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Will The Fed Fall Back on Treasury Purchases to Fuel Economic Growth?

Faced with a faltering recovery, the U.S. Federal Reserve today (Tuesday) will again consider ramping up purchases of Treasuries, a policy known as quantitative easing, to promote growth.

The Standard & Poor's 500 Index closed yesterday with a 1.5% gain on speculation that the Fed would at least indicate to investors that it is prepared to take further action to support the economy.

The Fed conducted its last major round of Treasury purchases from January 2009 to March 2010, buying $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies. The Fed planned on gradually reducing its balance sheet as the debt matured or was prepaid.

But last month the Fed signaled it might resume its quantitative easing steps when it voted to reinvest the principal payments in longer term Treasury securities. And with little improvement in the U.S. economy since then, analysts think the central bank is preparing to take the next step.

"The Fed's rhetoric will get the markets ready for the real possibility of expanding their balance sheet at a later meeting this year," Richard Clarida, a Columbia University professor and global strategic adviser for PIMCO, said Monday in a Bloomberg radio interview.

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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.

To find out which companies are dragging the economy forward read on...

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More Americans Tapping Into Entitlement Programs Swells Budget Deficit

As many U.S. citizens continue to rail against the ballooning budget deficit, the reality is that most Americans are unwilling to swallow the bitter pill it will take to tame it. 

Perhaps that's because nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history, according to a report from The Wall Street Journal.

At the same time, the number of American households not paying federal income taxes has grown to an estimated 45% in 2010, up from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

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Investors Flock to Gold and Silver on Recovery Worries

Investors worried about the global economic recovery pushed gold prices to fresh highs on Friday, marking the third time in a week the shiny metal set a new record. Silver also climbed to its highest price in thirty years.

Spot gold climbed above $1,282 an ounce in New York and London as a weakening dollar spurred demand from investors for wealth protection, while silver rose to $21.44 an ounce, its highest level since 1980.

Bullion, which usually moves inversely to the dollar, posted its biggest weekly gain since May as the greenback touched a five-week low against the euro.

Holdings in gold- backed exchange-traded products (ETP) reached a record this month as investors sought protection from financial turmoil and the prospect of slowing economic growth.

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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."

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Record Breaking Contango Suggests Higher Oil Prices for 2011

ConocoPhillips (NYSE: COP) is paying $41,000 a day to keep a storage tanker capable of holding 3 million barrels of oil floating in the Gulf of Mexico, according to international ship- and offshore broking firm RS Platou. And the TI Europe is just one of hundreds of oil tankers sitting idle in waters around the world, as energy companies and investment banks await higher prices for crude.

Oil prices have fallen precipitously since the spring, as optimism about "green shoots" of economic growth gave way to fears of a double-dip recession. Prices have fallen more than 12% to $75.81 a barrel, from a high of $86.54 a barrel in April.

Indeed, with the U.S. economy stuck in the mire, the global outlook for oil demand has diminished - at least in the near-term. Longer-term, however, traders expect prices to surge higher next year as growth solidifies. That's why contracts for crude set to be delivered six months from now are worth more than crude at its current prices - an anomaly known as "contango."

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Three Ways to Brace for a Double-Dip Recession

Economists are torn... Is the U.S. economy on the upswing? Or are we facing the dreaded "double dip recession"? Either way, there are a few things every smart investor needs to do now to protect their nest eggs. Find out what you should do in this free report.

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August's Insider Trading Augurs Well for Stocks

The stock market as a whole just turned in its worst August performance since 2001, with the major indexes posting losses ranging from 4% to 6%. Yet despite those negative numbers, there was one group that didn't act bearish at all - corporate insiders.

Insiders - the officers, board members and major shareholders of America's corporations - are required by law to almost immediately report to the Securities and Exchange Commission (SEC) any time they buy or sell the shares of their own companies. As such, insider transactions are tracked by a number of organizations and Wall Street analysts as a gauge of current market sentiment and future prospects for stock prices.

The theory underlying this practice is simple. As the people with the most intimate knowledge of what corporations are actually doing to grow their businesses, as well as the results those strategies are producing, insiders are in the best position to judge whether the fortunes of their companies are looking bright - or dismal. When they like what they see, they buy their company's shares - and when they don't, they sell.

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July's Narrowing Trade Gap Lifts Hope for U.S. Economic Recovery

The United States in July posted the biggest drop in its trade deficit in 17 months, as imports plunged and exports shot higher, according to a government report that could lift hopes for the economic recovery.

The U.S. trade deficit narrowed by 14% to $42.78 billion from a downwardly revised $49.76 billion the month before, the Commerce Department reported yesterday (Thursday).

