Financial Headline News for Thursday 10/20

Stocks ended little changed today as European leaders remain divided over a new financial rescue plan.

First time unemployment claims came in at 403,000 today which was 3,000 more than expected yet another week over the dreaded 400,000 mark.

The strengthening of the dollar to the euro is not getting the recognition it deserves. However it is keeping oil prices in check recently.

Here are the top financial stories of the day:

1) Stocks end mixed as Europe haggles over debt fix-From the AP

Stocks are closing mixed after reports that European leaders remain split over how to fend off a larger financial crisis in the region.

The Dow Jones industrial average rose 37 points, or 0.3 percent, to close at 11,542 Thursday. The S&P 500 index rose 6, or 0.5 percent, to 1,215.

The Nasdaq slipped 5, or 0.2 percent, to 2,599.

European officials are scheduled to meet this weekend to discuss ways to contain the continent's debt troubles. On Thursday, Germany and France called for a second emergency summit next week after it became clear that they would not be able to bridge their differences before the weekend.

More than three stocks rose for every two that fell on the New York Stock Exchange. Trading volume was average at 4.2 billion.

2) Jobless Claims Essentially Unchanged-From The Wall Street Journal

New claims for unemployment benefits moved down slightly last week but remained elevated, indicating the labor market still is weak.

Initial jobless claims fell by 6,000 to a seasonally adjusted 403,000 the week ended Oct. 15, the Labor

Department said Thursday. Claims filed in the previous week increased by 4,000 to an upwardly revised 409,000.

The number of new claims last week remained above the 400,000 mark -- a level under which economists generally believe the jobs market is really starting to improve.

The four-week moving average of new claims, a more reliable indicator of the labor market's performance because it smooths out volatile weekly figures, fell by 6,250 to 403,000 last week.

Economists surveyed by Dow Jones Newswires had forecast claims would fall by 4,000 to 400,000.

A Labor Department official said there was nothing unusual about the latest state level data.

The relatively stagnant new jobless claims figures suggest that companies are reluctant to add to payrolls in a still shaky economy but at the same time are resistant to big layoffs, economists have said recently.

Thursday's report showed the number of continuing unemployment benefit claims -- those drawn by workers for more than a week -- totaled 3,719,000 in the week ended Oct. 8. Continuing claims are reported with a one-week lag. That number was up 25,000 from the prior week.

Though U.S. employers did add jobs in September, the labor market is growing too slowly to bring down the unemployment rate, which was stuck at 9.1% last month.

President Barack Obama took to the road this week in North Carolina and Virginia to garner support for his $447 billion jobs bill that has met resistance in Congress. Republicans in the Senate blocked the plan as a whole and now Democrats are vowing to move it forward in pieces. The battle highlights the difficulty facing the Obama administration in bringing down the jobless rate.

That leaves Federal Reserve officials to debate options for boosting the economy -- including another round of bond purchases -- if the recovery falters. Fed officials project unemployment to remain elevated at least through 2012.

Their job, however, was made more difficult this week with reports showing that consumer prices increased by 0.3% last month, compared to August, and wholesale prices jumped a monthly 0.8%. The threat of rising inflation limits the central bank's options when it comes to interest-rate policy.

Thursday's report showed that the unemployment rate for workers with unemployment insurance for the week ending Oct. 8 remained unchanged from the prior week at 2.9%.

The state-by-state breakdown in initial jobless claims, which is also released with a lag, showed the biggest rise the week ended Oct. 8 was in California. Claims there rose by 13,882 amid more layoffs in the service industry. The largest decline in claims was in Wisconsin, down 1,536.

3) Dollar Strength Is Killing Stocks & Commodities-From Breakout

According to Clark Yingst, chief market analyst at Joseph Gunnar, the relationship between the dollar and the euro is the market tell of 2011, dominating the tape to the point that other fundamentals are being all but ignored. Yingst says the ratio is getting whipsawed by "the latest reports and rumors emanating from Europe and that's the indicator of the direction U.S. stocks are going that day".

Yinst says market reactions to earnings reports have been strictly company specific, with all other implications for the rest of the respective sectors. Pointing to IBM (gIBM), Yingst says weakness in Big Blue's core businesses "should" have impacted competitors. When an industry leader like this sees weakness in core segments, the news typically puts a dent in related stocks. Instead companies such as Hewlett-Packard (HPQ) moved higher off IBM's results, carried along with the rest of the tape and, not at all coincidentally, a weak dollar.

According to Yingst dollar strength is likely to persist. In September there "appeared to be a real breakout, technically speaking, in the dollar/euro." Pointing to a break of the dollar's 2-year downtrend as well as the 200-day moving average, Yingst forecasts near to intermediate term strength.

"Given the inverse relationship between the dollar/euro and the S&P500, that's a negative for stocks," Yingst concludes.

Quote of the Day from Dave Ramsey.com:

Unless you're willing to have a go, fail miserably, and have another go, success won't happen. — Phillip Adams

Financial Headline News for Wednesday 10/19

On the 24th anniversary of the stock market crash dubbed Black Monday, stocks were down to a much less degree today. On 10/19/87, the Dow fell 508 points and 22.6%. That would be comparable to an astonishing 2,600 point drop in this present market!

Apple reported slightly less in sales and profits than Wall Street had forecasted -- for the first time in 30 quarters. This caused the stock to fall over 5%.

From Hunting Permits to Ads on Trucks, U.S. Pushes for New Business Model for the Post Office.

Here are the top financial stories of the day:

1) Could you stomach a 2,600 point drop in the Dow? From MarketWatch

Anyone younger than their mid-40s probably doesn’t remember what happened 24 years ago today, since they were not yet out of college. This includes most mutual fund managers, by the way. But they should nevertheless study what happened on October 19, 1987 — a day that came to be known as Black Monday.

The Dow Jones Industrial Average INDU that day dropped 508 points, which at first blush might not seem all that noteworthy. After all, the Dow on a couple of occasions in recent months dropped at least that much.

But the Dow was a lot lower in 1987, which meant that the 508-point drop that day was far bigger in percentage terms—22.6%, in fact.

If a similarly-sized plunge were to occur at today’s lofty levels, the Dow would drop more than 2,600 points.

Such an extraordinary plunge may strike you as most unlikely, and you’d be right. But we’re kidding ourselves if we think that another drop of that magnitude won’t happen again.

In fact, according to a fascinating body of research (championed in large part by Xavier Gabaix, a finance professor at New York University) plunges as big as 1987’s Black Monday—while rare—are an inherent part of the investment landscape.

Gabaix discovered that the frequency with which huge plunges occur follows a well-known tendency known as Zipf’s Law. A crash like 1987’s, for example, will occur once very 75 years or so, on average.

Because this is an average frequency over many years, Zipf’s Law doesn’t tell us when the next crash will occur. But it does mean that we need to arrange our financial affairs on the assumption that another one, some day, will take place.

