Financials slam Wall Street; eBay drops late

October 22, 2009
US stocks fell yesterday, hurt by a late sell-off in financial shares after an influential bank analyst recommended selling Wells Fargo shares and a wider-than-expected loss from Boeing disappointed investors.

For most of the session, stocks had traded higher as the US dollar's weakness underpinned shares of natural resources companies, while results from Morgan Stanley and Yahoo Inc added to optimism about corporate profits.

Shares of Wells Fargo slid 5.1 percent to US$28.90 after Rochdale Research analyst Richard Bove cut his rating on the stock saying loan losses were mounting. The KBW bank indexdropped 2.4 percent.

"It just shows you how susceptible we are to bad news right now," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. "We've got such an extended stock market that a feather of news is enough to cascade it down 100 points."

The Dow Jones industrial average dropped 92.12 points, or 0.92 percent, to end at 9,949.36. The Standard & Poor's 500 Index lost 9.66 points, or 0.89 percent, to 1,081.40. The Nasdaq Composite Index shed 12.74 points, or 0.59 percent, to 2,150.73.

The S&P 500 is up 60 percent from the 12-year closing low of early March.

Earlier in the day, Wells Fargo had been among several banks, including Morgan Stanley and US Bancorp, posting quarterly earnings above Wall Street's forecasts.

But the market took a turn for the worst in the last half-hour of the session, causing indexes to finish at their lows of the day. In the Dow, six of the 30 stocks rose, 22 fell, and two were unchanged.

Besides Wells Fargo, other notable casualties in the bank sector were JPMorgan, down 3 percent to US$44.65 and Bank of America, off 2.9 percent at US$16.51. But Morgan Stanley bucked the trend, ending up 4.8 percent at US$34.08 following its forecast-beating results.

Boeing shares dropped 2.4 percent to US$50.63 following a wider-than-expected quarterly loss from the aircraft maker.

WAL-MART DROPS, eBAY FALLS LATE

Wal-Mart Stores shares lost ground, ending down 2.1 percent at US$50.63, after the world's largest retailer said it would slash prices as it readies for what is likely to be a tough holiday shopping season. The S&P consumer discretionaries index declined 1.5 percent.

After the bell, eBay Inc, the global e-commerce site, forecast fourth-quarter profit and revenue at the low end of analysts' estimates, quashing investors' hopes for a substantial turnaround at its main marketplaces division during the crucial holiday season.

In extended-hours trading, shares of eBay fell 5 percent to US$23.75.

In the regular session, biotechnology company Genzyme Corp was the Nasdaq's top drag after it posted lower-than-expected quarterly earnings and cut its 2009 outlook. The stock fell 6.2 percent to US$51.43.

On the positive side, Apple Inc hit an all-time intraday high, two days after the iPhone and MacBook computer maker posted earnings that eclipsed Wall Street's forecasts. Apple ended up 3.1 percent at US$204.92 -- a record close -- on Nasdaq, where it rose as high as US$208.71 earlier.

US front-month crude briefly hit US$82 a barrel on the New York Mercantile Exchange, while spot gold rose above US$1,060 an ounce as the euro soared above US$1.50 for the first time since August 2008. US December crude-oil futures, the new front-month contract, jumped 2.8 percent, or US$2.25, to settle at US$81.37 a barrel on the New York Mercantile Exchange.

Volume was moderate on the New York Stock Exchange, with 1.41 billion shares changing hands, below last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.60 billion shares traded, above last year's daily average of 2.28 billion.

On the NYSE and the Nasdaq, decliners beat advancers by a ratio of 2 to 1.

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Oil rises over 3% on products draw, equities

October 22, 2009
OIL jumped more than 3 percent toward US$82 a barrel yesterday, its highest level in a year, due to a drawdown in US refined oil inventories and as a rise in US equities showed optimism about the economy and a potential rebound in energy demand.

Weekly data from the Energy Information Administration revealed a larger-than-expected 2.3-million-barrel draw in gasoline stocks in the world's largest energy consumer last week, while crude inventories rose 1.3 million barrels, less than the expected 1.8 million-barrel rise.

US crude for December rose US$2.72 to US$81.84 a barrel by 2:03 pm EDT (1803 GMT). Brent crude added US$2.90 to US$80.14.

"The gasoline draw was bullish, and the same for distillates, with refinery rates nearly unchanged," said Mike Zarembski, senior commodities analyst for OptionsXpress in Chicago.

However, traders had their eyes on the weakness of the dollar and stronger equities as price drivers, rather than oil's fundamentals of demand and supply.

"As long as the dollar is down and stocks are up, traders want to buy energies. Everyone is watching the dollar now and that is what's driving crude prices. There is nothing in this report to change that," Zarembski added.

Wall Street gained yesterday as results from banks, including Morgan Stanley, topped expectations and on increased optimism about the technology sector's profit outlook.

The dollar sank against a basket of other currencies as expectations that US interest rates will remain very low weighed on the greenback. The euro rose above US$1.50 for the first time since August 2008.

A falling dollar makes oil relatively cheap to holders of other currencies.

The weak dollar and anticipation of future economic recovery have been the main drivers of the oil price rally for the past few months.

This year, front-month crude on the New York Mercantile Exchange has risen around 120 percent from the Dec. 31 2008 low of US$36.94 to the current session high on Wednesday to above US$81.

China's State Council voiced confidence that China's economy has recovered from the global financial crisis, performing better than expected in the first nine months of the year.

The International Energy Agency, which represents 28 industrialized countries, has warned that the fast rise in prices could pose a risk to global economic recovery.

But Nigeria's oil minister, Rilwanu Lukman, said US$80 was a fair price for oil and one that should encourage investment in new supplies.

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Minutes show Bank of Japan still worried about economy

October 22, 2009
Members of the Bank of Japan (BOJ) expressed hesitation that the global economic recovery could maintain its momentum, according to minutes from BOJ's September policy meeting released on Monday.

    "Many members ... said that the pace and sustainability of overseas economic recovery -- after inventory adjustments had been completed and the initial effects of the policy measures had abated -- remained highly uncertain," the minutes said.

    At the September meeting, the bank decided to keep stimulus measures to combat the global downturn in place.

    On Wednesday, at the October Bank of Japan policy meeting, members also decided to keep these measures in place, demonstrating the central bank's cautious view of current data, which shows the economic downturn seems to be abating.

    At the September meeting some members also raised concerns that current conditions could quickly be reversed, keeping economies from returning to vibrancy.

    "Some members ... expressed the view that lingering balance-sheet adjustments of firms, households, and financial institutions were likely to prevent the world economy from achieving an early and full-fledged recovery, and risks to the outlook were still tilted to the downside."

    At the meeting members were particularly positive on the condition of the Chinese and Indian economies. "The Chinese economy had continued to grow at a relatively rapid pace, led mainly by domestic demand," the minutes said. "The Indian economy ... also continued to grow at a relatively rapid pace."

    On Japan's domestic economy, the bank said it did not expect an economic recovery to reach households anytime soon.

    "The employment and income situation had become increasingly severe, with the substantial slackening of the labor market and the significant decrease in household income. Household income was likely to continue decreasing substantially for the time being, mainly due to the lagged effects of the earlier drop in corporate profits and production," the minutes said.

    The Bank of Japan's monthly monetary policy meeting is held in Tokyo to decide the best ways for Japan to maintain price stability and keep markets and the economy from changing dramatically.

