Market Talk

Sit back and take a deep breath, there’s a ton of news to digest today.

US stocks stage a furious late-day rally and close mixed as Senate passes financial overhaul bill, but more importantly, speculation swirled late in the day that a settlement had been reached between the SEC and Goldman Sachs (GS) over the fraud lawsuit.

Headlines crossed after the closing bell confirming the rumor, saying Goldman agreed to pay $550 million to settle the charges. SEC’s planning to hold a news conference any minute.

Dow snaps its seven-day winning streak, closes down 7 at 10359, but was down as much as 126 earlier in the session before recovering. S&P 500 rises 1 to 1096 and Nasdaq Comp slightly drops 0.8 to 2249.

JPMorgan kicked off the day by generating strong 2Q profits, although revenue fell in four of its six lines of business. Additionally, there was a plethora of economic data this morning which can be described as suspect, at best. Producer prices fall for third straight month and manufacturing data was weak. Jobless claims dip to two-year low, but seasonal factors skewed the data.

But all the fireworks came after hours. In addition to Goldman, Google shares are sliding 4% in late trading after the Internet giant reported 2Q earnings that missed analysts expectations.

WSJ also reports latest developments surrounding the scandalous iPhone 4, saying Apple (AAPL) overruled internal concerns about antenna reception and denied carriers the proper time to test the device before selling it.

Hectic week ends with a busy day tomorrow as GE, BofA and Citi all report quarterly results. As Art Cashin always says, stay nimble, folks.

- Retail sales dropping 0.5% last month isn’t so bad considering the broader trend, James Picerno notes at The Capital Spectator. “That doesn’t mean that there’s nothing to worry about, but for the moment the annual pace of retail sales is still comfortably in positive territory.”

- Retail sales data were weak this morning, adding to a string of poor economic reports recently. “The economic data we have seen of late — manufacturing, employment, personal income — all suggest a slowing in economic growth,” Edward Harrison writes at Credit Writedowns.

- Research in Motion (RIMM) CEO Mike Lazaridis is pretty confident about his company’s upcoming BlackBerry 6 operating system, saying it’ll make “anyone that looks at it…say ‘I want a BlackBerry.’” “For RIM’s sake, let’s hope so because the company’s current OS certainly isn’t doing that now,” Digital Daily blogger John Paczkowski says. Consumer interest in the BlackBerry is dwindling, according to ChangeWave Research, just as smartphone demand is rising.

- Retail sales of Microsoft Office 2010, which Microsoft (MSFT) released to consumers last month, are so far a “a bit disappointing,” market researcher NPD Group says. NPD doesn’t reveal specific sales figures, but says revenue generated and copies sold are down from Office 2007′s initial two weeks of sales.

- Apple (AAPL) has purchased 3-D mapping company Poly9, according to Canadian newspaper, le Soleil. The company, best known for creating maps that can be viewed in a Web browser, has already relocated most of its employees from their native Quebec to California’s Silicon Valley, the paper reports.

- “Mortgage applications have fallen off a cliff,” Calculated Risk notes, after weekly applications for purchase fell 3.1%. “The weekly applications index is at the lowest level since December 1996, and the four week average is at the lowest level since September 1995 –almost 15 years ago,” blog says, noting the four-week average is off 35% since “the mini-peak in April.”

- The rich are getting richer, and they’ve been getting richer faster than the rest of us, and that exposes a real problem, Yves Smith writes at naked capitalism.

- Miller Tabak equity strategist Peter Boockvar cautions short sellers to tread carefully from now until year end. “Combine a settling down of European credit stress with potentially a better than feared earnings season, the growing possibility of gridlock in Washington DC come November, a Fed that wouldn’t know a rate hike if even the Bank of Japan wrote it on Bernanke’s forehead and a very underinvested money management community and we are set up for a big rally over the next 5 1/2 months which may have already started.”

- “You may not love the stock market, but you have to love how it can make a fool out of just about anyone,” Evan Newmark says.

- For all Jamie Dimon’s gloomy talk, JPMorgan’s future is looking pretty bright post-credit crisis, NYT’s Eric Dash writes.

