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| 2008
Summary of Commentary on
Current Economic Conditions
by Federal Reserve District
Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.
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| 1970 - present (on the web site of the Federal Reserve Bank of Minneapolis) |
Housing Assistance Tax Act of 2008
September 3, 2008
The single largest provision in the $15.1 billion package of housing tax incentives in the recently enacted Housing Assistance Tax Act of 2008 (the “Housing Act”) is a measure allowing individuals buying their first home to take a tax credit of up to $7,500 of the purchase price. Qualified homebuyers can subtract the credit amount from their federal income tax when they buy a home and even get a refund if the credit exceeds the tax. However, they are then required to pay the credit back over 15 years. The result is that the credit resembles an interest-free loan that must be repaid to the government. Here are the details of the new credit:
- The home must be located in the U.S. and must be the taxpayer’s principal residence (main home). The taxpayer (and the taxpayer’s spouse if married) must not have owned another principal residence in the U.S. in the three-year period before purchasing the new home. Thus, the home doesn’t literally have to be the taxpayer’s first home.
- The home must have been purchased from April 9, 2008 through June 30, 2009, inclusive. Purchases from certain related persons and acquisitions by gift or inheritance don’t qualify. A home constructed by the taxpayer does qualify if the taxpayer moves in from April 9, 2008 through June 30, 2009.
- A special rule allows taxpayers who purchase a principal residence in the first six months of 2009 to treat the purchase as if made on Dec. 31, 2008. This allows the taxpayer to claim the credit for 2008 rather than 2009.
- The credit is equal to 10% of the price paid for the home, up to a maximum of $7,500. The $7,500 maximum credit applies both to individuals and married couples filing a joint return. A married individual filing separately can claim a maximum credit of $3,750.
- The credit is phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. Taxpayers with modified AGI over $95,000 ($170,000 for joint filers) can’t claim the credit.
- The credit is refundable, meaning that households with incomes too low to owe income tax can benefit from it.
- In the second year after purchase, taxpayers who took the credit must start paying back the credit in equal installments over 15 years, with no interest charge. This works as follows. Suppose a first-time homebuyer purchases a home for $100,000 this coming December and claims the maximum credit of $7,500 on his 2008 tax return. He would then be required to pay back $500 (one-fifteenth of the credit) on his tax return for 2010 and for each of the following 14 years, through 2024.
- If the taxpayer sells the home (or the home ceases to be the principal residence of the taxpayer or the taxpayer’s spouse) before complete repayment of the credit, any remaining credit is due on the tax return for the year in which the home is sold (or ceases to be the principal residence). If the home was sold at a loss to an unrelated person, repayment of the remaining credit is forgiven to the extent of the loss.
- No credit is allowed if: the taxpayer was ever entitled to a D.C. homebuyer credit; the home purchase was financed through tax-exempt mortgage revenue bonds; the taxpayer is a nonresident alien; or the taxpayer disposes of the residence (or it ceases to be a principal residence) in the year of purchase.
Population Boom Will Drive Real Estate Industries
When the Census Bureau released population projections last month, more attention was paid to the country's changing racial composition than to the massive scope of the increase. What's clear is that the latest numbers will inevitably give the real estate business a boost.
The Census Bureau is projecting an increase of 135 million people in the U.S, a 44 percent rise, by 2050. That’s equivalent to the entire populations of Mexico and Canada moving to the United States.
The bureau estimates that this population boom, largely fueled by immigration, will require 52 million new housing units, along with more places for people to shop and work.
Source: The Washington Post, Steven A Camarota (08/31/2008)
Mortgage Applications Rise for Second Week
Mortgage applications rose last week for the second week in a row. They increased 7.5 percent on a seasonally adjusted basis to 453.1 from 421.6 the previous week.
On an unadjusted basis, the index increased 5.8 percent compared with the previous week and was down 27 percent compared with the same week a year ago.
The refinance index rose 2.1 percent and the purchase index was up 10.5 percent. The increases coincided with a decline in mortgage rates.
