S&P Downgrades US Debt

Late Friday, S&P, one of the three major credit rating agencies, downgraded the US debt rating. The other two agencies have continued to assign the highest rating to US debt. S&P cited the deficit reduction in the debt ceiling agreement as too little. Since this is uncharted territory, it’s not clear what will happen when markets open on Monday. Interest rates may rise, but most analysts expect the impact to be small. A volatile session will be likely.

US stocks closed up

U.S. stocks closed up Friday as favorable economic reports balanced out disappointing earnings results, but it wasn’t enough give the Dow industrials its fourth consecutive weekly gain.

The Dow Jones Industrial Average rose 57 points, or 0.5%, to close at 12,342, with 20 of its 30 components rising. For the week, however, the Dow is off 0.3% to snap a three-week run of weekly gains.

Leading the Dow was Merck & Co., with shares up 1.9%, after the drug maker settled with Johnson & Johnson Inc. JNJ +0.90%  over a disputed arthritis medication. More on Merck.

The gains in stocks on Friday came as a measure of consumer sentiment rose in April, beating forecasts. Read more on consumer sentiment.

Core consumer prices climbing a modest 0.1% in March, according to the Labor Department, which provide the Federal Reserve with breathing space to continue its $600 billion bond buying program. Read more on the CPI.

Also released Friday was data showing that manufacturing in the New York region climbed to a one-year high in April on a surge of new orders. Read more on the manufacturing index.

Earlier, Chicago Federal Reserve President Charles Evans said as long as core inflation remained at 1.5% or lower he was “extremely doubtful” the Fed would adjust its monetary policy.

“The bottom line is that the good economy and cheap money will continue to bolster the stock market,” Cardillo said.

The biggest drag on the blue chips, Bank of America BAC -2.36% , saw its shares fall 2.4% after its first-quarter profit missed expectations and the bank said its chief risk officer would move up to become its chief financial officer. Read more on Bank of America.

The Standard & Poor’s 500 Index rose 5.2 points, or 0.4%, to close at 1,319.68, with technology the hardest hit and utilities the best performing among its 10 industry sectors. For the week, the index fell 0.6% for its second weekly loss in a row.

Both oil and gold settled higher on the day. Crude oil for May delivery CLK11 +1.44%  settled up $1.55, or 1.4%, at $109.66 a barrel, and gold for June delivery GCM11 +0.92%  rose $13.60, or 0.9%, to settle at $1,486.00 an ounce on the New York Mercantile Exchange.

Global anxiety has gold spiking

Gold prices continue to set records as investors look for a safe haven to ride out the storm. The price of gold keeps going up, setting records week after week. Gold rallied to record highs in Europe on Friday, with spot prices knocking on the door of $1,300 an ounce, as expectations grew that further quantitative easing could lead to volatility in the currency markets.

On Thursday it touched yet another new high, trading at $1,296.30 an ounce. Just two years ago, it was trading at about $900.

Low interest rates, a falling dollar and anxiety over holding government debt have prompted investors and central banks alike to buy the metal — something tangible instead of a promise.

To Weston, the gold rush reflects his clients’ diminishing trust in Wall Street and the federal government. Gold has fans in the tea party movement and among viewers of conservative cable-talk host Glenn Beck, who touts it on his show.

In financial circles, analysts credit the rising price of gold to an unlikely duo: investors seeking shelter and central bankers from India, Bangladesh and other developing countries. Both are wary of a falling dollar.

It starts with low interest rates. Central banks usually hold currencies from the world’s largest economies — dollars, pounds and yen — and then invest them in short-term bonds.

At the moment, interest rates in the United States and other developed countries are near record lows. Currencies tend to follow the path of interest rates, so not only do central banks get little return from buying dollars, but they face the prospect of the dollar falling even further. What’s the alternative?

To understand gold’s price surge, think of it as shifting between two roles, commodity and currency, said Barclays’ Cooper. When the majority of buyers use gold for jewelry and for filling teeth, it trades like a commodity and is relatively stable. In the 1990s, for instance, it traded between $300 and $400 an ounce. Gold is still well off its inflation-adjusted high. It hit $850 in ounce in 1980, which works out to about $2,250 in today’s dollars.

“Now you need to look at gold as wearing its currency hat,” she said. “It’s a barometer of investors’ concerns over the macroeconomic outlook.”

