Need To Know News

New single-family homes sold at an annual pace of 728,000, slightly above the revised September number but well below analysts estimates. The August and September numbers showed a major downward revision. With the August number revised down from 735,000 to 717,000 and the September revised down from 770,000 to 716,000. The September number, which had previously been reported as an increase from August, is now at the lowest level since January 1996.
The number of houses for sale at the end of the month was 516,000, down 2.3% from the previous month but still representing a 8.5 months supply at the current sales pace. Of the new homes for sale at the end of the period, 37% were already completed. The median price of a new home was $217,800, down 13% from year earlier levels. That was the largest year-over-year price decline in over 30 years.

Kathryn Kobe, NTKN Washington, DC

As of 28 November, 2008 SPR inventory is 695.4mln barrels of Oil. The Enbridge pipeline is said to pump 1.5mln bbpd into the U.S.

Upward GDP revision: Hot number in a cooling economy WSJ C1

Spiking equities’ punchbowl with rate cut “cheer” WSJ A1 FT 1 FT 28

Housing and dollar woes have U.S. regional impact WSJ A8

Getting real: Earnings for U.S. Banks drop 25% in Q3 FT 15

Market demand for debt instruments takes a shellacking: Corporate bond issuance hits 5 year low FT 26

E*Trade & Citadel deal reveals ABS valution realities WSJ

Large U.S. pipeline explosion blows up crude WSJ

The preliminary estimate of Q3 2007 GDP was revised up to 4.9% from its advance estimate of 3.9%. That was in line with the expectations of analysts. However, the upward revision to final sales was smaller, revised up to 3.9% from its originally estimated 3.5%. The rest of the upward revision in GDP came from a build-up in inventories. Nonfarm inventories increased at an annual rate of $29.8 billion, their largest increase since the third quarter of 2006 and $17.4 billion above the original estimate used in the advance GDP calculations. With the economic outlook uncertain, it is doubtful that producers wanted this level of inventory build up to meet potential increased sales demand. It is more likely that businesses will want to control continued inventory buildup in the near future. The revision to final sales came mostly from net exports. The exports of goods and services during the third quarter rose at a 25.8% annual rate, revised up from the original estimate of 23%. Import growth was revised down, which reduces its drag on GDP growth. Originally imports were estimated to have grown 5.2% and the current estimate is for an annual rate of increase of 4.3%. Personal consumption was revised down slightly from 3% in the advanced report to 2.7% in today’s report. That reflected weaker growth in durable and nondurable spending than was originally estimated. Nonresidential investment was also revised up in the second quarter, with both investment in nonresidential structures and equipment increasing at a faster pace than originally estimated. Overall nonresidential investment grew at an annual rate of 9.4% compared with the original estimate of 7.9%. Residential investment was revised down slightly and government expenditures were revised up slightly.
The GDP price index rose 0.9% compared with the originally estimated 0.8%. The core price index rose 1.6%, unchanged from its original estimate. The core PCE index rose at an annual rate of 1.8%.
This was the first estimate of corporate profits released for the third quarter. Corporate economic profits after tax were unchanged in the third quarter. Net cash flow declined by $57.1 billion during the quarter or a decline of 4.3%. Despite the weakness in corporate profits shown in the accounts, the Bureau of Economic Analysis explained that the bad debt expenses reported by several of the financial companies in the third quarter were treated differently in the national accounts than in financial accounting and therefore did not have a substantial impact on today’s estimates. The BEA treats those as capital losses that reduce the value of assets on the balance sheet rather than current period expenses.

Kathryn Kobe NTKN, Washington DC

Initial Jobless Claims for the week ending November 24 shot up 23k to 352,000, the highest level in 9 months (week of FEB 10, 2007). Claims are 22k higher than the consensus estimate of 330k. Continuing Claims also shot higher to 2.665mln from a downwardly revised 2.553mln. Continuing Claims are at their highest level since the week ending Dec 24, 2005. Texas had the highest Initial Claims at nearly 1,100 due to layoffs in information, service and manufacturing industries. Michigan Claims fell by nearly 6,500 with fewer layoffs in the auto industry. The FED has suggested emerging softness in labor markets, so this, at least at the FED, is not unexpected. Claims data are famously volatile so market reaction may be muted on these data, especially due to the GDP release this morning.

Can U.S. Equity Markets sustain yesterday’s gains? The short answer here is likely NO. The tightness in U.S. credit markets and indeed world credit markets due to subprime and its attendants; U.S. housing market weakness, the unwillingness of banks to be forthright about their exposure to subprime derivatives losses and the mistrust between banks that has lead to the credit market seize-up. While yesterday’s equity market rally might be largely put down to hopes for a December rate cut, the fact remains that a cut in FED funds will not alleviate the aforementioned banking disaster. What if GDP is revised up to 5% or better? That would in fact leave the FED with no reason to cut rates thus kicking out at least one short term support for higher equities prices. How about New Homes Sales? Not likely to stem a sell-off even if they do come in better than expected.

Add to this the Enbridge pipeline explosion in the U.S. overnight that pushed OIL up over $4 per barrel in European trade. Enbridge originates in Canada and carries 1.5mln barrels per day to U.S. refineries, about 20% of U.S. daily imports that feed multiple refineries in the Mid-West.

