We continue to be tugged between recession and inflation with pressure on the Fed to lower and to increase interest rates to avoid both the recession and inflation. Clearly an unenviable position to be in. The stock market generally one of the earliest leading economic indicators appears to suggest that the worst is either over or at least priced into the market. If this assumption  is indeed correct, the economic malaise that includes the recession and the credit meltdown could well be over a year from now but in the meantime expect significant volatility as everyone comes to terms with reality.

Today investors face what may be the bottom of the decline in the stock market, the financial markets and even the real estate market, if one goes by the first increase in the leading economic indicators in six months and the exuberance demonstrated by Wall Street on the back of bad financial results from both JP Morgan and Citigroup, but not as bad as expected.   Jamie Dimon the CEO of JP Morgan even suggested that the worst was over in the credit crunch even though about $260 billion in losses have been absorbed and announced by the major financial institutions out of a total expected industry wide loss that could reach $600 billion.  Clearly there are investment opportunities but investors better beware!

 

US mortgage rates soared this week after a dramatic sell-off in the Treasury market that hit housing sector recovery hopes even as it suggested investors were growing more confident in the medium-term US economic outlook.

The yield on the 10-year Treasury rose as high as 3.85 per cent on Friday from less than 3.50 per cent last week as investors sold bonds on expectations that the Federal Reserve could soon end its rate-cutting cycle.

The Fed sees the rise in yields as signalling increased market confidence in US economic prospects.

However, mortgage rates also moved higher, making it more expensive to buy homes and less likely that existing homeowners will be able to refinance mortgages.

Rates on 30-year fixed-rate mortgages rose to 5.87 per cent from 5.63 per cent a week ago, Bankrate.com said. Jumbo mortgages, those of more than $417,000, rose to 7.19 per cent from 7.06 per cent.

“The back-up in yields is a concern as it will damage the economic outlook,” said Jane Caron, strategist at Dwight Asset Management.

The three-month London interbank offered rate – Libor – increased to 2.91 per cent from 2.71 per cent this week, indicating underlying stress in the financial system.

Stocks rallied, said Anthony Conroy, head of equity trading at BNYConvergEx, because “the equity market is focused on a second-half recovery...and is not paying attention to the rise in bond yields yet.

 

For the entire article from the FINANCIAL TIMES click here:

Congress isn't done debating how best to stem the foreclosure crisis, but one near-certainty has emerged: Lawmakers will pull together a housing bill that expands Washington's role in helping troubled borrowers.

Key legislators, Bush administration officials, banking regulators and the presidential candidates have lined up behind the idea of letting the Federal Housing Administration back new loans for homeowners at risk of foreclosure.

Several plans have been proposed. All of them would let the FHA insure mortgages for troubled borrowers whose lenders voluntarily write down loans to an affordable level. Once refinanced, the loans could be sold to investors, which in turn could grease the wheels of the mortgage market as a whole.

Democrats and Republicans still disagree on important details including which borrowers would be eligible and how the program would be funded. But those are differences that can be worked out, political analysts say.

"Given election-year pressure and the lack of differences between plans, it's hard to see how they can't get this done," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

House votes expected soon

The leading Democratic plan - from House Financial Services Chairman Barney Frank, D-Mass. - is the most ambitious one proposed. It would let the government back as much as $300 billion in new loans if lenders reduced the mortgage principal owed to no more than 85% of a home's appraised value.

The Frank bill is expected to be approved by the Financial Services committee next week and likely will go to a full House vote by the first week in May, said Andrew Parmentier, a managing director and policy analyst for Friedman, Billings, Ramsey & Co.

Parmentier expects the House to overwhelmingly approve Frank's rescue plan and he predicts it will then go straight to conference negotiations with the Senate to hammer out the differences.

Frank, speaking on CNN's "Issue #1" on Thursday, said he's optimistic that lawmakers can get a housing package to President Bush by the end of May.

The crux of the debate

While critics worry that an FHA rescue plan could amount to a bailout, supporters say it's not since everyone involved - lenders, borrowers and mortgage investors - would make a sacrifice.

• Lenders get 100% backing from the FHA if a loan goes south. In exchange, the lender takes a "haircut" - reducing the principal owed and converting adjustable-rate loans to fixed-rate mortgages.
• Borrowers get to keep their homes, but they would pay a premium to the FHA for the mortgage insurance and they would have to give a small portion of their equity to the FHA when the house is sold. They would also have to show they can afford the newly refinanced loan.
• Mortgage investors - while they would sacrifice some future income from loans that have been reduced - would have more confidence investing in the new loans since the refinanced loans will be affordable and the borrower therefore will be more likely to pay them back.

THE HOMEBUILDER STOCK INDEX:

For the entire article from CNNMoney click here:

Big banks topped this week's investing news as they continued to fight their way through the subprime mortgage mess. For some, like JPMorgan Chase and Citigroup which both reported earnings this week, it meant continued writedowns.

That was both a good and bad thing. While those writedowns meant, obviously, that bank portfolios and balance sheets were taking hits, they also raised hopes among traders that Wall Street was putting the worst of the credit crunch behind it.

JPMorgan Chase said Wednesday that quarterly profit fell by half, although shares rose as the third-largest bank avoided the kind of massive losses that crippled many of its rivals. The bank absorbed more than $5 billion of losses and write-downs tied to mortgages and broken-down corporate credit markets.