US Economy | Confidence takes hit

U.S. consumers are increasingly worried about jobs and the economy, the Conference Board said Tuesday, as it reported that its consumer confidence index plummeted to 52.9 in June — the lowest level since March — from a downwardly revised 62.7 in May.

Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence and until the pace of job growth picks up, consumer confidence is not likely to pick up.

Earlier this month the government reported that nonfarm payrolls grew by a seasonally adjusted 431,000 in May, but most of the new jobs were temporary jobs at the U.S. Census, with very weak private-sector hiring.

Double dip? While the confidence report could fuel fears of a “double-dip” recession undercutting U.S. gross domestic product, analysts at RDQ Economics said such worries may be misplaced.

Confidence has double-dipped in the last two recoveries (in early 1992 and early 2003) without the economy falling back into recession and the June pullback in confidence is far less severe than either of those two episodes,” according to an RDQ research note. Furthermore, we think that the response to the oil leak in the Gulf of Mexico is depressing confidence.

Meanwhile, analysts at Barclays Capital Research said the confidence report contains volatility, and they expect a positive overall trend in confidence as the job market expands in the new few months.
Buying plans impacted – Consumers with plans to buy a home within six months fell to 1.9% in June – the lowest level since 1982 other than 1.7% in December, according to the Conference Board. In May 2.1% had plans to buy a home.

Those with plans to buy an automobile fell to a record low of 3.7% in June from 6% in May. The data go back to 1967.

Those with plans to buy major appliances fell to 22.9% in June from 26% in May.

While the recession may have technically ended last summer, consumers remain skittish about job and income prospects and are refraining from consuming in a sufficient enough manner as to create substantial growth in GDP, all enhancing an already sluggish US economy.

Economic Recovery Data

The economy is being boosted by higher retail sales, stronger factory output and a rise in companies’ stockpiles. That picture emerged from reports Friday pointing to an economy that’s improving modestly but steadily after the worst recession in decades. Yet the recovery needs stronger job creation, and it remains under pressure from fears that Europe’s debt crisis could slow the U.S. economy. See blog US Economy on Shaky Ground.

The decent gains in payroll employment in recent months have improved the outlook for spending, but economists expect a sub-par recovery because of high unemployment, tight credit and still-high debt loads.

Shoppers are closely watched because their spending accounts for 70% of economic activity. It rose in the first three months of this year at the fastest pace in three years, according to the Commerce Department report. Industrial production also climbed in April, posting an 0.8% gain. Factories, the biggest slice of industrial activity, ratcheted up output by a brisk 1% for a second straight month, the Federal Reserve report showed. Manufacturers have played a leading role in powering the recovery. They are boosting production because companies are starting to restore their depleted stockpiles of goods.

Still, consumers and businesses appear less confident than in previous recoveries. Complicating the outlook is the uncertainty in Europe.

Economists worry that spending could falter in the coming months without more growth in income. But there have been encouraging signs that job growth is picking up. In April, payroll jobs grew by 290,000, the most in four years.

Still, the unemployment rate rose to 9.9% as more people began or resumed job searches a sign that many are feeling more optimistic about the job market.

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Record-low rates aid struggling economy

Record-low interest rates are still needed to stabilize the economic recovery, Federal Reserve Chairman Ben Bernanke told Congress on Thursday.

He cited still-fragile economic conditions, and noted that inflation is low, which gives the government freedom to keep rates at rock-bottom levels.

Deciding when to tighten credit is the biggest challenge facing Bernanke, whose second term started in February. Moving too soon could stall any recovery and flat line any stress tests. Waiting too long could unleash inflation and sow the seeds for new speculative bubbles in stocks or commodities or other assets. Welcome to the US Economic conundrum.

One of the reasons the Fed is holding rates so low is because of stubbornly high unemployment, Bernanke said. It’s now at 9.7%, a potential restraining force on the economy’s rebound.

The Fed also wants to see more lending by banks before it starts tightening credit. The Fed kept a pledge last week to hold rates at record lows for an “extended period,” a decision that drew one dissent. Does this mean 3 months, 6 months or even longer? That is the million dollar question.

