S&P 500 conquers the 1900 for the first time

U.S. stocks inched up on Tuesday to all-time highs after the opening bell, highlighted by the S&P 500 conquering the 1900 threshold for the first time on record a day after benchmark indexes finished at record highs.

America’s economy accelerated third quarter

America’s economy rose at a 2% annual pace in the third quarter, reported the Bureau of Economic Analysis this on October 26. It marks an acceleration from a second quarter in which growth clocked in at just 1.3%.

The acceleration itself is encouraging. So too are some of the sources of that acceleration. Consumers continue to pull their weight, and an 8.5% rate of growth of durable goods consumption in the third quarter suggests that the appetite for big purchases is holding up. Residential investment boomed, rising at a 14.4% annual pace for the quarter. Despite that the sector managed just a 0.33 percentage-point contribution to total growth. The relatively low contribution reflects just how far residential output tumbled during the recession and recovery. Construction should chip in ever more in coming quarters, however, as inventory levels have been plummeting and rents and prices rising.

Government spending and investment also helped output along in the third quarter. The biggest contribution came from a rise in federal defense outlays.

There is also some cause for concern in the report, however, which seems to reflect the slowdown in industrial activity related to global economic weakness. The contribution of investment to growth sank for a second consecutive quarter, and net trade was a drag on output as exports fell by more than imports. Where industrial recovery and trade helped compensate for domestic economic weakness early in the recovery, they now seem to be preventing domestic resilience from adding more to output.

There is good reason to expect continued acceleration into the fourth quarter. A recovering housing sector should continue to raise household confidence. But beyond that, the outlook grows more cloudy. A raft of spending cuts and tax rises—the fiscal cliff—looms at year's end. If Congress is unable to prevent some of the expiring measures from hitting, the fiscal blow could harm two of the sectors most responsible for this quarter's decent performance: personal consumption and government spending and investment.

Fed Announces Open-Ended Bond Purchases - QE3

The Federal Reserve on Thursday announced that it is launching a new program of open-ended bond purchases, so-called QE3, saying it will buy $40 billion of agency mortgage-backed securities each month as long as the economy needs it, starting Friday.

It's also keeping in place so-called Operation Twist, which consists of swapping short-dated securities for longer-term securities, as well as reinvesting the proceeds of maturing securities, so the central bank will be adding $85 billion of long-term securities each month through the end of the year.

The Fed is also extending its plan to keep interest rates exceptionally low until at least through mid-2015. Fed funds rates are currently targeted at a rate between 0% and 0.25%.

The Fed said it's acting "to support a stronger economic recovery" and expects the new program to put downward pressure on longer-term interest rates, support mortgage markets and help make financial conditions more accommodative.

U.S. stocks added to Thursday gains after the Federal Open Market Committee announced a new round of buying mortgage-backed securities.

U.S. Economic Growth Slows to 1.5% in Q2

 

The latest government statistics showed that the United States economy expanded by a simply 1.5 percent annual rate in the second quarter. It has lost the momentum it appeared to be building earlier this year. The government also provided on Friday a revised figure for first-quarter G.D.P., saying the economy then grew by a 2 percent annual rate. The previous estimate was 1.9 percent.

The economic growth, as measured by the gross domestic product, lagged as consumers curbed new spending and businesses held back. Consumers increased their savings rate, a sign of increased uncertainty about the future. Several bright spots in the first three months of the year, including auto production, computer sales and large purchases like appliances and televisions, dimmed or faded away altogether in the second quarter, and government at all levels continued to cut spending. Growth was not strong enough to drive down the unemployment rate, which has stalled above 8 percent in recent months.

Exports accelerated in the second quarter despite more recent signs of diminishing demand, but the gain was canceled out by a larger increase in imports, which count against the gross domestic product. Economists expect exports to shrink as the dollar rises against other currencies, making American goods less competitive.

The housing sector, which has gone from a drag on the economy to a positive, continued to grow, posting a 9.7 percent gain, though it is less than half its rate of growth in the first quarter.

Inflation, a measure watched closely by the Federal Reserve as it determines whether to take further action, slowed as well, with consumer prices growing only 0.7 percent compared with 2.5 percent in the first quarter.

