Monday, July 30, 2012

Stocks decline ahead of Geithner-Draghi meeting


Updated 2m ago
NEW YORK (AP) – Major U.S. stock indexes started out slightly higher but reversed course as the lunch hour approached Monday. Investors are concerned as Treasury Secretary Timothy Geithner met in Europe with Germany's finance minister and the head of theEuropean Central Bank.
  • Traders and specialists work on the floor of the New York Stock Exchange on July 17, 2012.
    By Richard Drew, AP
    Traders and specialists work on the floor of the New York Stock Exchange on July 17, 2012.
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By Richard Drew, AP
Traders and specialists work on the floor of the New York Stock Exchange on July 17, 2012.
The Dow Jones industrial average and the broader Standard & Poor's 500 index were higher in late morning trading and then turned downward close to noon. The tech-laden Nasdaq composite index, which also had started out positive, reversed course and was slightly lower.
European Commission released a report Monday showing that economic sentiment dipped, with pessimism growing in both the industrial and service sectors. Also Monday, Spain's National Statistics Institute said its economy contracted for a third straight quarter.
Most of the attention Monday will continue to center on Europe, with Geithner meeting ECB's chair Draghi and Germany's finance minister to discuss the challenges facing Europe and the global economy.
The spotlight this week won't just be on Europe: Federal Reserve policymakers meet this week, and there are growing expectations that in light of waning economic growth, the Fed may announce a new monetary stimulus. The Bank of England also holds its monthly rate-setting meeting.
"With the rally we have had, the potential is for the central bankers to disappoint," said Louise Cooper, markets analyst at BGC Partners. "This Draghi-inspired rally may peter out if the central bankers fail to deliver."

Stock trend


Dow Jones industrial average, five trading days
Stocks, as well as the euro and the bond prices of Spain and Italy, had been buoyant since ECB president Draghi said last Thursday that the bank "is ready to do what it takes to preserve the euro. Believe me, it will be enough."

In the euro zone

Countries that use the euro currency: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain
Those comments raised expectations that, at the very least, the ECB will ramp up its bond-buying program in the hope of keeping a lid on Spanish and Italian borrowing rates. The recent sharp rise in Spain's interest rates raised concerns that the 17-country eurozone hasn't the capacity to bail out its fourth-largest economy, and raised the specter of Italy needing financial help, too.
Making sure that Spain and Italy can continue tapping financial markets for cash appears to be the priority of policymakers despite a warning from Germany's central bank, the Bundesbank, that the line between monetary and fiscal policy should not be blurred.
Both Spain and Italy have seen their borrowing rates in bond markets ease since Draghi's comments.
The yield on Spain's 10-year bonds has dropped significantly below the dangerous 7% level to around 6.60%, while Italy was able to raise a bigger than expected €5.5 billion ($6.77 billion) in a round of auctions Monday. Crucially, the yield on the 10-year bond fell to 5.96% from 6.19% the last time it was offered, a signal of improving investor appetite.
"There is no doubt that policy action is required given the escalation in the crisis and we think it unlikely that Draghi would endanger his reputation and credibility by not fulfilling expectations," said Neil MacKinnon, chief global strategist at VTB Capital.
In Europe, Germany's DAX rose 0.8% to 6,743 while the CAC-40 in France was 0.6% higher at 3,299. The FTSE 100 index of leading British shares was up 0.9% at 5,677.
The euro was down 0.5% to $1.2252 after figures from the European Union showed economic confidence in the eurozone fell to a 34-month low in July. News that the Spanish economy contracted a further 0.4% in the second quarter of the year, its third straight quarterly decline, also weighed it down.
Earlier in Asia, Japan's Nikkei 225 stock average closed up 0.8% at 8,635.44 and Hong Kong's Hang Seng jumped 1.6% to 19,585.40. Australia's S&P/ASX 200 climbed 0.9% to 4,245.70 and South Korea's Kospi rose 0.8% to 1,843.79. China's Shanghai Composite fell 0.9% to 2,109.91.
In energy trading, benchmark crude for September delivery was down 30 cents at $89.83 a barrel in electronic trading on the New York Mercantile Exchange.
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Friday, July 27, 2012