U.S. stocks dropped Wednesday 10/19/11, piling up losses in the final hours of trading, on conflicting signs from Europe about a potentially bigger plan to stave off a messy sovereign default; disappointing earnings from heavyweight Apple, Inc. /quotes/zigman/68270/quotes/nls/aapl AAPL -0.01% and some signs of continued strain on the economy from the Federal Reserve's Beige Book report.

The Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA -0.63% fell 72.43 points, or 0.6%, to 11,504.62, led by more than 3% drops in Alcoa Inc. /quotes/zigman/246295/quotes/nls/aa AA -0.10% and Bank of America Corp. /quotes/zigman/190927/quotes/nls/bac BAC +0.16% shares.

The S&P 500 /quotes/zigman/3870025 SPX -1.26% fell 15.5 points, or 1.3%, to 1,209.88, led by a pullback in natural-resource stocks. The Nasdaq Composite /quotes/zigman/123127 COMP -2.01% lost 53.4 points, or 2%, to 2,604.04.

2) Apple 'Disappoints'? Blame Wall Street-From Smart Money

Normally, a 54% profit jump would be impressive even for a promising start-up in a booming economy. On Tuesday, America's largest firm reported such a feat -- even though its posh gadgets fetch high prices and consumer sentiment is broadly drooping.

Investors were far from satisfied, however. Apple (AAPL: 398.62, -23.62, -5.59%) reported a whisker less in sales and profits than Wall Street had forecasted -- for the first time in 30 quarters. Just the quarter before, it had topped earnings forecasts by 34%.

The stock plunged following the report in after-hours trading.

That's the trouble with a popular stock. As SmartMoney.com noted earlier Tuesday, Apple looked poised for a dip, bathed as it has been in excess popularity. Fully 93% of analysts who cover it recommend a purchase of shares. Just one analyst, Colin Gillis of BGC Financial, lowered his recommendation on the stock to "hold" before the earnings report, citing the possibility of iPhone sales disappointing.

They did. Apple sold 17.1 million units, well shy of forecasts for 20 million.

That's not a sign of waning demand, for two reasons. First, it's a 21% increase from a year earlier.

Second, this year's September-quarter customers might have held off on iPhone purchases in anticipation of new model launch in October. Last year, Apple launched a new model in June, giving September-quarter customers ample reason to buy.

That's a timing quirk more than a disappointment. And if iPhone sales fell short in this year's September quarter they might top expectations in the December one.

Apple remains in excellent shape. Sales and profits are growing quickly and, as the company is quick to point out in presentations, its market share for phones and computers is low, suggesting there are plenty of customers to be won. Shares are now a bit more affordable and the company is stuffed with cash.

But prospective buyers of the stock shouldn't rush. Analysts are sure to revisit their remaining forecasts in coming weeks and a few might even issue downgrades. Fickle momentum traders might find love elsewhere for a while. There will be angst over whether the new management team is up to its task. Any of these might send the stock price lower.

Apple's Tuesday "disappointment" was mostly a matter of Wall Street disappointing investors and investors disappointing themselves. Once expectations are reigned in, what will be left is a fine company at a fair price.

3) Post Office Wants More Than Mail-From The Wall Street Journal

Will the U.S. Postal Service start issuing driver's licenses and deer-hunting permits? Selling country-music CDs? How about strapping weather or air-quality monitors on mail trucks?

Plummeting demand for traditional mail delivery, which funds the postal service, has created a looming fiscal crisis that has Congress, postal employees and government officials weighing a venture into non-mail business as a way to stay afloat. It's a divisive issue on Capitol Hill, where lawmakers are sparring over whether and how far the post office should be allowed to venture into the private sector.

On Tuesday, the Postal Service said it would increase the cost of mailing a letter by one cent to 45 cents staring in January. Earlier in the week, the 280,000-member National Letter Carriers Association hired advisers from Wall Street to help find ways to make it viable.

For more than 200 years, the agency has been almost singularly focused on delivering mail to everyone, everywhere.

No longer will that alone sustain the nation's mail delivery system, Postmaster General Patrick Donahoe recently told Congress.

He said the postal service faces mounting annual losses which could reach $16 billion by 2016 unless Congress passes legislation allowing the agency to slash its network and work force, reduce the amount it is required to set aside for retiree health benefits, drop Saturday delivery and have more freedom to offer products and services beyond mailing letters and packages.

Labor is the agency's biggest cost, so cuts there will provide the most immediate relief, says Mr. Donahoe.

But with mail expected to continue to drop, the agency can't "focus on cost cutting alone" and must also raise revenues for its long-term survival, according to an Oct. 6 report by the U.S. Postal Service Office of Inspector General.

The agency can either start outsourcing functions, like stamp sales and package handling, to private businesses, or it can find new ventures to bring into the fold, Phillip Herr, director of physical infrastructure for the Government Accountability Office said. "You can think of moving stuff into the post office, or start moving it someplace else—you're at a fork in the road," he said.

Most foreign post offices, anticipating the decline in first-class mail, long ago diversified, offering everything from banking to fingerprinting, to the sale of jewelry, candy, and children's books. Not all ventures have panned out, but many of these posts are now profitable even as traditional mail declines.

The inspector general's report suggested, for instance, that the U.S. postal service could get more into the logistics business, helping big commercial retailers navigate customs in cross-border business.

A number of U.S. legislators support the notion of moving beyond just mail. Several proposed bills would allow the postal service to offer retail products and services, such as check-cashing and the leasing of extra space in postal facilities and mail trucks to the private sector. A proposal by President
Obama would allow the agency to "offer non-postal products and increase collaboration with state and local governments."

And employees are getting involved: the National Letter Carriers Association has hired Ron Bloom, former White House "car czar," and investment bank Lazard Ltd. to explore new lines of business.

One idea: having mail carriers—who currently deliver mail by trucks, bicycles, snowmobiles, float planes, and even by mule to a Native American tribe at the bottom of the Grand Canyon—carry monitors that could test for air quality and track weather.

The postal service should have the "flexibility to function more like a business," Rep. Elijah Cummings, (D-Md.), co-sponsor of a bill that would establish a "chief innovation officer" at the postal service, testified recently.

Still, moves to expand the postal service into the private realm have been contentious and remain controversial today.

"If the postal service turns every post office into a coffee shop and that coffee shop drives neighborhood coffee shops out of business, I don't think people would be very happy," said a senior staff member for House Oversight and Government Reform Committee.

Starting in the 1990s, forecasting a decline in first-class mail, the postal service aggressively sought out non-postal products, ranging from phone cards, to e-commerce, to a "whole range of retail products like leather jackets, mugs, t-shirts," Ruth Goldway, the chairwoman of the Postal Regulatory Commission, the federal oversight agency for the postal service, recalled in an interview.

But Congress, which ultimately oversees the postal service, worried the ventures didn't seem to make much money, had spotty financial reporting and that companies were "complaining about unfair competition," she said.

In 2006, Congress passed strict laws curtailing non-postal activities and essentially told the agency to stick with philatelic pursuits. The postal service, for instance, was allowed by law to sell Frank Sinatra CDs to promote a stamp honoring the crooner, but came under fire from regulators in 2008 for "selling a number of popular music CDs that are not obviously related to any stamp," according to a report by the Postal Regulatory Commission.

The postal service faces similar concerns now.

A Republican-sponsored postal-reform bill that passed the House Oversight and Government Reform Committee and is headed to the House floor allows for the postal service to sell advertising on postal vehicles, and to branch into public services like fishing and hunting licenses.

But "using its tax exempt and other special statuses to compete against private sector businesses in new fields would create a new set of problems that occur when a federal government agency tries to play entrepreneur," said Ali Ahmad, the spokesman for the committee.

Another key Republican, Sen. Susan Collins of Maine, was silent on the issue of non-postal products in a major reform bill she introduced earlier this year but she is now negotiating the issue with Sen. Tom Carper, (D-Del.) and Sen. Joseph Lieberman, (I-Conn.), according to a senior staffer familiar with the negotiations.

Also part of the debate in Congress: Should a government service that is required to serve everyone be expected to be profitable?

"It's unfair to apply a private-sector business model to the function of the postal service," testified Rep. Peter Welch, a Vermont Democrat. "If you're FedEx or UPS, you can pick and choose your routes…you can not deliver in rural areas if that doesn't suit your shareholder bottom line."

Quote of the Day from Dave Ramsey.com:
Wealth, like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service. — Henry Ford

Financial Headline News for Tuesday 10/18

Stocks rebounded nicely today as the Dow recouped most of its losses from yesterday.Stocks soared in late trading on reports that France and Germany agreed to boost the rescue fund. We'll see how long that lasts.

Bank of America earned $6.2 billion on accounting gains and the sale of its stake in a Chinese bank. The Accounting rule that created this relates to a drop in the value of its debt. When the price of the bank's debt falls, the bank could theoretically buy it back at a lower cost. Accounting rules require that an income gain be recorded when that happens. Banks in this week's reporting are benefiting from this in their financial statements.

It looks like Money Markets aren't as safe as they seem to be.

Here are the top financial stories of the day:

1) Stocks jump on reports of progress in Europe-From the AP

Stocks are closing sharply higher on reports that Germany and France are moving closer to resolving the European debt crisis.

The Guardian newspaper reported Tuesday that France and Germany have agreed to expand a rescue fund. European officials are expected to take up the expansion along with other measures at a meeting this weekend.

The Dow Jones industrial average rose 180 points, or 1.6 percent, to close at 11,577.

The S&P 500 index rose 25 points, or 2 percent, to 1,225. Bank stocks were among the strongest performers.

The Nasdaq composite rose 43 points, or 1.6 percent, to 2,657.

More than five stocks rose for every one that fell on the New York Stock Exchange. Trading volume was higher than average at 4.9 billion shares.

2) Bank of America earns $6.2B on accounting gains-From the AP

Bank of America earned $6.2 billion in the third quarter on accounting gains and the sale of a stake in a Chinese bank, which offset lower revenue and income in its credit card, real estate and investment banking businesses.

Bank of America is also no longer the largest bank in the nation by assets, which fell to $2.21 trillion in the quarter. The Charlotte, N.C. bank ceded the bragging rights to rival JPMorgan Chase & Co. which reported total assets of $2.28 trillion.

The slimming down reflects Bank of America's strategy of cutting costs and selling off businesses that don't fit into its simpler banking model. CEO Brian Moynihan said in a conference call with analysts Tuesday he had begun the process of a "strategic transformation of the company."

Bank of America earned 56 cents per share, following a loss of $7.3 billion, or 77 cents a share in the same quarter last year. Analysts surveyed by FactSet forecast the bank would earn 28 cents per share.
Bank of America Corp.'s stock rose 3 percent to $6.21 at 10 a.m. Tuesday.

The income included accounting gains of $4.5 billion and $1.7 billion, both related to drops in the value of its debt. When the price of the bank's debt falls, the bank could theoretically buy it back at a lower cost. Accounting rules require that an income gain be recorded when that happens.

Bank of America gained $3.6 billion from selling its stake in China Construction Bank and recorded a loss in its private equity business of $2.2 billion as the value of its investments fell.

The sale of its stake in the Chinese bank was part of the bank's effort to focus the company and shed non-core businesses. During the quarter Moynihan realigned the business and reshuffled top management. He got rid of two of the bank's top executives -- head of wealth management Sallie Krawcheck and head of consumer banking Joe Price. Moynihan replaced them with two chief operating officers -- David Darnell to head all consumer businesses and Tom Montag to oversee all commercial relationships.

During the quarter, the bank also announced 30,000 job cuts in the quarter as part of an initiative to reduce expenses. Its goal is to reduce expenses by $5 billion a year in the next three years.

The third quarter results were hurt by declines in investment banking and trading from its Merrill Lynch division, which has been an income generator in previous quarters. Turbulent financial markets in the third quarter, brought on by the debt crisis in Europe and a downgrade of the U.S. government's credit rating, kept many investors away and led companies to put off stock and bond offerings.

Bank of America's investment banking and trading business reported a net loss of $302 million, compared to net income of $1.5 billion in the year-ago quarter. Revenue declined 26 percent to $5.2 billion. Fixed income, currency and commodity sales fell by $3.2 billion, while equity trading declined by $201 million. Investment banking fees fell 21 percent to $1.1 billion.

Bank of America's results are considered a proxy for the health of the U.S. consumer because the bank serves about half of all American households. The consumer business results showed that Americans were still holding back spending and demand for loans was low.

The bank's consumer real estate business reported a loss of $1.1 billion, while revenue declined 22 percent to $2.8 billion. The bank said it wrote fewer real estate loans due to lower demand.

One of the largest credit card issuers, Bank of America's revenue from the division dropped 16 percent to $4.5 billion. Customers used less credit than last year, leading to lower income for the bank.

The bank set aside less money for losses as more Americans got their financial houses in order and paid their bills on time. Bank of America's provision for losses from credit cards decreased $2 billion from a year ago to $1 billion.

3) Hidden Dangers Lurking In Money-Market Funds-From The Wall Street Journal

It's always the quiet ones.

Money-market funds—U.S. mutual funds that buy short-term debt issued by companies, banks and governments—are supposed to be safe, cash-like investments that lead an inconspicuous life in the lower reaches of the financial system.

In normal times, these funds, which collectively have more than $2.5 trillion under management, should be stored away in the drawer marked "BBB"—"Big But Boring"—and forgotten.

But times have been anything but normal in recent years. Cue a whirlwind of regulatory activity, led by the Securities and Exchange Commission, that could fundamentally change the nature of this huge sector, and not a minute too soon.

The issue is simple-yet-frightening: Money-market funds have become "systemic" institutions, whose size, interconnectedness and behavior have the potential to cause serious damage to companies, investors and the economy.

Exhibit A is from September 2008: After Lehman Brothers Holdings Inc. collapsed, the near-failure of the $62 billion Reserve Primary Fund precipitated a ruinous, and unexpected, domino effect that paralyzed financial markets and the global economy. Money markets were badly hit in the aftermath and the U.S. government had to step in to bail out the sector.

Exhibit B is more recent. In the past few months, investors have been gripped by concerns over these funds' exposure to the wobbly European banking sector. Conversely, fears of a money-market funds pullback has spooked shareholders in the European lenders, particularly the French ones, that rely on them for funding.

Any overhaul should start by tackling three misconceptions embedded in the current regime.

First, individual investors and companies perceive money-market funds as "safe" and treat them as current accounts, withdrawing money at will, writing checks against their deposits and so on. This attitude overlooks the fact that, unlike banks, these deposits aren't federally insured so in the event of a run, investors are at risk of losing money.

Second, money-market funds keep their net asset value fixed at $1 a share regardless of market movements. This fiction is justifiable on tax and accounting grounds, partly because changes in the daily prices of those short-term investments are tiny, but it does reinforce the mistaken impression of money markets as "stable" and "risk-free."

In fact, the run on the Reserve Fund happened precisely because its Lehman losses had forced it to "break the buck"—i.e., admit that its net asset value had fallen below $1.

The third issue centers on foreign banks. Since most of them don't have U.S. deposits, they fund dollar loans by issuing debt to money funds.

But there is a catch: By borrowing short-term funds and lending them out for years banks leave themselves far too exposed to changes in interest rates, credit markets and economic conditions, as shown by European lenders' current plight.

The nuclear option for regulators would be to scrap money-market funds' fixed net asset value, or NAV, and make it floatable, like other mutual funds. That would let investors know exactly how money funds are doing and might deter their managers from taking risky positions.

The only problem is that it might kill off the entire industry. As Karrie McMillan, general counsel of the Investment Company Institute, the trade association for mutual funds, told me: "The floating NAV is the worst possible option on the table."

Industry practitioners argue that a floating NAV would be an accounting nightmare for borrowers, drive investors away by forcing them to pay capital-gains taxes every time they withdraw money and wouldn't prevent runs on the funds anyway.

A more viable solution would be to require money-market funds to hold a bank-like capital buffer to pay out investors during a crisis.

The SEC is seriously considering such a cushion but it is still undecided on its size. Hard-liners would like to set it at around 3% of a fund's assets, a level that would require the industry to raise a not-inconsiderable total of $75 billion in new capital.

Money-market funds are pushing for something more like 1%, warning that higher requirements would saddle them with excessive costs and make their business uneconomical.

Industry representatives point out, with some reason, that only two funds have ever broken the buck, adding that, since the outset of the euro-crisis, the sector has steadily reduced holdings of European bank debt.

Indeed, the much-scrutinized French banks no longer feature among the top 10 borrowers from U.S mutual funds, according to the latest figures from Crane Data.

That is reassuring news but not reassuring enough to ease the regulatory pressure.

Let's face it: The rarity of breaking-the-buck incidents is offset by the catastrophe that ensued when the last one occurred. I wouldn't play Russian roulette even if I knew the gun's drum had 1,000 slots and only one bullet.

Moreover, even after sharply lowering their lending to Europe, U.S. money-market funds still have around the same level of exposure to some large French banks as the Reserve Fund had to Lehman in 2008.

As every fan of whodunits knows, overlooking the quiet and unassuming types can lead to unexpected dangers.

Quote of the Day from Dave Ramsey.com:
Man's mind, once stretched by a new idea, never regains its original dimensions. — Oliver Wendell Holmes, Jr.

Financial Headline News for Monday 10/17

Stocks staged their steepest drop in two weeks, as fresh European sovereign-debt worries helped knock the market off a 2 ½-month closing high.

Greece heads for standstill before austerity vote as the government refuses to make the proper cuts needed as protests and chaos reign.

The economy is so fragile at this point that rare increases and enthusiasm in stocks could cause a back draft later on in a weird dichotomy. This is what happened to Japan.

Here are the top financial stories of the day:

1) Germany's caution on debt plan sinks Wall Street-From Reuters

Stocks suffered their worst loss in two weeks on Monday after comments from Germany's finance minister caused investors to fear Europe's solution to its debt crisis may not come fast enough.

The S&P index had risen for two straight weeks for the first time since July, riding a wave of euphoria built on optimism that European leaders had a newfound commitment to tackle a crisis that threatened financial stability and global growth.

The rapid rally left the market susceptible to swift declines. German Finance Minister Wolfgang Schaeuble, speaking of an October 23 European Union summit on the debt crisis, tempered enthusiasm, saying, "we won't have a definitive solution this weekend.

U.S. bank earnings also contributed to the selling pressure. Wells Fargo & Co (NYSE:WFC - News) shares fell 8.4 percent to $24.42 after the U.S. lender financial results fell short of expectations.

The KBW Bank index (Philadelphia:^BKX - News) lost 3.9 percent.

"The German Finance Minister basically came out and sort of ruined the expectation that a grand plan was coming along, that some sizable fund was being put together to recapitalize European banks," said Stephen Massocca, fund manager with Wedbush Morgan in San Francisco.

"Depending on the development there, we could technically get back down to the low end of the trading range, which is about 1,100 on the S&P."

With that in mind, investors rushed to seek protection in the options market against losses. The CBOE Volatility index VIX (Chicago Options:^VIX - News), Wall Street's so-called fear gauge, rose 16.6 percent to 32.92, its highest one-day jump since August.

The VIX is a 30-day risk forecast of stock market volatility conveyed by S&P 500 index options; it generally moves inversely to the S&P benchmark.

The Dow Jones industrial average (DJI:^DJI - News) was down 246.58 points, or 2.12 percent, at 11,397.91. The Standard & Poor's 500 Index (^SPX - News) was down 23.72 points, or 1.94 percent, at 1,200.86. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was down 52.93 points, or 1.98 percent, at 2,614.92.

Trading volume was light, with just 6.73 billion shares exchanging hands on the New York Stock Exchange, NYSE Amex and Nasdaq for the day, well below the year's daily average so far of about 8 billion.

Events in Europe overshadowed a $21 billion deal by Kinder Morgan Inc (NYSE:KMI - News) to buy rival El Paso Corp (NYSE:EP - News), combining the two largest natural gas pipeline operators in North America in a huge bet on the fast-growing market for that fuel.

El Paso's shares surged 24.8 percent to $24.45 and Kinder Morgan shares jumped 4.8 percent to $28.19.

Shares of Citigroup Inc (NYSE:C - News) fell 1.7 percent to $27.93. The bank reported higher third-quarter earnings as it set aside less money to cover bad loans and recorded an accounting gain available to banks in turbulent markets.

Of the 45 companies in the S&P 500 that have reported earnings, 62 percent have beaten analyst expectations, according to Thomson Reuters data.

Declining stocks outnumbered advancing ones on the NYSE and the Nasdaq by a ratio of about 5 to 1.

2) Greece heads for standstill before austerity vote-From Reuters

A ruling Greek Socialist party deputy quit parliament on Monday to protest against austerity, striking a blow at Prime Minister George Papandreou's efforts to secure approval of a deeply unpopular package of measures later this week.

Although the resignation does not change the government's majority, it compounds Papandreou's woes. A 48-hour general strike has been timed to coincide with the vote, seen as essential to secure a loan installment and avert bankruptcy.

"I can no longer continue to vote without knowing what I'm voting about ... to vote for unjust and unpopular measures under threat that the government will collapse," Thomas Robopoulos said in his resignation letter to the prime minister.

Papandreou had earlier appealed for unity, saying these were critical times ahead of an EU summit on Sunday, where European leaders are meeting to forge a comprehensive solution to the Greek debt crisis that is shaking the euro zone.

"This is maybe the most crucial week for Greece and Europe," Papandreou said in a meeting with President Karolos Papoulias.

"It is very important on our part, that the entire Greek political class shows a sense of unity and responsibility."

Greece's two main unions, representing about half the four million-strong workforce, are preparing for one of the biggest protests since the crisis began two years ago, likely to hit food and fuel supplies, disrupt transport and leave hospitals run by skeleton staff.

Memories are fresh of battles between riot police and stone-throwing protesters at anti-austerity demonstrations in June and sporadic incidents were reported on Monday with a petrol bomb hurled at a garbage truck in a northern suburb of Athens.

Trailing badly in opinion polls, Papandreou has defied a wave of protests, pledging to push through a deeply unpopular package that includes tax rises, pay and pension cuts, job layoffs and changes to collective pay deals.

His four-seat majority is expected to hold up with the support of smaller opposition parties but at least one more member of the ruling PASOK party may oppose part of the bill.

With European Union leaders racing to prepare a new bailout deal in time for a summit next Sunday and growing speculation that Greece may be forced to default on its massive public debt, Papandreou said Athens had to show its resolve.

"We must show we want the great changes, to go into this negotiation on October 23 with our head high, with a strong negotiating hand, to make sure we obtain the best for Greece," he said.

Trapped in deep recession and choked by a debt equivalent to some 162 percent of gross domestic product, Greece has been shut out of bond markets and would run out of money within weeks without international support.

Inspectors from the EU and the International Monetary Fund were in Athens last week and have recommended releasing an 8 billion euro aid tranche to enable the government to keep paying its bills past November.

That will only provide temporary relief and they have told Papandreou's struggling team to push ahead with further belt-tightening, structural reforms and privatizations, on top of what are already the deepest cuts in Greece's postwar history.

"I WANT THEM OUT"

How far this will be possible remains unclear in the face of growing bitterness from Greeks who have increasingly turned against their political leadership.

"I want them out. They can't solve our problems because they are the ones who got us here," said Maria Papadopoulou, a 57-year old pensioner who helps to support both an unemployed daughter and a son at university.

"I don't usually take to the streets but this week we have to rise up and send a message to the government," she said, as mournful protest songs from the era of the 1970s military junta blasted out of loudspeakers set up by strikers occupying the nearby finance ministry.

"These measures are targeting the wrong people, the poor. I hope they won't be passed," she said.

With the official unemployment rate running at about 16 percent and many people already suffering wage cuts of more than 50 percent over the past two years, there has been growing doubt that repeated doses of austerity can solve the crisis.

The strike will hit public sector institutions including tax offices, state schools and airports as well as banks and businesses ranging from taxis and clothes shops to suppliers of everyday staples like bakers.

As well as the finance ministry, the justice ministry has also been occupied and even judges will hold indefinite stoppages, only issuing rulings on major cases.

Customs officials who clear fuel refinery deliveries hold a 24-hour strike on Monday and will decide whether to extend their action, potentially hitting petrol supplies.

A 48-hour strike by seamen, starting on Monday, has brought passenger ferries to a halt, disrupting traffic to the country's dozens of islands.

Garbage piled up on Athens streets for a week due to labor action and municipalities hired private firms to collect it before a "disease bomb" explodes, the health minister said.

3) U.S. Economy Trapped by Its Circle of Strife-From The Wall Street Journal

Bursts of enthusiasm aren't uncommon in bear markets. But they should be watched with caution.

Consider Japan. Just when the nation's stock market finally seemed to have stabilized, in the fall of 1991, another downdraft began.

The Nikkei 225 index, already down 35% from its December 1989 peak, went on to drop another 35% by the following summer. But even that wasn't the bottom. Nor was the next low in mid-1995. Nor the following one in late 1998.

The Nikkei, in fact, didn't bottom until it reached 7607 in April 2003. The 80% decline took 13 years to fully play out. And just when the deflation finally appeared to be over, the global financial crisis hit and pushed stocks to a fresh low again.

There are many important differences between Japan's experience and the U.S. today. But both instances, along with the Great Depression, are classic examples of credit booms turned bust. These are fundamentally different from garden-variety recessions and expansions triggered by inventory or demand shocks.

They are supercycles in terms of both time frame and scope. They are marked by asset-price bubbles that, upon reversal, trigger financial crises as the banking system struggles to stay afloat. And importantly, these financial crises tend to occur at the start—not end—of the debt-shedding process that can take years or even decades fully to play out.

Somewhere in the early innings of this debt-shedding process, then, is where the U.S. stands today.

And it is why investors and policy makers shouldn't overreact to bouts of bright economic news, like the retail-sales strength in September. The economy is hardly on the verge of a break-out performance.

Any flurries of strength, in fact, only risk ushering in periods of renewed weakness.

For instance, the yield on 10-year U.S. Treasury notes has jumped from a low of nearly 1.7% to more than 2.2% in the past three weeks as recession fears have faded. That in turn has pushed 30-year mortgage rates back above 4%, undercutting the refinance boom that policy makers are trying to trigger. Oil and commodity prices have also rebounded. And the urgency for Washington to move forward with fiscal stimulus measures has lessened. In other words, brighter growth prospects tend to reverse the very things that had helped to brighten growth prospects in the first place.

This is no side issue. These automatic destabilizers are the central reason why the U.S. recovery will remain choppy and confusion will continue to plague both businesses and households.

Policy makers will try to keep doing enough to stave off an immediate downturn. But they will likely be unable to return asset prices to their prior unsustainable levels. Short-term stimulus measures don't address the core issue of excessive debt. Plus, there is no guarantee that policy makers will be able—or willing—to keep the economy growing anyhow. 

If there is one lesson from Japan—or the Great Depression, for that matter—it's that it ain't over when you think it's over. The U.S. economy is going nowhere fast.

Quote of the Day from Dave Ramsey.com:
Start with where people are before you try to take them to where you want them to go. — Jim Rohn

Financial Headline News for Friday 10/14

   

The Dow average turned positive for 2011.Google soared as stocks rose today after strong retail sales news.

This jobless, bottom line recovery attempts to march on with all kinds of confusing economic data.

Retail sales rose more than expected in September as Americans spent more on cars, clothing and fuel, an indication that consumers remain willing to shop despite high unemployment and a weak recovery.

Here are the top financial stories of the day:

1) Wall Street racks up second week of gains-From Reuters

Stocks scored their first back-to-back weekly gains since early July on Friday, on strong Google (GOOG - News) earnings and as investors kept riding the optimism for a solution to the euro zone's debt crisis.

