Bailout, Indeed: Dow Up 404

By DONNA KARDOS YESALAVICH And KRISTINA PETERSON
Reuters

Stocks posted their biggest one-day gain in more than a year, boosted by the bailout package to stem Europe’s credit crisis.

The Dow Jones Industrial Average jumped 404.71 points, or 3.9%, to 10785.14, helped by gains in all 30 of its components. The average had its biggest one-day gain in both point and percentage terms since March 23, 2009.

The Standard & Poor’s 500-stock index rose 4.4% to 1159.73, led by its financial and consumer-discretionary sectors, up more than 5% each. All the broad measure’s other indexes posted gains as well.

The jump in U.S. stocks followed rallies in the Asian and European markets after the European Union agreed to a €750 billion ($954.83 billion) bailout, including €440 billion of loans from euro-zone governments., €60 billion from a European Union emergency fund and €250 billion from the International Monetary Fund.

In further coordinated efforts to assuage spooked markets, the European Central Bank will go into the secondary market to buy euro-zone national bonds—a step last week that its president, Jean-Claude Trichet, said the central bank didn’t even contemplate. Meanwhile, the Federal Reserve, working with other central banks, re-activated swap lines so foreign institutions can get access to loans.

“This bailout plan really avoided the worst-case scenario—it avoided contagion and the domino effect,” said Cort Gwon, director of trading strategies of FBN Securities. The package also shifts investors’ attention back to the U.S., where most economic yardsticks have been improving lately, he noted.

The Nasdaq Composite jumped 109.03 points, its first triple-digit point gain since October 2008. It closed at 2374.67, up 4.8%.

Trading volume was higher than the 2010 daily average, though below the frenzied pace of the previous two days, which included an unprecedented “flash crash” and traders’ scramble to square their books after certain trades were canceled. On Monday, composite New York Stock Exchange volume hit 7.1 billion shares, below last week’s peak near 11 billion.

U.S.-listed shares of European banks surged in reaction to the European Union’s bailout plan.

Gold hits record near $1,150/oz as dollar slips

Wed Nov 18, 2009 5:13am EST

By Jan Harvey

LONDON (Reuters) – Gold hit a fresh record high near $1,150 an ounce on Wednesday, boosting precious metals across the board, as a dip in the dollar index added to momentum buying as prices broke through key technical resistance levels.

In non-U.S. dollar terms, gold also climbed, hitting multi-month highs when priced in the euro, sterling and the Australian dollar.

Spot gold hit a high of $1,147.45 and was at $1,146.05 an ounce at 0948 GMT, against $1,141.50 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,148.10 and were later up $7.10 at $1,146.40 an ounce.

“Yesterday the market took a breather and tested below $1,130 very quickly, (but) a few physical related bargain hunters were lined up to grab the dip,” said Afshin Nabavi, head of trading at MKS Finance in Geneva.

The market is being underpinned by fresh interest in gold from the official sector, he said, after a recent major bullion acquisition from India and smaller buys by the central banks of Mauritius and Sri Lanka.

The acquisitions underlined gold’s appeal as a portfolio diversifier, especially in an environment where further dollar weakness was expected, analysts said.

The dollar eased back on Wednesday from its biggest rise in three weeks in the previous session, as traders awaited U.S. inflation data due at 1330 GMT.

The dollar index, which measures the U.S. currency’s performance against a basket of six others, was down 0.37 percent, while the euro/dollar exchange rate firmed.

Other commodities also climbed, with oil rising back toward $80 a barrel and copper to 13-1/3 month highs near $7,000 a tonne. Both are being lifted by the weak dollar.

Greenlight’s Einhorn holds gold, says U.S. policies poor

Mon Oct 19, 2009 2:25pm EDT

By Jennifer Ablan and Joseph A. Giannone

NEW YORK (Reuters) – Hedge-fund manager David Einhorn, who warned about Lehman Brothers’ (LEH) precarious finances before it collapsed, said on Monday he’s betting on rising interest rates and holding gold as a hedge for what he described as unsound U.S. policies.

“If monetary and fiscal policies go awry” investors should buy physical gold and gold stocks, Einhorn said at the fifth Annual Value Investing Congress in New York. “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”

Einhorn is president of Greenlight Capital, with more than $5 billion in assets under management.

