Stocks started way down at the open, showed hope in the middle of the day, and then tanked once again in the afternoon to finish way down yet another day.
Financial Planners are reaching their wits end in advising their clients.
401(k) participants who stuck with equities saw balances grow.
Here are the top financial stories of the day:
1) Stocks turn lower as traders prepare for weekend-From the AP
A growing belief that the country is headed toward recession gave the stock market its fourth straight week of losses.
The anxiety in the market was obvious Friday as the major indexes went from modest gains early in the day to another sharp loss. The Dow Jones industrial average had its 10th move of more than 100 points this month.
"We just don't know whether we're going to have a recession," said John Burke, head of Burke Financial Strategies.
Investors began the week on a more confident note after last week's volatility, the worst the market has had since the 2008 financial crisis. The Dow rose nearly 215 points on Monday when Google, Time Warner Cable and Cargill were among companies announcing multi-billion deals. The market remained relatively calm the next two days. But on Thursday, a stream of bad economic news in the U.S. combined with worries about Europe's debt problems and sent the Dow down 419 points.
On Friday, there was little news to help investors determine their next moves. And some traders did not want to take the chance of holding stocks if bad news came out of Europe over the weekend. So they began selling during the afternoon. European investors were also cautious -- banking stocks fell near two-and-a-half-year lows, dragged down by rumors about banks' potential losses on bonds issued by heavily-indebted governments.
"These things usually break out over the weekend and then you have a mad dash Monday to react to them," said Mike McGervey, the head of McGervey Wealth Management.
The drop late in the day recalled the 2008 financial crisis. Then, many investors stepped up their selling on Friday afternoons out of fears that another bank might fail over the weekend -- as Lehman Brothers did on Sunday, Sept. 15.
The Dow lost 172.93, or 1.6 percent, and closed at 10,817.65. It was down 4 percent for the week. Since July 21, right before the market began its plunge, the Dow is down 15 percent.
The Standard & Poor's 500 stock index fell 17.12, or 1.5 percent, to 1,123.53. It was down 4.7 percent for the week. The Nasdaq composite fell 38.59, or 1.6 percent, to 2,341.84. It was down 6.6 percent for the week.
2) Last Straw or Time to Buy? From The Wall Street Journal
Laurence Montello, a certified financial planner in Palm Beach Gardens, Fla., stayed the course through the stock market's swings earlier this month. Now that stocks are slumping again, led by Thursday's 3.7% decline in the Dow Jones Industrial Average, he is urging clients to bail out.
"Three weeks ago, I would have said: 'We're in it for the long haul,'" Mr. Montello says. "But we don't want to see these $200,000 to $300,000 swings in performance in a $5 million account."
Mr. Montello now is advising clients, many of them retired, to move 20% of their stock portfolios into cash and 10% into Treasurys.
Greg Zandlo, a certified financial planner in Coon Rapids, Minn., went further: He advised clients Thursday to move their investments completely out of equities. "Stocks that have a 5% dividend are great, but what kind of consolation is that going to be if they're down 10%?'' he asks.
After the 419.63-point selloff by the Dow, many individual investors are finally throwing in the towel. They were already nervous. Investors withdrew $23.5 billion from domestic equity funds during the week ended Aug. 10, more than in any single entire month since October 2008.
On Thursday, trading volume at discount broker Scottrade Inc. was 77% higher than the day before and 50% higher than average of the four previous days, while TD Ameritrade also said volume surged.
Relyea Zuckerberg Hanson LLC, a wealth-advisory firm in Stamford, Conn., that manages about $500 million, has been working hard to keep its clients calm. Carl Zuckerberg, its chief investment strategist, has sent out three client emails in the past week.
"We're fighting the perception that something unusual is going on,'' he says, "when what's really unusual is a prevailing end-of-the-world mindset.''
Janet Moffett says that her stomach dropped on Thursday as her anxieties about the economy worsened. The 73-year-old Beverly, Mass., resident, who retired in April, planned to call her financial adviser after she "settles down'' to ask that he move more of her $200,000 investment portfolio into cash. Otherwise, she says, "I think I am going to be wiped out.''
To guard against the kind of volatility that led the market's "fear index"—the VIX, short for the Chicago Board Options Exchange Volatility Index—to spike 38% on Thursday,Mark Singer, president of Safe Harbor Retirement Planning in Lynn, Mass., is reducing his clients' equity exposure by up to 25%. Mr. Singer, who manages $70 million, has sent out six emails to clients with what he calls "group hugs'' to assuage their fears.
Ted Sarenski, chief executive of financial adviser Blue Ocean Strategic Capital, is telling his clients to keep at least 20% of their total investments in cash. "While it might not be earning anything,'' says Mr. Sarenski, whose Syracuse, N.Y., firm manages $150 million, "that cash at least isn't losing value.''
For investors who are panicking, T. Rowe Price Group Inc. suggests putting a process in place for liquidating portions of your portfolio gradually—such as liquidating 10% today, and then later, maybe in a week or a month, liquidating another 10%, until you "regain your emotional equilibrium,'' says Christine Fahlund, a senior financial planner at the Baltimore firm.
The slide has other advisers reassessing their assumptions. Devin Pope, a certified financial planner in Salt Lake City, has ratcheted back his performance assumptions for future rates of return on equity portfolios to the 5%-to-6% range, from 7% to 8%.
For a "balanced account'' with at least 30% bonds along with equities, he has reduced the projected rate of return to 3.5% to 4%, down from 5% to 6%.
His reasoning: With governments grappling with deficits around the world, "we're going to have to have a decrease in government spending and an increase in taxes to combat those deficits,'' Mr. Pope says. "That's going to put stress on GDP and consumption-and limits the earnings we're going to see for the next five to 10 years.''
Not everyone is pulling the plug. Christopher Cordaro, a wealth manager at RegentAtlantic Capital LLC in Morristown, N.J., says that he and his clients are holding tight. "We're in a slow-growth recovery that will have a lot of volatility associated with it,'' Mr. Cordaro says. "But there's not enough bad economic news to get out of the market.''
3) Retirement savers who didn’t blink saw big gains-From MarketWatch
Did you stick with your investment plan through the madness that was the stock market in 2008 and early 2009? If you did, new evidence suggests your 401(k) account balance grew by a much larger amount than savers who jumped out of equities, even temporarily.
For 401(k) investors who kept with their equity allocation and continued to contribute to their plan as the financial markets went into free-fall in late 2008, their average account balance grew by 64% in the period from Oct. 1, 2008, through June 30, 2011, according to a Fidelity Investments study published Thursday.
But the average account balance grew just 2% in that time period for retirement savers who moved their money entirely out of equities between Oct. 1, 2008 and March 31, 2009 — and stayed out of equities through June 2011, according to Fidelity’s study of 7.1 million 401(k) people who participated in the plans it manages from Oct. 1, 2008 through June 30, 2011.
Some savers exited equities during the 2008 downturn, but then jumped back in at some point: Their account balances grew by 25% on average. The percentage change in average account balance includes both the workers’ contributions plus market gains or losses.
The majority of plan participants stuck with their game plan. Just 1.6% of the participants studied shed their equity positions, according to the study.
Another 1.4% of people stayed in equities but stopped contributing to their plan in the Oct. 2008 through March 2009 period. Maybe they were afraid of throwing more money into the market, or perhaps the household suffered a job loss and they needed that money to pay household expenses. Account balances for those plan participants rose 26% on average, through June 30, 2011.
“People either had one response or the other,” said Beth McHugh, vice president of market insights at Fidelity. “Either, ‘I’m getting out [of equities] altogether,’ or, ‘I’m not going to add any more to the market; I’m taking my money elsewhere,’” she said. “A small subset did both — that was about 5,000 participants.”
Quote of the Day from Dave Ramsey.com:
Are you bored with life? Then throw yourself into some work you believe in with all your heart, live for it, die for it, and you will find happiness that you had thought could never be yours. — Dale Carnegie
Friday, August 19, 2011
Thursday, August 18, 2011
Financial Headline News for Thursday 8/18
Stocks were down from the start today and they only got worse as all sectors were down drastically. Gold set yet another record today as it soared past the 1800 mark.
It was yet another week of at least 400,000 first time unemployment claims as this has now become the standard number throughout the last few months.
The European crisis now affecting the US units of European banks.
Here are the top financial stories of the day:
1) Beaten-down Wall Street slammed by recession fears-From Reuters
Rising fears of another recession hammered U.S. stocks on Thursday, sending major averages sharply lower in a return to the extreme fluctuations investors endured a week ago.
New worries about the health of European banks set the tone before the market's open, and a dismal report on regional U.S. manufacturing fueled a downward spiral in which the Dow dropped as much as 528 points, spurring a flight to safe-haven assets like gold.
The Nasdaq ended more than 5 percent lower, the S&P 500 more than 4 percent and the blue-chip Dow off more than 3 percent.
"Are we going to go into recession? Most market participants were looking for slow and steady growth, but the statistics and the financial situation here and in foreign economies have disturbed that view," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.
The Dow Jones industrial average fell 419.63 points, or 3.68 percent, to 10,990.58, while the Standard & Poor's 500 Index declined 53.24 points, or 4.46 percent, to 1,140.65, and the Nasdaq Composite Index dropped 131.05 points, or 5.22 percent, to 2,380.43.
The losses resumed a slide in stocks that began in late July and seemed to moderate in the last few days. In a more worrisome sign, volume was heavier than on recent positive days, with 11.4 billion shares changing hands, highest so far this week.
Volatility jumped, with the CBOE Volatility Index or VIX, a barometer of Wall Street anxiety, up 38 percent at 43.56. More investors were taking out protective positions against declines in the market.
The S&P 500 is now off 16.4 percent from its April 29 closing high, but the benchmark index still ended above its slump on August 9 at 1,101.54.
Sectors associated with growth were hit hard. Top drags on the Dow included shares of IBM, down 4.5 percent at $163.83, and United Technologies, down 5.5 percent at $68.12. On the Nasdaq, shares of Oracle fell 8.3 percent to $25.19.
Adding to fears of a another recession, a survey of U.S. Mid-Atlantic factory activity by the Philadelphia Federal Reserve Bank showed a drop in August to its lowest level since March 2009.
Hewlett-Packard Co slumped 6.1 percent after reporting quarterly results.
Bank shares also fueled the market's declines, with the KBW Banks Index down 5.6 percent.
A Wall Street Journal report said regulators are scrutinizing the financial health of U.S. units of Europe's biggest banks more closely.
Among Wall Street bank stocks, Citigroup Inc lost 6.3 percent to $27.98 and Morgan Stanley shed 4.8 percent to $16.20.
Shares of luxury retailer Tiffany & Co dropped 7.9 percent to $59.21.
Economists at Morgan Stanley lowered the outlook for global growth and said the United States and the euro zone are "dangerously close to recession."
2) Jobless Claims in U.S. Top Forecast-From Bloomberg
More Americans than forecast filed applications for unemployment benefits last week, signaling the labor market is struggling two years into the economic recovery.
Jobless claims climbed by 9,000 to 408,000 in the week ended Aug. 13, the highest in a month, Labor
Department figures showed today in Washington. Economists surveyed by Bloomberg News projected a rise in claims to 400,000, according to the median forecast. The number of people on unemployment benefit rolls rose, while those receiving extended payments fell.
Companies like Bank of New York Mellon Corp. (BK) are paring staff, one reason consumers are limiting their spending, which accounts for about 70 percent of the economy. Unemployment at 9.1 percent helps explain why Federal Reserve policy makers last week pledged to hold interest rates at a record low until at least mid-2013 to spur growth.
“People continue to get laid off,” David Semmens, a U.S. economist at Standard Chartered Bank in New York, said before the report. “The uncertainty in the economic outlook is continuing to give hiring managers sleepless nights and is keeping businesses from expanding. We have an incredibly long way to go” to get a healthy labor market, Semmens said.
Jobless benefits applications were projected to rise from the 395,000 initially reported for the prior week, according to the median forecast of 41 economists in a Bloomberg survey. Estimates ranged from 390,000 to 420,000.
Stock-index futures held earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing in September fell 2.2 percent to 1,163.40 at 8:39 a.m. in New York. The yield on the benchmark 10-year Treasury note fell to 2.1 percent from 2.17 percent late yesterday.
The number of people continuing to receive jobless benefits climbed by 7,000 in the week ended Aug. 6 to 3.7 million.
The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.
Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 43,700 to 3.66 million in the week ended July 30.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 2.9 percent in the week ended Aug. 6, today’s report showed.
Businesses reducing headcount include Bank of New York Mellon Corp. The world’s largest custody bank plans to eliminate 1,500 jobs, or 3 percent of the workforce, after expenses surged in the second quarter. It will implement an immediate hiring freeze across most departments and reduce its use of temporary workers, consultants and contractors.
“Expenses have been growing unsustainably faster” than revenue, Robert Kelly, BNY Mellon’s chief executive officer, said in a statement on Aug. 10. “We expect our natural turnover and immediate hiring freeze will reduce the impact on existing staff” from the reductions.
Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.
The lack of a pickup in hiring and an economy that’s growing “considerably slower” than expected prompted Fed policy makers to pledge for the first time to keep the benchmark interest rate at a record low at least through mid-2013.
“Indicators suggest a deterioration in overall labor market conditions in recent months,” the Federal Open Market Committee said in a statement on Aug. 9 after its meeting. “The unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate” of maximum employment and price stability.
3) Fed Eyes European Banks-From The Wall Street Journal
Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.
The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures.
The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.
Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.
Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.
Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.
Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations.
They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.
Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets.
Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, according to the people familiar with the matter. Officials also are in contact with regulators in the countries where the European banks are headquartered.
The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter.
The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.
Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.
In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.
Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector.
While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.
Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.
In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.
On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.
Spokesmen for Société Générale and Deutsche Bank declined to comment on the reasons for the funding buildup or whether there has been a pullback.
In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year.
The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.
Quote of the Day from Dave Ramsey.com:
It was yet another week of at least 400,000 first time unemployment claims as this has now become the standard number throughout the last few months.
The European crisis now affecting the US units of European banks.
Here are the top financial stories of the day:
1) Beaten-down Wall Street slammed by recession fears-From Reuters
Rising fears of another recession hammered U.S. stocks on Thursday, sending major averages sharply lower in a return to the extreme fluctuations investors endured a week ago.
