Stock Market Faces Critical Test This Week
Stocks rose gently like heat waves off a radiator over the past week, as traders guessed, assessed and processed the results of the midterm elections and the Federal Reserve's decision to try to light a fire under the U.S. economy by buying a $75-billion pile of fresh, new Treasury bonds every 30 days for the next eight months.
The major indexes rose 3.5% amid a set of sessions when banks finally found footing, as they were the best performing group, up 1%. Laggards were industrials and utilities, ending flat. Breadth was positive, favoring advancers by 2-1. And the number of new highs swelled to 1,200 while new lows also rose, to 80.
Money Morning Mailbag: Tobin Tax a Healthy Solution to Wall Street Greed
Last week Money Morning Contributing Editor Martin Hutchinson presented an open letter to U.S. President Barack Obama and members of Congress regarding passage of a Tobin tax.
The simple solution of a Tobin tax handles three of the U.S. government's biggest challenges: It resolves the controversy over expiring Bush tax cuts, helps reduce the federal budget deficit, and offers more regulation over controversial Wall Street profits.
Hutchinson said a Tobin tax – a tax on financial transactions – is the one tax increase that would not damage the already fragile U.S. economy.
Seven Ways to Profit from the GOP's Pledge to Sustain Defense Spending
Investors typically hate it when a stock bombs, but there are also times when bombs can make for good investments – and right now could be one of them.
With the Republicans seizing control of the U.S. House of Representatives and making gains in the Senate in Tuesday's mid-term elections, it now seems far more likely that the GOP will be able to honor its pledge not to cut defense outlays as it seeks to rein in discretionary government spending.
For the near term, that means the proposed 2011 U.S. defense budget of $708 billion should get through Congress relatively unscathed. It's also likely there will be less pressure to cut military spending in the budget battles for upcoming years – and that could bode well for most of the major U.S. defense contractors.
What We Can Learn From The Stock Market Genius That Wall Street Loves to Ignore
Mathematician Benoit B. Mandelbrot, the inventor of fractal geometry, died Oct. 14.
As mathematicians go, Mandelbrot was very likely the best of the last half-century. And that brilliance extended to the financial markets. In fact, his groundbreaking insights into the operations of the stock market could have been used to avert the 2008 crash – had those insights only been heeded.
But Mandelbrot – for all his stock market genius – has been largely ignored by Wall Street.
As investors, let's not make the same mistake.
Investment Banking Earnings Highlight Wall Street’s New Vulnerabilities
The collapse of The Bear Stearns Cos. and Lehman Brothers Holdings Inc. (OTC: LEHMQ), the forced takeover of Merrill Lynch and the decisions by Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) to get commercial-banking licenses seemed to signal that the investment-banking business model was dead.
Since then, however, Goldman Sachs, in particular, has posted an astonishing run of profitability, earning gigantic sums even while the rest of the U.S. economy languished.
But now it may be time for those Wall Street heavyweights to pay the piper: Heavyweights Goldman Sachs and Morgan Stanley are posting their third-quarter results this week. U.S. investment banks are looking at their worst quarter since just after the Lehman collapse. And analysts are slashing revenue forecasts just as the top players in this closely watched and often-vilified sector are getting ready to announce bonuses.
Money Morning Mailbag: GOP Announces "Pledge to America" as Voters Question Obama's Economy
Republicans this week outlined their plan for reform in one-page summary entitled "A Pledge to America." Republicans today hope their pledge will do for them what the "Contract with America" did for Republicans in 1994 when the GOP gained 54 House seats and regained control of Congress for the first time in 40 years.
The proposal's goals include immediately canceling any unused funds from last year's $787 billion stimulus program, permanently extending the Bush tax cuts, repealing the new healthcare law, cutting $100 billion in discretionary spending, and freezing the size of the "nonsecurity" federal work force. It also calls to end government control of Fannie Mae and Freddie Mac.
The plan comes at a time when many Americans are questioning the economic policies put forth by the Obama administration. With the unemployment rate stuck near 10%, President Obama two weeks ago announced a new six-year infrastructure plan, which says will create a "substantial" number of jobs and improve the country's transportation system.
Big Banks May Be Forced to Buy Back Bad Mortgage Loans
Major U.S. banks are under pressure from government officials, as well as groups of investors and insurers, to repurchase or modify bad mortgage loans they pooled into securities and sold to unwitting buyers.
In the latest effort, a group of investors with roughly $500 billion invested in 2,300 mortgage securities is trying to force the large banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them, The Wall Street Journal reported.
Some investors "had no idea that their money was being invested in mortgage-backed securities," Dallas-based attorney Talcott Franklin told The Journal. "And yet somehow these people are now the ones being punished, and that's just not right."
Leaders Emerging as the U.S. Economy Shakes Off Its Stupor
The past five days added more color to the emerging picture of U.S. economic growth that is slow and unsteady — but still in gear. Investors decided that was good enough, and bid up risky assets. The Standard & Poor's 500 Index rose 1.4%, emerging markets rose 1.8%, gold rose 2.2% and bonds fell.
Underlying breadth modestly weakened, as the market is primarily being propelled now by a withdrawal of sellers — not an increase in buyers. News late in the week typified the entire span, as it mostly favored bulls.
Indeed, the U.S. economy faces an uphill climb but some companies are emerging as market leaders.
Senate Hearing on Covered Bonds Highlights Wall Street's Resistance to Transparency
The Senate Banking Committee held a hearing Wednesday to further examine the uses and regulatory issues associated with covered bonds, to decide if they are a viable alternative to stimulate the U.S. economy and contribute to sustained growth.
Money Morning Contributing Editor Shah Gilani explained the benefits of a U.S. covered bond market in a story Wednesday. Covered bonds are debt securities backed by the cash flows from public-sector loans or from real-estate mortgages. They resemble other asset-backed securities (ABS) created through the process known as "securitization," but have one big difference: Covered-bond assets must remain on the issuer's consolidated balance sheet.
"A robust covered bond market offers many solutions to the problems that currently ail the U.S. economy, as well as its underlying financial system," said Gilani. "A covered bond market would jump-start needed lending by creating a healthy, transparent and "honest" securitization market. It would also enable the United States to regain its title as the financing center for the global economy."
Money Morning Mailbag: Market Volatility, BP's Blow Out, and Obama's Agenda
As the first full week of September ends and the summer draws to a close, many investors are still looking for answers to questions first asked back in May, notably:
- What's behind the recent market volatility?
- Can we put BP behind us?
- And what effect will President Obama's political agenda have on investments?
One reader writing into the Money Morning mailbag touched on all three of those topics. Wrote Ron, from Toronto:
Could it be that George Soros has finally dumped all of his equity holdings and that alone has cause a rebound in the futures and stock prices because there is simply less selling?
BP may be the next shoe to drop if that blowout preventer proves to be functional.