The next shoe to drop in housing

Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.

Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.

"Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.

And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading to higher mortgage rates.

The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week ago.

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The real estate market has been close to falling apart for sometime and the two enterprises that have kept the market somewhat stable, Fannie Mae and Freddie Mac, are being ignored by investors. This development will make it harder for people, even those with strong credit histories, to get a home loan. For those people who can somehow receive a loan, the price of receiving that loan will be more expensive. Because mortgage-backed securities have fallen, yields have risen, therefore, mortgage rates are higher.

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Caution: Crumbling Wall Street earnings ahead

The analysts have been preparing us for months. This quarter's Wall Street bank earnings are going to be bad - real bad.

Bear Stearns is in the center of the bulls eye. On Friday, the brokerage firm said a serious liquidity crisis had prompted it to secure an emergency loan from rival JPMorgan Chase. Bear's stock plummeted 47% and ended the week imperiled.

Far from winding down, as some of the optimistic had predicted last year, the credit crisis has engulfed even more sectors of the financial services industry since the start of 2008. Investors now are second-guessing the value of debt backed by student loans, municipal bonds, commercial real estate and even mortgages issued by Fannie Mae and Freddie Mac. On top of this, the trading of leveraged loans, a popular way for companies with weak credit ratings to finance the high-flying corporate buyouts of recent years, has lost its appeal.

As the contagion spread, analysts started furiously lowering earnings expectations. Goldman (GS, Fortune 500), which had largely escaped the subprime mortgage bloodbath of 2007, started the year with analysts predicting first-quarter earnings would come in at $5.64, on average, according to Thomson Financial. Now, the average earnings estimate is $2.59.

The weak overall market is not making it any easier for the Wall Street firms. Mergers and initial public offerings have dried up, eliminating a source of lucrative fees the companies could have used as a buffer against loan losses. Also, last year's strong first-quarter performance will make next week's announcements look even worse.

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When this quarter's earnings are reported later next week it will be clear how bad the market is doing at the moment. It was previously predicted that this credit crisis was going to slowly come to an end, but since the start of the new year, the crisis is affecting more people and more financial services. Due to the fact that the overall market is weak, the situation is even more dire. When the reportrs come out next week, they will apppear even more severe than they are because of last year's strong first-quarter performance. One example of this earning issue is Goldman (GS, Fortune 500), which had largely escaped the troubles of 2007. They started the year with analysts predicting first-quarter earnings would come in at $5.64, on average, according to Thomson Financial. Now, the average earnings estimate is $2.59.

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Big Pharmacy Opens Wallet to Democrats

Democrats have long served as the traditional enemy of Big Pharma, but in this presidential campaign, the left is taking the lion's share of drugmaker money.

Democratic senators Barack Obama and Hillary Clinton are the top recipients of donations from the pharmaceutical industry, according to The Center for Responsive Politics, a non-profit, non-partisan research group in Washington, D.C. Meanwhile, donations to Sen. John McCain, who was recently endorsed by President Bush as the official Republican candidate, pale in comparison.

Obama maintains a slight edge over his Democratic rival, with $181,000 in Big Pharma donations through Jan. 31, compared with Clinton's $174,000, according to the center. McCain is far behind with $44,000.

This is in spite of the fact that all three candidates have consistently bashed the pharma industry and vowed to lower drug prices, which would take a bite out of corporate profits.

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In this election, donations from large pharmaceutical companies have shifted from the Republican candidates in past elections to the two remaining Democratic candidates remaining in this year's election. One reason for this shift is that although Republicans still control the White House the Democrats have taken over the Senate and the pharmaceutical companies could be trying to secure access to the ruling party by funding their traditional enemies. Secondly, the distinctions have blurred between the two parties' relationship with big business. Democrats have traditionally been seen as enemies to the pharmaceutical industry, while Republicans are supposed to be their allies. With Mccain acting as the conservative candidate the situation is no longer clear cut. The policies of all three remaining candidates uniformly unfriendly to Big Pharma.

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Bush: 'Economy has slowed'

President Bush said Friday that "it's clear our economy has slowed," hours after a government report showed a decline in payrolls for the second straight month.

But he said the long-term outlook is good, with a stimulus package enacted last month by Congress providing support for the economy.

"I know this is a difficult time for our economy," the president said. "But we recognized the problem early and we provided the economy with a booster shot."

Bush said the effects of the stimulus package are "just starting to kick in" and that the plan will "put money into the hands of American workers and businesses."

Earlier in the day, Bush's chief economic adviser Edward Lazear said that the nation's economy could contract in the current quarter. But he added that, "we expect that the economy will get stronger, primarily in the third quarter."