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Sagging US consumer mood tempers output optimism

October 21, 2009

US consumer sentiment fell unexpectedly this month, tempering optimism inspired by news of a rise in US industrial production in September for a third consecutive month.

The two reports released on Friday suggest the US economy may have closed out the third quarter with surprisingly strong growth but still faces huge hurdles since consumer spending is unlikely to recover quickly from the worst recession in decades. Consumer spending accounts for about 70 per cent of US economic activity.

The Reuters/University of Michigan Surveys of Consumers preliminary index of sentiment for October fell to a reading of 69.4 from September's 73.5, below economists' median expectation in a Reuters poll for a steady reading of 73.5.

The report said diverging prospects for the general economy and personal finances would affect the pace of recovery as consumers cut spending to increase savings and pay down debts.

"While consumers still anticipated gains in the general economy and now think that the unemployment rate is close to its cyclical peak, there has been no improvement in consumers' dismal assessments of their personal financial situation," the report said.

"Indeed, personal finances have undergone the longest and deepest decline in the 60-year history of the surveys, and few consumers expect their finances to improve any time soon."

The disappointing consumer sentiment report helped drive down US stocks, ending a four-day rally that had driven the market to year highs. Government bonds, which investors prefer during times of economic weakness, had a strong rally.

The Federal Reserve said US industrial production rose 0.7 per cent in September, much greater than the 0.2 per cent advance that economists polled by Reuters had expected.

August's gain was revised up to 1.2 percent from the originally reported 0.8 percent, according to the report.

For the third quarter as a whole, output advanced at a 5.2 per cent annual rate, the first quarterly gain since the first quarter of 2008 and the largest increase since the first quarter of 2005.

The figures will likely reinforce the view that the longest US recession since the Great Depression of the 1930s ended in the third quarter. Economists in a Reuters poll released on Thursday pegged the third-quarter growth rate at 3.1 per cent.

"It's encouraging," Paul Ashworth, economist at Capital Economics in Toronto, said of the industrial production data.

"What I worry about is whether growth will be sustainable. Consumer spending will likely remain weak. If the consumers don't come back, it might as well fizzle out."

The recession has already strained public finances.

The US budget deficit hit a record $US1.4 trillion in the just-ended fiscal year, the government said on Friday, as the deep downturn crimped tax revenues and on the costs of a series of bank rescues.

The deficit was $US162 billion less than the White House had forecast in August, but still amounted to nearly 11 per cent of real US economic output, the most for any budget shortfall since World War Two.

In other data released on Friday, net overall capital inflows into the United States rebounded to $US10.2 billion in August from a revised outflow of $US107.7 billion the previous month, the Treasury Department said on Friday. The department originally reported outflows of $US97.5 billion for July.

Net long-term capital inflows, excluding swaps, rose to $US28.6 billion from $US15.3 billion the previous month.

The inflows, however, were not enough to cover the US trade deficit of $US30.7 billion for the same month.

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Global IT spending to rebound in 2010: Gartner

October 21, 2009
Global information technology (IT) spending is expected to return to growth in 2010, leaving the worst year ever behind, market research firm Gartner said on Monday.

    According to Gartner's latest forecasts, worldwide IT spending next year will climb to 3.3 trillion U.S. dollars, a 3.3-percent increase compared with 2009.

    Gartner also predicted that global IT spending as a whole will see a 5.2-percent drop year-on-year in 2009, and enterprise IT spending will fare worse with a decline of 6.9 percent.

    "While the IT industry will return to growth in 2010, the market will not recover to 2008 revenue levels before 2012," Peter Sondergaard, Gartner's global head of research, cautioned in a statement.

    "2010 is about balancing the focus on cost, risk, and growth. For more than 50 percent of CIOs (chief information officers) the IT budget will be 0 percent or less in growth terms. It will only slowly improve in 2011," he said.

    Analysts at Gartner noted that emerging regions will resume strong growth in the coming years and are expected to have increasing influences on the future of the IT industry.

    "By 2012, the accelerated IT spending and culturally different approach to IT in these economies will directly influence product features, service structures, and the overall IT industry. Silicon Valley will not be in the driver's seat anymore," Sondergaard said.

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Oil falls from 1-yr high over US$80, US data weighs

October 21, 2009
OIL fell yesterday after hitting a one-year high over US$80 a barrel, as disappointing US data on housing starts and inflation weighed on markets.

New construction of US homes rose less than expected in September, while US producer prices declined unexpectedly, largely due to a drop in energy prices.

US crude for November delivery fell US$1.45 to US$78.16 a barrel at 12:34 pm EDT (1634 GMT), after rising to US$80.05 a barrel earlier, its highest since Oct. 14 last year.

Traders said the weak US data spurred profit taking ahead of the November contract's expiry later yesterday.

London Brent crude fell US$1.23 to US$76.54 a barrel.

Oil prices have surged nearly US$10 in October, as strong company results fueled optimism that a strong corporate earnings season will signal economic recovery.

Oil traders have looked to equities and macroeconomic data for signs of a turnaround that could boost fuel demand.

US stocks fell as the lackluster housing data outweighed positive results from bellwether companies such as Apple and Caterpillar.

The dollar rebounded from a 14-month low against a basket of major currencies, with the euro falling below US$1.49 after failing to breach options-related barriers around US$1.50.

"The dollar strengthening coupled with the stock market slide pulled crude lower after it hit US$80. And there may be profit taking after eight straight sessions higher," said Dan Flynn, analyst at PFGBest Research in Chicago.

Analysts said that if prices again surpass US$80 a barrel, the rally could gather momentum because of a high density of call options -- a contract that gives traders the option of buying crude at a set price -- at around this level.

PRICE CONCERN

US Energy Secretary Steven Chu expressed concern about rising oil prices possibly hurting an economic rebound.

"Even US$80 is making me nervous," he told the Reuters Washington Summit, adding the government of the world's top fuel consumer would prefer stable prices to volatilie prices for the sake of economy.

OPEC Secretary-General Abdullah al-Badri said oil prices at US$80 a barrel were "a bit high," but they had helped the group revive major upstream investment projects to create a larger supply cushion.

The market was also awaiting direction from the US inventory due out later Tuesdy from the American Petroleum Institute, and from the US Energy Information Administration on Wednesday.

A preliminary Reuters poll of analysts forecast the data will show a 2 million barrel build in crude stocks last week.

US distillate stocks, which include heating oil, are near 26-year highs and are expected to be ample even if forecasts for below-normal temperatures materialize in the United States this winter.

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Wall St ends lower on weak data, profit taking

October 21, 2009
US stocks retreated from 12-month highs yesterday as disappointing housing and inflation data prompted investors to book recent gains despite strong results from bellwethers including Apple and Caterpillar.

New construction of US homes rose less than expected in September and US producer prices posted an unexpected decline, both pointing to an anemic economic recovery.

DuPont shares fell 2.2 percent to US$33.87, making it a top drag in the S&P materials sector and the Dow industrials after the chemical maker posted higher-than-expected third-quarter profit, but revenue fell short of Wall Street estimates.

Coca-Cola Co fell 1.3 percent to US$54.07 after reporting sales that also missed expectations.

Shares of companies in the materials sector declined as commodity prices fell. The Reuters/Jefferies CRB commodity index was off for the first time in seven sessions and crude oil settled lower for the first day in nine.