U.S. Growth Slows in 2nd Quarter


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By NEIL SHAH

The economy is slowing to a crawl as consumers cut back spending on big-ticket items and businesses curtailed investments, fueling fears that the U.S. could sink to stall-speed this year.
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Breaking Down the Report

Gross domestic product, the broadest measure of all goods and services produced in the economy, grew at a weak 1.5% annual rate, the Commerce Department said Friday -- a sharp slowing from the first quarter's 2% pace and the fourth quarter's 4.1%.
The slowing economy, along with new government figures showing the recovery has been weaker than previously thought, raises the risk that a financial shock -- an escalation of Europe's economic crisis, say, or next year's scheduled tax increases and spending cuts, the so-called "fiscal cliff" -- could shove the economy back into recession. Weak growth could also prompt Federal Reserve officials to take more steps to boost the economy at upcoming meetings -- especially since there are few signs their efforts have fueled unwanted inflation.
"The economy is kind of being strangled," said Bob Baur, chief global economist at Principal Global Investors. "We underestimated how much uncertainty may have contributed to a lack of desire to expand and hire." Mr. Baur expects a 2% to 2.5% pace of growth in the second half and has "grown more cautious," he says.
One of the biggest drags on the recovery is a lack of consumer spending, which accounts for roughly two-thirds of demand in the economy. Spending rose 1.5% in the second quarter, lower than the 2.4% pace in the first -- with buying of big-ticket items hurting the most. Retail sales have dropped three months in a row, while consumer confidence has wilted. A big factor is the weak labor market. Employers added fewer jobs in the second quarter than they have since the labor market began recovering in 2010. The unemployment rate, at 8.2%, has barely moved recently. And a severe drought in the Midwest is starting to push up food prices, which could make Americans less willing to spend.
The report did contain some encouraging news. Sales of houses continued to contribute to the nation's growth, though the pace flagged from the first quarter. Despite Europe's problems and slowing in the rest of the world, U.S. exports rose 5.3% in the second quarter. Cutbacks by federal, local and state governments continued to drag down the economy, but eased from earlier this year. Some of this year's slowdown could also be the result of unusually heightened activity during the winter months given unseasonably warm weather.
Still, the persistent unwillingness of consumers and businesses to spend and invest more despite historically low interest rates has economists and Federal Reserve officials worried about the coming months. Instead of spending, Americans are saving: The personal saving rate -- saving as a percentage of disposable personal income -- rose to 4% in the second quarter from 3.6% in the first, even though gasoline prices were falling.
Businesses, meanwhile, aren't investing as confidently as earlier this year, with many citing uncertainty over U.S. fiscal and tax policies, global economic turmoil -- especially Europe -- and weak domestic demand. Companies Apple Inc. and Ford Motor Co. have blamed bad results on Europe's recession. Manufacturing has weakened in recent months, while new orders for nondefense capital goods, excluding aircraft -- a proxy for business investment -- fell 1.4% in June from a month earlier.
Allan Pasternak, a founder of BAMCO Inc., a Middlesex, N.J., metal manufacturer, says his firm is doing brisk business but he's concerned about next year and proceeding carefully when using profits on investments.
"I really don't know what to expect," he says. "Our main concern is, is the economy going to experience another significant downturn." He also blames the "indecisiveness of our politicians, more than any of the actual policies" for creating uncertainty over government policies and crimping the ability of businesses to make decisions. BAMCO, for its part, is trying to be "lean and mean" and holding off on investing in new buildings even as business is growing.
A few months ago, economists predicted growth would pick up in the second half of the year as America's job market improved, government cutbacks stopped hurting growth and the fall in the price of oil lowered gasoline prices. None of those have really happened. "The economy has lost a fair amount of momentum this year," noted Paul Dales, an economist at Capital Economics, which predicts only 2% growth this year, below the economy's long-term potential of around 2.5%. Among the new headwinds: The rise of the dollar, which makes it harder for U.S. exporters to sell their goods abroad and could hit corporate profits.
The Commerce Department on Friday also said new revisions show the recovery from the 2007-2009 recession was weaker than previously thought. The recession, however, was a little milder than thought, largely thanks because rising government spending cushioned the blow.
Write to Neil Shah at neil.shah@dowjones.com

