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U.S. Morning Call for Friday, October 24, 2008 U.S. Preview Stock markets around the world today are crumbling on deepening concern that the global economic slump is intensifying and will further hurt company earnings. Bearish factors include the bigger-than-expected contraction in third quarter GDP for the UK (-0.5% q/q and +0.3% y/y versus expectations for -0.2% q/q and +0.5% y/y) which sent the British pound tumbling to a 6-year low against the dollar and the contraction in the European manufacturing and service sectors with the Oct Euro-Zone PMI composite falling to its lowest level (-2.3 to 44.6) since the survey began in 1998. The European DJ Stoxx 50 this morning is trading -8.05%. Asia-Pacific stocks today closed sharply weaker on bearish factors including South Korea's economy growing at its slowest pace in four years, Sony slashing its earnings forecast for the year through March 31 and the yen surging to a 13-year high against the dollar. Japan's Nikkei fell -9.6%, Hong Kong -8.3%, China -2.9%, Taiwan -3.19%, Aust ralia -2.64%, Singapore -8.33%, South Korea -10.2%, Bombay -11.0%. US Treasury Secretary Paulson is preparing to buy stakes in a number of regional US banks in another attempt in trying to unfreeze the interbank lending markets. In a plan that may be announced as early as today, Secretary Paulson is being forced by rapidly deteriorating global financial markets to act agressively and buying stakes in banks is the fastest way of injecting capital into them. Interbank lending rates were mixed today. The 3-month dollar Libor rate dropped 2 bp to 3.52% but the overnight dollar Libor rate climbed 7 bp to 1.28% and has risen 16 bp in the last two days. The Libor-OIS spead widened 8 bp to 262 and the 3-month Euribor today fell 1 bp to a 4-1/2 month low of 4.91%. US existing home sales – Today's Sep existing home sales report is expected to rise +0.8% to 4.95 million, reversing part of the –2.2% decline to 4.91 million seen in August. US existing home sales so far this year have been moving sideways near the recent multi-decade low. However, the credit crisis that began in September and extended into October is likely to push home sales down another notch. US citizens were more worried about moving their savings and retirement accounts to safer locations in September and October than they were about going out to look for a new home. The widespread talk in the popular media about a steep recession, or even a depression, can only further discourage anyone thinking about doing some bottom fishing in the housing market. Still, there was some news earlier this week that steep discounts on foreclosed property sparked some active home buying in parts of California. That raised some hopes that buyers will in fact emerge when price s are low enough. The housing market cannot start to recover until some of the heavy supply inventory of unsold homes is worked down. That heavy supply overhang is placing continued downward pressure on home prices, creating a negative spiral in which potential homebuyers are reluctant to buy a home for fear its price will continue to fall and put them underwater on their mortgage. The level of existing homes for sale is currently at 10.0 months, down from the 23-year high of 11.0 months posted in June, but more than twice as high as the average of 4.7 months seen during 1999-2004. Meanwhile, mortgage rates are not cooperating with the need to bring buyers into the housing market. The 30-year fixed mortgage rate in the latest week fell to 6.04% from the previous week's 2-month high of 6.46%. However, the 30-year fixed mortgage rate is still at a relatively high premium of about 200 bp above the 30-year T-bond yield. The 30-year mortgage rate remains high relative to T reasury yields due to (1) the sharply reduced number of players in the mortgage lending business, (2) much higher mortgage default risks, and (3) the continued shut-down in the mortgage securitization funding