“Over the last couple of years, we have adopted a policy of private profits and socialized risks — you are transferring many private obligations onto the national ledger,” he said.

Einhorn said, “Although our leaders ought to be making some serious choices, they appear too trapped in the short term and special interests to make them.”

According to a joint analysis by the Center on Budget and Policy Priorities, the Committee for Economic Development and the Concord Coalition, the projected U.S. budget deficit between 2004 and 2013 could grow from $1.4 trillion to $5 trillion.

Last week when Federal Reserve Chairman Ben Bernanke, U.S. Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers spoke in interviews and on panel discussions, Einhorn said, “my instinct was to want to short the dollar but then I looked at other major currencies — euro, yen and British pound — and they might be worse.”

Einhorn added, “Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield.”

(Reporting by Jennifer Ablan and Joseph A. Giannone; Editing by Kenneth Barry)

Dow closes above 10,000 for 1st time in a year

DJ comeback: Stock market’s best-known barometer closes above 10,000 for 1st time in a year

By Sara Lepro and Tim Paradis, AP Business Writers
5:08 pm EDT, Wednesday October 14, 2009

NEW YORK (AP) — When the Dow Jones industrial average first passed 10,000, traders tossed commemorative caps and uncorked champagne. This time around, the feeling was more like relief.

The best-known barometer of the stock market entered five-figure territory again Wednesday, the most visible sign yet that investors believe the economy is clawing its way back from the worst downturn since the Depression.

The milestone caps a stunning 53 percent comeback for the Dow since early March, when stocks were at their lowest levels in more than a decade.

“It’s almost like an announcement that the bear market is over,” said Arthur Hogan, chief market analyst at Jefferies & Co. (JEF) in Boston. “That is an eye-opener — ‘Hey, you know what, things must be getting better because the Dow is over 10,000.'”

Cheers went up briefly when the Dow eclipsed the milestone in the early afternoon, during a daylong rally driven by encouraging earnings reports from Intel Corp. and JPMorgan Chase & Co. (JPM) The average closed at 10,015.86, up 144.80 points.

It was the first time the Dow had touched 10,000 since October 2008, that time on the way down.

“I think there were times when we were in the deep part of the trough there back in the springtime when it felt like we’d never get back to this level,” said Bernie McSherry, senior vice president of strategic initiatives at Cuttone & Co.

Ethan Harris, head of North America economics at Bank of America Merrill Lynch (BAC), described it as a “relief rally that the world is not coming to an end.”

The mood was far from the euphoria of March 1999, when the Dow surpassed 10,000 for the first time. The Internet then was driving extraordinary gains in productivity, and serious people debated whether there was such a thing as a boom without end.

“If this is a bubble,” The Wall Street Journal marveled on its front page, “it sure is hard to pop.”

It did pop, of course. And then came the lost decade.

Freddie Mac: 30-yr mortgage average still falling

SAN FRANCISCO (MarketWatch) — Freddie Mac (FRE) said Thursday that the 30-year fixed-rate mortgage average declined further to 4.87% with an average 0.7 point for the week ending Oct. 8 from 4.94% last week. The last time the average was this low was May 21, when the average was 4.82%. The average was 5.94% a year ago. “Such low rates are spurring mortgage demand,” said Frank Nothaft, Freddie Mac chief economist, in a statement. “Mortgage applications surged to a 19-week high over the week ending on October 2nd, according to the Mortgage Bankers Association. Moreover, applications for home purchases were at the strongest pace since the beginning of this year.”

Where’s the next boom? Maybe in `cleantech’

Energy breakthroughs could be the next big thing, but how many jobs can they generate?

By Jordan Robertson, AP Technology Writer
9:33 pm EDT, Tuesday October 6, 2009

SAN FRANCISCO (AP) — Our economy sure could use the Next Big Thing. Something on the scale of railroads, automobiles or the Internet — the kind of breakthrough that emerges every so often and builds industries, generates jobs and mints fortunes.

Silicon Valley investors are pointing to something called cleantech — alternative energy, more efficient power distribution and new ways to store electricity, all with minimal impact to the environment — as a candidate for the next boom.

And while no two booms are exactly alike, some hallmarks are already showing up.

Despite last fall’s financial meltdown, public and private investments are pouring in, fueling startups and reinvigorating established companies. The political and social climates are favorable. If it takes off, cleantech could seep into every part of the economy and our lives.