- 30-year fixed-rate mortgages decreased to 6.39 percent from 6.44 percent
- 15-year fixed-rate mortgages increased to 5.96 percent from 5.94 percent
- 1-year ARMs decreased to 7.11 percent from 7.15 percent
Source: Mortgage Bankers Association (09/03/2008)
Make big bucks from a rising dollar
The world of exchange-traded funds abounds with investments that can help you profit from the greenback's sudden rebound.
By Tim Middleton
The U.S. dollar is soaring in value, and investors who are playing the move are raking in huge gains.
Since lows of early spring, the dollar has gained 8.7% against the euro, 9.1% against the British pound sterling and 12.9% against the Japanese yen.
Aggressive investors can do much better. The Market Vectors Double Short Euro ETN (DRR, news, msgs), for example, has spurted 14.3% in the month ended Aug. 26, making it the third-best-performing exchange-traded fund in the MSN Money database.
The second-best performer, UltraShort MSCI EAFE ProShares (EFU, news, msgs), surged 14.6% in the same period, with almost all of the gain due to weaker foreign currencies. The top performer, PowerShares DB Gold Double Short ETN (DZZ, news, msgs), powered up 24.6% as traders dumped gold for the currency it is known to hedge, the greenback.
The dollar is still down longer term -- 40% against the euro, for example. But that means that if you believe as I do that the trend has reversed, there's a lot of room for the dollar to move up -- and for investors to cash in.
Further gains seem likely. While the United States clings to positive growth -- revised to a gain of 3.3% in the second quarter -- Germany, the biggest euro-zone economy, suffered negative growth in the same quarter, and Great Britain is not far behind.
The biggest threat to U.S. growth, meanwhile, has abated as commodity prices have tumbled -- for us much more than for the rest of the world. Like gold, oil and grains are widely seen as beneficiaries of dollar weakness; their prices rise when the dollar falls, and those prices are the dollar's victims when it strengthens.
The world's largest economy, our own, will get the lion's share of the cost savings that come with cheaper raw materials.
Half a dozen ETFs offer particular potential for exploiting the dollar's sudden strength. One or more of them could help erase some of the considerable losses we investors have experienced throughout our portfolios over the past year or two.
Dollar's rise takes toll overseas
Almost universally and, in one case, surprisingly, overseas stocks have taken a beating with the dollar's rise.
The mighty Chinese renminbi -- whose value is arbitrarily set by the government, not traders -- has resisted the currency trend, rising 6.8% against the dollar this year, as of last week. But international investors have shrugged off the renminbi's manipulation and sold Chinese stocks along with other foreign equities.
In the past month, iShares FTSE/Xinhua China 25 (FXI, news, msgs) is down 7.8%. SPDR S&P 500 (SPY, news, msgs), the investable form of the index traded on the U.S. stock market, is actually ahead 1.6%.
iShares MSCI EAFE Index (EFA, news, msgs), which represents foreign developed markets, is down 6.8% in the past month. UltraShort MSCI EAFE ProShares, which I mentioned above, tracks the same index but is a leverage fund designed to go up twice as much as the EAFE index goes down.
I recently advised subscribers to my newsletter, ETF Insider, to buy the UltraShort EAFE fund, and I intend to buy it myself three days after this column appears, in accordance with MSN Money policy.
As the trend turns
Currency trends can be lengthy affairs. The euro's gain against the dollar between 2001 and this year reversed a decline of similar magnitude in the prior seven years.
As I explained in a column two weeks ago, foreign developed-market stocks have gotten all their gains in this decade from the dollar's weakness. When the buck turns bullish, those stocks become an albatross for U.S. investors.
Playing this trend as an investor could involve dabbling in some new areas.
Market Vectors Double Short Euro ETN, for example, is another leveraged fund that tries to double the numbers of the index it tracks. And the "ETN" in the name stands for exchange-traded note. Whereas ETFs own securities, including futures and options, ETNs amount to a bank-guaranteed return based on an index.