chain. -------------------------------------------------------------------------------- Overnight U.S. Stock News December S&Ps this morning are trading -60.00 points and reached their "limit down" level as the capitulation in global equity markets continues. The S&P 500 futures will not trade below the 855.20 level until regular trading begins today at 0930 ET. The US stock market yesterday tumbled into early afternoon before shooting higher into the close and finishing mixed (Dow +2.02%, S&P 500 +1.26%, Nasdaq Composite -0.73%). Bearish factors for stock prices yesterday included (1) continued losses in global equity markets on fears that emerging-market countries may be in severe financial shape after Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the IMF, S&P threatened to cut Russia's debt ratings and Argentina tries to avoid defaulting on its debt, (2) comments from the CEO of AIG that they may need to borrow more than the $122.8 billion already offered by the US government if capital markets don't improve, (3) the sell-off in homebuilders after US home foreclosures in Q3 surged by 71% to a record which sent home prices tumbling by 5.9% in Aug, the biggest decline in 17 years, and (4) the larger-than-expected increase in weekly unemployment claims. Bullish factors for stock prices yesterday included (1) the 11% surge in Amgen as the world's largest biotechnology company said Q3 profit rose more than fivefold as sales of its anemia drugs increased and it forecast full year earnings of at least $4.45 a share, topping analysts' estimates of $4.37, (2) comments from Fed Governor Duke that the Fed's efforts to aid banks and investors should help rebuild confidence amid the credit freeze and collapse in home prices, (3) comments from former Fed Chairman Volcker that the US needs a second stimulus program "at this point," and (4) the 9% jump in Exxon Mobil, the largest US oil company, and the 8% rise in Chevron, the second-biggest US energy producer, on expectations that OPEC will cut oil production enough to stem the slide in prices when it meets today. Global automakers are getting slammed today as job cuts and new models aren't sufficient in increasing profitability as the financial crisis hurts growth prospects. Toyota fell 6.4% in Japan as the world's second-largest automaker reported a decline in quarterly sales for the first time in seven years, Peugeot slumped 14% after Europe's second-biggest carmaker cut its full-year sales and earnings targets, and Volvo AB plunged 21% as the world's second-largest maker of heavy trucks cut its industry growth outlook for this year after curtailing production as demand slows and some customers struggle to finance the purchase of new equipment. Rounding out automaker losses today were GM down 10% in Germany trading and Ford down 4.6%. Air France is down 6.6% this morning after Europe's biggest airline said it will be "very difficult" to meet its 1 billion-euro operating-profit target for the 12 months through March 2009 -------------------------------------------------------------------------------- Today's U.S. Market Focus December 10-year T-notes this morning are trading +13 ticks on the global stock market meltdown. December T-note prices have rallied every day this week and closed yesterday +19 ticks at a 2-week high. Bullish factors for T-note prices yesterday included (1) a flight-to-quality as equity markets worldwide continue to fall on fears that emerging-market economies are now in severe financial trouble after Belarus, Hungary, Ukraine and Pakistan are reportedly all seeking aid from the IMF, (2) the shrinkage of the US commercial paper market for the sixth straight week by a total of $366 billion or 20% since Lehman Brothers collapse last month, the worst slump on record, to $1.45 trillion for the week ended Oct 22, its lowest level in 3-1/2 years as investors continue to flee the corporate borrowing market, (3) the larger-than-expected increase in weekly unemployment claims (+15,000 to 478,000 versus expectations of +6,000 to 