The gains put the Dow industrials and the Nasdaq back into positive territory for the year, marking a dramatic reversal from two weeks ago, when the threat of a Greek default and sour U.S. data had buyers running from the market.

"There are these positive catalysts that may be in place -- earnings being one and a more formalized policy action out of Europe," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

The benchmark S&P index has climbed 14 percent from the October 4th intraday low of 1,074.77, which had temporarily tipped it into bear market territory. Now investors are looking to see if stocks can sustain a move above the 1,215-1,220 area that has been upper end of the market's range since early August.

For the week, the Dow rose 4.9 percent, while the S&P 500 jumped 6 percent and the Nasdaq climbed 7.6 percent.

Google Inc (GOOG - News) led the Nasdaq higher on Friday as shares jumped 5.9 percent to $591.68, a day after its results sailed past Wall Street's expectations, helped by strong advertising sales and cost controls.

"To the extent earnings come through as expected or better than expected, which we think is more likely to be the case, then that will provide sufficient support for the equity markets," Trunow said.

Next week third-quarter earnings kick into high gear, with reports coming from Goldman Sachs (GS - News), Bank of America (BAC - News), Apple Inc (AAPL - News) and other prominent companies.

The Dow Jones industrial average (^DJI - News) was up 166.36 points, or 1.45 percent, at 11,644.49.

The Standard & Poor's 500 Index (^SPX - News) was up 20.92 points, or 1.74 percent, at 1,224.58.

The Nasdaq Composite Index (^IXIC - News) was up 47.61 points, or 1.82 percent, at 2,667.85.

Apple rose 3.3 percent to $422, just below its intraday lifetime high of $422.86 set on September 20, as the newest version of its iPhone went on sale across the country.

The CBOE Volatility Index, or VIX(^VIX - News), fell 8 percent to end at 28.24, and closed lower for the ninth day in a row, a pattern suggesting more gains could be in store as investors find less need for protection against losses.

"This has only happened four other times in the last 15 years and each time following this decline, the market over the next two months went up or stayed flat," wrote Jay Pestrichelli, co-founder and principal of Zega Financial LLC, an investment advisory firm specializing in option strategies.

French and German officials are trying to put flesh on the bones of a crisis resolution plan in time for a European Union summit on October 23, overshadowing Standard and Poor's cut of Spain's credit rating, a move that underlined the challenges facing Europe's finance ministers.

Stronger-than-expected retail sales data added to the upbeat mood Friday.

U.S. retail sales rose 1.1 percent in September from a month earlier, a report showed, beating the median forecast in a Reuters poll of a 0.7 percent rise. Sales growth during August was revised upward to 0.3 percent.

About 6.6 billion shares were traded on the New York Stock Exchange, NYSE Amex and Nasdaq for the day, well below the year's daily average so far of about 8 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 5 to 1, and on the

Nasdaq, advancers outpaced decliners by 3 to 1.

2) Why The Economy Looks Like Expansion, Feels Like Recession-From The Contrary Indicator

There's a great mismatch between the way people feel about the economy and many of the underlying trends. The sentiment says recession, but much of the underlying data suggest growth.

The Thomson Reuters/University of Michigan measure of consumer sentiment, released Friday morning, showed consumer confidence fell and that consumers' expectations for the future are at their lowest level in 30 years. They're not the only ones worried. Lakshman Achuthan of Economic Cycle Research Institute, perhaps the most reliable forecaster on changes in the business cycle, recently told the Daily Ticker he believes a recession is unavoidable.

And yet the numbers continue to tell the story of a grinding, continuing recovery that, in some ways, appears to be accelerating. Amid the rising gloom, the data flow in recent weeks has generally been positive. Retail sales, reported this morning, were up strongly in September, up 1.1 percent from August; August's figure was revised upwards. Compared with a year ago, retail sales are up 8 percent.

They were led by strong car sales. After putting up a bagel in August, the economy added 103,000 payroll jobs in September, including 137,000 private sector positions. Overall GDP growth, which fell dangerously close to flatlining in the first quarter, in which it grew at just a .4 percent annual rate, grew at a 1.3 percent rate in the second quarter. Macroeconomic Advisers, which tracks and continually updates estimates in real time with each new data point, currently has the third quarter expanding at a 2.7 percent rate. The Conference Board Leading Economic Index pushes higher every month.

So what's going on? Is all the data fudged? Is it simply backward-looking information telling us a positive story? I think of it as follows: The grind-it-out recovery continues. The underlying trends are moving in a positive direction, in many instances better than most people think and expect. But there's an overwhelming sense of fragility due to three significant factors.

First and foremost, there's the weak labor market. Go back and look at the Bureau of Labor Statistics' depressing monthly employment market update. It's not simply that the unemployment rate is at an elevated 9.1 percent, or that the U-6, a broader measure of un- and underemployment, is at 16.5 percent. Rather, the equation between management and labor has shifted drastically in the past several years. Simply put, capital is beating the living daylights out of labor. Personal income fell in August from July. Corporate profits bounced back impressively since 2009, but between June 2009 and June 2011, real household median income fell 6.7 percent. Workers' share of income has fallen to historic lows. (Check out this chart, courtesy of Mark Thoma at Economists' View).

Second, call it muscle memory, or post-traumatic stress disorder, or the new normal. But Americans remain shocked and traumatized by the events of the fall of 2008 and the deep recession of 2008-2009.

A dog that's been repeatedly abused cowers the minute someone — even someone with good intentions — raises his hand. The American public is like a dog that's been kicked one too many times.

The cascade of failures, the massive job loss, and the huge declines in home equity, have altered sentiment, psychology and actual behavior. Each time there's a new trauma — a month in which there is no jobs growth brinksmanship that almost results in default, a downgrade by Standard & Poor's, a damaging hurricane — Americans suffer flashbacks.

Third, beyond imagined threats, the world is a pretty dangerous place, full of potential shocks that can harm the U.S. economy. And because consumers and companies were caught unawares by the 2008 credit shock, they continue to take preventative action and be on the lookout for warning signs.

Many companies in 2008 suffered near-death experiences in 2008 due to a lack of cash; so today they stockpile it, and hesitate to invest or boost dividends. Meanwhile, there are plenty of potential shocks for which people should prepare: a Greek default, a new recession in the heart of Europe, instability in the Middle East, a sharp slowdown in China.

As the mood sours, the U.S. economy continues to grind its way, slowly, out of the deep hole of 2009. At present, the economic data we have points to a continuation of the current expansion, now in its 30^th month, even if many people feel as if the recession never ended.

3) Retail Sales Rise, but Consumers Still Worried-From The Wall Street Journal

U.S. retail sales jumped in September, though consumers' sour mood makes it unclear if the stronger-than-expected spending figures are sustainable.

Retail and food-services sales climbed 1.1% from the previous month to an adjusted $395.47 billion, the Commerce Department said Friday. Economists surveyed by Dow Jones Newswires had forecast a 0.8% increase.

