The Week That Was: Who's the Next Victim of the Subprime Serial Killer?

By William Patalon III
Managing Editor
Money Morning/The Money Map Report

These days, when I look at the news coming out of the financial-services sector, it reminds me an awful lot of the police-news blotter from my days as a fledgling reporter at The Record, the Havre de Grace, Md., weekly newspaper where I started my journalism career.

Following the course of most neophyte journalists starting at a small, community newspaper, I covered local government, and even did some business news stories [ultimately realizing it was my real calling]. But I spent focused a lot of my time on the "cops-and-courts" beat - where I wrote about accidents, fires, robberies, assaults and even murders. Most of the time, it was all about the victim of the crime.

With the subprime mortgage crisis continuing to unfold [as we repeatedly warned that it would], I almost feel as if I'm back on the murder-and-mayhem beat. Only this time around the victims are the banks, investment banks and brokerages houses - and their shareholders. The perpetrators are the twin assailants of the subprime-mortgage mess and the spiraling credit crisis, which authorities will tell you has emerged as the chief accomplice of the subprime menace.

The weapon of choice these days: The write-down.

It's not always Murder in the First, either. We all saw how Merrill Lynch & Co. Inc. (MER) forecasted write-downs at one level - only to discover just a couple weeks later that the write-downs they were facing were several times larger.

The investment gurus and staff here at Money Morning are writing about new victims every week, as the recent travails of online brokerage E Trade Financial Corp. (ETFC) have demonstrated.

And the impact can spread to non-financial sectors, as we're now starting to see with the shipping sector. There aren't any write-downs, but we are seeing a slowdown in shippers' businesses. That slowdown is linked to a slowdown in certain parts of the economy. And that deceleration has been heightened by the added weight of the growing debt crisis.

In a nutshell, last week's financial police blotter included E-Trade, HSBC Holdings PLC (HBC), Barclays PLC (BCS), Bank of America Corp. (BAC), The Bear Stearns Cos. Inc. (BSC), Merrill Lynch, and General Electric Co.'s (GE) GE Asset Management unit.  In other words, while the ongoing mortgage melodrama continued to dominate the headlines, the big question is
is next to fall?

However this plays out, and no matter what direction it takes, Money Morning will bring you news, analysis and investment opportunities.

Coming up in the week ahead:  Leading Indicators (Monday), Housing Starts (Tuesday), Federal Reserve Meeting Minutes (Tuesday), Thanksgiving (Thursday), Black Friday (Friday).

The Week That Was ...


Previous Week

Current Week

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Fed Funds



-75 bps

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-56 bps

'Tis the season to be...[very jolly/a little worried/totally indifferent].  With Thanksgiving - followed by the kickoff of the holiday shopping season - fast approaching, investors, analysts, and market pundits [from bloggers to TV talking heads and policymakers at the U.S. Federal Reserve] will all begin making their private and public predictions for holiday retail sales.

Indeed, retailers took center stage last week as consumer confidence and consumer spending [past, present and future] was dissected in every manner possible. [Indeed, for a related story analyzing expectations for the soon-to-start holiday shopping season, please click here].

Wal-Mart Stores Inc. (WMT) set an optimistic tone early by reporting strong quarterly earnings and increasing its forecast for the rest of the year.  J.C. Penney Co. Inc. (JCP) took the opposite approach by warning that weak September and October sales were precursors for a disappointing fourth quarter.  Morgan Stanley (MS) raised its rating on computer-maker Hewlett-Packard Co. (HPQ) to "Overweight," and investors felt better about the recently sputtering tech sector and its impact on both consumer confidence and, ultimately, consumer spending. Starbucks Corp. (SBUX) announced that store traffic declined for the first time ever and the upcoming quarter may find fewer coffee drinkers willing to pay a "reasonable" $7.50 for a venti decaf iced mocha frappuccino.  Finally, FedEx Corp. (FDX) also cut its earnings projections as higher energy costs start affecting the consumer's ability to rush delivery of their holiday gifts.  The shipping sector will suffer.

