The Economy Guy

Issue: 11/29/07 Thursday

The stock market went sideways today; resting a bit after the last hectic trading days. The Fed chief, Ben Bernanke, hinted that there will be a reduction in the Fed Funds rate in the future. Interesting that yesterday the same hint (from Federal Reserve Members) caused a stampede in buying stocks, but when the Fed chief spoke, the market hardly moved.

The bond market was the more vocal market. It is down again well below the 4% level, and looks like its going to stay there for the foreseeable future. The 10 year bond has discounted the 1/4% Fed Funds reduction that will probably be announced at the 11 December Fed meeting. It has ALSO discounted an additional 1/4%!!!! That last discount is the most interesting one to ponder.

The dollar gained ground today against most currencies. This is a natural phenomenon of “taking profits.” The dollar has lost so much against other currencies, and currency traders have racked up so much profit, that it’s natural for them to want to take some of their profit off the table. However, the fundamentals have not changed, and I would expect the dollar to continue its fall in the next couple of weeks.

Markets never go in a straight line – up or down. They move with great jerks up and down, but not the same direction each day. This is true of all markets. The more liquid the market, the less the period of its transitions. Housing markets are illiquid, and have periods measured in years. I making this point so no one is ever surprised when a market (stock, bond, currency, commodity) changes direction.

Here’s a fun news article that you probably won’t see.

Trustees of the State of Florida‘s investment fund for schools & local governments should be thoroughly despised by now as their investment in mortgage debt continues to cause massive withdrawals forcing the administrators to take drastic measures today. After a total of $10B in outflows (about 1/3 of total assets within the fund) the gang packed it in, halting access to what some may fear is vital short-term payroll cash. WSJ’s Gaffen yesterday “The state has been the epicenter of more than one debacle in the last handful of years. Of late, the housing crisis has hit the state hard, and now the credit crisis has made a home in the sweltering heat of the Sunshine State“.

If you thought the credit crisis was limited to banks and finance companies you were woefully wrong. The State of Florida was playing with those puppies too.

Mortgage Rates : Freddie Mac reports the average 30 year mortgage rates were down at 2 year lows of 6.10% in the latest week while the 15-yr dropped to 5.73% & average 1-yr adjustable rates were up at 5.43%. Those rates are starting to look friendly again.

The White House has announced that next year’s GDP is projected to increase 2.7%, rather than the 3.1% it previously predicted. It is interesting that they cannot ignore the fact that the economy is slowing. My personal history watch of White House announcements is that you SHOULD IGNORE THEM!!! This is not a politically motivated statement. It is a financial statement based on my personal observation. The White House has political objectives that it projects onto its predictions. There are much better predictors of GDP growth than a political body’s announcement.

Here are Thursday’s closing details:
DJ30 – 13,312 (Up 22 points)
10 year US Treasury Bond – 3.94% (Down 0.09%) – the bond market rules!!!
Euro $1.4757 – profit taking going on in the currency market
Gold closed at $802 per ounce. (Down $5)
Oil Closed at $91.01 (Up $0.39) – a fire broke out on an oil pipeline on the US/Canadian border
Gasoline is $2.26 (Down $0.01)