Archive for July, 2012

  • Morning News: July 18, 2012
    , July 18th, 2012 at 7:19 am

    BOE Voted 7-2 As MPC Signals Rate-Cut Case May Be Reviewed

    Spanish Borrowing Costs Drop as Economy Minister Warns on Debt

    Nordic Bank Earnings Hold Up in Face of Europe Debt Crisis

    Visa Europe Should Match MasterCard Fee Cut, EU’s Almunia Says

    Shares Gain, Euro Weak After Fed’s Mixed Signals

    The Last Years of America’s Historic GDP Reign

    Temporary Work Demand Rises As Companies Avoid Commitments

    Credit Suisse Raises Capital Reserves as Profit Increases

    Yahoo Data Shows Depth of Challenge Mayer Faces

    Intel Lowers Forecast as Developed Markets Fail to Rebound

    CEO Says HSBC Is Determined to Change

    ASML Forecasts Second-Half Sales Drop on Weaker Chip Demand

    Knight Capital 2nd-Quarter Net Down 81% on Lower Revenue, Facebook IPO Losses

    Credit Writedowns: The Unacceptable Behavior of the Market

    Roger Nusbaum: A Whole Lot of Nothing

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  • Bernanke Warns
    , July 17th, 2012 at 6:03 pm

    These are all from today.

    Ben Bernanke Warns Congress on ‘Taxmageddon’‎

    Bernanke Warns of Economic Downturn‎

    Bernanke warns Congress of slowdown, gives no sign of new Fed action

    Bernanke Warns Congress To Avoid The Fiscal Abyss‎

    Bernanke Warns of Economic Slowdown‎

    Bernanke warns of ‘fiscal cliff’ but leaves solution to Congress‎

    Bernanke Warns of Dire Risk From Fiscal-Cliff Inaction‎

    Bernanke warns against ‘fiscal cliff’ after Senate Dems embrace it‎

    Bernanke warns of ‘frustratingly slow’ job recovery

    Ben Bernanke Warns of Recession with the Coming Fiscal Cliff
    ‎

  • Death Cross Dead Ahead
    , July 17th, 2012 at 12:59 pm

    The S&P 500 is rapidly closing in on a “death cross.” This is when the 50-day moving average drops below the 200-day moving average. Historically, this has been a bad omen for stocks.

    I caution long-term investors not to take these signals too seriously, but I’ll note that many traders consider this to be very important.

  • Bernanke’s Testimony
    , July 17th, 2012 at 10:22 am

    Here’s Ben’s speech today:

    Chairman Johnson, Ranking Member Shelby, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy.

    The Economic Outlook

    The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2-1/2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter.

    Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent.

    Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers’ purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low.

    We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater–that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction.

    After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand–such as surveys of business conditions and capital spending plans–suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports.

    At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013. These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data. In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which–as I already noted–are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and–as I will discuss in more detail shortly–the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014.

    The Committee made comparatively small changes in June to its projections for inflation. Over the first three months of 2012, the price index for personal consumption expenditures (PCE) rose about 3-1/2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 1-1/2 percent over the first five months of this year, compared with a 2-1/2 percent rise over 2011 as a whole. The central tendency of the Committee’s projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014.

    Risks to the Outlook

    Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.

    Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of three-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain’s fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain’s troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe’s financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.

    The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.

    The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect–a scenario widely referred to as the fiscal cliff–a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013. These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.

    The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.

    Monetary Policy

    In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve’s balance sheet. By removing additional longer-term Treasury securities from the market, the Fed’s asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative.

    Economic growth is also being supported by the exceptionally low level of the target range for the federal funds rate of 0 to 1/4 percent and the Committee’s forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

    Thank you. I would be pleased to take your questions.

  • Industrial Production Rises 0.4% in June
    , July 17th, 2012 at 10:09 am

    I like to keep an eye on the monthly report on Industrial Production because it has a good record of aligning well with recessions and expansions (although it’s not a leading indicator). Check out how well the drops in the line match up with recessions (the gray area).

