Now What?

Europe is broadly higher. S&P futures are higher as a continuation of yesterday. Today is a light news day.

European Retail Sales Weaken, Bloomberg PMI Shows (Update1): “European retail sales growth slowed in September, led by the sharpest drop in Italy since June 2005, the Bloomberg purchasing managers index showed.

A gauge measuring retail sales slipped to a seasonally adjusted 50.5 from 51 in August. The index is based on a survey of more than 1,000 executives compiled for Bloomberg LP by NTC Economics Ltd. A reading above 50 indicates expansion.”

There are signs of consumer fatigue even outside the US.

“European consumers are more reluctant to increase spending after rising credit costs worldwide and turmoil on financial markets clouded the outlook for economic expansion. In Italy, the government said this week that economic growth will be weaker than expected this year and next.”

On the other hand, Asia is still in party mode.

South Korean Consumers Most Confident in Five Years (Update3): “South Korean consumers became the most optimistic in five years in the third quarter, indicating shoppers may step up spending and spur economic growth.

The consumer sentiment index increased to 112 from 108 in the second quarter, the Bank of Korea said in a report released in Seoul today. A reading higher than 100 indicates optimists outnumber pessimists.”

Banks Borrow 3.9 Billion Euros at ECB's Penalty Rate (Update3): “The European Central Bank lent the most money at its penalty rate in almost three years, suggesting at least one bank is still being shut out of credit markets.

The ECB loaned 3.9 billion euros ($5.5 billion) at its marginal rate of 5 percent yesterday, the most since October 2004, the Frankfurt-based central bank said in a daily borrowing-requirement statement today. It didn't provide details of which bank or banks asked for the money.”

No-one knows where the bodies are buried. Although things have calmed down some banks are still reluctant to lend to each other.

“The overnight rate for euros fell 18 basis points to 4.17 percent, the BBA said today, while the corresponding rate for pounds climbed 14 basis points to 5.8 percent. The three-month rate for pounds dropped 1 basis point to 6.31 percent.”

Bear Stearns May Draw Investment From Buffett, Banks (Update1): “Bear Stearns Cos. may be close to selling a stake to Warren Buffett or a financial institution as the beleaguered securities firm struggles to revive earnings and its stock price.”

Traders took that rumor and ran with it yesterday. However, these talks may signal that Bear Stearns needs cash quite badly after taking some serious mortgage related losses. I know a little about Buffett. He does not like complicated financial alchemy, going so far as to call certain derivatives ‘financial weapons of mass destruction’. I’m not yet convinced that Buffett would make this kind of purchase. I could see him snap up regional banks, insurance companies and maybe even a brokerage, but for some reason this Bear Stearns rumor doesn’t fit.

The rumor that a Chinese bank might be interested in a 30% stake… now that, that is far more likely.

KKR Banks Selling $10 Billion of First Data Loans (Update2): “Banks financing Kohlberg Kravis Roberts & Co.'s acquisition of First Data Corp. plan to sell as much $10 billion of loans today, double the amount targeted last week, said a banker involved in the deal.

Six underwriters led by Credit Suisse Group, Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. will sell as much as $8 billion of the debt at a discount of 4 percent of the face value. A further $2 billion will be sold at a 3 percent cut, said the banker, who declined to be identified because details of the sale are private.

“It's a significant event on the road back to normality,” said John Pattullo, who manages about $2 billion of mainly high- yield bonds and loans at Henderson Global Investors in London. “It shows that investors at least will accept a market clearing price and that wasn't the case a month ago.””

Some deals are starting find nibblers at discounted rates while others are still being abandoned:

Sallie Mae Says Investor Group Won't Complete Buyout (Update3): “SLM Corp. said a group led by J.C. Flowers & Co. won't complete the $25.3 billion purchase of the largest U.S. student loan company. The group said it's open to negotiation.

The group doesn't expect to complete the $60-a-share acquisition, Reston, Virginia-based SLM, known as Sallie Mae, said today in a statement. Under an agreement announced in April, SLM was to be sold for $60 a share to an entity 50.2 percent- owned by Flowers, with JPMorgan Chase & Co. and Bank of America Corp. each holding 24.9 percent.”

This morning Sallie Mae rejected an offer from Flowers to renegotiate the deal.

Dollar Falls to Record Low Against Euro Before Home Sales: “The dollar fell to an all-time low against the euro on speculation a government report will show a drop in U.S. home sales, bolstering the case for lower U.S. interest rates.

The currency headed for its biggest quarterly slump versus the euro and yen since December 2004 as the yield advantage on 10-year Treasuries over similar-maturity European debt narrowed to the least in almost three years. The dollar has weakened against 15 of the 16 most-active currencies since June 30, falling 4 percent versus the euro.”

The slow slide into the Abyss continues…

U.S. Economy Grew at a 3.8% Rate in Second Quarter (Update1): “The U.S. economy grew in the second quarter at the fastest pace in more than a year before last month's credit-market turmoil heightened concern the expansion might be cut short.

Gross domestic product rose at a revised 3.8 percent annual rate from April though June, propelled by a surge in exports, figures from the Commerce Department showed in Washington. The economy advanced at a 0.6 percent rate in the first quarter.”

While impressive, this is old data and not something to get excited about.

“More recent reports have shown residential construction slumped to a 12-year low in August and manufacturing cooled, suggesting last quarter's growth rate will be the strongest of the year. Concern over the damage a worsening housing recession may wreak prompted Federal Reserve policy makers last week to cut interest rates more than most economists forecast.”

A closer look at the data also reveals the ‘growth’ to be very concentrated and probably a consequence of the declining dollar more than anything else.

“Today's GDP revision mainly reflected a smaller narrowing of the trade deficit than previously estimated. Still, the smaller gap added 1.3 percentage points to growth, the most since 1996. Other categories were little changed.”

More important is determining the health of the consumer.

“In today's report, consumer spending, which accounts for about 70 percent of the economy, rose at a 1.4 percent pace, the same as previously estimated and the smallest gain in a year.”

The overall result is still a rapidly weakening economy.

“The economy will grow 2 percent this year, the least since 2002, according to this month's survey. Economists had projected a 2.5 percent expansion at the start of the year.”