Category: Finance

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Finance

Interest Rates to Remain Low

Policy makers, including Fed Chairman Ben Bernanke, are feeling confident in the economy’s growth for the first time since August last year. Despite this confidence, they have promised to keep rates low for an extended period of time.

The Commerce Department announced yesterday that the economy had grown in the third quarter for the first time in more than a year. Gross domestic product grew at a 3.5% pace, exceeding the expectations of economists. This was the first growth for the GDP after four consecutive quarters of loss.

The S&P 500, after climbing 56% from a 12 year low set in March, has fallen 3.6 % from the 2010 high set October 19th. Fed officials said in their August Federal Open Market Committee meeting, that they plan to gradually reduce their pace of buying Treasuries in the hope of creating a smooth transition in the market. The program was originally supposed to end in October.

The Fed’s Treasury purchases have caused some investors to fear that they were monetizing government debt. Those fears were alleviated with the Fed’s announcement of an end to the program, causing yields to rise again.

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US Unemployment Rate Surpasses Ten Percent

Last month, for the first time in just over a quarter of a century, unemployment in the United States exceeded ten percent. Although the news is worrisome, analysts, dating back to a year ago, have been predicting that we would surpass ten percent.

The final tally, for the jobless rate, was approximately 10.2 percent, compared to 9.8 in September (190,000 payroll jobs were lost last month).

As unemployment increases, President Obama has taken notice and extended unemployment benefits. As of now, benefits have been increased to as much as ninety-nine weeks in some cases. Obama also stated that the latest reports made it necessary to take such actions and although we loss less jobs than the previous month, our unemployment rate increased. He went on to suggest that the news also a sharp indicator that there are still challenges ahead.

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Finance

Measures to Combat Improper Short Selling of Stocks

Investor concern about speculators using improper short sales to lower prices was eased on Monday by the SEC’s announcement of preventative measures. Wall Street executives have claimed that speculators using these tactics contributed to last year’s collapse of several major financial companies. Legislators have been pressuring the SEC to take action to combat the practice. While not placing restrictions on short selling, the new SEC measures do require more thorough disclosure. The SEC is looking at additional action to curb short sales, like making it harder for speculators to accumulate stocks when they are already declining.

One of the actions taken Monday by the SEC requires the disclosure of more information by speculators involved in short sales. Several Wall Street self-regulatory companies will release info on their websites reporting the number of short sales in stocks on a given day. Also, the sites will report times and amounts of each short sale within a particular company’s stock. That info will be published with one month delay. The new measures will take place in the next few weeks.

Another measure will attempt to weed out what the SEC calls “abusive” short selling. In an ordinary short sale, a trader borrows shares from investors and sells them. If the stock’s value falls, the trader buys back the shares for a profit. Then the shares are returned. The amount of shares that can be short sold is limited by the amount the trader can borrow. In an “abusive” short sale, the trader sells more shares than he is able to borrow, thus driving the stock’s value down.

A temporary requirement to limit abusive short sales had been in place since the fall; now it will be made permanent. The SEC also announced plans to increase reporting of “fails to deliver” on its website, essentially telling investors when a brokerage fails to find or identify shares to borrow. This can occur for various legitimate causes like technical problems, or can be an indicator of improper short selling practices.

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Green Light to Repay Bailout Funds

The Treasury on Tuesday gave the go ahead for ten of the largest US banks to repay $68 billion collectively in federal bailout money. The move also loosens restrictions on executive compensation which the banks claim are causing them to lose top executives. The banks received the aid at the height of the financial crisis under the Troubled Asset Relief Program (TARP).

Experts say that the green light given to the banks to repay the money is an indicator that some stability is returning to the financial system, though we have yet to reach the end of the crisis. Some analysts also fear that the repayments could make the gap between healthy and struggling banks larger.

All eight banks which received money under the TARP and passed government-conducted stress tests last month have confirmed they’ve been given the green light to repay the funds. Those eight are : Chase, American Express, JP Morgan, US Bancorp, Capital One, Goldman Sachs, State Street, BB & T Corp., and Bank of New York Mellon Corp.

Morgan Stanley failed the stress test, but was able to raise sufficient capital and was also approved to repay its bailout money. Northern Trust Corp. was not put through the stress test, but they were also allowed to repay their bailout funds.

Addressing reporters at the White House, the President said the news is certainly welcome but “this is not a sign that our troubles are over – far from it.”

The stock market was up and down in response to the news. The Dow Jones gained around 20 points in the afternoon. Other indexes also made moderate gains. Some experts fear that the banks repaying TARP money may hide problems within the broader banking sector, such as the billions in risky real estate loans that smaller banks are struggling with. In addition, larger banks are still suffering from mortgage backed assets which are at the core of the financial crisis.

600-plus banks have received almost $200 billion in aid under TARP, a part of the broader $700 billion financial rescue plan. 22 smaller banks have already repaid their bailout money.

Initially the aid was utilized to purchase preferred shares of the banks’ stock, which serve as investments that go to pay regular dividends.

Officials say that the funds were an important investment in the banks. The government would get warrants and dividends, slowing it to purchase shares of the banks over the next ten years at a set price.

Critics complain that taxpayers will never see a significant portion of the aid. But the news released Tuesday indicates that taxpayers could profit from repayments, at least for this program.

The President expressed his approval that people are starting to receive “an initial return on a few of these investments.”

Other funds from the broader $700 billion bailout package will be more difficult to recover. And at least some of it, like the $70 billion given to failed insurance company AIG eventually landed among the assets of relatively healthy banks like Goldman Sachs. As a result, taxpayers are extremely unlikely to get back the entire $700 billion, despite profits from the banks.

One analyst, while agreeing that the repayments are a positive indicator, noted that three of the largest banks in the country, Citigroup, Wells Fargo, and Bank of America are still a factor in the bailout.

Even those banks which have been allowed to begin repaying funds are dependent on support from the government, such as guarantees on their debt and Federal Reserve credit lines.

AMEX and US Bancorp expect the repayments to lower earnings for the quarter. Banks have been under restrictions on executive compensation and claim they have lost key employees to small firms and foreign banks. It is expected that the Administration will announce new rules governing executive compensation which would apply to banks that have received TARP funds.

When the aid was first awarded, Treasury received warrants from the banks which it could use at a later date to purchase stock at a fixed price. Stock values are expected to rise, of course, as the economy experiences a recovery. Hence the warrants could represent nice profits for taxpayers.

The banks are now allowed to buy back the warrants from Treasury at fair market value. Secretary of the Treasury Timothy Geithner testified before a Senate panel that the value of these warrants is several billion dollars.

Besides the possible profits for taxpayers from Treasury’s future sale of the warrants, all ten of the banks have paid, collectively, almost $2 billion over the last 7 months in dividends on the preferred stock.

The total of dividend payouts from all TARP recipients is about $4.5 billion so far, Treasury officials report.
The totals each bank could repay are:
JPMorgan: $24.8 billion
Morgan Stanley: $10.1 billion
Goldman Sachs: $10.3 billion
U.S. Bancorp: $6.5 billion
Capital One: $3.7 billion
American Express: $3.3 billion
BB&T: $3.2 billion
Bank of New York Mellon: $3.1 billion
Northern Trust: $1.7 billion
State Street: $2.1 billion

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Finance

Stocks Surge in Response to Positive Economic Reports

The month of June started out with a bang for the stock market in response to the release of positive economic reports. Some investors, however, fear that the month, historically not a good month for stocks, will end poorly. The upticks in the market on Monday defied signs that the economy is not out of trouble yet, like rising interest rates and the fourth largest bankruptcy in US history. Investors on Monday were responding to better than expected results in manufacturing, consumer activity, and construction starts. The Dow and other major markets gained more than 2%, and both the S&P 500 and Nasdaq reached their highest levels of the year.

Even though these numbers indicate a slowing in the economy’s decline, they are indicative of a complete rebound. Construction spending was slightly higher in April, though personal spending dipped. Personal income remained steady while manufacturing declined in May for the 16th month in a row, though at a slightly slower rate General Motors filed Chapter 11 bankruptcy on Monday, the fourth largest company to do so in our nation’s history. Though certainly not a shock, the filing did serve to remind us that the government is now very involved in corporate America, having recently taken over AIG and the mortgage companies Freddie Mac and Fannie Mae.

Elsewhere, Treasuries continued their decline in value and better than expected economic data caused the dollar’s value to drop. In contrast to a week ago, the rise in long term interest rates did not impact the market, though economists still fear the economic recovery could be hindered by the rising rates.

As the rally in the stock market approaches its fourth month, many analyst fear that the jump has been too quick since 12 year lows were reached in March. The S7P enjoyed its quickest recovery since the ’30s.

Analysts are worried that even though the economy appears to be stabilizing, there will be nothing to increase demand when the market hits bottom.

Analysts indicated that several technical factors were also partially responsible for Monday’s gains. The 1st day of trade in a given month typically sees new capital come in from mutual funds, hence the Dow and S&P both surpassed 200 day moving averages for the 1st time in more than a year. Moving averages are monitored closely and many investors buy or sell depending on whether they are reached.

The Dow gained more than 220 points, over 2.5% to close at its highest level since early January. Its losses for the year are down to 55 ponts, or less than 1%. The Dow announced it will drop GM after their bankruptcy filing, and Citigroup as well, since it is also partially a government owned company. Those 2 companies will be replaced on the market by Travelers Cos. And Cisco Systems sometime next week.

The S&P 500 gained almost 24 points or 2.5%, while the Nasdaq rose more than 3%, or just over 54 points.
Some analysts have noted that the market’s patterns have been eerily similar to last year’s, declining through the middle of March, then climbing back up through the end of May. The bad news is that the market fell back down again last June. The average movement over the last 20 years for the month of June has been a .5% decline.

Top economists are predicting the economy to hit bottom in late summer or early fall, then go through a tedious recovery. The nations gross domestic product is expected to fall this year by a little more than 3%, while European nations and Japan suffer even bigger drops.

Also presenting an obstacle to a recovery is expected 2nd quarter coporate earnings. Should they be even worse than expected, the market could be impacted significantly.
Government-issued bonds declined once again, pushing yields close to last week’s high levels. The yield on a 10 year Treasury climbed to 3.69% from 3.45% on Friday. This number is commonly used as a benchmark for many consumer loans such as home mortgages.

The dollar was weaker on Monday against the euro as well as the British pound. Gold lost ground, while oil was slightly up.

Stocks gaining value outnumbered declining stocks by a 5 to 1 ratio on the NYSE. Trading was heavy, at 6.2 billion shares, compared to Friday’s 5.85 billion.

The Russel 2000 index of small companies rose almost 20 ponts, or 4%. Internationally, Japan’s Nikkei gained 1.5%, Hong Kong’s Hang Seng gained 4%, Britain’s FTSE 100 gained 2%, Germany’s Dax rose 4%, and France’s CAC-40 climbed 3%.

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FDIC Fund to Be Replenished By Large Banks

A measure approved Friday will make large US banks mainly responsible for replenishing the fund which guarantees bank deposits. The measure passed despite opposition from a key regulator.

Chairman of the FDIC Sheila Bair defended the measure saying that larger banks, by irresponsibly funding high-risk mortgages, shoulder the bulk of the blame for the recent financial crisis.

In a vote of 4 to 1, the FDIC board passed the measure, which will charge a levy of 5 basis points on assets, minus each bank’s biggest capital holdings. It is a modification of a past decision which charged a special fee of 20 basis points on domestic deposits.

Big banks like Bank of America and Wells Fargo, because deposits represent a smaller portion of their total assets compared to regional banks, will pay more under the new rule. Comptroller of the Currency John Dugan, the head of the agency that governs major banks, had the one dissenting vote. He called the change “perverse”, saying that the failure of smaller banks has been chiefly responsible for the draining of the deposit insurance fund. He says that the new rule makes larger institutions responsible for 76% of the replenishing of the fund when they had little to do with its depletion.

