Federal Reserve Does The Twist

Daily Market Commentary for September 21, 2011

The Federal Reserve, acting in the face of a weak economic outlook, decided to start a program to twist the yield curve by swapping shorter-maturity government securities for longer-dated ones.
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The National Association of Realtors reported that sales of existing homes climbed 7.7% to a five-month high during the month of August, as previously delayed deals closed, prices fell and rental fees rose. Sales reportedly rose to a seasonally adjusted annual rate of 5.03 million, up from an unrevised reading in July of 4.67 million. Every region saw sales gains but the Northeast gain was limited by Hurricane Irene and compared to August 2010, existing homes sales surged 18.6%. The median home price was $168,300 which shows a decline of 5.1% from the same period last year. July prices were revised lower to $171,200 from an initially reported $174,000. Mortgage rates dropped to record lows, for the buyers who can access them. Despite the increase in August existing home sales, tight credit and tough appraisals led to the number of real-estate agents reporting at least one cancellation rising to 18% in August from 16% in July. In addition to buyers remorse, flood insurance and loan-limit issues may be playing a role in the heightened cancellations. Conforming loan limits are set to come down on October 1, and some lenders already are enforcing those new standards on concerns deals won’t close by that deadline. The gap between the price of new and existing homes was about $50,000, a particularly large gap because of the number of foreclosed properties on the market, during the month of July. Distressed homes accounted for 31% of the existing-home sales market vs. 29% existing-home sales in July, with foreclosures accounting for 19% of the existing-home sales market. All-cash existing homes sales stayed at 29% which suggest tight lending standards as well as interest from investors and bargain hunters. First-time existing homes buyers accounted for 32% of all deals during the month of August, the same as last month and well below healthy levels of nearly 40%. Existing homes for sale inventories fell 3% to 3.58 million units, representing 8.5 months of supply at current sales rates with seven to eight months as consistent with price stabilization.

Google Executive Chairman Eric Schmidt will be in the congressional hot seat today as a Senate antitrust subcommittee opens a hearing on whether the search giant squashes competition. Schmidt is expected to repeat denials that his company profits by punishing other web sites on its search engine. Google’s rivals will continue to argue that the Mountain View, California based company continues to act anti-competitively. “We believe Google has acted anti-competitively in at least two key ways: by misusing Yelp review content in their competing Places product and by favoring their own competing Places product in search results,” Yelp! Inc. CEO Jeremy Stoppelman will tell senators, according to his prepared remarks. The chief executive of Nextag and a former Justice Department antitrust chief who now represents travel web site Expedia will also testify today.

Two American hikers - Shane Bauer and Josh Fattal - accused of spying for the U.S. government have finally been released by Iranian authorities after spending more than two years in prison. The two were reportedly en route to Tehran airport Wednesday after each posted $500,000 in bail. The two men, along with a third friend, Sarah Shourd were arrested by Iranian authorities in 2009 while hiking along the Iran-Iraq border. An Iranian court subsequently sentenced the men to eight years in prison for espionage. Shourd was released last year on bail.

First Solar (NasdaqGS: FSLR) fell 7.6% as the worst-performing stock in the S&P 500 today. First Solar has three projects lined up to receive federal loan guarantees by the end of September however, a Congressional probe into federal-backed loans to energy companies "hits at a bad time". The probe is part of inquiries on Capitol Hill into the bankruptcy of solar panel make Solyndra. If the loan guarantees to First Solar are rejected, it could have a "material negative impact" on earnings forecasts but the company would likely be able to finance the projects without a loan guarantee at a higher cost of capital.

Per the International Monetary Fund, European banks face as much as a 300-billion-euro ($410 billion) hit from debt-ravaged countries as global financial conditions have become more unstable in recent months. The estimate comes as the IMF said risks to global financial conditions have risen for the first time since the aftermath of the collapse of Lehman Brothers in the fall of 2008. “We are back in the danger zone,” said Jose Vinals, director of the IMF’s capital markets department, at a press conference after the report was released. The financial crisis has lasted so long that central banks have limited room to provide additional stimulus and fiscal policy is handcuffed by strained balance sheets. “Against this backdrop, the crisis…has moved into a new, more political phase,” the IMF said. “This environment of financial and political weakness elevates concerns about default risk and demands a coherent strategy to address contagion and strengthen financial systems,” the IMF said The IMF’s estimate of the $410-billion hit to European banks does not measure the banks’ capital needs, which would require a full assessment of bank balance sheets and income positions, the IMF said. Some European banks urgently need to bolster their capital to mitigate the risks posed by this hit. “In view of the heightened risks and uncertainties – and the need to convince markets – some banks, especially those heavily reliant on wholesale funding and exposed to riskier public debt, may also need more capital,” the IMF said. Per the report, in current market conditions, it may not always be possible for banks to raise capital, so public backstops should be used to provide capital to banks as needed.


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