Market Condition Week of October 8,2007

>> Review of Last Week

 This week on Wall Street, the truth came out on several fronts, with net positive results in all cases. True confessions began Monday with Citigroup putting a $3.4B loss from fixed income investments into Q3 and UBS taking a pretax loss of $690 million. Investors rewarded this financial candor by bidding Citi shares up $1.05 to $47.72 and UBS $1.69 to $59.94 in a big rally that pushed the Dow back above 14,000. What gives? Citi's CEO said he expected to "return to a more normal earnings environment" in Q4. What this really means is, in Wall Street's colorful parlance, Citi "kitchen-sinked" the quarter, throwing all the bad stuff on the table now so they can put it behind them and move on. The market looked at the numbers and said, ok, this isn't Armageddon-if this is the extent of the damage, we can live with it- which shows you how insignificant $3B is in the 21st century.

More economic truth came out Friday with the Labor Department's September Employment Report. There were 110,000 new jobs for the month, 10,000 more than expected. July and August figures were also revised to their true levels-93,000 new jobs in July, 25,000 more than the initial report. And the true August figure was an 89,000 gain in jobs, not the loss of 4,000 jobs originally reported. Average hourly earnings were up 4.1% and unemployment was just a tick above August at 4.7%.

Now truth be told (to continue our theme), 37,000 of those new September jobs were in government, mostly local teachers. So private sector job growth was only 73,000. Nonetheless, this report makes it hard to sell a recession. Fact is, when the credit issues get behind us, the economy is basically OK, fairly solid in fact, and we have great global growth. This good news pushed bond prices lower and home loan rates up a bit. It's now harder to see a rate cut for Halloween (when the Fed's next meets), although super bullish types argue things aren't so good that we shouldn't get one.

The week's final bit of truth-telling came with Merrill Lynch fessing up to a multi-billion dollar write-down for Q3 due to credit market turmoil and Washington Mutual charging off loan losses that cut their net 75% from a year ago. This honesty was rewarded with a $1.89 per share hike for Merrill and 79 cents a share for WaMu. The Dow ended the week at 14,066.01, up 12.9% for the year and the NASDAQ at 2780.31, up 15.1% for the year.

A bellweather for mutual funds and the Street's most important index, the S&P 500 ended at a record 1,557.59. If that weren't enough good news for us, oil ended the week down 22 cents at $81.22 a barrel-it's TRUE!

>> This Week's Forecast

ARE YOU GOOD AT READING TEA LEAVES?  OK, then how about deciphering the minutes from the last FOMC meeting that delivered the big rate cuts? On Tuesday the Fed will release those minutes, so pundits can pore over the language and debate what it all means-especially for inflation, credit availability and economic growth.

For those of you who prefer clarity to conjecture, the week will also give us some cold hard numbers to ponder. Retail Sales figures for September will be out Friday before the bell rings on Wall Street and these could have high impact on the outlook for interest rates and the economy. Of only slightly lesser importance are the Producer Price Index reports coming out at the same time.

Investors will also be looking at Q3 reports from some big corporate players. They'll  chew on numbers from YUM! Brands, as well as Alcoa, Monsanto, Costco and General Electric. By the way, the bond market is closed today for Columbus Day, but the others are going full steam.

>> The Week's Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of Oct 8 - Oct 12

>> Home Base

INFO THAT HITS US WHERE WE LIVE  Well, Tuesday saw some less-than-great news for the housing market, as the National Association of Realtors reported Pending Home Sales fell in August 6.5% from July. This was larger than expected and a 21.5% drop from a year earlier, the lowest reading since they began tracking these figures back in January 2001. But let's step back and look at the bigger picture.

Housing is still a phenomenal investment. It took 17 years, from 1980 to 1997, for the average American home to double in value, but only 10 years, from 1997 to 2007, for it to double in value again. And, of course, while their investment grows in value, homeowners get an income tax break from their real estate taxes and mortgage interest-PLUS a great place to live!

Finally, let's remember, key to the health of the real estate market is the health of the job market. In the last five years, over 7 million workers have been added, pushing our workforce to 138 million people. As this week's employment report shows, job growth continues, as it has for 49 consecutive quarters, the longest run in our history. So even though we're in a down cycle in housing, we can assure ourselves that we have the underlying strength in jobs needed to work our way out!

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. This week's better than expected employment report has most experts expecting the Fed to stand pat on rates this month. But this has caused more Fed watchers to forecast a cut in December.

Current Fed Fund Rate: 4.75%

Odds of change from current policy: