Panic mode?

Is the market capitulating? Everything is signaling that the market may switch to panic mode. The news flow is really bad so lets start with the more positive news first.

Japan's exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, easing concern that a slowdown in the U.S. will cool the economy's expansion. Shipments to the European Union surged 23.7 percent to 1.14 trillion yen, also the highest ever, today's report showed. Although exports to the U.S. fell 1.5 percent to 1.5 trillion yen the trend is up with a moderation from September's 9.3 percent drop.
In the US earnings reports were mixed again, but Deere, the world's largest maker of tractors and harvesters, said fourth-quarter profit climbed 52 percent, as demand outside North America countered slowing sales of construction equipment. Among retailers Abercrombie & Fitch said third-quarter profit rose.

On the housing front The National Association of Realtors saw the median price of single family homes down 2 percent in the third quarter. That is a less pronounced fall than reported by the closely watched Case/Shiller home price index. In addition they reported that in most municipalities home prices actually increased. Despite the median price decline homeowners have a median equity gain of 38.8 pct on their homes in the past six years.

Treasury Secretary Paulson said in Tokyo the number of potential U.S. home-loan defaults "will be significantly bigger" in 2008 than in 2007, because 2006 mortgages had lower underwriting standards, no amortization, and no down payments. What else is new. He is "aggressively encouraging" the mortgage-service industry to provide help "broadly" to struggling borrowers of resetting adjustable rate loans, instead of an earlier strategy of handling problems individually case-by-case. Currency traders in Tokyo cited Paulson's comments as a factor in the dollar's fall to a two-year low against the yen.

The Fed minutes of its end October meeting was in focus yesterday and reverberates overnight into todays markets. The Federal Reserve's first set of quarterly economic forecasts fueled speculation that it will cut interest rates again, contrary to warnings by policy makers in the past two weeks. The focus in the minutes is on the downside risks to growth, which contrasts with an optimistic inflation forecast. The dollar plunged and Commodities surged after the release of the minutes. Futures contracts on the Chicago Board of Trade showed a 90 percent chance the Fed will lower its target rate a quarter- percentage point to 4.25 percent next month and 77 percent odds of a further cut to 4 percent in January.

Bank of England members Blanchflower and Gieve voted for a cut in interest rates, as revealed by the minutes of the November meeting, on fears that money markets may become tighter as the credit crunch persists. This underscores how important credit markets are these days for central bankers decision making. The Fed between a rock and a hard place will not have much of a choice but to lower rates on its upcoming meeting. It will be interesting to see what policymakers have to say next week on their busy schedules.

FRE reported a 2 billion dollar loss on their mostly prime mortgage portfolio yesterday, which tanked the stock and the entire market with it. Freddie Mac may need to raise as much as $6 billion to bolster its capital by slashing its dividend or selling preferred stock. Fannie Mae last week raised $500 million from the sale of preferred stock after reporting a third-quarter loss of $1.4 billion. A preferred stock sale that would be meaningful to manage their capital comfortably would most likely result in a ratings downgrade. Bond insurer MBIA last month halted its share buyback after reporting its first ever loss. Citigroup also suspended its stock repurchases. California-based mortgage lender Countrywide sold $2 billion of preferred stock to Bank of America Corp. in August.

The financial services industry is shoring up their capital ratios to weather the storm that is brewing over their heads. Mortgage insurers are further under scrutiny on the adequacy of their capital base and their potential losses. ACA Capital Holdings will likely be the first bond insurer to have its credit rating cut, forcing banks to take on as much as $60 billion of collateralized debt obligations. This would have widespread implications not only for banks but also for municipalities which have their bonds insured with these institutions. ACA has insured bonds with a par value of $7.1 billion.

Mitsubishi Financial, Japan's biggest publicly traded bank, posted a 63 percent decline in second-quarter profit on losses at a credit-card unit and investments in the U.S. mortgage market. Losses on investments related to subprime U.S. lending swelled to 23 billion yen at the end of October, from 20 billion yen a month earlier. Losses on such investments erased 4 billion yen of profit in the first half. Mizuho said last week credit market losses may swell to 170 billion yen this year. Wall Street's largest firms have reported $50 billion in writedowns so far.
Further underscoring the global and far reaching nature of this financial crisis comes from Norway. The Norwegian government has launched probes into loss-making U.S. investments made by Norwegian towns. They bought notes, which were based on debt issued by U.S. cities and states. To boost returns the mostly high grade investments were leveraged by short-term loans taken out by the four towns.

In the meantime market internals are deteriorating. The three-month London interbank offered rate for pounds, which shows the cost of lending between banks, rose to a two-month high of 6.52 percent today. The London interbank offered rate for dollars climbed 2 basis points today to 5.02 percent, the highest since Sept. 18. Three-month Libor for dollars has increased to 1.89 percentage points more than Treasury bill yields of the same maturity. The TED spread is the widest since Aug. 21 and up from 0.94 percentage point on Oct. 15.
In morning trade Treasuries surged, sending 10-year note yields below 4 percent for the first time in more than two years, as a decline in global stocks spurred demand for the safety of government debt. The spreads on two-year U.S. interest rate swaps widened to record levels Tuesday on growing credit fears and rising short-term interbank loan rates. The two-year swap spread traded as wide as 101.25 basis points before settling at 97 basis points versus 96 on Monday. The last record spread was 97 basis points in March 1989, during the savings-and-loan crisis.

Asian stocks fell sharply Wednesday as concerns spread that the U.S. economy would continue to weaken. The Nikkei 225 stock index sank 373.86 points, or 2.46 percent, to close at 14,837.66 points, its lowest point since July 24, 2006. Since the start of November, the index has dropped 13.1 percent. Hong Kong's benchmark Hang Seng index tumbled 1,153.02 points, or 4.15 percent, to 26,618.19.

In Europe, major markets were also lower in midday trading. France's CAC-40 fell 2.01 percent, London's FTSE 100 Index fell 1.4 percent, and Germany's DAX was down 1.74 percent. European bank shares led the decline. The Markit iTraxx Financial Index, a benchmark for the cost of protecting the bonds of European banks and insurers, rose 6 basis points to 63.5, the highest since its start in 2004. Icelandic banks have the highest risk of default among European lenders. Barclays and Zurich-based UBS have the biggest risk outside of Iceland. Contracts on London-based Barclays, which last week reported writedowns of about $2.7 billion, have risen to 70 basis points, a tenfold increase since June. UBS, which announced $4.4 billion of writedowns last month, rose 2 basis points to 66.
The cost of contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 17 basis points to 402 basis points, the highest since August.

In the currency markets the yen climbed as high as 108.89 per dollar overnight, the strongest since September 2005. It has risen 5.7 percent against the dollar and 3.2 percent versus the euro this month. The dollar fell to $1.4856 a euro today, the weakest since the single European currency's debut in 1999.

Ahead of a report of crude inventories crude oil rose above $99 a barrel for the first time as a slumping U.S. dollar made crude cheaper to foreign buyers. Futures rose to within 71 cents of $100 as the dollar fell on speculation the Federal Reserve will cut interest rates for a third time this year.