is now seen as less of a backstop to falling demand in developed countries," Pervan said. "With definitive slowing in China, the market is even more sensitive to negative economic news out of the US and Europe."

The World Bank said Tuesday it expects developing countries to grow 4.5% next year, down from its previous forecast of 6.4% growth. Developed countries will likely contract 0.1% in 2009, the Bank said.

Trader and analyst Stephen Schork noted that the reaction to Beijing's planned economic stimulus package earlier this week -- and the subsequent oil price fluctuations -- were symptomatic of the jittery state the market finds itself in.

"It is important to remember that price is a function of the crowd's emotional input to a given fundamental event." he said in a research note. "Thus, those traders who thought it was a good idea to pay $65 Sunday night were probably the same traders who had to sell (at) $59 yesterday afternoon."

Investors have brushed off two recent production cuts by the Organization of Petroleum Exporting Countries, and prices have continued to fall amid talk of a third quota output reduction next month.

Qatar's prime minister, Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, said Tuesday that "fair" oil prices of between $70 to $90 per barrel would ensure that expensive oil exploration could continue and help to avert price spikes in the future.

"The market has become so demand focused that obvious support mechanisms, like OPEC cutting supply, don't have the same impact," said Pervan, who expects prices to fall to $45 a barrel during the first quarter of next year.

Investors will be watching for signs of slowing U.S. demand in the weekly oil inventories report to be released by the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 1.1 million barrels last week, according to the average of estimates in a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos. The Platts survey also showed that analysts projected gasoline inventories rose 850,000 million barrels and distillates increased 1 million barrels last week.

In other Nymex trading, heating oil futures slipped by more than 3 cents to $1.90 a gallon, while gasoline lost nearly 2 pennies to fetch $1.29 a gallon. Natural gas for December delivery fell 12 cents to $6.69 per 1,000 cubic feet. In London, December Brent crude fell 68 cents to $55.03 a barrel on the ICE Futures exchange.

Cost of crude rising to $200 by 2030

The International Energy Agency on Wednesday predicted world energy demand will rise 1.6% per year on average between 2006 and 2030 and called for massive investment in energy infrastructure, warning of a supply squeeze.

The IEA's base scenario for energy demand has slowed due to the global economic slowdown and higher oil prices, but the agency stressed that a delay in spending on new projects due to the credit crisis could mean a "supply crunch that could choke economic recovery."

The IEA expects demand for oil to rise from 85 million barrels per day currently to 106 million barrels per day in 2030 -- 10 million barrels per day less than projected last year. China and India continue to be the main drivers of the industry, accounting for more than half of incremental energy demand to 2030, while the Middle East, a longtime supplier, emerges as a major new demand center.

The agency said that these trends call for energy supply investment of $26.3 trillion to 2030, or more than $1 trillion a year, but it noted that tight credit could delay spending.

"Current trends in energy supply and consumption are patently unsustainable -- environmentally, economically and socially -- they can and must be altered," said Nobuo Tanaka, the agency's executive director, at the release of its annual World Energy Outlook report in London.

The Organization of the Petroleum Exporting Countries, which pumps around 40% of the world's oil, cut output by 1.5 million barrels per day from Nov. 1 to counter a recent fall in the price of crude from a high of $147 in July to under $59 on Wednesday.

OPEC has also warned that crucial downstream investment -- in refining and distribution -- in the industry will be curtailed if the oil price is not maintained at a reasonable level. The IEA said last week that it expects the price of oil, below $59 per barrel on Wednesday, to rebound above $100 and eventually reach $200 by 2030.

In a pre-released summary of Wednesday's report, it predicted the price to average $100 from 2008 to 2015. Tanaka said that "while market imbalances will feed instability, the era of cheap oil is over."

He added that a fundamental change was underway in the upstream oil and gas industry -- exploration and extraction -- with international oil companies facing dwindling opportunities to increase their reserves and production.

In contrast, national oil companies are expected to account for 80% of the increase in both oil and gas production to 2030. However, Tanaka said it was "far from certain" those companies would be willing to make the necessary investment themselves or to attract sufficient capital to keep up the necessary pace of investment."