But a separate gauge of consumer sentiment declined in October. The Thomson Reuters/University of Michigan consumer sentiment index for early October fell to 57.5 from an end-September reading of 59.4, below the 60.0 expected by economists.

The mood among Americans has frequently been more dour than hard retail spending numbers, and some economists think the disconnect will continue as families dip into savings to maintain their standards of living.

"Consumers seem to be chugging along even though consumer confidence is at recessionary levels, household net worth is falling, unemployment is high, and wage gains are outpaced by consumer price inflation," said Chris Christopher, senior principal economist at IHS Global Insight.

A separate Labor Department report Friday showed that U.S. import prices rose in September amid higher petroleum and food costs, an indication that lingering inflation pressures could further crimp consumers. The price of goods imported to the U.S. increased 0.3% from the month before, the biggest rise since April. On an annual basis, import prices last month were 13.4% higher than in September 2010.

Friday's Commerce Department figures, meanwhile, showed that August's retail numbers were better than initially thought—sales were revised up to a 0.3% gain. The Commerce Department originally estimated that sales were flat.

In September, consumers bought more cars, fuel and back-to-school clothes.

"Part of the rebound may simply reflect a makeup for purchases put off during August, when the stock market was in freefall and recession fears heated up," said Mark Vitner, senior economist at Wells Fargo.

Friday's data showed a 3.6% jump for auto and parts sales. Excluding cars, overall retail sales were up 0.6%.

Businesses aren't anticipating a huge revival in demand. A separate Commerce Department report Friday showed business inventories rose 0.5% to a seasonally adjusted $1.536 trillion. The inventory-to-sales ratio, which measures how many months it would take for a firm to deplete its current inventory, held steady at a relatively lean 1.28.

Quote of the Day from Dave Ramsey.com:
Great leaders are almost always great simplifiers, who can cut through argument, debate, and doubt to offer a solution everybody can understand. — General Colin Powell

Financial Headline News for Thursday 10/13

Thanks to the negative bank earnings, the Dow was down today.

First time unemployment claims came in at 404,000 today which was 1,000 less tha nexpected. yet another week over the dreaded 400,000 mark.

Just like goods, supply and demand also applies to the job market as the number of unemployed increases, salaries are decreasing.

Here are the top financial stories of the day:

1) Banking Stocks Pull Dow Into Red-From The Wall Street Journal

The financial sector led stocks lower following less-than-stellar results from J.P. Morgan Chase, while strength in technology shares limited the broader market's losses.

The Dow Jones Industrial Average fell 40.72 points, or 0.4%, to 11478.13, after dropping as much as 141 points on Thursday. It marked the Dow's second drop in the last three sessions and biggest decline since Oct. 3.

The blue-chip index still is up 5.2% this month and briefly moved this week into positive territory for the year before pulling back. It is down 0.9% this year.

The Standard & Poor's 500-stock index eased 3.59 points, or 0.3%, to 1203.66. Financial and industrial stocks registered the biggest declines, while technology stocks rose.

Meanwhile, the Nasdaq Composite rose 15.51 points, or 0.6%, to 2620.24, marking its fourth straight gain. The technology-oriented index has gained 12% over the last eight trading sessions.

Google rose $10.49, or 1.9%, to 558.99, in the regular session ahead of its quarterly results. The stock jumped in after-hours trading after the Internet company's third-quarter earnings came in well ahead of analysts' estimates.

Financial stocks notched the sharpest declines. J.P. Morgan Chase reported a slight drop in third-quarter earnings. Investment-banking operations were weak, as expected, and took a toll on results, although the damage was partially offset by strong lending to businesses and revenue gains in the consumer business. Shares fell 1.60, or 4.8%, to 31.60.

Other bank stocks also slumped. Bank of America led the Dow lower, dropping 36 cents, or 5.5%, to 6.22. Citigroup lost 1.56, or 5.3%, to 27.64, and Morgan Stanley shed 70 cents, or 4.4%, to 15.14.

"The earnings so far haven't been blowing the doors off like many of us had hoped," said Jack Ablin, chief investment officer at Harris Private Bank. "And there are still big unresolved issues out in Europe."

Elsewhere, crude oil fell for a second consecutive day, sliding 1.6%, to $84.23 a barrel. Gold prices edged down 0.8%, to $1,667.30 a troy ounce.

2) Applications for unemployment aid barely changed-From the AP

The number of people applying for unemployment benefits fell slightly last week, a sign the job market isn't getting much better.

Applications ticked down by 1,000 to a seasonally adjusted 404,000, the Labor Department said Thursday.

The four-week average declined for the third straight week to 408,000. That's the lowest average in eight weeks.

Still, applications are higher than they would be in a healthy economy. They need to fall consistently below 375,000 to signal sustainable job growth. They haven't been below that level since February.

The report suggests that layoffs have declined in recent weeks. But other data show hiring hasn't picked up.

Ellen Zentner, senior economist at Nomura Securities, said applications around 400,000 indicate a neutral job market, "one that's neither picking up, nor deteriorating."

Only a few weeks ago some had feared the risks of another recession had grown. So "even neutral readings are good," she said, because they signal that conditions aren't worsening.

Employers pulled back on hiring this spring, after rising gas prices cut into consumer spending and Japan's March 11 earthquake disrupted supply chains, which slowed U.S. auto production.

In recent months, gas prices have eased slightly and supply chains are flowing more freely. Yet hiring hasn't improved much. Employers have added an average of only 72,000 jobs in the past five months.

That's far below the 125,000 per month needed to keep up with population growth. And it's down from an average of 180,000 in the first four months of this year.

In September, the economy generated 103,000 net jobs. That's enough to calm recession fears, but it is far from what is needed to lower the unemployment rate, which stayed at 9.1 percent for the third straight month.

Thursday's Labor Department report also showed that the number of people who are receiving unemployment benefits fell by 55,000 to 3.67 million. That's the lowest level since April.

That figure doesn't include several million additional people who are receiving benefits under extended programs put in place during the recession.

All told, 6.8 million people received unemployment benefits in the week ending Sept. 24, the latest data available.

Without more jobs and higher pay increases, consumers are likely to keep spending cautiously. Consumer spending accounts for 70 percent of economic activity.

On Wednesday, the Labor Department said companies posted fewer jobs in August than the previous month, the first decline in four months. Economists said it was another sign that companies are reluctant to hire.

On a positive note, the turmoil didn't boost job cuts. Employers laid off 1.66 million people in August, the Labor Department's report said Wednesday. That's down from July and far below the peak during the recession of 2.5 million.

3) Workers Lose Pricing Power-From The Wall Street Journal

Competition drives down prices. This is as true in the labor market as with any other marketplace.

Labor Department figures out Tuesday showed the number of U.S. job openings fell in August for the first time in four months, to about 3.1 million. At the same time, the number of unemployed rose to nearly 14 million. In other words, there were roughly 4.6 job seekers for every opening in August, up from 4.3 in July.

Little wonder that the average hourly earnings of workers declined during the month. In fact, intense competition for jobs is a key reason why U.S. incomes broadly are under so much pressure. There were never more than three job seekers per opening even during the worst of the last jobless recovery.

