Don't let the doomsday headlines and the careening markets scare you

rising home foreclosurers, cranky consumer spending, soaring oil price with inflation implications, nausea-inducing market swings - pileup of indicators --Here we go again. Day after day, Americans are being bombarded by a relentless drumbeat of unsettling economic news. The Dow regularly swings by hundreds of points in a single session as it gyrates near bear-market territory. Oil prices keep bubbling toward $100 a barrel. The dollar is crumbling, and a rogue trader in Paris is blamed for triggering a synchronized selloff heard round the world. We're constantly warned that an ugly recession is looming, if not already here. It's all enough to cause a panic attack. --Don't let the doomsday headlines and the careening markets scare you. Washington is in control --But any slump is likely to be short and mild, mainly because Washington is on the case. Since mid-September, Federal Reserve chairman Ben Bernanke has reduced the target for the Fed funds rate by 2.25 percentage points, with the biggest move, a sudden 75-basis-point cut, coming on Jan. 22. On Jan. 30, the Fed cut another half-point, bringing the target to 3%. It usually takes six to nine months for a Fed rate cut to bolster consumer and business spending. By midyear the flood of liquidity will be channeled into new loans for companies and consumers. A resurgence in easy credit - stoking the appetite for everything from big-screen TVs to capital equipment - will be practically irresistible. Consumer spending will get another boost from the roughly $150 billion economic stimulus plan Congress is poised to approve. Checks that could range from $1,000 to well over $2,000 are likely to start going out to families this summer. The easy money doesn't stop there. The Fed has practically promised even more rate cuts. The markets are predicting that the Fed funds rate will be 2% to 2.5% by year-end. With that kind of aggressive stimulus, look for growth to jump back to the 3% to 3.5% range in the second half of the year. Says Brian Wesbury, chief economist at First Trust Advisors: "You simply don't get recessions when the Fed funds rate is at 3% or below, and the Fed is in a strongly expansionary mode." --It usually takes six to nine months for a Fed rate to bolster consumer and business spending. By mid year, the flood of liquidity will be channeled into new loans for consumers and business. --Consumer spending will get another boost from stimulus package. --Those low rates, though, are creating the conditions for a bigger crisis down the road. "The real challenge will be inflation," warns Darda, "not the near-term economic worries that the financial press is harping on." After fretting over surging prices early last year, the Fed is now ignoring them in its all-out campaign to revive the economy. But the threat isn't going away. In 2007 the consumer price index rose 4.1%, the biggest jump in 17 years. The combination of high oil, food, and metals prices, along with low interest rates and growing global demand, is a classic recipe for inflation. "Much higher inflation is practically inevitable," says Carnegie Mellon economist Allan Meltzer. Eventually the market will wake up to the problem, and so will the Fed. "The real danger is in 2009 and 2010," says Meltzer. "The Fed will be forced to raise rates substantially to kill off inflation, possibly causing a recession." Job market has not falling off the cliff --Jobless claims, a reliable harbinger of recession, have averaged aqbout 325k for the past four weeks, far below the danger point. In hte last two recession, jobless claims increased 25%. Temper your courage --Still, investors need to temper their courage with caution by picking investments that are genuinely cheap.

daily mkt review Feb 8th, 2008

Credit markets came under the spotlight on Friday as talk that a European fund was liquidating a structured credit product added to fears that economic slowdown would lead to companies defaulting on their debt.

The Markit iTraxx Europe index – a gauge of the cost of insuring against corporate default – hit a lifetime high of 98.75 while the CDX North America investment grade index touched 133. The iTraxx crossover index of mostly junk-rated credits – an important barometer of risk appetite – widened to a record 530.

SEC May Propose Changes Concerning Rater

--The Securities and Exchange Commission may soon propose rules that require credit-ratings firms to disclose the accuracy of past ratings and distinguish between various products they rate, the first indication how the industry might be regulated in the wake of the subprime crisis. --SEC Chairman Christopher Cox said the potential rules "would require credit-rating agencies to make disclosures surrounding past ratings in a format that would improve the comparability of track records and promote competitive assessments of the accuracy of past ratings." --Mr. Cox declined to give specifics of any possible rules. He said they are geared at fostering "healthy competition" that could involve highlighting and rewarding "successful past performance to punish chronically poor and unreliable ratings." --SEC officials said the agency's early reviews of credit-rating firms and investment banks also reveal that some firms used poor assumptions about high-risk mortgage debt in establishing their ratings, while some Wall Street investment banks had poor risk controls.

Credit-Card Pinch Sap Consumer Spending

--America's love affair with credit cards may be headed for the rocks. --Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit. --The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy. --Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters. --Sinking home prices have made it much harder to convert home equity into cash for living expenses. At the same time, plastic has pushed into every corner of American life, making new inroads that worry some economists and card issuers. --In past economic downturns, Americans used credit cards mainly for discretionary purchases, such as furniture, appliances and jewelry. Now, however, many of them regularly whip out plastic to pay for groceries, gasoline and other everyday necessities. Credit-card issuers won't disclose exact figures, but they say it is evident that a growing percentage of card volume is for basic purchases. Many issuers even dole out extra rewards for such transactions. --Evidence is mounting that the plastic-fueled spending spree won't last. In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier, according to research firm RiskMetrics Group. The analysis includes a broad swath of more than $200 billion of credit-card loans that are sold off to investors by major card issuers like Citigroup Inc., Capital One Financial Corp., American Express Co. and J.P. Morgan Chase & Co. --Card delinquencies are ticking up from historically low levels, but the trend is sending shudders through lenders already reeling from the subprime-mortgage tumult. As a result, leery card issuers are bulking up their reserves against future card-related losses -- and getting so much tougher on borrowers that some consumer are reining in overall spending. --Much of the card industry's growth has come from debit cards, which aren't included in the government's revolving-credit data because they immediately draw funds out of purchaser's checking account. Still, credit-card portfolios managed by card-issuing banks are growing at single-digit percentage rates each year as consumers put more small payments and everyday purchases on their cards.