New worries about the health of European banks set the tone before the market's open, and a dismal report on regional U.S. manufacturing fueled a downward spiral in which the Dow dropped as much as 528 points, spurring a flight to safe-haven assets like gold.
The Nasdaq ended more than 5 percent lower, the S&P 500 more than 4 percent and the blue-chip Dow off more than 3 percent.
"Are we going to go into recession? Most market participants were looking for slow and steady growth, but the statistics and the financial situation here and in foreign economies have disturbed that view," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.
The Dow Jones industrial average fell 419.63 points, or 3.68 percent, to 10,990.58, while the Standard & Poor's 500 Index declined 53.24 points, or 4.46 percent, to 1,140.65, and the Nasdaq Composite Index dropped 131.05 points, or 5.22 percent, to 2,380.43.
The losses resumed a slide in stocks that began in late July and seemed to moderate in the last few days. In a more worrisome sign, volume was heavier than on recent positive days, with 11.4 billion shares changing hands, highest so far this week.
Volatility jumped, with the CBOE Volatility Index or VIX, a barometer of Wall Street anxiety, up 38 percent at 43.56. More investors were taking out protective positions against declines in the market.
The S&P 500 is now off 16.4 percent from its April 29 closing high, but the benchmark index still ended above its slump on August 9 at 1,101.54.
Sectors associated with growth were hit hard. Top drags on the Dow included shares of IBM, down 4.5 percent at $163.83, and United Technologies, down 5.5 percent at $68.12. On the Nasdaq, shares of Oracle fell 8.3 percent to $25.19.
Adding to fears of a another recession, a survey of U.S. Mid-Atlantic factory activity by the Philadelphia Federal Reserve Bank showed a drop in August to its lowest level since March 2009.
Hewlett-Packard Co slumped 6.1 percent after reporting quarterly results.
Bank shares also fueled the market's declines, with the KBW Banks Index down 5.6 percent.
A Wall Street Journal report said regulators are scrutinizing the financial health of U.S. units of Europe's biggest banks more closely.
Among Wall Street bank stocks, Citigroup Inc lost 6.3 percent to $27.98 and Morgan Stanley shed 4.8 percent to $16.20.
Shares of luxury retailer Tiffany & Co dropped 7.9 percent to $59.21.
Economists at Morgan Stanley lowered the outlook for global growth and said the United States and the euro zone are "dangerously close to recession."
2) Jobless Claims in U.S. Top Forecast-From Bloomberg
More Americans than forecast filed applications for unemployment benefits last week, signaling the labor market is struggling two years into the economic recovery.
Jobless claims climbed by 9,000 to 408,000 in the week ended Aug. 13, the highest in a month, Labor
Department figures showed today in Washington. Economists surveyed by Bloomberg News projected a rise in claims to 400,000, according to the median forecast. The number of people on unemployment benefit rolls rose, while those receiving extended payments fell.
Companies like Bank of New York Mellon Corp. (BK) are paring staff, one reason consumers are limiting their spending, which accounts for about 70 percent of the economy. Unemployment at 9.1 percent helps explain why Federal Reserve policy makers last week pledged to hold interest rates at a record low until at least mid-2013 to spur growth.
“People continue to get laid off,” David Semmens, a U.S. economist at Standard Chartered Bank in New York, said before the report. “The uncertainty in the economic outlook is continuing to give hiring managers sleepless nights and is keeping businesses from expanding. We have an incredibly long way to go” to get a healthy labor market, Semmens said.
Jobless benefits applications were projected to rise from the 395,000 initially reported for the prior week, according to the median forecast of 41 economists in a Bloomberg survey. Estimates ranged from 390,000 to 420,000.
Stock-index futures held earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing in September fell 2.2 percent to 1,163.40 at 8:39 a.m. in New York. The yield on the benchmark 10-year Treasury note fell to 2.1 percent from 2.17 percent late yesterday.
Four-Week Average
Today’s data showed the four-week moving average, a less- volatile measure than the weekly figures, dropped to 402,500 last week, the lowest since April 16, from 406,000.The number of people continuing to receive jobless benefits climbed by 7,000 in the week ended Aug. 6 to 3.7 million.
The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.
Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 43,700 to 3.66 million in the week ended July 30.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 2.9 percent in the week ended Aug. 6, today’s report showed.
By State
Thirty-four states and territories reported an increase in claims, while 18 reported a decline. These data are reported with a one-week lag.Businesses reducing headcount include Bank of New York Mellon Corp. The world’s largest custody bank plans to eliminate 1,500 jobs, or 3 percent of the workforce, after expenses surged in the second quarter. It will implement an immediate hiring freeze across most departments and reduce its use of temporary workers, consultants and contractors.
“Expenses have been growing unsustainably faster” than revenue, Robert Kelly, BNY Mellon’s chief executive officer, said in a statement on Aug. 10. “We expect our natural turnover and immediate hiring freeze will reduce the impact on existing staff” from the reductions.
Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.
July Employment
Payrolls grew by 117,000 in July, bringing the average gain over the past three months to 111,000, according to Labor Department data. That was about half the 204,000 increase on average in the first four months of the year.The lack of a pickup in hiring and an economy that’s growing “considerably slower” than expected prompted Fed policy makers to pledge for the first time to keep the benchmark interest rate at a record low at least through mid-2013.
“Indicators suggest a deterioration in overall labor market conditions in recent months,” the Federal Open Market Committee said in a statement on Aug. 9 after its meeting. “The unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate” of maximum employment and price stability.
3) Fed Eyes European Banks-From The Wall Street Journal
Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.
The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures.
The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.
Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks.
Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.
Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.
Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations.
They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.
Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets.
Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, according to the people familiar with the matter. Officials also are in contact with regulators in the countries where the European banks are headquartered.
The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter.
The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.
Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.
In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.
Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector.
While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.
Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.
In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.
On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.
Spokesmen for Société Générale and Deutsche Bank declined to comment on the reasons for the funding buildup or whether there has been a pullback.
In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year.
The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.
Quote of the Day from Dave Ramsey.com:
The obstacles of your past can become the gateways that lead to new beginnings. — Ralph Blum
Wednesday, August 17, 2011
Financial Headline News for Wednesday 8/17
The volatility on Wall Street seems to be dying down as normal gains and losses have returned the last few trading days. Stocks rose slightly after companies reported stronger earnings but offered mixed forecasts.
When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.
So far it looks like green jobs aren't delivering as advertised due to cheaper costs in China.
Here are the top financial stories of the day:
1) Stocks rise slightly on earnings reports-From the AP
Stocks rose modestly Wednesday after companies reported higher earnings but gave mixed forecasts about how the fragile economy and rising costs will affect their growth.
Target Corp., Staples Inc. and Dell Inc. reported earnings for last quarter that were above analysts' forecasts. Companies in the Standard & Poor's 500 are on track to report higher profits for a ninth straight quarter. But economic growth is weak around the world, and some economists worry that a second recession may be coming. That could hurt companies' earnings in the future -- and kept investors from buying with more enthusiasm Wednesday.
Dell's forecast added to investors' concerns: It cut its prediction for revenue growth this year. Target and Staples gave profit forecasts that were above Wall Street's expectations.
The Dow Jones industrial average rose 4.28 points to 11,410.21. The S&P 500 rose 1.12, or 0.1 percent, to 1,193.88. The Nasdaq composite fell 11.97, or 0.5 percent, to 2,511.48.
Seven of the 10 sectors that make up the S&P 500 rose. The biggest drops came from technology stocks, which fell 0.8 percent after Dell cut its forecast.
"There are a whole bunch of contradictory signals in the system now, and it's hard to tell which way to go," said Charlie Smith, chief investment officer of Fort Pitt Capital Group, which has just over $1 billion in assets under management.
Investors are still worried about Europe. Some countries have borrowed so much that they may not be able to repay their bonds, and economic growth there has slowed. Concerns about a possible default by a
European country have dominated the market in recent weeks, along with worries about the slow U.S. economy.
Another concern Wednesday: Companies are contending with rising costs. Higher food prices helped push inflation at the wholesale level to 0.2 percent in July, according to a government report Wednesday. That compares with a 0.4 percent drop in June, but is still well below inflation levels earlier this year when violence in the Middle East forced oil prices higher. In February, wholesale prices rose 1.5 percent.
Economists say rising inflation reduces the chances that the Federal Reserve could announce another round of bond purchases to help the economy, a move called quantitative easing. The Fed just ended its second round of purchases, known as QE2, in June. "QE3 could be a hard sell" given higher inflation, Credit Suisse economists wrote in a report. They expect the government on Thursday to report that consumer prices rose 0.2 percent in July.
Preppy retailer Abercrombie & Fitch Co. fell 8.7 percent after its CEO warned of challenges ahead -- including higher expenses. Cost "pressures will be greater in the second half of the year, and macroeconomic uncertainty has increased," Mike Jeffries said, after the company reported a 64 percent rise in profit last quarter.
Dell said late Tuesday its profit rose 63 percent last quarter on strong demand from businesses and government agencies. But it also cited "a more uncertain demand environment" when it cut its forecast for annual revenue growth to a range of 1 percent to 5 percent. That's down from an earlier growth forecast for 5 percent to 9 percent. Dell stock fell 10.1 percent Wednesday.
Other companies are more optimistic. Retailer Target said it expects to earn between $4.15 and $4.30 per share this year. Analysts expected $4.14. Target also said its earnings last quarter rose 3.7 percent on sales of grocery, beauty products and other items. Target stock rose 2.4 percent.
Office products retailer Staples raised its profit forecast for the year after saying strong international sales pushed earnings up 36 percent last quarter.
Deere also raised its forecast for full-year earnings. It now expects to earn $2.7 billion this fiscal year, up from a May forecast of $2.65 billion. The maker of tractors and other heavy equipment said its profit rose 15 percent last quarter on strong demand for farm equipment.
Stocks have been particularly volatile in August. Worries rose as the U.S. government said it may default on its debt unless it was allowed to borrow more. The government just beat the deadline to avoid a default, but the partisanship in the debate came at a cost -- Standard & Poor's downgraded the U.S. credit rating on Aug. 5 by one notch to AA+ from the top AAA rating. That triggered one of Wall Street's wildest weeks: The Dow rose or fell by at least 400 points in each of the first four days of last week, the first time that has happened.
Markets appear to have calmed somewhat since then. Tuesday marked the first time since the Aug. 5 downgrade that the Dow rose or fell by less than 100 points. It fell 76 points on worries about Europe's ability to contain its debt problems.
Nearly three stocks rose Wednesday for every two that fell on the New York Stock Exchange. Consolidated trading volume was relatively light at 3.9 billion shares, the lowest in three weeks.
2) When They Are Wrong, Analysts May Dig in Their Heels-From Stanford Graduate School of Business
Like oracles in the stock market, securities analysts come up with earnings estimates that are supposed to signal the worth of a company's stock. But what happens when a company's actual performance proves an analyst's quarterly forecast is wrong?
Instead of fully incorporating new information into their forecasts, many of those analysts stubbornly stick to their erroneous views on the company, a tendency that might contribute to market bubbles and busts, according to recent research.
Analysts who make "extreme" quarterly forecasts — above or below the consensus or median estimate among all analysts following a given stock — tend to dig in their heels after being proved wrong, says John Beshears, an assistant professor of finance at the Stanford Graduate School of Business and coauthor of research exploring the phenomenon of stubbornness among stock analysts. Once a company reports quarterly earnings showing the analyst was too optimistic or too pessimistic, the extreme incorrect analyst will revise his or her full-year forecast, but will move less aggressively in the direction of the earnings surprise than other analysts.This stubbornness hurts an analyst's overall forecasting accuracy, say the researchers.
So what's behind the stubborn streak?
"People become overcommitted to a previous course of action," says Beshears. "Psychological factors like this play an important role in how people form expectations about the future."
Beshears and Katherine L. Milkman of the Wharton School at the University of Pennsylvania looked at how so-called "escalation bias" affects analysts' forecasts. Their paper, "Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?" was published in March by the Journal of Economic Behavior and
Organization.
The research has broader implications for understanding financial markets. Persistent, widespread over-optimism or over-pessimism by market participants could lead to mispricing of assets, says Beshears. He suggests, for example, that stubbornness contributed to the financial crisis of 2007-2008. Despite initial signs of a weakening real estate market, many analysts, investors, and lenders maintained or stepped up their commitment to housing-related assets, such as mortgage-backed securities. The result: The housing bubble continued longer than it should have, delaying and exacerbating the subsequent bust. Stubbornness, Beshears says, "is one mechanism that might allow market bubbles and crashes."
The study underscored the importance of psychological biases in shaping market participants' behavior. Previous research showed that when people make decisions that turn out to be wrong, they try to justify them. They may have invested time, money, and effort into a decision, so they want to recoup their "sunk costs." Hence, they are reluctant to back down. "They want to recover their costs" and "hopefully vindicate themselves," says Beshears, who researches how individuals and companies make financial decisions.
Securities analysts go out on a limb when they make extreme profit estimates. So when their quarterly forecasts are proven incorrect, these analysts adjust their full-year estimates less to coincide with fact than analysts who started at the quarterly consensus, according to the research.
Consider an analyst who forecasts quarterly earnings of $1.10 a share and a second analyst estimating $1.00 a share, which matches the consensus or median estimate. Suppose the company reports earnings of only 90 cents a share. The first analyst is wrong by 20 cents and the second analyst is wrong by 10 cents a share. Both would then revise their full-year forecasts downward, in the direction of the earnings surprise. The researchers found that the analyst who was more extreme in the wrong direction revised his or her full-year estimate by less than the second type of analyst.
Beshears and Milkman studied the Institutional Brokers' Estimate System I/B/E/S database with more than 6,200 analysts' quarterly forecasts on about 3,500 companies over more than 18 years, from 1990 to 2008. They created variables such as how far off a quarterly estimate was from reported earnings, how far off an estimate was from the consensus forecast, how much a full-year estimate was revised, and how accurate a full-year adjusted estimate turned out to be. Using statistical techniques, they looked at how the variables moved together or separately, discerning patterns in the analysts' forecasting and updating behavior.
Among their specific findings:
He believes research on escalation bias can be extended from equities to the debt markets to shed light on how credit analysts, loan officers, or risk management experts, for instance, view the performance of financial assets. Another future direction would be creating an "overarching model" of the psychological biases at play when people form expectations about the future or make financial decisions, he adds
3) Overrun by Chinese Rivals, U.S. Solar Company Falters-From The Wall Street Journal
Evergreen Solar Inc., once a darling of the U.S. solar industry, filed for bankruptcy protection this week, saying it couldn't compete with Chinese competitors without a reorganization—a sign of the difficulty in creating "green" U.S. manufacturing jobs amid bruising competition across the globe.
The market for solar panels is expanding world-wide. But the key thing driving demand is increasingly lower prices, which is forcing U.S. firms into a cutthroat cost-cutting war with rivals in China and elsewhere.
"When margins are getting squeezed, pennies count," says Pavel Molchanov, a solar analyst with Raymond James Financial. "Quite frankly, as a solar manufacturer, it is a lot better to pay workers $1 an hour in China than workers $15 an hour in Massachusetts."
The average price of solar modules has fallen 30% this year, after declining steeply last year, he said.
Evergreen declined repeated requests for comment.
Earlier this year, Evergreen closed its Massachusetts factory, a $450 million facility that opened in 2007 with support from state and local subsidies and employed about 800 workers. One of its largest creditors is MassDevelopment, a state agency, according to the bankruptcy filing.
Evergreen began to manufacture panels in Wuhan, China, last year. Other U.S.-based solar companies have already moved their production overseas: SunPower Corp. to the Philippines and First Solar Inc. to Malaysia.
In its Chapter 11 filing, Evergreen cited the difficulty in competing against Chinese solar companies that "receive considerable government and financial support."
It also blamed reductions in European subsidies for solar installations and what it called the U.S.'s failure to adopt supportive policies.
But while low-cost Chinese competition may have accelerated the collapse of the company's balance sheet, Evergreen also bet on the wrong technology.
Evergreen developed a technology that uses less polysilicon —a material housing small silicon crystals—than its competitors. When the cost of this raw material reached $400 per kilogram in 2008, Evergreen's solar panels were competitive. Evergreen's share price closed at a split-adjusted $108 in January 2008, its highest level in more than seven years.
Since then, polysilicon prices have plummeted to about $55 a kilogram. This has stripped away Evergreen's competitive edge and left it with a higher-cost manufacturing process. Its share price steadily fell since 2008, closing Tuesday at 16 cents on the Nasdaq Stock Market.
"As polysilicon got cheaper, this company could not compete with standard technology, which is getting cheaper weekly," says Jesse Pichel, global head of cleantech research at Jefferies & Co.
Chinese solar manufacturers enjoy extensive support from government industrial policy. They benefit from inexpensive capital, low-cost electricity and real estate, as well as less-expensive labor, says Mr. Pichel.
The global solar industry is growing quickly, in part because of government subsidies to promote clean-energy production and because of falling panel prices.
The annual production of solar photovoltaic cells reached 24 gigawatts in 2010, more than double the figure for 2009, according to Ren21, an international, government-supported institute that supports renewable-energy development.
The Obama administration has also supported "green" jobs as a future economic engine and has highlighted the solar industry. Its track record has been mixed,. Solyndra, a California-based solar-products maker, received a $535 million federal loan guarantee in 2009, but in late 2010 it announced plans to shutter an older plant and lay off workers.
Evergreen listed $424.5 million in assets in its filing with the bankruptcy court in Delaware, and debt of $485.6 million. It said it intended to shutter its facility in Midland, Mich., in the "near future." It also plans to lay off 83 workers in Massachusetts and Michigan, retaining 50 employees to help with the bankruptcy and reorganization process.
The company plans to reorganize operations with an emphasis on building up its China-based manufacturing facility.
Quote of the Day from Dave Ramsey.com:
Disgust and resolve are two of the great emotions that lead to change. — Jim Rohn
When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.
So far it looks like green jobs aren't delivering as advertised due to cheaper costs in China.
Here are the top financial stories of the day:
1) Stocks rise slightly on earnings reports-From the AP
Stocks rose modestly Wednesday after companies reported higher earnings but gave mixed forecasts about how the fragile economy and rising costs will affect their growth.
Target Corp., Staples Inc. and Dell Inc. reported earnings for last quarter that were above analysts' forecasts. Companies in the Standard & Poor's 500 are on track to report higher profits for a ninth straight quarter. But economic growth is weak around the world, and some economists worry that a second recession may be coming. That could hurt companies' earnings in the future -- and kept investors from buying with more enthusiasm Wednesday.
Dell's forecast added to investors' concerns: It cut its prediction for revenue growth this year. Target and Staples gave profit forecasts that were above Wall Street's expectations.
The Dow Jones industrial average rose 4.28 points to 11,410.21. The S&P 500 rose 1.12, or 0.1 percent, to 1,193.88. The Nasdaq composite fell 11.97, or 0.5 percent, to 2,511.48.
Seven of the 10 sectors that make up the S&P 500 rose. The biggest drops came from technology stocks, which fell 0.8 percent after Dell cut its forecast.
"There are a whole bunch of contradictory signals in the system now, and it's hard to tell which way to go," said Charlie Smith, chief investment officer of Fort Pitt Capital Group, which has just over $1 billion in assets under management.
Investors are still worried about Europe. Some countries have borrowed so much that they may not be able to repay their bonds, and economic growth there has slowed. Concerns about a possible default by a
European country have dominated the market in recent weeks, along with worries about the slow U.S. economy.
Another concern Wednesday: Companies are contending with rising costs. Higher food prices helped push inflation at the wholesale level to 0.2 percent in July, according to a government report Wednesday. That compares with a 0.4 percent drop in June, but is still well below inflation levels earlier this year when violence in the Middle East forced oil prices higher. In February, wholesale prices rose 1.5 percent.
Economists say rising inflation reduces the chances that the Federal Reserve could announce another round of bond purchases to help the economy, a move called quantitative easing. The Fed just ended its second round of purchases, known as QE2, in June. "QE3 could be a hard sell" given higher inflation, Credit Suisse economists wrote in a report. They expect the government on Thursday to report that consumer prices rose 0.2 percent in July.
Preppy retailer Abercrombie & Fitch Co. fell 8.7 percent after its CEO warned of challenges ahead -- including higher expenses. Cost "pressures will be greater in the second half of the year, and macroeconomic uncertainty has increased," Mike Jeffries said, after the company reported a 64 percent rise in profit last quarter.
Dell said late Tuesday its profit rose 63 percent last quarter on strong demand from businesses and government agencies. But it also cited "a more uncertain demand environment" when it cut its forecast for annual revenue growth to a range of 1 percent to 5 percent. That's down from an earlier growth forecast for 5 percent to 9 percent. Dell stock fell 10.1 percent Wednesday.
Other companies are more optimistic. Retailer Target said it expects to earn between $4.15 and $4.30 per share this year. Analysts expected $4.14. Target also said its earnings last quarter rose 3.7 percent on sales of grocery, beauty products and other items. Target stock rose 2.4 percent.
Office products retailer Staples raised its profit forecast for the year after saying strong international sales pushed earnings up 36 percent last quarter.
Deere also raised its forecast for full-year earnings. It now expects to earn $2.7 billion this fiscal year, up from a May forecast of $2.65 billion. The maker of tractors and other heavy equipment said its profit rose 15 percent last quarter on strong demand for farm equipment.
Stocks have been particularly volatile in August. Worries rose as the U.S. government said it may default on its debt unless it was allowed to borrow more. The government just beat the deadline to avoid a default, but the partisanship in the debate came at a cost -- Standard & Poor's downgraded the U.S. credit rating on Aug. 5 by one notch to AA+ from the top AAA rating. That triggered one of Wall Street's wildest weeks: The Dow rose or fell by at least 400 points in each of the first four days of last week, the first time that has happened.
Markets appear to have calmed somewhat since then. Tuesday marked the first time since the Aug. 5 downgrade that the Dow rose or fell by less than 100 points. It fell 76 points on worries about Europe's ability to contain its debt problems.
Nearly three stocks rose Wednesday for every two that fell on the New York Stock Exchange. Consolidated trading volume was relatively light at 3.9 billion shares, the lowest in three weeks.
2) When They Are Wrong, Analysts May Dig in Their Heels-From Stanford Graduate School of Business
Like oracles in the stock market, securities analysts come up with earnings estimates that are supposed to signal the worth of a company's stock. But what happens when a company's actual performance proves an analyst's quarterly forecast is wrong?
Instead of fully incorporating new information into their forecasts, many of those analysts stubbornly stick to their erroneous views on the company, a tendency that might contribute to market bubbles and busts, according to recent research.
Analysts who make "extreme" quarterly forecasts — above or below the consensus or median estimate among all analysts following a given stock — tend to dig in their heels after being proved wrong, says John Beshears, an assistant professor of finance at the Stanford Graduate School of Business and coauthor of research exploring the phenomenon of stubbornness among stock analysts. Once a company reports quarterly earnings showing the analyst was too optimistic or too pessimistic, the extreme incorrect analyst will revise his or her full-year forecast, but will move less aggressively in the direction of the earnings surprise than other analysts.This stubbornness hurts an analyst's overall forecasting accuracy, say the researchers.
So what's behind the stubborn streak?
"People become overcommitted to a previous course of action," says Beshears. "Psychological factors like this play an important role in how people form expectations about the future."
Beshears and Katherine L. Milkman of the Wharton School at the University of Pennsylvania looked at how so-called "escalation bias" affects analysts' forecasts. Their paper, "Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?" was published in March by the Journal of Economic Behavior and
Organization.
The research has broader implications for understanding financial markets. Persistent, widespread over-optimism or over-pessimism by market participants could lead to mispricing of assets, says Beshears. He suggests, for example, that stubbornness contributed to the financial crisis of 2007-2008. Despite initial signs of a weakening real estate market, many analysts, investors, and lenders maintained or stepped up their commitment to housing-related assets, such as mortgage-backed securities. The result: The housing bubble continued longer than it should have, delaying and exacerbating the subsequent bust. Stubbornness, Beshears says, "is one mechanism that might allow market bubbles and crashes."
The study underscored the importance of psychological biases in shaping market participants' behavior. Previous research showed that when people make decisions that turn out to be wrong, they try to justify them. They may have invested time, money, and effort into a decision, so they want to recoup their "sunk costs." Hence, they are reluctant to back down. "They want to recover their costs" and "hopefully vindicate themselves," says Beshears, who researches how individuals and companies make financial decisions.
Securities analysts go out on a limb when they make extreme profit estimates. So when their quarterly forecasts are proven incorrect, these analysts adjust their full-year estimates less to coincide with fact than analysts who started at the quarterly consensus, according to the research.
Consider an analyst who forecasts quarterly earnings of $1.10 a share and a second analyst estimating $1.00 a share, which matches the consensus or median estimate. Suppose the company reports earnings of only 90 cents a share. The first analyst is wrong by 20 cents and the second analyst is wrong by 10 cents a share. Both would then revise their full-year forecasts downward, in the direction of the earnings surprise. The researchers found that the analyst who was more extreme in the wrong direction revised his or her full-year estimate by less than the second type of analyst.
Beshears and Milkman studied the Institutional Brokers' Estimate System I/B/E/S database with more than 6,200 analysts' quarterly forecasts on about 3,500 companies over more than 18 years, from 1990 to 2008. They created variables such as how far off a quarterly estimate was from reported earnings, how far off an estimate was from the consensus forecast, how much a full-year estimate was revised, and how accurate a full-year adjusted estimate turned out to be. Using statistical techniques, they looked at how the variables moved together or separately, discerning patterns in the analysts' forecasting and updating behavior.
Among their specific findings:
- As analysts got more and more extreme, or "out-of-consensus," they became less and less responsive to the new earnings information when revising their full-year forecasts.
- Stubbornness hurts forecasting accuracy. Revised full-year forecasts from extreme incorrect analysts were further off the mark from actual earnings than they would have been had the analysts' updating behavior been like the behavior of analysts who started at the consensus point.
- Analysts are punished for stubbornness. The more extreme, incorrect, and stubborn an analyst was, the less likely that he or she would rank among Institutional Investor magazine's "All-American" list of top analysts.
He believes research on escalation bias can be extended from equities to the debt markets to shed light on how credit analysts, loan officers, or risk management experts, for instance, view the performance of financial assets. Another future direction would be creating an "overarching model" of the psychological biases at play when people form expectations about the future or make financial decisions, he adds
3) Overrun by Chinese Rivals, U.S. Solar Company Falters-From The Wall Street Journal
Evergreen Solar Inc., once a darling of the U.S. solar industry, filed for bankruptcy protection this week, saying it couldn't compete with Chinese competitors without a reorganization—a sign of the difficulty in creating "green" U.S. manufacturing jobs amid bruising competition across the globe.
The market for solar panels is expanding world-wide. But the key thing driving demand is increasingly lower prices, which is forcing U.S. firms into a cutthroat cost-cutting war with rivals in China and elsewhere.
"When margins are getting squeezed, pennies count," says Pavel Molchanov, a solar analyst with Raymond James Financial. "Quite frankly, as a solar manufacturer, it is a lot better to pay workers $1 an hour in China than workers $15 an hour in Massachusetts."
The average price of solar modules has fallen 30% this year, after declining steeply last year, he said.
Evergreen declined repeated requests for comment.
Earlier this year, Evergreen closed its Massachusetts factory, a $450 million facility that opened in 2007 with support from state and local subsidies and employed about 800 workers. One of its largest creditors is MassDevelopment, a state agency, according to the bankruptcy filing.
Evergreen began to manufacture panels in Wuhan, China, last year. Other U.S.-based solar companies have already moved their production overseas: SunPower Corp. to the Philippines and First Solar Inc. to Malaysia.
In its Chapter 11 filing, Evergreen cited the difficulty in competing against Chinese solar companies that "receive considerable government and financial support."
It also blamed reductions in European subsidies for solar installations and what it called the U.S.'s failure to adopt supportive policies.
But while low-cost Chinese competition may have accelerated the collapse of the company's balance sheet, Evergreen also bet on the wrong technology.
