- QE3 rally halted- After last week's Federal Reserve inspired surge where each U.S. market gained at least 2%, stocks opened lower Monday. The selling pressure might not last long though as investors are ready to profit off of the Fed's latest moves. "It looks like we need to take a small breather after the sizable rally that we've had," Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp., told Bloomberg News. "There's the potential for a small pull-back, but I think we will move back into the bull territory later in the week unless there's an unexpected negative news event."
stock market news
- The QE3 rally climbs higher - After the Federal Reserve announced its latest stimulus measure, QE Forever, as some are calling it, the markets soared, all reaching multi-year highs. Commodities and financials in particular did well. Oil is approaching $100 a barrel, gold is nearing $1,800/oz., Bank of America (NYSE: BAC) has gained over 10% this week and JPMorgan Chase & Co. (NSYE: JPM) has now made up all its losses since the "London Whale Trade." The dollar as expected took a beating, falling to its lowest level since May, and the euro is now over $1.31. Yet, the question is whether QE3 will be a short-term or long-term rally. "It was a strong signal from the Fed and a very welcome move but we'll have to wait and see if this is more than a one or two-day wonder for the market," Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London told Bloomberg News. "All of this central-bank policy removes a degree of uncertainty that has been plaguing markets."
- Retail sales rise but outlook grim - The Commerce Department reported that retail sales increased 0.9% in August from a month earlier following a 0.6% gain in July. This was spurred by better auto and gasoline sales, but outside of those categories there was little good news. Excluding those two items, retail sales inched up 0.1% with weak electronic, clothing, and appliance sales. Core retail sales, which exclude automobiles, gasoline, or building materials fell 0.1% and is more closely related to consumer spending within the U.S gross domestic product calculation.
So, if you're waiting to get back into the markets once the trash has been taken out, you're about to find out your wait may be a lot longer than you expected.
The scheming racket that too many aspects of Wall Street have become reminds me of an old Clint Eastwood movie.
It's the one where Dirty Harry goes into a porno shop with a hooker hotel above it and the thug behind the desk tells him, "You can't come in here, this is a protected joint."
But Harry sets him straight. "To them you're something," he says, "but to me you're just a maggot that sells dirty pictures."
While Wall Street doesn't sell dirty pictures, it does sell the prospect of a glossy future full of positive investment returns when their "products" are embraced, as in bought and sold-- but mostly bought, for the investor's long-term good, of course.
In Wall Street's world, the beat cops are their regulators, including the SEC and the CFTC. Above them are the Federal Reserve and an untold number of politicians and legislators who pimp and pander on behalf of banksters by writing laws with loopholes so their donating "constituents" can always get out of jail free.
There are plenty of examples, but the mortgage-backed securities bubble and its related fallout is, to date, the biggest and most obvious example of how protected the Street is.
- QE3 a 99% certainty?... Not quite- When the Federal Open Market Committee makes its statement at 12:30 p.m. EDT every investor will be waiting to hear if QE3 has finally arrived. After what seems like two years of speculation since QE2 was announced will we finally get QE3? According to Citigroup Inc. (NYSE: C) a gauge of indicators of market expectations for additional central bank stimulus rose to a record 99% in August. Yet many economists do not expect QE3 to be announced today for many reasons. If the Fed takes action it will be viewed as highly political coming just months before Election 2012. Even if the Fed announces QE3 but says it will delay QE3 purchases until after the election as it did with QE2, the political implications will still be there. Other reasons are the lack of progress the previous rounds of QE have had in turning around the economy - and not just the stock market. "The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," Catherine Mann, a finance professor at Brandeis and former Federal Reserve economist told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."
- Producer prices rise most in three years- Wholesale prices, measured by the producer price index, climbed 1.7% in August - the most since June 2009 - due to higher gasoline and natural gas prices. This was a faster increase than the 0.3% reported in July and ahead of the median forecast for a gain of 1.3%. Food prices rose 0.9% due to a rise in dairy and egg prices. The core producer price index which excludes food and energy rose 0.2%, which was in line with expectations. Tomorrow's consumer price index will be a good indicator if higher wholesale prices have translated into increased consumer prices.
