(Headlines - scroll down for full stories)
1. Paulson Revives Plunge Protection Team
2. Housing Market Drags Down Economic Growth
3. Looking to Invest in Real Estate? Go Commercial
4. Falling Gas Prices Boost Consumer Confidence
1. Paulson Revives Plunge Protection Team
Secretary of the U.S. Treasury Henry Paulson is reportedly reviving the
so-called Plunge Protection Team, says the New York Post.
The Plunge Protection Team is officially known as the President's Working Group
on Financial Markets. In the event of a stock market crash, the President
consults the Working Group for advice on whether to close the markets or wait
out the storm.
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The Group generally includes the Treasury Secretary, and the Chairmen of the
Federal Reserve, the Securities and Exchange Commission, and the Commodity
Futures Trading Commission.
President Reagan formed the Working Group following the Crash of '87 when the
Dow fell 508 points, or 22.6 percent. At that time, it was the largest drop in
U.S. history. Following 9/11, the stock market has fallen more in terms of
points, but not in percentages.
"The Working Group's main goal, officials say, would be to keep the markets
operating in the event of a sudden, stomach-churning plunge in stock prices -
and to prevent a panicky run on banks, brokerage firms and mutual funds," writes
the Washington Post in a 1997 article.
"Officials worry that if investors all tried to head for the exit at the same
time, there wouldn't be enough room - or in financial terms, liquidity - for
them all to get through. In that event, the smoothly running global financial
machine would begin to lock up," explains the Washington Post.
Conspiracy theorists say that the PPT pours money into crashing stock markets to
try to prop them up. That's somewhat true, but they don't do it by buying
stocks. According to the WP account of 1987, "The Fed kept the markets going by
flooding the banking system with reserves and stating publicly that it was ready
to extend loans to important financial institutions, if needed."
The Wall Street Journal, points out the New York Post, recently reported that
Treasury Secretary Paulson is meeting more frequently with the PPT - every six
weeks rather than every few months.
"Since taking the reins in July, the Wall Street veteran has reinvigorated the
President's Working Group on Financial markets, which had languished," says the
Journal article.
The New York Post says that it's "interesting that now - seemingly out of the
blue and far removed from any obvious crisis - Paulson is activating the Plunge
Protection Team."
So why is Paulson seemingly preparing for a crisis? Perhaps Paulson is just
being cautious. The Dow Jones industrial average after all has broken through
the 12,000 mark for the first time in history. The index has climbed almost 20
percent in the past year alone amidst a slumping housing market, rising fuel
prices, and geopolitical tension.
Is that a recipe for a crash? At least Henry Paulson is preparing for the
possibility.
Editor's Note:
2. Housing Market Drags Down Economic Growth
Economic growth slowed to a crawl in the third quarter, advancing at a pace of
just 1.6 percent, the worst in more than three years.
The latest snapshot of the economy, released by the Commerce Department on
Friday, showed that the slumping housing market figured prominently in the
economy's dramatic loss of momentum. Investment in homebuilding was cut by the
biggest amount since early 1991.
The reading on gross domestic product was weaker than the 2.1 percent pace many
economists were forecasting.
Gross domestic product measures the value of all goods and services produced
within the United States and is considered the best barometer of the country's
economic standing. Friday's report provided the last GDP reading before the Nov.
7 elections.
Economic matters are expected to influence voters' choices when they go to the
polls. President Bush's approval rating on the economy is at 40 percent, among
all adults surveyed in an AP-Ipsos poll. That remains near his lowest ratings.
The people surveyed trusted Democrats more than Republicans to handle the
economy.
The third quarter's 1.6 percent growth rate was the weakest since the first
quarter of 2003, when the economy grew at a 1.2 percent annual rate.
The latest performance underscores just how much speed the economy has lost this
year.
In the opening quarter, the economy grew at a brisk 5.6 percent pace, the
strongest growth spurt in 2 1/2 years. But growth slowed to a 2.6 percent pace
in the second quarter as consumers and businesses tightened the belt in response
to the toll of rising energy prices and the impact of two-plus years of rising
borrowing costs.
In the third quarter, consumers held up well, though. They boosted their
spending at a rate of 3.1 percent, up from a 2.6 percent pace in the second
quarter.
Businesses, meanwhile, increased spending on equipment and software at a 6.4
percent pace in the third quarter, an improvement from the 1.4 percent rate of
decline in the second period.
The economy's softness in the third quarter stemmed in large part from the
cooldown in the once-hot housing market.
Spending on home building dropped at a rate of 17.4 percent in the third
quarter. That was the biggest drop since the first quarter of 1991 when such
spending was sliced at a 21.7 percent pace.
Weak inventory building by businesses and the bloated trade deficit also played
roles in weighing down economic activity in the third quarter.