    There’s been some talk that the U.S. is either in or about to enter a recession. I prefer to let the data speak for itself. This morning’s industrial production report showed a seasonally adjusted increase of 0.4% for June.

    As a general rule, Industrial Production needs to fall by at least 6% for NBER (the official recession dating committee) declares a recession. The number for June is the highest number in four years.

    I still don’t see any conclusive evidence that the U.S. economy is currently in a recession.

  • CPI Unchanged Last Month
    , July 17th, 2012 at 9:54 am

    Some folks are convinced that we’re in an era of hyperinflation. The data, however, seems to disagree. The CPI for June showed no increase last month. The core rate, which excludes food and energy prices, rose by 0.2% for the fourth month in a row.

    We’ll learn more of Bernanke’s views later today when he testifies before Congress. But we do know that inflation is trending below the Fed’s target rate of 2%.

  • J&J Is Another Victim of the Dollar
    , July 17th, 2012 at 9:22 am

    Johnson & Johnson ($JNJ) reported adjusted second-quarter earnings of $1.30 per share this morning which was one penny better than expectations. Sales for the quarter fell by 0.7% to $16.48 billion which was $0.21 billion below Wall Street’s forecast.

    While J&J has introduced some promising new drugs recently, sales have been pressured by the loss of patent protection for older drugs, including attention deficit/hyperactivity disorder treatment Concerta.

    The health-care giant also recently completed its $19.7 billion acquisition of orthopedic products maker Synthes Inc., which it plans to integrate with its DePuy business. In the latest quarter, Synthes contributed 1.2 percentage points to global sales growth.

    The bad news is that Johnson & Johnson is getting squeezed by the strong dollar. The company lowered its full-year forecast today from $5.07 – $5.17 per share to $5.00 – $5.07 per share. In last week’s CWS Market Review I said I think the company has a shot of earnings $5.21 per share this year. I was clearly too optimistic.

    The silver lining is that the lower guidance isn’t due to problems with operations but rather due to the foreign exchange rate. I’m not as worried by that since foreign exchange issues come and go. If it’s a problem with the business itself, that’s something much more worrying.

    I still like Johnson & Johnson and the stock has performed well in the past month. Going by this morning’s price, the shares yield 3.6%.

  • Morning News: July 17, 2012
    , July 17th, 2012 at 7:12 am

    Spanish Borrowing Costs Drop as Economy Minister Warns on Debt

    Bank of England’s King Testifies To Parliament Committee

    ZEW Investor Confidence Declines to Lowest Since January

    Cuba Hits Walls in 2-Year Effort at Privatization

    Gold Climbs Towards $1,600/Oz Ahead Of Bernanke

    Oil Near Seven-Week High on Iran Tension, Fed Speculation

    Fed Shifts Focus to Jobs as Unemployment Stalls Above 8%

    U.S. Tightens Security for Economic Data

    U.S. Drought Worsens Crop Damage, Raising World Food, Fuel Worry

    A Yahoo Search Calls Up a Chief From Google

    Three Lessons From GlaxoSmithKline’s Purchase Of Human Genome Sciences

    Hokuriku Bank Linked To HSBC Money-Laundering Probe

    Visa Among U.S. Firms Seen Helped by WTO Ruling on China

    Mattel’s Profit Tops Estimates On Lower Costs

    Jeff Carter: The Fallacy of Government Spending

    Cullen Roche: Is The Wall Street Casino Closing?

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  • The Complete Interview
    , July 16th, 2012 at 12:38 pm

    Here’s the entire interview I did with Brian Richards of the Motley Fool.

  • 10-Year Yield Hits All-Time Low
    , July 16th, 2012 at 11:59 am

    The stock market dropped early on in today’s trading, but we regrouped and have made back everything we lost. Right now, the S&P 500 is holding on to a small gain.

    Both Johnson & Johnson ($JNJ) and Reynolds American ($RAI) got to new 52-week highs this morning. Tomorrow we’re going to receive earnings reports from JNJ and Stryker ($SYK). It will be interesting to hear what they have to say.

    The yield on the 10-year Treasury dropped to an all-time low today. The yield got to 1.442%.