On the other side of the argument, Bair says that many larger banks have relied on massive Federal aid, else they would have failed.

The new special assessment will be due during the third quarter, and could be followed by additional special fees. The FDIC’s expected loss for the fund was raised from $65 billion to $70 billion. A spokesman for the agency said the new assessment was necessary to prevent the deposit insurance fund from running out completely.

Actual and expected bank failures caused the fund to drop under $19 billion in the fourth quarter of 2008, a drop close to 50%. Thursday, the FDIC seized BankUnited Financial, the largest bank based in Florida, a move that will cost the fund almost $5 billion.

Also approved by the FDIC, an option to institute additional fees in 2009’s last quarter and 2010’s first quarter, should the fund’s drop in value affect public confidence. Bair says that such assessments are very likely, but hopes they would be less than 5 basis points, or 5 cents per $100 in assets. All fees would have a maximum of ten basis points. The third quarter special assessment will cost JPMorgan Chase around $741 million, Citibank around $319 million, Wells Fargo around $628 million, and Bank of America around $802 million. Officials within the banking sector say that the timing of the assessment couldn’t be any worse.

Bair said that the FDIC shouldn’t have to tap into its line of credit with the treasury, which was more than tripled this week to $100 billion. She said the increase in credit allows the agency to act more comfortably, and made the reduction in the special assessment possible.

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Treasury Secretary Stresses the Need for Worldwide Effort to Cure Economy

Treasury Secretary Timothy Geithner said Wednesday that the US is largely responsible for the poor state of the world economy but it will take worldwide effort to repair it. In a speech to the Economic Club of Washington, he said that in order for the world’s economies to recover from their worst recession in years, it’s vital to find a model for world economic growth in which US consumers are relied upon less.

The Treasury Secretary’s comments are part of an attempt by the Obama administration to encourage developing countries to rely less on exports for economic growth. President Obama spoke in London earlier this month at a meeting of the Group of 20 rich and emerging world economies(G20) with essentially the same message. Geithner is slated to reiterate the theme at a meeting of the G20 after a regularly scheduled meeting of banking officials and finance ministers from the Group of Seven major industrial nations (the United States, Britain, Canada, France, Germany, Italy, and Japan).

Geithner went on to say that the government is prepared to suffer budget deficits to incite economic activity but after the crisis subsides the Fed will get control of spending. Officials from the International Monetary Fund said Wednesday it expects the world economy to decline by 1.3% this year, the biggest hit it’s taken since World War Two.

Geithner also said that governments should continue economy stimulation measures even after their economies show signs of stabilizing to solidify the economic recovery. The US has been very vocal on the world stage in support of fiscal stimulus packages to aid economic recovery, while some European nations lean more towards stricter financial regulation.

Germany announced Tuesday it would not implement a third economic stimulus package even though their recession continues to worsen. G7 officials have said that at meetings to be held in Washington this weekend, European finance ministers will draw attention to shallow indicators of the economy stabilizing, even though none of them really expects a recovery to come this year. In contrast to Geithner’s comments that the US shoulders a large portion of the blame for the economic crisis, the IMF indicated in a report on Tuesday that the US is far ahead of European nations in cleaning up the balance sheets of its banks. Representatives present at the April 2 G20 meeting decided to boost the IMF’s funding and raise trade financing by more than $1 trillion. A tightening of restrictions on tax-dodgers was also agreed upon.

G7 finance ministers will try to expand on these proposals this Friday and will reveal their suggestions by late afternoon. The subsequent G20 meeting will focus on countries like India, Brazil, China, and Russia playing a more prominent role in financing the IMF as well as other global financial institutions. Geithner stressed the importance of other nations to provide markets for American goods and services in order to reverse our steep decline in exports. When Geithner was asked to comment on accusations that China has been manipulating its currency to obtain an unfair trade advantage, he only repeated the findings of a Treasury report that excused China from wrongdoing.

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Stocks Drop Late Friday, Reversing Early Gains

Stock markets, despite showing positive signs in a strong Monday rally, had another tough week. Responding to poor economic forecasts, stocks fell steadily through the rest of the week. As has been the trend lately, stocks plummeted in the last hour of Friday trading, negating gains made earlier in the week. Major indexes lost about a quarter of a percentage point.

