Fed interest-rate cuts

In a gloomy market, where the headlines have been dominated by crisis and interest-rate cuts, a lot of consumers have figured that they would at least get some payback when the rate cuts hit home.

For that to happen, however, consumers are going to have to work for it and make some moves that they might not have been expecting.

But what the rate situation is making plain is that for any consumer carrying debt and nervous about the stock market and inflation the best way to increase net worth is likely to come from refinancing and paying off debt.

That said, it won't be mortgages that lead the way in refinancing. Mortgage rates tend to be tied more to Treasury yields than to the short-term rates that the Federal Reserve is cutting, so while consumers may expect a Fed cut to help them out at home, there's no guarantee.

In general, long-term rates like mortgages move in sync with short-term rates because the cuts are being made in order to help a slowing economy; what makes today's situation different is that the cuts are being made to stem a financial crisis that occurred without a recession. Lacking that downward stimulus, longer-term rates have not followed the short-term made-to-bail-out-the-market-now trend.

The only plus for consumers is that rates on adjustable-rate mortgages have dropped, so that the mortgage resets that were expected to crush consumers -- as debts they took on a few years back were repriced to much higher levels -- have actually not been such a big burden. In some cases, the reset rate has actually been better than the introductory rate.

"This has helped people who got into trouble with ARMs," says Greg McBride, senior financial analyst for BankRate.com, "but for almost every other consumer, this news hasn't been so good."

The one sure outcome of a Fed rate cut is that savings rates are going down. For savers, that has dropped rates on certificates of deposit and money-market accounts back towards the record lows they didn't expect to see for awhile. The average one-year CD is now paying 2.89%, down from just over 3% a week ago and likely to fall further before stabilizing.

"Savers are watching two things happen right before their eyes," McBride says. "First, they are seeing savings rates go back to levels where they have to wonder if it's worth it, and they are watching each rate cut fuel inflation, which makes it harder for their savings to keep pace with inflation."

In fact, most savings vehicles currently lag inflation, meaning that the nervous investor who wants to find a safe haven to avoid principle risk in the stock market is, in fact, embracing purchasing-power risk -- the chance that their money will lag inflation -- if they move money into savings vehicles.

Oil Drops Near $100 on Stronger Dollar

Oil prices fell to hover above $100 a barrel Tuesday as a stronger U.S. dollar made energy futures less attractive to investors.

Many analysts including Tarek El Hewehi believe the dollar's recent depreciation was the primary reason oil surged to a record near $112 a barrel last week, since dollar-denominated oil and other commodities are seen as a hedge against inflation and a falling dollar. Now that the dollar is rising, the effect is reversing.

Light, sweet crude for May delivery fell 59 cents to $100.27 a barrel in Asian electronic trading on the New York Mercantile Exchange by midday in Singapore. The contract fell 98 cents to settle at $100.86 a barrel Monday.

The recent decline in oil prices has been far from decisive, and there are signs that some investors are willing to look beyond the dollar for future price direction. Some investors have sold contracts on concerns that a slowing U.S. economy would dampen crude oil demand. Last week, oil prices dipped in part on worry that Bear Stearns Cos.' near-collapse was a sign of significant economic problems.

Some analysts believe oil's recent declines are temporary -- a correction in a bull market -- and that prices will forge higher again when the Federal Reserve cuts interest rates again, as is widely expected. Lower interest rates tend to weaken the dollar.

"It's quite possible for the conditions that have pushed oil prices higher to be re-established," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "U.S. interest rates are low and they will be cut further. In this situation it's possible we'll see renewed vulnerability of the U.S. dollar at some point."

But there is an opposing school of thought that argues prices have risen far higher than can be justified by the oil market's underlying supply-and-demand fundamentals. These analysts believe prices will fall soon and sharply -- regardless of what happens to the dollar.

"One of the things that may count against oil somewhat is the fact that we're now entering into a sort of lower demand part of the year, and they will see some inventory building occurring," Moore added.

In other Nymex trading, heating oil futures lost 1.41 cents to $2.949 a gallon while gasoline prices dropped 0.5 cent to $2.6362 a gallon. Natural gas futures rose 2.1 cents to $9.35 per 1,000 cubic feet.

In London, Brent crude fell 46 cents to $99.40 a barrel on the ICE Futures exchange.

McDonald's February Sales

McDonald's Corp. said Monday that February sales at restaurants open more than a year jumped a better-than-expected 11.7 percent, boosted by growth in Europe, the weak dollar and the benefit of an extra selling day this year.

Two straight months of solid results to start the year have reassured investors worried about the impact of the economic slowdown on the world's largest fast-food chain, among other restaurant companies.

