01 October 2007

Bud Fox Fanclub: Day 1 of 4th Quarter

After another positive week for Wall Street, it appears investors are looking past the gloomy outlook for the the US economy and betting on sunnier times after some short-term problems. The market’s surprising performance over the past week have the main indexes showing strong gains in the traditionally weak month of September, and for the third quarter.

The record books show that the fourth quarter, which kicks off today, has been a very profitable period for stocks since the early 1990's. In the past 15 years, the broad U.S. stock market, as measured by the Standard & Poor's 500 index, has declined in value in the fourth quarter only two times. The average gain in the 13 instances where stocks have risen in the final three months of the year: 6.3%.

Wall Street shot higher today after a report on the manufacturing sector came in below analysts expectations and raised the prospects of another interest rate cut. The report, plus a big acquisition by Nokia, offset the market's concerns about a profit warning from Citigroup Inc., the nation's largest financial institution. This morning Citi warned its third-quarter earnings are likely to decline 60%, as it takes more than $3 billion in writedowns for securities backed by underperforming mortgages and loans tied to corporate buyouts.

The announcement from Citigroup came as the Swiss bank UBS AG said it will post a loss of up to $690 million in the third quarter partly due to losses linked to U.S. subprime mortgages.

Subprime mortgages -- loans given to customers with poor credit history -- have gone delinquent or defaulted at rising rates in recent months, causing banks to lower the value of the loans as investors shy away from buying them. Weakness in that business spread to other credit markets, leaving banks stuck with loans they promised during the merger and acquisition boom.

Citigroup will write down about $1.4 billion on funded and unfunded loan commitments when it announces its third-quarter results. It will record losses of about $1.3 billion on the value of securities backed by subprime loans. Citigroup will also record a loss of $600 million in fixed-income credit trading due to market volatility.

Third quarter global consumer credit costs also increased $2.6 billion from the same quarter a year ago, the company said. About 75 percent of that increase is due to rising loan-loss reserves -- money held to cover loans that default.

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