Even though the market enjoyed a large two month rally in the spring, choppy trading shows that investors doubt the rally will continue. Other bad news for the market this week came in the form of the government’s expectation that unemployment could top 9.5%, which is worse than previously thought, and S&P’s prediction that the British government could lose it’s top shelf credit rating.

Friday started out good as stocks rose in response to higher than expected earnings from retailers such as Sears, Gap, and Aeropostale Inc. But for the third time this week stocks plummeted late to erase early gains as losses in the financial and industrial sectors dragged the overall market down.

The recent two month-plus rally, in which stocks rose more than 30% from 12 year lows set in March, had little chance to continue this week as very few economic reports were released. Next week there should be more fuel for the market, as reports on home sales, consumer confidence, and orders for manufactured goods will be released. The news in those reports could be a key factor in whether the spring rally resumes or came to an end on Monday.

One analyst said that everything is overpriced and we are still very much in a recession. The Dow Jones fell almost 15 points, The Nasdaq fell 3.25, and the S&P 500 fell 1 1/3 points.

Despite the up and down movement in markets through the week, they ended the week with very small gains. The Dow gained a tenth of a percent, NASDAQ .7 percent, and the S & P .48%. Standard & Poor’s warned Thursday that it may lower the British government’s excellent credit rating, a move that would raise their borrowing costs even as they are actively spending to help ailing British banks. The move caused some investors to wonder if the US’ credit rating could be next. Those concerns abated somewhat on Friday, but Treasurys lost value and the dollar fell to its lowest against the euro since January.

The 10-year Treasury note’s yield hit a new high for 2009, rising from 3.37% late Thursday to 3.46%. The 10 year note is commonly used as a standard for loans. The price of gold rose about a percent as investors searched for safe investments. Analysts worry about the economy’s ability to recover while interest rates are high and the dollar is low. There were some encouraging signs this week. The Federal Reserve reported less banks borrowing from its emergency loan program, and investment banks borrowed nothing. That hasn’t happened since the early part of September. The financial sector had mixed results after federal regulators seized their largest bank of the year and investors tried to deduce just how many more banks might fail. The credit card sector saw declines as the President enacted new laws governing the industry.

Florida based BankUnited FSB was seized late Thursday by Federal officials, a move that’s expected to cost the FDIC insurance fund almost $5 billion. It is the largest bank seizure since California based IndyMac bank last year that cost around $10.6 billion.

Bank of America fell 3%, or 34 cents, while Capital One fell 4.4%, or over a dollar, and American Express fell 3%, or 75 cents.
In non-major markets, the Russell 2000 index fell almost a percent, or 3.60 points. Markets will be closed for Memorial Day on Monday. Trading was down, from 5.76 billion shares on Thursday, to 4.35 billion shares on Friday, with about a 5 to 4 ratio of stocks rising to falling. Oil climbed 62 cents.

Internationally, Britain’s FTSE 100 gained .5%, Germany’s DAX rose .4%, France’s CAC-40 gained .3%, and Japan’s Nikkei dropped .4%.
The Dow Jone US Total Stock Market Index, which accounts for almost all US based companies, ended the week down .2% at 9,068 points. This time last year, it was at 14, 127 points.

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Nervous Investors Anticipate This Week’s Tide of Economic Reports

Wall Street should be somewhat volatile through the next week as various companies report first quarter earnings. Stocks rose on Friday as investors reacted to stronger than expected earnings from some companies. Several hundred more companies will be releasing their earnings reports this week as well as their expectations for the near future. Some big companies expected to report this week are Aetna, Inc., Mastercard, Metlife, Pfizer, Exxon Mobil, Sun Microsystems, Visa, and Starbucks.