Evergreen developed a technology that uses less polysilicon —a material housing small silicon crystals—than its competitors. When the cost of this raw material reached $400 per kilogram in 2008, Evergreen's solar panels were competitive. Evergreen's share price closed at a split-adjusted $108 in January 2008, its highest level in more than seven years.
Since then, polysilicon prices have plummeted to about $55 a kilogram. This has stripped away Evergreen's competitive edge and left it with a higher-cost manufacturing process. Its share price steadily fell since 2008, closing Tuesday at 16 cents on the Nasdaq Stock Market.
"As polysilicon got cheaper, this company could not compete with standard technology, which is getting cheaper weekly," says Jesse Pichel, global head of cleantech research at Jefferies & Co.
Chinese solar manufacturers enjoy extensive support from government industrial policy. They benefit from inexpensive capital, low-cost electricity and real estate, as well as less-expensive labor, says Mr. Pichel.
The global solar industry is growing quickly, in part because of government subsidies to promote clean-energy production and because of falling panel prices.
The annual production of solar photovoltaic cells reached 24 gigawatts in 2010, more than double the figure for 2009, according to Ren21, an international, government-supported institute that supports renewable-energy development.
The Obama administration has also supported "green" jobs as a future economic engine and has highlighted the solar industry. Its track record has been mixed,. Solyndra, a California-based solar-products maker, received a $535 million federal loan guarantee in 2009, but in late 2010 it announced plans to shutter an older plant and lay off workers.
Evergreen listed $424.5 million in assets in its filing with the bankruptcy court in Delaware, and debt of $485.6 million. It said it intended to shutter its facility in Midland, Mich., in the "near future." It also plans to lay off 83 workers in Massachusetts and Michigan, retaining 50 employees to help with the bankruptcy and reorganization process.
The company plans to reorganize operations with an emphasis on building up its China-based manufacturing facility.
Quote of the Day from Dave Ramsey.com:
Disgust and resolve are two of the great emotions that lead to change. — Jim Rohn
Tuesday, August 16, 2011
Financial Headline News for Tuesday 8/16
When was the last day we didn't have over a 100 point Dow swing in either direction? Well today it was a 76 point loss so things might be getting less volitile on the Street.
Are you having trouble getting a loan from a bank? One of the reasons below could be why.
Walmart seems to be losing its Mo Jo among consumers as they claim prices aren't as low as other stores.
Here are the top financial stories of the day:
1) French-German euro zone plan fails to inspire Wall St-From Reuters
U.S. stocks fell on Tuesday after three days of gains when a meeting between the heads of France and Germany failed to quell fears about euro zone leaders' ability to contain the region's sovereign debt woes.
Efforts to stem the spreading European debt crisis have so far been ineffective, a major reason for the equity market's declines in recent weeks. Stocks were unable to rally on Tuesday despite positive U.S. earnings and Fitch Ratings' decision to keep the AAA credit rating for the United States.
German Chancellor Angela Merkel and French President Nicolas Sarkozy detailed plans for closer euro zone integration but they did not include boosting the size of the euro zone's rescue fund or sales of euro bonds.
"The market wanted to see at least some forward movement, something concrete coming out of the meeting that would've been supportive to what's been dragging the market lower," said Marc Pado, U.S. market strategist at Cantor Fitzgerald in San Francisco.
Shares of financials, seen as vulnerable to a European fiscal crisis, added to their decline and were the worst-performing sector in the S&P 500. The S&P financial index was down 1.9 percent.
Merkel and Sarkozy said they would propose a tax on financial transactions, which hurt shares of exchange operators. Shares of NYSE Euronext fell 8.4 percent to $26.54, making it the worst performer in the S&P 500.
Shares of retailers Wal-Mart Stores Inc and Home Depot Inc both rose after the industry bellwethers exceeded analysts' expectations for quarterly numbers.
Dell Inc's shares dropped 4.9 percent in after-hours trading after the company reported revenue slightly below analysts' expectations and said sales in the present quarter would be flat.
Euro zone worries have weighed heavily on markets, most recently with last week's concerns about the solvency of French banks and the continued uncertainty over the European Central Bank's ability to control sovereign bond yields.
The Dow Jones industrial average dropped 76.97 points, or 0.67 percent, at 11,405.93, while the Standard & Poor's 500 Index declined 11.73 points, or 0.97 percent, at 1,192.76, and the Nasdaq Composite Index fell 31.75 points, or 1.24 percent, at 2,523.45.
Worries about the euro-zone troubles and a weakening U.S. economy have pushed U.S. stocks into correction territory after the S&P 500's closing high on April 29.
Data showed Germany's gross domestic product expanded just 0.1 percent from April to June versus the previous quarter, missing forecasts and knocking regional growth figures below expectations.
"We have France out with no growth yesterday and Germany out with no growth today. It broadens a picture that global economies have experienced a simultaneous pause," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Fitch confirmed the United States' top-notch credit rating less than two weeks after Standard & Poor's downgraded the United States to AA-plus.
Wal-Mart shares advanced 3.9 percent to $51.92 after the company said U.S. same-store sales turned positive in July. Home Depot shares gained 5.2 percent to $33.12 after the company raised its fiscal-year profit forecast for the second time in three months.
About 8.2 billion shares were traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, roughly in line with last year's daily average of 8.47 billion. About three stocks fell for every advancer on the New York Stock Exchange and about four shares declined for every advancing stock on the Nasdaq.
2) Why Banks Aren’t Lending: Weak Economy, Regulatory Uncertainty-From The Daily Ticker
U.S. banks got hammered last week on concerns the sovereign debt crisis in Europe coupled with slow growth and a weak U.S. consumer are setting the stage for another financial crisis. U.S. banks still have some troubling legacy assets on their balance sheets but for the most part they are in much healthier shape then back in 2008, says John Garvey head of U.S. banks and capital markets at PricewaterhouseCoopers.
"The banks have made pretty significant steps in the last couple of years to improve their stability in terms of their funding sources, in terms of capital."
If banks are better shape then why aren't they lending? Wasn't the point of TARP and the rest of the bailouts to ensure banks could lend and support the economy?
Despite a slight improvement in the Fed's most recent survey of senior loan officers, bank lending remains stunted for several reasons, Garvey argues, including:
1. Underwriting standards have improved.
2. Changes in consumer behavior. "People are paying down their debt, people are not taking on a lot of debt."
(These first two changes are long-term positives for U.S. fundamentals but in the near-term, "it's a cocktail for weak loan demand for the foreseeable future," he says.)
3. Larger companies are sitting on record amounts of cash don't need the money. Plus, they're not investing more because of the weak economy.
4. Banks are reluctant to lend to "marginal borrowers" in this weak economy.
5. Regulations rules have not been written yet. All this uncertainty means companies "hesitate to invest" and become "cautious," according to Garvey
Speaking of troubles in the banking industry, at the end of the interview, Aaron Task and Henry Blodget also asked Garvey about the role of accountants and auditors like his employer PWC in causing the banking crisis of 2008. "We felt like we performed as we should have," says Garvey.
3) Wal-Mart Loses Edge as Perception That Retailer No Longer Has Best Prices Undercuts Sales Turnaround-From The Wall Street Journal
Wal-Mart is losing its longstanding reputation for offering consumers the lowest prices, complicating its efforts to end a two-year sales slump in the U.S.
The Bentonville, Ark., retail colossus became the world's largest store chain by avoiding sales gimmicks through "every day low prices" on everything from food to sporting goods under one roof.
But surveys by retail consultants, analysts and brand experts now find that Wal-Mart's aura of price leadership has faded since the recession, because customers who searched for better deals sometimes found them at competitors such as Dollar General Corp., Aldi Inc. and Amazon.com Inc.
Wal-Mart continues to post stable profits and overall sales, thanks to a fast-growing international business and a resurgence at its Sam's Club members-only stores. But Wal-Mart's U.S. business, which accounts for some 60% of its $419 billion in annual revenue, is expected by analysts to notch a ninth consecutive quarter of declining sales at stores open at least a year when it reports earnings on Tuesday.
"The competitive landscape has changed," says Wendy Liebmann, chief executive of consultancy WSL/Strategic Retail, which recently surveyed 1,500 Wal-Mart shoppers and found that 86% no longer thought it had the lowest prices. "And the economic trends that are battering Wal-Mart's core shoppers are not diminishing."
A spokesman for the company declined to comment.
Wal-Mart has responded by returning to its roots. It is cutting the number of "rollbacks," or planned sales specials, after some customers concluded Wal-Mart was becoming as gimmicky as competitors. Wal-Mart also began restoring thousands of products it had removed from stores as it sought to tidy up cluttered aisles.
Yet with the back-to-the-future strategy slow to show improvement, retail experts are questioning whether
Wal-Mart can win back its market share. Some believe it must embrace new methods of building customer loyalty, such as the "REDcards" that award 5% discounts on purchases from rival Target Corp.
"Wal-Mart has lost mind share in the U.S.," said Citigroup analyst Deborah Weinswig. "In this environment, with high gas prices, you need to do something special to get a consumer to drive to your store."
Ms. Weinswig and other analysts believe many customers are choosing to drive to stores closer to their homes to reduce their fuel bills.
Although Wal-Mart's reputation for low prices may be waning, price reviews show it still is the cheapest place for consumers to buy many household staples such as groceries, toilet paper and toothpaste. A recent Goldman Sachs Group Inc. survey of store prices in Chicago found that Wal-Mart prices on identical toys, foods and health and beauty aids were lower than Target's across all categories and 6.2% less overall.
Morgan Stanley surveys have yielded similar results. But when it recently polled 1,100 Wal-Mart customers to see what they thought, it found the perception was quite different.
"We were shocked to see 60% of Wal-Mart shoppers no longer viewed Wal-Mart as having the lowest prices," says Morgan Stanley analyst Mark Wiltamuth, who expects the company's U.S. same-store sales to decline for the rest of the year due to the image problem. "It is difficult to improve your price perception during a time of inflation, because it is hard to tell if a store's prices are getting better when prices in general are going up."
Part of Wal-Mart's problem is that more shoppers are deciding its merchandise is not the best value for the money, according to YouGov's BrandIndex, a researcher that constantly polls consumers to track customer perceptions. One of the factors contributing to that perception was that many competitors to Wal-Mart began carrying items in amounts smaller than the bulk sizes favored by Wal-Mart, which sometimes cost more per unit but allowed consumers to meet basic needs such as buying toilet paper before their next paycheck, even if they only had a few dollars.
Wal-Mart's value perception dropped four points in its surveys compared to last year, while low-cost retail rivals such as Dollar Tree Inc. rose.
"That is the largest decline we have seen among discount retailers," says YouGov researcher Ted Marzilli. "It is pretty strong confirmation that consumer perceptions are changing."
Carolyn Martin, a 46-year-old Waynesville, N.C., resident, goes to Wal-Mart less frequently. "I find myself going to other grocery stores, other clothing stores and particularly to online ordering electronic items," she says.
While she still sometimes shops at Wal-Mart due to its one-stop convenience, she recently purchased dog and cat food at a Tractor Supply Co. store after concluding it was a better value.
Quote of the Day from Dave Ramsey.com:
We gain strength, and courage, and confidence by each experience in which we really stop to look fear in the face ... we must do that which we think we cannot. — Eleanor Roosevelt
Are you having trouble getting a loan from a bank? One of the reasons below could be why.
Walmart seems to be losing its Mo Jo among consumers as they claim prices aren't as low as other stores.
Here are the top financial stories of the day:
1) French-German euro zone plan fails to inspire Wall St-From Reuters
U.S. stocks fell on Tuesday after three days of gains when a meeting between the heads of France and Germany failed to quell fears about euro zone leaders' ability to contain the region's sovereign debt woes.
Efforts to stem the spreading European debt crisis have so far been ineffective, a major reason for the equity market's declines in recent weeks. Stocks were unable to rally on Tuesday despite positive U.S. earnings and Fitch Ratings' decision to keep the AAA credit rating for the United States.
German Chancellor Angela Merkel and French President Nicolas Sarkozy detailed plans for closer euro zone integration but they did not include boosting the size of the euro zone's rescue fund or sales of euro bonds.
"The market wanted to see at least some forward movement, something concrete coming out of the meeting that would've been supportive to what's been dragging the market lower," said Marc Pado, U.S. market strategist at Cantor Fitzgerald in San Francisco.
Shares of financials, seen as vulnerable to a European fiscal crisis, added to their decline and were the worst-performing sector in the S&P 500. The S&P financial index was down 1.9 percent.
Merkel and Sarkozy said they would propose a tax on financial transactions, which hurt shares of exchange operators. Shares of NYSE Euronext fell 8.4 percent to $26.54, making it the worst performer in the S&P 500.
Shares of retailers Wal-Mart Stores Inc and Home Depot Inc both rose after the industry bellwethers exceeded analysts' expectations for quarterly numbers.
Dell Inc's shares dropped 4.9 percent in after-hours trading after the company reported revenue slightly below analysts' expectations and said sales in the present quarter would be flat.
Euro zone worries have weighed heavily on markets, most recently with last week's concerns about the solvency of French banks and the continued uncertainty over the European Central Bank's ability to control sovereign bond yields.
The Dow Jones industrial average dropped 76.97 points, or 0.67 percent, at 11,405.93, while the Standard & Poor's 500 Index declined 11.73 points, or 0.97 percent, at 1,192.76, and the Nasdaq Composite Index fell 31.75 points, or 1.24 percent, at 2,523.45.
Worries about the euro-zone troubles and a weakening U.S. economy have pushed U.S. stocks into correction territory after the S&P 500's closing high on April 29.
Data showed Germany's gross domestic product expanded just 0.1 percent from April to June versus the previous quarter, missing forecasts and knocking regional growth figures below expectations.
"We have France out with no growth yesterday and Germany out with no growth today. It broadens a picture that global economies have experienced a simultaneous pause," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Fitch confirmed the United States' top-notch credit rating less than two weeks after Standard & Poor's downgraded the United States to AA-plus.
Wal-Mart shares advanced 3.9 percent to $51.92 after the company said U.S. same-store sales turned positive in July. Home Depot shares gained 5.2 percent to $33.12 after the company raised its fiscal-year profit forecast for the second time in three months.