The consumer-oriented analysis gave investors a bit of a reprieve from the traditional (and mostly challenging) news-de-jour, better known as the ongoing subprime-mortgage fiasco and the closely related credit crisis.

But last week also drew some new names into the negativity fray. Internet brokerage E-Trade proved that diversifying into other businesses is not always the smartest move as its entrée into the mortgage biz resulted in significant write-downs.  [Congrats: You are now playing with the big boys like Bank of America that last week announced it would be taking a similar action - albeit to the tune of $3 billion].

On the global stage, Barclays also took a large hit to earnings ($2.7 billion) and U.K.-based HSBC Holdings increased its reserves against future mortgage-related losses ($2.4 billion).  Merrill Lynch hired a new chairman and chief executive, tapping NYSE Euronext (NYX) and Goldman Sachs Group Inc. (GS) veteran John Thain to save the day (or take future blame).  Goldman is apparently the hot breeding ground for Wall Street execs the days as former head Robert Rubin is the new Chair at Citigroup Inc. (C).  Reports have the GE Asset Management unit of General Electric Co. encountering enough losses in its mortgage holdings that the short-term bond fund will "break the buck," meaning investors are looking at a situation in which they can redeem their shares at only 96 cents on the dollar, a definite "no-no" in the perceived "safe" money market world. 

Oil prices gave back a bit of ground last week as crude and gasoline inventories surprisingly increased and the Organization of Petroleum Exporting Countries (OPEC) predicted that energy-related demand would decline in the fourth quarter.  Still, oil remained well above $90 per barrel level, and is still within eyeshot of its all-time high.

Volatility was the name of the game for equities as the Dow Jones Industrial Average experienced its second-best day of the year last Tuesday, before giving back some gains as the week progressed.

First, the mortgage-related write-downs have been keeping investors on edge for months.  Now, the often-contradictory signs of consumer activity have given investors given still additional concerns as the holidays approach. The government bond market was closed last Monday in observance of Veteran's Day, but investors continued their flight-to-quality allocation shift throughout the week.

The yield on the benchmark 10-year Treasury now stands at approximately around 4.15% [or about 35 bps below the benchmark Federal Funds Rate], which would seem to indicate that another rate cut [or two] is in the cards.

How's your mood, Dr. Bernanke?...Jolly?  Worried?  Or indifferent?

Weekly Economic Calendar

The Week Ahead


November 19

Leading Indicators (10/07)

November 20

Housing Starts (10/07)


Fed Policy Meeting minutes

November 21

Initial Jobless Claims (11/17/07)

November 22

Thanksgiving Holiday

November 23

Black Friday

With the start of the holiday shopping season staring us squarely in the face, economists looked closely [even more than usual] at the retail sales and inflation numbers reported this week for a hint of the consumer's mindset. In October, retail sales climbed an ever-so-slightly 0.2%, after surging by 0.7% in September.  Immediately analysts began predicting "gloom and doom" for the holidays as the combination of higher gas prices, lower home prices, and the ongoing credit crisis continued to take its toll on already-nervous consumers. [Then again, they have been wrong before.] Inflation remained relatively subdued at both the wholesale (PPI) and retail (CPI) levels, although the more-pessimistic analysts point out that rising energy prices have yet to work their way through the system and are not reflected in the recent data. 

While a strong labor market had been one savings grace for the economy for the past few months, last week's jobless claims data showed a larger-than-expected increase in filings for unemployment benefits.  But the more-optimistic analysts point out that the California wildfires and the writers' strike prompted the sudden rise in claims and the trend [just one week, thus far) will be reversed in the weeks to come, once normalcy [if there is such a thing] returns.

The manufacturing sector also manifested some newfound weakness as October industrial production suffered its worst decline in nine months.

This week brings both the Thanksgiving holiday and the "Black Friday" kickoff of the holiday shopping season - as well as the beginning of a full month of analysis, over-analysis, retailer bellyaching, and investor skepticism...all just in time for the holidays.

When the retailing season is over, investors will either be singing "Joy to the World," or repeatedly mumbling, "Bah, Humbug!"

News and Related Story Links:

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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