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Thursday, July 26, 2012

Keep a Close Eye on the Market's Fear Gauge


By JIM STRUGGER | MORE ARTICLES BY AUTHOR

If the VIX sustains a rise above 20, it may be wise to hedge a portfolio in anticipation of even higher volatility and resulting stock declines.

(Editor's Note: Steven Sears is on vacation. Today's guest columnist is Jim Strugger, the derivatives strategist with MKM Partners, a Stamford, Conn.-based  institutional investment research firm.)
Following five years of volatile stock markets, many investors are pining for the relative calm of earlier periods, like 2003-2007, when the Chicago Board Options Exchange's Volatility Index, the VIX, was capped around 20 and the Standard & Poor's 500 index sustained an upward trajectory that totaled more than 90%.
It's easy to be wistful. Our current reality is very different, and given the likelihood that a high-volatility regime will remain intact for several more years, we remind investors of a simple rule of thumb that can help manage risk in turbulent environments: When VIX sustains a rise above 20, take caution. It was trading at slightly under 18 in midday trading Thursday.
The history of equity implied volatility is rooted in listed options trading over the last 40 years, with market makers and a relatively small number of money managers focused on exploiting short-term divergences.
But since the fall of 2008, when VIX spiked above 80 to define the most traumatic point of the financial crisis, more fundamentally oriented institutional and retail investors have elevated the importance of the VIX and other options-market metrics, such as skew and implied correlation, in their analyses of equity-market risk.
The advent of exchange-traded volatility-linked products beyond VIX options and futures has provided a straightforward means for expressing directional views of volatility and hedging against the types of shocks that have occurred repeatedly over the last several years.
There is compelling evidence of this multiyear shift: Daily U.S. listed options trading volume is up 60% since early 2008; open interest of VIX options recently reached an all-time high of around 6.5 million contracts; and the iPath S&P 500 VIX Short Term Futures ETN (ticker: VXX), the most actively traded volatility-linked product, ranks in the top five and top 10 among exchange-traded products for daily cash and options volume, respectively.
For all of this newfound interest in volatility, there is scant analytical work that effectively harnesses its unique underlying properties. Empirically, we know that the VIX time series exhibits mean-reverting and path-dependent characteristics. This suggests that the recent history of implied volatility will play an important role in determining its route forward as it tends toward the long-term average. Think of a critical event such as the August 2011 shock, when VIX jumped to 48. It was inevitable that VIX would both revert down through its mean just above 20 and be suppressed below that level for a period of time generally proportional to the displacement of the shock.
The same principles guide the entire volatility cycle. From the time the current high-volatility regime began in July 2007 until August 2008, there were five volatility events that occurred every two months, on average, and spiked VIX to just above 30. Since the fall of 2008, there have been two major shocks of similar magnitude (in May 2010 and August 2011) that saw VIX peak in the mid-40s and were followed around six months later by lower-intensity events. These repeating patterns and periodicities make it possible to forecast the volatility cycle with enough accuracy to develop risk-mitigating strategies.
Thankfully, while analysis of the volatility cycle could include limitless complexity, it can also be distilled down to a rudimentary rule of thumb: When VIX sustains a rise above 20, take caution. There is typically a pause in the 20-25 range that provides enough time to deploy hedges and long volatility exposure prior to a sharp VIX spike higher.
If the event dissipates, as occurred with the recent May tremor, the premium spent on protection would be nominal relative to the potential risk of a high-magnitude shock. Given the likelihood of similar volatility events over the next few years, a simple, disciplined risk framework could be the key to portfolio survival.
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Why U.S. cities are going bankrupt

