Bank of America continues to restructure as the bank will make $3.3 Billion as it cuts its holding in Chinese lender to 5% from 10%.
From consumer spending to business investments, it seems nothing is the same this time around in the economic recovery or lack thereof.
Here are the top financial stories of the day:
1) Stocks rise on hopes for more economic stimulus-From the AP
The mere discussion of more economic stimulus from the Federal Reserve was enough to send stocks higher Tuesday. The Dow Jones industrial average rose 33 points.
Minutes from the Fed's latest policy meeting on Aug. 9 showed that central bank officials discussed a variety of options to bolster the economy, including buying more Treasury bonds. In the end, they decided to keep interest rates low until at least mid-2013.
The news that more aggressive action was being considered gave investors a reason to buy stocks.
"They want to see stimulus and they hope stocks will go higher," said Joseph Saluzzi, co-head of stock trading at Themis Trading.
The Federal Reserve has purchased Treasury bonds twice in the past as a way to keep long-term interest rates low. The government's second round of purchases, announced last August, helped to push the Dow up 28 percent through April 29.
Stocks were mixed for much of the day Tuesday after consumer confidence fell to the lowest level since April 2009. Trading volume was also much lighter than usual because many investors are on vacation.
The Dow Jones industrial average rose 33 points, or 0.3 percent, to 11,572 at 3:15 p.m. It had been down as many as 109 points earlier in the day.
Boeing Co. rose 2.3 percent after the aircraft maker said it received approval from its board to build a version of its workhorse 737 jet with a redesigned engine. That should help it compete better with rival Airbus. Caterpillar Inc. rose 2.2 percent, the most of any company in the Dow.
The Standard & Poor's 500 rose 3.7 points, or 0.3 percent, to 1,214. The Nasdaq composite index rose 16, or 0.6 percent, to 2,578.
Trading volume, or the number of shares bought and sold, was shaping up to be the lowest this year. About 2.1 billion shares exchanged hands on the New York Stock Exchange, the lowest since Dec. 31, 2010.
Low volume is worrisome because it suggests that few investors are driving the stock market's gains or losses. That creates the risk for bigger price swings, said Stephen Carl, principal and head of equity trading at The Williams Capital Group. A lack of volume also indicates that some investors don't believe that stocks are worth buying right now.
Stocks have swung widely in August. The Dow was down as much as 7.4 percent for the year on Aug. 10, but it is now up 0.1 percent. On Monday, the Dow soared 254 points, its fourth-largest gain this year. Insurers rose the most after it became clear the damage from Tropical Storm Irene wasn't nearly as bad as analysts had feared.
The Standard & Poor's 500 index hit a 2011 low Aug. 8 after the U.S. government's credit rating was downgraded for the first time. Since then, it has risen 7.7 percent.
Bond prices have been just as volatile. The yield on the 10-year Treasury note briefly fell to a record low below 2 percent on Aug. 18 on weak manufacturing data from the Philadelphia Federal Reserve. On Tuesday, the yield fell to 2.18 percent, down from 2.27 percent late Monday.
2) BofA Cashes Its China Chips- From The Wall Journal
Chief Executive Brian Moynihan bought himself some breathing room as the bank agreed to sell more than $8 billion of China Construction Bank Corp. stock, its second multibillion-dollar deal in a week.
Shares rose 8% Monday, adding to a rally following a deal Thursday for Warren Buffett's Berkshire Hathaway Inc. to buy $5 billion worth of Bank of America stock. Since the Buffett deal, the Charlotte, N.C., lender has regained $14 billion of market value.
It's a dramatic turn for a bank whose shares lost $16 billion in a single day earlier in August amid mounting questions about the bank's legal costs and its capacity to withstand another economic downturn.
The rally gives Mr. Moynihan more time to deliver on a strategy he has been pursuing since he took over as CEO on Jan. 1, 2010: to narrow the focus of the nation's largest lender and wring efficiencies out of a far-flung empire that was built up over the reign of his predecessor, Kenneth Lewis.
Still, it remains unclear whether raising new capital will set the bank on a path to success. Even with the recent gains, Bank of America stock is down 37% this year.
Every asset they sell might firm up their capital, but it will cost them earnings," said Paul Miller, bank analyst at FBR Capital Markets. "What does the earnings model look like when all these asset sales are done?"
Neither the Buffett deal nor the China stock sale look like bargains. Mr. Buffett will get a large stream of cash dividends and the right to buy more stock near its two-year low, which could turn him into the bank's largest shareholder.
And while Bank of America will recognize a $3.3 billion gain on its sale of China Construction Bank shares, those shares are down 30% from their high earlier this year.
On Tuesday, CCB confirmed that Bank of America agreed to sell about 13.1 billion of its Hong Kong-listed H shares to institutional investors. The Beijing-based lender didn't give any details about the deal but said it expects the share sale to be completed in third quarter.
The buyers of the stake include Singapore state investment company Temasek Holdings Pte. Ltd. and its wholly owned hedge fund, Seatown, according to people familiar with matter. The two funds were part of a group of buyers that included a Chinese investment fund, the people said. It was unclear how the stake was divided up.
Monday's sale represents about half of the company's stake in the Chinese lender. Under the deal, which was long anticipated by analysts and investors, Bank of America will continue to hold a 5% stake in China Construction Bank.
Bank of America has been trying to shore up its position by selling off noncore assets, inching the bank closer to meeting global regulatory standards due to take effect in coming years.
Doubts about the bank's ability to meet those rules without issuing new shares sent the price of its stock tumbling earlier in the month.
Mr. Moynihan spent the early part of August on a campaign to calm investors, board members and employees about the bank's ability to weather the turmoil.
