Tuesday Market Conditions

9/25/2007

Treasury prices improved overnight as bonds in Europe saw improvements on continued worries about earnings and credit which triggered safe haven buying.
German business confidence was weaker-than-expected adding a bid to bonds. U.S. Treasury futures opened on a strong note as well. Prior to the release of August existing home sales and September consumer confidence data, the 10-year note yield traded as low as 4.567% and mortgage prices were up +6/32. U.S. equity markets opened lower on earnings concerns and housing market woes.

At 10:00 AM the National Association of Realtors reported that August existing home sales fell 4.3% to an annual rate of 5.50M units from 5.75M units in July. The report is in line with expectations. Also at 10:00 this morning the Conference Board reported that September consumer confidence slipped to 99.8 from 105.6 in August, much lower than expectations. This survey covers 5000 households to ascertain the level of consumer confidence and has 2 components- current conditions and expectations for the future. The index is 60% weighted by expectations and 40% by current conditions as expectations are considered a better leading indicator than the current conditions are. The bond market held its earlier gains after the release of these reports.

The S&P/Case Shiller national home price index reported today that prices of single-family homes across 20 U.S. metropolitan areas was down again in July. Miami showed the largest decline followed closely by Tampa and New York City. The composite month-over-month index fell 0.4% in July from June and down 3.9% from a year ago. It certainly looks like the housing picture is going to get worse before it gets better.

The problems with the subprime mess have spread more fear in Europe as was evidenced by the run at the troubled British mortgage bank, Northern Rock. It is clear that the credit crisis is not confined to the U.S. The European Central Bank has intervened heavily in the interbank market since the early part of August to help lower short-term lending rates and help spur banks to lend to one another. While we saw credit spreads tighten over the past 2 weeks in Europe, fears of a continued credit crunch and nervousness over the housing data jolted the markets today and spreads turned wider. It appears that comments from the IMF that the credit crisis will hurt economic growth in the U.S. and abroad have spooked the European markets.

Concerns over corporate earnings and slowing growth are evident today with earnings warnings from Lowe’s Cos. and Target. Also adding to economic growth concerns and continued housing woes was the report from home builder Lennar of a weaker-than-expected quarterly loss. Losses were expected to be about $0.50 per share versus the reported loss of $3.25 per share. The deadlock continues between the UAW and GM. The strike, if extended, will put added pressure on the labor market and the economy. The problems at GM will spread to other companies such as auto parts suppliers. Without GM up and running, the suppliers have much to lose. If the strike continues into next month we can expect it to reflect negatively on the ISM manufacturing index and payrolls data. It appears that the UAW is looking to GM to concede on the issue of job security. The two groups go back to the negotiating tables this morning.

The dollar is weaker against the yen and euro. Gold is down and crude is down