Some of the biggest booms first blossomed during recessions. The telephone and phonograph were developed during the depression of the 1870s. The integrated circuit, a milestone in electronics, was invented in the recessionary year of 1958. Personal computers went mainstream, spawning a huge industry, in the slumping early 1980s.

A year into the Great Recession, innovation isn’t slowing. This time, it’s better batteries, more efficient solar cells, smarter appliances and electric cars, not to mention all the infrastructure needed to support the new ways energy will be generated and the new ways we’ll be using it.

Yet for all the benefits that might be spawned by cleantech breakthroughs, no one knows how many jobs might be created — or how many old jobs might be cannibalized. It also remains to be seen whether Americans will clamor for any of its products.

Still, big bets are being placed. The Obama administration is pledging to invest $150 billion over the next decade on energy technology and says that could create 5 million jobs. This recession has wiped out 7.2 million.

And cleantech is on track to be the dominant force in venture capital investments over the next few years, supplanting biotechnology and software. Venture capitalists have poured $8.7 billion into energy-related startups in the U.S. since 2006.

That pales in comparison with the dot-com boom, when venture cash sometimes topped $10 billion in a single quarter. But the momentum surrounding clean energy is reminiscent of the Internet’s early days. Among the similarities: Although big projects are still dominated by large companies, the scale of the challenges requires innovation by smaller firms that hope to be tomorrow’s giants.

Wall Street’s Math Wizards Forgot a Few Variables

by Steve Lohr
Monday, September 14, 2009
The New York Times

In the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

Investors trading 3 stocks that may be doomed

Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero

Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT

WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.

“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.

“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

CFTC moves to rein in small ETF investors: report

Sat Aug 22, 2009 12:18pm EDT

CHICAGO (Reuters) – Exchange-traded funds or ETFs have become a top target in U.S. regulators’ efforts to rein in excessive speculation in oil and other commodity markets, The Wall Street Journal reported on Saturday.

Commodity ETFs, which came into existence in 2003, offer one of the few avenues for small investors to gain direct exposure to commodity markets. The funds pool money from investors to make one-way bets, usually on rising prices.

Some say this causes excessive buying that artificially inflates prices for oil, natural gas and gold.

Commodity ETFs have ballooned to hold $59.3 billion in assets as of July, according to the National Stock Exchange, which tracks ETF data.

The Commodity Futures Trading Commission has said it seeks to protect end users of commodities, and that cutting out individual investors is not the goal.

“The Commission has never said, ‘You aren’t tall enough to ride,'” CFTC Commissioner Bart Chilton was quoted as saying in the WSJ article. “I don’t want to limit liquidity, but above all else, I want to ensure that prices for consumers are fair and that there is no manipulation — intentional or otherwise.”

Limiting the size of ETFs will result in higher costs for investors, the WSJ reported, because legal and operational costs have to be spread out over a fewer number of shares. Investors range from individuals to banks and hedge funds with multimillion-dollar positions.

The CFTC is currently considering a host of measures to curb excessive speculation, including position limits in U.S. futures markets. Many U.S. lawmakers called for greater regulation of some commodity markets after a price surge last year sent crude oil to a record high of $147 a barrel in July 2008.

(Reporting by Matthew Lewis; Editing by Toni Reinhold)

In sign of strength, S&P 500 breaks past 1,000 as Wall Street rally blows into August

By Sara Lepro and Tim Paradis, AP Business Writers
Monday August 3, 2009, 6:02 pm EDT

NEW YORK (AP) — The Standard & Poor’s 500 index (SPX) is four digits again now that the stock market’s rally has blown into August.

The widely followed stock market measure broke above 1,000 on Monday for the first time in nine months as reports on manufacturing, construction and banking sent investors more signals that the economy is gathering strength. The S&P is used as a benchmark by professional investors, and it’s also the foundation for mutual funds in many individual 401(k) accounts.

Wall Street’s big indexes all rose more than 1 percent, including the Dow Jones industrial average (INDU), which climbed 115 points.

The market extended its summer rally on the type of news that might have seemed unthinkable when stocks cratered to 12-year lows in early March. A trade group predicted U.S. manufacturing activity will grow next month, the government said construction spending rose in June and Ford Motor Co. (F) said its sales rose last month for the first time in nearly two years.

