Investors run for cover as Dow plunges 416 points, worst day since Sept. 2001

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Hey, learn to live with it...

Fed policy views split due to uncertainty: Kohn
Sat Jan 5, 2008 - Federal Reserve's vice chairman acknowledged on Saturday that the central bank's message had been clouded by a difference of opinions being voiced by policy-makers, but warned markets to learn to live with it.

"The resulting dispersion of messages has bothered market participants seeking clear, unambiguous guidance about the views of the central bank," Fed Vice Chairman Donald Kohn told the annual meeting of the American Economic Association in prepared remarks. A copy of his speech was released to the media prior to delivery.

Critics complain the Fed has managed to sound both dovish and hawkish at the same time -- cutting interest rates while warning on the risks of inflation in policy statements. This hints at a split between policy-makers that critics find worrisome, because it raises doubts about how far the Fed will be prepared to cut interest rates to shield the economy from a slumping housing market, increasing the odds of a recession.

Kohn made no apology. Instead, he argued a healthy debate was natural and would lead to better policy choices. "The public should understand that the FOMC (Federal Open Market Committee) members do not coordinate schedules and messages, and that members' views are likely to be especially diverse when, as in the current situation, circumstances are changing quickly and are subject to many different analyses.

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Investment firm not optimistic...

Goldman Sachs sees recession in 2008
Wed., Jan. 9, 2008 - Wall Street firm expects Fed to slash interest rates to 2.5 percent this year

Goldman Sachs on Wednesday said it expects the U.S. economy to drop into recession this year, prompting the Federal Reserve to slash benchmark lending rates to 2.5 percent by the third quarter. In a note to clients, Goldman said real gross domestic product would contract by 1 percent on an annualized basis in both the second and third quarters. For all of 2008, the investment bank said GDP would rise by 0.8 percent. The unemployment rate will rise to 6.5 percent in 2009 from the current 5 percent, it said.

The weakening economy will force the Fed to lower policy rates by an additional 1.75 percentage points from the current 4.25 percent. Starting in September, the Fed cut rates at the last three meetings of the Federal Open Market Committee, reducing the target rate on loans between banks by 1 percentage point from 5.25 percent. Goldman strongly advises fund managers to overweight health care, consumer staples, energy and utilities. They are significantly underweight consumer discretionary, financials, industrials, materials and information technology.

The three most significant changes to their sector recommendations are the reduction in the financial sector weighting by 300 basis points to 14 percent, the information technology weighting by 400 basis points to 15 percent, and the increase in their health care weighting by 300 basis points to 17 percent, the firm said. Their reduced allocation to financials reflects weak fundamentals and their declining weight in the S&P 500. The reduction in information technology reflects that the group has been the second-worst performing sector in both the six months leading up to a recession and during the first phase of a recession, Goldman said.

More Goldman Sachs sees recession in 2008 - Stocks & economy - MSNBC.com

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Washington reacting to recession...

Recession S.O.S. - goosing growth
January 9 2008: Lawmakers are considering a host of options to stimulate the economy, and some may mean more for your bottom line.

You may be getting an extra few hundred extra bucks for your wallet this year courtesy of the federal government. And if you could spend it as fast as you get it, lawmakers would be most appreciative. Rebate checks are just one of the ideas reportedly being considered by Democrats and Republicans to nip a potential recession in the bud.

Experts affiliated with both parties have called for some form of stimulus. In addition to rebates, ideas being batted about range from making the president's tax cuts permanent to giving businesses greater tax breaks to boosting government spending in ways that create jobs or provide more money for the unemployed. The White House hasn't committed to proposing a package, although President Bush has said numerous times he's considering a broad range of options.

One Congressional source told CNNMoney.com that both Senate and House Democrats are working together on a proposal. House Speaker Nancy Pelosi confirmed in a statement on Tuesday that the Democrats' plan "will assist hard-hit families by promoting consumer confidence, economic growth, and job creation."

Some Washington observers are saying only the Federal Reserve has any real chance of steering the economy away from recession and that any moves from lawmakers would be only for the sake of politics in an election year. What skeptics on both sides of the aisle express concern about is how quickly the measures chosen will take effect and how temporary they will be in nature.

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Fed gonna fix it...

Fed to act decisively to counter turmoil
Fri Jan 11, 2008 - Federal Reserve policy-makers will act decisively to reduce the growing risks that financial market turmoil pose for the US economic outlook, Fed Governor Frederic Mishkin said on Friday.