About 8.2 billion shares were traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, roughly in line with last year's daily average of 8.47 billion. About three stocks fell for every advancer on the New York Stock Exchange and about four shares declined for every advancing stock on the Nasdaq.
2) Why Banks Aren’t Lending: Weak Economy, Regulatory Uncertainty-From The Daily Ticker
U.S. banks got hammered last week on concerns the sovereign debt crisis in Europe coupled with slow growth and a weak U.S. consumer are setting the stage for another financial crisis. U.S. banks still have some troubling legacy assets on their balance sheets but for the most part they are in much healthier shape then back in 2008, says John Garvey head of U.S. banks and capital markets at PricewaterhouseCoopers.
"The banks have made pretty significant steps in the last couple of years to improve their stability in terms of their funding sources, in terms of capital."
If banks are better shape then why aren't they lending? Wasn't the point of TARP and the rest of the bailouts to ensure banks could lend and support the economy?
Despite a slight improvement in the Fed's most recent survey of senior loan officers, bank lending remains stunted for several reasons, Garvey argues, including:
1. Underwriting standards have improved.
2. Changes in consumer behavior. "People are paying down their debt, people are not taking on a lot of debt."
(These first two changes are long-term positives for U.S. fundamentals but in the near-term, "it's a cocktail for weak loan demand for the foreseeable future," he says.)
3. Larger companies are sitting on record amounts of cash don't need the money. Plus, they're not investing more because of the weak economy.
4. Banks are reluctant to lend to "marginal borrowers" in this weak economy.
5. Regulations rules have not been written yet. All this uncertainty means companies "hesitate to invest" and become "cautious," according to Garvey
Speaking of troubles in the banking industry, at the end of the interview, Aaron Task and Henry Blodget also asked Garvey about the role of accountants and auditors like his employer PWC in causing the banking crisis of 2008. "We felt like we performed as we should have," says Garvey.
3) Wal-Mart Loses Edge as Perception That Retailer No Longer Has Best Prices Undercuts Sales Turnaround-From The Wall Street Journal
Wal-Mart is losing its longstanding reputation for offering consumers the lowest prices, complicating its efforts to end a two-year sales slump in the U.S.
The Bentonville, Ark., retail colossus became the world's largest store chain by avoiding sales gimmicks through "every day low prices" on everything from food to sporting goods under one roof.
But surveys by retail consultants, analysts and brand experts now find that Wal-Mart's aura of price leadership has faded since the recession, because customers who searched for better deals sometimes found them at competitors such as Dollar General Corp., Aldi Inc. and Amazon.com Inc.
Wal-Mart continues to post stable profits and overall sales, thanks to a fast-growing international business and a resurgence at its Sam's Club members-only stores. But Wal-Mart's U.S. business, which accounts for some 60% of its $419 billion in annual revenue, is expected by analysts to notch a ninth consecutive quarter of declining sales at stores open at least a year when it reports earnings on Tuesday.
"The competitive landscape has changed," says Wendy Liebmann, chief executive of consultancy WSL/Strategic Retail, which recently surveyed 1,500 Wal-Mart shoppers and found that 86% no longer thought it had the lowest prices. "And the economic trends that are battering Wal-Mart's core shoppers are not diminishing."
A spokesman for the company declined to comment.
Wal-Mart has responded by returning to its roots. It is cutting the number of "rollbacks," or planned sales specials, after some customers concluded Wal-Mart was becoming as gimmicky as competitors. Wal-Mart also began restoring thousands of products it had removed from stores as it sought to tidy up cluttered aisles.
Yet with the back-to-the-future strategy slow to show improvement, retail experts are questioning whether
Wal-Mart can win back its market share. Some believe it must embrace new methods of building customer loyalty, such as the "REDcards" that award 5% discounts on purchases from rival Target Corp.
"Wal-Mart has lost mind share in the U.S.," said Citigroup analyst Deborah Weinswig. "In this environment, with high gas prices, you need to do something special to get a consumer to drive to your store."
Ms. Weinswig and other analysts believe many customers are choosing to drive to stores closer to their homes to reduce their fuel bills.
Although Wal-Mart's reputation for low prices may be waning, price reviews show it still is the cheapest place for consumers to buy many household staples such as groceries, toilet paper and toothpaste. A recent Goldman Sachs Group Inc. survey of store prices in Chicago found that Wal-Mart prices on identical toys, foods and health and beauty aids were lower than Target's across all categories and 6.2% less overall.
Morgan Stanley surveys have yielded similar results. But when it recently polled 1,100 Wal-Mart customers to see what they thought, it found the perception was quite different.
"We were shocked to see 60% of Wal-Mart shoppers no longer viewed Wal-Mart as having the lowest prices," says Morgan Stanley analyst Mark Wiltamuth, who expects the company's U.S. same-store sales to decline for the rest of the year due to the image problem. "It is difficult to improve your price perception during a time of inflation, because it is hard to tell if a store's prices are getting better when prices in general are going up."
Part of Wal-Mart's problem is that more shoppers are deciding its merchandise is not the best value for the money, according to YouGov's BrandIndex, a researcher that constantly polls consumers to track customer perceptions. One of the factors contributing to that perception was that many competitors to Wal-Mart began carrying items in amounts smaller than the bulk sizes favored by Wal-Mart, which sometimes cost more per unit but allowed consumers to meet basic needs such as buying toilet paper before their next paycheck, even if they only had a few dollars.
Wal-Mart's value perception dropped four points in its surveys compared to last year, while low-cost retail rivals such as Dollar Tree Inc. rose.
"That is the largest decline we have seen among discount retailers," says YouGov researcher Ted Marzilli. "It is pretty strong confirmation that consumer perceptions are changing."
Carolyn Martin, a 46-year-old Waynesville, N.C., resident, goes to Wal-Mart less frequently. "I find myself going to other grocery stores, other clothing stores and particularly to online ordering electronic items," she says.
While she still sometimes shops at Wal-Mart due to its one-stop convenience, she recently purchased dog and cat food at a Tractor Supply Co. store after concluding it was a better value.
Quote of the Day from Dave Ramsey.com:
We gain strength, and courage, and confidence by each experience in which we really stop to look fear in the face ... we must do that which we think we cannot. — Eleanor Roosevelt
Monday, August 15, 2011
Financial Headline News for Monday 8/15
The rally continued for a 3rd straight day as stocks have bounced back to reclaim all of last week’s losses.
There was more bad news on the future of the economy as Moody's Analytics lowered its short term forecast for growth.
Dave Ramsey would be proud as household debt continues to tick down.
Here are the top financial stories of the day:
1) Stocks rise for third day after acquisition flurry-From the AP
Stocks are having their longest rally since early July. A $19 billion corporate buying spree and encouraging economic news form Japan sent the Dow Jones industrial average up 213 points and erased its losses from last week.
The return of what's called "Merger Monday" on Wall Street made investors more optimistic about the future. So did a report that Japan's economy shrank less than feared following the March 11 earthquake and tsunami. That helped temporarily ease worries that the U.S. economy may slide into another recession.
The Dow rose 213.88 points, or 1.9 percent to 11,482.90. It has gained 762.96 points since Thursday. That's the best three-day point gain since it rose 927.18 in November 2008, during the depths of the financial crisis. The Dow is also up 7.1 percent over the three days, the biggest percentage gain since it rose 9.5 percent the first three days of the bull market in March 2009.
The Standard & Poor's 500 index rose 25.68, or 2.2 percent, to 1,204.49. The Nasdaq composite index rose 47.22, or 1.9 percent, to 2,555.20.
Markets may have stabilized the last three days, but financial analysts warned investors not to assume that stocks have fully settled down after last week's swings. The Dow rose or fell by at least 400 points in four straight days for the first time ever. The first-ever downgrade of the U.S. credit rating triggered the volatility.
It was worsened by concerns that Europe's debt problems are worsening and that the U.S. economy is weakening.
"You might have these moments of quiet, but the debt crisis in Europe did not go away," said John Hailer, chief executive for the U.S. and Asia of Natixis Global Asset Management. "Our issues with the debt, with what our tax policy is going to be going forward, our unemployment did not go away."
"We are probably going to have to look at some very different levels of volatility than what a lot of investors grew up with over the last 25 to 30 years," he said.
A period of relative stability has been common in past volatile markets. In 2008, stocks plunged between mid-September and mid-November. From mid-November until the beginning of January 2009, the Dow was in a lull of sorts. It ratcheted up and down, mostly in the high 8,000 range. But in early January 2009, it began to plunge before finally hitting a bottom of 6,547 on March 9.
More swings could come this week. Leaders of France and Germany meet Tuesday to discuss Europe's debt problems. Spain and other countries have borrowed so much that they may need help to repay their bills. Investors on Tuesday will get an update on how Spain's economy did during the second quarter.
Corporate deals dominated the news, as companies followed a years-long practice of announcing acquisitions on a Monday. The biggest was Google Inc.'s $12.5 billion cash purchase of wireless phone maker Motorola Mobility Holdings Inc. It is also the biggest acquisition in Google's history. No. 2 was its $3.2 billion purchase of DoubleClick in 2008. Motorola Mobility's stock jumped percent 55.8 percent. Google fell 1.2 percent.
Among other deals: Time Warner Cable Inc. said it will pay $3 billion in cash for Insight Communications Co., which has more than 750,000 cable customers in the Midwest. Agribusiness conglomerate Cargill said it will buy animal nutrition company Provimi of the Netherlands for $2.16 billion. And in the energy industry, offshore driller Transocean Ltd. said it will buy Aker Drilling of Norway for $1.43 billion in cash.
Companies across the United States have accumulated a record amount of cash since the recession ended. They have increased their cash reserves every quarter for more than two years, and businesses in the S&P 500 index had a total of $963.3 billion at the end of March, according to the most recent data from Standard & Poor's.
Investors have waited for companies to use some of that cash on acquisitions, dividend increases and stock buybacks. Many financial analysts believe that companies are more confident about the future if they're willing to buy other businesses. So a series of acquisition announcements tends to send stocks higher.
The growing cash hoard has been the result of stronger profits. Companies have kept costs low by being slow to hire. Revenue, meanwhile, is growing, particularly from overseas customers. For the 460 companies in the S&P 500 that have reported second-quarter results, total earnings are up 12 percent from a year ago.
It was the busiest day for acquisitions since July 11, when Express Scripts said it would buy Medco Health Solutions for $29.1 billion in a combination of the country's largest pharmacy benefits managers. The total value of deals targeting U.S. companies has climbed to $771 billion this year, according to Dealogic. That's up 55 percent from $498 billion at the same point of last year.
Some companies are looking to pare back. Bank of America Corp. said it will sell its $8.6 billion Canadian credit-card business to TD Bank Group. The bank will also get out of the credit card business in Britain and Ireland. The deals follow others that Bank of America made to move out of foreign credit cards, and they should help Bank of America improve its balance sheet
Bank of America rose 7.9 percent, part of a rally for the overall industry. Financial stocks in the S&P 500 rose 3.2 percent as a group.
Energy stocks in the index rose 3.4 percent after crude oil climbed $2.50 per barrel to settle at $87.88.
Asian and European markets rose earlier after Japan said its economy shrank at just a 1.3 percent annual rate between April and June. That's less than half the drop that economists expected following the earthquake, tsunami and nuclear crisis that struck the country in March.
Still, investors have more reason to worry about the weak U.S. economy.
Manufacturers in New York told the Federal Reserve they're more pessimistic about future growth. Manufacturing has been one of the country's strongest industries since the recession ended in 2009, but growth began to slow in March. Manufacturing nationwide barely grew in July.
Cosmetics company Estee Lauder Cos. fell 6.5 percent after it forecast earnings for the upcoming year that were below Wall Street's expectations. It also said its net income rose 72 percent last quarter on strong sales growth to China, Russia and the Middle East.
Lowe's Cos., the second-largest home improvement retailer, rose 0.9 percent after it said its net income was roughly flat last quarter on a 1 percent rise in revenue.
More than 10 stocks rose for every one that fell on the New York Stock Exchange. Trading volume at 4.5 billion shares was below last week's record levels, when it climbed above 9 billion. Volume was close to its average over the last year of 4.3 billion shares.
2) Moody’s Lowers Economic Growth Outlook-From The Wall Street Journal
Moody’s Analytics said its near-term outlook for the U.S. economy has fallen significantly in the past month wake of the debate over the U.S. debt ceiling and the downgrade of the nation’s credit ratings by Standard & Poor’s .
Moody’s Analytics, a sister company to credit-ratings company Moody’s Investors Service, now expects real gross domestic product to increase at an annualized rate of about 2% in the second half of this year and just over 3% next year, compared with its estimate a month ago for growth of 3.5% for the second half of this year and through 2012.
The firm attributes most of the expected decline to a loss of business, investor and consumer confidence, noting the economy’s improving fundamentals such as the strengthening of business’s balance sheets and consumers’ strides in cutting household debt.
The credit-rating company also said it thinks the odds of a renewed recession over the next 12 months — now at 1 in 3 — will increase if stock prices continue to fall. Moody’s maintains that the odds of a renewed recession rise with each 100-point drop in the Dow Jones Industrial Average. While Moody’s expects the economic recovery will continue, prospects for economic growth and job creation have “diminished substantially.”
Though the U.S. economic recovery looked healthy at the beginning of the year, a series of events have hurt business, consumer and investor confidence, Moody’s said. These include surging prices for food and gasoline, natural disasters in Japan, Europe’s debt crisis and, most recently, the U.S. debt woes.
The economy needs to grow 2.5% to 3% a year to create jobs fast enough to keep the unemployment rate stable, Moody’s said. However, Moody’s said it doesn’t think this will happen soon.
3) Household debt falls slightly to $11.4 trillion in Q2 2011-From CNN Money
Consumer borrowing fell slightly in the second quarter, as Americans shed more of their debt. A new report released Monday by the New York Federal Reserve -- which looks at mortgages, home equity lines, credit cards, auto loans and student debt held by consumers nationwide -- found that total consumer debt fell to $11.4 trillion in the second quarter of this year.
That marked a $50 billion drop in total consumer debt from the prior quarter, a decrease so slight that the New York Fed called consumer borrowing "essentially flat."
"This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed," Andrew Haughwout, vice president of the Research and Statistics Group at the New York Fed said in a statement.
Consumer debt remains 8.6% below its $12.5 trillion peak at the end of September 2008, just after the collapse of Lehman Brothers and the seizing of financial markets.
Reeling from the shock of the recession, American households have been paying down their debt slowly for nine of the last 10 quarters. That trend is typically viewed as a healthy rebalancing step for the economy, but at the same time it also limits the recovery.
Quote of the Day from Dave Ramsey.com:
There was more bad news on the future of the economy as Moody's Analytics lowered its short term forecast for growth.
Dave Ramsey would be proud as household debt continues to tick down.
Here are the top financial stories of the day:
1) Stocks rise for third day after acquisition flurry-From the AP
Stocks are having their longest rally since early July. A $19 billion corporate buying spree and encouraging economic news form Japan sent the Dow Jones industrial average up 213 points and erased its losses from last week.
The return of what's called "Merger Monday" on Wall Street made investors more optimistic about the future. So did a report that Japan's economy shrank less than feared following the March 11 earthquake and tsunami. That helped temporarily ease worries that the U.S. economy may slide into another recession.
The Dow rose 213.88 points, or 1.9 percent to 11,482.90. It has gained 762.96 points since Thursday. That's the best three-day point gain since it rose 927.18 in November 2008, during the depths of the financial crisis. The Dow is also up 7.1 percent over the three days, the biggest percentage gain since it rose 9.5 percent the first three days of the bull market in March 2009.
The Standard & Poor's 500 index rose 25.68, or 2.2 percent, to 1,204.49. The Nasdaq composite index rose 47.22, or 1.9 percent, to 2,555.20.
Markets may have stabilized the last three days, but financial analysts warned investors not to assume that stocks have fully settled down after last week's swings. The Dow rose or fell by at least 400 points in four straight days for the first time ever. The first-ever downgrade of the U.S. credit rating triggered the volatility.
It was worsened by concerns that Europe's debt problems are worsening and that the U.S. economy is weakening.
"You might have these moments of quiet, but the debt crisis in Europe did not go away," said John Hailer, chief executive for the U.S. and Asia of Natixis Global Asset Management. "Our issues with the debt, with what our tax policy is going to be going forward, our unemployment did not go away."
"We are probably going to have to look at some very different levels of volatility than what a lot of investors grew up with over the last 25 to 30 years," he said.
A period of relative stability has been common in past volatile markets. In 2008, stocks plunged between mid-September and mid-November. From mid-November until the beginning of January 2009, the Dow was in a lull of sorts. It ratcheted up and down, mostly in the high 8,000 range. But in early January 2009, it began to plunge before finally hitting a bottom of 6,547 on March 9.
More swings could come this week. Leaders of France and Germany meet Tuesday to discuss Europe's debt problems. Spain and other countries have borrowed so much that they may need help to repay their bills. Investors on Tuesday will get an update on how Spain's economy did during the second quarter.
Corporate deals dominated the news, as companies followed a years-long practice of announcing acquisitions on a Monday. The biggest was Google Inc.'s $12.5 billion cash purchase of wireless phone maker Motorola Mobility Holdings Inc. It is also the biggest acquisition in Google's history. No. 2 was its $3.2 billion purchase of DoubleClick in 2008. Motorola Mobility's stock jumped percent 55.8 percent. Google fell 1.2 percent.
Among other deals: Time Warner Cable Inc. said it will pay $3 billion in cash for Insight Communications Co., which has more than 750,000 cable customers in the Midwest. Agribusiness conglomerate Cargill said it will buy animal nutrition company Provimi of the Netherlands for $2.16 billion. And in the energy industry, offshore driller Transocean Ltd. said it will buy Aker Drilling of Norway for $1.43 billion in cash.
Companies across the United States have accumulated a record amount of cash since the recession ended. They have increased their cash reserves every quarter for more than two years, and businesses in the S&P 500 index had a total of $963.3 billion at the end of March, according to the most recent data from Standard & Poor's.
Investors have waited for companies to use some of that cash on acquisitions, dividend increases and stock buybacks. Many financial analysts believe that companies are more confident about the future if they're willing to buy other businesses. So a series of acquisition announcements tends to send stocks higher.
The growing cash hoard has been the result of stronger profits. Companies have kept costs low by being slow to hire. Revenue, meanwhile, is growing, particularly from overseas customers. For the 460 companies in the S&P 500 that have reported second-quarter results, total earnings are up 12 percent from a year ago.
It was the busiest day for acquisitions since July 11, when Express Scripts said it would buy Medco Health Solutions for $29.1 billion in a combination of the country's largest pharmacy benefits managers. The total value of deals targeting U.S. companies has climbed to $771 billion this year, according to Dealogic. That's up 55 percent from $498 billion at the same point of last year.
Some companies are looking to pare back. Bank of America Corp. said it will sell its $8.6 billion Canadian credit-card business to TD Bank Group. The bank will also get out of the credit card business in Britain and Ireland. The deals follow others that Bank of America made to move out of foreign credit cards, and they should help Bank of America improve its balance sheet
Bank of America rose 7.9 percent, part of a rally for the overall industry. Financial stocks in the S&P 500 rose 3.2 percent as a group.
Energy stocks in the index rose 3.4 percent after crude oil climbed $2.50 per barrel to settle at $87.88.
Asian and European markets rose earlier after Japan said its economy shrank at just a 1.3 percent annual rate between April and June. That's less than half the drop that economists expected following the earthquake, tsunami and nuclear crisis that struck the country in March.
Still, investors have more reason to worry about the weak U.S. economy.
Manufacturers in New York told the Federal Reserve they're more pessimistic about future growth. Manufacturing has been one of the country's strongest industries since the recession ended in 2009, but growth began to slow in March. Manufacturing nationwide barely grew in July.
Cosmetics company Estee Lauder Cos. fell 6.5 percent after it forecast earnings for the upcoming year that were below Wall Street's expectations. It also said its net income rose 72 percent last quarter on strong sales growth to China, Russia and the Middle East.
Lowe's Cos., the second-largest home improvement retailer, rose 0.9 percent after it said its net income was roughly flat last quarter on a 1 percent rise in revenue.
More than 10 stocks rose for every one that fell on the New York Stock Exchange. Trading volume at 4.5 billion shares was below last week's record levels, when it climbed above 9 billion. Volume was close to its average over the last year of 4.3 billion shares.
2) Moody’s Lowers Economic Growth Outlook-From The Wall Street Journal
Moody’s Analytics said its near-term outlook for the U.S. economy has fallen significantly in the past month wake of the debate over the U.S. debt ceiling and the downgrade of the nation’s credit ratings by Standard & Poor’s .
Moody’s Analytics, a sister company to credit-ratings company Moody’s Investors Service, now expects real gross domestic product to increase at an annualized rate of about 2% in the second half of this year and just over 3% next year, compared with its estimate a month ago for growth of 3.5% for the second half of this year and through 2012.
The firm attributes most of the expected decline to a loss of business, investor and consumer confidence, noting the economy’s improving fundamentals such as the strengthening of business’s balance sheets and consumers’ strides in cutting household debt.
The credit-rating company also said it thinks the odds of a renewed recession over the next 12 months — now at 1 in 3 — will increase if stock prices continue to fall. Moody’s maintains that the odds of a renewed recession rise with each 100-point drop in the Dow Jones Industrial Average. While Moody’s expects the economic recovery will continue, prospects for economic growth and job creation have “diminished substantially.”
Though the U.S. economic recovery looked healthy at the beginning of the year, a series of events have hurt business, consumer and investor confidence, Moody’s said. These include surging prices for food and gasoline, natural disasters in Japan, Europe’s debt crisis and, most recently, the U.S. debt woes.
The economy needs to grow 2.5% to 3% a year to create jobs fast enough to keep the unemployment rate stable, Moody’s said. However, Moody’s said it doesn’t think this will happen soon.
3) Household debt falls slightly to $11.4 trillion in Q2 2011-From CNN Money
Consumer borrowing fell slightly in the second quarter, as Americans shed more of their debt. A new report released Monday by the New York Federal Reserve -- which looks at mortgages, home equity lines, credit cards, auto loans and student debt held by consumers nationwide -- found that total consumer debt fell to $11.4 trillion in the second quarter of this year.
That marked a $50 billion drop in total consumer debt from the prior quarter, a decrease so slight that the New York Fed called consumer borrowing "essentially flat."
"This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed," Andrew Haughwout, vice president of the Research and Statistics Group at the New York Fed said in a statement.
Consumer debt remains 8.6% below its $12.5 trillion peak at the end of September 2008, just after the collapse of Lehman Brothers and the seizing of financial markets.
Reeling from the shock of the recession, American households have been paying down their debt slowly for nine of the last 10 quarters. That trend is typically viewed as a healthy rebalancing step for the economy, but at the same time it also limits the recovery.
Quote of the Day from Dave Ramsey.com:
Undertake something that is difficult; it will do you good. Unless you try to do something beyond what you have already mastered, you will never grow. — Ronald E. Osborn
Friday, August 12, 2011
Financial Headline News for Friday 8/12
After the whole week of ups and downs, analysis, theatrics, economists spewing theories, the net effect of the whole week was only a Dow loss of 193 or 1.5%.
Retail sales were up more than expected in July.
A very lengthy but interesting article below on the appraisal industry and how new inexperienced appraisers are driving housing prices lower than many feel they should be assessed
Here are the top financial stories of the day:
1) Wall St ends higher after volatile week-From Reuters
After one of the most volatile weeks in memory, U.S. stocks ended higher on Friday in a tentative sign that the worst of the selling may be over.
Volume was much lighter than on any other day of the week and intraday swings were far less violent than those seen in previous days. Both signs suggested a drop in investor anxiety.
The Dow Jones industrial average was up 107.74 points, or 0.97 percent, at 11,251.05, according to the latest available figures. The Standard & Poor's 500 Index was up 4.43 points, or 0.38 percent, at 1,177.07.
The Nasdaq Composite Index was up 13.36 points, or 0.54 percent, at 2,506.04.
For the week, the Dow was off 1.5 percent, the S&P fell 1.7 percent and the Nasdaq dropped 1
2) Retail sales rose 0.5 percent in July-From the AP
Consumers spent more on autos, furniture and gasoline in July, pushing up retail sales by the largest amount in four months. The gain could signal that Americans are a little more confident and help dispel fears that the country is in danger of toppling into another recession.
3) Judgment Call: Appraisals Weigh Down Housing Sales-From The Wall Street Journal
William Maxwell is an expert in finance. He's a professor at Southern Methodist University's business school, has co-authored a book on high-yield debt and spent years calculating values of financial markets.
Yet there's one valuation he can't understand: the appraisal of his Dallas home.
In August 2010, Mr. Maxwell's home was appraised at $790,000 as part of a mortgage refinancing. Yet this past spring, when he tried to sell the four-bedroom home for $756,500, the appraisal commissioned by the buyer's lender, Bank of America Corp., came up with a value of $730,000. Mr. Maxwell said the appraisal killed the sale.
Weak appraisals are "driving down the real-estate market," Mr. Maxwell says. Saying the appraisal process "borders on buffoonery," he's appealing his home's valuation to the Texas regulator.
One of the conclusions from the housing bust: The appraisal system was broken. One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.
There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. But some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.
Appraisals are supposed to be unbiased assessments of a property's value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don't appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.
Lenders are "instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem," says Columbia Business School economist Chris Mayer. A research paper last year titled "How Much Is That Home Really Worth?" by economist Leonard Nakamura at the Philadelphia Federal Reserve also cited a downward bias in appraisals.
Disputes over valuations are rising. The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.
A survey by the group earlier this year found that 10%-12% of members had a contract canceled last year as a result of a low appraisal; 10%-13% had a contract delayed; and 16%-20% reported that the sales price was negotiated lower due to a low appraisal.
Not everyone agrees the appraisal system is broken. The Mortgage Bankers Association, an industry trade group, concedes that appraisals are conservative but says they need to be, partly to protect the banks from future problems with investors who buy mortgages. "There's an extra note of caution," said Steve O'Connor, a senior vice president at the association.
And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.
Mr. MacPhee's company performed an appraisal in Decatur, Ga., last year that drew ire. John and Michelle Pennie were about to give up on selling their house last spring when an offer came in—just in time to qualify for the 2010 federal tax credit.
The two sides agreed on a sale price of $365,000, with the Pennies paying $8,000 in closing costs. "We were ecstatic," Mr. Pennie says.
But the appraisal put the home's worth at $327,000. And the deal ultimately collapsed. "Understandably in a declining market, you're going to have declining appraisals," Mr. Pennie says. "But when you have two parties who agree on a price, to then have an appraiser come in and make it $40,000 below…how do you ever get out of a falling market?"
For decades, appraising a home was both an art and a science, executed primarily by independent professionals who were experts on their local markets. Designed to protect both the borrower and lender, appraisals were based largely on selling prices of comparable homes. But appraisers also combed through property records and interviewed brokers, buyers, sellers—and even other appraisers. Banks selected the appraiser and often had influence over the outcome. Home buyers paid the fee.
In the aftermath of the housing bust, then-New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Besides combating inflated and sometimes fraudulent appraisals, the goal was to eliminate pressure on appraisers to provide estimates that match the contract price, which would increase chances that the mortgage loan would get approved. The sweeping Dodd-Frank financial-overhaul law that went into effect in 2010 went one step further to bolster appraiser independence by regulating both the industry and the fees they are paid.
Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.
The result has been that appraisers with less experience or who are unfamiliar with a community—but who work cheap—are getting assignments while more experienced appraisers are going out business. That, say critics, is producing appraisals that are less accurate.
"We've lost the best quality appraisers," said Leslie Sellers, the immediate past president of the Appraisal Institute, a trade group. "The people doing it are the ones who have cut overhead to bone, are working out of basements and many of them are not properly educated." The Institute estimates there are currently under 90,000 certified appraisers, down from nearly 100,000 in 2007.