Investors were surprised last week by Apple’s earnings coming in stronger than expected and Ford, while still reporting a loss, faring better than had been predicted. The Dow rose more than 119 points on Friday, helping the Dow, along with other major stock markets, recover from heavy early-week losses. Despite Friday’s rally, the Dow still finished the week down 55 points. The S&P 500 also lost, more than 3 points over the course of the week. This is normally a tense time for the market, as investors watch earnings reports and try to ascertain which direction the economy will go. This is especially true during a recession like we’re facing now. Some analysts believe that companies are intentionally setting projections low so that they will have a better chance at reaching them when earnings are announced. They fear that investors will catch on and alter their stock-buying strategies.

In the meantime, markets are anxiously awaiting more details about the government’s stress tests being given to the nation’s 19 largest banks. Bank officials were briefed by regulators Friday. The tests are supposed to determine which banks will need more government assistance. The banks will also be required to keep excess reserves of capital, forcing some banks to come up with more cash. The tests’ results will not be known until May 4, causing investor anxiety until then.

The Fed’s assessment of the economy is also expected this week, as well as its decision on whether to raise interest rates, after a meeting expected to be held Monday and Tuesday. Expectations are that they will not raise or lower interest rates. Federal Funds are already at a rate of 0-.25%, and could not go much lower. On Tuesday, the S&P/Shiller index of home prices for February will be released on Tuesday, and shortly after the Consumer Confidence Index for April will be released. On Wednesday, The Commerce Dept.’s report on first quarter gross domestic product will come out, followed Thurs. by their report on spending and personal income.

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New Hope For Economy Makes Stock Markets Perform Well

The Dow Jones Industrial on Friday was up, finishing its largest 6-week rise since July pf 1938. The Dow is up almost 23% over that time. The S&P 500 also closed higher and is in the midst of its longest streak of gaining weeks since 2007. A recent survey by Reuters and the University of Michigan showed that the confidence of US consumers is on the rise for the first time since September when Lehman Bros. suffered a sudden collapse. General Electric, as well as Citigroup both released quarterly reports which contained much better results than were expected. This boosted the broader market and other bank stocks started climbing as investors predicted other banks to follow Citigroup’s lead.

Bank of America, which will post their quarterlies on Monday closed almost 3 percent higher. The KBW Bank index rose almost 3.5% and is almost twice its lowest level this month. GE stocks also saw a significant gain. Economists say that the economy is stabilizing as data comes in that indicates credit markets are performing well. The Dow Jones gained almost 6 points Friday, while the S&P gained a little over 4 points and the Nasdaq gained just over 2 and a half.

The S&P’s streak of weeks posting a gain represents gains of almost 29% since the market hit a twelve year low early in March. This has decreased it’s year-to-date losses to about 4%. Nasdaq’s numbers were helped by Apple, whose stock rose more than 1.5%. Apple, who manufactures the popular iPhone and iPod, will post its quarterly numbers next week. Meanwhile, Google, who posted strong quarterly results Thursday, gained about 1%.

Other companies posting gains on Friday were McDonalds (up 2 ½%), Proctor & Gamble (up 2.3%), and Johnson & Johnson (up 1.5%). Citigroup, on the other hand, dropped more than 8% after posting a loss for the 1st quarter. Trading on the New York Stock Exchange was heavy, with almost 2 billion shares traded. Compare that to the daily average in 2008 of about 1.5 billion. The Nasdaq saw about 2.4 billion shares traded compared to 2008’s daily average of 2.3 billion. Stocks posting gains outnumbered losing stocks by about 2 to 1.

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Dow Falls, Street Climbs

Friday the Dow closed down 122 points, while Wall Street posted its first 2 week climb for over a year, however small. This is on the wake of the Fed’s announcement on Wednesday to buy over a trillion dollars in debt securities in an attempt to spur lending and spending. The market jumped up on Wednesday after Bernanke’s Beneficent Buying was announced, then investors began considering the long-term inflation that could arise from the Fed printing all its own money, and there were losses on Thursday and Friday. Decliners win versus Advancers by three to one.

Overall, for the week ending Friday, March 13, the Dow was up 0.8 percent for the entire week. This was the second week in a row the Dow gained a net advance, and the first time since May of 2008 this has happened. The dollar fell at least five percent against the euro, while oil prices shot up to more than $51 a barrel, the highest crude has been so far this year.

