Today's Tidbits

FOMC Minutes
From Bloomberg: “Federal Reserve policy makers put aside concerns about the rising cost of credit at their Aug. 7 meeting because they weren't convinced a slowdown in inflation would last, according to minutes of the session. Ten days before the central bank was forced to cut a key interest rate, the Federal Open Market Committee was given lower growth forecasts by staff economists and noted that ``strains in financial markets'' jeopardized the expansion. Further turmoil might require a response, Fed officials said. ``Policy makers would need to watch the situation carefully,'' the minutes said. ``For the present, however, given expectations that the most likely outcome for the economy was
continued moderate growth, the upside risks to inflation remained the most significant policy concern… On inflation, ``meeting participants believed that the readings for the past few months likely had been damped by transitory factors and did not provide reliable evidence that the recent level would be sustained,'' the minutes said.''
From Goldman Sachs: “Minutes from August 7 FOMC meeting suggest that most or all officials were comfortable with a continued focus on inflation risks at the time; although the potential risks from the housing sector are mentioned, they are downplayed. Clearly, both markets and Fed officials have moved significantly since then, but this is a more hawkish tone than we would have expected even at that time.”

ABS Delinquencies Rising
From RBSGC: “Delinquencies rose across all four ABX structures last month, with serious delinquencies increasing more than expectations on everything except possibly the ABX 06-2 structure, in our opinion. Prepayment speeds were relatively stable with the exception of the ABX 06-1 structure, where we are seeing a lot of coupon resets currently on the 2/28s backing the deals. In ABX 06-1, we saw a significant increase in prepayment speeds to 47% from 34% CPR. Despite the 2/28 resets, the magnitude of the speed increase is somewhat surprising given the current market environment for refinancing subprime loans, and we suspect we will see somewhat slower prepayments on this structure by early next year as the current depth of the credit crunch becomes reflected in secondary market data.”

Median Individual Earnings Fell for 3rd Year in a Row
From CNN: “Median household income rose 0.7 percent to $48,200, adjusted for inflation, the Census Bureau reported. But more people had to be at work in each household to get there. That's because median earnings for individuals working full-time year-round actually fell for the third consecutive year. For men, earnings slipped 1.1 percent to a median of $42,300, while for women, earnings sank 1.2 percent to a median of $32,500.”

Health Insurance Availability
From CNN: “When it comes to health insurance, the ranks of the haves and have-nots widened for the second straight year. The number of Americans not covered by health insurance rose to 47 million in 2006 - or 15.8 percent of the population …Among those who do have health insurance, the total number of people with policies rose by 800,000 to 249.8 million. But the percentage of people covered through their employers fell to 59.7 percent from 60.2 percent, as did the percentage of those covered by government health programs - down to 27 percent from 27.3 percent.”

World Won’t Starve Without Bees, But Diversity Definitely Suffers
From Fortune: “We wouldn't starve if the mysterious disappearance of bees, dubbed colony collapse disorder, or CCD, decimated hives worldwide. For one thing, wheat, corn, and other grains don't depend on insect pollination. But in a honeybee-less world, almonds, blueberries, melons, cranberries, peaches, pumpkins, onions, squash, cucumbers, and scores of other fruits and vegetables would become as pricey as sumptuous old wine. Honeybees also pollinate alfalfa used to feed livestock, so meat and milk would get dearer as well. Ditto for farmed catfish, which are fed alfalfa too. And jars of honey, of course, would become golden heirlooms to pass along to the grandkids. (Used for millennia as a wound dressing, honey contains potent antimicrobial compounds that enable it to last for decades in sealed containers.) In late June, U.S. Agriculture Secretary Mike Johanns starkly warned that "if left unchecked, CCD has the potential to cause a $15 billion direct loss of crop production and $75 billion in indirect losses."