The Commerce Department also released updated estimates of economic activity for 2009, 2010 and 2011. Those figures showed that the recession was less severe than it seemed in the most recent reports. The new estimates show that economic activity fell by 3.1 percent in 2009 and then rose by 2.4 percent in 2010. Last summer, the government reported that activity fell by 3.5 percent in 2009 before rising 3 percent in 2010. The estimated pace of growth in 2011, 1.8 percent, remained basically unchanged. It was previously reported as 1.7 percent.

The agency now estimates average annual growth of 0.3 percent over the three-year period, rather than 0.4 percent.

LIBOR Rigging

LIBOR (the London inter-bank offered rate) scandal that involves Barclays, a 300-year-old British bank, is beginning to assume global significance. Over the past weeks damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks.

The LIBOR that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion-worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

On July 3rd, Barclays PLC Chief Executive Robert Diamond caved in to intense pressure to quit after the U.K. bank became embroiled in a bitter political row over its role in the Libor rate-rigging scandal. Robert Diamond resigned amid a deepening dispute about whether the Bank of England pushed the lender to submit artificially low Libor rates during the financial crisis.

Like many of the City’s ways, LIBOR is something of an anachronism, a throwback to a time when many bankers within the Square Mile knew one another and when trust was more important than contract. For LIBOR, a borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day’s LIBOR fix.

In theory, LIBOR is supposed to be a pretty honest number because it is assumed, for a start, that banks play by the rules and give truthful estimates. The market is also sufficiently small that most banks are presumed to know what the others are doing. In reality, the system is rotten.

First, it is based on banks’ estimates, rather than the actual prices at which banks have lent to or borrowed from one another.

A second problem is that those involved in setting the rates have often had every incentive to lie, since their banks stood to profit or lose money depending on the level at which LIBOR was set each day. Worse still, transparency in the mechanism of setting rates may well have exacerbated the tendency to lie, rather than suppressed it. Banks that were weak would not have wanted to signal that fact widely in markets by submitting honest estimates of the high price they would have to pay to borrow, if they could borrow at all. Read full article “LIBOR Rigging” at smartinmoney.com

Operation Twist Extension: Latest Round of Monetary Easing

The Federal Reserve on June 20th it announced its seventh installment of unconventional monetary policy since running out of orthodox ammunition in late 2008, when short-term interest rates fell, in effect, to zero. It would purchase $267 billion of long-term bonds by the end of the year, paid for from the proceeds of sales of short-term bonds already in its portfolio.

The move extends a program, called Operation Twist (because it "twists" the slope of the yield curve on bonds) . To lower long-term interest rates down in the hope of stimulating demand, the Fed announced Operation Twist program last autumn and due to expire this month, under which the Fed has swapped $400 billion of short-term bonds for long-term ones. Previous initiatives have included purchasing bonds with newly created money (“quantitative easing”, or QE), reinvesting the proceeds of maturing bonds, and verbally committing to keeping rates near zero for ever longer periods.

This latest round of monetary easing, like its predecessors,  was motivated by the economy’s failure to grow as quickly as the Fed had forecast. Members of the Federal Open Market Committee (FOMC), the Fed’s main policymaking body, now expect growth of between 1.9% and 2.4% this year, down sharply from their April forecast of growth between 2.4% and 2.9%.

Moody’s Slashed Credit Ratings of Big Banks

Moody’s Investors Service on Thursday slashed the credit ratings of 15 large financial firms. Citigroup and Bank of America, two United States banks that were hit hard in the financial crisis, are now rated only two notches above junk. While Morgan Stanley avoided a worst-case scenario of a three-notch downgrade, its rating slipped by two levels.

The downgrades are a serious blow for the banking industry, which is already dealing with the European sovereign debt crisis, a weak American economy and new regulations.

Moody’s downgrades are part of a broad effort to make its analysis more rigorous. The financial crisis stained the reputation of credit rating agencies. Both companies attached high ratings to mortgage-backed bonds that later suffered big losses in the housing bust.