“The market is beginning to smell economic recovery,” said Howard Ward, portfolio manager of GAMCO Growth Fund. “It may be too early to declare victory, but we are well on our way.”

The day’s reports were the latest indications that the recession that began in December 2007 could be retreating. Better corporate earnings reports and economic data propelled the Dow Jones industrial average 725 points in July to its best month in nearly seven years and restarted spring rally that had stalled in June.

On Monday, a report from the Institute for Supply Management, a trade group of purchasing executives, signaled U.S. manufacturing activity should increase next month for the first time since January 2008 as industrial companies restock shelves. Also, the Commerce Department said construction spending rose rather than fell in June as analysts had expected. The reports and rising commodity prices lifted energy and material stocks.

Ford said sales of light vehicles rose 1.6 percent in July. Other major automakers said they saw signs of stability in sales. Investors predicted that the government’s popular cash for clunkers program would boost overall auto sales to their highest level of the year.

A Few ETF/ETN Picks – One Year Later

Here is an update on our ETF/ETN picks that are one year old today.

Not your normal 12 months by any stretch.

Staying disciplined and taking what the market gives leaves us well ahead of the market in even the worst of times.

ETF/ETN picks after 1 year

Investors dump brokers to go it alone online

Fri Jul 24, 2009 12:31pm EDT

By Rachel Chang

NEW YORK, July 24 (Reuters) – The collapse of Lehman Brothers (LEH) last September marked the start of a downward spiral for big investment banks. For a smaller fraternity of Internet brokerages, it has set off a dramatic spurt of growth.

Since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding Corp (AMTD) and Charles Schwab Corp (SCHW), company records show.

By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup Inc’s Smith Barney (C) and Bank of America-Merrill Lynch (BAC).

Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.

And while figures for 2009 are not yet available, the flow of investors in the past 10 months has clearly been in the direction of the online brokerages, according to analysts both at Gartner and research consultancy Celent.

Joining the exodus is Ben Mallah, who says he lost $3 million in a Smith Barney account in St. Petersburg, Florida, as the markets crashed last year.

“I will never again trust anyone who is commission-driven to manage my portfolio,” said Mallah. “If they’re not making money off you, they have no use for you.”

This trend, a product of both the financial crisis and the emergence of a new generation of tech-savvy, cost-conscious young investors, is positioning online outfits as increasingly important in the wealth management field.

The numbers reflect a loss of faith in professional money managers as small investors dress their wounds from the hammering they took over the last year, the Internet brokerages say.

“There has been an awakening,” said Don Montanaro, chief executive of TradeKing, which reported a post-Lehman spike in new accounts of 121 percent. Investors now realize they alone are responsible for their money, he said.

Breakout or Fakeout?

The S&P 500 celebrated its great technical accomplishment highlighted in our last note by doing exactly nothing. Maintaining a tight 32 point range from top to bottom, the S&P 500 netted just over 3 points from our previous note to the closing price last Friday, June 12. This week has changed the tune, giving up more than 34 points in just two days. Surrendering initial support in the 925-930 area designated by the May highs, the SPX is once again bearing down on the 200 day moving average, this time from above.  Additional support of the 50 day moving average is also moving into the area, just 15.5 points below the 200 day as of today, and rising.  The lows from May, which are also the highs from April and February, mark another major support level in the 875-880 range.

Both the MACD and the daily 13/34 exponential moving average indicator have signaled a negative divergence by not confirming the new highs in the price of the average.  With the January highs holding as resistance, the head and shoulders bottom we discussed in Still overbought, but over first resistance also is still in play.  As we noted, “…finishing the inverse head and shoulders bottom should happen somewhere around the end of June time wise to produce a symmetrical pattern. At this point, it looks like the January highs need to hold as resistance to keep the inverse head and shoulders pattern in play. This is also the approximate level of the 200 day moving average currently and the 200 day stopped the SPX multiple times from 2001-2002, plus twice early in 2003. The first test early in 2003 led to the formation of the right shoulder in the bottoming pattern and the second test required a test of the 50 day moving average as support before breaking out and leaving the 200 day well behind.”  With the 50 and 200 day moving averages relatively close together this time, plus the support of the recent lows/previous highs around 875-880, this market has plenty of candidates for a right shoulder not far from current prices.  A convincing move back below 875 would signal a deeper correction with targets as low as 741 still completely valid.

