Today's Tidbits

HUD and OFHEO Considering Raising GSE Limits
From Bloomberg: “U.S. Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae and Freddie Mac in order to increase liquidity in the mortgage market. Jackson said today that he and Fannie Mae Chief Executive Officer Daniel Mudd talked about the government-chartered company's request to be allowed to buy mortgages beyond a current $722.5 billion federal limit. ``I told him we will take it under advisement and give him an answer probably by tomorrow,'' Jackson said in an interview in Washington. In addition to Mudd, Jackson also spoke yesterday with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, about allowing Fannie Mae and Freddie Mac to buy mortgages that exceed the current federal cap of $417,000.”

China Threatens to Sell Treasury Hoard if U.S. Pushes Tougher Trade Sanctions
From UBS: “China, in an unsubtle response to potential trade sanctions by the US, threatened to flood the markets with US Treasuries from their $1.33 trillion stockpile of foreign reserves…Should China follow-through on the threat, liquidating some portion of the estimated $900 billion of US bond holdings, yields could be driven much higher as the dollar collapsed, and swap spreads could narrow rapidly. Although we believe China is unlikely to follow-through on such a threat, given the profound ramifications to their own economy, speculation in the financial press can add to the volatility.”

Subprime Problems Impacting “Low Risk” Commercial Paper Markets
From Bloomberg: “Companies are extending payments on commercial paper backed by home loans for the first time as the subprime mortgage crisis spreads to debt perceived to be among the safest in the market, according to Moody's Investors Service. Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and
Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said. The three issuers are probably the only ones to defer
payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's. The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free… commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities… Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold… Asset-backed commercial paper comprises about half, or $1.15 trillion, of the $2.16 trillion in commercial paper outstanding, with extendible notes making up about 15 percent of the asset-backed portion, or about $172.5 billion, according to Moody's. Investors are demanding higher interest rates on so-called asset-backed commercial paper, extendible or not, than on commercial paper issued by companies like General Electric Co. and Citigroup Inc. to fund their operations, because of concern about the value of the collateral. Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible
and 5.25 percent to 5.30 percent for corporate commercial paper.. ``Commercial paper buyers are notoriously risk averse because they have such thin margins,''…”

NAR Expects Existing Home Sales to Drop to 5y Low, New Home Sales to 10y Low
From Bloomberg: “U.S. home sales will tumble to a five-year low this year as a widening credit crunch reduces the number of buyers who can get mortgages, the National Association of Realtors said today. Sales of previously owned homes probably will fall 6.8 percent …the real estate trade group said today in its monthly forecast, lowering its outlook for the eighth time this year. New-home sales, which account for about 15 percent of the housing market, probably will fall 19 percent to … a 10-year low…”
From Dow Jones: “Toll Brothers Inc. said its fiscal third-quarter home-building
revenue fell 21% from a year earlier to $1.21 billion as the industry continues to struggle against a housing market further weakened by turmoil in mortgage markets.”

JOLTS Employment Data Shows New Hiring Slowing to 3 Year Low
From JP Morgan: “The hires rate slipped from 3.6% to 3.4% in June, the lowest level since fall 2004. But the separation rate was unchanged and the job openings rate edged up… The job openings rate remains near its cycle-high, pointing to labor shortages in some industries. This is consistent with the low unemployment rate and the high net percent of firms reporting job openings in the NFIB small business survey. The JOLTS indicates that the slowdown in nonfarm payroll growth between 2006 and 1H07 has been due mainly to a decline in new hiring, as opposed to a surge in separations. The quit rate has remained within a narrow range and the layoff and discharge rate is unchanged from a year ago.”

High School Students Better Educated on Basic Economics Than Expected
From Bloomberg: “High school seniors in the U.S. know more about personal finance and the world economy than about reading or math, according to the first nationwide exam in economics. In the test, administered last year, 79 percent of 12th-grade students demonstrated at least basic knowledge…The fact the test was conducted at all shows that the nation's educators see economics as a mainstream subject…On specific questions, 72 percent of respondents correctly described the benefits and risks of leaving a fulltime job to further one's education, and 60 percent could identify the factors that lead to an increase in the national debt. More than half, 52 percent, showed how commercial banks use money deposited in checking accounts, while only 11 percent showed how a change in the unemployment rate might affect income, spending and production. Performance among racial and ethnic groups varied. Eighty-seven percent of white students were at or above the basic level, compared with 64 percent of Hispanics and 57 percent of blacks.
Fifty-one percent of whites were proficient, as were 21 percent of Hispanics and 16 percent of blacks…Economics courses aren't required in about two-thirds of the
states.”

MISC
From UBS: “Conventional wisdom declares that a flight to quality is delineated by a period of widening credit spreads. The current flight has pushed swap spreads outside the tight range they have inhabited since 2005, and back into the center of the range they occupied in the 2000-04 period.”

From Dow Jones: “The inventories of U.S. wholesalers and demand for their goods grew moderately during June. Wholesale inventories rose by 0.5% for a second straight
month. Sales climbed 0.6%, slowing from their 1.3% surge in May and 1.5% run in April, the Commerce Department said. It was the weakest sales performance since a 0.9% drop in January.”

From JP Morgan: “Japan released more soft economic data, adding to the perception that the pace of economic activity was sluggish at midyear. Core machinery orders—a leading indicator of business equipment spending—tumbled 10%m/m in June.”

From Dow Jones: “Blackstone Group has closed the largest buyout fund ever raised at $21.7 billion, and despite the recent red flags in the debt markets, some of the New York buyout firm’s backers say it already may be thinking about its next offering.”

End-of-Day Market Update

From Lehman: “Treasury yields rose sharply as credit tightened, stocks rallied, and no one showed up for the 10 year auction, which tailed 1.25 bp or so after what was
already a large yield concession. The market did rebound sharply from intraday
lows though, when the stock market reversed in the afternoon and credit widened
as well…. Wednesday's yield changes were roughly as follows: 2 years: +9.1 bp…10 years: +11.3 bp…”

From Bloomberg: “Treasuries fell the most in more than a month…a decline in 10-year notes pushed yields to the highest in almost two weeks…Trading in credit-default swaps showed the risk of owning corporate bonds dropped.”

From UBS: “After a quiet and often choppy session, swap spreads narrowed about 4.5bps or so. Agencies traded in line with swaps for the most part, and saw better selling overall in the 5-year sector. Mortgages outperformed as the Street covered its shorts, finishing 8-9 ticks tighter to Treasuries and 2-3 better to swaps.”

The Dow closed up 154 points today, near the high for the week, and up around 500 points from the low of Monday morning. The rally places the Dow’s closing level back above its 50 day moving average for the first time since July 26th.

The dollar index fell .15 to 80.33. The yen weakened against most currencies, and is down 4.9% YTD versus the euro, as investors jumped back into the carry trade.

The slide in oil price slowed. NY futures prices settled only 13 cents lower after the government reported smaller than expected stockpiles.