Shares of home builders also fell, with the Dow Jones home construction index <.DJUSHB> down 2.1 percent.

"The market is trying to absorb all the earnings news and see where the economy stands. The market has rallied recently pretty good, so it's giving back some of the gains," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois.

"Off the weaker housing data, people are forecasting a little bit weaker economy and that is hurting commodities, as the economy may not be as strong as previously expected."

Caterpillar Inc shares hit a 12-month high after the machinery maker's third-quarter earnings soared past expectations.

Caterpillar, up 3 percent at US$59.61, was the Dow's best performer, even as the blue-chip index dropped 50.71 points, or 0.50 percent, to end at 10,041.48. The Standard & Poor's 500 Index fell 6.85 points, or 0.62 percent, to 1,091.06. The Nasdaq Composite Index shed 12.85 points, or 0.59 percent, to 2,163.47.

Among other Dow components reporting yesterday, United Technologies Corp dipped 0.1 percent to US$65.40 after its profit fell from the year-ago quarter. Pfizer Inc fell 0.3 percent to US$17.93 despite beating profit expectations.

Crude oil fell as the NYMEX November crude contract approached expiration and hurt shares of energy companies. US November crude oil futures expired at the close and settled at US$79.09 a barrel, down 0.65 percent, or 52 cents.

Shares of Dow components Chevron Corp and Exxon Mobil Corp fell about 0.8 percent, with Chevron at US$77.03 and Exxon at US$73.02.

Apple Inc posted earnings and sales that were higher than expected in quarterly results released after Monday's closing bell.

Yesterday, brokerages lifted their price targets on the iPhone maker's stock to as much as US$280, implying a gain of about 40 percent from current levels. Apple shares gained 4.7 percent to US$198.76.

In spite of yesterday's decline, the stock market's trend in the third quarter has been mostly positive. US stocks have risen steadily as S&P 500 companies have largely exceeded earnings expectations.

Through noon yesterday, with 95 of the benchmark S&P 500 companies having reported earnings, 79 percent have beaten expectations and only 11 percent have fallen behind, according to Thomson Reuters data.

Volume was moderate on the New York Stock Exchange, with nearly 1.24 billion shares changing hands, below last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.13 billion shares traded, below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 2 to 1, while on the Nasdaq, nearly three stocks fell for every one that rose.

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U.S. announces new aid to home market

October 20, 2009
The U.S. government announced Monday a new initiative to boost the housing market, helping support low mortgage rates and expanding resources for low and middle income borrowers to buy or rent homes.

According to a report released by the Treasury Department, the new plan includes two parts: a new bond purchase program to support new lending by housing finance agencies (HFAs) and a temporary credit and liquidity program to improve the access of HFAs to liquidity for the agencies' outstanding bonds.

    "This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times," said Treasury Secretary Timothy Geithner.

    "Through the years, many low and moderate income Americans have been well served by state and local HFAs, but the housing downturn has hit these organizations too," he said.

    "Housing Finance Agencies are critical partners to helping American families through this tough economic time," Department of Housing and Urban Development (HUD) Secretary Shaun Donovan said. "Today's announcement makes clear this Administration's commitment to providing responsible homeownership opportunities, affordable rental homes and getting our housing market back on track."

    The government did not disclose the cost of the new initiative but said that the plan would provide "hundreds of thousands of affordable mortgages for working families and enable the development and rehabilitation of tens of thousands of affordable rental properties."

    The new plan is expected to be launched in November, the month when a 8,000 dollar tax credit for first-time home buyers expires.

    The tax credit plan, which has been a key drive for the ailing home market in recent months, is a part of the U.S. government's rescue plan for housing market launched earlier this year.

    Latest data showed that the price of the housing market is still about 30 percent lower than its peak in 2007. Foreclosure rate remains climbing.

    Many economist say that the U.S. housing market need more support. But others worry that too much government support may reinflate the same asset bubble that got the country into the worst recession after the Great Depression.

    In its latest report, the Federal Reserve reaffirmed to keep the country's core interest rate at the historical low level for "an extended period."

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Oil hits 1-yr high above US$79, eyes equities

October 20, 2009

Oil prices rose more than 1 percent toward US$80 a barrel yesterday as stronger company earnings raised optimism about the economy, outweighing weak fundamentals.

US crude for November delivery settled up US$1.08 at US$79.61, the highest settlement since October 13, 2008. London Brent crude rose 78 cents to settle at US$77.77.

"We have been tagging along with equities," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "It comes down to whether or not the fundamentals underlying the oil market itself can justify holding that level."

Oil markets have been looking to equity markets and wider macro economic data in recent months for signs that the economic crisis is easing and energy demand may rebound.

US stocks rose yesterday, buoyed by investor optimism over the strength of earnings season at the beginning of a busy week for corporate results.

The dollar hovered near a 14-month low against the euro as investors bet the Federal Reserve will hold US interest rates near zero, which provided support for oil. A weak dollar makes dollar-denominated commodities like oil cheaper for holders of other currencies.

"The gains were overwhelmingly driven by financials and market optimism rather than fundamentals," said analyst Richard Gorry at JBC Energy in Vienna.

Crude prices have now risen for eight straight sessions and have gained more than 10 percent in October, spurred by a weak US dollar and bullish sentiment across financial markets, interpreted by some oil speculators as outlying indicators for a potential return to demand growth.

EYEING EQUITIES

MSCI's benchmark all-country world stock index was up around half a percent early on Monday, recovering after investors were disappointed by General Electric and Bank of America on Friday.

Thomson Reuters Proprietary Research shows that with around a quarter of companies in the US S&P 500 index having reported, 79 percent have beaten analysts expectations. In a typical quarter the percentage is 61 percent.

But oil market participants remains mindful that fuel demand is only expected to recover gradually, and that large volumes of oil, including refined products, are now in excess following a contraction in energy use triggered by the financial crisis.

"OPEC spare capacity has reached 6 million barrels per day, refining margins are depressed, OECD demand remains lackluster and the world has yet to come to terms with the massive middle distillate stock surplus. Oil looks a little overblown at US$79," JBC's Gorry said.

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Wall St hits 12-month highs; Apple up late

October 20, 2009
US stocks rose to fresh 12-month highs yesterday as optimistic investors rode a wave of solid quarterly earnings, which continued after the session's close when Apple Inc's shares jumped on its results.

Earnings from companies, including Gannett Co Inc, which beat analysts' expectations, and positive broker commentary on Caterpillar Inc further encouraged investors looking for confirmation the economy is healing.

After the closing bell, Apple Inc extended the stocks' momentum following the iPhone maker's results that also beat estimates and lifted US stock index futures. Its shares jumped 7 percent in extended trading.

"The fact that they beat as aggressively as they have tells me that they are selling music, telephones and personal computers in a market where everyone has thought up until now that the consumer is dead," said Phil Orlando, chief equity market strategist at Federated Investors in New York.

"So clearly the rumors of the demise of the American consumer have been greatly exaggerated. Either that or Apple is just doing a phenomenal job that consumers can't help themselves, they have to buy their products."

Consumer spending is a closely watched economic indicator, as it accounts for roughly two-thirds of the US economy.

The Dow Jones industrial average added 96.28 points, or 0.96 percent, to end at 10,092.19. The Standard & Poor's 500 Index gained 10.23 points, or 0.94 percent, to 1,097.91. The Nasdaq Composite Index rose 19.52 points, or 0.91 percent, to 2,176.32.

