US Markets Closing Comments - 5th Feb 2008

Economic Summary:

There was only one monthly indicator reported today, the ISM non-manufacturing
index, but it had an outsized impact on the markets. A sharp decline in this
index, while somewhat suspicious, unsettled equities and drove Treasuries
higher. Concerned words from normally-hawkish Richmond Fed President Lacker
about the increased likelihood of recession exacerbated the market moves in
the early afternoon. And Fitch's decision to put MBIA on negative watch,
announced just before the market close, pushed equities to the lows of the
session. While off its intraday highs, the dollar rose despite the news,
partly because Europe posted surprisingly weak service industry data of its
own.

The Institute for Supply Management's Non-manufacturing Index (NMI) for
January fell to a below neutral 44.6 from 53.2 in December. Like its
manufacturing counterpart, a reading of below 50 on the NMI indicates a
contraction in activity. January's was the first sub-50 reading for the
non-manufacturing sector since March 2003. Moreover, 44.6 was the lowest
reading since the ISM began surveying non-manufacturing activity in July 1997.

While a deterioration in the ISM non-manufacturing index was not particularly
surprising, the severity of the decline reported for January was hard to
believe, especially as it came amid an annual revision to the seasonal factors
and a new methodology for compiling the data. Nevertheless, the data
reinforced the general impression given by other data that the economy is weak.

Economic Outlook:

The preliminary readings on Q4 Productivity and Unit Labor Costs will be
released at 8:30 on Wednesday (Forecast +1.0%/+2.5%, Consensus +0.5%/+3.5%).
Given the tepid annualized growth rate of 0.6% reported for Q4 GDP, it appears
that productivity grew at only about 1.0% last quarter. This rate would
represent a substantial deceleration from the 6.3% growth in productivity
reported for Q3. With productivity growth slowing, ULC probably accelerated,
rising about 2.5% after a 2.0% drop in Q3. That would translate into a year
over-year ULC growth rate of +1.1% for Q4, down from +3.0% YoY through Q3.

Market Summary
The broad equity indexes were weak from the opening bell after disappointing
service sector news in Europe drove down stocks abroad. A record drop in the
newly-calculated ISM non-manufacturing index added momentum to the decline,
and Richmond Fed President Lacker didn't help by mentioning the "R" word.
Fitch placed MBIA's AAA insurer financial strength reading on negative watch
17 minutes before the market close, and that was the final straw. The major
indexes closed down some 3% at or very close to their intraday lows. (DJ INDU
12265, -370; S&P500 1337, -44; NASDAQ 2310, -73)