Market Talk

US stocks little changed, after the Fed again dances around the question of whether it will throw yet another net under the economy. They talked real smart, and danced around the issue, but ultimately didn’t really say anything new (although they came perilously close to almost saying “deflation.” But they didn’t.)

DJIA adds 7 to 10761, but S&P 500 slips 3 to 1140, Nasdaq Comp eases 6 to 2349. Stocks did rally, but gave it back by the close. You wonder what’ll happen with stocks. Have they climbed too far? Are the heights too much? I tend to think that the bulls have this thing by the tail, to mix metaphors, and aren’t about to let go. The data are (marginally) better, the central bank’s got their back, the midterms are coming up and everybody expects the business-friendly party to come back to town. ‘Course, you never know.

Treasurys and gold stick their rallies, however, while the dollar sells off. Yield on the 10-year Treasury note fell back to 2.58%, and gold jumped to $1,287. The dollar got smacked around. With the Fed ever-so-subtly threatening to debase the currency, euro jumps to $1.3240, and the yen slides to 85.05, although there’s no overt signs the Bank of Japan stepped in to defend its line in the sand.

What’s been going on the past week or so is really something to see, though. Stocks, gold, Treasurys are all rallying. It can’t last and somebody has to be wrong, but if there is, ahem, some invisible hand behind all this, it’s doing one bang-up job right now.

Anyhow, key event today was the statement coming out of the Fed’s one-day rate-setting meeting. The bankers kept rates at zero, of course. But it’s assessment of the economy wasn’t so hot, and the Fed says it’s prepared to “provide additional accommodation” if needed. While it didn’t signal the start of any new bond-buying programs, most read this as yet another incremental step toward what’s being called QE2, another massive bond-buying program to hold things together.

But it did say, in it usual circuitous way, that inflation’s too low, and if it goes much lower, the central bank will step in. The Fed’s stance raises the issue of how other central banks will react to the notion of the world’s premier central bank bashing its own currency. As our colleague Mike Casey wrote this afternoon:

The FOMC’s latest dovish statement implying further QE to fight deflation lands at an awkward time in global currency markets. The dollar is weakening on the news, but that’s not what central banks from Brazil’s to Japan’s want to see. There’s a distinctive shift toward more intervention around the world right now. Anything the Fed does to soften the dollar raises the risk of a self-destructive round of competitive devaluations. It’s yet another sign of how global imbalances are making it harder for policymakers.

“Competitive devaluations.” Keep that phrase handy.

- AIG and Treasury reportedly discussing an accelerated sale of the government’s stake. WSJ reports Treasury’s likely to convert $49B in AIG preferred shares to common and gradually sell its stake.

- “In case you lost track of this sorry affair, AIG, the biggest ward of the state in human history, continues to get the kid glove treatment,” Yves Smith writes at naked capitalism. “Funny, isn’t it, how creative and accommodating the Treasury can be when dealing with large distressed firms, and its skill seems to evaporate when contending with underwater homeowners.”

- This is not a typical stock picker’s market. Far from it. Since the May 6 “flash crash,” correlation of S&P 500 stocks to the overall index has reached its highest level since the 1987 crash. “The stock market has turned into a schizophrenic herd of sheep,” the Pragmatic Capitalism blog says. “Currently, the herd is grazing happily with not a care in the world. But don’t be fooled — when something spooks them you’ll get trampled if you don’t run with them.”

- Retail sales rise for second straight month and the 0.4% rise in August is the highest percentage gain since March. “If we look at the monthly trend of late, there’s an upside bias,” James Picerno writes at The Capital Spectator. “It’s hardly definitive or strong enough to close the book on worries, but considering what might have been it’s okay and more than welcome.”

- Microsoft’s (MSFT) Bing has overtaken Yahoo (YHOO) as the No. 2 search engine in the US, at least according to Nielsen’s August report. Firm says Bing had 13.9% search share last month, compared to Yahoo’s 13.1%. This will “will surely cause a firestorm of controversy in the search arena today,” Kara Swisher says at All Things D. Regardless, Google (GOOG) still dominates as it holds 65.8% of search, up 0.9% month-over-month and 0.5% from a year earlier.

