Investing Daily

In an interesting earnings twist, shares of Ambac have risen almost 150 percent since July 29 after the company announced that it had settled almost $1.5 billion in collateralized debt obligations (CDO) and that its net income rose to $823.1 million in the second quarter. However, that gain was booked using a different accounting rule than it’s previously held to, so the increase is reflective of that accounting change rather than any improvement in the business. Ambac’s credit enhancement production, a measure of its new business, actually fell 95 percent in the quarter to $19 million.

The reductions come after the Federal Deposit Insurance Corporation (FDIC) reiterated guidance in late June that financial instituations could only reduce HELCOs under a very rigid set of circumstances, such as when there’s a drastic change in home values. What was first seen as an important step toward protecting consumer financial wherewithal, the guidance appears to have opened the door to HELCO reductions because lenders have a clear understanding of how to go about it. As long as the drop in value can be clearly documented and the consumer receives ample notice of the change in the credit line, lenders are in the clear to make fairly drastic reductions.

Freddie Mac also posted its fourth straight quarterly decline, losing $821 million, or $1.63 per share, in the second quarter. That’s forced the troubled mortage lender to slash its dividend from 25 cents to 5 cents or less per quarter. Freddie took $2.8 billion in credit-related expenses as it wrote down the value of many subprime, low-quality mortgages.

Troubled US automakers may catch a break, however, as John Dingell (D-MI), chairman of the House Energy and Commerce Committee, asked the government to speed up rules that would free $25 billion in government loans to convert General Motors, Ford Motor and Chrysler factories to build alternative-fuel cars. The loans would come under the auspices of the US Dept of Energy, though it looks like a long shot. Still, it would help revive the ailing industry, and the beneficiaries would have 25 years to pay them off with interest rates set at the cost of funds to the Dept of Treasury for obligations with compared maturities. Given the massive losses coming out of the sector, the companies would never be able to find such favorable terms anywhere else.

Finally in corporate news, Citigroup announced that it would buy back $7.3 billion in auction rate securities, which had been marketed essentially as money-market securities with little chance of losses. But after the major players stepped out of the game, the auction rate market dried up, leaving millions of investors holding the debt with no way to sell it. The buyback program will mainly benefit individual investors and small- to medium-sized businesses, and it’s coming about to settle fraud changes in state and federal investigations. Several other major Wall Street players are expected to follow suit.

Consumers borrowed twice as much as expected in June, as consumer credit rose by $14.3 billion to $2.59 trillion. Total consumer borrowing accelerated at a 6.7 percent annual rate after gaining 3.8 percent in May. Revolving debt, such as credit cards, gained $5.5 billion and non-revolving debt, such as auto loans, rose by $8.8 billion. As banks restrict HELOC, consumers are increasingly turning to loans and credit cards to make ends meet. May’s borrowing number was also revised upward, rising by $8.1 billion versus the first reported $7.8 billion.

The number of American workers making initial filings for unemployment benefits spiked last week to a six-year high as the labor market continues to weaken, with a net rise of 7,000 claims to 455,000. Continuing claims rose by 31,000 to 3.3 million. The extended federal benefits program may continue to contribute to the rise as the government continues to find workers who still qualify for benefits under state programs, which workers must exhust before qualifying for federal dollars.

There’s some positive news for the real estate market. Pending home sales jumped 5.3 percent in June, with the index rising to 89 from a downwardly revised 84.5 in May. Much of the activity was related to purchases of foreclosed properties at bargain basement prices, though we may see the number continue to improve after the government makes tax credits available to first-time buyers through its housing stimulus bill.

Mortgage applications also increased last week, with the Mortage Bankers Association reporting that its mortgage application index rose 2.8 percent, though the index is down 33.7 percent compared to the same period last year. Applications to refinance rose 4.4 percent while purchase applications were up 1.8 percent.

The interest rate on 30-year fixed-rate mortgages averaged 6.41 percent last week, down from 6.46 percent the previous week. The rate on 15-year fixed-rate mortgages climbed to 6.02 percent from 5.98 percent, and one-year adjustable rate mortgages (ARM) averaged 7.17 percent, down from 7.25 percent.

The Federal Open Market Committee (FOMC) decided not to change the current benchmark rate of 2 percent at its meeting this week, while indicating that, barring exigent circumstances, it would hold at this level at least through the end of the year. In its statement, the Fed said that inflation concerns preclude further cuts while the economy is still too weak for increases.

The news helped the dollar touch its highest level in almost seven weeks against the euro. The rate decision was coupled with an increase in factory orders.

June factory orders jumped 1.7 percent, up 2.3 percent with weak transportation-related orders backed out, once again driven by rising food and energy prices as well as a weak dollar. Non-durable goods orders rose 2.5 percent in the month and are up 12.3 percent so far this year. Durable goods took their biggest jump since February, rising 0.8 percent.

US retail same-store sales reportedly grew 2.6 percent in July, its smallest gain since March, according to the International Council of Shopping Centers. The trade group also said that it anticipated the slowest back-to-school shopping season since 2001 as the effects of the tax-rebate checks continue to wane.

Wal-Mart saw sales at stores open more than one year rise 3 percent in July. Sales at Costco and Target were up 10 percent and down 1.2 percent, respectively. Consumers continue to opt for lower-priced options as their wallets continue to get pinched by the weak economy.

We’ll be getting some interesting data this week, with import and export price reports as well as the consumer price index and consumer sentiment data. This should paint a clearer picture of the inflation situation over the last month, as well as provide some guidance on what sort of consumer behavior we can expect in the near term.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government.

Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011364 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., publisher of Friday Market Wrapup, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.