Bonds - bonds are likely to benefit from a flight to quality bid.

Equities - an unwind of yesterday’s gains could get out of hand on the downside with all sectors coming under pressure

U.S. dollar - the dollar may in fact benefit from EUR/JPY unwinds as the market shifts into risk aversion mode, driving widespread JPY purchases.

Gold - Gold is up 4.90 at this writing and likely headed significantly higher today, along with Silver and Platinum.

Oil - higher

Existing home sales slipped below 5 mln for the first time since ’98, while single family home inventories climbed to a 23yr high. Durables Goods Orders also came in lower than expected; nonetheless, equities rallied in anticipation of a Dec. rate cut. The FED’s Donald Kohn provided some rather dovish comments in his speech, saying continued market weakness since Oct. may factor into the FOMC next rate decision. Equity indices may re-trace some of today’s extensive gains and could potentially sell-off if tomorrow’s preliminary Q4 GDP data comes in lower than expected.

Bonds took it on the chin for a second consecutive day, sending the yield on the 10yr above 4%. Treasury markets saw extended weakness in the long end; however, the short end was relatively well-bid as traders continue to take safety in t-bills; especially the 3month, which yields over 50 BPS less than the 4week bill. Dec FED Fund Futures fell for a second straight day and now factor in a 92% chance of a 25 BPS cut and an 8% chance of a 50 BPS cut. If GDP comes as expected, FED Fund should gain some strength and bonds should continue their decline. If GDP supersizes, it will most likely be to the downside—which should yield some fixed income buying.

The USD was higher for most of the day, however sold-off mid-afternoon following the release of the Beige book and comments from the Dallas FED’s Richard Fisher. EUR/USD finished flat at 1.4832, after trading in the red for most of the day. USD/JPY gained over 1% for the second consecutive day finishing a touch over 110 after falling to the mid 107s on Monday. The USD Index is up .1% to 75.176. If Q4 GDP falls in line with expectations, the USD should pick up some strength; however, there may be some profit taking consider the greenback’s recent surge.

Energies continued declines off persistent rumors OPEC is increasing production in Dec., improved EIA energy inventories, and strength in the dollar. Crude is down over 3% down to $91.58. Gasoline is also over 3% to 229.33-heating oil down almost 2% to 260.00. Natural gas is down over 4.5% to $7.02.

Metals were mostly down across the board as the need to hedge against the dollar lost strength. Gold was down over 1% to $812.00-silver was down a slight 0.3% to 14.635-platinum down 0.72% to $1443.00. Copper was today’s lone gainer up 1.5% most likely due to strength in equities signaling strong demand for industrial metals.

Energies are lower across the board as a result of USD strength, a larger than expected build in DOE inventories and speculation that OPEC will boost production in December. Crude is down over 3% to $91.58. Gasoline is also over 3% to 229.33, while heating oil fell almost 2% to 260.00. Natural gas is down over 4.5% to $7.02.

Metals finished lower across the board except copper, which gained 1.5%. Gold continues to come under selling pressure, as the USD rally has reduced the appeal of the yellow metal as a hedge against the greenback. Gold was down over 1% to $812.00; silver fell to 14.635 and platinum dropped0.72%.

The consensus estimate for tomorrow’s GDP data is 4.9% give or take a tenth of a percent. Where in these data might the revisions that will push GDP nearly 25% higher?
Perhaps Commercial Lending will be revised sharply higher. Commercial and Industrial lending is starting to dry up due to higher rates and tougher credit conditions and the newly emerging notion of a Commercial Real Estate bubble; that said, maybe it wasn’t as tight in early Q3 so an upward revision is not out of the question, but unlikely since Q3 was the onset of the credit crunch.
How about an upward revision in residential construction? Yes, housing starts were surprisingly up in October, but not enough to snap GDP higher. Residential Construction is falling through the floor..so not here.
How about a sharp upward revision in Inventories? Not likely given the outlook expressed by those participating in Regional Fed Surveys. They are looking for slower growth so unlikely to be stocking up on inventories. That said, exporters might be stocking up a bit – but again – a 1% revision cannot be made on just inventories.
In short, some combination of upward revisions will have to take place that completely ignore the August credit crunch. There’s not much talk of a revision lower but tighter credit conditions for residential mortgages and commercial and industrial loans might precipitate a downward revision there. Tomorrow’s median estimate is for a revision from 3.9% to 4.9% - a downward revision is not out of the question.

The USD Index is up over .5% for the second consecutive day; even though today’s Existing Home sales and Durable Goods reports were quite unimpressive. This data, however, could not drag down the USD today, as it is trading higher vs. every major currency except GBP and CAD. USD/JPY is up over 1% for a second straight day, and is currently trading above 110 after hitting a 2.5 yr low in the mid 107 range on Monday. USD/JPY is likely to pull back from its recent surge, especially if flight to quality re-establishes precedence. EUR/USD is higher for a second consecutive day, however, pulled back a bit following the release of the Beige Book. Tomorrow’s preliminary GDP is expected to show a 1% improvement from the advance reading. Any potential surprise is likely to the downside, which should yield some USD selling pressure. Only time will tell if the USD can maintain its recent momentum, or if the past two days have been nothing more than a rest-stop on the path of sustained deterioration.