The oil price continued to lead commodity prices down, with the dollar responding positively and interest rates remaining low with bonds rallying, but stock prices did not embrace these new directions with any great enthusiasm. A continued downward trend in commodity prices should bode well for the general economy and relieve the inflation pressures, which if left unchecked could see much higher interest rates. The prevailing opinion now suggests that the Fed will leave interest rates unchanged for the rest of the year, which is good news for borrowers, but challenges investors with low and even negative inflation adjusted returns in most of the bond market and continued uncertainty of investments in the stock market.

IF we have learned anything from this unrelenting credit mess, it is that greater disclosure is needed if investors are to regain their trust in the financial system. Nowhere is this disclosure more urgent than in the $2.6 trillion municipal securities market, an arena where information is scant and investors must pay to view the financial filings that issuers do make.

It’s hard to believe that a market this big remains such a disclosure backwater. More than 50,000 nonprofit issuers offer municipal securities, including states, cities, hospitals, turnpikes and other entities. Individual investors like the securities because the income they generate is usually tax-free. At the end of 2007, retail investors directly held 35 percent of this market; mutual funds held an additional 36 percent, the S.E.C. said.

But minimal disclosure requirements leave these investors decidedly in the dark about issuers’ financial health. Exhibit A for how this can harm investors is a recent development at the West Penn Allegheny Health System, a four-hospital system based in Pittsburgh that raised $750 million in revenue bonds in May 2007.

West Penn, which generated $1.1 billion in patient revenue in the nine months that ended in March, was formed in 2000. Its creation followed a 1998 bankruptcy filing by its predecessor, the Allegheny Health and Education Research Foundation, or Aherf. Some $555 million in debt was affected by the bankruptcy, the largest among nonprofit health care entities rated by Moody’s Investors Service.

The health system’s default ensnared MBIA, the giant bond insurer, which had backed $256 million in Aherf securities and lost $170 million on the failure.

Last year, the mess resurfaced when the Securities and Exchange Commission contended that MBIA had tried to mask the loss by setting up a sham reinsurance contract after learning of Aherf’s problems. Without admitting or denying the accusations, MBIA paid a $50 million penalty to settle with the commission in January 2007.

West Penn began talking about raising capital in 2006. It wanted to reorganize its debt to reduce its interest costs, allowing the system to make much-needed capital investments, it said.

All three rating agencies opined on the West Penn bond offering, which came in May 2007. Fitch Ratings assigned West Penn’s bonds a BB rating, saying the system had made “significant financial and operational progress” since its formation in 2000. The issue sold briskly at prices as high as $1,017 a bond, or just over par.

MBIA, which had insured some of the old debt that West Penn hoped to redeem with the new issue, didn’t insure the new bonds. Months earlier, in October 2006, West Penn had urged MBIA to support its capital push, arguing that it was a “great business recovery story that needs to continue.” But MBIA declined; a spokesman would not say why.

EVEN as West Penn was telling MBIA that it had achieved significant revenue growth since 2000, the system was encountering difficulties. Revenues exceeded expenses by only $3.1 million in the quarter that ended September 2006, down from an excess of $5.3 million generated in the same period in 2005.

But that quarterly statement wasn’t filed publicly and still does not show up in the financials that West Penn has supplied to the organizations that maintain municipal-issuer information. Indeed, between Nov. 7, 2006, when it reported its June 30 results, and July 25, 2007, well after the bond issue was sold, West Penn made no filings.

To be sure, the offering circular given to investors ahead of the bond deal contained some figures from 2006. But it didn’t provide details on the quarter that ended in September 2006 and contained no information about results generated in 2007.

In any case, trouble surfaced almost immediately after the May 2007 bond deal. That July, the health system announced that West Penn’s chief executive had resigned over differences with the board. A new chief executive, Christopher T. Olivia, took the job last March.

Then, about three weeks ago, the system said an internal review had concluded that West Penn had overstated accounts receivable by roughly $73 million over an unspecified period. It will have to restate earnings as a result.

