Need To Know News

St. Louis FED President Poole’s speech today in Washington D.C. focused on the relationships between the stock market and expansionary policy by the FED. He noted that there can be no moral hazard when overall well being of the economy is the goal; a gain in stock markets is merely a function of economic wellbeing. Poole was as bold to say there is and should be a FED “put”, but only because stock market relief is an unintended but predictable byproduct of the FED’s conformity to its mandate to ensure full employment. Poole’s comments seem to be mowing down any hawkish notions of “moral hazard” going toward future FOMC rate decisions. As a result today’s comments may be indicative of a coming FED rate cut in Dec. As Poole clearly stated - if the FED monetary policy is aimed at price stability and full employment then there can be no moral hazard.

In a speech today in Philly, FED Gov. Kroszner remarked about the current condition of financial markets, specifically referring to those involving mortgages. He spoke extensively about price discovery in more recent investment vehicles such as SIVs. Noting that with any young investment there is a lack of history which is useful in assessing risk and ultimately price. Kroszner commented that it was extremely important for newer investment vehicles to improve information-gathering so that pricing could be more accurate. In reference to news of a cooperation between lenders and the government; he explained this would be in the best interest of all parties involved from Main Street to Wall Street to resist an increase in foreclosures. His comments pointed out the most beneficial borrowers of a rate freeze on ARMs would be those on-time with payments who would soon see an upward reset. It seems the FED and Treasury are hoping to stagger foreclosures to buy time for price discovery regarding investment vehicle underlined with mortgages. More generally a reduction in foreclosures would loosen up credit tightness and leave homeowners with more money for personal consumption.

CNBC is reporting Q4 writedowns for Morgan Stanley could be as high as $5.7bln.

The USD continued its recent advance and is trading higher against every major currency. The USD Index is higher for a fourth straight day, and is set for its strongest week since August. EUR/USD and CABLE fell to weekly lows, while USD/JPY is up .83%. USD’s strength comes in spite of expectations that the FED will cut rates, suggesting the forex market has already factored in a 25bps. The JPY is weaker vs. all major currencies, as today’s global surge in equities has lead to an increase in the carry trade. The carry trade has also hit the CNF, falling to its lowest level against the USD. Cable has come under selling pressure on expectations of slower growth and speculation the BOE will have to begin cutting rates in the near-term.

Fixed income markets sold off on the news of the US Treasury’s subprime aide plan. This plan will include voluntary rate freezes for subprime ARMs with upcoming rate resets. Countrywide, Wells Fargo and WaMu are expected to participate. The rate freeze, however, will only be temporary and will be re-adjusted as the mortgage market stabilizes. This plan appears to address the problem but does not eliminate it altogether. Bonds are pointed lower across the board, with extended weakness in the long-end. T-bills are down for the first time in several days; as the increase in expectations for a rate hike and easing credit market concerns have reduced the demand for the near-term safety of T-bills. Dec. FED FED Fund futures still factor in a full 25 bps, while the implied likelihood of a 50 bps at 32%

The USD higher than all major currencies and the USD Index is up .5%, extending its win streak to four days. USD/JPY is up .71%, which is most likely a result of this morning’s surge in equities. JPY is lower vs. most major currencies as increased risk appetites have spurred carry trades. FED Chief Ben Bernanke addressed “renewed market turbulence” in a rather dovish speech last evening; increasing the number of bets favoring a Dec. 11th rate cut. However, USD managed to post gains as a 25 BPS is likely to have already been factored into the USD. The USD could pull back this afternoon if the rally in equities stalls; nonetheless, the USD will have its best weekly performance in several months.

Equities indices got a boost from Bernanke’s speech as well as the Treasury’s subprime aid plan. Indices were generally unresponsive to today’s tame PCE data and lower than expected Construction Spending. The rally petered off a bit just before lunch, and the indices have since consolidated within narrow ranges. DOW futures are up .5%, S&P futures are up .8% and Nasdaq futures are down .1%.

Crude has resumed its retreat from $100, as the release of oil reserves from DOE, word of an OPEC production increase, dollar strength, and the prospects of a slowing economy have all be attributed to today’s decline in Crude. Crude is down over 2% to 89.27. Gasoline is off by 1.5%; Heating oil is down 2.3% and Natural gas is down 5 cents.

Gold is down over $12 to $789; coinciding with the drop in Crude and the rise in the USD. The recent drop in Crude prices appears to be reducing Gold’s appeal as a hedge against inflation. Silver is down .5 %; Platinum is marginally lower and Copper is up over 2.3% helped by strength in global equities.

October construction spending fell 0.8%, more than the 0.3% decline most analysts expected. The September increase in spending was revised down from a 0.3% increase to a 0.2% increase, but the August change was revised upward from a 0.2% decline to a 0.4% increase. Private construction expenditures fell 1.4% in October following a revised 0.1% decline in September. Private residential construction fell 2%, that was its twentieth consecutive decline and the largest since July. Nonresidential private construction fell 0.5% in October, its first decline in over a year. Large declines in construction of power and manufacturing facilities and less construction of recreation facilities overcame continued strength in the building of lodging, office and educational facilities. Public construction rose 0.8%. Federally funded construction rebounded with an 8.2% increase after a 7.5% decline the previous month and state and local construction rose 0.3%. On a year-over-year basis the total value of construction spending is 0.6% lower than in October 2006 although nonresidential construction has increased 16% while residential construction spending has fallen 16%.

Wells, Citi, Countrywide, Treasury Meet: Close to Subprime Solution Locking Rates on Select ARMs WSJ A1

Bernanke Blazes Trail for Coming FED Rate Cuts FT 1 WSJ A1 WP D1

Recent Financial Sector Stock Rally More Short Squeeze Than Renewed Bullish Interest FT 15

JPY Carry Trade Sees a Gradual Unwind FT 24

Libor Rate Surge Indicates Bank Credit Woes FT 24

Chinese FX Reserve Growth Slowing: Sovereign Funds Benefit FT 24

Citadel weighs E*Trade Risk/Reward: Longterm view & a Platform for More Deals(?) WSJ A1

Opening the Door: China to Stop Subsidies-Helping U.S. Exporters WSJ A2

Once Riskier Emerging Markets May Be New Equity Haven WSJ C1