Before the announcement on Thursday, bank shares continued to fall. Goldman Sachs, Citigroup, Bank of America and Morgan Stanley were all down for the day.

JPMorgan's $2 Billion Loss

JPMorgan Chase CEO Jamie Dimon on Thursday revealed that the banking giant lost a $2 billion due to a massive trade that went sour, and that the losses could climb by another $1 billion in the coming days. Mr. Dimon said on Thursday that JPMorgan’s “synthetic credit portfolio,” an amalgam of derivatives and hedging bets that blew up in recent weeks, was part of “a strategy to hedge the firm’s overall credit exposure.”

Several days after announcing a $2 billion loss in its chief investment office, JPMorgan Chase is clearing house. Matthew E. Zames, the JPMorgan executive, was tapped Monday to replace the outgoing chief investment officer, Ina Drew.

The bank most likely structured the trade in a way that magnified losses (see the image). Read more “JPMorgan's Appalling $2 Billion Loss”

 

(The illustration is a courtesy off The New York Times)

S&P & Fitch lowered J.P. Morgan rating due to $2B loss

S&P cuts outlook on J.P. Morgan to negative

Standard & Poor's said late Friday it lowered its ratings outlook on J.P. Morgan Chase to negative from stable because of the bank's unexpected $2 billion loss on derivatives. S&P kept its A/A-1 issuer credit ratings on the bank and its A+/A-1 ratings on its subsidiaries.

S&P said it could lower its ratings by a notch if its determines that risk management mistakes were not limited to the specific credit portfolio mentioned late Thursday, or if it believes management is pursuing a more aggressive investment strategy than originally believed.

Fitch downgrades J.P. Morgan after trading loss

Fitch Ratings said on Friday it downgraded J.P. Morgan Chase & Co.'s long-term credit rating to A-plus from AA-minus, saying that while the $2 billion trading loss disclosed by the bank on Thursday is "manageable," the potential reputational risk and risk-governance issues raised are no longer consistent with an AA-minus rating. "The magnitude of the loss and ongoing nature of these positions implies a lack of liquidity," Fitch said in a statement after the stock market closed. "It also raises questions regarding J.P. Morgan's risk appetite, risk management framework, practices and oversight; all key credit factors."

Stock market reaction

Shares of J.P. Morgan closed down 9.3% on Friday and slipped further in after-hours trading.

U.S. stocks mostly slid Friday to a second weekly decline after a rise in consumer sentiment failed to outweigh J.P. Morgan Chase & Co.'s $2 billion trading loss, disclosed by the bank late Thursday.

The Dow Jones Industrial Average fell 34.44 points, or 0.3%, to 12,820.60, off 1.7% from the week-ago close. The S&P 500 retreated 4.6 points, or 0.3%, to 1,353.39, down 1.2% for the week. The Nasdaq Composite managed a fractional gain to close at 2,933.82, down 0.8% from last Friday's finish

First U.S. budget surplus in the past four years

The U.S. government posted its first monthly budget surplus of $59 billion in April since September 2008, thanks to increase in tax receipts and decrease in spending on education, Medicare and certain defense programs.

The government spent $260 billion in April, $70 billion less than in the same month in 2011. Receipts in April were $319 billion, up $29 billion from a year ago.

For the fiscal year to date, the deficit is $720 billion. For the full fiscal year, Treasury is projecting another deficit of more than $1 trillion.

The previous surplus of $46 billion was posted in September 2008, the month Lehman Brothers filed for bankruptcy.

Global Economy Prospects Improving

The global economy prospects are slowly improving, according to the IMF, which released new forecasts this week.

World GDP is set to rise by 3.5% this year, and by 4.1% in 2013. Emerging markets will sparkle, and America will grow by an improved 2.1%.

The IMF sees several risks ahead: the euro crisis and fiscal austerity in the rich world, upheaval in the Middle East and the possibility of a hard landing in countries, such as China, which have seen exceptional credit growth.

The IMF also warned that growth could be hurt by the deleveraging that is under way at European banks. Balance-sheets could be reduced by up to $2.6 trillion over two years, as the banks boost capital and get rid of unprofitable businesses. Credit will be harder to come by.

