Thanksconsuming Day

The Consumer was out and shopping over the weekend lured by deals on everything from Consumer electronic to apparel. According to ShopperTrak, which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about US$10.3 billion on Friday, the day after Thanksgiving compared with US$9.5 billion on the same day a year ago. ShopperTrak had expected a rise of no more than 4 percent to 5 percent. Internet research firm comScore reported a 22 percent gain in online sales on the day after Thanksgiving compared with the same day a year ago and estimated online sales would exceed $700 million online Monday, the official kickoff to the online shopping season.

Despite all the deals the costs for the holiday weekend are the highest in several years, with inflation just lurking around the corner. Merrill Lynch calculated a Thanksgiving cost-of-giving index using the prices of traditional holiday meal items such as turkey, cranberries, sweet potatoes and pumpkin pie, as well as the cost of flowers, gifts ranging from toys to clothing and electronics, plus gasoline, hotels, air fare, and greeting cards. The index has risen 7.9 percent year-over-year in the approach to the festive season, a huge swing from a drop of 4.4 percent a year ago. This is more than double the historical trend for this time of year and the second highest since 1999.

Overshadowing all the good news from the retailers are bad news on the credit front. A report by credit market analysts at Morgan Stanley states systemic financial risk is inordinately high. They also refer to Standard & Poor's estimate that total losses on subprime mortages could be up to 14 per cent. The report describes the number of downgrades of residential mortgage-backed securities as "shocking", saying agencies had taken 8000 ratings actions in 190 days from May 1. "Lack of investor confidence in credit ratings destabilises the system. AAAs are not AAAs," the analysts say. If this would not be enough already the report says they do not feel the accommodative central bank policy will fix the deep structural issues in the system."

Others are more optimistic. Thomas Barrack Jr., who founded Los Angeles-based Colony Capital in 1991 and purchased loans at discount prices during the U.S. savings and loan crisis, says it may soon be time to buy asset-backed securities. Colony isn't interested in buying subprime mortgages, instead might purchase beaten down securities backed by sufficient collateral such as loans to finance leveraged buyouts. ``The asset-backed derivatives market is still a falling knife and it will take a few quarters to narrow the gap between sellers' hopes and buyers' expectations,'' Barrack said in the Nov. 16 interview.

Over the weekend a Wall Street Journal report took aim at the looming problem of mortgage resets due to adjustable rate mortgages. In 2008 interest rates will be reset upward on $362 billion worth of adjustable-rate subprime mortgages. FDIC Chairman Sheila Bair is urging lenders to find ways to help borrowers keep their homes, and the issue is becoming a talking point among presidential and congressional candidates. The Mortgage Bankers Association estimates that 1.35 million homes will enter foreclosure in 2007 and another 1.44 million in 2008, up from 705,000 in 2005. The anticipated supply of foreclosed homes could add four months to the existing homes inventory and lead to a "fundamental shift" in the housing supply, according to Bear Stearns.

According to some a combined effort of politicians and lenders will be necessary to prevent a total collapse of the housing market. Some politicians are taking concrete steps. One of them is the governer of California. He has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market. Under Mr Schwarzenegger’s deal the four lenders Countrywide Financial, GMAC, Litton and HomeEq will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure. Federal officials are seeking further information on the California deal and could not indicate whether there might be any potential to extend this specific solution either state-by-state or nationally.

The mortgage problems are mirrored in a freezing up of the credit market. Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up. The Federal Reserve is also providing more liquidity. The London Interbank Offered Rate or LIBOR, the lending rate banks charge each other, is still going higher. It is thirty basis points above its target, yet the gap is not as wide as in August.

Banks are still in the news on both sides of the Atlantic. French bank Natixis dropped 3.7 percent after it put the cost of the credit crisis at 407 million euros for its third-quarter results. Citigroup is planning major job cuts over the coming months to save costs, CNBC television reported on Monday. The cuts could total anywhere between 17,000 and 45,000.

Freddie Mac, the U.S. mortgage finance company that stunned Wall Street with a $2 billion quarterly loss earlier this week, plans to sell $5 billion of preferred stock in a deal to be launched as early as next week, the Wall Street Journal said on Friday. A spike in credit losses could result in Moody's downgrading the ratings on Freddie Mac's bank financial strength, subordinated debt and preferred stock ratings.

HSBC, Europe's largest bank, will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings. HSBC said it doesn't expect any "material impact'' on its earnings or capital strength. HSBC's SIVs have more than $34 billion of senior debt, according to Moody's Investors Service, making it the second- largest bank sponsor of SIVs after Citigroup. The bank set aside $3.4 billion in the quarter to cover U.S.defaults from subprime loans, $1.4 billion more than it forecast in July. HSBC is the second bank to restructure its SIVs. Dusseldorf- based lender WestLB AG provided a credit facility to Kestrel Funding. HSBC's actions will restore a degree of confidence to sector, while providing a specific solution for investors in SIVs.

A group of investors led by pension fund Caisse de Depot et Placement du Quebec signed the so-called "Montreal proposal,'' accepting a standstill agreement while pursuing a restructuring of their CP market. The group is about to restructure about C$34 billion ($34.4 billion) in Canadian commercial paper and may meet its December deadline.

One of the major victims of the credit market turmoil is widely believed to be the dollar. As Investors and businesses have to deal with the dramatic demise of the dollar, the voices of dissent are becoming ever louder. From China to oil rich nations in the Gulf to European politicians and business nobody seems to be happy with this development in the world's reserve currency. After French premier Sarkozy warned of coming economic wars Airbus CEO Louis Gallois said that that the company must make additional savings of 1.5 billion euros due to the weak dollar. Earlier he warned that the level of the euro against the dollar threatened the life of the company, and that he might have to access funds provided by the government to cope with this situation.

The Canadian currency has also gained 21 percent this year and more than 59 percent against its U.S. counterpart in the past five years, prompting economists to slash their growth forecasts. The government of Quebec, where much of Canada's factory sector is based, on Nov. 23 said it will free up $628 million to help its manufacturers adapt to the new reality. The Bank of Canada, meanwhile, is hinting it may be poised to lower its 4.5 percent benchmark interest rate.

European officials are visiting in China this week. China Premier Wen Jiabao told French President Nicolas Sarkozy that the yuan's fall against the euro was due to the euro's rise in international markets. Wen also told Sarkozy that China will boost the flexibility of the yuan and push forward its foreign exchange reforms. China isn't in pursuit of an overly large trade surplus but seeks balanced trade, according to Liu Jianchao, spokesman for China's Ministry of Foreign Affairs. In a take it and give it EADS, the parent of planemaker Airbus, gained 2 percent after CEO Louis Gallois said the company has signed a framework agreement with China to sell 160 aircraft in a deal worth $16.7 billion at list prices.

Over night Japan's Nikkei was up 1.6% buoyed by strong retail sales and a resilient US consumer and Dubai International Capital took a "substantial" stake in Sony. Hang Seng jumped 4%. The only exception in Asia was the Shanghai Composite index down 1.4%. Europe traded higher in the morning but followed US futures lower. With central banks providing massive liquidity and credit markets worse than in August by some measures, it seems unlikely for stocks to move higher. Coming FED speak this week will also provide further insight, but with credit markets seizing up again one has to wonder about the efficiency of policymakers in this current financial episode.