467,000), (4) the surge in US home foreclosures by 71% to the highest on record in Q3 which dragged down home prices by -5.9% in Aug, the biggest decline in 17 years, and (5) comments from former Fed Chairman Greenspan that the stabilization of US home prices "is still many months in the future" and the continued rise in layoffs and unemployment will lead to a "marked retrenchment of consumer spending." The dollar index today is sharply higher and at a 2-year high. The dollar/yen is -4.94 yen as the yen is now at a 13-year high against the dollar as the risk of a global recession spurs masssive unwinds of the yen carry trade. The euro/dollar is -3.49 cents as the euro slumps to a 2-year low against the dollar. The dollar index yesterday closed little changed after posting a nearly 2-year high. Bullish factors for the dollar yesterday included (1) a continued flight-to-safety into the dollar from emerging-market currencies as Belarus joined Hungary, Ukraine and Pakistan in seeking a bailout from the IMF to help weather frozen credit markets and a slump in commoditiy prices along with Argentina's continued risk of defaulting on its debt, (2) the fall in the euro to a 1-3/4 year low against the dollar after Finland's Finance Minister Katainen said the European economy may be headed for a recession that could last two to three years, (3) continued weakness in the Briti sh Pound which fell to a 5-year low against the dollar, and (4) the plunge in the Russian ruble to a 2-year low against the dollar after Standard & Poor's cut the outlook on Russia's credit rating to "negative" from "stable" and saying the country's rating could be downgraded if the cost of the government's bank rescue increases. Bearish factors for the dollar yesterday oncluded (1) the larger-than-expected increase in weekly unemployment claims, and (2) the rally in the yen to a 7-month high against the dollar as the continued rout in global equity markets forces more investors to abandon the yen carry trade and as Barclays Capital predicts the yen may strengthen to 90 per dollar by Mar 2009 as investors continue to dump higher-yielding assests funded in Japan and bring their cash home. December crude oil prices this morning are trading -$4.03 a barrel at a fresh 16-month low and December gasoline is trading -9.54 cents a gallon at a 20-month low. Crude prices are selling-off today despite the first cut in crude production by OPEC in almost two years. OPEC today in Vienna decided to lower supply by 1.5 million bpd starting November but slumping global equity markets and the surge in the dollar index to a 2-year high are keeping prices under pressure. December crude oil prices yesterday rebounded from a 16-month low and closed +$1.09 a barrel and December gasoline rebounded from a 20-month low and closed +1.60 cents a gallon. Bullish factors for crude oil prices yesterday included (1) comments from Iran's Oil Minister Nozari that OPEC must "balance" the market and that a 2 million bpd cut in crude production was necessary because of falling demand, and (2) comments from Venezuela's oil minister that OPEC needs a "substantial" cut in crude production immediately. Bearish factors for crude oil prices yesterday included (1) Saudi Arabia's oil minister declining to endorse Iran's and Venezuela's calls for OPEC production cuts at today's cartel meeting in Vienna and said "prices will be determined by the market", (2) the continued rally in the dollar index to nearly a 2-year high, and (3) the prediction from Sanford C. Bernstein that an OPEC cut in production may fail to stem the collapse in oil prices as roiling stock markets signal the financial crisis has spread to emerging markets, the center of demand growth -------------------------------------------------------------------------------- Today's U.S. Earnings Reports Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): EXC-Exelon (BEST earnings consensus $1.16 per share), UST-UST Inc. (0.90), TROW-T Rowe Price Group (0.56), ITT-ITT (1.06), IMCL-Imclone Systems (0.27), FO-Fortune