The unwinding of the investor bias towards owing commodities and shorting stocks, especially financial stocks, continued last week with high levels of volatility, but by week’s end the stock bulls were clearly in charge and commodity bears in oil and gold emerging from hibernation. Financial stocks were not quite as robust as the rest of the market and even the homebuilder stocks had a weak pulse, at least they are not dead. With labor productivity increasing, uncharacteristically during weaker economic times; interest rates still low; a dollar that is strengthening; stocks showing some resilience and the commodity led inflation threat decreasing, the economic doomsday - so well publicized – may well be averted. Investors could well start to seek positive inflation adjusted returns on their cash now well hidden under various mattresses.

Annual yields on certificates of deposit are creeping up at banks nationwide, and some analysts say that they may now be an especially attractive cash alternative.

Traditionally viewed as safe but low-yield investments, CDs are getting a second look from investors who are seeking a steady yield while taking some cash out of the stock market. They are also appealing to banks looking to shore up deposit accounts amid the crises in the housing and credit markets.

Some banks are dangling deposit rates as high as Wachovia Corp.'s 4.25% on a one-year CD and Countrywide's 5% on a five-year CD, compared with national averages of 3.6% and 4.16%, respectively, according to Bankrate.com. (Countrywide is a unit of Bank of America Corp.) Such yields also outweigh rates of Treasury notes of the same durations, currently set at about 2.3% and 3.3%, respectively.

The lingering question is whether CD rates will outpace inflation. In the current investment environment, with the Federal Reserve holding interest rates steady at 2%, they are beating it. But because of uncertainty over the long term, short-term CDs -- with maturities between three months and up to a year -- tend to be more attractive.

For the entire article from THE WALL STREET JOURNAL click here:

Rates on 30-year mortgages didn’t budge this week, while rates on other home loans were a mixed bag.

Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.52 percent for the week ending Aug. 7. That was the same as last week’s rate, which marked the second-highest of the year. The highest — 6.63 percent — came the week ending July 24.

Meanwhile, rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, rose to 6.10 percent this week, up from 6.07 percent last week.

A year ago, rates on 30-year mortgages stood at 6.59 percent, 15-year mortgage rates averaged 6.25 percent, five-year adjustable-rate mortgages were at 6.33 percent and one-year adjustable-rate mortgages stood at 5.65 percent.

For the entire article from MSNBC click here:

FALLING house prices have been at the heart of the rich world’s economic troubles in the past year. They led to the surge in defaults on American subprime mortgages that poisoned the market for asset-backed securities and drove up inter-bank rates. Mortgage-related losses have made international banks wary of lending to even creditworthy borrowers. The drying-up of credit has meant fewer buyers for new homes, leading to construction busts in America, Spain and Ireland. Now even countries unaffected by the global housing boom, such as Germany and Japan, are suffering from weaker export demand.

In America the tangible impact of the housing slump is plain to see in the number of empty homes and in rising unemployment. There is greater uncertainty about the indirect effects of falling house prices, including the extent to which consumer spending will be held back by the “wealth effect”. Spending is largely driven by how much people earn in real terms today, but it is also affected by expectations about incomes tomorrow. An important part of future incomes is tied up in the assets—stocks, bonds, property—where household wealth is stored. When asset values fall, those who own them are poorer, hence they spend less and save more. When wealth increases, they spend more.

The Fed’s model assumes the same wealth effect for housing as for financial assets. From the perspective of lifetime income, a dollar of housing wealth is the same as a dollar of stockmarket wealth.

Alternatively some, such as Willem Buiter, a former member of the Bank of England’s monetary-policy committee, believe there is no wealth effect from housing at all.

A shift in the value of housing does not affect household wealth in the aggregate, he says, because on average everyone is a tenant in his own home. A price fall hurts those who are “long” housing assets, ie, those who own more property than they will need over their lifetime (call them landlords). It benefits those who are “short” housing, ie, those who plan to buy a property or to trade up to a bigger one in the future (call them tenants). The average experience is of an owner-occupier who plans to live in his home until he dies. Unless he worries about how much he will leave to his heirs, he is indifferent to the value of his home.