For this reason, ETNs are subject to the risk that the credit rating of the issuing bank will turn sour. Last year, when Bear Stearns collapsed, an ETN tied to it, BearLinx Alerian MLP Select Index ETN (BSR, news, msgs), was briefly buffeted in trading. It recovered as Bear Stearns was bailed out through public and private intervention.
PowerShares DB Gold Double Short ETN, similarly, represents bank debt rather than physical securities. But even amid today's financial meltdown ETNs have held up well.
There are at least three other ways to play a burgeoning buck:
- PowerShares DB US Dollar Index Bullish (UUP, news, msgs), ahead 5.9% in the past month, invests in futures tied to the dollar's performance against the big three foreign currencies, plus the Canadian dollar, the Swedish krona and the Swiss franc.
- PowerShares DB Commodity Double Short ETN (DEE, news, msgs), ahead 11%, is a leveraged bet against crude oil, heating oil, gold, aluminum, corn and wheat. Nearly all commodities trade in U.S. dollars, and the global bull market in commodities in recent years was fueled partly by the greenback's weakness.
- Ultra S&P Small Cap 600 ProShares (SAA, news, msgs), up 3.9%, is a leveraged vote for small companies, which depend far less than giant firms on foreign sales. A rising dollar actually hurts multinational companies, whose products become less competitive at the same time the value of their foreign earnings declines.
The trouble with currency trading
All of these pro-dollar investments are likely to be much more volatile than the stuff most of us own in our brokerage and retirement accounts. The simplest way to take advantage of the dollar's advance is to cut back on foreign developed-market stock funds and bulk up on small-cap and midcap funds.
One of the most pleasant prospects of a rising dollar is that foreign travel will become more affordable. When my wife and I were in London some months ago, we remarked that many, many prices were identical to those in New York City -- except they were denominated in pounds, which cost us $2 each.
Accordingly, I did not pick up that Savile Row suit that is on my perpetual wish list. I reasoned its price would come down some day. Already the sale is beginning.
At the time of publication, Tim Middleton did not own any securities mentioned in this article.
Crude prices continue to slide
Oil falls for a fourth day, but investors found little relief as economic jitters remained in the marketplace. A report on factory orders is better than economists had expected. Apple hints at new product releases.
By Charley Blaine and Elizabeth Strott
The sell-off in crude oil continued today as concerns about global demand overshadowed any worries about approaching tropical storms and hurricanes.
Crude was down $1.23 to $108.48 a barrel after a $5.75 drop on Tuesday. "Weakening global demand appears to be the key factor pulling down crude oil prices (although the surge in the dollar is helping as well)," Michael Darda, chief economist at trading and research firm MKM Partners, wrote in a note to clients this morning.
Stocks turned sharply lower by midday, despite oil's decline. At 12:50 p.m. ET, the Dow Jones Industrial Average was down 64 points to 11,453. The Dow had given up a 250-point gain on Tuesday to close down 27 points. This afternoon, the Nasdaq Composite Index was down 21 points to 2,328, and the Standard & Poor's 500 Index had shed 11 points to 1,266.
Darda was cautious about cheering oil's decline too much. "It would probably be an error to assume falling crude oil will rescue the U.S. consumer," he wrote, adding: "Energy expenditures account for just over 4% of total U.S. consumer expenditures, whereas labor compensation accounts for 80% -- meaning the labor market is 20 times as important to the outlook for spending."
The calm after the storm
Oil's decline came as worries about Hurricane Gustav's impact on the Gulf coast dissipated Tuesday. The storm had been downgraded to a tropical depression, and little damage was reported on the oil and natural gas rigs in the Gulf of Mexico.
"Damage was done to the markets more than it seems to have been done to U.S. Gulf energy infrastructure," Peter Beutel, an energy analyst at Cameron Hanover, wrote in a note to clients.
Beutel pointed out that the production loss that followed evacuation of the rigs didn't faze the markets. "Had that happened in late June or the first days of July, prices would have spiked dramatically higher," he said.
Beutel expects oil prices to retreat to between $69 and $80.
Weather forecasters are now watching four new storms -- Hanna, Ike, Josephine and Karina -- as hurricane season kicks into high gear this month.