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On Friday, President Bush finally explained a piece of news to America that has been clear for a number of months now, that the economy is performing poorly. However, Bush also said that he believes that the economy is in good shape over the long term due to the stimulus package that was enacted last month. Because we wiill not see the effects of the stimulus package for a couple months the economy will probably contract this quarter, but by the time the third quarter rolls around, the economy is expected to get stronger. The statements come after the Labor Department said employers made their deepest cut in staffing in almost five years during February, showing concerns that a recession is coming. It doesn't help the matter that oil prices are at record highs and that stocks have fallen to their lowest value in 18 months.

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Stocks sink on recession fears

Stocks slumped Thursday after comments from Fed chair Ben Bernanke on the banking sector and weak reports on economic growth and the jobs market revived worries about a recession.

The Dow Jones industrial average (INDU) lost 0.9%, while the broader Standard & Poor's 500 (SPX) index fell 0.9%. The Nasdaq composite (COMP) declined 0.9%.

GDP. A revised reading of gross domestic product, the broadest measure of the nation's economic activity, showed fourth-quarter growth remained at the same tepid 0.6% rate initially reported. Economists surveyed by Briefing.com thought growth would be revised up to 0.8% in the quarter.

Jobless claims. Separately, the number of Americans filing new claims for unemployment rose unexpectedly to 373,000 last week from a revised 354,000 in the previous week. Economists expected 350,000 new claims.

Financials fall. The financial sector led the stock downturn after weak earnings from mortgage lender Freddie Mac and comments from Bernanke that while large U.S. banks will likely recover from the recent credit crisis, smaller, regional ones could fail.

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Chairman of the Fed, Ben Bernanke made comments on the banking sector, and these comments alon with bad GDP, the decreasing value of the dollar, and the increasing of oil and gold prices, have caused stocks to slump and the fear of an oncoming recession to increase. The Dow Jones, S&P 500, and NASDAQ all declined .9% and according to Bernanke, these problems are not going to go away any time soon.

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Oil hits new record

Crude prices rebounded Thursday, shooting up nearly $3 a barrel to another new record as a falling dollar and the prospect of lower interest rates attracted fresh money to the oil market. Retail gas prices, meanwhile, rose closer to records above $3 a gallon.

A pair of dismal economic reports Thursday drew more money into the oil market, as did Federal Reserve Chairman Ben Bernanke's comments that the economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation. The Commerce Department said gross domestic product grew at only a 0.6% rate in the fourth quarter, below estimates and at only a fraction of the previous quarter's growth rate, while the Labor Department said applications for unemployment benefits rose by 19,000 last week, more than expected.

Rather than viewing such news as bad for oil demand, investors chose to see it as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy. Interest rate cuts tend to weaken the dollar, and crude futures offer a hedge against a falling dollar. Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

Light, sweet crude for April delivery rose $2.95 to settle at a record $102.59 a barrel on the New York Mercantile Exchange. Prices continued rising after the Nymex closed, setting a new trading record of $102.97.

Crude prices are within the range of inflation-adjusted highs set in early 1980. A $38 barrel of oil then would be worth $97 to $104 or more today, depending on the how the adjustment is calculated. A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.

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On Thursday, the price of crude oil rose to an all new record high of almost $3 a barrel, and gas prices rose to around $3 a gallon. Crude oil prices are reaching all-time highs because the worth of the dollar is continuing to drop and because of the possibility of decreased interest rates. It is expected that the Fed will continue to cut interst rates in hopes of helping the economy as a whole. Lower interest rates tend to lower the value of the dollar, and crude futures help prevent the dollar from falling too much.

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Credit crisis hits Main Street

Wilkes-Barre, which suffers from a weak BBB credit rating, depends on bond insurance to issue municipal bonds at favorable rates. If Ambac were to lose its AAA rating and its credibility, it could mean higher taxes, fewer services and lost jobs for the people of Wilkes-Barre.

"Without affordable funding, projects don't get built, streets don't get repaved," Leighton said.

"It affects the people driving on those roads and the people paving those roads."

The credit crisis that began in the subprime mortgage market last year has now spread to municipal bonds. Governments and public authorities face steep increases in borrowing costs because investors are losing confidence in the credit markets and the companies that insure the debt.

Public officials nationwide are now weighing whether to restructure their debt to lower rates - if they have good enough credit ratings - or to ride out the storm with the hope that investors will return. However, some are concerned they may have to raise taxes or cut services to balance their budgets.

This spike in borrowing costs comes at a time when governments can least afford it. Many are already facing a budget squeeze from the national economic downturn. The drop in housing prices and sales and increase in foreclosures mean they are taking in less revenue from transaction fees and property tax revenue. On top of that, the pullback in construction and consumer spending translates into fewer sales tax dollars.

