Today's Tidbits

Fed Should Protect System, Not Individual Participants, Says Dallas Fed President
From Reuters: “It is not the job of the U.S. central bank to protect individual risk-takers, but the system itself, Federal Reserve Bank of Dallas President Richard Fisher said in a magazine article published on Wednesday. The Dallas Fed said the interview with International Economy was conducted in June. "I don't mind tears among individual market operators, as long as we don't get tears in the fabric of the financialsystem," Fisher said.”
From Bloomberg: “Dallas Fed President Richard Fisher said the central bank's job is safeguarding the financial system, not protecting ``risk- takers.''… ``A cut in the federal funds rate would be for the whole economy,'' he said. Another reduction of the discount rate ``can address very specific problems such as lack of liquidity in the market.''

Fed “Cautiously Optimistic” Efforts Working to Stabilize Markets
From The Wall Street Journal: “Federal Reserve officials are cautiously optimistic that the series of steps they have taken to stabilize markets have started to work. Officials acknowledge conditions are far from calm, and markets could easily take a turn for the worse. But they cite stable stock prices, a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened. Many on Wall Street are more pessimistic, and believe the Fed will still have to cut interest rates sharply, perhaps starting in the next week or two. But as long as Fed officials think things are getting better, they are less likely to feel pressured to cut interest rates immediately and more likely to wait until their scheduled meeting Sept. 18 to decide.”

Four Large Banks Borrow From Fed’s Discount Window
From Barclays: “JP Morgan Chase, Bank of America, and Wachovia issued a joint press release today indicating that they had each drawn $500mn through the discount window in order to "take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions." In a separate statement, Citigroup indicated it had also tapped the discount window for $500mn. It is unclear whether these public announcements in support of the Fed's recent policy change will affect the behavior of other depositories, although it does suggest that the Fed is likely to give the policy some time before is assesses its effect, as there may be some hesitancy on the part of banks who have traditionally viewed the Fed as a lender of last resort. The average amount of loans through the discount window over the past three months is $216mn. Tomorrow the Fed releases its H.4.1 report, Factors Affecting Reserve Balances, which includes data on discount window loans through August 22 and will provide the first snapshot of the response to the Fed's policy change.”
From Dow Jones: “The trio said while it has “substantial liquidity and the
capacity to borrow money elsewhere on more favorable terms,” they believed it was important to show leadership in showing the value of Fed’s credit facility.”
From RBSGC: “Interesting to see the effort to preempt potential speculation on WHO borrowed ahead of Thursday's Fed data.”

FDIC Says Late Loan Payments at 17 Year High
From Bloomberg: “U.S. banks and thrifts suffered the biggest increase in late loan payments in 17 years as more homeowners fell behind on mortgages, the Federal Deposit
Insurance Corp. said. Loans more than 90 days past due rose 10.6 percent to $66.9
billion in the period ending June 30, the largest quarterly rise since 1990, the FDIC said in its Quarterly Banking Profile released today. ``The bottom line for banks is that the credit environment continues to be more challenging now than it has been in recent years,'' FDIC Chairman Sheila Bair said during a news briefing at the agency's Washington headquarters. The report reflects the growing strain lenders are facing as the collapse of the subprime mortgage market roils the banking industry. At least 90 U.S. mortgage companies have halted operations or sought buyers since the start of 2006, according to Bloomberg data. Loans more than 90 days past due grew 36.2 percent from $49.1 billion in the second quarter a year ago, the largest 12- month increase since 1991. Residential mortgage loans 90 days delinquent increased 12.6 percent to $27.5 billion in the second quarter from $24.4 billion in the first quarter.”
From Investment News: “The "tremendous golden age of banking" for U.S. financial institutions had ended, at least temporarily, said FDIC chairman Sheila Bair in a statement. "Everybody is being challenged in this current environment," she said.”

Inflation-Adjusted Incomes Drop, Adding to Economic Stress of Workers
From New York Times: “Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows. While incomes have been on the rise since 2002, the average income in 2005 was $55,238, still nearly 1 percent less than the $55,714 in 2000, after adjusting for inflation, analysis of new tax statistics show… Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945… The growth in total incomes was concentrated among those making more than $1 million. The number of such taxpayers grew by more than 26 percent, to 303,817 in 2005, from 239,685 in 2000. These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000. .. nearly 90 percent of Americans who make less than $100,000 a year… Nearly half of Americans reported incomes of less than $30,000, and two-thirds make less than $50,000… The fact that average incomes remained lower in 2005 than five years earlier helps explain why so many Americans report feeling economic stress despite overall growth in the economy. Many Americans are also paying a larger share of their health care costs and have had their retirement benefits reduced, adding to their out-of-pocket costs.”