Bernanke said the term “extended period” isn’t a fixed number of months. Rather, it is tied to how economic conditions evolve. If the economy were to rebound more strongly than anticipated, then the Fed would “respond appropriately” and start raising rates, Bernanke explained.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, however, expressed concern that keeping rates at record lows could cause a buildup of “financial imbalances” and put the economy’s stability at risk. Analysts took that to mean low rates could spur a new speculative bubble later on that could burst and hurt the economy.

In other observations, Bernanke said the housing market is “still quite weak.”

I don’t believe the US Economy is quiet ready for any planned stress tests.  At least not any with much weight.

Rattled Investors

The US unemployment rate dropped sharply last month, but employers continued cutting jobs in January as businesses remained insecure about the economic outlook.

The jobless rate fell to 9.7% from 10% in December, the Labor Department said Friday, because its survey of households found more people landed jobs than entered or returned to the labor market.

But a separate survey of employers, which counts how many workers are added or cut from payrolls, found that 20,000 jobs were eliminated last month. And revisions to last year’s data found far more jobs were lost over the 12 months than previously predicted.

After rising virtually uninterrupted since its bear market low in March, the stock market is suddenly exhibiting a fragility not seen since the dark days of the financial crisis. Rising investor angst was evident Thursday, when mounting worries over debt problems in Europe and a fresh reminder that jobs are hard to find in the USA sparked a sell-off that pushed the Dow Jones industrials briefly back below 10,000 on its way to a 268-point loss — its biggest one-day drop since April.

The Dow, which hit a peak of 10,725 on Jan. 19, closed down 2.6% at 10,002.

Talk of a correction, or a drop of 10%, is also heating up, with the broad market now down 7.6% since its January high. It’s one thing to talk about a correction, but when it happens, investors start to have visions of March ’09.

The latest worry surrounds a familiar concern: debt. This time it’s not ballooning debt at the corporate level, such as banks, that has investors worrying about defaults; it’s ballooning deficits facing countries such as Greece, Portugal and Spain.

The ability of bad news to “overshadow” good news and rattle investors is “more about the psyche of the investor than the outlook for the economy.

January Effect in 2010 Stock Market

So what is all of this talk of the January Effect?  By Wikipedia’s definition it is “a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.”

Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.

This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient.

The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008.

So how much impact has already been felt in January 2010?

Further theoretical explanation of the January effect, and it’s corollary small-cap outperformance observation, is that retail investors who are tax sensitive choose to take capital losses during the month of December, and then after the 30 day wash rule waiting period buy the stocks back in January. Further interpretation suggests that the selling pressure on small stocks from tax selling creates buying opportunities in these “sold off” stocks that is taken advantage of in January. In any event, over the last 85 years most years do record a first half January outperformance of small cap stocks.

This year there have been no losses that people either have or want to take in December. Most taxable investors took losses last December. This year only those that have held stocks through the market cycle still have losses to take. Those long term investor are most likely heartened by the performance of their stocks since March and therefore probably will not sell them to take significantly smaller losses than they had on paper a year ago. People who bought stocks during 2009 , in general, have few losses to take.

There are, however, lots of investors who have short term gains. This is the group that is torn. They fear a correction, but their greed is not fully fulfilled yet. The first wave of these trader/investors will have long term capital gains in April and May. They may want to wait until then to sell. However, if they see a big correction start they may want to sell early next year to lock in profits that they won’t pay tax on until April of 2011.

The real question is whether buyers and sellers in aggregate foresee enough economic challenges coming to warrant selling early next year. Will this group start a correction early in 2010, or will the continued march of a self-sustaining economic recovery keep them locked into stocks as they recognize that we are still very early in a new market cycle.

We still are dedicated to three steadfast rules of rebuilding your net-worth that we have now been chanting for six months. We believe that those that follow these rules will look back in five years with great satisfaction at their decisions.

1.) Don’t sell into corrections, buy more when they happen.

2.) Start investing in stocks in international stock markets.

3.) Keep bond maturities short.

Retail report: holiday stress or success

With Christmas just days away, consumers must be flooding malls and stores nation-wide to fill the underneath of their trees. But, the media reports lackluster sales and empty parking lots, which I recall hearing for the last, oh, ten years! Are the large retailers struggling? Or is this a strategic media ploy to motivate shoppers to start buying to aid the economy? Lets take a look in this month’s retail report.

