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Tuesday, September 18, 2007

To Cut Or Not To Cut

Today is the big day. To cut or not to cut. That is the question.

Bernanke Weighs Recession Risk Against Bailout Charge (Update1): “The Federal Reserve will probably cut its benchmark interest rate today for the first time in four years, seeking insurance against a recession. The main question is how big a policy Chairman Ben S. Bernanke is ready to buy.

While a quarter-point reduction in the federal funds rate may not be enough to bolster growth and investor confidence, a half-point cut might fan inflation and be perceived as giving in to pressure from Wall Street firms that made bad bets, especially in the market for securities backed by subprime mortgages.”

The accompanying statement today will be the most analyzed in a long time. The Fed needs to avoid the perception of bailing out the markets, lenders or borrowers while effectively tackling the credit crunch. A tough job indeed.

Lehman Profit Beats Estimates as Equities Offset Mortgage Woes: “Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds, said profit fell less than expected as fees from equities trading and investment banking offset some losses from subprime home loans.

Net income fell 3 percent to $887 million, or $1.54 a share, in the third quarter from $916 million, or $1.57, a year earlier, the New York-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was $1.48 a share.”

At first glance it would appear the Lehman weathered the storm.

“Lehman may have to fund $16 billion of loan commitments to leveraged buyouts at a loss because investors are reluctant to buy that type of debt, Citigroup Inc. analyst Prashant Bhatia estimated last month.”

A closer look at the numbers is still warranted.

Northern Rock, Rivals' Shares Rise on State Guarantee (Update2): “Northern Rock Plc, the U.K. mortgage lender that sought an emergency bailout last week, rose in London trading after the government stepped in to stop a run on the bank.

Shares of Newcastle, England-based Northern Rock rose 9.6 percent to 309.75 pence as of 9:10 a.m. after falling 56 percent in the past two days. Rival Alliance & Leicester Plc, which fell the most in a decade yesterday, gained 26 percent to 753.5 pence and Bradford & Bingley Plc was up 5.8 percent to 295.25 pence.”

Yesterday, as the panic spread from Northern Rock to other financial institutions in the UK, the BOE stepped in with a guarantee of Northern Rock deposits. Maybe that will calm people down a bit and halt the wave of withdrawals.

Bank of England Makes Emergency Loans to U.K. Banks (Update2): “Bank of England made emergency loans to U.K. banks to bolster the financial system, saying it received “intelligence” that demand for money may prolong a surge in overnight borrowing costs.

The central bank said it loaned 4.4 billion pounds ($8.8 billion) of “exceptional” funds at its benchmark interest rate of 5.75 percent today in London, and will offer the same amount on Sept. 20 in seven-day debt. The overnight rate banks charge to lend in pounds soared 60 basis points to 6.47 percent yesterday, the most since June.”

Well, so much for that grand speech on bailouts and moral hazard leading to increased future risky behavior…

Home Foreclosures Doubled in August on Loan Rates (Update1): “The number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier as subprime borrowers with adjustable-rate mortgages saw their monthly payments rise, RealtyTrac Inc. said.

Lenders sent notices of default or the equivalent to 108,716 homeowners in August, up from 42,144 in August 2006, RealtyTrac said today. It was the highest recorded in a study that goes back to 2005. California led with 41,714 notices and Florida was second with 26,203.”

Expect these numbers to worsen dramatically later in the year as the bulk of the rate resets will kick in then.

“There are lots of people who bought homes they could only afford at the teaser rates, and now have very few options.

U.S. Producer Prices Index Drops 1.4% in August; Core Up 0.2%: “Prices paid to U.S. producers fell more than forecast in August, diminishing concern over inflation as the Federal Reserve considers lowering interest rates.

The 1.4 percent decrease, the biggest since October, followed a 0.6 percent increase in July, the Labor Department said today in Washington. So-called core producer prices, which exclude fuel and food costs, rose 0.2 percent, after a 0.1 percent gain the month before.”

These numbers are deceiving. The headline rate dropped. A lot. Granted. However, the drop was led by a 6.6% decline in energy costs. Prices have since trickled higher already. The core rate was expected to come in at 0.1%, but still came in at 0.2%. The Fed, as they have said many times, emphasizing the core rates. The rumors of the death of inflation are still greatly exaggerated.