The Economy Guy

Issue: 9/05/07 Wednesday

Yah-hoo. The market is very volatile. It went down 143 points today because the Beige Book came out, and it didn’t support the concept of the Fed dropping the Fed Funds rate. Oh my goodness!!! The sky is falling. The Beige Book is collection of stories about how the US economy is doing around various regions. Those stories basically said that the “illiquidity” problem has NOT bled through to the rest of the economy. So, if the sub-prime market is not causing financial problems in other areas of the economy, then it’s not causing a recession, and there is not a strong argument to drop the Fed Funds rate to fend off the recession. Got it?? That’s what happened today.

Pending sales of existing homes fell in July to the lowest level in nearly six years as borrowers struggled to finalize home purchases, particularly in expensive areas. The National Association of Realtors said its seasonally adjusted index of pending home sales for July fell 16.1 percent from a year ago and 12.2 percent from the prior month. July’s reading of 89.9 was the second-lowest ever for the index and its lowest since September 2001, when the economy was jolted by the terrorist attacks. “Numbers like this should put to rest the belief that we’ve reached the bottom” in the housing market, said Joel Naroff, chief economist for Commerce Bancorp Inc. “There’s still a lot of pain that’s ahead of us.” The index is designed to predict sales levels over the following two months. A reading of 100 is equal to the average level of pending sales activity in 2001, when the index began. This could be a fun index to follow.

On the eve of an interest rate meeting, the European Central Bank said Wednesday that volatility in the euro money markets has increased and it is prepared to “act accordingly.” In a statement, the bank said it may take action at a meeting of its Governing Council on Thursday to “contribute to orderly conditions.” “Volatility in the euro money market has increased and the ECB is closely monitoring the situation,” the ECB said in an unexpected announcement. “Should this persist tomorrow, the ECB stands ready to contribute to orderly conditions in the euro money market.”

The bank did not immediately explain why it issued the statement or what was behind it. Most analysts had expected the bank would lift its benchmark lending rate from 4 percent at the meeting, but they have backpedaled from that in the wake of market turmoil resulting from liquidity problems and the U.S. sub-prime mortgage crisis. So, it looks like a financial crisis is boiling up in Europe right now.

Here are Today’s closing details:

DJ30 – 13,305 (down 1.07%). Think roller coaster.

10 year US Treasury Bond – 4.47% (Down .09) This is a new recent low. This rate is telling us that bond investors think interest rates are coming down.

US Dollar – $1.3653/Euro.

Gold closed at $691 per ounce. (Down $1) Is gold making a move?

Oil Closed at $75.74 (Up .65) Oil continues to move up.

Gasoline is $2.00