Brands (1.06), FDRY-Foundry Networks (0.17), IDXX-Idexx Labs (0.40), GCI-Gannett (0.77), HPC-Hercules (0.40), TKR-Timken (1.06), GHL-Greenhill & Co. (0.30), CPO-Corn Products (0.78), ISBC-Investors Bancorp (0.06), AXB-Alexander & Baldwin (0.78), TR-Tootsie Roll Industries (0.36), UBSI-United Bankshares (0.46), ZMH-Zimmer Holdings (0.89), LG-Laclede Group (-0.07) Global Financial Calendar Friday 10/24/2008 United States 1000 ET Sep existing home sales expected +0.8% to 4.95 million, Aug –2.2% to 4.91 million. Germany 0200 ET Sep German import price index expected –0.8% m/m and +7.8% y/y, Aug –0.8% m/m and +9.3% y/y. 0330 ET Oct German PMI manufacturing expected –1.4 to 46.0, Sep –2.3 to 47.4. 0330 ET Oct German PMI services expected –1.4 to 48.8, Sep –1.2 to 50.2. France 0300 ET Oct French PMI manufacturing expected –0.7 to 42.3, Sep –2.8 to 43.0. 0300 ET Oct French PMI services expected –1.1 to 49.0, Sep +2.1 to 50.1. Euro-Zone 0400 ET Oct Euro-Zone PMI manufacturing expected –1.0 to 44.0, Sep –2.6 to 45.0. 0400 ET Oct Euro-Zone PMI services expected –1.4 to 47.0, Sep –0.1 to 48.4. 0400 ET Oct Euro-Zone PMI composite expected –1.5 to 45.4, Sep –1.3 to 46.9. United Kingdom 0430 ET Q3 UK GDP expected –0.2% q/q and +0.5% y/y, Q2 unchanged q/q and +1.5% y/y. Canada 0700 ET Sep Canadian consumer price index expected –0.1% m/m and +3.2% y/y, Aug –0.2% m/m and +3.5% y/y. 0700 ET Sep Bank of Canada core consumer price index expected +0.3% m/m and +1.7% y/y, Aug +0.3% m/m and +1.7% y/y. Morning Quote Board Morning Quotes (ET) Last Chg %chg Updated US Stock Futures S&P (Globex) (Z8) 855.20 -60.00 -6.56% 07:19:16 DJIA (CBOT) (Z8) 8224 -550 -6.27% 06:47:56 European Stocks Europe DJ Stoxx 50 2047.43 -179.25 -8.05% 07:25:30 London UK FTSE Index 3795.58 -292.25 -7.15% 07:25:31 German Dax Index 4156.60 -363.10 -8.03% 07:25:36 French CAC 40 Index 3050.62 -260.25 -7.86% 07:25:30 Asian-Pacific Stocks Japan Nikkei Index 7649 -812 -9.60% 03:00:16 Hong Kong Hang Seng 12618 -1142 -8.30% 04:10:30 China CSI 300 Index 1782 -53 -2.90% 03:01:00 Taiwan TAIEX Index 4580 -151 -3.19% 01:46:01 Australian S&P 200 3869.4 -105 -2.64% 01:47:03 Singapore Str. Times 1600.28 -145.39 -8.33% 05:10:06 South Korea KOSPI 200 123.27 -14.2 -10.33% 02:02:38 Bombay Sensex 30 8701 -1070.63-10.96% 07:28:01 Karachi KSE-100 9183 0 0.00% 10/23/2008 US Interest Rates 10yr T-notes (CBT)(Z8) 116.080 0.130 0.35% 07:30:37 Cash 10yr T-note Price 104.015 1.125 1.35% 07:40:31 Cash 10yr T-note Yield 3.508 -0.167 -4.53% 07:40 5yr T-note (CBT)(Z8) 114.145 0.140 0.38% 07:30:31 Cash 5yr T-note Price 103.040 0.270 0.82% 07:40:00 Cash 5yr T-note Yield 2.447 -0.181 -6.90% 07:39 30-yr T-bond (CBT)(Z8) 119.13 1.14 1.22% 07:30:35 Cash 30yr T-bond Price 110.065 2.155 2.31% 07:39:30 Cash 30yr T-bond Yield 3.914 -0.135 -3.34% 07:39 Eurodollars (CME)(Z8) 97.395 -0.045 -0.05% 07:29:43 Eurodollars (CME)(H9) 97.650 0.020 0.02% 07:28:38 Asian & European Rates 10-yr JGBs (TSE) (Z8) 137.70 0.59 0.43% 02:00:00 EuroyenTibor(SGX)(Z8) 99.235 0.030 0.03% 07:05:00 Bunds (Eurex) (Z8) 117.48 0.84 0.72% 07:25:37 Euribor (Eurex) (Z8) 96.05 0.02 0.02% 05:31:45 UK Gilts (Liffe) (Z8) 113.03 1.14 1.02% 07:25:25 Short Stlg (Liffe) (Z8) 95.38 0.19 0.19% 07:20:55 Forex US Dollar-Japanese Yen 92.37 -4.94 -5.08% 07:40:31 EuroFX-US Dollar 1.2585 -0.0349 -3.49% 07:40:36 US Dollar-Swiss Franc 1.1581 -0.0008 -0.08% 07:40:30 British Pound-US$ 1.5523 -0.0707 -7.07% 07:40:35 US$-Canadian Dlr 1.2739 0.0267 2.67% 07:40:35 Yen (Globex) (Z8) 1.0884 0.0438 4.38% 07:30:37 Euro FX (Globex) (Z8) 1.2566 -0.0267 -2.08% 07:30:37 SwissFranc (Globex)(Z8) 0.8685 0.005 0.58% 07:30:34 British Pound(Glbx)(Z8) 1.547 -0.0618 -3.84% 07:30:37 Canadian$ (Globex)(Z8) 0.7859 -0.0093 -1.17% 07:30:31 Commodities Gold (Comex) (Z8) 693.4 -21.3 -2.98% 07:10:34 Copper (Comex) (Z8) 169.1 -11.4 -6.32% 07:10:26 Crude Oil (Nymex) (Z8) 63.81 -4.03 -5.94% 07:10:33 Gasoline (Nymex) (Z8) 145.5 -9.54 -6.15% 07:05:30 Heating Oil(Nymex)(Z8) 195.97 -9.6 -4.67% 07:04:04 NaturalGas(Nymex)(Z8) 6.488 -0.131 -1.98% 07:06:52