Archive for February, 2010

Stocks fall on renewed concerns about economy (AP)

Thursday, February 25th, 2010 | Finance News

NEW YORK – Stocks backtracked from an early plunge Thursday but still closed lower on concerns about lingering economic weakness in the U.S.

Investors were also uneasy about the possibility that Greece's rising debt problems might spill over to other countries. But the dollar, which spiked early in the day as investors sought safe investments, came off its highs. And that signaled that investors, at least for now, had lost some of their fears about overseas economies.

The Dow Jones industrial average closed down 53 points after having fallen 188. Treasury prices, like the dollar, rose as investors sought safety.

An unexpected rise in first-time claims for unemployment insurance made for a sour mood in the market.

The Labor Department said first-time claims for unemployment insurance rose by 22,000 to a seasonally adjusted 496,000. Economists polled by Thomson Reuters had forecast a drop in claims.

It was the second straight week that claims rose unexpectedly. High unemployment remains one of the biggest obstacles to a sustained economic recovery. The Labor Department's monthly report on employment will be released next week.

The market was watching the dollar as it gained against the euro, which is seen in jeopardy because of the weak economy not only in Greece, but in other European countries as well. The euro touched a nine-month low against the dollar before regaining some ground.

Concerns about Greece have dogged investors this year but grew after credit rating agencies Standard & Poor's and Moody's said they might further downgrade the country's debt. That would make it harder for the country to borrow.

Trading in the U.S. has been choppy in recent weeks because of uneasiness about the economy. Global markets retreated earlier this month because traders were worried about Greece's debt problems. The market's drop early in the week, a rebound and the latest slide signal that investors are waiting for clearer information on the direction of the economy.

Justin Golden, a strategist at Macro Risk Advisors in New York, said there is an undercurrent of worry about long-term issues like debt in Greece. The presence of the concerns means it doesn't take much to rattle investors.

"It's a statement of how fragile the markets really are," Golden said.

The Dow fell 53.13, or 0.5 percent, to 10,321.03. The broader Standard & Poor's 500 index slipped 2.30, or 0.2 percent, to 1,102.94. The Nasdaq composite index fell 1.68, or 0.1 percent, to 2,234.22.

Bond prices rose, pushing yields lower. The yield on the benchmark 10-year Treasury note fell to 3.64 percent from 3.70 percent late Wednesday.

Crude oil fell $1.83 to $78.17 per barrel on the New York Mercantile Exchange. Gold rose.

The drop in major stock indexes masks the broad improvement in the market. For much of the day, all 30 stocks that make up the Dow were lower. In the end, five turned higher and one was unchanged. Aluminum producer Aloca Inc. was the biggest gainer, rising 25 cents, or 1.9 percent, to $13.31.

The Chicago Board Options Exchange's Volatility Index, which is known as the market's fear gauge, ended down 0.8 percent after jumping 11.9 percent in morning trading. A rise in the VIX signals that investors are expecting swings in the market.

By the closing bell there were slightly more advancing stocks than decliners on the New York Stock Exchange. Early in trading more than five stocks fell for every one that rose.

Jim Maguire Jr., a trader at E.H. Smith Jacobs in New York, said he expects the market to continue the back-and-forth trading it has logged this year as investors look for clues about the pace of an economic rebound.

"There is a feeling out there that this is not a self-sustaining economy as of yet and there is this expectation that the stock market is going to falter because of it," he said.

Maguire said questions about how quickly the rebound will occur is keeping traders from placing big bets after a year of enormous gains in stocks. The Dow hit a 12-year low in March last year.

"Ultimately, I think we're looking at a consolidation here and I think it could be a very long haul," he said. "The characteristics of that are typically these types of choppy markets. We get these updrafts and downdrafts."

Stocks broke a two-day losing streak on Wednesday after Federal Reserve Chairman Ben Bernanke said in a semiannual report to Congress that the central bank plans to keep interest rates low to help the economy. There was little reaction to his testimony before the Senate on Thursday.

Advancing stocks narrowly outpaced those that fell on the NYSE, where consolidated volume came to 4.58 billion shares, compared with 4.2 billion Wednesday.

The Russell 2000 index of smaller companies rose 0.03, or less than 0.1 percent, to 630.46.