In Mr. Maxwell's case, he says that the appraiser, Jim Applegate, works in Plano, a suburb 20 miles from Dallas, and was unfamiliar with Mr. Maxwell's Dallas neighborhood of Lakewood, an affluent community near a picturesque lake. Mr. Maxwell also claims that Mr. Applegate improperly used less desirable homes as comparables, or "comps," to arrive at a value. In a June 17 formal letter of complaint with the Texas
Appraiser Licensing and Certification Board, which regulates the industry, Mr. Maxwell said that Mr. Applegate had used a home near an elementary school that encounters a lot of traffic. Mr. Maxwell's home, by comparison, sits on a quiet, quarter-acre lot.
Calls to Mr. Applegate were returned by a Bank of America spokeswoman, who declined to comment on Mr. Maxwell's situation. She did say the lender has received feedback from customers asking it to reevaluate "geographic competency in our appraisal reports." She said efforts are being made to find appraisers who generally work within 15 miles of a property; if no appraiser is available, the company assigns alternate appraisers with local experience.
Others complain that appraisers are using foreclosures and other distress sales as comps when coming up with estimates. Because foreclosures tend to sell at big discounts from the actual value, some argue that shouldn't be used.
At least four states—Illinois, Nevada, Missouri and Maryland—have considered legislation that would bar appraisers from using distress sales when drawing estimates.
Some economists disagree. They argue that foreclosures account for such a large share of housing sales that it's perfectly acceptable to use them as comps, or to use them but adjust pricing accordingly. "A third of transactions are previously foreclosed homes. In some markets, it's close to 50%," said Columbia's Mr. Mayer. "It would be one thing if you're talking about throwing out a small number of transactions."
Another complaint is that appraisers are increasingly relying on automated valuation models, or AVMs, computer programs that extrapolate home values based on reams of property data, and public and privately compiled databases. The industry began automating in the mid-1990s, but it wasn't until a few years ago that AVMs took hold in a big way.
AVMs are most reliable when there are a larger number of typical transactions to observe. But during the housing slump, typical transactions have been scarce while distressed sales have been abundant.
One of the biggest complaints is that appraisers, in their haste, are overlooking or missing important elements that could add substantial value to a home.
Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale—one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.
"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size—as well as the number of fireplaces and its heated pool—weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.
Ms. Wanner says appraisers today seem less knowledgeable. "Real estate is a neighborhood business," she said. "One neighborhood can be hit, another can be flourishing." She said the new laws prevent lenders and agents from contracting the appraiser directly, which has been especially frustrating. "Once we get the report, it states that individual's opinion of value, and that's that."
Quote of the Day from Dave Ramsey.com:
Great spirits have always encountered violent opposition from mediocre minds. — Albert Einstein
Retail sales were up more than expected in July.
A very lengthy but interesting article below on the appraisal industry and how new inexperienced appraisers are driving housing prices lower than many feel they should be assessed
Here are the top financial stories of the day:
1) Wall St ends higher after volatile week-From Reuters
After one of the most volatile weeks in memory, U.S. stocks ended higher on Friday in a tentative sign that the worst of the selling may be over.
Volume was much lighter than on any other day of the week and intraday swings were far less violent than those seen in previous days. Both signs suggested a drop in investor anxiety.
The Dow Jones industrial average was up 107.74 points, or 0.97 percent, at 11,251.05, according to the latest available figures. The Standard & Poor's 500 Index was up 4.43 points, or 0.38 percent, at 1,177.07.
The Nasdaq Composite Index was up 13.36 points, or 0.54 percent, at 2,506.04.
For the week, the Dow was off 1.5 percent, the S&P fell 1.7 percent and the Nasdaq dropped 1
2) Retail sales rose 0.5 percent in July-From the AP
Consumers spent more on autos, furniture and gasoline in July, pushing up retail sales by the largest amount in four months. The gain could signal that Americans are a little more confident and help dispel fears that the country is in danger of toppling into another recession.
The Commerce Department said Friday that retail sales rose 0.5 percent last month, the best showing since a 0.8 percent advance in March. And the government revised sales higher in the previous two months. That suggests the economy was not as weak as previously believed.
The report is the government's first read on consumer spending for the July-September quarter. Consumer spending is always closely watched because it accounts for 70 percent of economic growth. But the mood of the consumer is of particular interest to traders right now.
A batch of poor data and a gloomy outlook from the Federal Reserve this week have made many more nervous that the economy could fall back into a recession. The Dow has lost nearly 1,600 points, or more than 12 percent, since July 22.
High unemployment and a spike in gas prices have forced many consumers to be more cautious about spending. Their hesitation was a major reason the economy grew a meager 0.8 percent in the first six months of the year, the weakest growth since the recession officially ended. In June, consumers cut spending for the first time in 20 months.
Retail sales, which don't include spending on services, have been slowing since February. They grew only 0.1 percent in June, and when excluding car sales, retail spending was flat.
Back-to-school promotions helped boost sales in July at large chain stores. Target, Macy's and luxury chain
Saks all reported gains that beat Wall Street expectations. But retailers worry that consumers may be thrifty when shopping this summer, sticking with basic necessities and holding out for sales. That's a popular strategy in tighter economies, but one that hurts stores' profits.
Many economists, including Federal Reserve Chairman Ben Bernanke, had thought the economic slowdown was mostly because of temporary factors, such as high gas prices and the parts shortage out of Japan.
But this week the Fed acknowledged that the economy's problems are deeper. Its statement suggested growth could be dismal for at least two more years.
As a result, the Fed took the unprecedented step of pledging to keep a key interest rate it controls at a record low near zero at least through mid-2013.
Private economists have been busy marking down their own forecasts. Analysts at JPMorgan Chase said they expect the just 1.5 percent growth in the July-September quarter, a full percentage point lower than their previous forecast.
3) Judgment Call: Appraisals Weigh Down Housing Sales-From The Wall Street Journal
William Maxwell is an expert in finance. He's a professor at Southern Methodist University's business school, has co-authored a book on high-yield debt and spent years calculating values of financial markets.
Yet there's one valuation he can't understand: the appraisal of his Dallas home.
In August 2010, Mr. Maxwell's home was appraised at $790,000 as part of a mortgage refinancing. Yet this past spring, when he tried to sell the four-bedroom home for $756,500, the appraisal commissioned by the buyer's lender, Bank of America Corp., came up with a value of $730,000. Mr. Maxwell said the appraisal killed the sale.
Weak appraisals are "driving down the real-estate market," Mr. Maxwell says. Saying the appraisal process "borders on buffoonery," he's appealing his home's valuation to the Texas regulator.
One of the conclusions from the housing bust: The appraisal system was broken. One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.
There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. But some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.
Appraisals are supposed to be unbiased assessments of a property's value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don't appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.
Lenders are "instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem," says Columbia Business School economist Chris Mayer. A research paper last year titled "How Much Is That Home Really Worth?" by economist Leonard Nakamura at the Philadelphia Federal Reserve also cited a downward bias in appraisals.
Disputes over valuations are rising. The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.
A survey by the group earlier this year found that 10%-12% of members had a contract canceled last year as a result of a low appraisal; 10%-13% had a contract delayed; and 16%-20% reported that the sales price was negotiated lower due to a low appraisal.
Not everyone agrees the appraisal system is broken. The Mortgage Bankers Association, an industry trade group, concedes that appraisals are conservative but says they need to be, partly to protect the banks from future problems with investors who buy mortgages. "There's an extra note of caution," said Steve O'Connor, a senior vice president at the association.
And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.
Mr. MacPhee's company performed an appraisal in Decatur, Ga., last year that drew ire. John and Michelle Pennie were about to give up on selling their house last spring when an offer came in—just in time to qualify for the 2010 federal tax credit.
The two sides agreed on a sale price of $365,000, with the Pennies paying $8,000 in closing costs. "We were ecstatic," Mr. Pennie says.
But the appraisal put the home's worth at $327,000. And the deal ultimately collapsed. "Understandably in a declining market, you're going to have declining appraisals," Mr. Pennie says. "But when you have two parties who agree on a price, to then have an appraiser come in and make it $40,000 below…how do you ever get out of a falling market?"
For decades, appraising a home was both an art and a science, executed primarily by independent professionals who were experts on their local markets. Designed to protect both the borrower and lender, appraisals were based largely on selling prices of comparable homes. But appraisers also combed through property records and interviewed brokers, buyers, sellers—and even other appraisers. Banks selected the appraiser and often had influence over the outcome. Home buyers paid the fee.
In the aftermath of the housing bust, then-New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Besides combating inflated and sometimes fraudulent appraisals, the goal was to eliminate pressure on appraisers to provide estimates that match the contract price, which would increase chances that the mortgage loan would get approved. The sweeping Dodd-Frank financial-overhaul law that went into effect in 2010 went one step further to bolster appraiser independence by regulating both the industry and the fees they are paid.
Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.
The result has been that appraisers with less experience or who are unfamiliar with a community—but who work cheap—are getting assignments while more experienced appraisers are going out business. That, say critics, is producing appraisals that are less accurate.
"We've lost the best quality appraisers," said Leslie Sellers, the immediate past president of the Appraisal Institute, a trade group. "The people doing it are the ones who have cut overhead to bone, are working out of basements and many of them are not properly educated." The Institute estimates there are currently under 90,000 certified appraisers, down from nearly 100,000 in 2007.
In Mr. Maxwell's case, he says that the appraiser, Jim Applegate, works in Plano, a suburb 20 miles from Dallas, and was unfamiliar with Mr. Maxwell's Dallas neighborhood of Lakewood, an affluent community near a picturesque lake. Mr. Maxwell also claims that Mr. Applegate improperly used less desirable homes as comparables, or "comps," to arrive at a value. In a June 17 formal letter of complaint with the Texas
Appraiser Licensing and Certification Board, which regulates the industry, Mr. Maxwell said that Mr. Applegate had used a home near an elementary school that encounters a lot of traffic. Mr. Maxwell's home, by comparison, sits on a quiet, quarter-acre lot.
Calls to Mr. Applegate were returned by a Bank of America spokeswoman, who declined to comment on Mr. Maxwell's situation. She did say the lender has received feedback from customers asking it to reevaluate "geographic competency in our appraisal reports." She said efforts are being made to find appraisers who generally work within 15 miles of a property; if no appraiser is available, the company assigns alternate appraisers with local experience.
Others complain that appraisers are using foreclosures and other distress sales as comps when coming up with estimates. Because foreclosures tend to sell at big discounts from the actual value, some argue that shouldn't be used.
At least four states—Illinois, Nevada, Missouri and Maryland—have considered legislation that would bar appraisers from using distress sales when drawing estimates.
Some economists disagree. They argue that foreclosures account for such a large share of housing sales that it's perfectly acceptable to use them as comps, or to use them but adjust pricing accordingly. "A third of transactions are previously foreclosed homes. In some markets, it's close to 50%," said Columbia's Mr. Mayer. "It would be one thing if you're talking about throwing out a small number of transactions."
Another complaint is that appraisers are increasingly relying on automated valuation models, or AVMs, computer programs that extrapolate home values based on reams of property data, and public and privately compiled databases. The industry began automating in the mid-1990s, but it wasn't until a few years ago that AVMs took hold in a big way.
AVMs are most reliable when there are a larger number of typical transactions to observe. But during the housing slump, typical transactions have been scarce while distressed sales have been abundant.
One of the biggest complaints is that appraisers, in their haste, are overlooking or missing important elements that could add substantial value to a home.
Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale—one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.
"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size—as well as the number of fireplaces and its heated pool—weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.
Ms. Wanner says appraisers today seem less knowledgeable. "Real estate is a neighborhood business," she said. "One neighborhood can be hit, another can be flourishing." She said the new laws prevent lenders and agents from contracting the appraiser directly, which has been especially frustrating. "Once we get the report, it states that individual's opinion of value, and that's that."
Quote of the Day from Dave Ramsey.com:
Great spirits have always encountered violent opposition from mediocre minds. — Albert Einstein
Thursday, August 11, 2011
Financial Headline News for Thursday 8/11
The week long roller coaster stock market continued today but this time it was all positive.
As of now the first time unemployment claims came in today at 395,000. However, this figure has been adjusted up the last few weeks so don't go to the bank with this number.
Any wonder for these wild swings in stocks the last few days-did anyone say day traders?
Here are the top financial stories of the day:
1) Dow soars 423 points on economic news-From The Wall Street Journal
U.S. blue-chip stocks notched a strong advance Thursday, as investors seized on favorable corporate and economic reports to recover most of the ground they lost in the previous session.
The blue-chip Dow Jones Industrial Average soared 423.37 points, or 3.95%, to 11143.31. It was the fourth straight move of 400 points or greater, a first in the Dow's history. The action followed Wednesday's 520-point slump, the ninth-largest point drop ever, amid mounting worries about the health of Europe's banks and the chances of a global economic recession.
The Standard & Poor's 500-stock index jumped 51.88 points, or 4.63%, to 1172.64, led by battered financial stocks. The Nasdaq Composite surged 111.63 points, or 4.69%, to 2492.68.
Thursday's two big catalysts were a rare favorable weekly employment report and signs of a turnaround at networking-equipment maker Cisco Systems. The absence of troublesome new developments in European sovereign debt and banking also helped. Markets have swung violently this week and last as investors weighed the chances of a global economic recession and fretted over further debt turmoil on two continents.
While the huge swing to the upside relieved some investors, to others it was more a symptom of the extreme volatility that has gripped markets of late.
"It's great to have these up days, but I think that we are going to continue to be in a choppy period with these big swings," said Margaret Patel, senior portfolio manager at Wells Capital Management. "The reason we had our meltdown was really over in Europe. It made the markets look like one of the dark days in 2008, melting away with no rhyme or reason."
Cisco Systems was the strongest blue-chip stock, surging 16% after its late Wednesday earnings report. Chief Executive John Chambers said the company was making "solid progress" on its turnaround effort. Bank of America, which slumped 11% Wednesday, was the second strongest, rising 7.1%.
The number of people claiming new jobless benefits fell last week to the lowest level in four months, dropping to a seasonally adjusted 395,000 in the week ended Aug. 6., a small bright spot in a persistently weak U.S. labor market that boosted investor sentiment Thursday
2) Applications for jobless benefits decline-From MarketWatch
The number of people who applied for unemployment benefits fell below 400,000 last week for the first time since early April, as jobless claims continued on a slow downward trajectory.
Initial claims dropped by 7,000 to a seasonally adjusted 395,000, the Labor Department said Thursday. Initial claims from two weeks ago were revised to 402,000, up from 400,000 originally.
