by Bob Plunkett

The dollar is sinking in value and Wall Street should be panicking that foreign investors will start dumping their U.S. Treasury securities. Should worry – but clearly there is no cause for concern.

Foreigners are still buying with abandon. Foreign sales of Treasury bonds and notes in September topped $44 billion. That’s up from $28 billion in August. That brings to total buying to more than $333 billion over the last 12 months. These are odd financial times and this is odd financial behavior. Because while the falling dollar makes U.S. securities cheaper for foreigners to buy, it also devalues the value of their holdings. Despite complaining about how U.S. borrowing is getting out of hand, the Chinese remain the biggest single foreign owner of Treasury securities — $798.9 billion as of September. Japan is the second with $751.5 billion worth of Treasuries and Britain is third at $249 billion – a smaller amount but double what it held last January.

And this is the only reason the U.S. can keep interest rates low and why the dollar’s decling has been orderly.

Stay tuned.

by Bob Plunkett

If your college-bound kids is looking for a solid career path, you might suggest learning to become an eavesdropping expert.  The hedge fund industry can’t hire you fast enough to sweep their offices for bugs.  With two black eyes already – from helping undermine the world financial markets and losing tons of customer money as a result – the industry is facing the biggest insider-trading scandal since Mike Milken and Ivan Boesky.  But the scariest thing is that the SEC used electronic surveillance to bust the case wide open.

But unlike Milken and Boesky, who remained suave gentlemen as they stole, the new criminal complaint says the insiders acted more like drug traffickers.  The met on street corners and swapped information on disposable cellphones which they busted up and threw away after each call.  It was the understatement of the year when an SEC chief said, “If you find yourself chewing the memory card in your cellphone to destroy any record of your misconduct, something has gone terribly wrong with your character.”  To build their case, authorities used informants, wiretaps and a stakeout on a Manhattan street corner. The scheme had already netting the participants $53 million.  The only odd detail is why it was pulled off by such elite members of the financial community who were making super big money anyway.

The sad conclusion if that insider trading is more pervasive than anyone imagined.  Hold on, this isn’t going to be the last of these cases.

by Bob Plunkett

The government’s new report on worker productivity growth shows businesses are reaping huge benefits from slashing jobs and sweating the remaining workers to more and more. The amount of work employees produce in an hour is up 9.5%.  Meanwhile, unit labor costs are down a whopping 6% — the largest two-quarter decline on record.  This one-two combo has been producing great earnings.  But analysts are mixed on whether it can last.

Michael Darda, chief economist at investment firm MKM Partners in Greenwich say that at some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules.  As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger piece in savings.  But Steven Ricchiuto, chief economist at Mizuho Securities, says the danger is that companies have fallen into a trap of excessive cost cutting.  The more companies strive to cut cost, the more workers they fire and the lower the future demand for their product.  He says that the more household income is squeezed the more consumers have to save to balance their budgets. This means less shopping, less revenue growth for companies and more cost cutting to boost earnings.  It’s a negative feedback loop that sets the stage for a double-dip recession. Its understandable that companies remain fearful of spending money, but the concern is real: squeezing the remaining labor force to death isn’t a recipe for long-term business success.

By Bob Plunkett

If you think getting a home mortgage is tough, try applying for a home equity line of credit. Not so long ago, banks were giving them away.  Now they want you to give them back.

The days when bankers were falling all over themselves to help you empty the equity out of your home are over.  The market collapsed when home prices tumbled and remains tight despite reports of a pick up in housing.  This is true even for people with lots of equity.  And if you do get a loan, don’t expect to get it at prime rate.  Banks took a cold bath on these loans when which became worthless when home equity went “underwater” borrowers slide into foreclosure.  Bank of America, for example, wrote off $2 billion in home equity debt as uncollectable in the third quarter.  Keeping your nose above the water line won’t help – lenders are freezing equity credit lines by halting withdrawals.  And although borrowers commonly paid half a percentage point above the prime rate you’ll now pay at least 2 points over prime.  This week, an average equity credit line is 5.33% compared with 3.25% for the prime.  Not surprisingly, fewer equity lines are being sought.  The National Mortgage News reports they tumbled 75% over the past year.  Somewhere we’re learning a lesson.

by Bob Plunkett

Why is it that a recession officially begins when we have two straight quarters of economic decline, but it is officially over with just one quarter of gain? That is where we stand right now as investors are breaking out champagne with their best “who cares” attitude. But can it last?

The economy expanded during the third quarter for the first time in a year, according new report that the GDP to grew by 3.5%. Forget that the growth was driven largely by a rebound in consumer spending from a federal Cash-for-Clunkers stimulus package or that business spending was boosted by a stimulus program for home buying. Forget that analysts at Brown Brothers Harriman have been advising that a bump up in GDP is a sign for “profit taking in the asset markets”. In other words, take money out of the market – don’t put more in. Thursday’s preliminary GDP report doesn’t mean the economy is in good shape. Its expansion of 3.5% only partly offsets its 6% decline last fall and winter. Economists are predicting weaker expansion in the fourth quarter and well into 2010. And the unemployment rate, a 26-year high of 9.8%, is showing no sign of improving. In short, the economy needs an annual growth rate of 3% or more over at least three quarters to add enough jobs to bring down unemployment.