- BofA, Citi, JPMorgan and Goldman Sachs all racked up perfect trading quarters in 1Q, but the Kid Dynamite blogger is less than impressed with the ensuing analysis. “See, the probability of winning when your cost of funds is near zero and you can invest at positive interest rates at assets which are already being supported by the Government is probably closer to 100% than 50%.”

- “It’s no wonder that Goldman Sachs–perhaps the largest market maker in the world–consecutively avoids trading losses quarter after quarter,” FT’s Alphaville blog says. “That’s because when you’re making markets with no obligation to do so, you are in complete control. You dictate the terms. It’s very hard to lose.”

- EU’s nearly $1T bailout package stabilized Europe’s stock and bond markets this week, but hasn’t done much for the sliding euro.

- The online advertising business is improving from its dismal
performance a year ago, but how much of an improvement is tough to quantify.

- Paul Volcker’s candidness is undermining Obama. “It’s one thing for people in the private sector to express negative views about the future on the Eurozone, quite another for someone of Volcker’s stature who is playing a policy role for the Administration to undermine an initiative deemed so important that the President has thrown its weight behind it,” Yves Smith says.

- The number of people considered long-term unemployed sits at its highest level on record even as the economy has experienced four-straight months of net payroll growth. “Think about what that means: The new jobs that have been created so far seem to be going disproportionately to people out of work for only a short period,” Catherine Rampell writes.

- NBC canceling Law and Order could mean 8,000 people will join the unemployed ranks.

- Bespoke compiles a list of companies whose stocks have performed well on their earnings release days, but then declined the most since then. Topping the list, First Solar (FSLR) which rose 18% after posting earnings April 28, but since has dropped 20%.

- Well, that experiment didn’t last long. Google plans to stop selling its Nexus One on the Web.

- The summer of LeBron officially starts now. Mayor Bloomberg says he’ll give LeBron a “big sales pitch” to come to NY, but President Obama hopes the King goes to Chicago. LeBron, you can guest post here at Market Talk anytime you’d like if you become a Knickerbocker.

US stocks close mixed as strong earnings from Caterpillar (CAT) were offset about worries in the financial sector.

With the debate in DC heating up over regulatory reform, financials were the S&P 500′s biggest declining sector. JPMorgan (JPM), Goldman (GS) and Citi (C) all fall, the last even as Treasury moves step closer to selling its 27% stake.

On the bright side, CAT jumps 4.2% on better-than-expected 1Q profit as well as its boosted 2010 outlook.

DJIA narrowly keeps its five-day winning streak intact – barely – closing up 0.83 to 11205. Index has now risen in 12 of the last 13 sessions. Nasdaq Comp falls 7 to 2523 and S&P 500 ends down 5 at 1212.

- Hulu not being shy about broadcasting the fact that it’s profitable. “Even if the number isn’t huge, a profit is well worth bragging about, because I can’t think of another Web video company that has claimed on so far,” including YouTube, MediaMemo blogger Peter Kafka says.

- Capital rules alone won’t keep banks honest. “The better solution is the ‘dumber’ one: avoid having banks that are too big (or too complex) to fail in the first place,” Baseline Scenario bloggers Simon Johnson and James Kwak say.

- Naked Capitalism blogger Yves Smith rips Jamie Dimon’s “self-serving” defense of big financial institutions. “One has to wonder whether anyone in a position of influence really believes what he is selling,” she says.

- “Businesses have dramatically tempered the rate of firing but still seem reluctant to aggressively add to their payrolls,” says Miller Tabak’s Peter Boockvar. “That process will seem more gradual in nature assuming the economy can sustain its healing and recovery in the face of reduced government stimulus and the growing likelihood of higher market interest rates.”

- Felix Salmon discusses the economics of Netflix (NFLX).

- “The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy,” Robert Reich says. “As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.”

- Jeff Miller offers his March employment preview. Following the strong ISM manufacturing report, he estimates zero net job growth before factoring in the temporary census jobs, translating into a monthly gain of 130,000. That’s less than the 200,000 gain economists expect.