- The outcome from Basel III has been critiqued left and right, but Reuters blogger Felix Salmon finds some positives, calling Basel III a “quiet victory” and saying the banking restraints are fairly constructive. “The Basel committees did a masterful job of depoliticizing the process as much as possible,” he says. “If politicians and the media had got involved, that might have made the process more democratic, but it would also have made it much more chaotic and quite possibly would have derailed any chance of an agreement at all.”

- Couch potatoes rejoice! Google TV, the new Internet television product Google (GOOG) is rolling out, will hit stores in the middle of October, possibly on Oct. 17, Engadget reports. Citing an internal memo from Best Buy (BBY), the blog says BBY had originally planned to begin selling Google TV on Oct. 3 but the launch has been pushed back by two weeks.

- Investors who try to time the market may be better off sticking with a buy-and-hold strategy. Barry Ritholtz posts a chart at The Big Picture looking at how investors would do if they bought the S&P 500 in 1993 and how their performance would be dictated if they missed the 10 best days or avoided the 10 worst days.

- Rimarkable blog wonders why the BlackBerry Curve 3G doesn’t run on BlackBerry 6 out of the box. Research In Motion (RIMM) says BlackBerry 6 will be available for the Curve 3G upon network certification in the coming months. And RIMM notes the device, which will sell initially through Verizon Wireless, is BlackBerry 6 ready. But for now, it will run on BlackBerry 5, prompting Rimarkable to wonder why RIM would release a device with an “old deprecated OS” a month after the debut of its next-generation operating system.

- Rafael Nadal finally solves New York. Congrats Rafa.

- Well, that didn’t take long. Verizon Wireless is already slashing prices on the two Microsoft (MSFT) Kin phones, just one month after the devices’ release. “That we’re seeing discounts for the Kin so soon after its debut suggests that it’s not selling nearly as well as Microsoft and Verizon had hoped,” Digital Daily blogger John Paczkowski says.

- Ten-yr Treasury yield drops below 3% amid fears of a global economic slowdown. Tom Petruno at LA Times’ Money & Co blog notes G-20′s wealthiest nations pledge to slash deficits doesn’t help matters. “The more the industrialized nations talk about reducing spending, the greater the risk that the global economy tilts back toward recession and deflation.”

- “When the benchmark indices of four of the six largest economies in the world are either at or near new lows, it doesn’t paint a pretty picture of the outlook by investors on the path of the global economy,” Bespoke says.

- “If you’re invested in these kind of markets, only two extremes make any sense,” Reuters blogger Felix Salmon says. “Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis,” he adds. “Everybody else is liable to get stopped out, or otherwise crushed.”

- Not surprisingly, first-time home buyer traffic plunged in May amid the expiration of federal tax credit, according to recent survey (via Barry Ritholtz.) Survey’s first-time home buyer traffic index registered a 35.1 in May, down from 63.5 in April. And prior to May, the index hadn’t dropped below 50 since September 2009. The drop implies fewer signed contracts in June as well as less closed transactions in July and August.

- Deutsche Bank’s Jim Reid looks at inflation and deflation prospects facing the economy in the future. “While we fear inflation is the biggest longest term concern, we see deflation as the bigger near-term risk, and a highly possible path in many parts of the western world,” Reid says (according to FT’s Alphaville blog.)

- The founder of Q&A website Quora is feeding the rumor mill with tidbits suggesting that Google (GOOG) is preparing to take another stab at Facebook. Adam D’Angelo, who formerly worked at Facebook, says “reliable sources” have convinced him that GOOG is “really scared” by Facebook’s growing clout.

- Despite Apple (AAPL) CEO Steve Jobs’ antipathy toward porn apps for his company’s products, the porn industry appears to be lending AAPL a hand in its feud with Adobe (ADBE) over Flash video technology. According to the ConceivablyTech blog, the founder of Digital Playground — a US “porn heavyweight” — says it’ll abandon Flash as soon as desktop browsers fully support HTML 5.

- “If Mr. Bernanke wanted to make a big statement on fiscal policy and additional legislative measures to stimulate the economy, he would probably have done it in another venue, where he would be less open to criticism that he is jeopardizing the Fed’s independence,” James Politi writes at FT’s Money-Supply blog.

