A Melman Minute — January 30, 2008

Markets this morning are marking time until the Federal Reserve Board announces its decision on the future course of interest rates. Traders have been assuming that there will be a further drop in the Fed Funds rate in addition to the three-quarters of a percent announced last week by Fed Chairman Bernanke.

However, markets also received some new and perhaps unwelcome information to deal with in the form of the Department of Commerce’s report on the Fourth Quarter 2007 Gross Domestic Product (GDP) numbers which grew at an abysmal 0.6%, about half the growth which had been expected by economists. As the Associated Press story related, this poor figure reflected, “worsening problems in the housing market and harder-to-get credit which made individuals and businesses more cautious in their spending.”

For the entire year of 2007, GDP growth came in at 2.2%, the lowest figure since 2002, as it was beset by deepening housing problems, credit squeezes, subprime crises and shaky stock market performances.

The situation has deepened to the point where there is actual talk of cooperation between candidates of both parties in order to solve the economic dilemma. If only it were that easy!

What is immediately apparent is that this morning’s GDP report will certainly put additional pressure on the Fed to further reduce interest rates to get the economy moving forward, regardless of the risks to the dollar and to future inflationary pressures.

Of course, highest on the list of concerns is the ever-deepening housing crisis and the just-released December report of the California Association of Realtors (CAR) could barely have been more pessimistic. That state already leads America in the number of homes in foreclosure, presently estimated at near 400,000, and there is no sign of a turnaround in this report.

According to their data, home sales during December plunged to their lowest levels yet reached during this decline and now number 33.4% below the year-earlier figure and state-wide single family residences are now priced a whopping 16.5% below year-earlier levels, having fallen from a median price of US$569,350 in December, 2006 to US$475,460 in December, 2007 - a drop of about $94,000 per home! One can only wonder how many millions of homes now have mortgages greater than their re-sale value and also how many long-term homeowners are becoming fearful that the price declines will continue to ravage their net equity values.

Some prominent areas in California such as the High Desert, Northern Wine Country, Riverside/San Bernardino, Sacramento and Santa Barbara have all suffered through one- year median price declines of greater than twenty percent.

Markets this morning have a negative bias with precious metals lower (gold down to US$918), base metals slightly lower and securities markets also weaker. The U.S. Dollar is also down slightly while oil is fighting the trend and has risen back above the US$92.00 per barrel mark.

Yesterday, we published the chart of MBIA to show that the recovery rally so far remains modest at best and this morning we are including the yearly chart on the Dow Jones Industrial Average. As can be seen, all that has been accomplished by the Fed’s monumental interest rate exertions is to create a rally which has moved up only to the point of its previous breakdown.

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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