Federal Reserve officials on Friday said falling home prices and financial market turmoil are big risks to the U.S. economy but pledged that the central bank would not shrink from taking bold steps to support growth. At a symposium in New York, Fed Governor Frederic Mishkin said the central bank "has been acting and will continue to act decisively" to counter rapidly deteriorating financial market conditions.

"The disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains," Mishkin said. His tone echoed that of Fed Chairman Ben Bernanke, who signaled on Thursday that the Fed was ready to cut interest rates in the face of housing and credit crises that Wall Street fears could tip the United States into recession this year. Financial markets now expect the central bank to cut benchmark borrowing rates by half a percentage point to 3.75 percent at the Fed's January 29-30 policy meeting.

A bevy of weak U.S. housing, employment and manufacturing data in recent weeks has sparked fears of recession at many Wall Street firms. Boston Fed President Eric Rosengren may have bolstered those fears on Friday. In a speech in Vermont, Rosengren traced a gloomy outlook for the economy when he said declining U.S. home prices could fall further this year.

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Foreign investors ride in to rescue Citi
January 11 2008: An investment of even 1 percent from Saudi Prince Alwaleed could signal confidence in the struggling bank

Saudi billionaire-Prince Alwaleed bin Talal and a team of Chinese investors may ride to embattled Citigroup's rescue, according to a report from The Wall Street Journal.

Chinese investors, including China Development Bank, will reportedly contribute around $2 billion. It was not known how much would be invested by Prince Alwaleed, but the Journal calculated that his stake in the bank would likely remain under 5 percent, but that even a 1 percent stake would be a vote of confidence.

An earlier report said that Citigroup is trying to raise an additional $10 billion, most of which would come from overseas funds. In November, Alwaleed sold a 4.9 percent stake in Citigroup for $7.5 billion to the Abu Dhabi Investment Authority. Citigroup (C, Fortune 500) will reportedly reveal the investments when it reports its fourth-quarter earnings on Tuesday.

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Say what? That's outrageous!...

BofA's awesome Countrywide tax break
January 11 2008: Brace yourselves, taxpayers of America. You're going to help Bank of America finance its $4 billion buyout of Countrywide.

Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States. That's because Bank of America (BAC, Fortune 500), which is solidly profitable, will be able to use some of Countrywide's losses to offset its own taxable income. The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.

At this point, of course, no one knows how much in losses Countrywide has run up since the junk mortgage market began souring and defaults accelerated. Countrywide (CFC, Fortune 500) itself probably doesn't know. But it seems almost certain to ultimately be in the billions. In tax circles, Bank of America is famous for its 1988 purchase of the failed FirstRepublic Bank of Dallas, which was being auctioned off by federal regulators. Bank of America, then known as NCNB Corp., the parent of North Carolina National Bank, discovered a way to structure the deal to save $1 billion of taxes, using a convoluted strategy that none of the other bidders knew about. That allowed NCNB to outbid its rivals for the bank, and still come out way ahead.

The Countrywide tax break isn't in that league, but it would still be worth a lot of money. Willens estimates that Bank of America will be able to deduct $270 million of Countrywide's losses annually for the first five years it owns the firm. That's based on a $6 billion purchase price - $4 billion to Countrywide's common stockholders, plus the $2 billion of preferred stock that Countrywide sold to Bank of America in August. Willens says that you multiply that $6 billion by 4.49 percent - the so-called "long-term tax-exempt rate" - to calculate how much of Countrywide's losses Bank of America can deduct annually for five years after the purchase.

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Wall Street plunges on credit concerns
Fri., Jan. 11, 2008 - Fears that financial companies will suffer big writedowns

Wall Street plunged again Friday amid renewed fears that the financial sector’s troubles with bad credit won’t soon end and that some consumers are buckling under the weight of a slowing economy. The major indexes each lost more than 1 percent, including the Dow Jones industrials, which finished down nearly 250 points.

The arrival of quarterly earnings reports has investors worried about how banks and brokerages have fared after suffering losses in the collapse of the subprime mortgage market. Traders appeared to grow more pessimistic ahead of reports due next week from the nation’s biggest financial institutions. Merrill Lynch & Co., Citigroup Inc. and JPMorgan Chase & Co. are slated to weigh in next week.

Adding to investors’ unease, Merrill Lynch might take a $15 billion hit from its exposure to soured subprime mortgage investments, according to The New York Times. The nation’s largest brokerage is also said to be seeking another capital infusion to help shore up its balance sheet. Investors also grew nervous after American Express Corp. warned that slower spending and more delinquencies on credit card payments will hamper profit throughout 2008. A profit warning from Tiffany & Co. added to Wall Street’s unease about the fortitude of the consumer.