Lets start with the large, upscale department store, Nordstrom. I can’t remember a December where I didn’t have to fight for a parking spot or park across the street from it at a business park. Nordstrom offers clothing, jewelry, fragrance, and food, which all should be in high demand this time of year. Has the recession taken a bite out of their sales or stock price as the Nordstrom stock news would have you believe? Doesn’t appear to have, not when you look at 2009 Q4 sales and corollary stock price for Nordstrom, Inc. Total sales for Nordstrom, Inc. rose 5.9 percent to $749 million for the four-week early Christmas/Black Friday period ending November 30, 2009 from $707 million a year ago. Its stock price has also increased from $33.45 on Nov. 30 to Dec. 14th price of $35.95.

Now lets look at Target stock news. Another retail establishment busting at the seams with potential flu carriers…I mean, consumers. Target has a more broad selling focus, offering clothing, electronics, toys, household, office supplies, and groceries. If their checkout lines are any indication, Target will also dispel the media’s claims of a “ghost town” shopping season. Target’s stock price rose from $46.56 to $47.66 from Nov. 30 to Dec. 14. Its net retail sales for the early Christmas/Black Friday period from Nov. 1-28, 2009 were $5,689 million, an increase of 1.5 percent from $5,605 million for the same period in 2008.

Before we take a look at our last outlet in this retail report, there is another issue that I want to discuss. If we’re in a ression then how is there a “holiday hot toy”! It’s almost impossible to find a Zhu Zhu Pet at the store. From Nov. 1-30, over 206,000 Zhu Zhu Pets transactions have taken place on ebay. Shouldn’t parents be buying bread and socks for their kids insted of motorized hamsters? The market is a contradiction. Its not just pockets of retail success. Look at this eBay chart indicacating where Zhu Zhu Pets have been sold. It looks like a nation-wide outbreak of (spending, that is) rather than a recession.

Venture into the online shopping arena with the recent powerhouse Amazon.com news and you will see no other cyber-retailer compares with Amazon. They offer books, electronics, home & garden, tools, grocery, digital downloads, you name it. Have the attractive prices and ease of shopping from your office chair or couch enticed consumers in this economy? From the same range as the other retailers, Nov. 30 to Dec. 14, Amazon’s stock price (AMZN)  has dipped from $135.91 to $131.38. Interesting. However, if you move back the starting date to Oct. 22, which could mark the time people embarked on their early Christmas shopping, the price was $93.45. Four days later it shot up to $124.64 and has stabilized in the $120-$144 range since. Into Q4, Revenue was up 28% from last year to $5.45 billion. Amazon.com Consumer Electronics VP Paul Ryder reported that sales are up in December and have been getting busier and busier as Christmas grows closer. So, it looks like Amazon is beating the slow consumer spending rap as well.

So, don’t believe what you hear on the news. Based on this retail report of three of the retail leaders in their segments, there is no consumer spending crisis. Spending this Christmas season has not only matched last year’s numbers, it has eclipsed them. Stocks are up, revenue is up, and no-one can find Zhu Zhu Pets. Good luck, shop well, and have a great Christmas.

Economic Growth Projected to Continue

The U.S. Economy will continue to grow in 2010 and this expected strength will help ensure the dollar stays firm, Federal Reserve Chairman Ben Bernanke said Monday.

In a rare move, the Fed chief made several remarks on the U.S. dollar, which has fallen in value recently as global economic activity has picked up and investors no longer seek the safety of dollar assets.

Mr. Bernanke said the central bank will keep a close eye on the dollar’s slide but reiterated that the key federal funds target rate is expected to remain at record lows for some time. More from Bernake’s luncheon speech on US Economy today:

“Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers’ forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery.

“We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.

How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup–including a reduced pace of inventory liquidation and limited-time policies such as the “cash for clunkers” program–are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds–in particular, constrained bank lending and a weak job market–likely will prevent the expansion from being as robust as we would hope. I’ll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.

Bank Lending and Credit Availability.  Several factors help explain the reluctance of banks to lend, despite general improvement in financial conditions and increases in bank stock prices and earnings. First, bank funding markets were badly impaired for a time, and some banks have accordingly decided (or have been urged by regulators) to hold larger buffers of liquid assets than before. Second, with loan losses still high and difficult to predict in the current environment, and with further uncertainty attending how regulatory capital standards may change, banks are being especially conservative in taking on more risk. Third, many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

More of Bernanke’s speech found at Reuters.com Bernanke’s  Economic Speech

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