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Friday AM March 7th, 2008

Pending home sales stabilize; foreclosures reach all-time high… Western and Southern Financial Group chief investment officer tells Houston Club we have “the feel of a recession,” but the worst of it will be over by year’s end…

U.S. pending home sales stabilized last month. The National Association of Realtors says its index of pending sales for existing homes came in at 85.9–the same reading as December–and just shy of a revised record low of 85.8 in August. There is generally a month or two lag between when a buyer signs a home sales contract and closes the deal. Sales completed last month and into this month should be reflected in the January reading. The real estate trade group, which is more optimistic about the housing market than most economists, is projecting home sales will start to rise during the second half of the year.

An industry group has reported that home foreclosures soared to an all-time high in the final quarter of last year. The newest analysis by the Mortgage Bankers Association underscores the suffering of distressed homeowners and the growing danger of the housing meltdown on the national economy. The association’s report says the percentage of all mortgages nationwide that fell into foreclosure shot up to a record high of just over eight-tenths of a percentage point in the October-to-December quarter. That surpassed the previous high of just over three-quarters of a percentage point–a figure which was recorded in the prior quarter.

A new report says subprime lenders that went out of business with the industry’s collapse targeted minority neighborhoods. These companies’ high-risk loans made up 20 percent of all loans in predominantly minority communities, compared with just four percent of total loans in mostly white areas. The report says that means minority communities are being hurt most by the subprime crisis, with foreclosures, sinking property values, abandoned homes and higher crime. The report is being released Thursday by an alliance of policy, research and advocacy organizations. Advocacy groups say poor and minority borrowers who qualified for traditional loans were still steered into risky adjustable mortgages. When the “teaser” rates reset to higher ones, it often made monthly payments unaffordable. The report recommends mortgage reform legislation.

The chief investment officer for Western and Southern Financial Group looked into his crystal ball for the Houston chapter of the University of Chicago’s Graduate School of Business at a Houston Club luncheon. Nicolas Sargen says the subprime problem has grown into a much bigger issue.

“Many of our largest financial institutionsâ€â€especially the commercial banksâ€â€had much greater exposure than anybody, and I think including the authoritiesâ€â€the Federal Reserve and othersâ€â€ever anticipated. The credit market conditions are about as bleak as I’ve seen, so there’s no doubt now that there is a legitimate basis for concern about what, you know, whether this could tip this economy into a formal recession.” Ed: “Warren Buffett says we are in one, even if the definition isn’t there.” “And I think that’s fair. It certainly has the feel of one, and you know, plus I would say it’s psychological. You just read the newspapers anymoreâ€â€even myself, I’m a professional investor. I believe that we’re right now, in the worst of the crisis and I think it’s going to stay pretty bad, at least into the summer months.”

Sargen is hopeful that the economy will stabilize later this year.

“First of all, we’re going to get the temporary stimulative effect from the tax cuts that have been enacted. They’re going to kick in probably about the middle of the year. So, I would emphasize they aren’t a long-term solution, but when the economy is pointed in the wrong direction, they’re at least helping to right the economy, temporarily. The most important thing, though, I’m looking forward to is that the Federal Reserve, which has been easing monetary policy very aggressively is going to continue to do so. I’m expecting that the federal funds rate will be down to two-and-a-half percent in two weeks. And so that would be cut more than half from where we were. And the last thing I would emphasize is the housing is still very bleak. Housing prices could be down eventually 15 to 20 percent, so again, I don’t see a quick end in sight. But the combination of those falling house prices and lower interest ratesâ€â€hopefully mortgage ratesâ€â€means that homes start to become more affordable by next year. So that’s why I’m more hopeful that we’re getting through the worst of it by this year.”

Sargen says the high price of gasoline is as if we’re being taxed by OPEC, but if the U.S. economy slides into a recession, oil prices will probably become more moderate in the second half of the year.

