The market was up and down and up and down today.  I’m feeling seasick.  We are definitely in the light volume season of trading from today all the way to the end of the year.  Moves can and will be exaggerated.  Bonds increased in value slightly as bond players are still trying to figure out what’s really going on with all the money flashing around the world.  The dollar is meeting resistance in its attempt to climb against the Euro.  If the Euro turns around, it is ready to continue its march in strength.  If the dollar finds more strength, it has a couple of cents left in its climb.

Here are details of how the Fed will protect homebuyers.

Key provisions of a Federal Reserve plan to protect home buyers from shady lending practices:

1. Restrictions on penalties for paying off a mortgage early.
2. Requirements to set aside money to pay for property taxes and homeowners’ insurance.
3. Showing proof of income when seeking a home loan.

For both risky and not-so-risky borrowers, the Fed proposed:
- Prohibiting certain types of misleading or deceptive advertising for home mortgages. For instance, it would bar using the term “fixed” to describe a rate that is not truly fixed over the life of the entire loan. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory “teaser” rates.
- Requiring lenders to provide financial disclosures to borrowers early enough for them to use while shopping for a mortgage.

The “protection” for buyers include restrictions on who can qualify for a loan.  Sounds like a little double-talk.  In reality, these restrictions aren’t a big change in lending practices, and don’t really stop those poor loans from being made in the future.  A great example of your government in action.  Unfortunately, it’s the Fed this time.

Here are the results of the first Fed $20B auction.

The Fed announced that the interest rate on the short-term loans will be 4.65 percent, which is slightly less than the 4.75 percent the Fed charges banks on emergency loans through its “discount” window. Banks have been reluctant to use the Fed’s discount window because of the fear that investors will believe they are having trouble getting funds in a normal manner.  The Fed received bids from banks for $61.6 billion worth of loans, an indication the Fed had been successful in achieving its goal of encouraging banks to use the new auction facility.  In its announcement of the auction results, there were 93 bids for the emergency loans. Each bank could submit up to two bids.

The good news is that the auction was oversubscribed by 3 to 1.  The bad news was that somewhere between 47 and 93 banks bid.  This is a small number consider the 1000’s of banks in the country.  The Fed isn’t going to publish which banks got how much money – a sign a fear to be transparent.

Dinner Time Conversation Teasers  (some of you told me you like having this type of diversion)

U.S. military commanders in Iraq didn’t know Turkey was sending warplanes to bomb in northern Iraq until the planes had already crossed the border, said defense and diplomatic officials, who were angered about being left in the dark.  Americans have been providing Turkey with intelligence to go after Kurdish rebels in northern Iraq. And a “coordination center” has been set up in Ankara so Turks, Iraqis and Americans can share information, two officials said Tuesday.  But defense and diplomatic officials in Washington and Baghdad told The Associated Press that U.S. commanders in Iraq knew nothing about Sunday’s attack until it was already under way.

Do you remember that crazy Armenian Resolution that Congress tried to pass, but failed??  Well, here is a follow-on story on how the US military works with its allies.  Here is what you can read into this story – the Turks don’t trust the Iraqi Central Government, so they didn’t give any advance notice of the air raid; the US has set up an intelligence center in Turkey to share knowledge about the PKK (Kurdish rebels) whereabouts and movements; the US still has excellent military relations with the Turks.

Here’s another dinner time story.

Credit rating agency Standard & Poor’s slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade “CCC” from investment grade “A.” The downgrade of ACA led S&P to cut ratings on nearly 3,000 municipal bonds, which could may spark a municipal borrowing crisis, according to Peter Schiff, chief executive of Euro Pacific Capital.  ”Many municipalities get high credit ratings because their bonds are insured,” said Schiff. “Higher borrowing costs for cities will force them charge higher property taxes, which will increase the strain on consumers. And some cities may be shut out of the credit markets.”

