Tuesday, April 10, 2012

Tuesday, April 10, 2012

DOW – 213 = 12, 715
SPX – 23 = 1358
NAS – 55 = 2991
10 YR YLD -.05 = 1.99%
OIL +.09 = 101.11
GOLD + 19.30 = 1661.60
SILV + .08 = 31.94
PLAT – 14.00 = 1605.00

Today marked the start of the first quarter earnings reporting season. The Dow and the S&P have now dropped for 5 consecutive days. The S&P 500 dropped below its 50-day moving average of 1,372. The Nasdaq also slid below its 50-day moving average and closed below 3,000 for the first time since March 12. Volume finally increased today, confirming the bearish move. The Standard & Poor's 500 Index is still up 8 percent so far this year - compared with its gain of 12 percent at the end of the first quarter, but the benchmark index has fallen 4 percent in the past five sessions, its worst streak since November.

Earnings reporting is actually well underway; with 5 percent of the S&P 500 components having already reported, profits are seen rising 3.1 percent in the quarter. Symbolically or alphabetically if you really want to be accurate, Alcoa kicks off the earnings season. Alcoa is one of the 30 stocks in the Dow industrial Average and the ticker is AA. After the close of trade, Alcoa said income from continuing operations in the first quarter was $94 million, or 9 cents per share, compared with a profit of $309 million, or 27 cents per share in the same quarter last year. Revenue rose slightly to $6 billion.

Alcoa's CEO Klaus Kleinfeld said: "Performance rebounded strongly this quarter due to our proactive cash sustainability actions ... focus on profitable growth, and stabilizing markets," but he said: "Challenges remain in this economy." And even with an bounce in after hours trading, Alcoa is still down more than 40% over the past 12 months.

The results beat expectations of a loss of 5 cents per share. This is part of the funny game among Wall Street analysts and corporations to ratchet down expectations and then beat the diminished estimates. Earnings for the last quarter of 2011 surprised investors by being better than expected, with 63 percent of S&P 500 companies beating earnings estimates. And that's how the game works; surprise, we beat expectations. The current expectations are for 2 percent earnings growth for the S&P 500. Surprise!

And so the games begin.

As we work through earnings, one of the big themes is figuring out why earnings are slowing. Is it because there has been hiring, and labor costs have gone up? If that's the reason, then it is actually positive for the economy. Jobs are an expense for companies against the bottom line but jobs also mean more customers with money to spend, and the long term outlook is positive.

Meanwhile, It was a bad day for European stocks, especially the banks. Within the past few weeks the European Central Bank pumped in more than $1 trillion to prop up local banks, but it might not be enough, as concerns are growing that countries like Spain and Italy will not be able to pay their debts. The banks hold billions of state-backed debt. Spanish banks, for example, increased their holdings of government bonds by 68 billion euros ($89 billion) from November to February. Italian firms bought 54 billion euros ($71 billion) of government securities over the same period.

The yield on Spanish 10-year bonds, for example, rose to nearly 6 percent despite an announcement from the country’s prime minister about an additional 10 billion euros ($13 billion) of budget cuts. Shares in Banco Santander dropped 3.9 percent, while the stock in BBVA fell 3.6 percent.

The pain was most acute in Italy. Shares in UniCredit, the country’s largest bank, fell 8.1 percent, while the stock of its local rival Intesa Sanpaolo slipped 7.9 percent.
The declines came after reports the Italian government would cut its growth forecast for 2012. Italy is expected to grow by 0.4 percent – so now it might be negative.

Federal Reserve Chairman Bernanke was speaking last night. He said the banks need more capital in order to ensure the financial system is stable. Yeah, that's the answer, give the banks more money. How's that been working out for ya?

Bernanke said regulators were taking steps to force financial institutions to hold higher capital buffers, even if they allow for a long period of implementation. Bernanke said the U.S. economy has yet to fully recover from the effects of the financial crisis, and regulators must continue to find new ways to strengthen the banking system. He said financial stability matters had historically played second fiddle to monetary policy issues in the list of central bank priorities, but the crisis changed that.

Bernanke said recent bank stress tests will become a regular feature of the supervisory landscape, and for that reason the latest round of tests is being reviewed to identify possible areas of improvement in "execution and communication."
He reiterated a worry that he and other top policymakers have expressed about the continued vulnerability of money market funds.
"Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration," Bernanke said.
"The risk of runs ... remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available."
Let's clear this up. Bernanke isn't talking about the old-fashioned run on the bank, after all bank deposits are insured by the Federal Deposit Insurance Corporation, and, as a last resort, the Federal Reserve can back deposits by printing money.
The new complication is that bank deposits are no longer the dominant form of modern short-term finance. The modern bank run means a rush to withdraw from money market funds, the disappearance of reliable collateral for overnight loans between banks or the sudden pulling of short-term credit to a troubled financial institution. But these new versions are in some ways still similar to the old: both reflect the desire to pull money out of an endeavor — and to be the first out the door. And both can set off a crash.