Inflation surpassed earnings

Consumer prices increased 0.3 percent last month, the department said on Friday. Gasoline prices rose 1.7 percent, a slowing from February when costs at the pump rose more than three times as quickly.

The inflation outstripped wage gains remains. Workers’ earnings fell 0.4 percent in March after adjusting for the increase in prices.

Core inflation, which strips out food and energy prices, climbed 0.2 percent, pushed higher by rising rents, medical care costs and used car prices.

In the 12 months to March, core consumer prices increased 2.3 percent after rising 2.2 percent in February. The persistence of core inflation could affect the Federal Reserve’s maneuvering room for stimulus.

Overall consumer prices rose 2.7 percent compared with a year ago, down from a reading of 2.9 percent in February.

Linsanity’s Economic Clout

Businesses capitalize New York Knicks point guard Jeremy Lin’s phenomenal success

The Linsanity  started in February 2012 when Jeremy Lin unexpectedly led a winning streak by New York Knicks while being promoted to the starting lineup. The Linsanity influence resonates beyond basketball court. It penetrates stock market, sales, and marketing, according to SmartInMoney.com.

Jeremy Lin is a Harvard-educated, undrafted point guard for the New York Knicks who seemingly emerged from nowhere to become an international phenomenon. He is also the first N.B.A. player to have at least 20 points and 7 assists in each of his first four starts. New York Knicks had a 7–0 record after Lin started receiving major playing time, 6–0 with him starting.

Since Linsanity breakout game through Friday, Madison Square Garden Co., parent of the Knicks, had seen its shares advance 13% since early February, compared with a 4.4% increase of the S&P over the same period.

Nike's short-term investment in Jeremy Lin is ready to pay some long-term dividends. Like a futures bet on a Wall Street stock, the athletic giant had the foresight to sign Lin to a minor deal when he entered the NBA in 2010. Nike extended its endorsement pact with Lin in late February to stop him from being stolen by rival athletic sponsors. Nike then launched “Linsanity” T-shirts for sale at its own stores and at Foot Locker Inc. locations. Nike hopes to double its sales in China to $4 billion annually by 2015.

15 banks passed Fed’s stress tests

15 of 19 banks passed stress tests, but Citigroup, Suntrust Banks, Ally and Metlife failed!

The Federal Reserve said 15 of the 19 largest U.S. banks pass stress tests, or Comprehensive Capital and Analysis Review (CCAR), as they could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Four banks, including Citigroup, have more work to do and need more capital.

Under the stress scenario, unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in prices would produce aggregate losses of $534 billion over nine quarters. Even with that blow, the 19 banks would see their tier one common capital ratio fall to 6.3 percent in the fourth quarter of 2013 in the hypothetical scenario, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.

It was the first time the Fed had released a thorough test of the banks' financial health since the early days of the financial crisis. The Fed has conducted the stress tests each year since 2009. The Fed did not publicize the results of its tests in 2010 or 2011. After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America Corp. alone was told to raise $34 billion.

Fed considers Sterilized Bond Buying to boost economy

The Federal Reserve is considering a new type of bond-buying program designed boost the economy in the months ahead while curbing future inflation, according the Wall Street Journal.

Federal Reserve officials have used different types of bond-buying programs since 2008. All of them are aimed to drive down long-term interest rates to spur investment and spending by businesses and households. Now they're exploring three different approaches, which are:

1. The Fed could use the method they used aggressively from 2008 into 2011, in which the Fed effectively printed money and used it to purchase Treasury securities and mortgage debt. The Fed has already acquired more than $2.3 trillion of securities in several rounds of purchases using this approach, widely known as "quantitative easing," or QE.
2. They could reprise a program launched last year in which it is selling short-term Treasury securities and using the proceeds to buy long-term bonds. This $400 billion program, known as "Operation Twist," allows the Fed to buy bonds without creating new money.
3. In the new novel approach, the Fed could print money to buy long-term bonds, but restrict how investors and banks use that money by employing new market tools they have designed to better manage cash sloshing around in the financial system. This is known as "sterilized" QE.