Which brings us to the market leading NASDAQ Composite.  Since our last note highlighting the breakout by the COMP, a brief rally has fizzled out with the last two trading days completely erasing the gains and setting up a quick test of the breakout point as support.  The rally stopped short of filling the gap opened on the way down in early October 2008, but did manage to bring the 50 and 200 day moving averages into a bullish golden cross.  Plenty of support exists for this market, but it doesn’t come into play until 60-120 points below the breakout point at 1785 if the breakout fails to hold.  Targets as low as 1500 do not invalidate the uptrend if the SPX makes a run toward the 2002 lows or even 741.  The MACD is also showing a negative divergence here by not confirming the new high in price and the ROC shows a failure to build momentum on the breakout.

We are again returning to our short positions, including SH, after precautionary stop outs proved unnecessary and untimely.  Our position in SH specifically was re-entered exactly at the stop out price (see Security Growth for details).

How Do I Know You’re Not Bernie Madoff?

by Paul Sullivan
The New York Times
Monday, June 15, 2009

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

U.S. clears 10 big banks to repay bailout funds

Tue Jun 9, 2009 6:09pm EDT
By Glenn Somerville

WASHINGTON (Reuters) – JPMorgan (JPM), Goldman Sachs (GS) and eight other top U.S. banks won clearance on Tuesday to repay $68 billion in taxpayer money given to them during the credit crisis, a step that may help them escape government curbs on executive pay.

Many banks had chafed at restrictions on pay that accompanied the capital injections. The U.S. Treasury Department’s announcement that some will be permitted to repay funds from the Troubled Asset Relief Program, or TARP, begins to separate the stronger banks from weaker ones as the financial sector heals.

Treasury didn’t name the banks, but all quickly stepped forward to say they were cleared to return money the government had pumped into them to try to ensure the banking system was well capitalized

Stock prices gained initially after the Treasury announcement but later shed most of the gains on concern the money could be better used for lending to boost the economy rather than paying it back to Treasury.

“If they were more concerned about the public, they would keep the cash and start loaning out money,” said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago.

Treasury Secretary Timothy Geithner told reporters the repayments were an encouraging sign of financial repair but said the United States and other key Group of Eight economies had to stay focused on instituting measures to boost recovery.

MUST KEEP LENDING

Earlier this year U.S. regulators put the 19 largest U.S. banks through “stress tests” to determine how much capital they might need to withstand a worsening recession. Ten of those banks were told to raise more capital, and regulators waited for their plans to do so before approving any bailout repayments.

As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.

American Express Co (AXP), Bank of New York Mellon Corp (BK), BB&T Corp (BBT), Capital One Financial Corp (COF), Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley (MS), Northern Trust Corp (NTRS), State Street Corp (STT) and U.S. Bancorp (USB) all said they had won approval to repay the bailout funds.

In contrast, neither Bank of America Corp (BAC) or Citigroup Inc (C), which each took $45 billion from the government, received a green light to pay back bailout money.

U.S. distressed debt best performer in 2009: report

Tuesday June 2, 2009, 1:19 pm EDT

NEW YORK (Reuters) – U.S. distressed debt, among the hardest hit asset classes last year, has become the best, with returns of 39.5 percent year to date as risk appetite improves, Bank of America Merrill Lynch said.

For the month of May, distressed debt was second only to emerging market equities after returning 25.4 percent, Bank of America Merrill said in a research note late on Monday.

Distressed issuers are those whose bond spreads trade at or above 1,000 basis points over comparable Treasuries.

Distressed issuers drove 95 percent of the strong performance of the U S. high-yield corporate bond market in May as a resurgence of new debt sales improved sentiment, the report said.

“Some deeply distressed issuers were able to access new issue markets and enjoyed significant improvements in pricing of their existing bonds as a result,” said Oleg Melentyev, lead author of the report.

Companies including Ford Motor Co’s (F) finance arm, Harrah’s Entertainment and MGM Mirage (MGM) sold more than $23 billion in junk bonds in May, the most since the credit crisis started in mid-2007, according to Thomson Reuters data.

The high-yield cash market outperformed high-yield derivatives by 2 percentage points in May, the report said. The main index of high-yield credit default swaps returned 5.1 percent while Merrill Lynch’s high-yield Master II index returned 7.1 percent.