- “Depression is the price we pay for budgetary murder and, contrary to Krugman’s belief, further budgetary murder cannot possibly cure anything,” says Mike Shedlock.

- “Cutting government spending, raising taxes, raising interest rates, and hoping the rest of the world does the same as some have called for is not the answer to the threat of a depression,” writes Mark Thoma.

This morning’s data weren’t exactly anything to write home about; the services sector stalled in April, and ADP said private-sector job growth was just 32,000. Now, Friday’s “official” report should be greater than that, but it’ll be mainly on those temp jobs the Census Bureau’s offering. If the private sector isn’t producing a lot of jobs, we’re going to stuck where we are for a spell longer.

Oh, and Greece is a mess, and the great fear is that the rest of Europe isn’t too far behind. All that and a bit more in today’s Tomorrow’s News Today (for which, for some reason, I don’t have the coding to embed, which is a bit annoying.) And, we actually have a bit of good news, too: the Treasury’s trimming its funding needs. A bit. Still, it’s less than it was.

There, don’t you feel better?

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.

There are more than five times as many people looking for jobs as there are openings, but that problem won’t last forever, at least according to a new study from Northeastern University. Other observers aren’t as optimistic.

The study argues there will be more jobs than people to fill them by 2018, (hat tip WSJ’s Real Time Economics). Retiring Baby Boomers will leave too many jobs open, as there will be 14.6 million new jobs by 2018, and only about 9.6 million workers available to fill those positions.

“Not only will there be jobs for these experienced workers to fill, but the nation will absolutely need older workers to step up and take them,” study says.

The idea sounds nice in principle, but some aren’t ready to believe time and retirement will immediately heal the labor market’s wounds.

Economist’s Free Exchange blog says it’s not clear retiring workers will “magically solve” all the issues plaguing the labor market. Skilled workers retiring could exacerbate income inequality, blog says. And increasing retirees will boost budget strains, which eventually have to be addressed.

“If budget balancing involves spending cuts and tax increases (as it typically does) then broader economic growth may slow, leading to reduced job growth,” blog says, offsetting some job openings created by retiring Baby Boomers.

“No magic bullets waiting out there to solve these labor market issues, I’m afraid.”

If that news on the jobs front isn’t depressing enough, Credit Writedowns blogger Ed Harrison wonders where job growth will come in the future, especially since there hasn’t been any nonfarm payroll growth over the last 10 years. Financial services, construction, auto and real estate employment are all way down from 2000.

“I know these numbers are all backward looking,” he admits. “But, I don’t see any of these sectors jumping off the table right now as a job growth engine.” Only actual bright spots: healthcare and government, he adds.

At some point this number will matter.

US stocks rising yet again, following yesterday’s gains, as President Obama signs new health-care legislation into law.

Positive reaction to the passing of the health bill is a bit perplexing, especially since many expected health care to act as a drag to the market’s yearlong rally.

But as we noted yesterday, it looks like there could be several benefactors from the legislation, ranging from hospital operators and pharmacy-benefit managers to drug and medical-device makers. And the final vote has added some much-needed closure to the situation, which seems to please investors.

But the ballooning federal budget deficit isn’t lost on some, and this $940 billion piece of legislation has Harvard economist Greg Mankiw worried about future implications:

In addition, I could not help but fear that the legislation will add to the fiscal burden we are leaving to future generations. Some economists (such as my Harvard colleague David Cutler) think there are great cost savings in the bill. I hope he is right, but I am skeptical. Some people say the Congressional Budget Office gave the legislation a clean bill of health regarding its fiscal impact. I believe that is completely wrong, for several reasons (click here, here, and here). My judgment is that this health bill adds significantly to our long-term fiscal problems.

Nevertheless, the stock market keeps puttering along. DJIA’s up 44 at 10830, while S&P 500′s up 2 to 1168.

“I don’t read this market rise as an endorsement of expanding federal indebtedness, but rather a vote of support for the functionality of government,” John Curran writes at Time’s Curious Capitalist blog.

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Bloggers Local 109 discusses the recent press coverage of Treasury Secretary Tim Geithner

Tim Geithner’s taken a beating in the blogosphere in recent months, as many expected him to be one of the Obama administration’s first fall guys.

