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From Staff Reports
With U.S. Federal Reserve policymakers slated to review the nation’s interest-rate situation this week, investors spent last week scrutinizing corporate earnings reports in search of signs that the “mortgage challenges” facing the U.S. economy might be limited to financials and housing. With about 150 Standard & Poor’s 500 Index companies having reported last week, the most optimistic predictions are so far for a break-even quarter – at best.
But for the week, at least, the overall news wasn’t half bad. While Countrywide Financial Corp. (CFC) surprised no one by reporting a loss of $1.2 billion, management expects the company to return to profitability next quarter (wishful thinking?). Merrill Lynch & Co. Inc. (MER) was forced to write-down more than $8 billion in mortgage-related loans and other debt, a sign that the company perhaps should have been a bit less “bullish on America” [Now the question of the day may be this: Is Wachovia Corp. (WB) bullish on Merrill?]
On the positive side of the ledger, drugmakers Merck & Co. Inc. (MRK) and Bristol Myers Squibb Co. (BMY) reported strong quarterly profits and such diverse companies as E.I. du Pont de Nemours & Co. (DD (chemicals), American Express Co. (AXP) (financial services), Royal Dutch Shell PLC (RDS.A, RDS.B) (energy) and AT&T Inc. (T) (telecommunications) each had favorable showings, as well. Techs continued to surpass expectations as Apple Inc. (AAPL) rode the wave of i-Phone (and i-Pod and Mac) popularity, while Microsoft Corp. (MSFT) also reported strong sales of its popular video game, Halo 3 (though the company also gave up its losing battle against European regulators over anti-trust issues).
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Housing Woes to Continue
Even so, no week would be complete without a mortgage debacle update. And last week, a few troubling reports and comments made headlines again, making it clear that this problem isn’t going away anytime soon (as if that wasn’t already obvious to most all of us). The Congressional Joint Economic Committee projected that foreclosure rates would continue to rise over the next year-and-a-half as an estimated 2 million subprime mortgages move closer to their reset date.
The “man, the myth, the legend” known as Buffett [not Jimmy, but Warren of Berkshire Hathaway fame (BRK.A, BRK.B)] thinks that consumers will be dealing with this fiasco for another two years, although the economy will prove resilient and will somehow survive without permanent damage. And, finally, the “man, the myth, the legend” (though from a negative perspective), Angelo Mozilo, of Countrywide infamy, informed investors that delinquencies are “bleeding into prime mortgages.” Another type of loan – known as an “option arm” – is starting to show up more and more on bad debt reports.
While the underlying borrowers may have (slightly) better credit than subprime, these mortgages offer such features as “negative amortization” (increasing loan balances) and often required very little (if any) documentation to confirm income and assets, two recipes for disaster. Countrywide reported that 5.7% of such mortgages are at least 30 days past due (a far cry from the 29.08% of subprime borrowers who are now behind). Nice going, Angelo, for your role in the story that simply won’t go away (but thanks for that “cockeyed” optimism for the quarters to come).
Equities reacted well to the decent earnings as investors turned a blind eye to record-setting oil prices that traded above $90/barrel (inflation anyone?). The Nasdaq Composite Index, in particular, benefited from the positive tech news, though uncertainty remains as earnings season continues and investors again focus on another “man, myth, legend.” Next week, Fed Chairman Ben S. Bernanke and his policymaking FOMC posse may even have a thing or two to say about Mozilo and Buffett (Warren, that is).
* Reflects changes in interest rates over various time frames.
Fed in the Spotlight Again
Has it been six weeks already? It seems like just yesterday that Gentle Ben surprised the world (maybe that’s a tad strong?) by cutting the Fed Funds Rate by half a percentage point to 4.75%.
Well, what “tricks or treats” does Mr. Popularity (for the time being) have up his sleeve for an encore this week? On the surface, the decision seems to be an easy one. The economy has slowed (and not just housing); corporate earnings reflect those current mortgage struggles; and everyone seems to be predicting foreclosures to get worse (except maybe Countrywide). Then again, inflation is never far off the Fed’s radar screen and $90+/barrel oil will not go unnoticed. The powers-that-be may be hesitant to take additional action with such threats of price pressures. The smart money seems to be on another rate cut – this time 25 basis points. But whoever said analysts/economists are smart?
Housing data highlighted last week’s economic reports and again the results were nothing to “write home” about (for those who can still afford their homes). Existing home sales plunged for the seventh-straight month in September, posting their worst one-month decline since 1999. Additionally, the mean sales price had dropped by 4.2% over the past 12 months. Though new home sales actually rose in September (+4.8%), sales activity actually remains more than 20% below last year’s level
Here’s to doing the right thing, Mr. Chairman: Don’t let those naysayers “spook” you on Halloween.