Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – October 30th, 2007

More Info. This Week

After minimal information to report on last week…there’s a ton to get to this week…so let’s get on it!  We mentioned last week that interest rates would closely follow the stock market direction. 

Well, that’s exactly what happened.  Merrill Lynch, our largest investment banker and broker, reported huge third quarter earnings losses.  Basically, Merrill indicated a few weeks ago that they would have to revalue about $5 Billion worth of very complicated financial instruments known as collateralized debt obligations (CDOs). 

What Are CDO’s?

CDO’s go further than logarithms; they are complex, MIT graduate, financial calculations – insofar as how an investment will perform.  Now, Merrill indicates that $7.9 Billion worth of CDOs will have to be re-evaluated on their value to investors.  They also reported a 94%, yes that’s ninety-four percent loss in revenue, earning $577 million.  This helped rates, as money flowed out of the Stock Market and into bonds, or Mortgage-Backed-Securities. 

Existing Home Sales for September moved to 10 ½ month average for homes on the market to sell.  The medium home price lost 4.2% nationwide, too. 

Foreign Investment In Bonds

Durable Goods Orders were reported at -1.7%.  Initial Jobless Claims were reported at 331,000, higher than the expected 320,000.  This week actually had a favorable auction of Two-Year Notes.  $20 Billion worth!  We have discussed how foreign investment in our Bonds in key to keeping down interest rates.  This last week was a good sign. 

Then Countrywide reported poor earning, however, not as poor as investors expected.  So, money went back into stocks, at the expense of bonds and rates worsened a bit. 

Black Tuesday – 78 Year Ago

Seventy-eight years ago Monday, this last October 29, 1929 we experience “Black Tuesday.”  Sixty percent of the stock market value was eventually lost, causing the Great Depression.  So, even though we’re going through this terrible mortgage market meltdown, think about it…things could be a lot worse.

So, again, I miss the Federal Reserve’s meeting and announcement of what they will do with the overnight rate by one day!  One day!  So, you’ll be reading this article and already have the answers that I can only prognosticate, at this point…let’s see how I do…

First, stocks started trading lower on Tuesday, when a Wall Street Journal Article stated that they didn’t think that the Fed was going to lower rates on Wednesday.  Hm?

Will The Fed Call It Right?

Exactly one day after the Fed Meeting on Wednesday, two very important inflationary important gauges will be released:  the Employment Cost Index, and the Core Personal Consumption Expenditure Index (PCE).  Will the Fed call it right?  I think they will, lowering the rate 0.25% on Wednesday.  Remember that the Fed’s main purpose in life is to combat inflation.  With the PCE showing inflation to be at 1.8% on a year-over-year basis, the Fed has room to lower the rate a little, but they also desire to keep employment moving at a good pace. 

Lately, employment numbers have shown some weakness.  Whilst being good for inflation (keeping rates lower) they also do NOT desire HIGH unemployment numbers…a fun teetering job of the Fed.  Let’s face it, the economy is moving a little slower, so a cut for these three reasons looks eminent…but I’ve been wrong before (I know it’s hard to believe).  One final note…Consumer Confidence is FINALLY reporting lower.  Remember back in July, I commented on the consumer’s willingness to spend and spend…this may be the straw to the finally move to 0.25%  lower…until next week.

This entry was posted on Tuesday, October 30th, 2007 at 5:54 pm and is filed under Interest Rates, Weekly Market Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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