Yen Rallies As Carry Trade Unwind Resumes
From Bloomberg: “…speculation banks will report more credit-market losses pushed traders to reduce riskier investments funded by loans in Japan. The Japanese yen gained against all 16 major currencies tracked by Bloomberg as investors pared the so-called carry trade… The yen rose 1.3 percent to 114.41 per dollar at 4:01 p.m. in New York, and is up 3.6 percent in August… Japan's benchmark interest rate of 0.5 percent is the lowest among industrialized nations, encouraging the carry trade and weakening the yen 3.8 percent versus the euro over the past 12 months. The rate compares with 5.25 percent in the U.S., 4 percent in the euro region, 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.”

Concern Rising That Firms Will Cut Back Business Investment
From USA Today: “Business investment, such as opening new offices as Burnett was considering, or buying new equipment and buildings, has been a key player in the economy in recent years, accounting for more than 10% of U.S. economic activity in 2006. In the second quarter, business spending provided its biggest boost to the economy in more than a year, almost equal to the contribution from consumer spending. And a key measure of business spending, orders for capital durable goods excluding defense and aircraft, rose in July at the fastest pace since March. Business spending is also a barometer of corporate sentiment, which can influence hiring, salaries and other factors that can affect consumers, the biggest driver of the $13 trillion U.S. economy. But some economists are questioning if businesses will continue to be a pillar of strength, given the erratic stock market, a barrage of credit crunch news, and concerns that the housing market will not pick up for quite some time. Federal Reserve policymakers are closely watching how businesses react to determine if they need to cut interest rates to help prop up the economy. "All this noise will affect people's outlook," says William Dunkelberg, chief economist at the National Federation of Independent Business. He's not concerned that businesses will stop spending because they can't find financing — many have a lot of cash on hand and don't need to borrow. The issue is if the wave of bad news will have a negative impact on business owners' view of where the economy is headed and lead them to exercise greater caution, like Burnett…Moody's Economy.com chief economist Mark Zandi says businesses will make or break the economy going forward. "What businesses decide to do determines if we end up in a recession or not, both in terms of their investment and in terms of their hiring," Zandi says. "If they pull back in either, confidence will completely unravel, and we will be in recession," … Companies outside of farming and banking had $1.5 trillion in liquid assets at the end of the first quarter, up 3.5% from a year ago according to the latest available data from the Federal Reserve. Earnings were up more than 10% in the second quarter, the biggest gain since the third quarter of last year, according to Standard & Poor's… But business owners who have dipped their toes in the borrowing waters are giving mixed reviews, with some reporting problems even before the recent credit crunch worries emerged. Charles Weinacker, owner of Pet Friendly of Fairhope, Ala., recently notched an unusually large $1.2 million in orders from Wal-Mart, Whole Foods and other stores. They were largely buying his organic dog food after traces of melamine were found in many other brands of pet food, sparking a massive recall. But Weinacker wasn't able to secure a line of credit from a local bank to buy boxes, labels and raw materials to fill the orders. He needed the loan, he says, because the big chains don't pay him until about two months after he delivers the merchandise. After a search of several months, Weinacker ultimately snared a $3 million line of credit but at nearly double his typical 7% interest rate. Loan officers "are scared to death, 'cause they get fired if a loan goes bad," he says… "It seems like everybody is in a wait-and-see mode," he says of his clients, noting companies often hire based on their gut feelings of the economy, which can be influenced by the stock market and other financial news. "Businesses are very fickle sometimes." It's such caution that would be unwelcome news for the economy. Even if companies have access to money, they have to feel confident enough to spend it and to hire to make a difference. In a survey of more than 30 economists conducted by USA TODAY last week, nearly all marked down their forecasts for business spending in the third and fourth quarters. But the reductions were not dramatic. "Most of the fundamentals for business investment are still quite positive," Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said last week. "Profitability is high, and the cost of capital is still fairly low, despite recent financial market developments. Thus, investment could well maintain momentum this year." Paul Villella, CEO of HireStrategy, a Reston, Va.-based job placement firm operating in the Washington, D.C., area, is watching his clients closely. While businesses are going ahead with hiring plans, the time between starting the job search and closing the deal seems to be expanding, he says. Temporary help and placement firms are often among the first to pick up on changes in business sentiment.”