The junk bond market has retraced all of the losses it sustained in the financial meltdown late last year, Melentyev said.

(Reporting by Tom Ryan; Additional reporting by Dena Aubin; Editing by James Dalgleish)

The S&P 500 closes above the 200 day moving average

The NASDAQ leads the market higher; leaves the 200 day behind

The S&P 500 accomplished something today, trading above the 200 day simple moving average for the first time in over a year. It was last call in May of 2008 at the 200 day for the SPX before dropping over 50% to the lows of this past March (the SPX hasn’t actually closed above this trend line since late 2007). Today also marks a new high for 2009, some 42% above those March lows in less than three months! Year-to-date the SPX has gained just over 4%.

The NASDAQ is the real star leading the markets higher and breaking free from the recent consolidation range. The NASDAQ is also some 8% above its 200 day simple moving average and almost 10% above the early January highs. Sitting on a year-to-date gain of 16% and almost 45% above the March lows, large cap techs are showing investors’ renewed interest in risk.

At this point, we are exiting the position in SH with a small loss on this renewed strength (see Security Growth for details).

Still overbought, but over first resistance also

Another update finds the market shaking off initial profit taking to challenge the highs for the year. Monday’s big push finally left the late January, early February highs behind for the S&P 500 (SPX) after about two weeks of backing and filling to make room for the exit of early profit takers. Volume for this stage of the rally has not been impressive, declining since the large profit taking day in the third week of April. What is impressive, is new buyers have stepped up to continue to push prices higher. Fear of “missing the bottom” is setting in and chasing the rally at this point remains dangerous.

The NASDAQ has been leading the charge, already surpassing the highs for the year to challenge the early November 2008 highs and the 200 day simple moving average. Up more than 39% in less than two months is a remarkable move and building on that through the seasonally weak summer session is going to be difficult. Up days are beating down days by more than 2 to 1 since the bottom, but the pace of gains is decelerating. Volume has remained relatively solid and this change in market leadership posture is notable. Investors have clearly decided to favor more aggressive stocks in this recovery, with the small and mid caps also showing relative strength.

It’s time to break out a chart we were saving for later, as the comparison may be valid already. This is a chart of the bottom formed in the SPX during 2002-2003, after the tech bust. While the bottom itself formed an inverse head and shoulders pattern (which we expect this time also), the recovery from the right shoulder is what really interests us here. Since the drop was not as violent and much more time was worked off with the head and shoulders bottom, the moving averages were not as far above the low prices and were overtaken sooner as a result. But look at the trend that steadily moved up from March to June, before flattening out for the summer, then racing higher again into 2004. It was less than a 30% gain for the first leg up in 2003 from the March low; it’s already 36% for the SPX from the bottom in March this year. While the low was much lower this time, the highs and resistance levels from both years are almost identical. In 2003, the SPX overtook the early January highs around 930 in early May. After a quick, steep drop below 920 to test the breakout, it was off to the races for another straight month, rising over 10% before the June highs. Then it was one test of the inverse head and shoulders neckline in early August at 960 before moving over 1150 by early 2004. This year, the early January highs are in the area of 944 and the SPX is again challenging them in early May. A breakout here followed by a retest of the 920 level could again produce a similar result. The only problem is finishing the inverse head and shoulders bottom, which should happen somewhere around the end of June time wise to produce a symmetrical pattern. At this point, it looks like the January highs need to hold as resistance to keep the inverse head and shoulders pattern in play. This is also the approximate level of the 200 day moving average currently and the 200 day stopped the SPX multiple times from 2001-2002, plus twice early in 2003. The first test early in 2003 led to the formation of the right shoulder in the bottoming pattern and the second test required a test of the 50 day moving average as support before breaking out and leaving the 200 day well behind. Either of those would be a welcomed event for this market to burn off some overbought conditions and excess euphoria. With the VIX at the lowest levels in seven months, purchasing some protection via puts is probably a good idea. We continue to hold and look to add to our position in the ProShares Short S&P 500 ETF (SH) which is about 5% under water now from our first entry. Select longs continue to beat the market averages by a wide margin.

Bonds’ 30-Year Hot Streak Begins to Cool

by Brett Arends
Monday, May 4, 2009
WSJ.com

Bonds for the long run, anyone?