The Dow industrials and the S&P 500 closed at levels not seen since October 2008, while Nasdaq is at an almost 13-month closing high.

APPLE JUMPS AFTER THE BELL

Apple's stock rose above US$203 in extended trading after the company reported better-than-expected results as iPhone and Mac sales hit quarterly records. Apple shares jumped 7 percent to US$203.23.

Chip maker Texas Instruments Inc also posted quarterly profit and revenue that exceeded Wall Street's estimates on better-than-expected chip demand, boosting its shares 2 percent after the bell.

During regular trading, Caterpillar led the Dow industrials, gaining 6 percent to US$57.85 after Bank of America-Merrill Lynch raised its price target to US$65 from US$52, and increased its 2010 and 2011 earnings-per-share expectations, citing a faster recovery in machinery revenue next year. Caterpillar is set to report results today.

Gannett Co Inc jumped 8.2 percent to US$14.06 after the largest US newspaper publisher posted lower quarterly profit, but still beat expectations amid cost cutting.

Diversified manufacturer Eaton Corp rose 5.7 percent to US$63.89 after it reported profit that beat estimates and said it saw early signs of recovery in its markets.

As of noon Monday, 62 companies in the S&P 500 had reported earnings, with 79 percent above analysts' expectations, according to data compiled by Thomson Reuters.

This week's earnings include 13 Dow components and 135 companies in the S&P 500.

In other news, the Market Vector Agribusiness ETF gained 3.1 percent, with US-traded shares of Potash Corp of Saskatchewan up 6.5 percent at US$103.71 after a research report speculated that miner BHP Billiton could afford offering a 30 percent premium to acquire the Canadian fertilizer maker.

HOME BUILDERS OFF, VOLUME THIN

Home builders' shares slid, with the Dow Jones home construction index down 1.3 percent. KB Home dropped 2.3 percent to US$15.46.

Frank Husic, managing partner and chief investment officer of Husic Capital Management in San Francisco, said the home building sector's shares were hurt by concerns the current US$8,000 tax credit to first-time home buyers, which expires on Nov. 30, would not be extended.

Volume was light on the New York Stock Exchange on Monday, with 1.08 billion shares changing hands, sharply below last year's estimated daily average of 1.49 billion. On the Nasdaq about 2 billion shares traded, short of last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 14 to 5, while on the Nasdaq, about nine shares rose for every five that fell.

Monday's rally coincided with the 22nd anniversary of Black yesterday, as Oct. 19, 1987, is known, which was the day the Dow industrials fell 22.6 percent -- still the largest daily percentage drop on record.

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Few lessons learnt from crisis

October 20, 2009

There is something about coming to this sun-baked corner of California that feels like inspecting the scene of a crime.

Riverside, part of the thickly populated area known as the Inland Empire east of Los Angeles, has become synonymous with all the worst lending and spending practices of a property boom that busted and pushed the world's No. 1 economy into its longest slump since the 1930s.

"Welcome to Ground Zero," said Melinda Opperman, vice president at the Riverside branch of Springboard, a nonprofit counseling group that helps homeowners avoid foreclosure. "This is where the canary died."

In the early coal mines, a dead canary meant the buildup of noxious gases. And the Riverside housing market was surely one of the nation's most toxic, with some of the fastest growth rates in the boom and one of the worst reversals.

There is a call to action in the destruction of wealth.

Consumers have to bone up on finances and homeownership, banks need to tighten internal controls and corporate governance and red-faced regulators must show they can protect borrowers and oversee lenders.

But responses to the housing crisis may fall short of fostering the kind of stability required to rebuild a housing market healthy enough to withstand the next downturn.

The government's focus on American homeownership and corporate zeal to make money on loans leaves open the possibility that the same behavior that led to the market meltdown will be allowed to flourish.

Already, some are declaring the crisis is nearing its end, that the US housing market has hit a floor - though rising unemployment and an unknown quantity of inventory yet to hit the market could destabilize the market.

Others, including some of the same rare skeptical voices raised during the boom, warn that few lessons have been learned and say declarations the worst is over are at best optimistic.

"The same people who told us there was no crisis are the ones who are telling us it's over," said Peter Schiff, president of brokerage Euro Pacific Capital, famous for his prediction in 2004 of impending doom due to lax lending and adjustable rate mortgages, or ARMs.

Schiff, who is running for a U.S. Senate seat in Connecticut, now warns property prices have further to fall as the billions of dollars in option ARMs begin to blow up.

"This is going to get much, much worse," he said. "Just how long are we going to live in this delusional state?"

'Financially illiterate'

While still scrambling to stop more people from going into foreclosure, consumer advocates are also looking toward avoiding future crises through accountability in the real estate industry and responsibility among American consumers.

"We wouldn't be saddled with all this debt if we were a financially literate nation," said Lori Gay, president of nonprofit lender Neighborhood Housing Services of Los Angeles. "But we're not. We're a financially illiterate people."

The housing boom had its origins in the early years of this decade thanks to then historically low interest rates. To generate more demand for loans, banks began offering mortgages to people who could not afford them over the long term.

Borrowers blindly bought with no money down and "stated income" loans - whereby prospective buyers could say what their income was but not have to prove it, earning this type of mortgage the nickname of "liar loan." And then there were the deceptive ARMs that proliferated in California and elsewhere.

Alejandro Estrella is a case in point. The 47-year-old postman in Riverside, California recounts how he was given a $US300,000 Option ARM - one of the worst toxic loans because it allowed him to pay what he wanted every month but his principal increased as a result.

"It's crazy to think now how stupid I was," Estrella said on his lunch break in Riverside. "When I got my mortgage my broker said 'Don't worry about making the payments, you can catch up later on.' My broker has since lost her own home and I nearly lost mine."

"What the hell were we thinking?" he added. "We Americans have been very stupid when it comes to money."

Who takes responsibility?

Even if consumers were stupid, many blame banks and Wall Street for taking advantage of them, and argue that government action has done little to hold them accountable.

The lion's share of public money has gone to fix loans made by banks which knew they were taking too much risk but were intoxicated by riches that came from ever growing volumes.

Bruce Marks, CEO of the Neighborhood Assistance Corp. of America, likened lending practices of the boom to "loan sharking," adding: "You cannot blame the homeowner."

NACA says it has pressured major lenders including JPMorgan Chase & Co into doing thousands of modifications.

Homeowners are also the focus of the U.S. Treasury's $75 billion program to refinance and modify loans.

Under the Home Affordable Modification Program, borrowers can reduce housing payments to 31 percent of their income. So far, more than half a million homeowners have seen payments reduced on a trial basis.

Government help to the homeowner has a controversial side, just as does the $700 billion in taxpayer bank bailouts.

The majority of borrowers offered modifications before the launch of President Barack Obama's plan are expected to end up in default again, raising questions over the value of another costly plan. Many in real estate believe modifications are manipulating an economic cycle that will ultimately manifest itself as consumers are forced to pare back further.

"They are just postponing the foreclosure process," said Fred Arnold, whose American Family Funding in Stevenson Ranch, California, provides loans. "It might sound cold of me."

What's more, the government is fanning the flames of consumer entitlement, said Todd Kaufman, chief executive officer of Alta Community Investment, who led a team at Washington Mutual that encouraged the boom in lending by packaging loans into bonds.

