A Brand New Week

The jobs’ report from Friday was a major disappointment for the market. Here they had thought the Fed might actually be right that the “subprime” problem would not affect the broader market and what do they have to believe now? Well, the jobs’ report was very ugly. As reported by the Labor Department, nonfarm payrolls declined by 4,000 in August for the first decline since August of 2003, four years ago. Not only that, they also revised lower the previous two months of data with large reductions. The July number dropped from 92K down to 68K and June from 126K to 69K. That’s 24K lower for July and a whopping 57K for June.

These numbers were just too much for the market to handle and the opening was down about a percent in the major indexes we follow. What’s more, the familiar bounce we generally see after a weak opening did not appear. We did see buyers attempt to hold the market after the initial drop but that failed and the market dropped again. The rest of the day was spent trading sideways to down with the Dow closing very close to its low of the day and the week while flirting with the previous week’s low near 13,050.

After the market closed on Friday (don’t you just love this timing?), Countrywide Financial (CFC) announced that it plans to slash about 12,000 workers, 20% of its workforce, over the coming months. We wonder what papa B of A has to say about that. For most of the morning, CFC traded below the magic 18 number, the one that B of A is able to buy its stock at. After the news hit the tape after the close, buyers came in to bid up the stock in afterhours. Let’s see how it trades during real trading on Monday.

But, there is the new legislation proposed by the senior senator from New York, Schumer (D). You can see the WSJ article for yourself (they’re saying page A3). The plan is to allow Fannie Mae and Freddie Mac to buy more mortgages. Right now they can buy mortgages up to $417,000 which is what we call conforming. Mortgages above that amount are nonconforming or jumbo loans. We have said they are Alt-A here in past posts. Anyway, Schumer would like Fannie and Freddie to be able to buy mortgages up to $625,000. This would provide much more liquidity in those higher priced markets. We will let you draw your own conclusions as to whether this is a good idea or not.

Part of the proposal will allow Fannie and Freddie to raise their portfolio caps by 10% and require them to use half of that (about $73 billion) to help “borrowers with certain high-risk adjustable-rate mortgages refinance into more affordable products” according to the WSJ article. We again wonder what people think that don’t have adjustable rate mortgages. Do they think this is a good idea or not?

So, housing continues to make the news. One other group that is now suffering is the mortgage insurance companies. Apparently, claims are up significantly this year. The WSJ has the article on page C1.

The market had some trouble on Friday and this week it will need to trade on its own. The Fed meeting is next week so we don’t think there is any chance the Fed will make any moves this week unless of course the market has a very bad day. Even then, the Fed needs to be careful when it decides to make a cut. They can’t really be watching the stock market to make their decision. They have to convince themselves that the economy is going to suffer unless they cut rates.

We want to be clear on this point. The Fed does not decide what rates are going to be. They simply watch what is going on in the fed funds rates as banks need funds as to what level the rate should be set at. Right now, Treasury securities all along the curve are trading with rates below 5%. The fed funds target rate at 5.25% makes no sense. The fed funds rate itself is near 5.05% so that would indicate a target of 5% is about right. The main problem with this thinking is something we mentioned here last week and that is Libor. This rate has risen over the past several weeks from 5.32% to around 5.80%. This causes some issues for the Fed to lower rates next week. Oh, the problems they have at the moment. The stock market knows it, too.