The major headlines in the stock market today (Tuesday) include Moody's warning it might lower America's AAA rating, the trade deficit and a financial shakeup:
- U.S. Credit Rating at Risk- In a statement released Monday, ratings agency Moody's said the United States is in danger of losing its AAA credit rating if Congress cannot come up with a solid plan to lower the debt-to-GDP ratio. "If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable," Moody's said in an e-mailed statement. "If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."
Currently Moody's rates the U.S. AAA credit rating with a negative outlook. Standard & Poor's last year downgraded the U.S. to AA+ which is the equivalent to Moody's Aa1. Both agencies cite the political bickering in Congress and inability to deal with fiscal situations as the main reasons for the downgrades. S&P has mentioned that those risks could lead to another downgrade. When President Obama updated his federal budget in August the debt-to-GDP ratio was projected to be 75% by 2022, currently it is just over 1.04%. If lawmakers decide to go off the fiscal cliff as a debt reduction measure Moody's said it will maintain its current rating and negative outlook and then wait to see results of the fiscal cliff before deciding to return to a stable outlook.
The major headlines in the stock market today include Europe's latest rescue effort, cautious optimism on U.S. jobs, and these big-name stocks leading the rally:
- ECB unveils unlimited bond buying plan- European Central Bank (ECB) President Mario Draghi announced in Frankfurt today (Thursday) that the ECB will embark on a drastic new bond-buying plan. The new program, called "Outright Monetary Transactions," allows the ECB to buy bonds with maturities between one and three years without announcing any limits in advance, as long as the government in question is under a program approved by the Eurozone. The plan is aimed at stabilizing interest rates in the euro area and will require countries such as Spain and Italy to request aid from the ECB to activate the bond purchases.
"Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area," Draghi said at a press conference. "Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial-market circumstances and risks to financial stability exist -- with strict and effective conditionality. The ECB reserves the right to terminate bond purchases if governments don't fulfill their part of the bargain." The ECB held its benchmark rate at its record low level of 0.75%. Draghi announced that the ECB won't claim the status of a senior creditor if the bonds it buys have to be restructured and that the purchases will be "sterilized" meaning there will be no impact on the monetary supply.
- Home prices show strong improvement- The S&P/Case-Shiller National Home Price Index increased for the fifth month in a row as prices in June on a non-seasonally adjusted basis were up 2.3% from the previous year and ahead of expectations for a 2.2% increase. Home prices rose 6.9% in the three months ended June 30 compared to the first three months of 2012. The index, which measures single-family homes and covers more than 80% of the housing market in the United States, continues to back up the belief that the housing market has finally turned a corner. "We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change," said David Blitzer, a spokesman for Standard & Poor's, in a statement. "The market may have finally turned around."
- Consumer confidence falls to nine-month low- As worries over the economy escalate and more Americans are unemployed consumer confidence slipped to its lowest level since last November. In August, consumer confidence, measured by the Conference Board's Confidence Index, fell to 60.6 from 65.4. Economists had hoped the index would rise slightly to 66. The board's future expectations sub-index dropped to 70.7 from 78.4, while the present-conditions index was basically unchanged at 45.
- Mario Draghi to skip Jackson Hole- President of the European Central Bank Mario Draghi was expected to be the keynote speaker Saturday September 1 in the second day of the Jackson Hole, WY Symposium. Draghi will not attend due to his heavy workload regarding the strategy of the ECB's new bond-buying plan. Details regarding the European Stability Mechanism and other measures to improve the Eurozone debt crisis are expected to be announced at the ECB's next meeting Sept. 6.
- Capital goods orders declines most in 8 months- Orders for core capital goods which excludes transportation and defense dropped 3.4% in July, the biggest decline since November. Capital goods such as computers, engines, and communication equipment are thought to be key indicator of business spending and this drop certainly does not inspire any confidence in the economy. "There's uncertainty domestically about the tax environment, and there's uncertainty globally about the outcome of the European crisis," Millan Mulraine, a senior U.S. strategist at TD Securities in New York told Bloomberg. "This is not engendering business investment and hiring." Economists had expected this category to rise 0.7% after a previously reported 1.7% decline in June.