- 90% of stocks in S&P 500 are trading above their 50-day moving averages. “This is at the top end of the indicator’s range over the last year,” Bespoke says.

- Hedge fund manager pay soared last year. The top 25 earned a collective $25.3B. “We bet on the country’s revival,” says top-ranked David Tepper, who earned $4 billion. “Those who keep their heads while others are panicking usually do well.”

- Give the good ol’ microwave some respect.

- “The disease that left [Lehman] vulnerable was a mad embracing of risk, the excess use of leverage, an extensive exposure to mortgage and real estate, and the enormous usage of derivatives — concurrent with a lack of intelligent risk management,” Barry Ritholtz writes. Citi and JPM merely made matters worse when Lehman’s “immune system was compromised.”

- Tapping Janet Yellen as Fed vice chairman is a good choice. “She’s open-minded, a good counterweight to the inflation hawks who think that any day now we’ll be partying like it’s 1979,” Paul Krugman says. “She’ll provide exactly the kind of intellectual flexibility the Fed needs.”

- Interesting to note the examiner’s scathing report on who should be held accountable for Lehman’s collapse doesn’t mention short sellers, Jeff Matthews points out on his blog. Instead blame falls on “a lot of really bad management by people desperate to keep a sinking ship afloat any way they could, including ‘accounting maneuvers.’”

- Is it surprising that allegations surrounding Tim Geithner and the NY Fed surfaced in the examiner’s report on Lehman’s collapse? Yves Smith weighs in.

- “All in all, the entire system failed,” Barry Ritholtz bluntly states. “The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me.”

- They can’t be too happy at Ernst & Young today. “Enron brought down Arthur Andersen,” Felix Salmon says. “Will Lehman do the same for Ernst & Young?”

- Takeover talks swarm the rumor mill this week. “I don’t know if this would be considered a sign of a healthy market or an ailing one, but we can’t ignore the presence of so many takeover rumors, specifically those concerning high profile retailers,” Joshua Brown writes at The Reformed Broker.

- Fallout from Lehman raises some troubling questions. There’s a “seminal” question, blogger Karl Denninger says at the Market Ticker, “that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.”

- US-subsidized mortgage modifications rise 6% from a month earlier to one million, Treasury says.

- Economy’s in the midst of a “sham recovery,” former labor secretary Robert Reich writes. Big companies, Wall Street and high-income Americans are doing better, but Main Street, small businesses as well as middle and low-income Americans face a much gloomier outlook.

Does the Volcker Rule have legs?

The more we read about this so-called “Volcker Rule,” the more pessimistic we become that it will ever become anything more than a pipe dream.

The latest to offer his two cents on the matter is Alan Blinder, former Fed vice chairman, who’s pessimistic that some sort of financial reform in its present form will pass into law. “The overriding message is this. Plan A died long ago, and Plan B is gasping for breath. It’s time to prepare Plan C,” Blinder says in a WSJ op-ed today.

I am waiting to see if what is really the Volcker “idea” can be translated into a workable Volcker rule. It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients. Mr. Volcker himself said that “you know it when you see it,” suggesting an analogy with pornography. The problem is, often you don’t.

Furthermore, the firms that take the biggest proprietary trading risks are not banks at all—or at least not real banks, with depositors and all that. (I am not naming names.) Yet some of these firms are too big to fail, whether we like it or not. If they gamble and lose big, we taxpayers may find ourselves on the hook again, which is why we need resolution authority. So I’m waiting for the details of a fleshed-out Volcker rule. After that, we’ll see if anyone can convince 60 senators of its wisdom.

And despite all the tough talk coming from President Obama surrounding financial reform and limiting growth in the financial sector, it seems as if the banks are maintaining their business-as-usual stance when it comes to growth.

JPMorgan (JPM) may be testing the White House’s mettle in its latest deal. JPM has agreed to buy European and Asian parts of RBS Sempra Commodities, the energy-trading business owned by RBS and Sempra Energy, for $1.7 billion.

