The Down Jones Industrial Average and S&P 500 posted modest gains for the week, up 3.6 percent and 1.7 percent, respectively, as the initial earnings announcements from a few major financials were better than expected. And government-sponsored enterprises (GSE) are set to keep their doors open one way or another. The Nasdaq Composite gained 2 percent on decent numbers from IBM and Microsoft.

It’s been a busy week in Washington; both the Congress and securities regulators put in overtime on a variety of issues.

Tuesday the Democratic leadership of the Senate filed a bill with broad bipartisan support mandating futures regulators to launch an investigation into natural gas trading and broader powers to regulate speculation in the energy markets. But the legislation may face an uphill battle because, although many Republicans are behind it on principal, they’re insisting that it included greater access for drilling given that oil prices are still more than double year-ago levels.

President Bush also lifted an executive ban on drilling in the Outer Continental Shelf, which had been place since 1981 during the first Bush administration, though the move is mostly symbolic until Congress lifts its own version of the moratorium.

Federal Reserve Chairman Ben Bernanke was also on the Hill Tuesday, delivering his twice-yearly economic report to Congress, in which he painted a less-than-rosy picture despite a recent upward revision to the 2008 growth forecast. He highlighted the fact that the nation is in a rather precarious position with inflation and is concerned that higher commodity prices may become tied to compensation expectations, potentially creating a wage spiral. Despite that, he hinted at the fact that a rate increase is unlikely before the end of the year, barring a greater inflationary spike or quick economic recovery.

Off the Hill, the Federal Reserve Board unanimously approved a final rule meant to protect consumers from deceptive mortgage lending practices and more tightly regulating higher priced, i.e., subprime mortgage loans.

There’s also movement afoot in the House of Representatives on the regulatory front, with Reps. Gary Ackerman (D-NY) and Michael Castle (R-DE) introducing legislation calling for the Securities and Exchange Commission (SEC) to set rules governing what sorts of structured finance investments are eligible for rating by the major rating agencies.

The SEC also announced an emergency plan to help take the pressure off Fannie Mae and Freddie Mac amid their liquidity and capitalization worries by requiring traders to actually borrow shares before selling them short in the market. It’s ironic that such an action had to be taken, given that Regulation SHO covers just this scenario, so the move essentially enforces a rule already on the books. However, it did help the share prices of the troubled lenders rebound. The SEC is considering extending the emergency order to cover the entire market.


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Fannie and Freddie are also mulling over a $10 billion stock sale in the hopes of holding off a possible federal bailout, which could take the form of nationalization, implicit guarantees or cash infusions. So far, the most drastic action has been the opening of the discount window.

There’s also momentum in the House for a push to get a second stimulus package out of at least $50 billion; legislation is expected to come up in September. The wisdom of that move is questionable because, although the first round of checks totally $168 billion did help boost the economy in the second quarter, sending out free money every three months is hardly sound economic policy. More effort should be made to put a floor under home prices than cutting free checks, though they certainly improve the odds of re-election.

With all of the news measure taken in sum, a great deal of effort is being expended with little chance of achieving meaningful results. Speculation in commodities markets is hardly to blame for the spike in prices, given that the law of supply and demand tells you that when more folks are chasing the same amount of goods, prices will go up. Even if every square inch of potential oil producing coastline is drilled, it will be years before there’s a significant impact on oil and gasoline prices.

The new found risk aversion felt by mortgage lends leaves little room for excessive levels of subprime lending in the near future. And haven’t the rating agencies already shown they can’t be trusted to fairly rate structured finance investment in a timely manner?

Oil prices took a steep dive this week, falling 11 percent in the first four trading days, though the commodity staged a bit of a rally today. Decreasing nuclear tensions with Iran and a slowing global economy worked to push prices lower, although supply disruptions continued in Nigeria, and a pipeline that carries about 140,000 barrels a day from Canada to the US was shutdown because of maintenance problems. But traders are betting that the decline in oil was too steep and prices were up almost $3 to just more than $134 a barrel in midday trading after touching $128 earlier in the week.