Economists surveyed by MarketWatch had expected new applications to rise to 410,000 in the week ended Aug. 6.
The average of new claims over the last four weeks, viewed as a more accurate gauge of employment trends, fell by 3,250 to 405,000, the lowest level since mid-April.
While the level of claims is still elevated, applications for jobless benefits have subsided since hitting a recent peak of 478,000 at the end of April. In good economic times, claims tend to drop well below 400,000 when the pace of hiring soars and companies rapidly expand their workforces.
Like last week’s monthly employment report for July, the latest claims figures suggest the labor market isn’t quite as poor as feared after a slew of other data pointed to a sharp economic slowdown. In July the U.S. added 117,000 jobs to nonfarm payrolls.
Still, the economy remains weak, and hiring by historical standards is very slow at the current stage of recovery. The U.S. needs to add at least 125,000 jobs a month just to keep up with the growth of the labor force — and double that amount to drive down the nation’s unemployment rate, which stood at 9.1% for July.
The chance that hiring will sharply accelerate in the near future, however, appears low. Slower consumer spending, plunging stock markets and worries about excessive debt in the U.S. and Europe have spurred many companies to reevaluate hiring plans.
On Tuesday, the Federal Reserve added to the gloom with an updated forecast suggesting the U.S. could remain weak through 2013. The central bank offered little hope that the nation’s jobless rate would fall quickly and put millions of jobless Americans back to work.
The latest claims report, however, appeared to temporarily ease the concerns of investors. U.S. stock markets rose in early Thursday action.
3) Big ups and downs give daytraders a way to thrive-From Reuters
These days, every day in the market is an adventure. But some daytraders are making a killing, taking advantage of wild market swings that have scared off even strong-stomached investors.
The Dow industrials have traded in a range of 400 points every day in the last five days, while the CBOE Volatility index (Chicago Options:^VIX - News) has more than doubled from a recent closing low on July 22.
Fear has increased alongside signs of slowing growth and an unprecedented downgrade of the U.S. credit rating by Standard & Poor's. But swings have gone both ways: the S&P recently posted not only its worst day since 2008, but also its best.
"I trade the way the market tells me. And if you're like that, this is one of the best markets you'll ever have," said Joe Donohue, money manager at Dimension Trading in Red Bank, New Jersey, a proprietary trading services firm.
Donohue said his focus is more short-term to play this market. A few weeks ago he held positions for two or three days, but now he closes out positions at the end of a session.
"If you need to play, be squared out at the close," he said. "Don't carry much exposure overnight because you could be long and then have a 400-point drop at the open ... We're in such a risky market that anything could come out of Europe or Asia to change things completely."
Daytraders take a short-term outlook on the market, holding positions for less than a day. They often sell securities short to profit from both upward and downward movements, bringing the chance of big wins, or equally large losses.
Donohue said he primarily traded in the Direxion Daily Small Cap Bull 3X Shares ETF (Pacific:TNA - News), which seeks returns of 300 percent of the daily performance of the Russell 2000, and the Direxion Daily Small Cap Bear 3X Shares ETF (Pacific:TZA - News), which is trice-short the Russell, tapping into market volatility.
On Tuesday afternoon, markets swung madly as investors parsed comments from the U.S. Federal Reserve pledging two more years of near-zero interest rates. Indexes reversed course six times before ending more than 4 percent higher.
"After the market dipped, I sensed there would be a move to the upside so I went long," Donohue said. In Wednesday's similarly volatile session, "I was long in the morning then went to TZA late in the day."
BELLE OF THE BALL
Donohue isn't the only trader embracing favorite names to avoid the fluctuations of the broader market.
"Right now the belle of the ball is the FactorShares 2X: Gold Bull/S&P500 Bear ETF (Pacific:FSG - News)," said Joshua Brown, vice president of investments at Fusion Analytics in New York, referring to a fund that is double-short S&P futures and double-long gold prices.
Volume on the fund has surged in recent sessions, with the 10-day moving average more than triple the 50-day average.
It "was built for this moment," Brown said of the fund, which is up 76 percent from its July 1 recent closing low. "The chart looks like the Empire State Building."
Of course, the velocity of the changes in market direction means traders who are not nimble can get caught on the wrong side of a trade, exposing themselves to massive losses.
The FactorShares fund "is a momentum heavy story," Brown said. "if you're not quick on it, it's the kind of instrument that can wipe you out."
With sudden moves between gains and losses an ever-present concern, traders do what they can to find an edge.
SEIZE THE MOMENT
Chicago-based Bright Trading trains its traders to manipulate mechanics like the opening gap, where they take advantage of price gaps in the initial trading of the stock.
"The other day General Electric Co (NYSE:GE - News) opened and moved up 40 cents within 60 seconds," said Donald Bright, one of the firm's directors.
"Traders made thousands of dollars on it right then, and when you see openings where the market moves 300 points, the returns are even bigger... Lately we've had the best days on (opening gap plays) that we've had in maybe a year."
Toward the close, the firm looks to take advantage of order imbalances, which are published 15 minutes before the market session ends and suggest which side of a trade will have greater demand.
Knowing the imbalance gives an edge that "works a lot of the time," Bright said. "Experienced traders at our firm dream of days like this," he added. "They make more in a week than they do in a month, normally."
But the recent price action can be too much of a good thing, even for traders who thrive on fast swings.
"I love volatility, But I don't think we wanted to get to this level of volatility every day," said Tony Battista, who co-anchors Chicago-based Tasty Trade's how-to show on trading techniques and was a market maker for 25 years.
"You don't like for the market to have this type of percentage move in a day," he added. "That's something nobody wants to see, even volatility buyers."
Battista's solution to trading losses was simple -- do something to change his luck. "I changed my pen this morning," he joked. "I had a $2 pen. I went to a 15-cent pen. It's back to basics now."
Quote of the Day from Dave Ramsey.com:
I can accept failure, everyone fails at something. But I can't accept not trying. — Michael Jordan
As of now the first time unemployment claims came in today at 395,000. However, this figure has been adjusted up the last few weeks so don't go to the bank with this number.
Any wonder for these wild swings in stocks the last few days-did anyone say day traders?
Here are the top financial stories of the day:
1) Dow soars 423 points on economic news-From The Wall Street Journal
U.S. blue-chip stocks notched a strong advance Thursday, as investors seized on favorable corporate and economic reports to recover most of the ground they lost in the previous session.
The blue-chip Dow Jones Industrial Average soared 423.37 points, or 3.95%, to 11143.31. It was the fourth straight move of 400 points or greater, a first in the Dow's history. The action followed Wednesday's 520-point slump, the ninth-largest point drop ever, amid mounting worries about the health of Europe's banks and the chances of a global economic recession.
The Standard & Poor's 500-stock index jumped 51.88 points, or 4.63%, to 1172.64, led by battered financial stocks. The Nasdaq Composite surged 111.63 points, or 4.69%, to 2492.68.
Thursday's two big catalysts were a rare favorable weekly employment report and signs of a turnaround at networking-equipment maker Cisco Systems. The absence of troublesome new developments in European sovereign debt and banking also helped. Markets have swung violently this week and last as investors weighed the chances of a global economic recession and fretted over further debt turmoil on two continents.
While the huge swing to the upside relieved some investors, to others it was more a symptom of the extreme volatility that has gripped markets of late.
"It's great to have these up days, but I think that we are going to continue to be in a choppy period with these big swings," said Margaret Patel, senior portfolio manager at Wells Capital Management. "The reason we had our meltdown was really over in Europe. It made the markets look like one of the dark days in 2008, melting away with no rhyme or reason."
Cisco Systems was the strongest blue-chip stock, surging 16% after its late Wednesday earnings report. Chief Executive John Chambers said the company was making "solid progress" on its turnaround effort. Bank of America, which slumped 11% Wednesday, was the second strongest, rising 7.1%.
The number of people claiming new jobless benefits fell last week to the lowest level in four months, dropping to a seasonally adjusted 395,000 in the week ended Aug. 6., a small bright spot in a persistently weak U.S. labor market that boosted investor sentiment Thursday
2) Applications for jobless benefits decline-From MarketWatch
The number of people who applied for unemployment benefits fell below 400,000 last week for the first time since early April, as jobless claims continued on a slow downward trajectory.
Initial claims dropped by 7,000 to a seasonally adjusted 395,000, the Labor Department said Thursday. Initial claims from two weeks ago were revised to 402,000, up from 400,000 originally.
Economists surveyed by MarketWatch had expected new applications to rise to 410,000 in the week ended Aug. 6.
The average of new claims over the last four weeks, viewed as a more accurate gauge of employment trends, fell by 3,250 to 405,000, the lowest level since mid-April.
While the level of claims is still elevated, applications for jobless benefits have subsided since hitting a recent peak of 478,000 at the end of April. In good economic times, claims tend to drop well below 400,000 when the pace of hiring soars and companies rapidly expand their workforces.
Like last week’s monthly employment report for July, the latest claims figures suggest the labor market isn’t quite as poor as feared after a slew of other data pointed to a sharp economic slowdown. In July the U.S. added 117,000 jobs to nonfarm payrolls.
Still, the economy remains weak, and hiring by historical standards is very slow at the current stage of recovery. The U.S. needs to add at least 125,000 jobs a month just to keep up with the growth of the labor force — and double that amount to drive down the nation’s unemployment rate, which stood at 9.1% for July.
The chance that hiring will sharply accelerate in the near future, however, appears low. Slower consumer spending, plunging stock markets and worries about excessive debt in the U.S. and Europe have spurred many companies to reevaluate hiring plans.
On Tuesday, the Federal Reserve added to the gloom with an updated forecast suggesting the U.S. could remain weak through 2013. The central bank offered little hope that the nation’s jobless rate would fall quickly and put millions of jobless Americans back to work.
The latest claims report, however, appeared to temporarily ease the concerns of investors. U.S. stock markets rose in early Thursday action.
3) Big ups and downs give daytraders a way to thrive-From Reuters
These days, every day in the market is an adventure. But some daytraders are making a killing, taking advantage of wild market swings that have scared off even strong-stomached investors.
The Dow industrials have traded in a range of 400 points every day in the last five days, while the CBOE Volatility index (Chicago Options:^VIX - News) has more than doubled from a recent closing low on July 22.
Fear has increased alongside signs of slowing growth and an unprecedented downgrade of the U.S. credit rating by Standard & Poor's. But swings have gone both ways: the S&P recently posted not only its worst day since 2008, but also its best.
"I trade the way the market tells me. And if you're like that, this is one of the best markets you'll ever have," said Joe Donohue, money manager at Dimension Trading in Red Bank, New Jersey, a proprietary trading services firm.
Donohue said his focus is more short-term to play this market. A few weeks ago he held positions for two or three days, but now he closes out positions at the end of a session.
"If you need to play, be squared out at the close," he said. "Don't carry much exposure overnight because you could be long and then have a 400-point drop at the open ... We're in such a risky market that anything could come out of Europe or Asia to change things completely."
Daytraders take a short-term outlook on the market, holding positions for less than a day. They often sell securities short to profit from both upward and downward movements, bringing the chance of big wins, or equally large losses.
Donohue said he primarily traded in the Direxion Daily Small Cap Bull 3X Shares ETF (Pacific:TNA - News), which seeks returns of 300 percent of the daily performance of the Russell 2000, and the Direxion Daily Small Cap Bear 3X Shares ETF (Pacific:TZA - News), which is trice-short the Russell, tapping into market volatility.
On Tuesday afternoon, markets swung madly as investors parsed comments from the U.S. Federal Reserve pledging two more years of near-zero interest rates. Indexes reversed course six times before ending more than 4 percent higher.
"After the market dipped, I sensed there would be a move to the upside so I went long," Donohue said. In Wednesday's similarly volatile session, "I was long in the morning then went to TZA late in the day."
BELLE OF THE BALL
Donohue isn't the only trader embracing favorite names to avoid the fluctuations of the broader market.
"Right now the belle of the ball is the FactorShares 2X: Gold Bull/S&P500 Bear ETF (Pacific:FSG - News)," said Joshua Brown, vice president of investments at Fusion Analytics in New York, referring to a fund that is double-short S&P futures and double-long gold prices.
Volume on the fund has surged in recent sessions, with the 10-day moving average more than triple the 50-day average.
It "was built for this moment," Brown said of the fund, which is up 76 percent from its July 1 recent closing low. "The chart looks like the Empire State Building."
Of course, the velocity of the changes in market direction means traders who are not nimble can get caught on the wrong side of a trade, exposing themselves to massive losses.
The FactorShares fund "is a momentum heavy story," Brown said. "if you're not quick on it, it's the kind of instrument that can wipe you out."
With sudden moves between gains and losses an ever-present concern, traders do what they can to find an edge.
SEIZE THE MOMENT
Chicago-based Bright Trading trains its traders to manipulate mechanics like the opening gap, where they take advantage of price gaps in the initial trading of the stock.
"The other day General Electric Co (NYSE:GE - News) opened and moved up 40 cents within 60 seconds," said Donald Bright, one of the firm's directors.
"Traders made thousands of dollars on it right then, and when you see openings where the market moves 300 points, the returns are even bigger... Lately we've had the best days on (opening gap plays) that we've had in maybe a year."
Toward the close, the firm looks to take advantage of order imbalances, which are published 15 minutes before the market session ends and suggest which side of a trade will have greater demand.
Knowing the imbalance gives an edge that "works a lot of the time," Bright said. "Experienced traders at our firm dream of days like this," he added. "They make more in a week than they do in a month, normally."
But the recent price action can be too much of a good thing, even for traders who thrive on fast swings.
"I love volatility, But I don't think we wanted to get to this level of volatility every day," said Tony Battista, who co-anchors Chicago-based Tasty Trade's how-to show on trading techniques and was a market maker for 25 years.
"You don't like for the market to have this type of percentage move in a day," he added. "That's something nobody wants to see, even volatility buyers."
Battista's solution to trading losses was simple -- do something to change his luck. "I changed my pen this morning," he joked. "I had a $2 pen. I went to a 15-cent pen. It's back to basics now."
Quote of the Day from Dave Ramsey.com:
I can accept failure, everyone fails at something. But I can't accept not trying. — Michael Jordan
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