That figure shot as high as seven during the worst of the recession in 2009. Today, it has yet to recover to anything like the average of two seekers per opening during the expansion of 2004-07.

This helps explain the sharp recent worsening of U.S. household finances—and sentiment. A study by two former Census officials released Monday showed that in real terms, the annual income of the typical U.S. household has fallen from $55,309 in December 2007 to $49,909 as of June, a drop just shy of 10%. This is partly because of the higher unemployment rate. Even for households headed by a full-time worker, however, median income has fallen by more than 5%.

And as Credit Suisse economist Henry Mo points out, even if all U.S. job vacancies were filled overnight, nearly 11 million workers would still be unemployed—and that doesn't include the nine million working part-time who would prefer full-time work and the 1.2 million who have given up looking altogether. Although the pace of layoffs has slowed, there simply aren't enough new positions to go around. In fact, separate Labor Department figures show the average number of people employed by new firms has been on a downward trend for two decades.

Given all this, deflationary pressure on incomes is likely to persist. While that helps companies control costs, it will also constrain consumer spending. That is because prices of certain household necessities, like food and gas, haven't been deflationary enough. The global commodity market is much tighter than the U.S. labor market. This, unfortunately, is the new normal.

Quote of the Day from Dave Ramsey.com:

Success in life is a matter not so much of talent as of concentration and perseverance. — C.W. Wendte

Financial Headline News for Wednesday 10/12

Thanks to this unbelievable 4th quarter rally, the Dow has now reached break-even for the year.

Due to the Dodd-Frank act provision named for former Fed Chief Paul Volcker,  Goldman Sachs and Morgan Stanley may stop its banking holding companies.

Things are really bad when the state capital of Pennsylvania needs to file for Chapter 9 bankruptcy.

Here are the top financial stories of the day:

1) Wall Street gains on European rescue progress-From Reuters

U.S. stocks rose on Wednesday as Europe's progress toward bolstering its financial rescue fund brought more battle-weary investors back into the market.

The Dow Jones industrial average (DJI:^DJI - News) was up 102.48 points, or 0.90 percent, to end unofficially at 11,518.78. The Standard & Poor's 500 Index (^SPX - News) was up 11.71 points, or 0.98 percent, to finish unofficially at 1,207.25. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was up 21.70 points, or 0.84 percent, to close unofficially at 2,604.73.

At Wednesday's session high, the S&P 500 was up 13.5 percent from the intraday low hit last Tuesday.

2) Goldman, Morgan Stanley May Shed 'Bank' Status: Analyst-From CNBC

Goldman Sachs (NYSE:GS - News) and Morgan Stanley (NYSE:MS - News) may shed the "bank holding company" classification in order to skirt the Volcker rule banning propriety trading with the firm's own capital, according to Susquehanna Financial Group analyst David Hilder.

Goldman and Morgan Stanley both became bank-holding companies during the 2008 financial crisis in order to be eligible for emergency Fed lending. But the new rule, which would limit trading when the bank's own money is a risk, would deal a major blow to one of Wall Street's most profitable businesses.

"The regulators have proposed a massive new compliance burden on banks to prove that their market-making activities are just that and not proprietary trading in disguise," wrote Hilder in a note to clients.

"There will be large additional costs imposed on banks as market-makers that will not apply to market-makers not owned by banks. We would expect that to draw capital to non-bank market-makers, and cause Goldman Sachs and Morgan Stanley to examine whether it makes sense for them to exit the banking system."

The Dodd-Frank act provision named for former Fed Chief Paul Volcker was released Tuesday in a rather lengthy form by the Fed and the FDIC for public comment. The Securities and Exchange also agreed Wednesday to put the new rules out for public comment.

"Only in Washington could a simple idea-ban banks that accept insured deposits from short term trading for their own account-become a proposal that runs to 298 pages and asks for comments on 394 specific questions," wrote Hilder. "We would add to positions in positive-rated names that could potentially exit the banking system, GS and MS."

This exit may draw the ire of everyone from legislators to the Occupy Wall Street crowd as Goldman and Morgan Stanley changed their status during the height of the financial crisis following the collapse of Lehman Brothers in Sept. 2008 in order to get access to emergency funds not provided for non-commercial banks.

The Federal Reserve rushed through these applications on a Sunday, saying in a statement that in order "to provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility."

The Volcker rule gained popularity as many critics of the banks believe that the monster, levered proprietary trading done by these institutions helped exasperate the crisis and worked against their clients' best interest.

Goldman and Morgan Stanley are set to report earnings next week and according to analysts the lack of profitable trading will weigh heavily on these results.

"Given third quarter weakness across trading and investment banking that extended through the end of September, further equity market declines and wider credit spreads we reduce our GS EPS estimate from a 10-cent gain to a 65-cent loss," wrote Citigroup's Keith Horowitz on Monday.

The analyst went on to cite "regulatory risk" as one of the factors that could derail a comeback by the shares.

"Goldman operates several businesses including financial and physical commodity trading, private equity or derivatives that could face greater regulation, or in a severe case, require Goldman to divest some business units," the analyst said.

3) Harrisburg, Pa., Votes to File for Bankruptcy-From The National Journal

Pennsylvania's capital city voted to file for Chapter 9 bankruptcy protection on Tuesday as it faced a state takeover, according to media reports.

The City Council voted 4-3 to seek bankruptcy protection for Harrisburg, which has a debt burden five times its general-fund budget "because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue," Bloomberg Businessweek reported.

The bankruptcy means the city will lose state aid, but that is better than the proposed recovery plans, Councilwoman Susan Brown-Wilson said, according to Bloomberg. But State Sen. Jeffrey Piccola, a Republican from Dauphin County, where Harrisburg is located, said the council's vote is against the law.

“I have been on the record as saying that bankruptcy is simply not an option. It’s illegal under Pennsylvania law, which prohibits third class cities from filing for bankruptcy,” Piccola said, according to PennLive.com.

Patty Kim, who voted against bankrupcy protection, said the city cannot afford the high cost of litigation that will likely ensue.

“The problem still exists that we still don’t have money, and we still haven’t moved one foot forward,” Kim said.

Pennsylvania's capital city voted to file for Chapter 9 bankruptcy protection on Tuesday as it faced a state takeover, according to media reports.

The City Council voted 4-3 to seek bankruptcy protection for Harrisburg, which has a debt burden five times its general-fund budget "because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue," Bloomberg Businessweek reported.

The bankruptcy means the city will lose state aid, but that is better than the proposed recovery plans, Councilwoman Susan Brown-Wilson said, according to Bloomberg.

Patty Kim, who voted against bankrupcy protection, said the city cannot afford the high cost of litigation that will likely ensue.

“The problem still exists that we still don’t have money, and we still haven’t moved one foot forward,” Kim said.

Quote of the Day from Dave Ramsey.com:
The very essence of leadership is that you have to have vision. You can't blow an uncertain trumpet. — Theodore M. Hesburgh