"The government is sending a very poor message to people ... you were screwed by your bank and we'll take care of you," he said. "It's a systemic problem in our society and the government is pouring lots of gas on it."

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British economy shows signs of recovery, but difficulties remain

October 19, 2009
The British economy has shown signs of recovery, and it is expected to get over the recession within the year but the rebound will be slow and weak.

    Official figures showed last week that the number of jobless people in Britain has fallen for the first time since the spring of last year -- an unexpected evidence of labor market resilience in the worst recession in decades.

    The Office of National Statistics said that 2.469 million people were out of work and seeking a job between June and August this year, slightly down from the period of May to July. This was the first fall in its quarterly unemployment rate since March-May period of 2008.

    House price rose by 0.7 percent in September from the previous month, boosted by rising values at the top end of the market. It was the fourth consecutive month of increase, indicating that the housing market is getting back on the right track.

    The boom in the stock market is another sign that the British economy is on the way to recovery. The benchmark FTSE 100 index closed at over 5190 points at the end of last Friday, about 20 percent higher than last summer when the global financial crisis first erupted.

    Meanwhile, the U.S. Conference Board said earlier this month that the leading economic index for Britain, which forecasts economic performance in the coming three to six months, increased by 0.9 percent in August following a gain of 0.5 percent in July, the fifth consecutive monthly rise.

    Therefore, many analysts have predicted the British economic recovery will start within the year and some even believed it had already started in the third quarter.

    However, the country has to tackle problems such as weak household expenditure and soaring government debt before significant rebound could happen.

    Household spending declined by 0.6 percent in the second quarter of this year compared with the previous quarter and dropped by 3.6 percent against the same period last year due to high jobless rate and low wage increases.

    Soaring public debt is another headache for the British government and its fiscal deficit is expected to reach a record high of 175 billion pounds (285.4 billion U.S. dollars) at the end of this year.

    The risk of deflation also pose a potential threat to sustainable economic recovery as inflation has been declining and gain of earning tumbled in the three month to August -- some analysts predicted Britain could face a deflation next year.

...Read more...

Sam's big slide

October 19, 2009

The long decline of the US dollar is not all bad news, writes Lucy Battersby.

A SEALED limited edition box set of the Beatles' remastered mono recordings was going for $699.99 on eBay last night.

The re-mastered songs were "a thing to behold", according to the seller, with Lady Madonna "rolling like a freight train" and I'm Down "hitting the guts".

The seller was based in a town called Lake Forest in the US, which means any Australians buyer would have done a quick calculation to see how many Australian dollars they would need to pay for the box set and the $US44.55 postage — a total of $US744.54.

Yesterday, $US744.54 was worth $A810.52. A year ago it would have been $1110.43.

But the rise of the Australian dollar is not just a story about the good deals suddenly available on global online auction websites.

With Australia's strong economic position in relation to other developed economies and the benchmark interest rates at 3.25 per cent, Australia is an attractive currency for foreign investors right now.

From a consumer's point of view, a weak currency is bad because foreign travel is expensive and foreign-made goods cost more. But from a government's point of view a weak currency can be a very good thing, particularly if you have a lot of debt and want to increase your exports.

The US dollar has been weakening since 2002, falling about 10 per cent every year against the currencies of its 20 major trading partners, according to a trade-weighted index compiled by the Federal Reserve.

Its fall was interrupted in March last year when investors started getting jittery about high-risk investments and began transferring their assets into cash. When the liquidity crisis hit in October, demand for the US dollar jumped and the dollar shot up to 95 points on the trade-weighted index in November, the strongest it had been since 2007.

Businesses were buying US dollars straight out of the currency cash markets because they could not get credit through normal channels, Macquarie Group economist Mark Tierney told BusinessDay. This pushed the price of the US dollar even higher.

But as the debt crisis has faded and the cost of borrowing returned to normal levels, that cash has been sold back to the market.

Now, the US dollar has returned to that longer-term downward trend, and since April this year has fallen about 15 per cent on the Federal Reserve's index. Against the Australian dollar, it has dropped 45 per cent since 2002.

In July last year, the Aussie reached US97.98¢, then fell US30¢ after the financial crisis hit. It has since recovered, and as BusinessDay went to press last night it was buying US92.25¢.

Demand for the US dollar is expected to stay low for as long as the Federal Reserve keeps its benchmark interest rate at an emergency low of 0.25 per cent. Low interest rates give a low return on cash deposits, so investors are converting their deposits into higher yielding currencies, like the Aussie.

...Read more...

Breaking down the deficit: It's been worse (by some measures)

October 19, 2009
The federal government's budget gap is huge — but by some measures, it's been bigger in the past.

The annual budget deficit reached $1.4 trillion in fiscal year 2009, the Obama administration said Friday, a record sum by far in dollar terms. It's the result of both a huge jump in spending and a sharp drop in tax revenue.

In effect, the federal government went on a spending binge at the same time it received a sharp pay cut.

And if, like an overextended consumer, Washington doesn't mend its ways, it will pay more and more in interest. Interest payments could balloon to $799 billion in 2019 from $191 billion in 2009, according to an estimate by the nonpartisan Congressional Budget Office.

The budget gap reached 10 percent of gross domestic product in fiscal 2009, which ended Sept. 30. GDP is the broadest measure of the economy's output.

That's the largest proportion since World War II, when it was much higher. The 1943 deficit, for example, equaled 30.3 percent of the economy.

The total national debt is projected to worsen over the next decade unless major changes are made to tax and budget policies. According to the CBO, publicly held national debt — which represents the accumulation of annual deficits — would reach 81.7 percent of the economy by 2019, from about 51 percent in fiscal 2009. Still, that's below the record of 113 percent in 1945.

That level of debt could drive interest rates higher as Uncle Sam struggles to finance the flood of red ink.

Friday's announcement raises other questions. Here are some answers.

———

DEFICITS, DEFICITS:

$459 billion: 2008 deficit

$1.4 trillion: 2009 deficit, highest on record

$1.4 trillion: 2010 deficit (Projection by Congressional Budget Office)

$974 billion: 2011 deficit (projected)

$633 billion: 2012 deficit (projected)

$1.2 trillion: 2019 deficit (projected)

———

BIGGEST DEFICITS AS PERCENTAGE OF GDP, SINCE 1940:

10 percent: 2009 deficit

3.2 percent: 2008 deficit

6 percent: 1983 deficit

21.5 percent: 1945 deficit

30.3 percent: 1943 deficit

———

WHEN HAS THE NATION RUN A SURPLUS?