U.S. economy grew faster in fourth quarter 2011

The U.S. economy growth in fourth quarter 2011 was stronger than originally thought as consumers increased their spending and businesses stocked up their inventories.

Gross domestic product (GDP), the broadest measure of the nation's economy, grew at a 3% annual rate in the last quarter of 2011, the Commerce Department reported Wednesday. The government had initially reported the economy grew at a 2.8% rate, and economists had projected the GDP growth would be revised down to 2.7% from the initial reading.

That's the fastest growth since the second quarter of 2010 and a major improvement from a 1.8% growth rate in the prior quarter.

Consumer spending picked up at an annual rate of 2.1% in the fourth quarter, slightly higher than originally reported. Spending on durable goods, especially motor vehicles, helped drive GDP higher, as did increased spending at restaurants and hotels.

Meanwhile, businesses increased their inventories by $54.3 billion, after cutting back on their stock the prior two quarters.

Rising European Debts

The debts of the European Union (E.U.) countries have been rising to dangerously high in the past decade causing the current Europe's debt crisis. Greece and Italy have had high levels of debt since 2000, according to Smartinmoney.com. Now more than a half of the E.U. countries carry debts exceed the European Commission limit, which is 60 percent of gross domestic product (GDP).

Greece’s debt problems are not new. The country had high debt as percentage of GDP, even as it prepared to join the euro zone in 2000. Italy and Belgium have long wrestled too with large debt loads. The debt-to-GDP ratios of Greece and Italy have been dangerously high, which are 109% and 103% respectively, since 2000.

Greece In Default

~ Smartmoney.com ~ Ratings agency Standard & Poor's (S&P's) cut Greece's long-term credit rating on Monday to selective default from already junk-level CC category. It is a result of debt write-off deal with private creditors that is part of a second EU bailout of the country.

The rating firm says their move was triggered by the terms Greece put in the tentative deal agreed last Tuesday, which amounts to a 53.5 percent write-down. Following the February 21 debt deal, Greece amends its sovereign bond documentation with collective action clauses (CACs). Greece has been seeking to avoid an outright default on its massive debt by negotiating a "voluntary" debt exchange with creditors.

A CAC binds all bondholders of a certain series to amended payment terms in the event that a certain quorum of creditors has agreed to the terms, S&P explained. If a large majority of creditors accept the new terms then all the creditors need to agree, which would have consequences for bondholders.

Congress passes economic stimulus of payroll tax cut

A $143 billion economic package to extend the payroll tax holiday and unemployment benefits

Large bipartisan coalitions in both the House and Senate passed a $143 billion economic package that includes a year-long extension of the payroll tax holiday for 160 million workers, just as Obama had requested more than five months ago, and also extends unemployment benefits for millions of others.

On a 293 to 132 vote on Friday, February 17, the House supported a compromise plan to keep giving workers a small amount of extra cash with each paycheck while also providing a continued cushion for the unemployed, and the Senate followed shortly afterward with a 60 to 36 vote to approve the plan. It now goes to Obama for his signature, giving him a victory on a portion of the massive jobs bill he presented to Congress last fall.

Facebook takes typical IPO route for its stock market debut

Facebook Inc. is in a quiet period after it filed paperwork on Feb. 1 with the U.S. Securities and Exchange Commission (SEC) to raise $5 billion in an initial public offering (IPO). Federal rules limit what company executives can say in public after companies file form S-1 to register their securities with the (SEC).

The social networking site is just beginning a months-long effort that involves appeasing regulators, wooing investors, and dealing with endless amounts of paperwork before starting its stock market debut. Facebook will follow a familiar IPO pattern, according to SmartInMoney.

Going public using a typical IPO route, Facebook is likely will go through the following course of actions. (Read more detail “Facebook IPO Process Roadmap” at SmartInMoney.com)

• Facebook’s S-1 filing goes the Division of Corporation Finance and the desks of a lawyer and an accountant who specialize in the industry. These staffers will go through the document page by page review. They bring their recommendations to a more senior lawyer and accountant who complete the SEC’s first comment letter.