These newer forms occur in the so-called shadow banking system, involving short-term financial credit not guaranteed by the deposit insurance umbrella.  shadow banking accounts for about $15 trillion in assets — more than the traditional banking system. But as recently as 1990, the shadow-banking total was much lower, at less than $4 trillion. The core problem is that the growth of short-term credit has been outracing our ability to protect it, and since 2008 most investors have realized that these shadow-banking transactions are not risk-free. The quantity of open derivatives amounts to trillions, and these positions are another source of short-term credit risk. So a need for sudden payouts could also prompt a run on a financial institution.
It now seems that the 21st century will resemble the 19th and early 20th centuries, with periodic panics and runs on financial institutions, perhaps followed by deflationary collapses. In the euro zone, these problems have plagued banks and entire countries, like Greece and Portugal. The “country as bank” is a new and not entirely reassuring catch phrase, and it shows that the problem goes beyond the private sector.

The European Central Bank has stemmed a financial collapse for now, but only by lending large amounts to banks at 1 percent for a three-year window, but there is a lingering doubt that it might not be enough. Should governmental guarantees be extended beyond traditional bank deposits? That would check the problem, but at what cost? In a larger financial crisis based on insolvency, government would face intolerable financial burdens, as happened in Ireland when its government guaranteed bank debts.
There is no stomach for bank bailouts, shadow or otherwise; the economy may be showing some signs of improvement but we never fixed the banking system, and if you're looking for a weak link – this might be it.

The Federal Reserve is going on tour. It seems every voting member of the FOMC has a speaking engagement this week. Federal Reserve policymakers last month kept their ultra-easy monetary policy in place, reiterating expectations they will need to keep U.S. interest rates near zero through late 2014 to nurse a slow recovery. So, what have they been saying?

"To a person that I speak to, I am pleaded with, 'Please no more liquidity."
"The 2014 language in effect names a date far in the future at which macroeconomic conditions are still expected to be exceptionally poor. This is an unwarranted pessimistic signal for the (Fed) to send."
"The arguments for doing another dose of monetary stimulus aren't nearly as strong....Relative to a few months ago, I think the downside risks to the U.S. economy have lessened."
"With my current outlook, I think our policy stance is still the one best suited to foster steady gains in output and employment and to maintain stable prices."

"As always, we have to look at the inflation side and be comfortable that price stability will be maintained and that inflation will be low and stable. ... There's no simple formula, but as the economy strengthens and becomes more self-sustaining then at some point ... the need for so much support from the Fed will begin to diminish."
"If growth continues to improve, the unemployment rate continues to fall, then there will be increasing pressure on us to begin easing off of our policy stance. ... We've never been in this situation. ... We don't know how rapidly we might have to raise interest rates."
"I don't see too much danger coming from Europe through real economy channels and I would say the potential for something coming through financial channels has actually reduced recently."
"At this time, although I do not anticipate further efforts by the Federal Reserve to address the potential spillover effects of Europe on the United States, we will continue to monitor the situation closely."

Around the beginning of the month we started talking about the old adage “Sell in May and stay away”; so, that was a very good call but I must admit, the past five days have been a little sharper and swifter decline than I thought. April typically is a strong month for the U.S. stock market, but not in presidential election years. Since 2006, stocks have risen every April, gaining an average of 4.2%, and April is the best month for the Dow. Election year April has been about half as good with the Dow up only about 1% back to 1950 and Nasdaq actually going negative in election years. There tends to be quite a bit of selling in April after you have a better idea of who the contenders will be for the national election.
Rick Santorum received a calculator in his Easter basket. He did the math and he has suspended his campaign.
Best Buy CEO Brian Dunn has quit. There was an audit committee investigation of Dunn; he quit before the investigation was completed.
Crude oil futures dropped to their lowest prices in 2 months.

The newly formed Consumer Financial Protection Bureau outlined details of a measure that would require mortgage servicers to provide regular monthly statements to borrowers with a breakdown of each payment so borrowers know how much they are spending on fees, interest and what amount is going to reduce the principal they owe.
Delinquent borrowers would be required to receive alerts and information about counselors to help in their efforts to avoid foreclosure. Another proposal would require servicers to provide borrowers with advanced notice that their interest rate will change for homeowners who have adjustable-rate mortgages.
Ed DeMarco, the head regulator for Fannie Mae and Freddie Mac says a preliminary analysis shows that it might make financial sense for the government-backed mortgage giants to reduce the loan balances of struggling homeowners. New data shows Fannie and Freddie could save an estimated $1.7 billion by taking advantage of enhanced incentives from the Treasury Department to write down the principal for some homeowners, but he said more study is warranted before making such a move. Sure, that's the answer – wait a few more years. Nobody thought of this in the past five years; let's cogitate, let it stew; don't rush into anything.

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