Today's Tidbits

Spike in July’s Consumer Confidence Unlikely to PersistFrom Lehman: “Consumer confidence jumped to 112.6 in July, the highest level since August 2001 when the index was at 114.0. The jump was the result of a 9.3 point increase in current conditions and a six point gain in expectations. Buying plans for autos and housing both increased with the latter rising to its highest level since March. Among the current conditions components, business conditions posted a modest improvement but net employment conditions surged - the percentage of consumers reporting that jobs are "plentiful" less the percentage reporting that jobs are "hard to get" rose to 12.1 from a 7.1 reported last month. Like the headline index, this is the highest level since August 2001 when the series was at 17.6. This data is consistent with recent employment readings and suggests that the "tightness" of the labor market is real and not the result of BLS adjustments….The report is yet more evidence of the overall health of the labor market despite the downturn in construction activity and supports the notion that, while consumer spending may slow, there are some reasons for optimism.”
From Deutsche Bank: “…the recent rise in the minimum wage could also have been a factor behind the increase in consumer confidence as lower income households reported a large increase in confidence this month. …confidence is a terrible predictor of future spending…”

Lower Stock Prices Will Hurt Consumer Spending as MEW Subsides
From HSBC: “Unlike the business sector, the household sector has had a growing financing gap in recent years. It reached a record USD600bn in 2006, even though households savagely reduced their investment in residential structures. In 2002-2004, the household financing gap was comfortably covered by mortgage equity withdrawal (MEW). But since 2005, consumers have had to also sell equities back to the corporate sector. For instance, MEW went from USD400bn in 2004 to virtually nothing by early 2007. In that same period, the net selling of equities by households went from about USD100bn to over USD500bn - virtually a perfect offset - which gave consumers the cash to keep plugging their large financing gap. But this game may be changing. If leveraged buyouts decrease and the pressure on firms generally to maintain their current level of buybacks is reduced, the implication is that consumers will have to find another willing buyer of equities (or corporate bonds and Treasuries, for that matter). Perhaps foreigners will step up to the plate, but that might require further declines in asset prices and/or a further decline in the dollar to entice them. Alternatively, and perhaps more likely, consumption has to slow so that the financing gap can narrow.”

Oil Prices Rising on International Demand Growth & Stagnate Reserve Gains
From Bloomberg: “Crude oil rose to a record close of $78.21 [+$1.38] a barrel in New York on speculation demand will outpace supply as refiners increase fuel production. Bets on rising prices by hedge funds and other speculators rose to a record earlier this month, according to U.S. Commodity Futures Trading Commission data. Global demand will climb 1.7 percent in 2008, showing no sign of slowing because of high prices, a Deutsche Bank AG report showed. A government report tomorrow may show U.S. oil supplies fell for a fourth week. ``There's significant growth in global energy demand and
production isn't keeping up,''…”
From JP Morgan: “The EIA revised May oil demand down by a whopping 822 kbd this month, with revisions distributed across all major product categories. This is the fourth straight month EIA has made downward revisions to its weekly data. As with previous months, the adjustments significantly changed the US demand story, changing the 2.5% yoy growth seen in weekly data to a 1.5% contraction…“
From Dow Jones: “…in an indication as to why it may be keeping a tight rope on future production capacity, the report [OPEC’s annual statistical review] showed OPEC’s base of economically recoverable oil reserves last year was flat if new, higher estimates from troubled OPEC producer Venezuela are stripped out, the worst growth in this key metric in recent years.”

MISC
From JP Morgan: “…the global upturn in manufacturing to date has been led by EM Asia excluding China…”

From Morgan Stanley: “the Chicago Fed announced that its current director of research, Charles Evans, will become the bank’s new president when Michael Moskow retires at the end of August, following in the footsteps of Richmond Fed President Lacker, who was also his bank’s research head before being promoted to president in 2004…He will be a voting member at his first FOMC meeting in September.”

From Merrill Lynch: “…the beginning of the rise in overall equity market volatility as measured by the CBOE Volatility Index (VIX) coincided with the Bank of Japan's initial interest rate increase in February. Not surprisingly, we also have suggested that the increase in financial market volatility is the prime symptom of a gradual unwinding of the so-called yen carry trade (i.e., borrowing in low Japanese interest rates to get higher rates of return in other markets). Debt markets generally sniffed out this unwinding before equity markets did. For example, although high yield bond spreads were widening during June, equity market participants didn't realize that their assumed takeover premiums were too high until late-July.”

From Bloomberg: “American Home Mortgage Investment Corp. shares plunged 89 percent after the lender said it doesn't have cash to fund new loans and may have to sell off assets. Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already agreed to provide, the Melville, New York-based company said in a statement today. It anticipates $450 million to $500
million of loans probably won't get funded today. ``They can't function without access to capital,''…”

From Bloomberg: “On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk. Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show… Credit-default swaps tied to $10 million of bonds sold by Bear Stearns, the second-largest underwriter of mortgage bonds, rose to about $110,000 on July 27, from $30,000 at the start of June, indicating growing investor concerns.”

From Bloomberg: “Moody's Investors Service described some so-called Alt A mortgages as no better than subprime home loans, saying it will change how it rates related securities after failing to predict how far delinquencies would rise. The ratings firm said today its expectations for losses on Alt A mortgages will rise between 10 percent and 100 percent, depending on whether a loan pool has a lot of debt extended to borrowers with low credit scores and little money for down payments. It's also raising loss expectations when borrowers don't fully document their incomes. ``Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,'' Marjan Riggi, Moody's senior credit officer, said in a statement. ``Absent strong compensating factors, we will model these loans as subprime loans.''”

End-of-Day Market Update

From RBSGC: “The [Treasury] market ended the day near the 4.76% [-6bp] low-yield close of last Friday. The reason for the late-session uptrade was multifaceted -- including a resurgence of credit-related concerns, month-end, weakness in stocks, and an emerging willingness to go-with uptrades. 4.75/76% does represent some resistance -- and we have now traded up here for the 4-th consecutive session, continuing to flirt with the highs, but yet to break. We expect another leg of serious credit concerns will need to precede a sustainable break of the highs.”

From UBS: “Swap spreads swung around from 3bps wider to 3bps tighter, finishing about 1bp tighter. Mortgages saw $1.5 billion in origination on the day, and $2.5 billion in selling, compared to $3 billion in buying. Considering the bad news from MGIC, Sowood, Indy Mac, Am Home, Oddo, Kfw and Macquarie... MBS did quite well until after 3pm when MBS went a + wider to Tsy and a tick wider to swaps…”

From CNN: “Wall Street [equities] could not sustain its early rally, slipping into negative territory Tuesday afternoon on higher oil prices and signs that recent credit market woes were not over. The Dow Jones industrial average eased… [closing down 146 points at 13,212] after climbing by as much as 138 points after the market open. [The S&P fell 18.6 points to 1455.]

The dollar weakened again today with the dollar index falling -.05 to 80.80.

From CNN: “Oil prices…neared its record [intraday] trading high of $78.40 hit a year ago, …. U.S. light crude for September jumped $1.41 to $78.24 a barrel on the New York Mercantile Exchange.”