Sinclair Noe’s Financial Review
Wednesday, September 19, 2007

DOW + 76 = 13,815
SPX + 9 = 1529
NASDAQ + 14 = 2666
DJTA – 27 = 4905
DJUA + 6 = 511
RUT  + 10 = 817

Economist Robert Shiller, in testimony prepared for a hearing of the Joint Economic Committee said the loss of a boom mentality among the public may bring on a drop in consumer confidence that poses a "significant risk" of a recession within the next year.

Meanwhile, Peter Orszag, director of the Congressional Budget Office, gave a more tempered forecast, saying that financial market turmoil and weakened consumer confidence pose economic threats but are not likely to send the economy into a recession.

Yesterday the Fed cut rates a half point in order to forestall adverse effects from disruptions in the financial markets. There are plenty of opinions about the Fed rate cut. Some folks think it will be a boon, others just a short term bailout. Some think it will lift the economy, others think it will destroy the dollar. Today, I read analysis that called this (the disruptions in the financial markets) a crisis of confidence, not a crisis of liquidity. I think the lack of confidence comes from a lack of transparency. We have all sorts of financial instruments, not just mortgages, but derivatives of mortgages, and they’re marked to models; nobody knows how to mark to market. It’s difficult to trade something when you don’t have any idea what it’s worth. We don’t have a crisis of liquidity; we have a crisis of transparency.

A new Reuters/Zogby Index, a new measure of the mood of the country, dropped from 100 to 98.8 in the last month on worries about the economy and fears of a recession. Some said they weren't worried about the economy and cheered the interest rate cut and stock market recovery. Some said while they felt good about their personal finances for now, they feared for the future. One in three Americans expect a recession in the next year, and some are even concerned about a Depression. The cost of the war was a common complaint. Only 29 percent of Americans gave Bush a positive grade for his job performance; only 11 percent rated Congress positively.

Whether you think the Fed rate cut will help or not, the undeniable fact is that Helicopter Ben has cranked up the printing press and he’s tossing money out of the chopper. Keep your eyes open and feel free to pick up any bills that happen to fall onto your path.

Overseas markets liked the rate cut: Britain's FTSE 100 finished up 2.8 percent, Germany's DAX index rose 2.3 percent, and France's CAC-40 rose 3.2 percent. Japan's Nikkei closed up 3.6 percent, for the biggest one-day gain in 5 years, and Hong Kong's Hang Seng Index rose almost 4 percent.

In economic news:
Consumer Price Index dropped 0.1 percent last month. It was the first decline in consumer prices since a 0.4 percent fall in October 2006. The core inflation rate, excluding food and energy, was up 0.2 percent. Energy costs dropped 3.2 percent, but that is likely to change, as oil prices have spiked in recent weeks. Food prices were up 0.4 percent, as higher costs for dairy products and fruit offset prices declines for vegetables and pork. So far this year, food prices have been rising at an annual rate of 5.6 percent. Overall inflation through August is rising at an annual rate of 3.7 percent.

The Commerce Department reports new home construction fell for the third month in a row in August. New home and apartment construction dipped last month by 2.6 percent to a seasonally adjusted annual rate of 1.331 million units, the slowest pace in 12 years.

The bond market is anticipating more rate cuts. The yield on longer term debt is going higher, in expectation of more inflation, while rates on short term debt is going lower. Price action in the futures market projects a fed funds rate of 4.35 percent in January, 2008 and of 4.14 percent in April, 2008. The 30-year bond was down nearly 1-1/2 points in price, its yield rising to 4.84 percent, up 14 basis points in just two days. 10-year notes down 19/32 in price, and the yield was up 7 basis points to 4.54.

Energy prices are a big factor in the ongoing debate about inflation. For a while today, oil prices were closer to $85 dollars a barrel than to $80. Another intraday record high for oil, at $82.51. The energy Department reported big declines in oil inventories. Light, sweet crude for October delivery rose 42 cents to settle at a record $81.93 a barrel

The dollar was mixed today. That was expected. The dollar is in a long term downtrend, and that hasn’t changed. The news of the rate cut lifted hopes that the economy may strengthen, and even in a downtrend, you don’t go straight down. Gold has been going almost straight up – right up near some levels of resistance. December gold jumped $5.80 to close at $729.50 an ounce. Silver for December delivery rose 18 cents to settle at $13.105 an ounce, while October platinum picked up $1.80 to settle at $1,308.50 an ounce.

In earnings news:
Morgan Stanley reports third-quarter profits sank 17 percent. The second largest U.S. investment bank was forced to write down nearly $1 billion worth of loans. Just a reminder, Morgan Stanley is not in the subprime mortgage business.
MS – 1.48 = 67.03

Goldman Sachs and Bear Stearns report quarterly earnings tomorrow.
GS + 5.00 = 205.50
BSC – 3.56 = 115.64

General Mills report an 8 percent increase in its first-quarter profit, and says there is a chance we’ll see higher food prices.
GIS + .18 = 58.85

United Auto Workers and General Motors resumed negotiations for a new labor contract. The old contract expired five days ago.
GM -- .79 = 34.98

The run on the bank continues for Northern Rock, Britain's fifth biggest mortgage lender. Faced with the prospect of collapse, no potential buyers have stepped forward, even as the share price dropped another 16 percent today.