- Durable goods orders rise- Manufactured goods which are expected to last at least three years, increased 4.3% in July fueled by airline and auto sales. Economists had expected on average a 2.5% increase. Overall orders last month were lifted by a 14.1 % jump in transportation equipment as demand for civilian aircraft surged 53.9%. This was led by Boeing Co. (NSYE: BA) which had a strong performance at the Farnborough Air Show and received orders for 260 aircraft, up from 24 planes in June. Motor vehicle sales increased 12.8%, the largest increase since last July. Yet omitting the transportation sector, orders fell 0.4% and declined for the second month in a row.
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- Jobless claims rise again- A higher number of people filed for their first week of unemployment benefits last week, a sign that the job market is not improving as hoped. For the week ended August 18 372,000 filed for unemployment, up 4,000 from the previous week, the Department of Labor said Thursday. Economists had expected initial claims to be 368,000. As of the July jobs report, 12.8 million people were counted as unemployed and about 5.59 million people received some kind of state or federal benefit in the week ended Aug. 4. "Jobless claims continue to indicate ... a sluggish labor market," Peter Cardillo, an economist at Rockwell Global Capital in New York told Reuters. "The numbers also strengthen the hand of the Fed to aid the economy with more stimulus."
- Global manufacturing slumps- The flash manufacturing Purchasing Managers Index for the U.S. edged slightly higher to a 51.9 reading in August from 51.4 in July, according to Markit. The August reading marked the first monthly increase in five months, but it was the third weakest result since the manufacturing sector stopped shrinking in October 2009. New export orders continue to be below the 50 mark, indicating contraction, but output and new orders rose. Also causing concerns is the HSBC Flash China manufacturing PMI which fell to 47.8 for August, its lowest level since November and well down from July's final figure of 49.3.
- The FOMC will release minutes from its July meeting at 2 p.m. EDT- Even though further additional stimulus measures were not announced at the last meeting investors will try to decipher what was said for clues that QE3 could be on the way. Many economists think that the Federal Reserve could announce the measure at the Jackson Hole, WY symposium which takes place next Friday and Saturday Aug 31- Sep 1.
Bernanke announced QE2 in Jackson Hole in 2010 but investors may be disappointed this time around. "There's not going to be enough data for him to say anything new," Catherine Mann, a finance professor at Brandeis University and former Fed economist who has attended the meeting twice told CNN. "It's possible he will make some reference to slowing global growth, increasing headwinds from Europe, and the slowing of the economy as the consequence of uncertainty related to fiscal cliff."
With few economic indicators today and earnings season winding down, investors are dealing with reports that Japan's economy is slowing.
Japan's cabinet office reported that gross domestic product (GDP) grew at a 1.4% annualized rate in the second quarter, compared to 5.5% in the previous quarter and below the 2.3% economists expected.
Investors are eyeing Europe with a continued sense of apprehension after Italy completed a successful round of selling one-year Treasury bills. Yet, investors worry that Italian yields on ten-year bonds will soon reach Spain's which is once again hovering at the dangerous 7% line.
Fisher stated that adequate economic stimulus is in place and that global central banks may not have the capacity to undertake additional stimulus measures.
In the U.S., nonfarm productivity grew faster than expected during the second quarter, but still at a slow 1.6% annual rate. Economists had expected on average to see a 1.3% rate. The Labor Department also revised numbers from earlier this year and 2011 that showed productivity was better than originally thought.
Overseas, Standard & Poor's Rating Services on Tuesday lowered Greece's long-term credit outlook from "stable" to "negative." The rating agency said that Greece will need further aid from international lenders and needs to implement harsher austerity measures.
The outlook drop means Greece's credit rating, which remained at the junk status CCC, could be lowered in the near future if Greece does not receive additional funding.
England's central bank issued its quarterly inflation report Wednesday and it was not optimistic. The Bank of England cut its prediction for GDP growth this year from 0.8% to 0.0%. The bank also lowered its forecast for economic growth over the next two years from 2.6% to 2%.