Experts on the Street warn about the fall-back or retrenchment for which many stocks were due. If you get a great run like on Wednesday after the Fed’s decision, then you are going to see a pullback.

Other stock indicators were losers for the week as well. The S&P 500 index fell about two percent, and the Nasdaq almost as much, but the Russell 2000 closed just over four hundred for a loss of over three percent, on Friday.

The stock market began a rally run up from 10 year lows about two weeks ago when confidence returned to banks reporting profits for the beginning of 2009. Fund managers are pointing to the overall move as a signal that the economic crises could be hitting bottom and shouldn’t be hard to sustain growth. Financials have transitioned from over sold to slightly over bought. The 10 year Treasury note yield on the three month bond rose from .18 percent to .019 percent.

Wall Street veterans express a healthy skepticism about the market sustaining the rally, however they are placated by the modest gains following larger ones. Many analysts point to weak knees and high unemployment as a reason the recovery may be too soon to be sustained. So far the rallies have been emotional and news driven some experts claim. The rallies have bounced near the bottom so hard it sucks in investors afraid to miss the rally ready to believe in recovery. Take the mutual funds that have gained a net investment of more than $12 billion as reported by TrimTabs Investment Research.

For the week’s end the Dow closed up more than half a percent. Small companies had net gains in the Russell 500 index of almost two percent. Elsewhere in the world, Britain’s FTSE 100 index rose three fourths of a percent. In Germany the DAX index gained more than a half of a percent.

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Fed Tries to Revive Economy by Buying Debt

In Washington on Wednesday the Federal Reserve announced they will buy up to $300 billion in long-term US government bonds and an additional $750 billion in mortgage-backed securities that have been guaranteed by Freddie Mac and Fannie Mae. After a 2 day meeting, Fed Chairman Ben Bernanke announced a record low short term banking rate would be left between zero and a quarter percent. Economists believe the Fed will keep this rate in place for both 2009 and most of 2010.

The real surprise of this Fed strategy is the plan to buy up such a large quantity of government bonds to the order of a trillion dollars or more. This has the immediate effect of liquefying the credit markets, lowering the rate on consumer debt, and has the long term effect of spurring consumer spending and ultimately reviving the struggling economy. After the announcements by Bernanke, Wall Street rebounded, and the Dow rose over one percent by close.

Government bond prices took off, while both the dollar and the 10 year Treasury note took a loss. The T-note had the largest one day drop in over 25 years. Bernanke has said the key to ending the recession; is stabilizing the credit and financial markets, and has pledged to do everything at his disposal to accomplish just that. At the announcement issued Wednesday by Fed policymakers that the economy continues to contract since January, implying causes such as job losses, equity loss in the housing sector, and constricting credit conditions.

Leading economists have the belief that everyone should benefit from the new Fed spending, as well as the belief that these steps are enough to halt the declining economy. The additional $750 billion on top of the $500 billion the Fed already buys in mortgage backed securities creates a whopping $1.25 trillion in debt purchasing. This is supposed to spur lending, the Feds main goal for this economy. The mortgage rates are low and have even fallen as a result of the announcement. Experts feel that this huge influx of credit may increase lending, and it may keep the rates down for a long time. Lending is related to spending, and the Fed hinted at program it may be unveiling next week that will expand consumer lending for autos and education another $1 trillion.

This has the net effect on the Fed of increasing its balance sheet to almost $2 trillion, doubled in five months from $900 billion. The Fed has to be careful and has said as much with regard to the so called “moral hazard” by creating an environment where companies play high-stakes games full well cognizant that the government will jump in and bail them out.

The Bank of England has taken similar measures buying government bonds to help revive the ailing British economy. Ministers of Finance from a number of countries have discussed coordinating their actions to maximize the effectiveness for the global financial situation.

The Fed warns that although the short-term economic outlook is not great the long-term outlook is for a gradual resumption of sustainable economic growth. For example some experts predict a peak unemployment rate of ten percent before the end of the year. Over four million jobs have been lost since the end of 2007, and a total of twelve and a half million out of work.

