The Wall Street Journal-20080118-Ahead of the Tape
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Ahead of the Tape
[Today's Market Forecast]
The Fed Gets
This Part
Right
The Fed has taken flak lately for its response to the credit crisis. But one part of its strategy is going right.
Due largely to its efforts to pump money into the financial system, a key short-term interest rate, the London interbank offered rate, or Libor, has fallen to 3.93%, its lowest level since September 2005. It spiked well above 5% last year, as banks in a fear-gripped market stopped lending to each other for short periods. Now it's behaving as the Fed wants.
This return to near-normalcy could soon lend a hand to the housing market. Libor is a benchmark interest rate for many adjustable-rate mortgage loans. Falling Libor rates could make the monthly payments on some of the estimated $385 billion in adjustable-rate mortgages due to reset this year a bit less painful.
All of the U.S. subprime ARMs that have found their way into mortgage-backed securities are indexed to Libor rates, according to a recent Fed study. Many "jumbo" ARMs, of more than $417,000, are also tied to Libor.
Libor's drop could cut by 5-10% the monthly payment increase for many ARM borrowers with mortgages resetting -- so a $500-per-month increase would be $450 -- says Lehman economist Michelle Meyer.
That hardly makes the economy recession-proof. Many borrowers will still find their new monthly payments unmanageable, sparking more defaults and foreclosures. Home prices could keep falling and new credit is still tighter for many borrowers.
But for some families with ARMs, a lower Libor rate could be the difference between keeping a home and losing it, and take some of the sting out of the economic slowdown's punch.
GE, a Global Bellwether,
Gives a Reading Today
It's often said that investing in General Electric is like investing in the global economy. Right now, that might not be such a bright idea.
GE's earnings report today is a thermometer on global output. Analysts expect the company to report fourth-quarter earnings of 68 cents a share, up 6% from a year ago. GE's stock, however, is down about 20% since the end of September.
Investors are worried about GE's growth prospects as the U.S. economy sputters. That's not how GE Chief Executive Jeffrey Immelt's playbook was supposed to work. Mr. Immelt has been pushing GE to expand its overseas operations to capture robust global growth. Some 50% of its revenue now comes from abroad.
GE's global infrastructure unit has thrived, posting year-over-year earnings growth of 20% in the nine months ended Sept. 30, 2007.
Mr. Immelt said last month that while a slowdown in the U.S. would crimp earnings, its global businesses should remain strong. But there are signs the rest of the world is slowing, too. French and German exports to other countries have slipped. Retail sales have been weak in the U.K. Stocks have been dropping in emerging markets.
There's little question that GE will make cautious comments about the ailing U.S. economy today. If Mr. Immelt tempers his enthusiasm about overseas growth, that's evidence the rest of the world is catching a cold.
-- Scott Patterson
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