The bank has now made several moves in the past few weeks to assuage those concerns, including selling its consumer credit-card unit in Canada and putting other non-U.S. card units up for sale.
Executives are scrubbing the company for other noncore pieces to unload, such as mortgage-servicing rights or private-equity assets, said a person familiar with the situation. It also is finishing work on a dramatic restructuring of its consumer units that may eliminate at least 10,000 jobs, that person said. That is on top of 6,000 jobs already cut across the company this year.
A key meeting that will determine the extent of the additional job cuts is expected to happen shortly after Labor Day, the person said.
Like its competitors, Bank of America has struggled to make up revenue lost to a stagnant economy and tighter rules on fees.
But Bank of America faces additional worries because of its 2008 acquisition of Countrywide Financial Corp., the troubled California lender that is the source of many bad mortgages now plaguing the bank.
"No one really knows the capital hole that sits there," said Mr. Miller, the bank analyst for FBR Capital Markets.
Shareholders, he said, could get more comfortable about that exposure if a judge rules that an $8.5 billion settlement the Bank of America reached with a group of mortgage-bond investors is fair and can move forward. The Federal Deposit Insurance Corp. on Monday joined the parties objecting to that proposed agreement.
3) Four ways this economic recovery is different-From Fortune
It's hard to pinpoint exactly what has continued to hamper the U.S. economy. Economists and the media have popularly adopted the term "The Great Recession" to describe all that's gone wrong since the housing market collapsed several years ago, implying that Americans have just come out of a typical recession that, if anything, was only more severe.
Needless to say, the near implosion of the U.S. financial system was severe. But as Harvard University economist Kenneth Rogoff has pointed out, the recovery today is something that can only be called "The Great Contraction," suggesting that the aftermath of a financial crisis does not look anything close to that of a typical recession.
"In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy," Rogoff wrote earlier this month in Project Syndicate. "The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend."
The recession officially ended more than two years ago. And yet, during the first half of this year, the economy barely grew. With Federal Reserve Chairman Ben Bernanke acknowledging in his speech in Jackson Hole, Wyo., last week that the problems plaguing the marketplace are beyond the powers of the central bank, it becomes all the more important for Washington lawmakers to help reboot the economy.
Members of Congress might be scratching their heads over what to do next, but perhaps as a starting point, members should look at how this recovery is different from previous ones.
Long-term business investment: Since 1949, construction has been a major component driving economic recoveries. Not only does construction of new buildings and factories help make companies become more productive, but it also creates jobs for the overall economy as each order of concrete, for instance, demands workers to do everything from taking the order to delivering it from the warehouse to the building site.
But unlike the end of other recessions when business investment surged, companies today aren't building many new factories or buying up much commercial real estate. Business investment has continued at a slow place, averaging 10.3% of GDP since the start of the latest recession – the lowest average for any business cycle since the 1970s, according to the Center for American Progress.
Given that S&P 500's non-financial companies altogether hold more than $1.1 trillion in cash and short-term investments, it's not as if America's biggest companies don't have the money to invest. So what's to blame for the pullback in spending?
"It's a question of why is it that we no longer in a recovery can fund long-term assets –basically 20 years or more – and the answer essentially is that there's a huge element of uncertainty in this economy," former
Federal Reserve Chairman Alan Greenspan said in a recent interview with The Financial Times.
Greenspan has urged Washington lawmakers and policymakers to stand aside and let the economy heal on its own. However, the pains of slow growth and high unemployment might be too much for many to endure.
What's more, doing nothing would certainly be politically unpopular especially given the 2012 presidential election.
Government job loss: The private sector may have shed millions of jobs during the depths of the latest recession, but part of what has added to the persistent gloom of the economic recovery is the slash in government jobs.
For instance in July, the private sector added 154,000 jobs but the bump was counteracted by the fact that the economy shed 37,000 public-sector jobs.
Government employment today is about 1.9% lower than it was at the start of the recovery, a fall of 430,000 jobs, according to a recent report by the Economic Policy Institute. By contrast, government employment rose by 1.1% or 232,000 jobs during the same stage of the recovery following the 2000 recession.
The stubborn woes of today's government job market have been largely due to falling tax revenues while spending on unemployment and Medicaid has surged. State and local governments, unable to legally run deficits (unlike the federal government), have been dealing with glaring budget holes by slashing headcount at an unprecedented rate. And that likely will continue – not only at the state and local level, but also the federal level depending how a special congressional committee assigned to reduce America's debt decides to find $1.5 trillion in savings.
Consumer spending: In the years leading up to the latest recession, households clearly overspent. They've since been working to improve their finances but we're still a long way from the point where household debt levels fall where consumers feel comfortable spending more and saving less.
Consumption, which makes up roughly 70% of the U.S. economy, dropped off significantly during the depths of the recession and has continued to be slow through the economic recovery. But as the Federal Reserve Bank of New York recently noted, what has been unusual is the decline in spending on discretionary services like education, entertainment and meals at restaurants.
Spending on such luxuries partly drove the decline of real GDP during the latest recession. It is down nearly 7% -- more than double the percentage decline seen in the early 1980s recession.
Housing: During most economic recoveries, the housing industry typically rebounded in a big way and helped drive overall growth.
Needless to say, this hasn't played out this time. And it become less likely that it will, given expectations that home prices could fall further as an onslaught of foreclosures could eventually seep into the housing market already in excess.
This not only impacts home sales, but it also means consumers will spend less on furniture and appliances and other housing-related goods and services.
Bernanke, acknowledging that economic policies supporting strong economic growth in the long run are beyond powers of the central bank, has urged Washington lawmakers to adopt "good, proactive housing policies" to undo the depressed real estate market.
Quote of the Day from Dave Ramsey.com:
People are changed, not by coercion or intimidation, but by example. — John Maxwell
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