Congress wants to get the lead out of children’s toys. Both the House and Senate are out to overhaul the Consumer Product Safety Commission, the agency that’s supposed to ensure that toys and other products pose no hazard. The Senate could vote on a bill that would nearly double the agency’s budget and increase its staff to nearly 500 people by 2013. The measure would also ban lead from children’s products and establish a publicly available database of heads-up information about toys. It would deal things like injuries, illnesses and deaths from consumer products and would be collected from such sources as hospitals and consumers. The House passed its version last December. President Bush has not threatened to veto either version. But the administration has expressed concern about some of the provisions dealing with enforcement, testing and new protection for whistleblowers.

The battle for control of the Liverpool Football Club has escalated. Co-owner Tom Hicks of Dallas is disputing claims that co-owner George Gillett, Jr., had been allowed to unload his 50 percent stake in the English Premier League soccer club. An informed source tells the Associated Press that Gillett’s in the final stages of striking a deal with Dubai International Capital. The source says that’s after Hicks relaxed his power of veto and allowed his partner to sell his stake. However, a source familiar with the Texan’s plans tells the AP that Hicks is standing firm to his own intention of taking majority control of the Reds. Hicks is only willing to let Gillett sell 49 percent of the club as long as Hicks gets the other one percent to make him the majority shareholder. Hicks and Gillett bought Liverpool for $431 million in March 2007. Hicks also owns the Texas Rangers baseball club and the NHL’s Dallas Stars. Gillett owns the NHL’s Montreal Canadiens.

American Airlines is fighting a federal decision to take away one of its daily flights to Bogota, Colombia, and give it to another carrier. The U.S. Transportation Department said it had granted preliminary approval to Delta, jetBlue, Spirit and Continental to operate one new daily flight each between the United States and Bogota. If the DOT’s tentative decision is finalized, Delta may begin its new services immediately, jetBlue and Spirit on April 1st, and Houston-based Continental on October 1st. Those four airlines were picked over US Airways, which had applied for service from Charlotte, North Carolina, and Fort Worth-based American, which sought to retain the three daily flights it has between Miami and Bogota. The company wants to keep the flight. On January 22nd, it filed a “petition for review” of the government’s intended decision in the U.S. Court of Appeals for the District of Columbia circuit. But American last week began winding down service on the flight, which no longer operates daily. It’ll stop offering it by the end of the month unless the appeal is granted.

Ford is recalling about 100,000 2008 F-series trucks because the front driver’s seat does not conform with federal standards. Ford says the weld connecting a bracket and the driver’s front seat back could crack on a small number of vehicles. As a result, the vehicles do not comply with federal rules for seat back strength. The recall covers F-250 through F-550 super duty trucks. More than 87,000 of the trucks are in the United States and 14,000 are in Canada. Ford spokesman Wes Sherwood said that no injuries have been reported. Ford discovered the issue after receiving reports of the weld cracking. Owners will be notified of the recall later in March. For more information, owners can call Ford at (800) 392-3673.

Wal-Mart says that grocery, electronics and health items helped it post solid February sales that exceeded Wall Street expectations. The world’s largest retailer’s results came despite an overall weak sales trend that has continued into February and shows no sign of improvement. Limited Brands and Wet Seal both say that February sales fell as consumers, facing high food and gas prices, focus on necessities. Wal-Mart says that sales at stores open at least a year rose 2.6 percent. Analysts polled by Thomson Financial predicted a gain of 1.1 percent.

Blockbuster says its fourth-quarter profit grew more than fourfold on cost cutting and repositioned subscription programs. The Dallas-based video rental company’s earnings surged to $38.1 million in the three months ended January 6th. That’s up from $8.3 million in the previous year. Excluding severance costs and other items, it earned $54.9 million. Blockbuster’s sales increased four percent to $1.57 billion from $1.51 billion a year ago. Wall Street expected revenue of $1.44 billion. Operating expenses fell to $723.9 million from $736.8 million.

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