More Firms Close Subprime Businesses
From Bloomberg: “Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs…Accredited Home Lenders Holding Co., a subprime specialist, announced 1,600 job cuts earlier today in an effort to outlast the credit crunch that has forced dozens of rivals out of business. HSBC Holdings Plc is eliminating 600 positions in its U.S. operations and closing a mortgage office in Indiana, and Capital One Financial Corp. is closing GreenPoint Mortgage because it can't make money anymore lending to homeowners and then selling those mortgages to investors.”

Gasoline Demand at All-Time High
From Lehman: “Gasoline demand rose by 190k b/d w-o-w to its highest level ever, 9.76m b/d, 40k b/d higher than the next highest level achieved in July 2005. Combined with total motor gasoline imports falling by 285k b/d and a draw in blending components of 3.8m bbls, gasoline inventories fell by 5.7m bbls on the week, putting them 6.2m bbls below the five-year average. The divergence between this year and last year's gasoline stocks picture has grown more stark with stocks off 9.6m bbls y-o-y… The crude oil build leaves crude stocks still above 2006 levels and above the five-year range, likely further undermining, in our view, any chance that OPEC would increase output at its September 11 meeting.”

Baltic Freight Index Indicates Demand For Industrial Commodities Remains Strong
From Barclays: “One index that has proven the past to be a very reliable indicator of underlying trends in the bulk commodity markets is the Baltic Freight Index (BFI). It is composed of a survey carried out each day into the costs of booking raw material cargos, such as iron ore, base metal concentrates, coal or grains on a variety of representative trade routes. With no speculative participation, there is little linkage to the broader financial markets. Twice already this year the BFI has proved a reliable indicator of underlying fundamental trends for commodities when financial market pressures have caused confidence to wobble. At the start of the year when oil and metals prices were under pressure from short-selling hedge funds expecting a big slowdown in US demand, the steep increase in the BFI showed that Chinese commodity demand was accelerating and was an indicator of the subsequent price corrections. Again, in February, after a steep decline in the Shanghai Stock Exchange, the strength of the BFI showed that there had been little impact on underlying Chinese commodity demand. It is therefore noteworthy that on the day that base metals fell sharply last week (Thursday 16th) the BFI made a fresh all-time high and is still trading close to that level. The continued strength of China’s commodity demand that the upward trend in freight rates is pointing to is reinforced by the latest Chinese commodity import data (reviewed on page 2 of this report) which continues to look very strong indeed. The message to take from the strength of the BFI is that once the dust from the current financial market settles, the likelihood is for some very strong rebounds in commodity prices.

MISC

From Reuters: “The ABC News/Washington Post Consumer Comfort Index tanked to -20 in the latest week from -11 in the previous period. It was the first time the index fell 9 points in a week since it was launched in 1985…"The decline is broadly based among population groups, and there seems not to be a single negative event to blame, but a confluence,"…”From MNI: “ABC News/Washington Post Consumer Comfort … 'falling to its lowest level since the aftermath of Hurricane Katrina in late October 2005.”
From Dow Jones: “Toll Brothers Inc.’s fiscal third-quarter net fell 85% as the luxury home builder recorded more land writedowns amid continued slowing in new-home construction. Chairman and Chief Executive Robert Toll said in a statement that the builder had experienced “a much higher rate of cancellations than at any time in our 21-year history as a public company” due to the downturn in the housing market.”

From RBSGC: “Historically, the Fed has eased when we've seen unemployment 0.3% UP from the cycle low -- not a guaranty, but over 4.7% and you have one duck lined up.”