12: Number of years since 1940 the United States has run a budget surplus

28: Number of years the budget was in deficit, 1970-1997

4: Number of years the budget was in surplus, 1998-2001

$70 million: Cumulative U.S. surplus from 1789-1849

$1 billion: Cumulative U.S. debt from 1850-1900

———

NATIONAL DEBT, HIGHS AND LOWS:

29.6 percent: National debt — the total of annual deficits — as a percentage of GDP in 1790

2.7 percent: Debt as percentage of GDP in 1916, lowest since 1900

33.4 percent: Debt as percentage of GDP in 1919, after World War I

112.7 percent: Debt in 1945

24.6 percent: Debt in 1974, a postwar low

51 percent: National debt as percentage of GDP, 2009

81.7 percent: National debt by 2019 (CBO estimate)

———

SPENDING OVERSEAS (All figures for 2008):

40.8 percent: United States

90.2 percent: Belgium's national debt as percentage of its GDP

107.9 percent: Greece's debt-to-GDP

60.6 percent: UK

54.2 percent: France

38.9 percent: Germany

———

MAKE LESS, SPEND MORE:

$419 billion: Drop in federal taxes and other revenue from 2008 to 2009

$543 billion: Increase in spending from 2008 to 2009

$2.1 trillion: Federal revenue in 2009

$3.5 trillion: Federal spending in 2009

———

PAYING THE PIPER:

$253 billion: Interest paid by government, 2008

$191 billion: Interest in 2009

$799 billion: Projected interest, 2019

———

INTEREST COSTS COMPARED for 2009:

4.7 percent: Interest as a proportion of federal spending

18.1 percent: Military's proportion of spending

11.6 percent: Medicare's proportion

———

INTEREST COSTS COMPARED for 2019 (White House projections):

14.6 percent: Interest

13.5 percent: Military

16.4 percent: Medicare

...Read more...

Dow Jones hitting 10,000 points

October 19, 2009
Investors are euphoric over the Dow Jones recapping five digits this week, more than a year after getting clobbered by a sudden implosion of the financial system. Many are overly upbeat about the world economy making a robust comeback, and cannot wait to bait big on the equities in their hastening chase for wealth.

For the huge number of individual investors worldwide, the rush for big returns of investment may not bear fruit in the end. To put more of one's hard-earned eggs in equities at this moment when the average rise of major stock markets is no smaller than 30 percent from their dearth, will prove to be too much risk-taking and imprudent, if not gambling.

The chance for the market to make continuously solid gains after a sprint from the ebb since last March is slimmer, economists believe. Now isn't time for being exuberant but taking caution. The sizzling surge in the past 6 months is feared to greet a hiatus.

It is true that global economy is stabilizing and the heavyweight ones like the United States and China have shown signs of a tentative recovery, but uncertainties remain, clouding the prospect of a sustainable bounce back to pre-crisis levels. Consumers are kept timid who tend to snap shut pockets while shopping in stores, amid a murky picture of unemployment which could worsen in the following months.

If history is any reminder, once a milestone of 10,000 points is reached, it needs a few weeks, if not months, to consolidate. The majority of market watchers are cautiously optimistic about the coming days, but the possibility the economy could take a u-turn and go down again hasn't been eliminated yet. After all, the recovery in the United States, the world's economic locomotive, is fragile, as consumers there are traumatized by the crisis and not enthusiastic about spending at all.

As America's Main Street struggles in the sand, and the jobless rate is predicted to go up to 10 percent in the first half of 2010, the big American banks, major drivers of Dow Jones, have reported in the newest quarterly report they are now making money. However, a closer look into the books finds that the lenders' profits originate from trading stocks, bonds, precious commodities like oil and gold and other assets, while not from lending, refinancing homes and other traditional bread-and-butter business.

Some fear that the banks' lopsided operation doesn't bode well for the sector as questions linger what happens if trading profits fall off. That is more likely if the stock market heeds the jitters of uncertainties and goes down. And, the American mortgage market remains bearish, though some tech companies have reported increasing sales.

China seems in a better shape as a proactive fiscal policy and monetary relaxation has led to mammoth government investment into infrastructure, which has buoyed domestic spending of steel, cement and other basic materials. In recent months, consumers gained confidence in the government's job-boosting measures and started to buy houses and other items.

However, investors keep vigilant of the country's notoriously volatile stock market, as earlier gains have eroded, partly because of the government's massive outpouring of new IPOs diluting the nascent market rally in the first half year. The Chinese stock market is directionless now, as investors face huge difficulty to judge the trend of the economy, which might strengthen further but the prospect of inflationary pressure is sure to invite interest rate rises from the central bank.

...Read more...

US debt dilemma, no better solution?

October 18, 2009

The U.S. government is without doubt facing great challenges, among which the debt dilemma is the biggest test.

The 1.42 trillion dollars federalbudget imbalance of the fiscal year ending on Sept. 30 announced Friday is a so-called better-than-expected result. The figure, which tripled last year's record, deserves close attention.

As a proportion of the economy, the deficit accounts for about 10 percent, the highest it has been since the World War II. Earlier this year, the government had projected the ratio might reach about 12 percent.

For fiscal year 2009, the government collected 2.1 trillion dollars in revenues, a 16.6 percent drop from 2008, while government spending last year jumped to 3.52 trillion dollars, up 18.2 percent over 2008.

In its statement Friday, the Treasury Department estimated deficits would total 9.1 trillion dollars over the next decade unless corrective action was taken.

REASONS BEHIND THE INCREASE

The Secretary of Treasury Tim Geithner gave two reasons for the skyrocketing federal deficit.

Firstly, Geithner believed that the deficit was inherited from the George W. Bush administration.

The statement from the department said that "the 2009 deficit was largely the product of the spending and tax policies inherited from the previous administration."

Second, it was a result of the government's actions to tackle the worst economic recession since the Great Depression of 1930s.

The Obama Administration has launched a 787-billion-dollar stimulus bill to boost the economy and another 700 billion dollars to stabilize the financial system since President Barack Obama took office at the beginning of the year.

"This year's deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers." Geithner said.

"It was critical that we acted to bring the economy back from the brink earlier this year," White House Budget Director Peter Orszag said in a statement.

The fact that Americans have been addicted to debt is not news anymore. It dates back to the Ronald Reagan era in 1980s when the president began to think that a deficit budget was not a big deal for the country thanks to the status of the U.S. dollar as the core of global reserve currencies.

George W. Bush, too, believed deficits mattered little. During his terms of presidency, Bush launched the war against Iraq and reduced taxes twice, changing the federal budget from surplus to severe deficit.

Now the U.S. government realizes that heavy and heavier debt really matters, thanks to the financial crisis that hit in 2008.

David Walker, the former Comptroller General of the United States, and now President of the Peter G. Peterson Foundation, said Americans living beyond their means would finally lead to leadership deficit of the world.

The U.S. federal deficit would be unsustainable if the government did not impose fiscal discipline, said William Gale, senior fellow of the Washington think tank the Brookings Institution.

"The president recognizes that we need to put the nation back on a fiscally sustainable path," White House Budget Director Peter Orszag said.

NO BETTER SOLUTION?

Basically, as the former Treasury Secretary Robert Robin put it, there are only two ways to solve the deficit problem: to increase income on one hand, and cut spending on the other.

The Obama Administration, at least at this moment, seems unwilling to take serious actions on either.

Firstly, let's look at the spending side.

The economic recovery remains nascent and fragile; the unemployment rate is high and still climbing. At 9.8 percent, unemployment is expected to rise to double digits soon and will not fall significantly in the next several years.

In addition, President Obama has vowed to lay the foundation of prosperity of future generations, which means that he has to implement profound and fundamental reforms to American society.

The healthcare overhaul is one of the most difficult tasks that the government is pushing now. But critics say that "Obamacare" will only weigh more debt on American taxpayers, at least in the short run.

Moreover, the two wars in Iraq and Afghanistan have been constantly sucking money from the federal government.

Then, on the income side, the government faces an even harder choice.

To raise or not to raise taxes, the president has to make a reasonable decision. Obama had promised during his election campaign that he would not impose higher taxes on middle-class people, who make up the majority of American society. This is sensible, especially when a government or a party is pursuing re-election.

