Bernanke Hints

Good day… And a Happy Fantastico Friday to you! The end of November! This month sure went by fast, which is no problem for me since I’ve never been a fan of November. This should be short-n-sweet this morning, as there just wasn’t too much happening in the currencies yesterday to talk about. Carry trades weren’t put on or taken off, and it looks like the only thing I have to talk about today is all the rot on the vine of the housing/mortgage meltdown. I’ll try to get through it fast though, as it IS a Fantastico Friday!

Well… As I said, the currency movements were a non-event yesterday, as there wasn’t a bias to buy or sell anything! So… Here we go, to the U.S. economy news.

New home sales edged up slightly in October, but at a cost… The cost? The price of new homes fell 13% versus a year ago. Well, that’s one way to get rid of the inventory of new homes which is now equal to 8.5 months’ supply… The average length over the years has been six months of inventory.

The housing market correction is still underway with sales only taking place when a huge discount is in place. This news does little to change my call on the Fed cutting rates on December eleventh.

Nobody is talking about this… But in case your keeping score at home… The weekly initial jobless claims keep creeping higher and higher. Last week’s number was 352K. Remember six months ago when it was around 300K?

In an attempt to report the good with the bad… U.S. third quarter GDP was revised up to 4.9%… Whew! That’s strong! But it seems that this number was fueled by a larger build in inventories and less of a deterioration in net exports. So… This report could be thrown a spanner in the works for a Fed rate cut… However, I think the Fed Heads are smart enough to see that consumer spending is down, and GDP is nothing more than smoke and mirrors, and a lot of government spending!

OK, remember the story I told you the other day about the Florida schools districts removing their funds from an investment pool run by the state, because the pool had tons of defaulting mortgages in it? Well… In a follow up to that story… Yesterday, the Florida Agency running the investment pool, suspended withdrawals! The investment pool was experiencing a “run” on their financial institutions! WOW! This is the tip of a crisis iceberg folks… And it will only worsen…

Yesterday, my long time friend and colleague again, Ed Bonawitz was telling me that he had heard an interview on the BBC talking about the mortgage losses… And that the losses that the lenders have been reporting are the mortgages they are stuck with. They’ve sent a ton of them to the “insurers” for collection. AMBAC is a bond insurer, and there are others… But think about that for a minute… The bond insurers are the next shoe to drop. They will be the next to begin announcing huge write-downs… Oh, brother!

Morgan Stanley is the latest BIG LENDER to take on water from mortgage problems… Morgan Stanley fired their co-President yesterday in an attempt to save face, after so many losses have been taken… And that old saying of things happening in threes… Well, e-Trade announced that their CEO would “step down” , and there are rumors going round, that someone’s underground, and that Bear Stearns will announce their leader to “retire early”.

OK, did you hear about this one? The U.S. government is working on a plan to freeze interest rates on subprime mortgages. U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers. OH NO! Talk about getting your hands in there and mixing it up… If the government is getting involved, watch out!

And then… There was Big Ben Bernanke… I wonder if Big Ben would like to “retire early”? Nah… We’re stuck with him, whether we like it or not!

Last night, Big Ben gave a speech, and I think he hinted at a rate cut. Let’s see what you think… Big Ben said that he expects consumers could turn more cautious as they try to cope with all the stresses… Those being… The worsening credit crunch, a deepening housing slump and rising energy prices… And those will probably create some “headwinds for the consumer in the months ahead.”

He went on to say… “The odds have grown that the country could enter a recession. And that the Fed policymakers will need to be ‘exceptionally alert and flexible'”… Hmmm… Does he mean they will be practicing yoga to keep their minds sharp and their bodies limber? I have a friend that used to run a yoga studio, I bet Lizzie could get these guys in shape!

Unfortunately, I don’t think that’s what he was talking about. I believe he was hinting around the rate cut bush…

OK, I promised short-n-sweet, and that’s what I’m going to deliver! But before I head to the Big Finish. I’ll tell you that we saw Japanese consumer spending rise for the first time in almost two years last month… Japan’s deflationary economy has tried to break out of that pattern for a couple of years now, but couldn’t because consumer spending wasn’t strong… Let’s hope this isn’t a false dawn, eh?

Currencies Today: A$ .8890, kiwi .7730, C$ 1.0050, euro 1.4770, sterling 2.0685, Swiss .8935, ISK 60.90, rand 6.7640, krone 5.4930, SEK 6.3440, forint 171.45, zloty 2.45, koruna 17.7640, yen 110.50, baht 30.67, sing 1.4450, HKD 7.7880, INR 39.64, China 7.3960, pesos 10.90, BRL 1.77, dollar index 75.58, Oil $89.40, Silver $14.36, and Gold… $801.30

That’s it for today… The excitement is building for me, as we get closer to the Big 12 Championship game tomorrow night. My beloved Missouri Tigers made the cover of Sports Illustrated this week! I cringed when I saw that, knowing all too well about the “SI Cover Jinx” but then my little buddy, Alex, said that the Patriots have been on the cover twice this year, and that made me feel better, as the Patriots are undefeated!

So… Good luck to my beloved Tigers this weekend… Wear some Black and Gold tomorrow to show your support! And have a Fantastico Friday, and wonderful weekend!

Chuck Butler
November 30, 2007

The Daily Reckoning