U.S. exports expanded 1.8% to $153.33 billion - the highest level since August 2008 - from $150.57 billion in June. Imports registered their biggest decline since February of last year, falling 2.1% to $196.11 billion from $200.33 billion in June.

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Obama Floats $350 Billion Stimulus Package to Re-Ignite Economy

Faced with pre-election polls showing strong Republican support leading up to the mid-term elections in November, President Barack Obama is floating a $350 billion stimulus package designed to assuage the fears of troubled homeowners and create jobs.

In another move aimed at stabilizing a shaky economic recovery, the president today (Wednesday) will officially unveil a new $200 billion tax cut that gives businesses across the country incentives to buy new equipment, an anonymous administration official told CNN.

The proposal would be in addition to a $100 billion permanent extension of the business tax credit for research and development, as well as a $50 billion six-year program to fix roads, railways and runways and modernize the air-traffic control system.

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Stock Market's Rally A Salute to Slow Growth

The markets staged a relief rally last week that reflects Wall Street's attitude about the overall economy. Simply put, investors are saying they can live with slow growth, so long as the U.S. can avoid a double-dip recession.

Stocks leapt around the world last week like jets of water shooting out of a fountain that had been closed down for weeks. The major U.S. indexes rose 3%, the NASDAQ rose 4%, non-U.S. foreign big-caps rose 3.6% and small-caps rose 4.6%.

Many of our plays on growth overseas rose even more: iShares MSCI Thailand Index Fund (NYSE: THD) jumped 4.9% and iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) rose 4.4%, while iShares MSCI Singapore Index Fund (NYSE: EWS) rose 3.2% and iShares MSCI Turkey Index Fund (NYSE: TUR) rose 3.5%. Once again, as we have seen all year, the response in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI) was more muted, up 2.4%.

Read on to see where the next turning point for the market will come...

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Question of the Week Responses: The U.S. Bond Market Has Lost Its Luster With Investors

Ongoing stock market worries and a string of discouraging economic reports have imbued the U.S. bond market with "safe-haven" status. The upshot: Investors have poured record amounts of money into bond funds.

Bond funds for the past two years have seen inflows almost as high as stock funds did during the Internet bubble, according to the Investment Company Institute (ICI). From January 2008 through June 2010, outflows from equity funds totaled $232 billion, while inflows to bond funds hit a staggering $559 billion.

Investors are spending billions in the bond market even as yields reach record lows. Investment-grade U.S. corporate debt yields hit a low of 3.79% last week and two-year U.S. Treasury yields fell to less than 0.5%.

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We Want to Hear From You: Should the U.S. Government Offer More Incentives to Help the Housing Market?

Experts fear that the already-battered U.S. housing market is getting ready to stall again, leaving the Obama administration to decide what - if anything - it should do next.

Standard & Poor's Case-Shiller Home Price Indices yesterday (Tuesday) reported that home prices rose 3.6% in the second quarter from a year earlier - but the boost came from the homebuyer tax credit that expired in April. And that doesn't bode well for the housing market's near-term outlook.

"The numbers were inflated by the homebuyer tax credit," David Sloan, a senior economist at 4Cast Inc. in New York, told Bloomberg. "The numbers will be going down in the coming months. We could see some significant declines."

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Little Hope for the Housing Market

Just when you thought the housing market couldn't get worse, it did.

New single-family home sales slumped 12.4% in July to a record-low annual rate of 276,000 units, as homebuyers shunned their realtors in the absence of government support. The consensus expectation was for a slight up-tick to a 333,000 unit annual rate, so I suppose it's time to throw out the models. Sales over the prior three months were also revised lower by 9,000 units.

No section of the country was spared, though the West led the parade with a 25.4% plunge. On a year-over-year basis, sales were down 32.4%, the fastest decline since April 2009.

New home inventories held steady at 210,000 units, the lowest level in 42 years, according to Ned Davis Research analysts. Low-to-medium-priced homes were in the most demand. Only properties in the $150,000 - $300,000 price range rose as a share of total sales. So median prices fell to the lowest level since 2003.

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Let's Make a Deal: How the Mergers-and-Acquisitions Boom Will Hurt the U.S. Economy

With its $39 billion hostile bid for Canada's Potash Corp. (NYSE: POT), mining giant BHP Billiton Ltd. (NYSE ADR: BHP) capped an active August in the mergers-and-acquisitions market.

With the moribund growth prospects of the U.S. economy, there would seem to be no great urgency for companies to go on an M&A spree, yet the total value of announced buyout deals for August alone has topped $175 billion.

Cynics are reaching only one conclusion: With interest rates so low and corporations so cash-rich, it seems that company management teams would rather do anything with that cash than to give it back to shareholders via stock buybacks or boosted dividends.

And those deals signal additional trouble ahead for the U.S. economy.

To understand the problems that this rampant dealmaking figures to cause, please read on...