Tuesday, November 11, 2008

Gas drops 2 cents to $2.22

Gasoline prices are falling across the country with 46 states and the District of Columbia posting prices below $2.50 a gallon.

The average price of unleaded regular gas dropped 2 cents to $2.220 a gallon, from $2.240 the day before, according to a survey released Tuesday by motorist group AAA.

The last time gas was this low was Feb. 12, 2007 at $2.2158 a gallon.

Gas has fallen 55 straight days, since just after Hurricanes Gustav and Ike battered the Gulf coast in September.

Prices have dropped 46.04%, or $1.894, from their record high of $4.114 a gallon set July 17, according to AAA. The average price per gallon dropped below $3 on Oct. 18, the first time in nearly nine months.

Gas has dropped by 88 cents from this time a year ago, a decrease of 28.41%. In the past month, prices have dropped more than a dollar, $1.027 a gallon, for a decrease of 31.62%.

Even as gas prices fall, demand for gasoline has continued to slip. MasterCard's weekly survey of gas station credit card swipes showed demand down 3.9% last week, compared to the same period last year.

By state, Alaska reported the highest average gas prices, $3.361 per gallon, while Missouri boasted the cheapest, at $1.915 a gallon, according to AAA.

In addition to Missouri, Indiana and Oklahoma and Ohio reported prices below $2 per gallon.

Crude prices, which make up roughly half of gasoline prices, have fallen nearly 60% since hitting $147.27 a barrel on July 11. U.S. crude for December delivery rose $1.37 to $62.41 a barrel in New York trading on Tuesday.

The AAA figures are state-wide averages based on credit card swipes at up to 100,000 service stations across the nation. Many drivers have reported even lower prices across the country.

Obama presses Bush to help automakers

President-elect Barack Obama discussed with President Bush the need for urgent action to help the nation's struggling automakers during a meeting Monday.

"It was a discussion about the broad health of the industry" that was not just limited to just any one of the nation's three largest car makers, Obama spokesman Robert Gibbs said.

The 43rd president and the man who will be the 44th -- and first black -- commander in chief met alone in the Oval Office, with no handlers or staff. It was Obama's first time in the storied workspace, even though he had been to the White House previously for events.

Neither Bush nor Obama spoke to reporters.

Gibbs said the two men "talked extensively" about both the economic situation and foreign policy. Obama inherits from Bush an economy in deep turmoil and two wars that are far from won, among other problems.

Topics between them included the housing industry, foreclosures, the auto industry in crisis, as well as "the need to get the economy back on track," Gibbs said.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid asked the administration this weekend to consider expanding the $700 billion bailout for financial firms to include car companies.

At a news conference Friday, Obama said he hoped the Bush administration would "do everything it can to accelerate the retooling assistance that Congress has already enacted."

The White House did not reject such an idea. Presidential spokeswoman Dana Perino said Bush would listen to lawmakers if, when they come back for a post-election session, "they decide to try to do something more on the auto industry."

She said Treasury Secretary Henry Paulson would review the rescue plan again, but also suggested the administration needs Congress' help to determine which industries might qualify for help under the new law.

Regarding any new economic stimulus plan, the White House has repeatedly stressed that its main priority is passage of a free trade agreement with Colombia.

Monday, November 10, 2008

Circuit City files for bankruptcy

Circuit City Stores Inc., the No. 2 electronics seller, filed for bankruptcy protection Monday, thus becoming the latest retailer hurt by a worsening economic downturn.

According to the company's Chapter 11 filing with the U.S. bankruptcy court in Richmond, Va., Circuit City (CC, Fortune 500) will continue to do business and pay its workers while it restructures debt and its business operations.

Just last week the Richmond-based company announced that it would close another 150 stores and cut about 17% of its domestic workforce as it continues to face eroding sales at its stores.

The company said it has negotiated a commitment for a $1.1 billion "debtor-in-possession" (DIP) revolving credit facility to supplement its working capital. The company said the DIP credit will replace the company's $1.3 billion asset-based credit facility provided by its lenders.

"We recently have taken intensive measures to overcome our deteriorating liquidity position," James Marcum, Circuit City's acting president and chief executive officer, said in a statement.

