The Economy Guy

Issue: 10/22/07 Monday

Thank goodness we’re past last week when the market went down over 500 points.  Today, the market sorted itself out, and had time to think without the panic of last Friday.  The market started out down, but ended up 45 points.

What was the big story today?  It was oil (down $1.04) and told (down $8).  These retreated because people just plain wanted to take some of their profits off the table.  This was short term action only.  Also, there was an announcement of peace on the horizon as it looks like Turkey isn’t inclined to invade Northern Iraq.

Here’s some of the economic news coming out today.  Fed Governor Kroszner made it clear that we’re not out of the economic woods yet.

The Federal Reserve will do whatever is necessary to prevent damage to the economy from the credit crunch that has gripped Wall Street, a Fed official said Monday, warning it will take time for financial markets to fully recover from the strains. Fed Governor Randall Kroszner’s remarks came as fears about the credit crunch and a painful housing slump have gripped investors in recent months, causing stocks to nosedive. Wall Street took another sharp plunge — 366 points — on Friday. The Dow Jones industrials was up in trading on Monday afternoon, after being down more than 100 points early in the session.  ”The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability,” Kroszner said in a speech here to the Institute of International Bankers.  Still, the financial situation is fragile, and it will take time for the markets to fully recover. “Strains … persist even now,” Kroszner said.

Oil futures prices fell Monday amid concerns about economic growth and on profit-taking ahead of the November contract’s expiration. News of a possible ceasefire between Turkey and Kurdish rebels in Iraq added to the selling. The stock market’s sharp downturn Friday has reignited concerns that the economy might be slowing, cutting demand for oil and petroleum products.  But traders are also selling to lock in profits from a rally in which oil futures jumped almost 14 percent in less than two weeks. The November crude contract, which expires Monday, is trading more than $1.20 higher than the December contract. November crude reached a record $90.07 a barrel on Friday morning before declining to settle lower.

Prices were already down sharply in morning trading when Iraq‘s president announced that Kurdish rebels will announce a cease-fire Monday night; the news added to crude’s decline. (Read this announcement carefully….  Why would the Iraqi’s announce a cease-fire???  Diplomacy – that’s why.  There is no doubt that the US Government made it crystal clear to the Iraq central government and the Kurdish government that it was in their best interest to temper the Kurdish rebels.  Diplomacy works again!!!!!)

U.S. Treasury Secretary Henry Paulson pressed the International Monetary Fund on Monday to thoroughly carry out its monitoring of foreign exchange rates.  While welcoming the recent update of the IMF’s currency surveillance policy, Paulson said its implementation is “critical” and urged IMF staff to “roll up their sleeves, undertake thorough analysis, and put forward their judgments.”  ”Without meaningful exchange rate surveillance, governance and management reform will ring hollow,” he said at a plenary session of the annual IMF-World Bank meetings.  The IMF’s currency surveillance is intended to make it easier to identify countries that manipulate their currencies. The program could serve as a tool to put pressure on China to relax its currency policy further.  On Friday, Group of Seven finance ministers and central bankers urged China to let its currency, the yuan, rise more rapidly to help rebalance global growth.

I find it very interesting that the US wants the IMF to watch exchange rates.  The IMF has historically proven itself to be a useless organization (similar to the UN).  I admit that I don’t understand all the messages being sent here, but I truly believe there are some important messages to be listened to.  The IMF can’t do any damage just “watching.”  One explanation is that the US is using alternative methods to lobby the Chinese on their undervalued currency.  Another explanation could be that the US is setting up the IMF to have a bigger role in current exchanges – I hope not.

Here are Monday’s closing details:
DJ30 – 13,567 (Up 45 points)
10 year US Treasury Bond – 4.39%  (Down 0.01%)  This continues to be a big deal.
Euro 1.4178 – The Euro broke out of the $1.43 barrier, but fell back.   It will be easier to break thru $1.43 the next time.
Gold closed at $760 per ounce. (Down $8)
Oil Closed at $87.56 (Down 1.04)
Gasoline is $2.13 (Down 0.04)  I hate paying high gas prices, so when these numbers go up, it gets my attention.  These prices are for “futures” and that means they will be purchased for those higher prices, and WE will be paying them in the future.