The Economy Guy

Issue: 8/24/07

(See note about Chinese banks and sub-prime markets at end.)The Market closed the week up 143 points with buoyant enthusiasm. Why did this happen????

Sales of new homes perked up, while factory orders took off in July, raising hopes that the economy can safely weather financial turmoil that has shaken Wall Street. The Commerce Department reported Friday that new-home sales rose 2.8 percent in July, after falling 4 percent in June. The increase in July lifted sales to a seasonally adjusted annual rate of 870,000 units. A second report showed that orders to factories for big-ticket goods jumped 5.9 percent in July, the most in 10 months Both reports were better than analysts had expected. They were forecasting home sales to fall and were calling for a much smaller, 1 percent gain in factory orders.

The housing report showing sales up in July comes as credit standards have been tightening on home mortgages. Credit problems took a turn for the worse in August, making it even harder for some would-be buyers to get financing. That means home sales in the coming months will likely show renewed weakness, economists said. “We were getting some signs of stabilization in July. This was certainly a positive number,” said Bernard Markstein, senior economist at the National Association of Home Builders. “If we could wipe out the events of the last several weeks, we would be rejoicing.”

Even with the overall increase in home sales for July, sales are down a deep 10.2 percent from a year ago, underscoring the toll of the housing slump. The median price of a new home, meanwhile, was $239,500 in July, up from $238,100 in July a year ago. The median price means half sell for more and half sell for less. The average home price, however, dropped to $300,800 in July, down from $311,300 for the same month last year.

Well, what does that all mean. Well, it means the economy isn’t as bad as some folks said it was, and the Fed (who isn’t inclined to reduce the Fed Funds rate because it’s afraid of inflation) now has a good reason to NOT change the Fed Funds rate BEFORE their next meeting in September, and also NOT to reduce at that meeting. Increase sales of houses, and increased production means that the economy is pumping along, and inflation could be just around the corner — that could be how the Fed is thinking.

Chinese banks are just beginning to disclose their exposure to the U.S. subprime mortgage crisis, sending some bank shares plummeting in Hong Kong. Bank of China saw its Hong Kong stock price fall by as much as 8.1 percent Friday in reaction to the bank’s report that it holds $9.65 billion in subprime asset-backed securities and collateralized debt obligations. That’s 3.8 percent of its total securities investments.

Bank of China denied a report earlier this month by a Chinese financial magazine, Capital Week, that it risks losses of 3.85 billion yuan ($509 million). The magazine, citing accounting estimates, put potential losses for six major Chinese lenders from sub-prime related securities at 4.9 billion yuan ($647 million).

So, why am I telling you about Chinese banks? Why should we care? It’s just another example of how international this sub-prime mortgage problem really is. Would you have guessed that Chinese banks held sub-prime US mortgages?

Here are Today’s closing details:

DJ30 – 13,378 (up 1.1%).

10 year US Treasury Bond – 4.63% (Up .02)

US Dollar – $1.3680/Euro. (Up a booming 0.0121) Wow, the Euro is coming back with a vengance.

Gold closed at $678 per ounce. (Up $9) This was a fairly significant move by Gold.

Oil Closed at $71.09. (Up 1.29) It’s a shame that Oil could hold below the $70 level.

Gasoline is $1.98, (up .06)