There is a also a more general point that emerges from Mr Buiter’s paper. Very often there is too much emphasis on the losers from falling house prices and too little on the winners. A fall in house prices is not bad for everybody. In an important sense, a house is much like any other durable good: a fall in prices is a boon for those consumers who have yet to buy one.

 

THE STOCK PRICE INDEX OF HOMEBUILDERS

For the entire article from THE ECONOMIST click here:

US stocks soared on Friday as the dollar saw its biggest one-day jump against the euro in eight years and oil prices plunged.

The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak.

The dollar reached its highest in five months against a trade-weighted basket of currencies, while oil fell more than $5 to $114.87, 22 per cent below its record high of $147.27 last month. The S&P 500 closed 2.4 per cent higher in New York.

The shift in sentiment was triggered by Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that third-quarter eurozone growth would be “particularly weak”. This sparked talk that the ECB would be forced to abandon its hawkish policy stance and start cutting interest rates, thereby weakening the euro.

“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”.

The dollar hit a five-month high of $1.5055 against the euro and climbed 1.3 per cent to $1.9189 against the pound – its strongest since November 2006.

Traders said the violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US.

For the entire article from the FINANCIAL TIMES click here:

U.S. productivity remained elevated in the second quarter despite a sluggish economy and weak manufacturing, making it easier for Federal Reserve officials to balance risks to both economic growth and inflation while holding interest rates low.

Labor costs, meanwhile, slowed markedly, suggesting high energy prices have not triggered the kind of wage-price spiral that bedeviled policymakers in the 1970s and early 1980s.

Meanwhile, inventories held by U.S. wholesalers continued to rise in June, growing nearly twice as much as expected although climbing at a slower clip than sales, a government report released Friday said.

Nonfarm business productivity increased 2.2%, at an annual rate, in the second quarter, the Labor Department said Friday. The first quarter gain was unrevised at a 2.6% gain.

Wall Street economists had expected a 2.5% rise last quarter, according to a Dow Jones Newswires survey. Compared to the second quarter of 2007, productivity rose 2.8%. Productivity is defined as output per unit of labor.

Unit labor costs -- a key gauge of inflationary pressures -- advanced just 1.3%, below Wall Street forecasts for a 1.6% increase. Labor costs were up a modest 1.5% from one year ago, an indication that the economic slowdown and slackening jobs market is making it harder for workers to command higher wages.

Labor is the biggest input in the production of goods and services. If not matched by productivity, higher wage, energy and material costs are either passed along by a company in the form of higher prices or absorbed in profit margins.

Productivity so far this year has bucked its usual pro-cyclical nature -- up in good times and down in slumps -- by remaining sturdy even as the economy skirts near recession. That in turn gives Fed officials the flexibility to pursue an easier monetary stance than would otherwise be the case, since high energy and other material costs need not translate into broad-based gains in consumer prices.

For the entire artcile in THE WALL STREET JOURNAL click here:

The dollar soared Friday in what analysts are calling a game-changing move as concerns about the deteriorating euro zone economy gripped investors and commodities sold off.

On Thursday, the European Central Bank and Bank of England left their key interest rates unchanged at 4.25 percent and 5 percent, respectively. ECB President Jean-Claude Trichet issued a warning on inflation and said economic growth figures for the second and third quarters of 2008 would be much weaker than in the early part of the year. He signaled that an interest-rate increase to counter inflation would probably not be forthcoming.

This is payback time for the European currencies against the dollar," said Ashraf Laidi, currency strategist at CMC Markets. "These currencies have to retreat to better reflect the sharp deterioration in economic fundamentals in (the euro zone) region. This is not to say there's been an improvement in U.S. fundamentals."

Earlier in the week, the Federal Reserve maintained the benchmark federal funds rate at 2 percent.

For the entire article from CNBC click here:

“It is not because the truth is too difficult to see that we make mistakes... we make mistakes because the easiest and most comfortable course for us is to seek insight where it accords with our emotions - especially selfish ones.”

 

Alexander Solzhenitsyn

 

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