But a funny thing’s happened recently – press coverage of the Treasury secretary has actually turned somewhat positive. The New Yorker recently published a piece praising Geithner, noting taxpayers may actually profit from his financial rescue package. At the very least, it could cost less than the savings-and-loan implosion of the early 1990s. The Atlantic also just wrote a favorable story, noting Geithner’s plan one year later has been cheaper and worked better than most initially imagined.

But all the positive coverage has prompted the critics to come out swinging for the fences even harder.

“I’ve seldom seen so much rubbish written by people who ought to know better in a single day,” Yves Smith writes in a 3,100 word blog post ripping what she calls the Obama administration’s “propaganda campaign,” which she says has reached a new level.

Smith isn’t the only one who’s peeved. She cites former IMF chief economist Simon Johnson, who in a similar tear-down notes there are good reasons why the government should never guarantee financial institutions. “You can’t run any form of reasonable market system when some big players hold ‘get out of bankruptcy free’ cards,” he says.

Smith’s demolition is too good of a read to sum up in a few quotes, so we’ll leave you with a tease of her masterpiece. Be sure to check the rest of her post, here:

The campaign to defend Geithner and Emanuel, both architects of the administration’s finance friendly policies has gone beyond what most people would see as spin into such an aggressive effort to manipulate popular perceptions that it is not a stretch to call it propaganda.

This strategy, of relying on propaganda to mask their true intent, has become inevitable, given the strategic corner the Obama Administration has painted itself in. And this campaign has become increasingly desperate as the inconsistency between the Administration’s “product positioning” and observable reality become increasingly evident.

- Record low new-home sales don’t deter surging stocks. “New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further,” Calculated Risk says. “Obviously this is another extremely weak report.” Still, Dow rallies 91 points.

- Supplementary Financing Program, the Treasury’s program for assisting with the Fed’s balance sheet, is making a sudden and dramatic comeback, James Hamilton writes.

- “The Volcker rule is following the tried and true path of all Obama ‘reforms,’ meaning an idea announced with great fanfare is being whittled back to meaninglessness,” Yves Smith says.

- Martin Wolf offers quite the depressing economic outlook, predicting a sovereign debt crisis on the horizon. “This, in turn, would surely result in defaults, probably via inflation,” he says. “In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.”

- Princeton economist Paul Krugman adds his two cents: “”What we really need now is… higher spending and lower trade surpluses in surplus nations, China especially but also Germany,” he says. And “some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.”

- Drop in bank lending truly is “epic.”

- $15 billion jobs-creation bill seems to have some limitations, Time’s Curious Capitalist blogger notes.

- Washington Post’s sales slump improves, sort of. “As always: remember what the economy was like a year ago when you think about these year-over-year comparisons,” Peter Kafka says.

- Consumer confidence data falling ten points has only happened 21 times since Conference Board began its monthly survey in 1977. “Almost every such ten-point drop can be attributed to an unusual market-moving event,” Jim Bianco says. “This is not meant to imply a cause and effect relationship, but is certainly something worth watching over the following months.”

- Critics rip new short-sale rules. “This puts a government thumb on the scale of stock prices,” says legendary short seller Jim Chanos. “Efforts to prop up stock prices where the fundamentals will not sustain them will inevitably fail.”

We’re sure he was just trying to sound strong, but Tim Geithner’s response to questions about the credit rating of the U.S. has the stink of historical notoriety written all over it. When asked by ABC News if the U.S. would lose its triple-A credit rating, he said bluntly “Absolutely not. That will never happen to this country.”

Frankly, we don’t need to hear bluster from the Treasury Secretary, because at this point in the crisis, it is painfully obvious that a great number of things that “could never happen” have indeed happened, and sitting there and arrogantly saying they can’t is just the wrong approach.

What he should have said was “that will never happen, because we are dedicated to maintaining the good faith and credit of the United States. In times of grave peril, the United States has always been a beacon of light and a refuge, and we are dedicated to doing absolutely everything within our power to keep it that way.” Or something like that.

“That will never happen.” It took all of about five seconds for me to think of Irving Fisher’s “permanently high plateau” comment, just before the stock market crashed in 1929, a crash that, incidentally, took the market something like 25 years from which to recover.

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