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Government to Buy Up Banks Toxics Assets

In Washington this week the Obama administration outline a bank buy out plan involving billions of dollars in soured loans. Industry officials say they will try to remove at least a trillion dollars from banks ledgers. Secretary of the Treasury Timothy Geithner announced the official details may be out by the first of the week. Administration insiders say the recent scandal over million dollar AIG bonuses for executive employees has soured prospects for future bailout money from the government. One aspect of Geithner’s plan would rely on the FDIC to aid the government’s $789 billion Recovery Act. The FDIC would create special partnerships with investors to buy up bad debt. Exact numbers were not given.

Another aspect of the as-yet-unannounced plan is to be a public-private partnership for investing in bad assets. In other words, the government would match 100% dollar for dollar any private investment, and share profits equally as well.

A third leg of the plan would involve the Term Asset-Backed Securities Loan Facility, or TALF, leveraging $100 billion from the Buyout Fund to support $1 trillion in Fed loans. Economists speculate that the key to success is speed. How quickly can the government get the toxic assets off of the banks backs? The sooner the banks have lending room, the sooner the system will get moving in the right direction. One concern about Geithner’s plan is that analysts worry that not enough is being done, or that the market becomes underwhelmed. For example, in February after Geithner’s announcement of the rescue overhaul, due to the lack of details the Dow plunged downward almost 380 points.

The market is waiting for a unique signal that the administration is finally tackling the problems the previous administration had been unable to resolve. And the main point of Geithner’s plan of attack is to rid the banks of mountains of bad loans and soured mortgage-back securities. This has been perceived as a failure for the Recovery and bailout program, that these toxic assets are not going away.

There have been a lot of political fallout against Wall Street, and some industry officials have expressed concern about the government changing the terms or imposing new regulations that harm the private sector.

This plan is just the latest in the government’s attempt to tackle the economic crises, other programs have included covering the back log of mortgage foreclosures; loosening up the markets that support credit card debt, student loans, and auto debt.

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Stocks up Thursday

Wall Street rallied for the second day in a row on Thursday March 26. The Nasdaq composite pushed into gainer territory for the year to date figures based on rising consumer demand and optimism based on the government reports that the economic crises is nearing the end of the worst. Experts at a trading firm have expressed that collectively seeing news as less negative than feared is very important to investor confidence.

Retail Stocks that confirm this new confidence are Best Buy, closing up over twelve and a half percent; Wal-Mart, one of the highest climbers, was up two percent; and the Standard and Poor’s retail index RLX gained over four percent.

The Dow Jones industrial average closed up over one hundred and seventy points, more than two and a quarter percent. The Nasdaq Composite closed up over fifty eight points, nearly four percent. Combined with earlier reports on both the housing market and durable goods market improving, investors pushed the S & P 500 Index was up over two and a quarter percent as well. At this current rate of growth the S & P 500 is on track for over twenty three percent growth since the ten year low in March.

Government data reveals the harsh fact that the entire US economy faltered in the last quarter of 2008 at the most rapid rate since 1982. US Corporate profits in the same quarter plunged the most in fourteen years. However, these losses are less than originally feared and investors took this as a buy sign. Two of the market sectors hit the hardest by contraction are homebuilder stocks and obviously bank stocks, both had upward gains on Thursday.

Some indexes are showing positive gains for the year to date: S&P’s technology index (GSPT), and the material index (GSPM). Natural resource companies gained along with commodity prices by Thursday’s close.

The Obama administration’s plan to finance the recovery act was having trouble selling government debt Wednesday, found new demand Thursday relieving investors concerns. Technology sector gainers include Apple, climbing over three percent; and the semiconductor index (SOXX) gained six percent. Total trade on the New York Stock Exchange was over 1.8 billion shares, more than last years average daily shares traded of 1.4 billion shares. Advances beat declines by a ratio of four to one. On the Nasdaq exchange advancers beat decliners by approximately 4.2 to 1.

In the Banking sector, Goldman Sachs released numbers expressing an expected performance in line with market forecasts, sending the stock soaring up almost five percent to close out over forty five dollars.