The Economy Guy

Issue: 8/27/07

By Global Economy Guru, Tom Harvey…
The market went down today (Monday) because the housing news just doesn’t go away. The Dow close down 57 points. Oil was up slightly. 10 Year Bond interest rate fell a little, and Gold stayed about the same.

Sales of existing homes dropped for a fifth straight month in July, falling to the slowest pace in nearly five years, while home prices fell for a record 12th consecutive month. The National Association of Realtors (NAR) reported that sales of existing homes dipped by 0.2 percent last month to a seasonally adjusted annual rate of 5.75 million units. The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch. Sales are 9% lower than last year, and match the sale rate met in November, 2002.

By region of the country, sales fell by 2.2 percent in the Midwest and were unchanged in the South. Sales rose by 1.8 percent in the West and 1 percent in the Northeast. However, many analysts believe it could be months before housing stabilizes because of the threat that rising delinquencies could dump further homes onto an already glutted market. The inventory of unsold homes rose by 5.1 percent at the end of July to a record of 4.59 million units. This problem won’t go away until after the inventory number starts to fall.

The deep slump in housing, combined with recent severe turmoil in financial markets, has raised worries about a possible recession. But many economists believe the Federal Reserve will ward off a full-blown downturn by reducing a key short-term interest rate should financial market conditions fail to stabilize. WOW!!! Did you see the “r” word??? The NAR doesn’t want to admit that a recession might occur, but …..

Bad credit has supplanted terrorism as the gravest immediate risk threatening the economy, a key national research group reported Monday. Borrowers’ withering ability to pay their bills and the subsequent fallout in the credit markets this summer topped the list of short-term risks on peoples’ minds, according to a survey by the National Association of Business Economics.

Former US Treasury Secretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany. Traders are braced for another week of turmoil after the near breakdown of America’s $2,200bn (£1,100bn) market for commercial paper. “It would be far too premature to judge this crisis over,” Mr Summers said. “I would say the risks of recession are now greater than they’ve been any time since the period in the aftermath of 9/11.”

Are you wondering what that token sum is all about in Germany???? Well, here’s the facts. It emerged that the state-bank SachsenLB may have accumulated $80bn of exposure to risky assets through a set of Irish funds kept off balance sheet. Well, who said European aren’t good at hiding what they are doing? Unfortunately, this caught up to SachsenLB.

Last week a group of state banks said they would rescue the bank. In return for a 17 billion euro ($23.1 billion) credit line to keep it afloat, the owners were forced into agreeing to its sale, a milestone in Germany, where few state-owned banks are ever put up for auction.

German newspaper Welt am Sonntag said it had information that the purchase price would be 300 million euros, citing a source close to the company. It also said that SachsenLB had immediate obligations of 250 million euros which the new buyer would have to pay in cash. If that’s right, this bank went for about $400M, and had 10’s of Billions of Dollars in “questionable” assets.

This prompted calls for the reform of financial market supervision. The economy minister of the southern state of Bavaria, Erwin Huber, said on Friday that supervision needed tightening. The horse has left the barn!!!!!! Hasn’t anyone told this politician????

In an interview with the web edition of Financial Times Deutschland, it was said that the roles of the Bundesbank and financial watchdog BaFin needed to be better defined. A spokeswoman for BaFin said SachsenLB’s Irish subsidiary had already been investigated in 2005 and problems with its risk exposure had been found. It’s great to see that the Europeans don’t know what’s going on in their markets, just like the Fed.

Here are Today’s closing details:

DJ30 – 13,322 (down 0.42%).

10 year US Treasury Bond – 4.60% (Down .03)

US Dollar – $1.3645/Euro. (Down .0035)

Gold closed at $676 per ounce. (Down $2)

Oil Closed at $71.97. (Up 0.88)

Gasoline is $2.04, (up .06)