The Economy Guy

Issue: 11/02/07 Friday

Today, the stock market didn’t tell you what’ going on as it only went up 27 points.  However, the bond market was LOUD in it predictions, as were commodities (oil and gold). Gold is now over $800 per ounce for your gold buffs.  The dollar continues to fall to a new low against the Euro, and other currencies.

Why was the bond market LOUD????  Coming on the heals of yesterday’s fall of 0.11%, the 10 Year Bond fell an additional 0.08%.  If one day’s big percentage drop is a big deal (read yesterday’s article), then having two days in a row with BIG moves is more than doubly dramatic.

What does the Bond move mean???  Well, it means that Treasuries are safer than other markets, and people tend to park money there during turbulent times.  Generally speaking, bonds and stocks do not move in the same direction; they tend to move in opposite directions.  Bond values went way up, and stocks went up a little.  My interpretation is that stocks were the anomaly this time.  Bonds were telling the story that the “unknown market risks” were prevailing.  It is generally agreed that the “illiquidity crisis” hasn’t completed working its way through the financial marketplace yet.  There are probably more companies out there that will be telling us about their “one time profit write down” in the foreseeable future.  That will be bad for those stocks, and could be bad for the market overall if it hits enough companies, or foretells a recession.

The dollar continues to paint its ugly picture.  As it reaches new lows, commodities (like oil and gold) naturally go up to compensate in our worldly marketplace.  Oil is going up faster because there is a presumed risk to the oil supply (think Turkey and Iran).

Speaking of international matters, did you see (probably not as the press doesn’t really advertise these things) that Saudi Arabia is building a fence all the way along the Saudi – Iraq border?  That’s one long fence.  You would think that it would be impossible to build something like that as we can’t build one along the US – Mexican border.  The specifications for the Saudi fence is the same as the one for our border fence, and the same companies are bidding to build it using the latest in surveillance technology.  I guess the Saudi’s have more political willpower than Americans.

Back to the US marketplace – a mixed bag (as usual) ….

Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed spending growth in September to the weakest performance in three months.  The Commerce Department reported Thursday that consumer spending rose by 0.3 percent in September, slightly lower than the 0.4 percent increase that analysts had been expecting. Incomes grew by 0.4 percent, matching the August gain, and in line with analysts’ forecasts.  Economists are worried that consumers, the main support for the economy, may cut back on their visits to the malls in coming months as they struggle with the housing slowdown, tighter credit and now record-high oil prices.

The news about inflation from the consumer spending report was good.  (Is this an oxymoron?)
Prices paid by consumers on the Fed’s preferred inflation gauge rose a moderate 0.2 percent in September, excluding food and energy. This measure is up 1.8 percent over the past 12 months, inside the Fed’s comfort zone of increases in core inflation of between 1 percent and 2 percent.

In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 6,000 last week to a total of 327,000. That was a bigger drop than analysts had been expecting.

Employers boosted payrolls by a surprisingly strong 166,000 in October, the most in five months, an encouraging sign that the nation’s employment climate is holding up relatively well against the strains of a housing collapse and credit crunch.

Analysts believe that growth will slip to less than half that level in the current quarter and the first three months of 2008 under the impact of the worst housing downturn in more than two decades, which has rattled consumer confidence.  Many economists see the next few months as the maximum danger point when the economy could slip into a full-blown recession. However, analysts still believe the chances are good that the country can avoid a downturn because they believe the Fed will help matters by cutting rates further should economic data weaken more.

And on the international front….

Iran’s new central bank governor has warned the government of President Mahmoud Ahmadinejad over money supply growth, urging measures to prevent a further rise in inflation, the press reported Thursday.  ”The government, the private sector and anyone who cares about the nation’s economy should prevent the increase of liquidity,” said Tahmasb Mazaheri, quoted by most moderate Iranian newspapers.  ”It has an inflationary impact and it will lead to higher prices,” said Mazaheri, who was appointed in September as part of a wide-ranging economic reshuffle by Ahmadinejad.  At the end of May 2007, the central bank said money supply had grown by a colossal year-on-year rate of 39.4 percent.  Now that’s what I call INFLATION…..

The Qatari government suggested Friday it intends to propose an output increase in crude oil during the upcoming summit of the Organization of the Petroleum Exporting Countries, given recent historic surges in crude prices, Japanese government officials said.  Visiting Qatari Deputy Prime Minister and Energy and Industry Minister Abdullah al-Attiya was quoted as saying that the recent oil price hikes have been “out of control.”  He said supply and demand have been meeting, blaming the price surges on short-term investors who have been pumping money into the market.

On the crazy side of the US financial market…..

Merrill Lynch has been quietly talking to hedge funds about temporarily buying up to $5 billion in mortgage-backed securities, in what looks like an attempt to put off writing down risky mortgage assets, The Wall Street Journal reported. The Securities and Exchange Commission is examining how Wall Street firms value mortgage securities, and the Merrill transactions are on the SEC’s radar.

Here are Thursday’s closing details:
DJ30 – 13,595 (Up 27 points)
10 year US Treasury Bond – 4.29%  (Down 0.08%)

Euro 1.4487
Gold closed at $809 per ounce. (Up 15) - another new recent high.
Oil Closed at $95.93 (Up 2.44)
Gasoline is $2.44 (Up 0.10)