What if Muni Insurance Disappeared?

--Firms like MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. write insurance on tax-exempt debt issued by municipalities, hospitals, nonprofit groups and others. If there is a default, they guarantee repayment. The same firms are in trouble because of insurance they have written on shaky mortgage-backed debt. As their mortgage woes deepen, the firms' standing in the municipal-bond market could be severely shaken.

--Roughly half of the $2.6 trillion municipal-bond market is insured by these firms. Municipal issuers and taxpayers have paid as much as $2.3 billion a year in premiums to bond insurers, according to Standard & Poor's Ratings Service. But some regulators, investors and municipalities are starting to question the value of all that insurance.

--Municipal bonds don't default much. Municipal bonds with a double-B rating from credit-rating services have a cumulative average 10-year default rate of 1.74% since 1970. That is much lower than double-B-rated corporate bonds, which have a 29.93% 10-year cumulative default rate during the same period, according to research compiled by research firm Municipal Market Advisors. Municipal bonds rated triple-B by Standard & Poor's default less frequently, at 0.32% of the time, than triple-A-rated corporate bonds, which have a 0.6% default rate over time.

--Issuers of municipal bonds with insurance traditionally can expect to pay a lower interest rate than they would otherwise have to pay, thanks to the coverage. But it has always come at a price.

--Before the bond-insurer crisis, bond insurers charged about 30% of the interest-rate savings an issuer would get. In recent months, that has climbed to about 80% or 90% as the bond insurers try to extract as much premium as possible. For the issuers, though, that has reduced the value of the coverage.

three factors for China smooth growth pattern

--The 2007 growth of 11.4 per cent, although robust, is not as high as the peak of the 1980s and ’90s, when GDP growth in some years surpassed 15 per cent.

--Jonathan Anderson of the investment bank UBS says China’s boom-bust cycles of those two decades are being wound back into a more sustainable pattern. --He points to three factors helping to smooth growth cycles: improved corporate management skills, the declining role of the state in the economy and better financial institutions after recent reforms.

--“That explains why growth in the past three years has been 11 per cent and not 15,” said Mr Anderson. He added that the overcapacity of the past three years, which has fuelled the trade surplus, is now being squeezed out of the economy. The huge profits, which have funded investment, will also come back “to historical norms”.

Credit Crunch Pounds UK Economy

--The global credit crunch is threatening to claim a new casualty: The United Kingdom, a country that has staked its economic success on attracting other people's money. --For more than a decade, the U.K. has reaped vast benefits from its role as a hub for the world's capital, building London into a financial center to rival New York. No large country is more dependent on the movement of foreign money through its banks: Some $2.4 trillion flowed in and out of the U.K. in 2006, an amount equivalent to the country's entire annual economic output, the most recent data indicate. The financial sector accounts for more than one-fifth of all U.K. jobs, compared with only 6% of jobs in the U.S., and contributed about one-quarter of the nation's economic growth over the past five years. --But now, amid the deepening credit-market turmoil, the U.K.'s embrace of financial globalization is becoming a liability. The investment-banking business is already stalling, potentially eliminating thousands of high-paid jobs and demand for everything from tailored suits to high-end hunting trips. As mortgage credit dries up, house prices are sliding at the fastest rate since 1995. And retailers are facing a tough time as consumers, coming down from years of credit-fueled spending, turn decidedly gloomy. --Bank of England officials, in a crucial policy-making meeting today, will decide what, if anything, to do to ease the pain. Economists expect the central bank to take out some insurance against a recession, cutting its short-term interest-rate target by one-quarter percentage point, or perhaps one-half point, from the current 5.5%. But with inflation running above the desired level of 2%, the bank may have little leeway to ease further. Meanwhile, the government, hobbled by a large budget deficit, will be hard pressed to come up with a stimulus package like the one being considered in the U.S. --Much of the prosperity, though, depended on the global boom in credit of the past several years. The pulse of London's financial center, known as "the City," quickened as its bankers invented increasingly complex ways to package and resell all kinds of assets, from high-risk U.S. home loans to European corporate bonds. Over the five years ended September 2007, the financial-services sector grew at an average, inflation-adjusted rate of just over 8%, its most intense stretch of growth in almost two decades. --Locally oriented retail banks, such as mortgage lender Northern Rock PLC, also tapped global capital markets for cash, which they made available to British consumers. The abundance of easy money catalyzed a sharp rise in home prices and boosted consumer spending. But it also drove people deeper into debt as they stretched to buy homes and live large. According to the most recent data from Paris-based Organization for Economic Cooperation and Development, total consumer debt in the U.K. stood at 164% of annual disposable income at the end of 2006, by far the highest level of any developed country. In the U.S., that number was 138%. --As the credit cycle takes a sharp turn downward, many of the businesses that fed the U.K.'s financial sector, from taking companies public to issuing corporate debt, are set for a fall. Among the hardest hit so far have been the complex products in which London-based bankers and traders specialize, such as the collateralized debt obligations and structured investment vehicles, or CDOs and SIVs, that are at the center of the current crisis. "You've got certain sectors that are out to lunch and are likely to be out to lunch for the rest of their lives, or at least for the foreseeable future," says Mr. Kirkwood of Citigroup.