Fitch downgraded the health system’s bonds one notch the next day and warned of further downgrades. Moody’s also dropped its ratings. The bonds tumbled in value; last week they traded at $830 each.

Thomas G. Chakurda, a West Penn spokesman, declined to answer any questions for this article, including why the system’s September 2006 financial statements couldn’t be found. West Penn barred reporters from listening to a conference call with investors in early August to discuss the restatement, saying the call was invitation-only. The company wouldn’t provide a transcript of the call.

A spokesman for the S.E.C. declined to comment, as is the commission’s custom, when asked whether it is examining West Penn’s restatement. But a person briefed on the matter, who requested anonymity because he was not authorized to speak to reporters, said the commission was making inquiries.

If the S.E.C. wants to make the case that greater disclosure should be required of municipal issuers, the West Penn matter is certainly a fine brief.

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

Treasuries gained, driving yields on two-year notes close to a three-month low, as falling commodity prices and a strengthening dollar spurred speculation the Federal Reserve won't raise interest rates this year.

Ten-year notes gained for a third straight week as central bank policy makers said in speeches and interviews the economy is unlikely to improve soon. Reports showed sales at U.S. retailers dropped in July for the first time in five months. The euro zone's economy contracted for the first time since the European common currency debuted in 1999.

``The focus has shifted from being concerned about inflation to the global growth story,'' said Kurush Mistry, an interest-rate strategist at Lehman Brothers Holdings Inc. in New York, one of the 19 primary dealers that trade with the central bank. ``If commodities keep coming down, the market will be less concerned about inflation and more sanguine about the fact that the Fed doesn't need to be as hawkish'' against rising prices.

The yield on the two-year note fell 12 basis points, or 0.12 percentage point, this week to 2.39 percent in New York, according to BGCantor Market Data. It touched 2.31 percent, close to the lowest since May 21. The price of the 2.75 percent security due in July 2010 rose 7/32, or $2.19 per $1,000 face amount, to 100 22/32.

The 10-year note's yield dropped 10 basis points this week to 3.84 percent. It touched 3.82 percent, the lowest since July 16. Yields on 30-year bonds fell 7 basis points to 4.46 percent.

 

 

Copyright © 2008 Mortgage-X.com
Source: www.mortgage-x.com
Reprinted with permission

For the entire article from BLOOMBERG NEWS click here:

Until recently Moreno Valley was one of the fastest-growing cities in America. It lies in the Inland Empire, a two-county region in southern California that is so called largely because it is difficult to know how else to characterise such a sprawling expanse of detached homes, strip malls and warehouses. Between 1990 and 2007 the Inland Empire’s population grew from 2.6m to 4.1m—the equivalent of adding a city the size of Philadelphia.

As in other regions now suffering from a rash of foreclosures and falling house prices, such as south Florida and Nevada, rapid growth is itself largely to blame. Moreno Valley had the misfortune to swell at a time of lax lending practices. Whole neighbourhoods were built on cheap credit and inflated expectations—palaces for the middle class.

Despite the gloom, a few souls are rather cheerful. Public-transport advocates and planning groups such as the Congress for the New Urbanism have seized upon the crisis in far-flung regions like the Inland Empire as evidence that sprawl is no longer viable. “The frontier of endless mobility that we’ve known our entire lives is closing,” wrote Bill McKibben, an environmentalist, in the Washington Post. At last, the urbanists predict, Americans will return to city centres. They will swap their sport-utility vehicles for public transport and begin to act more like well-behaved Europeans.

Some of these cheerful forecasts appear to be coming true. Across southern California, use of the skeletal rail network is rising. Property prices are indeed holding up fairly well in older neighbourhoods near the coast. It can be difficult to convince people in Beverly Hills or Santa Monica that the state has a housing crisis. But the growing price gap between such burghs and places like Moreno Valley can be read in two ways. It is both a sign of the suburbs’ plight and the thing that is gradually renewing their competitive edge.

The Inland Empire’s housing market did not collapse because people chose not to live in sprawling suburbs. They clearly did, hence the huge growth there. The problem was that buyers could not really afford the houses that were being built. Now they can. Mr Husing reckons 39% of residents can now afford the average property—up from just 18% in 2005. House-builders are at last creating smaller homes, and a few buyers are returning.