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Because of the struggling bond market, municipal borrowing has become more expensive . This

problem will more than likely result in increased taxes and fewer services. Many larger governments have faced unexpected interest rate spikes when auctions of their debt drew no bidders. The interest rate on this debt is variable so it increased after the auctions failed. This lack of faith in the bond insurers is wreaking particular havoc on smaller and weaker municipalities as well. More money is being given toward interest expense, therefore, less is being allocated elsewhere. A solution to the problem may be to reduce the use of bond insurance.

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The 44th president's $4 trillion headache

According to the Congressional Budget Office (CBO), the annual budget deficit will improve during the next president's four-year term and end in a surplus of $61 billion by 2013.

But that baseline projection is based on financial assumptions that no one expects to pan out. Two of the biggest roadblocks threatening to upend budgetary nirvana: What to do about the looming expiration of tax cuts enacted in 2001 and 2003, and the growing cost of fixing - or nixing - the Alternative Minimum Tax (AMT).

Depending on how you address them, those two factors alone could add close to $4 trillion to the federal budget deficit by 2018, according to estimates by the Tax Policy Center.

Add in the costs of the wars in Iraq and Afghanistan and the growing costs of Medicare and Social Security, and you end up with something more like a budgetary nadir.

"A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation's long-term fiscal stability," the CBO warned in a recent report.

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Due to many factors, most notably the looming expiration of tax cuts enacted in 2001 and 2003, and the growing cost of fixing the Alternative Minimum Tax, the federal budget will be at a deficit of around 4 trillion dollars by 2018. The next president must act on this problem by reducing spending, increasing tax revenues, or a combination of the two. Experts don't believe that any of the presidential candidate's plans will help with this issue although each candidate has said that his/her proposals are fiscally responsible and, at the very least, will not add to the deficit.

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Goodbye gasoline? Not so fast

Gasoline use over the next two decades is expected to soar as developing nations get richer and more people there buy cars, but gas alone won't be able to shoulder the burden.

Along with their surging economies, the number of cars in India and China is expected to jump to 1.2 billion by 2050 from 20 million just a few years ago.

"Will oil be able to supply this increase in demand?" Jim Dalton, a director at Cambridge Energy Research Associates (CERA), asked at the group's annual energy conference here in Houston.

It will certainly supply a lot of it, he said. Dalton expects oil use in the worldwide transport sector to jump 50% by 2030. But it will need some help to meet the world's energy needs.

Experts here say the fuel mix of the future must rely not just on gasoline, but a variety of sources - everything from biofuels and electric power to synthetic fuels, natural gas and greater efficiency will all help meet this growing demand.

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Despite the invention of hybrids and new technology being put in to use to limit the amount of gas needed for vehicles, gasoline use is expected to increase tremendously over the next twenty years. Because the economies of countries in the east, like India and China, are surging, the number of vehicles in use are also expected to surge. This will make it difficult to supply all the vehicles in use with oil and gasoline without implementing new methods of running our vehicles. Two possible sources of energy that could run our vehicles include the biofuel solution which is a corn-based ethanol, and electricity and the plug-in hybrid.

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Downward Revisions Characterize the Short-run Outlook for Growth

The forecasters have cut their estimates for growth, but their revision is minor and largely confined to this year’s fourth quarter and next year’s first quarter. Growth this quarter will average 2.5 percent (annual rate), down just 0.1 percentage point from the previous estimate of 2.6 percent. Larger revisions (-0.2 percentage point) characterize the following two quarters, when growth is now expected to average 2.7 percent. Year over year, growth will average 1.9 percent this year, down from 2.1 percent in the last survey. The forecasters see growth rebounding, to 2.8 percent, in 2008.


Downward revisions to output growth are not translating into deteriorating conditions in the labor market. The unemployment rate is seen averaging 4.6 percent this year, unchanged from the estimate in the last survey, and 4.7 percent next year, down from 4.8 percent previously. Moreover, the forecasters are raising their estimate for monthly job gains this year, to 156,000 from 151,000 previously. Next year, payrolls will increase at a rate of 118,000 per month, down just a bit from the estimate of three months ago.


The accompanying charts provide some information on the degree of uncertainty the forecasters have about their views on year-over-year growth in real GDP in 2007 (see Chart) and 2008 (see Chart). Each chart presents, for the current and previous survey, the forecasters’ are raising their estimates of the probability that growth will fall into each of six ranges. The forecasters are raising their estimates of the probability that growth in 2007 will average either 1.0 to 1.9 percent or 2.0 to 2.9 percent, but they are cutting their estimates of the probability that growth will average even more. Their probability estimates for growth in 2008 are little changed from the estimates in the last survey.

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The article gives and explains the numbers and percentages, involving growth, unemployment, and real GDP growth, that economic forecasters have predicted for 2008. In 2007, overall growth was predicted to decline from 2.1% to about 1.9%, but growth is expected to rise to around 2.8% in 2008. In 2008, unemployment rate is expected to bel lowered and mor monthly jobs will be made available. The growth of real GDP is not expected to change much as seen in the charts.

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