"The decision to restructure the business through a Chapter 11 filing should provide us with the opportunity to strengthen our balance sheet, create a more efficient expense structure and ultimately position the company to compete more effectively," he said.

China to launch $586B stimulus plan

China announced a $586 billion stimulus package Sunday in its biggest move to stop the global financial crisis from hitting the world's fourth-largest economy.

A statement on the government's Web site said China's Cabinet had approved a plan to invest the amount in infrastructure and social welfare by the end of 2010.

Some of the money will come from the private sector. The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

China's export-driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

Economic growth slowed to 9 percent in the third quarter, the lowest level in five years and a sharp decline from last year's 11.9 percent. That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

Exports have been growing at an annual rate of more than 20 percent but analysts expect that may fall as low as zero in coming months as global demand weakens.

The statement said the Cabinet, at a meeting chaired by Premier Wen Jiabao, had "decided to adopt active fiscal policy and moderately easy monetary policies." It did not give details.

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing -- an urgent need in many parts of the country -- as well as increased spending on rural infrastructure.

Money will also be poured into new railways, roads and airports. Spending on health and education will be increased, as well as on environmental protection and high tech.

Spending on rebuilding disaster areas, such as Sichuan province where 70,000 people were killed and millions left homeless by a massive earthquake in May, will also be sped up. That includes $2.93 billion planned for next year that will be moved up to the fourth quarter of this year.

The statement, without giving details, said rural and urban incomes would be increased.

Credit limits for commercial banks will also be removed to channel more lending to priority projects and rural development, it said.

Also, reform of the value-added tax system will cut taxes by $17.5 billion for enterprises, the statement said.

The plan was announced before President Hu Jintao goes to Washington to push Western leaders to give poorer countries a bigger role in global financial institutions at a Nov. 15 summit of the Group of 20 major economies on the financial crisis.

Thursday, November 6, 2008

Cost of borrowing falls further

- Lending rates remained near historically low levels Wednesday as banks struggled to put the credit crisis behind them.

Prices for ultra-safe U.S. Treasury bills fell in anticipation of several debt auctions scheduled for next week.

The 3-month Libor rate dropped to 2.39% from 2.51% on Wednesday, according to Thursday's rate is the lowest since Nov. 25, 2004, when it was also 2.39%.

The overnight Libor rate rose slightly, bouncing off an all-time low, to 0.33% from 0.32%. The rate had been falling for 7 days in a row.

Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend dollars in the U.K. and is a key barometer of liquidity in the credit market.

Libor rates have been retreating since mid-October, when the Federal Reserve flooded 13 central banks around the globe with unlimited amounts of dollars.

Less than a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boon for the troubled credit markets because more than $350 trillion in assets are tied to Libor.

"Banks are beginning to come into line," said Bob Brusca, economist at Fact and Opinion Economics in New York. "But the real question is the economy."

While banks are becoming more willing to lend to each other, they remain reluctant to lend to customers, which hampers economic activity, Brusca said.

"When economic conditions get bad, banks pull back. That makes economic conditions even worse, and banks pull back more. It's a vicious circle," he said.

Central banks world wide have taken unprecedented steps to shore up the economy amid growing sings of a global recession.

In a widely expected move, the European Central Bank cut its benchmark interest rate on the main refinancing operations of the Eurosystem by one half percentage point, to 3.25%.

Meanwhile, the Bank of England slashed its key lending rate by a bigger than expected 1.5 percentage points to 3%, citing worsening economic conditions in the U.K. and around the world.

Playing it safe: U.S. Treasury prices turned lower Thursday as investors geared up for government debt auctions next week.

"We had a good rally in Treasurys," said Steve Van Order, chief fixed income strategist at Calvert Funds. But he added that the market is now "pulling back" ahead of a big influx of supply next week.

The benchmark 10-year note fell 20/32 to 10-24/32 with a yield of 3.78%, up from 3.67% late Wednesday. Bond prices and yields move in opposite directions.

The 2-year note lost 1/32 to 100-9/32 with a yield of 1.35%.

The spread between the 2-year and the 10-year yield, a key measure of market sentiment, widened slightly to 2.35 percentage points from 2.32 percentage points Wednesday. A wider spread, or a higher yield curve, indicates a weaker economic environment. The yield curve reached a near 5-year high Tuesday.