In the latest issue of the Journal of Indexes, investment manager Rob Arnott, chairman of Research Affiliates (read article here) says that long-term bonds have beaten stocks for decades.

“Starting any time we choose from 1979 through 2008,” Mr Arnott writes, “the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor.” He argues the figures are even true going back to the late 1960s.

Mr. Arnott’s article has generated quite a stir in the investment world, where he has, in theory, turned a lot of received wisdom on its head.

But American mutual fund investors, responding to last year’s turmoil, are already voting this way with their wallets. So far this year they’ve withdrawn $45 billion from mutual funds that invest in the stock market, and put $68 billion into bond funds, reports the Investment Company Institute.

Should you follow suit? Not so fast.

Obviously bonds, especially Treasurys, held up well during last year’s crisis. And they can make an important part of a portfolio, especially at the right price. But anyone hoping for a repeat of the last thirty years is probably dreaming.

Treasurys don’t look appealing. Short term bonds yield a miserable 1.9%. And long-term bonds, far from offering “security,” are actually at serious risk from rising inflation.

The past is the past. Those who bought long-term Treasury bonds in the late 1970s and early 1980s simply pocketed an enormous one-off windfall when inflation collapsed. It neared 15% in 1980. Latest figure: -0.4%.

Consider what that means for investors.

In 1979, 20-year Treasurys yielded 9.3%. So over its life the bond paid out $180 in interest for each $100 invested. At one point in 1981, 30-year Treasurys yielded an incredible 15%, thanks to runaway inflation in the 1970s. Investors demanded high interest rates to offset the expected loss of purchasing power on their money.

But when inflation collapsed after 1982, those coupon payments turned golden because the purchasing power stayed high. Bond prices soared in response.

Today, bond investors get no such deal. Ten-year Treasurys pay just 3%. And the 30-year 3.96%.

Overbought and moving into resistance

An update on the SPX chart today to show the market finding resistance near previous highs. We are adding a new indicator to the top of the chart, the MACD. The negative divergence in the MACD histogram reinforces the strength of this resistance as the market advance begins to stall. Finally, we have a short term reversal pattern showing in the candlesticks as an Evening Doji Star has formed over the last 3 trading days. Taken together, it looks as if profit taking may have already started.

The NASDAQ chart shows similar resistance being met at the Jan highs with negative divergences in the MACD histogram and the Rate of Change indicator which is approaching the zero line.  Both of these confirm the loss of momentum as the market approaches resistance.

Exactly the opposite looks to be developing in the ProShares Short S&P 500 Fund ETF (SH) as positive divergences are present with the price firming near support.  Hedging long exposure here and/or taking profits looks like a good idea.  It’s still a bear market rally at this point.

Some positive developments

We have a lot to show, so we’ll keep each one short and sweet.

First, an update on the SPX battle with the 50 day. The bear trap looks to be pretty solid with assistance from the Feds. How much backing and filling needs done is still up for debate. We have added a new indicator to the bottom of the chart this time, the daily 13/34 exponential moving average indicator. We have it set on a favorite parameter of John Murphy at Stockcharts.com that we have referenced previously in Is it really 2001 again? Look for further reference in the charts below.  This indicator on the daily chart is more of a leading indicator (subject to some whipsaw) and becomes more valuable when combined with the medium and long period charts.  The daily indicator has turned positive (above zero) and has held positive ground for the first time since early in the year.  This is the most positive showing for this indicator since April/May of 2008.

Here is a weekly shot of the same indicator.  Even with this indicator still deeply in negative territory (below zero) a clear positive trend change is visible.  This is confirmed by the SPX moving above the 13 week exponential moving average, which drags the indicator higher.  These are also the first positive developments in this indicator since April/May of 2008.

Finally we have the monthly chart featuring the indicators referenced previously (MACD, RSI, ROC) plus an overlay of the 20 month Bollinger Bands set to two standard deviations.  This shows all of these indicators to have been severely stretched, yet showing signs of recovery.  The MACD histogram is now climbing for two months in a row and the RSI is closing in on 30, which marks the top of oversold territory.  The ROC has at least ceased its vertical drop and the Bollinger Bands are finally well below the current price as opposed to being violently penetrated to the downside.  This at least shows stabilization, with potential being revealed by the shorter periods.