Inflation continues its upward march, with both the producer price index (PPI) and the consumer price index (CPI) posting sizable gains in June.

The PPI, which measures inflation at the wholesale level, is rising at its fastest pace in three decades, jumping 1.8 percent on a month-over-month basis and a huge 9.2 percent year-over-year. It’s driven by food and energy costs, which are up 1.5 percent and 6 percent, respectively. With those two factors backed out, the PPI came in at 0.2 percent on a monthly basis and 3 percent over the previous year.

And those higher prices are being passed along to consumers, with the CPI jumping 1.1 percent monthly and 5 percent from last year in the same month. Excluding food and energy, the increases were 0.3 percent and 2.4 percent, respectively. That’s bad news for sagging consumer spending and confidence, as higher costs continue to eat away at expendable income even as Americans are already feeling the pinch because of the decline in home values.

Even though consumer spending is weak, data released by the Commerce Dept this week showed that the pace of business inventories is slowing, expanding 0.3 percent in May as sales were up 0.8 percent. The pace of sales is down from 1.5 percent in April as the initial effects of the recent stimulus package began to wane. Retail inventories were down 0.2 percent as sales were up 0.8 percent in the same month. Auto sales weighed on the numbers, lagging 0.6 percent.


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Building permits surprised to the upside in June, up 11.6 percent with 1.09 million issued in the month, up from a revised 977,000 in May. Unfortunately the jump was primarily due to a code change in New York City, which took effect July 1, prompting builders to begin construction of projects early to avoid having to comply with it.

Housing starts were also up on an uptick in the pace of multi-family housing construction in the Northeast, even though single-family home starts have fallen to their lowest level in 17 years. Starts were up 9.1 percent to 1.07 million, though without multi-family construction, it would have fallen 4 percent.

Even though there was improvement on that front, the National Association of Home Builders confidence index fell 16 percent, its lowest level since tracking began in 1985, as home values continue to fall and foreclosures jumped a shocking 171 percent in June from year-ago levels. Nationwide, one in every 500 households are in some stage of foreclosure proceedings.

Mortgage applications rose 1.7 percent in the week of July 11 for the consecutive week, with refinance application volume up 6.9 percent, though purchase volume was down 1.7 percent.

Interest rates fell across the board, with the average for a 30-year fixed rate down to 6.22 percent from 6.43 percent, 15-year fixed-rates dropped to 5.74 percent from 5.94 percent, and one-year Adjustable-rate mortgages (ARM) hit 7.16 percent, down from 7.24 percent.

Jobless claims rose less than expected last week and an expected sharp upward revision in the previous reporting periods didn’t materialize, even though the decline in that period was attributed to potential reporting errors. Initial claims rose by 18,000 new filings based revised numbers from the previous week, which only rose by 2,000 claims. Continuing claims fell by 81,000, showing 3.122 million continuing to draw benefits.

The stabilization in initial claims seems to suggest that the pace of layoffs is slowing. It’s too early to draw any conclusions on continuing claims though, since there’s no way of knowing if those individuals actually re-entered or simply exited the workforce. However, if the number continues to decline over the next few weeks, it would be reasonable to infer that the pace of hiring is quickening.

The pace of foreign buyers purchasing US assets fell in May; net purchases were down to $67 billion from $111.9 billion in April, after foreigners sold a net $2.5 billion. The trade deficit also shrank to $59.8 billion in May as the cheaper dollar helped boost exports.

Finally, industrial production jumped by half a percentage point in June, and manufacturing ended two straight months of declines as utility and mining output grew. A 5.4 percent increase in motor vehicle and parts production also helped to boost capacity utilization to 79.9 percent from 79.4 percent in April.

As has been the case for several weeks now, the data paint a picture of a weak economy, but hardly one that should be taken out back and shot as many of the talking heads seem to continually imply. And as long as Freddie and Fannie don’t implode and the pace of bank failures doesn’t pick up, we’re not on the brink of depression.

Our shop is on a production break this week, so our output is a bit lower than usual. That means this week we’ll forgo attaching an excerpt from any of our other e-zines and let you get to your weekend a few minutes earlier than usual.