McDonald's shares increased $1.11, or 2.1 percent, to $53.38 in morning trading.

The leap year boosted same-store sales by about 4 percent last month, the Oak Brook-based company said.

Same-store sales in the U.S. rose 8.3 percent during the month ending Feb. 29, led by breakfast and coffee offerings. European same-store sales grew by an impressive 15.4 percent on strong results in the U.K., France, Germany and Russia.

Same-store sales in the Asia Pacific region, Middle East and Africa rose 10.9 percent for the month, mostly on strength in Australia, China and Japan.

Systemwide sales, which include restaurants owned by franchisees and affiliates operating under joint-venture agreements rose 13.2 percent in February.

Goldman Sachs analyst Steven Kron said McDonald's is well-positioned to navigate through economic challenges because of its tiered menu platform which offers a mix of value and more expensive new products.

Paul Westra of Cowen and Co. said he is hearing positive feedback from the rollout of McDonald's specialty coffees, now available in more than 1,000 U.S. restaurants en route to being in all of them by mid-2009.

"We strongly believe that February's solid results were positively impacted by the rollout of its two Southern-style chicken sandwiches (breakfast and lunch sandwiches) ahead of a likely spring 2008 media launch. This fact bodes well" for a strong second quarter, he said in a note to investors.

U.S. stocks brace for more volatility next week

U.S. stocks are poised for more volatility and losses next week, with investors digesting the past week's turbulence, including further evidence suggesting that the U.S. economy is in recession and that the credit crisis shows no signs of abating.

The past week saw an acceleration of the troubles in credit markets, where investors find it increasingly hard to assign value to debt instruments as a result of the bad loans that have surfaced on the balance sheets of financial institutions worldwide.

"We can be sure that this won't go away anytime soon," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "We'll see more news of banks having trouble raising capital and more news pointing to the fact that we're in a recession."

Stocks took another hit on Friday after news that the U.S. economy lost 63,000 jobs in February, the largest drop since March 2003 and marking the second drop in a row in monthly employment.

The Dow Jones Industrial Average (DJI:^DJI) lost 146 points, or 1.2%, to end at (DJI:^DJI) 11,893, capping a 2.8% weekly decline.

The S&P 500 Index fell 10.97 points to 1,293.37, down 2.8% on the week, while the Nasdaq Composite Index (COMP) shed 8.01 points to 2,212.49, off 2.6% on the week.

The Federal Reserve also intervened to boost liquidity ahead of the jobs report, somewhat cushioning its impact. Credit markets also had become increasingly volatile since earlier in the week, after a default at mortgage lender Thornburg Mortgage Inc. (NYSE:TMA) and a litany of other problems at other financial institutions.

Financials stocks ended Friday's session mixed with Citigroup Inc. (NYSE:C) off 1.3%, while J.P. Morgan Chase (NYSE:JPM) was up 0.5%, and American Express Co. (NYSE:AXP) 0.6% higher.

"Friday's market action is not going to satisfy anybody," said Ken Tower, chief market strategist at Covered Bridge Tactical. "The bulls did not get the recovery they'd hoped, and the bears did not get the collapse they wanted to get. There will be a lot of uncertainty and disgruntlement over the weekend."

Following the jobs report, market odds that the Federal Reserve will cut interest rates by 75 basis points in March jumped to 96%. The move would bring the central bank's key rate to 2.25%.

Investors next week will sift through more data that could point to economic weakness, though the first three trading sessions of the week will be relatively light on indicators.

On Thursday, February retail sales, weekly jobless claims, January business inventories and import prices for last month will be released.

Friday will bring a consumer-sentiment survey and the key consumer-price index for February, which will be watched closely for signs of inflation.

Commodities continued their rally over the past week. Crude futures touched a record high of $106.54 Friday.

The dollar dropped to a new low against the euro Friday, with the European currency hitting $1.5463. A weaker dollar makes dollar-denominated commodities, such as oil, less expensive for buyers holding other currencies.

Among key reasons cited by traders for the continued surge are that investors fleeing dollar-denominated assets are increasingly turning to commodities to seek a safe haven.
Other beneficiaries of market turmoil have been Treasury bonds, which typically serve as a safe haven.

Some analysts believe that the current trends in U.S. markets will continue until the global economy also gets hit, which would force other central banks to also cut interest rates, putting pressure on their currencies.

But U.S. stocks could take an even turn for the worst once this happens, according to Joshua Rosner, analyst at Graham Fisher, as current dollar weakness has provided support in making dollar-denominated assets more attractive. "Once foreign central banks start to cut rates and the dollar strengthens relative to those foreign currencies, we are likely to see capital flight from our equity markets," he wrote in a note.