Ospraie closes flagship fund
Hedge fund Ospraie Management is closing its flagship commodity fund, the company announced this morning.
The fund has lost 40% of its value so far this year, including a 27% loss in August after oil prices fell more than 10% in the same period.
"The losses were primarily caused by a substantial sell-off in a number of our energy, mining and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years," fund manager Dwight Anderson wrote in a letter to investors. "After nine years of striving to be a good steward of your capital, I am very sorry for this outcome," Anderson wrote.
Lehman Bros. (LEH, news, msgs) bought a 20% stake in the Ospraie Fund in 2005.
Mixed news on factory orders, unemployment
The markets got some upbeat economic news from a factory-orders report this morning.
Orders grew at 1.3% in July, the Commerce Department reported this morning -- better than the 0.4% increase economists were expecting. Factory orders for June were revised higher to 2.1% from a previously reported 1.7% gain.
The report was "yet another sign that the manufacturing sector is faring better than one might expect in the midst of a deep recession in housing," Nomura Chief Economist David Resler wrote in a note this morning. "While some of the gain may reflect higher prices (e.g., steel, petroleum, food, and other basic commodities), the growth in demand for manufactured goods is an encouraging sign that the industrial sector is continuing to provide support for overall economic growth."
Meanwhile, consulting firm Challenger, Gray & Christmas offered some mixed data about the unemployment picture. The firm's monthly report showed that employers have announced 667,996 job cuts in 2008 so far, a 29% increase from the 2007-to-date total of 515,855. Things brightened in August, however, with employers announcing 14% fewer planned job cuts in August from July.
The government will release its August jobs report on Friday, before the opening bell. Economists expect an eighth straight month of job losses.
Later today, the Federal Reserve will release its "beige book," an anecdotal gauge of economic conditions around the country.
And investors can tune in to automakers' sales numbers. Ford Motor (F, news, msgs) said August U.S. sales fell nearly 25% to 155,690 vehicles, worse than analysts had expected. Ford said the second-half of the year will be more difficult than the first half. General Motors (GM, news, msgs) will report its sales figures later today.
Corning, Staples struggle
Corning (GLW, news, msgs) lowered its third-quarter sales and earnings forecast this morning, which sent the stock falling $1.98, or 10.1%, to $17.42 by midday.
Citing slowing shipments of glass used in liquid crystal display televisions, Corning said earnings will fall between 43 cents and 45 cents per share; sales will range between $1.58 billion and $1.62 billion.
Analysts expect 49 cents per share on $1.7 billion in sales.
Staples (SPLS, news, msgs) this morning reported a 16% drop in fiscal-second-quarter profit as companies pulled back on spending.
The office-supply retailer said net income came in at $150.2 million, or 21 cents per share, matching analysts' expectations, and the company reiterated its 2008 profit guidance for low-single-digit growth.
Shares of Staples managed to move higher, rising 18 cents to $24.95 by midday.
Coca-Cola taps China
Coca-Cola (KO, news, msgs) this morning said it offered $2.5 billion to buy Chinese juice maker China Huiyuan Juice Group.
If the deal goes through, it would be the biggest acquisition of a Chinese-controlled company by a foreign one, according to data from Thompson Reuters. The deal would help Coke expand its Chinese product line beyond carbonated beverages.
Coca-Cola also announced a $1 billion share buyback.
The stock was down 22 cents to $51.74 in midday trading.
Apple announces mystery event
Next week is going to be a big week for Apple (AAPL, news, msgs) lovers.
The company late Tuesday sent out an invitation to an event called "Let's Rock." Analysts expect Apple to introduce newer versions of its popular iPhone and iPod devices.
Gene Munster, an analyst with Piper Jaffray, told clients the product announcements will be key to Apple's holiday season.
"We just thought it was going to be an updated version of the iPod Touch, but they may have something even more interesting to show," Munster said.
Apple debuted its iPhone and iPod at events that were similarly secretive.
Shares of Apple were down $1.07 to $165.15 this afternoon.
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