Overseas, Britain's FTSE 100 fell 1.2 percent, Germany's DAX index dropped 1.5 percent, and France's CAC-40 fell 2 percent. Japan's Nikkei stock average fell 1 percent.

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Fed to look into insurance contracts on Greek debt (AP)

Thursday, February 25th, 2010 | Finance News

WASHINGTON – Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the central bank is looking into the use by Goldman Sachs and other Wall Street firms of high-risk financial instruments to make bets that Greece would default on its debt.

Bernanke said the Fed is examining companies' use of credit default swaps, a form of insurance against bond defaults. He made the comments at the start of a Senate Banking Committee hearing. It marked the second day that the Fed chief has testified on Capitol Hill about the economy.

Bernanke also:

• Said the severe snowstorms that recently affected the country will likely have a short-term effect on unemployment and layoffs. He said policymakers will "have to be careful about not overinterpreting" upcoming data.

• Argued anew against Senate efforts to strip the Fed of its powers to regulate banks, saying such a move would be a "grave mistake."

• Said Congress must tackle the thorny issue of how to overhaul Fannie Mae and Freddie Mac, which were taken over by the government in 2008 as they faced mounting losses from mortgage defaults.

• Repeated a message he delivered Wednesday to the House Financial Services Committee: that record-low interest rates are still needed to ensure the economic recovery lasts and to help relieve high unemployment.

On credit default swaps, Bernanke said, "Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive. We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S."

The panel's chairman, Sen. Christopher Dodd, D-Conn., cited reports that financial companies are using credit default swaps to bet that Greece will default on its debt. He's troubled that this practice could worsen Greece's debt crisis.

"We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be private gain," Dodd said.

Dodd said he wondered whether there should be limits on the use of credit default swaps to prevent "the intentional creation of runs against governments."

Securities and Exchange Commission spokesman John Nester wouldn't say whether his agency is looking specifically into the credit default swap arrangements between Wall Street firms, including Goldman Sachs, and Greece.

"As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices," Nester said in a statement.

SEC Chairman Mary Schapiro has advocated bringing the financial instruments under government regulation.

Goldman Sachs earlier this week defended currency swap deals it undertook with Greece to reduce that country's debt, saying the impact of the transactions was minimal and within the rules.

Even though the economy is growing again, senators on both sides of the aisle worried about high unemployment — now at 9.7 percent — rising home foreclosures and difficulties people and businesses have in getting loans.

"The state of our economy as a whole may be improving, but if we're talking about the situation of ordinary American families, I think I can sum up this recovery in three words: not good enough," Dodd said.

Senators pressed Bernanke for ideas about what Congress can do to help out, especially in bringing down unemployment. The Senate on Wednesday approved a package aimed at generating jobs by giving companies a tax break for hiring the unemployed.

Bernanke shied away from providing recommendations. But he did say that if additional stimulus measures are approved, it would be "very constructive" to pair them with a plan on how the government intends to shrink record-high deficits later.

The chairman argued that disarming the Fed of its authority to regulate banks would deprive it of information needed to set interest rates and influence economic activity. Bernanke also warned that the Fed would lose insights into the health of individual banks and of the entire banking system.

Dodd has wanted to rein in the Fed's power and remove it from overseeing banks as part of a broader legislative revamp of the nation's financial structure. That conflicts with the Obama administration's stance, as well as the approach taken by House lawmakers in their financial overhaul bill.

On Fannie Mae and Freddie Mac, Bernanke said: "Right now, we're kind of in no-man's land. Fannie and Freddie are in conservatorship. They are part of the government's efforts to maintain the housing market, because there really is no other source of mortgages at this point or mortgage securitization. But, certainly, this is not a sustainable situation."

He said an overhaul is needed to eliminate this "platypus kind of — you know, neither fish nor fowl status that those firms have now," he added.

Treasury Secretary Timothy Geithner said Wednesday that the Obama administration will wait until 2011 to propose a revamp of the mortgage companies.

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AP Business Writer Marcy Gordon contributed to this report.

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Rising jobless claims reflect weakening recovery (AP)

Thursday, February 25th, 2010 | Finance News

WASHINGTON – Layoffs are no longer dropping as they were in the final months of last year, reinforcing fears that the jobs crisis will weigh down consumer spending and the economic rebound.