The acquisition would make one of the biggest banks in the US bigger, increase its trading operations, and seems to suggest CEO Jamie Dimon isn’t too worried about the regulatory roadblocks, Rochdale analyst Dick Bove says.

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The White House is attempting to contain the damage surrounding President Obama’s curious remarks about bank bonuses. Whether it’s working is up for debate.

In case you missed it, Obama said he doesn’t “begrudge” the multi-million dollar bonuses JPMorgan (JPM) CEO Jamie Dimon and Goldman Sachs (GS) CEO Lloyd Blankfein received, noting it’s all part of the free-market system. He also compared these “savvy businessmen’s” exorbitant salaries to sports, saying some baseball players make more dough than both of those folks.

Now the White House is trying to mop up Obama’s mess. Huffington Post has the details:

The White House is moving swiftly to stem the fallout from a potentially damaging interview President Obama gave on Tuesday, in which, it was reported, he did not “begrudge” the multibillion-dollar bonuses of Wall Street executives.

Administration aides insisted, in email exchanges with the Huffington Post, that the quote was largely overplayed. The story, they say, made it appear as if the president didn’t mind massive compensation packages when he was simply stating that he didn’t fault anyone for his or her personal or professional success. Moreover, they added, the president has made similar remarks many times before without getting the critical reception he received on Wednesday morning.

“The president has said countless times, as he did in the interview, that he doesn’t ‘begrudge’ the success of Americans, but he also expressed ‘shock’ at the size of bonuses and made clear that there are a number of steps that need to be taken to change the culture of Wall Street,” spokesperson Jen Psaki told the Huffington Post. “[That is] a sentiment he has consistently expressed since long before he took office.”

The White House is clearly on damage control, trying to clean up a messy situation. But Princeton economist Paul Krugman, who heavily criticized Obama yesterday, still can’t get over the presiden’t “clueless” comments.

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President Obama strikes a curious chord, to say the least, in his latest comments concerning bonuses given to Goldman Sachs chief Lloyd Blankfein and JPMorgan CEO Jamie Dimon.

Obama says he doesn’t “begrudge” the multi-million dollar bonuses they received, noting some athletes make more dough than these two folks. From Bloomberg:

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

Umm, we’re not even sure where to begin on this one.  Free-market system? That went out the window when the government engaged in its bailout binge with the nation’s largest banks. As former IMF chief economist Simon Johnson points out: “Not only were their banks saved by government action in 2008-09 but the overly generous nature of this bailout means that the playing field is now massively tilted in favor of these banks.”

And wasn’t it only a few weeks ago that Obama was ripping “fat cat” bankers on Wall Street for their “obscene” bonuses? From fat cats to savvy businessmen, that’s quite the reversal.

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- It’s no coincidence the biggest banks are on pace to pay record bonuses. “How hard is it for any finance firm to make risk free money when they can borrow form the Federal Reserve at zero, and lend that same cash to the Treasury (by buying bonds) at 3%?” Barry Ritholtz ponders.

- Editor & Publisher finds a buyer, although editor Greg Mitchell is out of a job.

- Obama’s bank tax may prevent firms from over-expanding and taking on too much risk yet again. “It will be better than doing nothing at all,” Greg Mankiw says. James Kwak says the tax “isn’t nearly big enough.”

- The bank tax doesn’t create an incentive to lend. Or maybe it doesn’t have any effect on lending.

- Mark Thoma wonders if the bank tax will create a moral hazard problem. “The proposed financial crisis responsibility fee is a good first step, but much more is needed to try to prevent the next crisis, and to reduce the impact if a crisis hits despite our best efforts to prevent it,” he says.

- The market’s reaction to reports from Intel (INTC) and JPMorgan (JPM) suggest earnings season has gotten off to a slow start for stocks.

- Stocks are dropping and the news isn’t half-bad. Chad Brand says the markets have priced in good news.

- WSJ’s coverage of the Haiti earthquake.

- Sprint Nextel (S) and Verizon Wireless respond to surging text-message donations for Haiti victims.

- BofA says late payments on credit-card loans fell to lowest level in about a year.

- Gordon Gekko prepping to make his long-awaited return.