Credit Card Defaults Rise From
The Financial Times: “US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt. Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.”


MISC

From Dow Jones: “U.S. sales of home-repair and remodeling products should drop 1.3% to $308.9 billion this year as the housing market isn’t expected to improve until mid-2008, a trade group for the home-improvement industry said. The Home Improvement Research Institute said the decline would be the first since 1991 and only the third since it began tracking industry figures in 1977.”

From Dow Jones: “A federal judge in New York has overturned a bankruptcy court’s decision in the Enron Corp. case that had sent shudders throughout Wall Street, saying the ruling “threatened to wreak havoc on the markets for distressed debt.” In a 53-page decision Monday, U.S. District Judge Shira Scheindlin said U.S. Bankruptcy Judge Arthur Gonzalez was wrong to have ruled last year that holders of claims against a
bankrupt company could see those claims wiped out if they bought them from a seller who engaged in “inequitable conduct.” Gonzalez’s ruling alarmed Wall Street. The Bond Market Association, the International Swaps and Derivatives Association, the Loan Syndications and Trading Association, and the Securities Industry Association filed court papers criticizing the ruling.”

End-of-Day Market Update

From JP Morgan: “After a few calm days where spec positions were unwound (mostly curve and spreads), we’ve spent most of the day today putting risk premium back into the market.”

From Handelsbanken: “The latest set of news reports highlighting troubled financial institutions, both domestically as well as overseas, shook investor confidence again …and resulted in a renewed downturn in the broad stock market indices and sparked a flight to quality rally in the Treasury bond market. All three major domestic stock indices opened lower and traded in negative territory all day. The sell off in stocks pushed up the Treasury prices and widened out the 2-year/10-year spread at the margin after narrowing for almost a week.”
From RBSGC: “The bond market had a very impressive day with the curve resteepening quite sharply and prices making technically significant gains… the aura of calm doesn't translate to liquidity or an end to the problems… To the extent that weaker stocks are supporting our generic bias for bull steepening, stocks do not look healthy. Corporate issuance is coming, but at a cost. We emphasize that buyback/LBOs/M&A activity that has accounted for nearly 2.5 years worth of NEGATIVE equity issuance WAS a main source of that strength. With borrowing costs to everyone BUT Treasury the highest they've been in years, we see a major source of support largely gone.”
From UBS: “Overnight general collateral Treasury repo rates are now back to the Fed funds rate at ~ 5.15-5.25%. Term repo markets continue to rebuild slowly, restoring (some) confidence for now. The curve re-steepened sharply as stocks followed the Financials and Homebuilders lower… Swap spreads widened on very little volume despite corporate issuance picking up, a curve steepening and the market rallying. Agency debt saw heavy buying all day from both domestic and foreign accounts. As Agencies outperformed Libor 3 to 5 bps across the curve, some accounts took profit in the front end. 5y agency debt has become the hottest sector, surpassing 10s, which struggled to stay even on spread.”

From JP Morgan: “Late day rally in term general collateral markets and bills are spooking specials markets…Term GC offers and term specials offers are few and far between and likely will be good for about 25mm and that’s it! Bills continue to rally w/ 3s @ 4.09 last and 6s @ 4.11 last. Stocks falling sharply into the close and $$ seems to want govies…”

From SunTrust: “We continue to see buyers creep back into the ABCP and A2/P2 term
market… Problems continue for SIV and CDO conduits.”

Three month T-Bill yields fell 24bp
Two year Treasury Note yields fell 13.5bp
Ten year Treasury Note yields fell 5bp

Dow closed down 280pts to lowest level in a week, trading below 50 day moving average and above 200 day moving average. The S&P 500 closed down 34.5 points.

Dollar index rallied .15 to 80.88. The Japanese yen exchange rate fell by 1.6 yen to the dollar, to 114.3.

Oil fell 44 cents, to $71.53, after rallying close to its 50 day moving average yesterday.