The bears aren’t dead and buried yet

The SPX only stayed above the 50 day simple moving average this time for 5 days.  At the turn of the year, it at least managed 7.  The 2002 lows are crucial support to test the will of new buyers.  If they fail to hold, the 741 level will serve as the canary to warn of a possible complete retest of the March lows.

So far, we have only another headfake to the upside created by jawboning from the Feds.  We still believe this is part of a bottoming process, but we need more honest buying (not short covering) to confirm the lows are already in.

The Fight Over Who Will Guard Your Nest Egg

By JASON ZWEIG
wsj.com

A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra’s rules, brokers must recommend only investments that are “suitable” for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of “fiduciary duty,” or the obligation to put their clients’ interests first.

Most investors don’t understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don’t. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.

Brokers can sell you any investment they have “reasonable grounds for believing” is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.

A key factor still is missing from Finra’s suitability requirements: cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is “suitable’ for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.

If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.

Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. “It’s time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers,” he told me. “Both should have a fundamental first responsibility to their customers.”

The Sky already fell?

The Commerce Department said sales of newly built U.S. homes rose 4.7 percent to a 337,000 annual pace, the fastest increase since last April, from 322,000 in January.

Despite the increase, February sales were the second lowest ever after the drop in January to the slowest pace in records going back to 1963, the department said. Economists, who had forecast another decline in sales, were still encouraged.

“This completes a trifecta of positive housing reports for February. A sustained increase in housing demand would be the best tonic for the credit crisis and a major sign that the worst of the recession is behind us,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

Sales of previously owned homes rose 5.1 percent in February, while housing starts soared 22.2 percent that month.

Stabilizing the housing market, the main trigger of the current economic slump, is crucial for the economy’s recovery.

The median sales price in February fell a record 18.1 percent to $200,900 from a year earlier, the department said.

The inventory of homes available for sale in February was at 330,000, the smallest since June 2002. The February sales pace left the supply of homes available for sale at 12.2 month’s worth.

“New and existing home sales have hit their lows for this cycle. We expect housing inventory-to-sales ratios to fall from still-high levels as 2009 unfolds,” said Michael Darda, chief Economist, MKM Partners in Greenwich, Connecticut.

“Home prices should begin to flatten out after inventories fall to 7-8 months, which we expect before the year is up.”

In other good news for the housing market and the economy, applications for home loans jumped last week as interest rates hit record lows after the Federal Reserve announced it would buy longer-term U.S. government debt.

The Feds use a backhoe for a gravedigger

“It’s déjà vu all over again.”
– Yogi Berra

In mid-December, after the Fed lowered rates to 0 to .25%, we noted:

Aggressive action by the Federal Reserve today pushed most markets above their respective simple 50 day moving averages for the first time since September.  We have highlighted the 50 day as resistance level number one in prior notes and have shown it to be critical resistance along with the 200 day and 80 week.  This is a primary step to recovery and opens the door to a potential challenge of the 200 day near the beginning of 2009.

That rally was short lived, eventually failing after a more sustained move above the 50 day near the beginning of the year.  What is interesting is that we may be seeing a similar sequence of events again.

After a brief dip below the 2002 lows, the SPX has rallied back significantly on the back of announcements from the Treasury and Federal Reserve.  The combination of these announcements (along with better economic reports) has again pushed most major market averages over their simple 50 day moving averages.  Unfortunately, volume has not expanded with this push, even though volume levels are higher than earlier in the year.

The market managed about 7 days above the 50 day in early January.  So far, we have 3 days on this trip.  To avoid a repeat of action earlier in the year, it is critical that the SPX remain above the 50 day and the 2002 lows.  The Feds can do all of the grandstanding and wagon circling they want, but the market will not be forced higher.  We need to see organic buying build on this foundation for the bears to truly remain buried below the 2002 lows.  Ideally, a high volume rally will spring from support at the 50 day to challenge the Feb highs in the area of 875.  If this occurs, the 50 day and 800 will serve as very solid support going forward as we move toward the Jan highs around 940.

If the market again fails after a quick Fed induced burst over the 50 day, we look at 741 as the first support level below the 2002 lows.  A significant break at 741 would argue for at least a retest of the lows at 667.  With other indicators showing improvement, including some leaders exhibiting notable relative strength, it is our assumption at this point that the lows at 667 will not be broken.