Why U.S. cities are going bankrupt
July 20th, 2012
11:45 AM ET
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Why U.S. cities are going bankrupt

By Fareed Zakaria
I was struck last week to hear that the city of San Bernardino, California is declaring bankruptcy. It follows similar moves in the past month by Mammoth Lakes and Stockton, also in California. Before them it was Harrisburg, Pennsylvania, Jefferson County, Alabama, Central Falls, Rhode Island – the list continues.
What in the world is going on? Companies go bankrupt all the time – but what happens when a city goes under?
In reality, the two aren’t that different. Companies file for what’s known as “Chapter 11” – a provision which enables them to renegotiate deals, to downsize, to fire people. But filing Chapter 11 also gives them the option of liquidating – or breaking up. That would be essentially impossible for a city – it also happens to be unconstitutional. So cities go for “Chapter 9,” which covers municipalities: that’s cities, but also towns, villages, taxing districts and utilities.
641 cases of municipal bankruptcy have been filed since Chapter 9 was created. Most have been smaller cases involving utilities. But when an entire city goes bankrupt, things are much more complicated. It affects public sector jobs and vital services like fire and police departments.
Now, naturally, we assume all bankruptcies are a bad thing. They're humiliating, they impact business, they’re difficult to recover from. The situation is far from ideal. But it’s actually not without its benefits.
Take for example San Bernardino. It was running a $45 million deficit (on a $130 million budget.) But its creditors – workers and retirees – were unwilling to help out. The best the unions were able to do was to offer what they thought was a major concession: allowing newly-hired public safety workers to retire with 90 percent of their salary at the age of 55 – instead of 50, which had been the earlier deal!
That won't work in a chapter 9 bankruptcy. An independent judge brings all parties to a table where an agreement has to be reached – no matter how painful. And, we need some of those painful decisions – not just at the federal level, but at local and state levels as well. At its heart, the bankruptcies you keep hearing about these days aren’t about taxes being too low or spending on city services being too high – they're about pensions.
California's pension-related costs rose 20-fold in the decade since 1999. This frightening trend is true almost everywhere in America. And it’s simply not sustainable. A recent Pew research survey found that the gap between state assets and their obligations for public sector retirement benefits is $1.38 trillion. It rose by 9 percent in 2010 alone – and it will likely keep rising until these obligations are renegotiated.
The truth is America is sacrificing its future to pay for its past. To keep up with burgeoning pensions, states and cities are slashing services. It's also feeding into the unemployment problem. State and local governments have 445,000 fewer workers today than in 2007. Even if you exclude teachers from that number, we have 231,000 fewer workers.
For decades now, local governments have doled out patronage by increasing pension benefits – these costs impact the budget years later, when the officials who gave the benefits are safely retired themselves. We're now having to reckon with those choices.
I'm not saying bankruptcies are a good thing. But they are a mechanism that allows us to admit an emergency and renegotiate the deals that are, well, bankrupting the country.
Watch "Fareed Zakaria GPS" Sunday at 10 a.m. and 1 p.m. ET
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Stocks surge on Draghi comments


