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Fri, October 27, 2006 02:18:59 PMFrom:
MoneyNews
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Paulson Revives Plunge Protection Team
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Paulson Revives Plunge Protection Team (Headlines - scroll down for full stories)
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. 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 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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