Bill Batey, Moreno Valley’s mayor, is frank about the city’s present problems. When asked about its future, though, he brightens. Pointing to a large aerial photograph on the wall, he outlines plans for a new warehouse, a cluster of medical offices and a lot more houses. There is plenty of empty space in the photograph; indeed, there is a huge expanse of bare earth directly across the street from city hall. The frontier is not closed yet.

 

THE INDEX OF HOMEBUILDERS: 

For the entire article in THE ECONOMIST click here:

Stocks could drift higher in the coming week as the proverbial dog days of summer take hold.

The market has been dependent on the drop in commodities, particularly oil, and the strengthening dollar to move forward. The dollar gained 2.2 percent against the euro and 3 percent against the pound in the past week. Oil lost 1.2 percent, and metals and other commodities fell. Gold, for instance, slipped 8.4 percent to $786, its lowest settle since last Nov. 30.

"We're going to see how long the strong dollar, weak commodities trade continues. I think, personally, we're going to have a snoozer" next week, said Jefferies and Co. chief strategist Art Hogan.

"The economic data calendar is not robust. I think the biggest driver in this market is going to be oil," he added.

A highlight will be Federal Reserve Chairman Ben Bernanke's speech Friday at the Kansas City Fed's annual symposium in Jackson Hole, Wyo. Otherwise, producer price inflation data and housing starts Tuesday top the economic calendar.

The Dow lost 0.6 percent in the past week, finishing at 11,659.90. The S&P 500 eked out a 0.15 percent gain to end at 1298.20. The Nasdaq, though, rode higher, finishing the week up 1.6 percent. The best performers this past week were consumer discretionary, up 2.4 percent; telecom, up 2.2 percent and consumer staples, up 1.5 percent; followed by tech, up 1 percent.

The S&P financial sector was the worst performer, down nearly 3 percent for the week.

For the entire article from CNBC click here:

The U.S. dollar marched higher again on Friday, continuing a development that could ease inflationary pressures but also could slow a U.S. export boom.

Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.

On Friday, the euro fell to 1.4673 against the dollar, and the dollar fetched 110.51 yen. The British pound has fallen against the dollar for 11 straight days, its worst such streak since at least 1982. Over the past month, the U.S. currency has gained about 8% against the euro and the pound, and nearly 6% against the yen.

When a currency strengthens, it's usually a sign of health in the underlying economy. In this case, the dollar's rally is a sign of weakness in other economies. Reports in recent days showed that the economies of Japan and Europe contracted in the second quarter, and the U.K. slowed. It's now looking less likely that the rest of the world will be insulated from U.S. economic ills.

The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the U.S. currency strengthens, commodity producers have less incentive to increase their prices, further easing the upward pressure on prices.

The development has wide-ranging implications for financial markets and the global economy. It is generally good news for central bankers worried about the upward drift of inflation, particularly in the U.S.

In June, Federal Reserve Chairman Ben Bernanke issued a rare public declaration on currencies, saying the dollar's steep fall was feeding inflation pressures by pushing up the cost of imported goods. On Thursday, the Labor Department reported that U.S. consumer prices were up 5.6% in July from a year ago, the biggest increase in 17 years.

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

The dollar surged to a two-year high against the pound and a six-month peak against the euro on Friday, as fears about spreading economic gloom triggered a sell-off in commodities.

Against sterling, the US currency notched up its 11th consecutive day of gains – its longest uninterrupted rise in more than 35 years – as markets became increasingly convinced that the US was best-placed to weather the global downturn.

The long-running surge in commodities and resulting inflationary pressures had been a main factor in slowing global economic activity – playing a bigger role than global financial turmoil, for instance, in the eurozone. The eurozone economy shrank in the second quarter for the first time since the launch of the euro in 1999, while Japan’s economy contracted 0.6 per cent, its worst performance for seven years. The US staged at least a modest recovery in the same period.

For the entire article from THE FINANCIAL TIMES click here:

From Despair.com:

 

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