Therefore, the Obama Administration has been taking a relatively easier way to solve the problem, which can be called the globalized solution.

Simply speaking, the U.S. government's method is to borrow money from the world and devalue the dollar, the dominant reserve currency of the world currently.

The U.S. dollar index, a measure of the dollar's strength against a basket of major currencies, is down 14 percent since early March. It touched a 14-month low last week.

The dollar's sharp drop has led to considerable anxiety about the status of the United States as the dominant force in the global economy, said Zachary Karabell, a U.S. scholar, in an article published Tuesday in the Wall Street Journal.

What the Obama Administration has promised is that it will tackle the deficit problem when the economy is on a firm footing of growth.

But economists say the "let the debt grow itself out" solution will not happen in the short term and the recovery remains full of uncertainties. Besides, returning to fiscal discipline since then will be another story.

Obviously, foreign investors are not ATMs without limit either. No wonder many experts worry that the debt bubble will be a greater crisis some day in the future.

...Read more...

U.S. foreclosure filings rose in third quarter

October 18, 2009
U.S. properties subject to foreclosure filings totaled nearly 938,000 in the third quarter, up 23% from the year-earlier quarter and up 5% from the second quarter, RealtyTrac reported on Thursday.

The figures reflect properties subject to default notices, scheduled auctions and bank repossessions in the quarter.

The figures indicate that 1 in every 136 U.S. housing units received a foreclosure filing during the quarter. That's the highest quarterly rate since the Irvine, Calif., real-estate-consulting company began issuing its reports in first-quarter 2005.

Bank repossessions, known as real estate owned, increased in the third quarter from the second quarter in all but two states and Washington, D.C., RealtyTrac Chief Executive James J. Saccacio said in a statement.

That indicates that "lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan-modification efforts, and high volumes of distressed properties," he said.

In September, foreclosure filings were reported on 344,000 properties, up 29% from a year earlier and down 4% from August 2009, RealtyTrac reported.

The September figure was the third-highest monthly total since RealtyTrac began its reports, lagging only July and August of 2009.

Nevada continued as the state with the highest foreclosure rate, with 1 in 23 housing units subject to a foreclosure filing in the third quarter, nearly six times the national average.

Almost 48,000 Nevada properties were the subject of foreclosure filings in the quarter. That's up 59% from the year-earlier quarter and 10% from the second quarter.

Arizona and California followed Nevada, each with a foreclosure rate of 1 in every 53 housing units.

In absolute numbers, California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62% of U.S. foreclosure activity in the third quarter, with a total of 580,000 properties subject to foreclosure filings.

California itself accounted for more than a quarter of the country's foreclosure filings in the quarter, with more than 250,000 properties. That's up 19% from the year-earlier quarter and off 1.5% from the second quarter of 2009.

Florida's foreclosure filings totaled 157,000 properties, up 23% from the year-earlier quarter and down less than 1% from second-quarter 2009.

And Arizona was third, with more than 50,000 properties subject to foreclosure filings. That's up 25% from the year-earlier quarter and up 5% from the second quarter of 2009.

...Read more...

Silicon Valley's unemployment rate drops to 11.8 percent

October 18, 2009
A drop in the number of people looking for work sent Silicon Valley's unemployment rate down to 11.8 percent in September, raising concerns that some of them may be packing their bags and leaving town to look for jobs elsewhere.

The number of available jobs reported by employers also shrank, a sign that the recession is continuing to batter the valley's job market. The state Employment Development Department released September job figures Friday.

The drop in the unemployment rate could mean the return of a trend that occurred during the dot-com bust of the early 2000s, when discouraged job-seekers moved away. Others may have temporarily given up looking for work or returned to school, also typical of past recessions.

"It's not a good sign," said Stephen Levy of the Center for Continuing Study of the California Economy. "The rate went down because people dropped out of the work force."

There were 107,500 people seeking work in the valley in September, down 3.5 percent from 111,400 in August. The drop was three times the average for this time of year.

That helped drive the unemployment rate down from an initially reported 12.2 percent in August, which the EDD adjusted to 12.1 percent in Friday's report. The rate is calculated as a percentage of the total number of employed and unemployed.

At the same time, the valley lost 2,700 nonfarm jobs.

Valley employers have shed 47,200 jobs since September 2008. Manufacturing is down 13,700 jobs over the year, with more than 80 percent of that in the key high-tech areas.

"We may be starting to see some moving out of the area like we did during the dot-com downturn,'' EDD labor market analyst Janice Shriver said.

Another hint that people may be leaving the area came this week as the Alum Rock Union School District considered closing three schools because of declining enrollment.

Nevertheless, the valley's job market "appears to be stabilizing," Shriver said. Monthly job losses were close to the average for this time of the year, she said. And the number of employed typically drops by 11,200 at this time of year, she said, when many people opt to return to school. This time, it fell by 8,100.

The EDD combines Santa Clara and San Benito counties in its local report. The unemployment rate for more agricultural San Benito County was 12.5 percent, and 11.8 percent for Santa Clara County.

California's unemployment was 12.2 percent in September, down from a revised 12.3 percent in August.

The state lost about 39,300 jobs as the labor force contracted and the number of people looking for work also shrank.

Beacon Economics of San Rafael called the reason for the drop "an unwelcome one: 19,400 discouraged workers exited from California's labor force last month, meaning they are no longer being counted among the unemployed."

The state's numbers "tell us that employment is still contracting at a rate faster than we've see in past recessions but not as bad as during the worst months of this recession," said Jed Kolko of the Public Policy Institute of California.

The current rate of decline, if carried out for a full year, would be 3 percent, Kolko said. Last month's decline of 7,200 jobs may turn out to have been "just a blip" in a larger continuing decline, Kolko said.

One of the hardest-hit sectors in the state is construction. It has shrunk about a third over 32 months, to about 615,000 in September, said Michael S. Bernick, a former EDD director. "Construction seems to be in complete free fall," Bernick said.

...Read more...

Bank of America, GE results push stocks lower

October 17, 2009
STOCKS ended a strong week with a flash of selling after Bank of America Corp. and General Electric Co. signaled that businesses and consumers are still struggling to pay off their debts.

Stocks slid yesterday as quarterly results from the companies dented hopes that corporate earnings would show strong signs of improvement in the July-September period. A rise in oil also helped the market end well off its lows, following a similar pattern from earlier in the week.

The Dow Jones industrial average fell 67 points to close just below the 10,000 mark, which it had broken through on Wednesday for the first time in a year. Despite the declines stocks still posted big gains for the week.

Bank of America lost more than $2 billion after preferred dividends in the third quarter. The loss was steeper than expected and stirred fears that struggling consumers won't be able to increase their spending. The bank, one of the largest recipients of government bailout funds, said its losses from failed loans came to almost $10 billion.

Rivals Citigroup Inc. and JPMorgan Chase & Co. also posted higher loan losses this week that underscored the challenges brought by high unemployment, weak consumer spending and diminished home values.

"It is, after all, the largest consumer bank and it may have just offered up a reminder that financial strains in the household sector haven't gone away," said David Rosenberg, chief economist and strategist at Gluskin Sheff.

The Dow fell 67.03, or 0.7 percent, to 9,995.91 after being down as much as 123 points earlier in the day.

The broader Standard & Poor's 500 index fell 8.88, or 0.8 percent, to 1,087.68, and the Nasdaq composite index fell 16.49, or 0.8 percent, to 2,156.80.