Severe weather contributed to a rise in jobless claims last week. But other economic data add to evidence that the recovery remains weak and uneven.

An example is orders for big-ticket manufactured goods, excluding airplanes and other transportation equipment. Those orders dropped 0.6 percent in January, the government said Thursday.

Earlier in the week, new-home sales fell in January to their lowest pace on record. And consumer confidence plunged in February.

Mark Vitner, senior economist at Wells Fargo, said the weak reports point to an economy struggling to wean itself from government stimulus programs such as homebuyer tax credits and other supports.

"Going forward, growth is going to be much more dependent on the private sector," Vitner said. "And consumer demand hasn't picked up that much yet."

The economy's growth rate will likely slow from above 3 percent in the current quarter, Wells Fargo estimates, to less than 2 percent by the middle of the year.

In its report Thursday on jobless claims, the Labor Department said first-time claims for unemployment benefits rose 22,000 to a seasonally adjusted 496,000. Wall Street analysts polled by Thomson Reuters had expected a drop to 455,000.

The rise occurred mostly because state agencies last week processed a backlog of claims caused by snowstorms the previous week. The storms also increased temporary layoffs in the weather-sensitive construction and transportation industries.

Still, the four-week average of jobless claims, which smooths out volatility, rose 6,000 to 473,750. The average had fallen sharply over the summer and fall from its peak last spring of about 650,000.

This year, the improvement has stalled. The four-week average has risen about 30,000 in the past month. It's now well above the 425,000 level that many economists say would signal net hiring.

Economists closely watch initial claims as a gauge of the pace of layoffs and a sign of companies' willingness to hire. More layoffs means consumers will have less money to spend, hindering the economic recovery.

"The fact that these snowstorms — as bad as they were — could have such an impact is more testimony to the fragility of the recovery," Diane Swonk, chief economist at Mesirow Financial, wrote in a note to clients. "The recovery is still on thin ice and lost momentum in the first quarter."

The jobless claims report, along with economic anxiety in Europe, contributed to unease on Wall Street. In late-afternoon trading, the Dow Jones industrial average fell about 86 points, or about 0.8 percent. Broader stock averages also dropped.

Europe's debt crisis is adding to pressure on the U.S. economic recovery, given how closely the economies feed on each other. The European Union is pushing debt-laden countries such as Greece, Ireland and Portugal to balance their books. But that's heightening fears that such austerity measures could tip the continent back into recession.

In the United States, the Senate on Wednesday sought to counter persistent joblessness by passing a $35 billion jobs bill. The bill would provide more funding for transportation projects and tax cuts for companies that hire.

The higher claims figures in recent weeks means the unemployment rate likely rose in February and more jobs were lost. The unemployment rate in January was 9.7 percent, and employers cut a net total of 20,000 jobs. The Labor Department will issue the February employment report next week.

Many analysts expect this month's snowstorms cost up to 100,000 jobs and will artificially inflate the unemployment rate. A clear reading of the job picture may not be available until March or April.

Also Thursday, Federal Reserve Chairman Ben Bernanke told a congressional committee that the snowstorms are likely to have a short-term — but not permanent — effect on unemployment and layoffs. He said policymakers will "have to be careful about not overinterpreting" the upcoming jobs data.

The Fed said last week that it expects the rate will average between 9.5 percent and 9.7 percent this year.

The Commerce Department's report Thursday on durable factory goods was mixed. Orders shot up in January by 3 percent, the most in six months. The gain resulted from a surge in orders for aircraft. Excluding transportation, durable goods orders fell by 0.6 percent.

But economists weren't overly alarmed by that drop. They noted that the figures are volatile month-to-month. And they pointed out that the government raised its estimate for orders, excluding transportation, in December to show a 2 percent gain.

The economy has grown for six months but is not yet spurring new hiring. Many economists point out that the recovery is weak compared with the aftermath of previous deep recessions. Employers have shed 8.4 million jobs since the recession began.

The gross domestic product, the broadest gauge of the economy's output, grew at an annual rate of 5.7 percent in last year's October-December quarter. That figure is expected to decline in the current quarter.

The government will release a revised estimate of fourth-quarter GDP on Friday. Economists expect the number to be unchanged at around 5.7 percent.

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AP Economics Writers Martin Crutsinger and Jeannine Aversa contributed to this report.

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