1) Ford Motor Company warned that their earnings would suck and also that they'd be cutting more jobs. As a result of this the Street expects their bond rating to be cut to BB-, or junk bond status. Thier stock dropped 4.5% today. GM fell 3%. Wonder what this means for the hedge funds. Did they bet on the wrong side of this one again?
2) The 10 year treasury bond fell under 4% yield again (3.945). This number is significant psychologically and it puts it within 23 basis points of the 5 year bond which is at 3.71%. According to economists, a flattened yield curve portends bad economic times ahead. This is a global phenomenon. Western and European bonds are all at historic low yields, the German ten year yield is at 3.114% and the UK ten year yield is at 4.21%.
News from Europe today indicated that they would begin lowering rates. This fueled rumours that there is a major slowdown in economic growth coming out of Europe and that it could effect the United States. Is this a spreading of the asian contagion, Japan's economy is sloooooow, now Europe, are we next?
3) Morgan Stanley reported that they would see a 24% drop in profit. They claim that rising costs of their equities trading, retail investors leaving the market earlier than usual during the summer, legal costs and equity underwriting all suffered. Who cares? Hey its Morgan Stanley, they're huge! 24% Yow!
4) Standard and Poors is downgrading mortgage debt of the type that consists of optionable ARMs, where a borrower can choose a variety of monthly payments. The minimum payment is one where they pay down none of the interest. These are popular in overheated markets where buyers are clammoring for houses. They are also the ones most likely to default. If defaults begin to occur the economy will suffer.
I went to a bookstore today and noticed the magazines. A lot had cover stories of the housing boom and coming bust: Economist, Atlantic Monthly and New York Magazine (nobody wants to be left in the dust for having not called such an obvious bubble burst). How long before home buyers start noticing the writing on the wall? Prices are all psychological. When buyers wake up to the fact that the 1 bedroom apartment is not worth $650,000 (I swear to god,
it's for sale less than a block from my house) two things will happen: 1) loan defaults and 2) plummeting prices. Having S&P downgrade mortgage loans will probably have a tightening effect so that those dumb enough to want to buy a $750k 1 bedroom apartment will no longer be able to and then the guy holding onto it, who bought it a year ago for $600k is screwed.
