I hope everyone had a great Thanksgiving holiday. I know it was great for all of us to have a few days off with family and friends. We’ve only got a few weeks of 2009 left, so let’s get started…
*****The big news from Friday was the potential default from Dubai’s sovereign wealth fund, Dubai World. There can be no doubt that Dubai is a poster child for excess. I mean, dredging part of the ocean and building palm tree-shaped islands with ridiculously expensive communities is the very definition of excess.
And now that real estate values have been cut in half in Dubai, it’s no surprise that it’s having trouble meeting its debt obligations. Sure, maybe there’s not much direct exposure to Dubai’s debt here in the U.S. But don’t forget that we in the U.S. and Europe participated in excess that was similar. And just like in Dubai, we may not have seen the full consequences of that excess yet.
*****Holiday retail sales got off to decent start on Friday. At stores, sales were up 0.5% from last year. Considering how much the unemployment rate has risen in the last year, this is good news. Online sales did even better, up 11% from last year.
Still, the National Retail Federation is sticking to its forecast that overall holiday sales will be down 1% from last year. At this point, that still sounds like a victory.
*****In case you missed it last week, I’ve decided to extend my Black Friday subscription offer for SmallCapInvestor PRO. For today only, you can still get a 1-year subscription to my top-performing advisory service for just $99. You can get the details HERE.
*****The Fed is starting to test the waters for removing excess liquidity. As you know, the Fed has injected liquidity into the financial system by purchasing securities like mortgage loans and holding them in its portfolio. Now, the Fed is going to start engaging in small scale “reverse re-purchase agreements.”
In a reverse-repurchase agreement, the Fed will sell some of its portfolio holdings to a bank, like Bank of America, with the agreement to buy them back at a later time. This temporarily soaks up liquidity from the bank. It will be felt in the form of less lending from the bank.
The Fed’s action, announced today, is a way for the Fed to gauge what the effect will be of less liquidity in the system. And really, it’s a good sign. There will come a time when the Fed has to be more aggressive in turning off the liquidity pumps. Might as well see how the market will react now, while it’s not a do or die situation.
*****Interestingly, the government is stepping up pressure on lenders to modify mortgage loans in order to keep more houses from entering foreclosure and hitting the market. The Treasury estimates that only 1,700 loans have been modified of the 375,000 who are faced with a year-end deadline.
Fourteen percent of all mortgage loans are either late or in default. That’s a big number, and certainly threatens the economic recovery. The government has put up $75 billion to compensate lenders who modify endangered loans. Let’s hope that’s enough. Otherwise, banks will be saddled with foreclosed properties and values across the board will take another hit.
Part of the solution, too, is reversing the unemployment trend. I expect we’ll see some tax breaks offered for companies that hire workers announced soon.