An inflation gauge tied to the GDP report showed that core prices -- excluding
food and energy -- advanced at a rate of 2.3 percent in the third quarter, which
was down from 2.7 percent in the second quarter.
Over the last 12 months, however, this inflation measure rose by 2.4 percent,
the largest annual increase since 1995.
Energy prices, which had surged in the summer, have since calmed down.
Gas prices are now hovering around $2.23 a gallon nationwide, compared with more
than $3 a gallon in early summer. Oil prices are now just over $61 a barrel,
down from $77.03, a record high close in mid-July.
That is supposed to help ease inflation and lead to better economic activity.
Lower energy prices leave people and companies with more money to spend on other
things. If they spend and invest, that adds to economic growth. Many economists
believe the economy will do better in the current October-to-December quarter,
perhaps clocking in close to 3 percent.
The Federal Reserve held interest rates steady on Wednesday for the third
meeting in a row. The Fed had hoisted rates 17 times since June 2004 to fend off
inflation. The Fed's goal is to slow the economy sufficiently to thwart
inflation but not so much that it tips into recession.
© 2006 Associated Press.
Editor's Note:
3. Looking to Invest in Real Estate? Go Commercial
The slump in residential real estate won't wipe out commercial real estate
growth, says Investors Business Daily.
"Residential and commercial real estate are entirely different asset
categories," Dennis Yeskey, national director of real estate capital markets for
Deloitte Services, tells IBD. "Residential is a personal investment driven by
your job, your income and where you want to live. On the commercial side, people
buy and sell based upon their return on investment."
According to Merrill Lynch, investors have invested $4.6 billion into real
estate mutual funds, which primarily invest in companies that invest in
commercial real estate such as apartment building developers, office buildings,
shopping centers, hotels, etc. Assets in those funds have exploded from $17
billion to $69.3 billion year to date, says IBD.
REITs have returned almost 30 percent, including dividends, year to date as of
October 23, according to the National Association of Real Estate Investment
Trusts. Compared to anemic sales and plunging prices in the residential real
estate market, that's a great return.
Specifically, IBD says the most opportunity is in the office sector. The job
market is rebounding following the aftermath of 9/11. That's allowing building
owners to hike rents, on average, by 6.3 percent this year, according to real
estate research firm Reis. That's almost double last year's growth, says IBD.
According to Yeskey, big markets such as New York are seeing 15 percent
increases in office rents.
IBD also points out that there isn't a glut of commercial property on the market
like there is with residential homes.
"Frequently what happens is there's a lot of pent-up demand for housing, and a
lot of good home building companies will race to buy land," said Jahn Brodwin, a
partner with the Schonbraun McCann Group, a New York-based real estate adviser,
to IBD. "But once in a while supply and demand get out of balance and you have a
correction. That's where the single-family home market is now."
"The residential market is backing up," says Yeskey. "But the commercial
market's going the opposite way."
Editor's Note:
4. Falling Gas Prices Boost Consumer Confidence
U.S. consumers' mood brightened by more than expected in October, a report
showed Friday, as their view of both future and current conditions improved on
the back of lower gasoline prices.
The final October reading of the University of Michigan's consumer sentiment
index was 93.6, up from a preliminary 92.3 and September's final 85.4, said
sources who saw the subscription-only report.
The median forecast of Wall Street economists polled by Reuters was for a final
October reading of 92.5.
"The consumer is doing OK. The housing market is OK and the consumer has been
helped by lower prices at the pump and energy prices, while the employment
numbers are still good. We will continue to see the consumer contribute here,"
said David Straus, portfolio manager at Johnston Lemon Inc. in Washington.
The survey's index of current conditions climbed to a final 107.3 in October
from a preliminary 106.1 and from 96.6 in September, while consumer expectations
rose to 84.8 from a preliminary 83.4 and 78.2 in September.
Consumer spending accounts for about two-thirds of U.S. economic activity but in
recent years confidence measures have been a weak guide to actual spending.
Expectations for inflation were virtually unchanged from September, the report
said, according to the sources.
The survey's final October reading on one-year U.S. inflation expectations was
3.1 percent, up from a preliminary 2.9 percent, but unchanged from 3.1 percent
in September.
Median expectations for inflation over a five-year horizon were unchanged from
early October at 3.1 percent but were fractionally higher than September's 3.0
percent.
Government bonds were little moved by the data, with prices holding at higher
levels after an early boost from surprisingly weak preliminary data on third
quarter U.S. gross domestic product growth.
The first reading of third-quarter GDP showed a 1.6 percent increase, falling
short of an expected 2.2 percent rise and below the 2.6 percent advance of the
second quarter.
"There is this exhaustion about which way the economy is going right now, or
maybe it's contentment that yields are where they need to be right now," said
T.J. Marta, fixed income strategist at the Royal Bank of Canada Capital Markets
in New York.
© 2006 Reuters.
Editor's Note:
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