From Barclays: “[Hurricane] Dean is likely to result in significant lost Mexican oil production in the order of 10m barrels ... However, the risk of serious damage to Mexican operations is dissipating, with Dean being downgraded to a Category 1 hurricane as it heads toward oil installations in the Campeche Bay…the impact of incremental Mexican production losses and temporary closure of oil ports will result in lower US imports in the weeks ahead, therefore contributing at the margin to further declines in US crude oil inventories which are already falling fast…”

From Bloomberg: “General Motors Corp. is trimming production at six plants that make large pickup trucks and sport- utility vehicles as the biggest U.S. automaker moves to clear dealer lots in a sales decline…GM already offers no-interest loans for as long as five years and rebates as high as $4,000 on light-truck models…”
From Bloomberg: “Wheat surged to a record in Chicago, extending a rally that began in April, on signs of rising demand for U.S. supplies and slumping output from the world's largest growers… Large grain users probably will pass on higher costs to grocers, who will then increase consumer prices…”

End-of-Day Market Update

From Bloomberg: “U.S. two-year Treasury notes led the bond market lower on speculation the Federal Reserve will cut its benchmark interest rate no more than a quarter-percentage point in the next month. Three-month bill yields rose a second day, suggesting investors are returning to risky assets. Interest-rate futures show traders reduced bets the central bank will lower its overnight lending rate by a half-percentage point to 4.75 percent at its Sept. 18 meeting… ``The attitude has changed, and we're returning to some level of a regular market environment,…The early read is what the Fed has done so far is working. That's removing the safe-haven flight.'' The yield on the two-year note rose 10 basis points, or 0.1 percentage point, to 4.12 percent as of 3:02 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The increase ended a seven-day rally that was the longest since April 2005…The yield on the benchmark 10-year note increased 3 basis points to 4.62 percent. Ten-year Treasuries yielded about 50 basis points more than two-year notes, down from a two-year high of 56 basis points yesterday, when investors sought the safety of shorter maturities. The so-called flattening of the yield curve today suggests investors trimmed expectations for an imminent rate cut… Three-month bill yields rose 7 basis points to 3.67 percent…The spread between three-month bill yields and the London interbank offered rate, seen as an indicator of credit risk, shrank for a second day, by 0.06 percentage point to 1.84 percentage points. The ``TED'' spread, as it's known, was the widest on Aug. 20 since the 1987 crash.”
From Lehman: “The flattening was clearly the big story today, and the move was a relentless one… Wednesday's yield changes were roughly as follows: 2 years: +9.5 bp
5 years: +7.0 bp 10 years: +2.8 bp 18 years: +2.4 bp 30 years: +1.2 bp”
From UBS: “4-week T-bills, which tailed 200bps in yesterday's auction, cheapened 75bps, perhaps signaling the return of some semblance of sanity in the markets. TIPS … Breakevens widened across the board.”

From Bloomberg: “U.S. stocks climbed for a fifth day on growing speculation the summer breakdown in credit markets won't derail the economy or pending company mergers… Stocks extended a rebound from their worst decline in four years after the Federal Reserve on Aug. 17 cut the rate it charges banks to borrow in a bid to stem rising credit costs. The Standard & Poor's 500 Index increased 16.95, or 1.2 percent, to 1,464.07. The Dow Jones Industrial Average added 145.27, or 1.1 percent, to 13,236.13. The Nasdaq Composite Index advanced 31.5, or 1.3 percent, to 2,552.8… An unprecedented amount of acquisitions propelled the stock market to a record July 19. The pace declined 65 percent this month from July after mortgage defaults sent the Standard & Poor's down 5.7 percent from its peak.”

From Dow Jones: “The dollar weakened to a one-week low against the euro Wednesday as volatility in U.S. stocks continued to decline, leading investors to focus back on interest rates comparisons between the Fed and the ECB. The ECB hinted that it still is planning to hike rates next month despite market turmoil, which helped push the euro to an intraday high of $1.3552. Meanwhile, investors are still betting the Fed will start cutting rates, although these forecasts were pared back slightly Wednesday. The greenback gained modestly against the yen but remained in rather tight ranges near Y115.00, as carry trade investors remain unsure if it’s safe to venture back into short yen positions.” [ Dollar index down -.27 to 81.23]

From Dow Jones: “Crude oil futures dropped Wednesday morning after U.S. oil and oil product inventory data revealed that gasoline inventories fell and crude oil stocks increased, countering analysts’ expectations… the Department of Energy said that U.S. gasoline inventories fell by a shocking 5.7 million barrels in the week ended August 17, more than 5 million barrels above projections of a 600,000 barrel draw in a Dow Jones survey of analysts.” [Oil futures fell -.34 cents to $69.23 barrel]