Among profit reports of interest next week, will be Texas Instruments Inc. (NYSE:TXN) , which reports on Monday along with Blackstone Group (NYSE:BX) , Foot Locker (NYSE:FL) and Hovnanian Enterprises Inc. (NYSE:HOV)

Weak Dollar Hurts Smaller European Firms

Hugh Quinn has seen the ever-weakening dollar shatter his ability to sell hand-cut Irish lead crystal to American customers.

Ingolf Haas says profit at his family-run cuckoo clock business in Germany has dropped at least 10 percent since the U.S. currency's latest decline began. Roberto Anselmi now sells more of his Italian white wine to Canada than to the United States.

Times are tough for small and artisanal businesses across Europe that traditionally target Americans as their No. 1 buyers, since the swooning dollar shrinks their revenues from U.S. sales but their costs remain in expensive euros.

The problem is compounded by economic worries that may make Americans think twice about buying the products they coveted and consumed in more prosperous days.

With the euro topping $1.52 this week -- up from $1.18 when it was introduced in 1999, and from 82 cents at its lowest in 2000 -- economists say all euro-denominated exporters have reason to be worried. But tourism-oriented producers of luxury goods are hurting the most.

These niche manufacturers are often too small to engage in the complex, risky hedging that protects larger companies from shifts in the value of different currencies.

"They can get into trouble if they have their eggs in one basket, particularly these days if it's an American basket," said Alan McQuaid, chief economist of Bloxham Stockbrokers in Dublin.

"They have to broaden their horizons."

Irish crystal offers a glittering example. Five years ago, both Quinn's employer, Galway Irish Crystal Ltd. in western Ireland, and its much bigger Irish competitor Waterford, relied on Americans for about half of their sales.

Both have now been hammered by the dollar's decline -- but Waterford has maintained its U.S. sales volumes by slashing Irish production and shifting output away from the euro zone to cheaper locations like Eastern Europe and Brazil.

That's no option for Galway Crystal, whose work force has nearly halved in the past five years to 80. Americans today account for just 20 percent of its sales, a figure that keeps falling with the dollar.

"It will probably continue to decline until the dollar resurrects itself," said Quinn, the company's sales and marketing director.

Galway Crystal began retreating from the U.S. market two years ago, he said, after the euro reached $1.40 and the company started taking a loss on each piece of crystal it sold in dollars. That forced Galway Crystal to raise prices -- which only hurt sales.

"We spent a good few years telling ourselves: This is not about profit, it's about defending our market share. So we kept our prices firm in U.S. dollars as best we could and just about broke even. We just kept hoping for a turnaround," Quinn said.

"But when you reach the stage where you're actually losing money, you have to take a fresh, hard look at it: When is it going to come back? How long can I sustain this?"

Galway Crystal has survived by shifting its designs in tune with European tastes, which favor simpler and lighter glassware. This also means less labor-intensive pattern cutting.

That's not an option for German makers of wooden cuckoo clocks, who count Americans among their best customers.

At Rombach & Haas Schwarzwalduhrenmanufaktur, or Black Forest Clock Manufacturers, they craft more than 100 different wooden clocks -- most of which have the traditional little bird peeking out of the door and chirping on the hour.

In general more than half of the company's customers are Americans -- either tourists or online shoppers -- who buy products that sell from about $120 for a small clock to $6,000 for a 5-foot-tall model.

"Making cuckoo clocks has never been a very lucrative business, but now this drama with the weak dollar is really giving us trouble," said Haas, 45, who runs the company along with his wife, father and three employees. "I think we've suffered at least a 10 percent drop in profit since the dollar's latest decline started a few months ago."

Lately, Haas has broadened his range of offerings, and customers who pay extra can design their own clocks over the Web.

"I hope the Americans will take advantage of this offer," he said. "Like it or not, they are our main customers and most of the cuckoo clocks end up on living room walls in the U.S."

He's also been looking into selling his products in new markets, particularly Asia and Russia. "However, that's not so easy either, since we don't have an additional few hundred thousand euros that we could invest in advertising," Haas said.

Anselmi is seeing sales go elsewhere than the United States. The maker of premium white wines said his U.S. sales have fallen by about 20 percent, or 50,000 bottles, over the past year. He also had to raise prices up to 20 percent on U.S. store shelves.

As a result, Canada has eclipsed the United States as Anselmi's largest export market.

"We can't recoup this market," said Anselmi, who is based in the northern Italian town of Monteforte near Verona. "In the United States there is a lot of competition from domestic wines, and consumers are also looking for wines that are more competitively priced from other regions of the world that have lower costs."