Nevertheless those losses were less dramatic than those of rivals such as Citigroup, which posted its second straight quarterly loss, hurt by more than $16 billion of write-downs and costs related to credit losses, and said it will cut another 9,000 jobs.

Though the $5.11 billion first-quarter loss was larger than expected, analysts and investors expressed optimism that the largest U.S. bank and its new chief executive, Vikram Pandit, were taking necessary steps to move past credit problems and drive down costs.

Citigroup shares rose sharply Friday in reaction to the news.

Meanwhile, Merrill Lynch & Co. the world's largest brokerage, also saw it's stock price rise Thursday in spite of saying it would cut another 3,000 jobs after more than $6.5 billion of fresh write-downs pushed it to a loss for the first quarter. It marks the third straight quarterly loss for Merrill amid a global credit crisis that began last summer. Banks and brokerages have racked up nearly $200 billion of write-downs to date, with more feared to come.

 

 

For the entire article from CNBC click here:

AMERICANS are cutting back on purchases of things they do not have to have, sending retail sales down sharply at many types of stores.

Those cutbacks, which now seem to be worse than at any time since the 1990-91 recession, are helping to slow the economy and to spur calls in Washington for more fiscal stimulus even before the government starts to send out money to most taxpayers next month.

Those checks could provide at least a temporary stimulus, but until they arrive, the slowdown in spending appears to be nationwide.

In its beige book report on economic conditions released this week, the Federal Reserve said that surveys by the 12 regional Federal Reserve banks found that “consumer spending was characterized as softening across most of the country.”

The Fed said that in 10 of the 12 districts, spending on things other than cars was down, while car sales were generally reported to be flat or declining.

The strength in consumer sales, such as it was, was concentrated around Boston and New York, areas that, not coincidentally, attract many European tourists. With the dollar down sharply against the euro and the British pound, there are more foreign visitors and many of them find prices low compared with what they are used to back home.

The Census Bureau reported a small increase in retail sales for March, with overall sales up 1.8 percent over the previous year. But much of that gain was caused by higher prices. Sales at gasoline stations soared almost 19 percent as prices climbed. In food and beverage stores, sales were up 4 percent from a year earlier.

But spending more money on food and gasoline leaves less for other things, and sales were down, even without adjusting for inflation, at department stores, clothing stores and furniture stores, as well as at auto dealers.

The accompanying chart adjusts sales for inflation, and looks only at the trends in retail sales other than at gasoline stations. The inflation adjustment is for all commodities — that is, for the entire Consumer Price Index except for services. It may have been better to adjust using an index for commodities other than energy, but the government does not publish that.

The latest figure shows that such sales fell 4.5 percent during the first three months of this year, compared with the same period of last year. That is the deepest decline since the 1990-91 recession.

For the entire article from THE NEW YORK TIMES click here:

A sharp and unexpected rise in a widely used interest rate is threatening to add billions of dollars to the interest bills of homeowners, companies and other borrowers around the world.

The London interbank offered rate jumped for the second straight day Friday -- two days after the British Bankers' Association, which oversees the calculation of the interest rate, said it was investigating the borrowing rates that banks had been providing to it.

The BBA started its review amid growing concerns among bankers that their rivals weren't reporting their true high borrowing costs, for fear of signaling to the market they were desperate for cash. John Ewan, a manager of the Libor system at the BBA, said Friday the association continues to believe in the accuracy of the Libor system.

Libor is one of the world's most important financial indicators. It serves as a benchmark for $900 billion in subprime mortgage loans that adjust -- typically every six months -- according to its movements. Companies globally have nearly $9 trillion in debt with interest payments pegged to Libor, according to data provider Dealogic.

If sustained, the past week's rise of Libor could add roughly $18 billion in annual interest costs on that corporate debt, or about $100 to the monthly payment on a $500,000 adjustable-rate mortgage loan.

The Libor rate, which is supposed to reflect the average borrowing costs of banks, had been falling in recent months as the Fed lowered interest rates. At the same time, though, the gap between the interest rates central banks set and Libor has risen -- an indicator of increased concerns about banks' financial health. That, combined with this weeks' moves, counteracts efforts by the Fed to ease pressures on the economy.

While Fed officials see the rise in Libor spreads as predominantly reflecting pressures on European banks, they also see it as symptomatic of a broad reluctance by banks in the U.S. and elsewhere to lend money they think they may need a few weeks from now. They continue to study options for addressing the pressures.

One way might be to expand the Fed's "term auction facility," from the $100 billion it has currently lent to banks. It could also extend the term of loans made through the facility from the current 28 days, perhaps to three months or as long as six months.

Friday, the closely watched three-month U.S. dollar Libor rose 0.09 percentage point to 2.9075%, its highest in nearly six weeks. Between Wednesday and Friday, the rate rose 0.174 percentage point, an increase that hadn't been seen since August and the start of the financial turndown that has spread from banks into the broader economy. Meanwhile, the six-month U.S. dollar rate -- used as the basis for payments on most subprime mortgages -- rose even more sharply and was quoted Friday at 3.01875%, or 0.33 percentage point more than at the start of the week.

For the entire article from the WALLSTREET JOURNAL click here:

FROM THE ECONOMIST:

 

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