More Stocks plunge on credit crisis woes - Stocks & economy - MSNBC.com

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Wall Street waits and ponders...

Wall Street awaits answer to recession question
13 Jan. 2008 - Traders to seek signs in this week’s data on earnings, retail sales, inflation

This week’s flood of readings on inflation, retail sales and earnings is just what a data-hungry Wall Street has been anxious for. But it could be a case of the old saying, be careful what you ask for, because you might actually get it. Evidence that consumers and companies are cash-strapped could mean the economy is on a fast track toward recession — or already in the midst of one. “I think we’re going to look back on fourth-quarter earnings and instead of thinking the recession is coming, if there is one, it already started,” said JPMorgan equities analyst Thomas J. Lee.

Stocks floundered last week, bouncing higher and lower as investors grasped for direction ahead of the upcoming earnings deluge. Last week brought a pledge from Federal Reserve Chairman Ben Bernanke that he was prepared to lower interest rates if needed, and news that Bank of America Corp. was buying the embattled mortgage lender Countrywide Financial Corp. But the two pieces of encouraging news gave stocks only a temporary lift, as upcoming economic data and earnings releases hung over investors’ heads. The Dow Jones industrial average was down 1.51 percent for the week, the Standard & Poor’s 500 index was down 0.75 percent, and the Nasdaq composite index was down 2.58 percent.

This week, investors will pore over fourth-quarter results from a stream of banks — Citigroup Inc., JPMorgan Chase & Co., Merrill Lynch, Wells Fargo & Co. and Washington Mutual Inc., to name a few — and other big names such as Intel Corp., International Business Machines and General Electric Co. The fourth-quarter numbers, already expected to be disappointing, will be less important than the outlooks the companies give, as investors try to gauge when earnings will rebound. The financial sector will be under particular scrutiny, being the industry that dragged down the rest of the market in 2007, as will technology, which was the Wall Street darling last year.

More Wall Street awaits answer to recession question - Stocks & economy - MSNBC.com

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Down we go - again...

Wall Street's worst day in 3 months
February 5 2008: Stocks tank after an economic report and comments from a Fed official amplify recession panic. Dow loses 370 points.

Stocks tanked Tuesday, after a report showing a big slowdown in the services sector of the economy and cautionary comments from a Fed official amplified fears that a recession is underway or imminent. The Dow Jones industrial average (INDU) lost about 370 points, seeing its worst one-day point loss since mid-October. The decline equaled a drop of 2.9%.

The broader Standard & Poor's 500 (SPX) index lost 44 points, its worst single-day point loss in almost 6 months. The decline equaled a drop of 3.2%. The Nasdaq composite (COMP) fell 73 points and saw its worst single-day point loss since mid-October. The decline equaled a drop of 2.6%.

"The pebble in the pond this morning was the ISM report and then the comments from [Fed President] Lacker came out and that kind of pushed people over the edge," said Kim Caughey, senior equity analyst at Fort Pitt Capital Partners. "This is a very volatile time, everyone is nervous and the volatility shows the degree of nervousness," Caughey added.

Stocks tumbled in January, with the Nasdaq seeing its worst start to the year ever, on fears that the credit and housing market crises will send the economy into recession, if it isn't there already. After such a steep decline, stocks managed to bounce back for a few days last week as investors scooped up battered shares. But the rally was short-lived, with stocks erasing last week's gains in a matter of two sessions.

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Bears still runnin' loose...

Stocks slammed by economic outlook
Fri., Feb. 8, 2008 - Investors biting nails over bond insurers, broader economy

Wall Street finished a dismal week with a mixed performance Friday as investors grappled with fears about insurers of distressed mortgage-backed bonds and anxiety about the broader economy. The Dow Jones industrial average, which rose in earlier trading, fell more than 60 points, while the Nasdaq composite index managed a gain. Both ended the week down more than 4 percent, however, and it was the Dow's worst week, percentage-wise, since March 2003.

The market has been shaken in recent weeks by uncertainty surrounding bond insurers and whether they'll be able to handle huge losses in the value of mortgage-backed bonds. On Thursday, Moody's Investors Service lowered its rating on the bond insurer Security Capital Assurance Ltd. Then at midday Friday, Fitch Ratings, another credit rating agency, put a series of mortgage-backed securities insured by MBIA Inc. on negative watch.