By CNNMoney staff @CNNMoneyInvest July 26, 2012: 11:03 AM ET
U.S. markets
Click the chart for more stock markets data
NEW YORK (CNNMoney) -- U.S. stocks got a boost Thursday after European Central Bank president Mario Draghi said the bank would do whatever it takes to preserve the euro.
The Dow Jones industrial average rose 172 points, or 1.4%, the S&P 500 added 17 points, or 1.3% and the Nasdaq gained 33 points, or 1.2%.
Speaking at an investment conference in London, Draghi's comments suggest the ECB may start buying bonds again in an effort to help bring down skyrocketing borrowing costs.
"His comments were a bit of a game changer because they put the power back in the ECB to buy Spanish and Italian bonds," said Paul Zemsky, chief investment officer for ING Investment Management. "That caused a great turnaround in sentiment."
Analysts also said Draghi's comments signify that another long-term refinancing operation-- the ECB's cheap lending program aimed at preventing a credit crunch-- is back on the table.
Europe's debt crisis remains a significant headwind for global markets, as investors have been growing increasingly convinced that Spain will need a sovereign bailout. The country's borrowing costs remain unsustainably high, with Spain's 10-year yield hovering near 7%, after touching an all-time high of 7.75% Wednesday.
While Draghi was driving the early rally, investors also had a fresh batch of corporate earnings to contend with.
Exxon Mobil's profit surged 49% to $15.9 billion during the second quarter. The massive number -- which would be by far the highest quarterly profit ever for any company -- included a special gain for divestitures. Shares of Exxon (XOM, Fortune 500) edged higher.
The most anticipated numbers of the day, however, won't come until after the close, when Facebook (FB) reports its first set of quarterly resultsas a public company.
Related: Facebook earnings have a lot to live up to
Of the 215 S&P 500 companies that have reported so far, about 67% have beat Wall Street's expectations, according to S&P Capital IQ. Analysts are currently expecting overall S&P 500 second-quarter earnings to decline 0.38%, which would mark the end of a 10-quarter winning streak.
Fear & Greed Index
U.S. stocks closed the day in mixed territory Wednesday.
World markets: European stocks jumped after Draghi's comments. Britain's FTSE 100 rose 1.4%, the DAX in Germany added 1.9% and France's CAC 40 surged 3%.
Related: Spain on the brink
Asian markets ended mixed. The Shanghai Composite lost 0.5%, while the Hang Seng in Hong Kong ticked up 0.1% and Japan's Nikkei rose 0.9%.
Economy: The number of people filing for initial jobless claims fell 35,000 to 353,000 in the latest week, according to the Labor Department. Analysts were expecting a reading of 381,000 unemployment claims.
The Census Bureau reported that durable goods orders rose 1.6% in June, far better than the 0.3% increase economists were expecting.
Mortgage rates reached all-time lows this week for both 30-year and 15-year fixed-rate loans. The average rate for a 30-year mortgage fell to 3.49%, according to the weekly survey by Freddie Mac, and the 15-year dipped to 2.80%. Rates have fallen or matched lows for 13 of the past 14 weeks.
Not all news out of the housing market was positive though. Pending home sales slipped 1.4%, according to the National Association of Realtors. Economists had been expecting growth of 0.9%, according to Briefing.com.
The mixed (but largely still sluggish) economic data has revived the debate over whether the Federal Reserve will take steps soon to stimulate the economy.
Companies: Zynga's (ZNGA) stock plunged 40% early Thursday, a day after the online-gaming company badly missed earnings expectations. Shares of Facebook, which earns roughly 18% of its revenue from users who play Zynga games on its platform, were also down sharply in premarket trading.
Facebook is expected to report quarterly earnings of 12 cents a share on $1.15 billion in revenue later Thursday, according to a survey of analysts by Thomson Reuters.
Shares of Sprint Nextel (S, Fortune 500) rallied after the wireless carrier reported higher revenues for the second quarter.
Dow component 3M (MMM, Fortune 500) reported better-than-expected earnings, but the company's revenue fell short of estimates.
Shares of Whole Foods (WFM, Fortune 500) were up sharply after the organic grocery store chain's earnings surpassed Wall Street's expectations and the company raised its forecast for the year.
Currencies and commodities: The euro popped in response to Draghi's comments, rising more that 1% versus the dollar. The greenback was down versus the British pound, but up against the Japanese yen.
Oil for September delivery rose 81 cents to $89.78 a barrel.
Gold futures for August delivery gained $6.50 to $1,614.60 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury fell, pushing the yield up to 1.43% from 1.41% late Wednesday.  To top of page
First Published: July 26, 2012: 9:39 AM ET

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