The 30-year long bond fell 1-13/32 to 104-2/32 and its yield rose to 4.25% from 4.13%.

The yield on the 3-month bill fell to 0.37% from 0.4% . This yield 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 lower yield suggests less optimism.

Market confidence: Key indicators of market confidence continued to show signs of improvement Thursday.

The Libor-OIS spread fell to 1.85 percentage points from 1.93 points on Wednesday. The spread measures the difference between actual borrowing costs and the expected official borrowing rate from the Fed. It is used as a gauge to determine how much cash is available for lending between banks. The bigger the spread, the less cash is available for lending.

While the indicator has fallen from a high of 3.66 points set last month, it is still far above the 0.11 percentage point seen prior to Sept. 15 when Lehman Brothers' bankruptcy filing sparked intense concern about the U.S. and global economies.

Another indicator, the "TED spread," fell to 2 percentage points from 2.12 points on Wednesday.

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 less willing investors are to take risks.

The TED spread has fallen from an all-time high of 4.63 points set in mid-October. It was at 1.04 percentage points just days before Wall Street's crisis.

Jobless claims higher than expected

The number of Americans filing new claims for unemployment insurance last week was higher than economists expected, and the number continuing to collect benefits shot to a 25-year high.

The U.S. Department of Labor reported Thursday that initial filings for state jobless benefits reached 481,000 for the week ended Nov. 1.

While that was down 4,000 from the revised 485,000 reported the week before, it was above the 476,000 claims expected by economists surveyed by The prior week was revised up by 1,000 to 479,000.

The report shows the number of Americans continuing to collect unemployment benefits surged to 3,843,000, the highest level since 1983. The number increased by 122,000 for the week ended Oct .18, the most current data available. A year ago, the number stood at 2.59 million.

The 25-year high level of continuing claims outweighs the slight drop in initial jobless claims, according to Bob Brusca, economist at FAO Economics.

"It's a problem," he said. "The labor market is not looking good at all. The small back off, that's not great...initial claims have fulfilled any expectation you have of them for a normal or severe recession."

The four-week moving average of unemployment claims, used to smooth fluctuations in the data, remained unchanged at 477,000 from the previous week. A reading above 400,000 has been present during the past two recessions. A year ago, the four-week moving average was 324,000.

Last month, nearly 7,500 jobless claims were attributed to the effects of Hurricanes Ike and Gustav, but no such claims were reported this week.

The number of jobless claims spiked in late September to 499,000, the highest level recorded since the 517,000 claims filed in wake of Sept. 11 terrorist attacks.
Job cuts

On Wednesday, a private outplacement firm reported that last month had the highest number of pink slips handed out since January 2004. The job cut announcements soared to 112,884, up 19% from September's 95,094 cuts, according to Challenger, Gray & Christmas Inc.

Separately, payroll manager ADP said the private sector lost a seasonally adjusted 157,000 jobs last month - more than six times September's decrease and the largest drop since December 2001.

The Department of Labor's monthly unemployment report due Friday is expected to show that 200,000 jobs were lost in October and that the unemployment rate grew to 6.3% from 6.1% a month earlier.

President-elect Barack Obama has put forth a few economic stimulus proposals, which may gain bipartisan support.

Some of his ideas include temporarily exempting the unemployed from having to pay income tax on their unemployment benefits, extending unemployment benefits, spending more on infrastructure to create jobs, and temporary tax credits for businesses that create jobs in the United States.

Wednesday, November 5, 2008

Economy: What now

The wear-and-tear of a 22-month campaign may seem like a Caribbean vacation next to what awaits President-elect Barack Obama when he takes over as the 44th president of the United States.

In his first year in office he will have to tackle a mountain of complex and unprecedented problems facing the country. His agenda will be driven by the need to stabilize the financial system and the pained economy.

Since mid-September, which was the last time took a crack at gauging what No. 44's economic to-do list would be, the financial world -- and Washington -- have been turned on their heads.

