Interest Rate Roundup

Tuesday, August 14, 2007

Back in the office

My family's nice, relaxing vacation is over and now it's time to get back to business. I won't rehash everything that's happened the past few days, but I would like to comment on a few things ...

First, the outlook for retail spending looks a little bleak, judging by a pair of earnings reports today.

Wal-Mart Stores lowered its profit forecast, saying "Our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us ... For the remainder of this year, our management team is focused on inventory improvements, delivering quality products at low prices, and store execution at the highest standards."

Home Depot, for its part, said second-quarter earnings fell 15%. Earnings per share may fall up to 18% this year, with the company continuing to cite a "challenging housing market" and a "tough selling environment."

Second, is it just me or does this market continue to play out like 1998? Back then, it was the rocket scientists at Long-Term Capital Management that blew the markets up. This time, it's a bunch of hedge funds that are getting blown up by computer models that refuse to play nice. Goldman Sachs (along with a couple of investors) has decided to throw $3 billion at one of its failing funds, which pulled off the amazing feat of losing 30% of its value in a week, according to the New York Times.

Third, we're seeing another mortgage firm in the line of fire this morning. Five brokerage firms have cut their ratings on Thornburg Mortgage over liquidity concerns. The company is a prime credit quality, jumbo mortgage originator and loan investor, not one that plays in the subprime arena. In other words, we are getting even more evidence of just how un-contained the supposedly "well-contained" mortgage problem really is.


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