So you thought there weren’t going to be knock-on effects of the sub-prime meltdown???  Here is one that could catch you in the pocket book – a gift from your county property taxing authority.  Cities and counties are run by small time politicians who usually aren’t much different in their inability to get anything done – just like Congress.  Cities and counties were hoping home prices would just keep going up, so they could spend all that extra cash and NOT have to increase your “tax rate.”  Your taxes would go up, but your tax rate wouldn’t – a bittersweet reality for homeowners.  Now cities and counties are going to have to make some hard choices.  I encourage you to hold their feet to the fire, and not allow them to even think about deficit spending.

Here are Wednesday’s closing details:
DJ30 – 13,207 (Down 26 points)
10 year US Treasury Bond – 4.07% (Down 0.05%)
Euro $1.4376
Gold closed at $805 per ounce.  (Down $2)
Oil Closed at $91.24 (Up $1.16)
Gasoline is $2.33 (Up $.03)

The market consolidated today mostly.  Thank goodness stocks didn’t go down again – so it’s like dodging a bullet.  We continue to be firmly in a sideways trend in the market, technically speaking.

The big news was that the European Central Bank (ECB) will drop $500B into the European system over the next two weeks.  Technically speaking this is the cash needed to get across the important year end cash requirements, but it is twice what is normally needed.  That means the ECB added an additional $250B into the European economy.  The bond market was asking itself, “If they had to add that much money, what kind of problem is really out there?”  This is a great question, and the type of question you should always ask yourself.

Here is a story about China’s economy.

The size of China‘s economy is overestimated by some 40 percent based on most current measures, but is the world’s second largest, the World Bank said Monday. In a report ranking the world’s economies, the World Bank said a more reliable method of estimation using “purchasing power parity” (PPP) shows a much smaller value than the traditional market value estimates which the Bank called “less reliable.”

Now this story is interesting because it shows how silly the World Bank is.  First lesson is “the World Bank is a joke.”  The second less is “Don’t believe everything you read.”  PPP is totally dependent on exchange rates.  If the Chinese increased their exchange rate by 40%, the “40% overestimation” would disappear.  The best measure of a countries economy is GDP, and will remain so for awhile.

Here is an important statistic for the US.

The U.S. trade deficit declined during the third quarter to the lowest level in two years, raising hopes that the country’s trade troubles could be easing.  The Commerce Department reported Monday that the current account trade deficit fell by 5.5 percent to $178.5 billion in the July-September quarter. That was a better-than-expected showing and the smallest current account imbalance since a $173.4 billion deficit in the third quarter of 2005. The current account is the most comprehensive measure of trade because it includes not only trade in products and services but also investment flows between countries.  The current account deficit had set all-time highs for five consecutive years but has declined for two consecutive quarters, prompting economists to predict that this year will see the deficit finally start to decline.

This is good news for the US, but not great news.  So what if the current account is declining?  It is still so big that we are drowning other countries in our dollars.  The weak dollar is causing the decline as we increase our exports at the expense of other nation’s exports.

Keep your eye on the inflation potential.

Wheat prices surged above $10 a bushel for the first time ever Monday amid concerns that strong demand globally could result in a grain shortage in the United States next year — worsening food price inflation. Wheat supplies in the U.S. have dwindled this year as one wheat crop after another around the world has been damaged by poor weather, most recently in Australia and Argentina.

Here is another sign of inflation.  Wheat has NEVER been $10/bushel before. This price increase should work itself onto our grocery shelves next year sometime.

I love it when someone else echoes my concern about Citibank.

The financials are trading lower on concerns about problems in the credit markets and exposure to structured investment vehicles [SIVs]. These worries are not new, but don’t seem to be going away any time soon. In fact, the troubles prompted one Morgan Stanley analyst to recommend Citigroup as the top short investment idea for 2008. The sell recommendation came last Wednesday, and just two days before Moody’s downgraded Citi’s credit rating on concerns about low capital ratios. Monday, CNBC commentators said investors are now speculating that Citigroup will also cut its dividend. Shares of the bank have fallen 11.5% since last Monday and among the worst performers of the Dow over the past week.

The horse has bolted, so it’s time to close the barn door.

The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their head. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion losses for financial companies and resulted in political finger-pointing over who was to blame.  The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation’s riskiest sub-prime borrowers — those with spotty credit or low incomes — who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

This is too little, too late.

Here are Tuesday’s closing details:
DJ30 – 13,232 (Up 65 points)
10 year US Treasury Bond – 4.12% (Down 0.07%)
Euro $1.4414
Gold closed at $807 per ounce.  (Up $8)
Oil Closed at $90.49 (Down $0.14)
Gasoline is $2.30 (Down $.03)

The markets have started (please emphasize the word – started) to rationalize the meaning of the historic move the Fed made last week – meaning the move to add lots of liquidity to the US and European markets.

The stock market fell 173 points today after falling 178 points last Friday. Tomorrow is the key day. This crazy zig-zag market doesn’t really like continuing in one direction for 3 days in a row. The 10 year Treasury bond market settled in at its higher interest rate, and Gold stayed near $800/ounce. Oil declined just slightly.

Here is the news that moved the stock market.Today the Fed offered $20 billion in 28-day credit through an auction. The Fed will not release the results until Wednesday, but the aim of the auction is to encourage commercial banks to borrow from the Fed. That, in turn, is designed to boost banks’ lending to businesses and consumers and keep the economy humming. (Please note that if banks do not take the auction offer up, the implication is that the economy will NOT be humming. The bond market wants to know if the auction will work in providing confidence in liquidity in the economy.)

A speech Sunday night by former Fed Chairman Alan Greenspan added to the market’s ill humor. Greenspan said “stagflation” — when inflation accelerates and the economy weakens — is a growing possibility, given last week’s data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again. (I think I beat Greenspan to the word Stagflation!!!!)

Here is a heart felt request from the financial community to stabilize the market, and allow liquidity to flow once more.

It is time for the banks to fully disclose their US home-loan losses to prevent fear from making a tough credit crunch worse since the central banks have done about all they can to restore confidence, analysts say. Central banks “can’t do any more” to boost confidence in the financial markets, Commerzbank economist Michael Schubert warned, while Bank of America’s Gilles Moec urged the private sector to state clearly “who lost what and how much.” They pointed to the vital link between information and confidence, with Monday a key test of whether the markets take a more positive view of the central bank rescue operation of last week or instead turn more sceptical still. At stake is the possibility of ever tighter funding for businesses and even a recession in the US economy. “I’ve heard of institutions that won’t lend beyond one week, to anybody, it doesn’t matter who the name is.”

That means banks and other major lenders are hoarding cash, diminishing the flow of credit on which business depends. I am pleased to see that financial leaders are speaking out about creating a sense of trust in our banking system by having banks speak the truth about their true sub-prime loan exposure.

Here is the international liquidity crisis in a nutshell.

One of the vital functions of central banks is to prevent the break of a link, or links in the banking chain from freezing the national, and potentially international, banking system. “If Northern Rock went under you’d be faced with a house of cards,” referring to the troubled British mortgage lender that had to be bailed out by the Bank of England to the tune of billions of pounds.An ECB study estimates that 18 of the biggest eurozone banks are exposed to risks which, if handled in the same way, would require additional funding “of approximately 244 billion euros (356 billion dollars).”

Those words should scare you stiff. Using the term “house of cards” and the loss of $356B are big red flags to all of us who are innocent bystanders in this mega-monopoly play for wealth and power.

Here are Monday’s closing details:
DJ30 – 13,167 (Down 173 points)
10 year US Treasury Bond – 4.19% (Down 0.04%)
Euro $1.4401 – the dollar holds its move up in strength.
Gold closed at $799 per ounce. (Up $1)
Oil Closed at $90.63 (Down $0.64)
Gasoline is $2.34 (Down $.01)