"The bond insurers are really on people's minds," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. "This is a horribly complex issue." If the ratings agencies downgrade more bonds and bond insurers, the moves could hurt the banks that own the bonds — and "just drive the credit markets into a downward spiral," Caughey said. "It's things happening further upstream that's making people nervous."

More Stocks slammed by economic outlook - Stocks & economy - MSNBC.com

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Bond insurers' bail-out...

Plan to Rescue Bond Insurers Is Outlined
February 15, 2008 WASHINGTON — The recapitalization of bond insurers hit by the subprime crisis may occur soon, but if it fails, insurers can be forced to separate riskier activities from their municipal bonds business, New York State officials said Thursday.

“The clear preference is a recapitalization of the companies, something that could happen at some point. We would hope shortly,” Gov. Eliot Spitzer of New York said after testifying before a House Financial Services subcommittee about the state of the bond insurance industry. Asked to be specific, Mr. Spitzer said: “It could happen within a couple of days.”

The New York State insurance superintendent, Eric R. Dinallo, has been working with banks on rescue plans for several bond insurers, which guarantee $2.4 trillion of debt. The companies are facing big losses from insuring bonds linked to subprime mortgages and other risky assets. “Speed is important at this point,” Mr. Spitzer said, referring to diminishing confidence that has hurt markets like auction rate securities. “The time for delay has passed.”

At the hearing, the chief financial officer of MBIA, C. Edward Chaplin, said the insurer was more than adequately capitalized to meet obligations to policyholders. That view was echoed by Michael A. Callen, the chief executive of the Ambac Financial Group, who said Ambac had the resources to “comfortably” meet existing obligations.

In his testimony, Mr. Chaplin told lawmakers that they must support the bond insurers’ efforts to raise capital, because failure could have “far-reaching effects” on the economy. The company also criticized short-sellers like William Ackman, founder of the hedge fund Pershing Square Capital Management, for what MBIA said was undermining market confidence in the bond insurers.

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Do we really need another bubble?...

Surge in bonds and emerging markets fuels bubble
Fri Feb 15, 2008 - U.S. government bonds and emerging-market equities have benefited as investors have sought refuge from the housing and credit crises, but the two asset classes' surge in popularity is inflating a dangerous bubble that is likely to burst.

Last year, U.S. Treasuries benefited tremendously from the flight from risk as the credit crisis began. But the sector's popularity took off when the Federal Reserve started cutting interest rates aggressively last September to support the economy. It has reduced its target for the fed funds rate by 2.25 percentage points, to 3 percent. Short-maturing U.S. Treasuries have returned nearly 7 percent since August, while 10-year Treasury notes have posted returns of over 11 percent, according to Merrill Lynch data.

Not coincidentally, the S&P 500 .SPX, Dow industrial .DJI and Nasdaq Composite .IXIC indexes in 2007 posted their worst annual returns in four years. Dan Fuss, co-manager of the $16.8 billion Loomis Sayles Bond Fund, sold nearly all of his long-maturing Treasury holdings in recent weeks because he sees more risks than value there.

"Treasuries are in a bubble, in a hot air balloon, and now it is starting to leak," Fuss said. On Friday, the 30-year Treasury bond fell for a fourth straight day, ending its worst week of losses since early December and pushing its yield to the highest level of the year.

More Surge in bonds and emerging markets fuels bubble | Special Coverage | Reuters

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Bonds gonna go bust?...

The Next Financial Crisis?
Feb. 20, 2008 - Failure in the Normally Dry World of Bond Insurance Could Have Grave Ramifications

As bond insurers struggle, it is another sign that banks will have mounting losses, which will make it harder for average Americans to get necessary financing for things like mortgages and credit for purchases.

Starting last summer, as more and more homeowners began to default on their mortgages, banks wrote off billions of dollars in investments, based on those loans. In turn, banks turned off the lending spigot, making it harder to get a mortgage, or for businesses to make billion-dollar deals. All of that has fed into the recent economic slowdown, and what has been called a "credit crunch," a "liquidity crisis," or a "seizing up of the credit markets."

Now, worries by investors and analysts, about the state of bond insurers, indicate more trouble ahead for the nation's financial markets, and perhaps, another period of extreme difficulty in getting a loan or credit. Recent news stories have focused on an obscure part of the financial sector, called "bond insurance," also referred to as "monoline insurance." Investors worry that the big insurers like Ambac and MBIA will see their credit ratings downgraded.

What Is Bond Insurance?