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Wednesday, October 31, 2007

Don't Do It Bernanke!

U.S. Economy Grew at a 3.9% Annual Rate in Third Quarter: “The U.S. economy unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.

Gross domestic product grew at an annual rate of 3.9 percent in the quarter, the most since the first three months of 2006, compared with a 3.8 percent pace in the prior quarter, the Commerce Department said today in Washington. The Federal Reserve's preferred price gauge rose more than forecast.”

Surprisingly robust growth AND inflation. Any cut, especially a 50 basis point cut today would be madness. No amount of rate cuts will alleviate the pain caused by the bursting of the residential real estate bubble. Long rates, which are the benchmarks for most mortgages, will not drop in lockstep with each cut… in fact there is the very real possibility that at some threshold level, they will RISE with each cut. Each cut will also result in an INCREASE in inflation as the dollar spirals ever downward and import prices therefore eventually rise. Important input costs, namely commodities too would accelerate their parabolic rises…

Obscenely low rates, coupled with lax credit standards, were the biggest causes of this credit and asset price bubble. Obscenely low rates are not the cure.

Fed Seeks to Be `Nimble' as Spending, Housing Diverge (Update2): “The Federal Reserve, with consumer spending and housing figures sending conflicting signals, is likely to reduce interest rates today while leaving itself leeway either to take back the move or cut more.”

A 25 basis point cut followed by some strong jawboning on inflation concerns is the most probable strategy that Bernanke will announce at 2:15 today.

“Some investors are counting on lower rates, and a disappointment today may roil stocks, increasing the risk that the six-year expansion will end. Traders see a 94 percent chance of a quarter-point move today, according to futures quoted on the Chicago Board of Trade.”

The junkies are eagerly awaiting any cut… and it is hard to imagine that a mere 25 basis points followed up by some tough talk won’t be greeted with disappointment.

“At the same time, cheaper borrowing costs may stoke consumer prices, already pressured by a weakening dollar and record oil prices. After the Fed's half-point reduction on Sept. 18, commodities prices jumped and yields on Treasury notes linked to inflation increased.”

A rate cut will be ENTIRELY offset by decreases in the dollar and increases in commodity prices… the September cuts proved that.

Treasuries Fall as Reports Show Faster Job Creation and Growth: “Treasuries fell after reports showed companies added more employees to payrolls in October than forecast and the U.S. economy unexpectedly accelerated in the third quarter.

The data led some traders to pare bets that the Federal Reserve will reduce its target interest rate a quarter- percentage point today to prevent the housing slump from causing a recession.”

Once can only hope that Bernanke will find the courage to pause today.

Defaults on Insured Home Mortgages Rise 22 Percent (Update1): “U.S. homeowners defaulted last month on 22 percent more privately insured mortgages than a year earlier, an industry report today showed.

The number of insured borrowers more than 60 days late on their payments climbed to 54,699 in September from 44,791 a year earlier, according to monthly data from the Washington-based Mortgage Insurance Companies of America. The defaults represented a 4.9 percent increase from a revised August number, while 2.9 percent fewer loans returned to good standing.”

The deterioration is accelerating. Which is INCOMPATIBLE with this:

MasterCard Profit Rises 63 Percent as Purchases Rise (Update1): “MasterCard Inc., the second-biggest payment-card network, said profit climbed 63 percent, beating analysts' estimates, as customer spending increased. The shares rose as much as 8 percent in premarket trading.

Third-quarter net income rose to $314 million, or $2.31 a share, from $193 million, or $1.42, a year earlier, the Purchase, New York-based company said today in a statement. MasterCard earned $1.80 a share before gains of $70 million on the partial sale of its stake in Redecard SA in Brazil. The company said it will more than double the size of its share repurchase program.”

With prices declining and rapidly rising mortgage defaults the American Super Consumer is desperately swiping their plastic to delay the inevitable as in this story:

Stressed borrowers use plastic to delay default: “This may be Johari Reeves' last chance to catch up on her mortgage payments. The credit cards, she'll worry about later.

"We fell behind (with the mortgage) and twice we agreed to new repayment schedules that didn't work out," said the 31-year-old, a compliance officer at a small bank on Chicago's blue-collar South Side. "It's been a lot of stress. But this time, if all goes well, we should be able catch up."

In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 -- higher than they planned on, especially with her husband's furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.

An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling.

But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has "maxed out" all her credit cards, spending to the limit on basic needs. "Now all I'm doing is making the minimum monthly payments."

The Reeves were ‘advised’ by their ‘financial counselor’ Nancy Barba to do this. Any financial advisor that advocates using credit card debt to make your mortgage payments should be shot on the spot.

Not all of MasterCard’s results are suspect. The company is well diversified outside the US. But since the credit bubble was a global event, so will the consequences. The only differences will be the timing and the degree.

“MasterCard, which gets about half its revenue from customers outside the U.S., benefited as the dollar fell to a record low during the quarter. The shares have risen more than fivefold since Chief Executive Officer Robert Selander took the company public in May 2006, capitalizing on consumers' growing preference for credit and debit cards over cash and checks.”

All I can say is: Don’t do it Bernanke! Hold the line!