"The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro area and a broader slowing in the world economy," Bank of England governor Sir Mervyn King said in a statement.
Private-sector jobs increased by 163,000 ahead of economists' expectations of 125,000, but down from last month's 172,000. If you remember, last month's number was thought to be a precursor to a great nonfarm payroll report but that number can in at an underwhelming 80,000 jobs.
Investors hope for 100,000 jobs added when July's U.S. jobs report is issued Friday.
Manufacturing continues to slow across the U.S. and overseas, with the latest data slipping from previous months:
- The U.S Markit PMI index fell to 51.4 from 52.5 in June and the ISM reading was again below 50 with a July level of 49.8. This was the first time the ISM index has been below 50 since the end of the recession in mid-2009.
- The United Kingdom's measure of manufacturing, Markit/CIPS Manufacturing PMI index, declined at its fastest rate in more than three years falling from 48.4 in June to 45.4 in July.
- Manufacturing in the Eurozone fell to a three-year low of 44 and two different levels of China's manufacturing hovered around 50. Any reading below 50 signals contraction.
"Evidently not" I told him.
Bob had seen me earlier that afternoon on Fox News. I appeared on the show to respond to a new study on corporate earnings by Professors Ilia Dichev, Shiva Rajgopal of Emory University and John Graham of Duke.
The study found that a full 20% of publicly traded companies lie about their earnings.
The shocking thing is that the figure wasn't much higher. Twenty percent strikes me as abnormally low. Earnings manipulation is one of Wall Street's greatest, best-kept secrets and has been for years.
In fact, CFOs I've met over the years have told me they could routinely swing things within 5-10% of the target earnings per share (EPS) if needed - a figure in line with the one cited in the study.
But lie is a big word.
As I noted during my interview, there are all kinds of reasons why companies manipulate the numbers, beginning with the terribly flawed system itself.
As appalling as this thought may be, the system actually encourages this kind of behavior.
Under the current system, the law requires quarterly performance reports when many publicly traded companies actually operate in business cycles that are 1, 3, 5, or even 7 years long.
This creates a disincentive to report what's actually happening and an incentive to "lie" about the numbers or at least "fudge" them, depending on your perspective. And, the longer the business cycle, the more a company must make estimates about quarterly results with the risk, of course, that things don't turn out as management expects.
So while some companies may have lost their ethical and moral compasses, what they are doing is entirely legal.
Why Companies Lie About EarningsHaving spent more than 20 years in the markets, I believe the reason for this comes down to three biggies, for lack of a better term. Companies may "lie" to boost stock prices, smooth earnings and jack up compensation packages.
Virtually every publicly traded company draws on reserves and engages in all kinds of financial hocus-pocus in an effort smooth things out.
Take Boeing Co. (NYSE: BA), for instance.
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This was slightly ahead of the 1.3% growth economists had expected, but much lower than the revised 2% growth of 2012's first quarter.
GDP was hurt by lower consumer spending, which rose 1.5% in Q2 compared to 2.4% in the first three months of the year. Jobs were another blemish in the report as the Commerce Department reported payroll gains averaged 75,000 in the second quarter, down from 226,000 in the previous three months for the lowest gains in almost two years.
The unemployment rate, which held at 8.2% in June, will be reported next Friday. The unemployment level has exceeded 8% for 41 straight months.
Consumer sentiment measured by the Thomson Reuters/ University of Michigan reading fell to its lowest level of the year. The final reading for July fell to 72.3 from 73.2 in June. The barometer for current conditions inched up to 82.7 from 81.5, while the measure of consumer expectations slipped to 65.6 from 67.8.
Facebook Inc. (Nasdaq: FB) reported its earnings yesterday after markets closed and it was not what investors were looking for.
The company announced earnings per share of 12 cents, which matched expectations. But investors were hoping for profits to crush estimates that had been drastically lowered ahead of the report.
What is more concerning is the absence of any specific plan on how Facebook will monetize mobile users, and the continued slowing growth of its user base.
Facebook stock was down more than 15% today, reaching an all-time low of $22.28.