Consider just a few of the recent sea-changing events:

* President Bush signed into law a $700 billion financial rescue package, which the Treasury is using to inject capital into banks in the hopes of spurring more lending and giving stronger banks the means to acquire weaker ones.
* The government stepped in to bail out insurer AIG with more than $100 billion in loans.
* The number of big Wall Street investment banks fell to zero after Goldman Sachs and Morgan Stanley converted to bank holding companies -- putting them under the control of the Federal Reserve.
* The government decided to temporarily guarantee money market funds and significantly boost the federal deposit insurance coverage for individuals and businesses' bank accounts.
* The Federal Reserve has opened its lending spigot to businesses and cut interest rates to near-record-low levels.
* Countries around the world fell prey to the credit crisis, and one nation -- Iceland -- went bankrupt.
* Stocks -- along with most people's nest eggs -- have had the stuffing knocked out of them.

And that was in just 6 weeks. Imagine what might happen in the 10-plus weeks between Election Day and Inauguration Day. For anyone with a nervous system left, let's hope not too much.
Give the economy a boost

In the meantime, here's a look at what Obama's economic to-do list is likely to be during his first year in office.

While Congress may pass a fiscal stimulus package during its lame-duck session after the election, the chances of that happening appear to be less than 50% given the current disagreement between the White House and Democrats over what constitutes effective stimulus and whether stimulus is even required.

If that's the case, it will be up to Obama to decide what measures are needed to juice the economy that offer the most bang for the buck.

Obama made a host of stimulus proposals in recent weeks, of which two are likely to garner bipartisan support:

Temporarily exempting seniors from having to make annual withdrawals from their IRAs and 401(k)s after age 70-1/2;

and temporarily exempting the unemployed from having to pay income tax on their unemployment benefits.

Beyond that, Obama has called for an extension of unemployment benefits, more infrastructure spending to create jobs, and temporary tax credits for businesses that create jobs in the United States.
Make the bank bailout work

The Troubled Asset Relief program, which is the centerpiece of the $700 billion financial rescue package that Obama voted for, is a work in progress. Treasury Secretary Henry Paulson has committed at least $250 billion so far to provide capital to banks and to create an auction to buy up troubled assets from financial institutions.

It's not clear what further decisions Paulson will make between now and Jan. 20 and what he'll leave for the next administration to decide. But on deck for consideration is whether to broaden eligibility for the TARP money to non-financial institutions. There has been talk, for instance, that GM is seeking a loan from the Treasury Department to help finance a deal to merge with Chrysler.

In any case, the process of injecting capital into financial institutions is one President-elect Obama is likely going to have to continue, as well as deciding where the bailout stops, said Alex Pollock, a resident fellow at the American Enterprise Institute and a former head of the Federal Home Loan Bank of Chicago. "It's very hard to draw the line. ... Everyone wants to make the case that they're essential to the national well-being."
Get to the bottom of the housing problem

Democrats and Republicans may disagree on the solutions, but both acknowledge that financial markets will continue to be hobbled until housing prices find their true bottom.

A continued decline in prices and increase in foreclosures, along with anemic economic growth, could put pressure on the next president to do something more to help troubled borrowers and the housing market.

Before Obama steps into the Oval Office, the government may already have taken some definitive action, using some of the $700 billion allocated in the financial rescue package.

Currently the Bush administration is said to be considering a program designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of a lender's loss if borrowers re-default on their modified mortgages.

President-elect Obama will also have to address what to do with private-sector mortgage giants Fannie Mae and Freddie Mac -- the two government-sponsored enterprises that the government put into conservatorship in early September.
Reform financial regulation and oversight

He supported the takeover -- intended to reassure foreign investors that buy the agencies' debt. Long-term, however, Obama has indicated he wants their public functions to be completely disentangled from their private ones.

The credit crisis has painfully revealed three truths about the U.S. financial system: It's not as transparent as it needs to be; it's been run under rules that haven't kept pace with the development of new financial instruments; and it can't be reformed without input from and coordination with other countries.

It's not clear what, if any role, the president-elect will play in the upcoming global financial summit being held in Washington, D.C., on Nov. 14-15. It is expected to be the first of several.

But come Jan. 20, Obama will certainly have a large say in how the financial regulatory system is overhauled.

"It's a sure thing Congress will be preoccupied with fixing the financial system next year," said Robert Litan, director of economic studies at the Brookings Institution. "I think everything will be on the table."

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