Today's Tidbits

November 1, 2007 TIDBITS

Stock Market Tumbles, Lead by Financials
From AP: “Wall Street plunged Thursday, pulling the Dow Jones industrial average down more than 360 points as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing economy. Mindful of a warning from the Federal Reserve Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking. The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates. Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.
The combination of factors led investors to pull back sharply from Wednesday's rally, in which the Dow climbed 137 points after the Fed said the economy had weathered the summer's credit crisis…Financial stocks were pummeled after Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks, were downgraded by CIBC World Markets on worries about the credit markets. Investors pulling money out of stocks turned to the safe haven of the Treasury market. The yield on the 10-year Treasury note dropped to 4.34 percent from 4.47 percent late Wednesday.”
From Bloomberg: “U.S. stocks tumbled after analyst downgrades of Citigroup Inc. shares spurred speculation the nation's largest bank may have to shore up its capital, sending financial companies to their biggest drop in five years. Citigroup slid the most since 2002 after CIBC World Markets said its dividend may be cut and Credit Suisse Group reduced its rating. Bank of America Corp. had its steepest decline in four
years. Retailers fell, led by Target Corp., after consumer spending slowed more than economists forecast. The Standard & Poor's 500 Index lost 40.94, or 2.6 percent,
to 1,508.44, erasing about $369 billion of market value from the benchmark for American equities. Financial shares, this year's worst-performing industry, led the slide with a 4.6 percent retreat, the most since September 2002. The Dow Jones Industrial Average decreased 362.14, or 2.6 percent, to 13,567.87. The Nasdaq Composite Index slipped 64.29, or 2.3 percent, to 2,794.83. More than 13 stocks fell for every one that rose. ``There is more downside in financials,…We just don't know what the ultimate impact is going to be for all the subprime difficulties.'' The S&P 500 lost the most since Aug. 9.”

Mortgage Insurers Under Pressure As Concerns Rise About Sub-Prime Risks
From Dow Jones: “Derivatives traders see bond and mortgage insurers as speculative-
grade, or junk, companies, underscoring the market’s deepening uncertainty about their exposure to the subprime crisis. The credit default swaps of solidly rated investment-grade insurers such as Ambac, MBIA Inc. and PMI Group Inc. are trading 10 to 14 notches below the ratings assigned to them by Moody’s Investors Service, according to the agency’s implied ratings service. While the insurers generally trade lower than their agency ratings, the gaps widened even more after the companies posted dismal third-quarter earnings because of significant mark-to-market losses on their credit derivatives portfolios. Radian Group Inc. was the latest to report a third quarter loss due, and noted that the mortgage-insurance credit losses will continue to impact their results “for the foreseeable future.” Such losses are based on trading levels at the end of the quarter and don’t mean cash is actually flowing out of the company. The insurers say they only need to make payments in the event of an actual default of the securities they insure. “It remains to be seen how much they’re going to pay at the end of the day,” said Walter Schmidt, manager of structured product strategy at at FTN Financial Capital Markets.
Still, since the securities are so difficult to value, some insurers are “getting ahead of the curve” by writing down heavy losses, he said. The credit default swaps continued to widen Thursday, as the market braces for more losses related to subprime mortgages
that have rocked the financial world.”

End-of-Day Market Update

Three month T-Bill yield fell 11bp to 3.80%.
Two year T-Note yield fell 19 bp to 3.76%
Ten year T-Note yield fell 12bp to 4.35%
Dow fell 362 to 13,568
S&P 500 fell 41 to 1508
Dollar index rose .24 to 76.71
Yen strengthened by .79 yen to 114.65 per dollar
Euro fell .006 to 1.443
Gold fell $9 to $787
Oil fell $1.35 to $93.18, after reaching another all-time high of $96.24 overnight
*All market prices as of 4:55pm