Two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.4 billion, in line with Thursday.

A drop in the mood of consumers fanned concerns that people nervous about jobs and the economy will hold off spending. The Reuters/University of Michigan consumer sentiment index fell to 69.4 in a preliminary reading for October from 73.5 in September.

General Electric's report also revealed signs of credit weakness. The conglomerate's profit dropped 44 percent, hurt by much lower earnings at its financial arm, GE Capital, which loans money to a variety of businesses.

Tim Knepp, chief investment officer of Genworth Financial Asset Management, said the reports from Bank of America and GE reminded investors that a recovery in the economy will be difficult and that the stock market could be getting too far ahead of the economy.

"They're still talking about a tough environment," he said. "The market is a bit rich."

For the week, the Dow rose 1.3 percent, the S&P 500 index added 1.5 percent and the Nasdaq rose 0.8 percent.

The Bank of America and GE reports overshadowed solid results from Google Inc. that arrived after the closing bell Thursday.

Investors have pored over the rush of bank reports this week for signs that credit losses are stabilizing, which would boost confidence that the economy is improving.

JPMorgan reported a strong profit in part because of robust activity in its trading business, which compensated for its own higher loan losses. That helped push the Dow industrials over the 10,000 mark on Wednesday.

Bank of America fell 84 cents, or 4.6 percent, to $17.26, while GE gave up 71 cents, or 4.2 percent, to $16.08.

Crude oil rose 95 cents to settle at $78.53 a barrel on the New York Mercantile Exchange. Oil rose more than 9 percent during the week as the dollar slid. Oil and other commodities are priced in dollars so a drop in the currency makes commodities more attractive to overseas buyers.

Investors have continued to pump money into stocks even as many analysts worry that the market is getting overheated. The S&P 500 index is up 60.8 percent from a 12-year low in early March and some of those who have been left out of the advance have been buying on the dips.

That stream of new money could be disrupted if earnings reports signal that the economy will have trouble mounting even a modest recovery.

Most earnings from the third quarter have topped expectations, but the heaviest weeks of reports are yet to come. Weak revenue at some companies has been worrisome to investors, who want to see businesses increase their profits through sales growth and not just cost-cutting.

Reports are due next week from hundreds of companies ranging from Coca-Cola Co. to Microsoft Corp. Investors also will get data on home construction, sales of existing homes, inflation as well as a region-by-region look at the economy from the Federal Reserve.

In other earnings news, Google reported a record profit as revenue growth accelerated for the first time since the recession began in December 2007. The stock advanced $19.94, or 3.8 percent, to $549.85. During trading, it rose to $554.75, a 12-month high.

IBM Corp. fell $6.34, or 5 percent, to $121.64 after the company signaled that its business is improving but still down from where it had been. The value of services contracts that the company signed in the third quarter fell 7 percent from a year earlier.

Bond prices mostly rose, pushing yields lower. The yield on the benchmark 10-year Treasury note fell to 3.41 percent from 3.46 percent late Thursday.

The Russell 2000 index of smaller companies fell 7.16, or 1.2 percent, to 616.18.

...Read more...

Dollar recovers some losses at end of busy week

October 17, 2009
The dollar extended its losses against major currencies during the past week, but it picked up on Friday after weak economic data and disappointing quarterly results of some big U.S. companies hurt risk appetite in financial markets.

    Risk sentiment remains a key driving force in currency trading, analysts said. Weakness of the U.S. currency is likely to persist, as reports of housing start and existing home sales due next week are expected to provide further evidences that U.S. housing market is gaining strength.

    A bunch of major U.S. companies reported their third-quarter results this week. The world's largest chip maker Intel said on Tuesday that both its profit and revenue in the third quarter fell from a year ago, but still beat expectations. Intel forecasted fourth-quarter revenue well above Wall Street expectations, giving investors hope of a recovery in the technology sector.

    JPMorgan Chase, the second largest U.S. bank, said on Wednesday that it earned 3.6 billion dollars in the quarter from July to September, much better than expected. As the first major U.S. bank to report results of the last quarter, JPMorgan Chase helped push the Dow Jones Industrial Average above 10,000 on Wednesday, the first time in a year.

    Rising hopes for recovery drove the dollar lower against higher-yielding currencies, with the euro hitting a 14-month high of 1.4969 dollars in Thursday trading. But risk appetite faded later as results of other companies failed to satisfy investors whose expectations had risen in previous sessions.

    Goldman Sachs Group reported a profit of 3.03 billion dollars last quarter, much better than expected, but its investment banking revenue fell. Citigroup reported that its loss per share in the third quarter was smaller than a year ago, but credit losses remained high.

    Bank of America, the largest bank in U.S., reported a bigger-than-expected third-quarter loss on Friday. The bank wrote down almost 10 billion dollars in bad loans, about 1 billion dollars more than in the previous quarter. Quarterly results of conglomerate General Electric, technology giant IBM and chipmaker AMD were also disappointing.

    Economic data released during the past week are mixed. U.S. initial claims of jobless benefits fell by 10,000 to 514,000 last week, the Labor Department reported on Thursday. Both the four-week moving average of initial claims and continuing jobless benefit claims edged lower.

    A separate report from the Labor Department showed U.S. consumer price index (CPI) in September rose 0.2 percent from the previous month and fell 1.3 percent from a year ago. Core CPI, excluding food and energy, also rose 0.2 percent month-to-month. The report didn't show deflation, not did it show sufficient inflation pressures.

    U.S. consumer sentiment index fell to 69.4 in October from 73.5 in September, according to a latest survey released on Friday by the University of Michigan and Reuters. The decline reverses about half of September's improvement. The assessment of the economic outlook deteriorated sharply. The consumer spending is not strong enough yet to be a driving force of economic recovery, analysts said.

    The dollar's decline against most major currencies took a break on Friday amid improved safety-haven demand and profit-taking activities. The greenback was also helped by a report showing that foreign demand for U.S. financial assets remains strong. Foreign net inflows into long-term U.S. securities were 28.6 billion dollars in August following a net inflow of 15.3 billion dollars in July, the U.S. Treasury reported.

    However, the dollar kept falling against the pound on speculation the Bank of England policy makers may pause their asset-purchase program in the near future as the economy shows signs of recovering from the recession.

    The U.S. Federal Reserve Vice Chairman Donald Kohn reiterated on Tuesday that U.S. benchmark rates would remain near zero amid slow recovery and high unemployment. Minutes released on Wednesday revealed disputes among Fed officials on their latest monetary policy meeting in September. Policymakers of the central bank had a wide range of views about economic outlook.

    A top White House adviser repeated the U.S. administration's commitment to a strong dollar on Thursday. A strong dollar is in the United State's best interest, said National Economic Council director Lawrence Summers. But few economists are convinced, with some believing that the Obama administration is prepared to tolerate the dollar's weakness quietly.

    The dollar will extend its drop versus the euro over the next two to five years, falling as much as 20 percent to an all-time low under a widening U.S. budget deficit, Harvard University's Professor Niall Ferguson said.

    The euro bought 1.4899 dollars in late Friday New York trading, about 1.3 percent higher than a week ago. The British pound rose 3.3 percent to 1.6353 dollars. The dollar fell 0.6 percent during the past week to 1.0381 Canadian dollars, and fell 1.4 percent to 1.0179 Swiss francs. It rose 1.1 percent to 90.85 Japanese yen.

...Read more...