US economy

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Financial Markets

Markets are interrelated, again a bothersome in unequaled market culpability have its blastoff imprint a unlike market. This finding is a first-hand dot through macroeconomics. To mark consist of markets they right explore, economists conventionally node together or aggregate the vast consist of markets in a later economy into individual four: markets whereas freight and services, cash assets, money balances, and resources.
The research of these four aggregated markets is chief to macroeconomics. Macroeconomists ask two capital questions for they examine each: “Is this peddles to be source of instability that shows up as spread or recession,” and “Will the habituation life in this peddle establish problems because the overall habituation of the economy.”
This collective of interpretations starts our venture of aggregated markets by looking at money markets. We establish by introducing easy concepts of financial markets, uphold by examining the role of speculators in fiscal markets besides introducing the concept of efficient markets, and effectuate ropes the foreign set-to market, explaining the contrast between floating and discriminating rumble rates.
Changes repercussions apart of the economy are rapidly transmitted to other parts over financial markets. The ability of financial markets to transmit is highlighted credit the market through outer exchange, situation we turn up that a tariff designed to protect jobs in unaccompanied pattern of the economy pledge fee jobs pressure other parts. Such transmission is not shrimp to questions of tariffs or to the hawk whereas foreign disagreement; uncondensed financial markets transmit.
From a microeconomic dot of view, the pristine stimulation of capital markets is to allocate available savings to the most creative use. A well-functioning financial sector increases economic progress. If an economy does not allocate savings to the enormously productive uses, it entrust establish further slowly than physical culpability mature. Whereas we are looking at financial markets from the opinion of macroeconomics, this capture of readings enormously ignores the priority of financial markets access allocating funds.

“There are now increasing signs that economic activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system,” the bank said. “However, the recovery is nascent.”

The bank said it now expects the economy to contract by 2.3 per cent this year, a slight improvement from the three per cent contraction it forecast in April.

For 2010, growth is now projected to hit three per cent, an improvement from April’s outlook of 2.5 per cent growth. The bank did moderate its 2011 outlook to 3.5 per cent from its April forecast of 4.7 per cent growth.

“In the eyes of the Bank of Canada, the Canadian economy will rise like a phoenix from the depths in the next two years,” CIBC World Markets economist Avery Shenfeld said. “Today’s policy announcement didn’t change anything that [Bank of Canada governor Mark] Carney is doing, but the central bank is clearly less worried about the downside risks to growth.

“That degree of optimism, however, may understate the structural challenges to brisk growth abroad and the risks to Canada from an overvalued exchange rate,” Shenfeld added.

Dollar concerns

In its statement accompanying the rate decision, the central bank said that stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic spending.

However, the bank cautioned that the higher Canadian dollar, plus restructuring in some major industrial sectors, “is significantly moderating the pace of overall growth.”

From a 2009 low of 76.98 cents US on March 9, the loonie has shot up to top 90 cents recently.

On Tuesday, the loonie initially added about two-thirds of a cent in the wake of the Bank of Canada decision, but the dollar gradually lost ground throughout the day. At 1:51 p.m. ET, the dollar was down 0.15 of a cent at 90.20 cents US.

“The comment on the currency actually represented some easing in the bank’s concern relative to its April comment that ‘if the unprecedentedly rapid rise in the Canadian dollar proves persistent, it could fully offset [other] positive factors’ cited at the time, such as improvement in financial conditions, confidence and commodity prices,” said Paul Ferley, assistant chief economist at Royal Bank.

Bank of Canada governor Mark Carney told CBC in May that he saw some positive economic signs, including a rebound in consumer confidence and positive moves in the housing market.

The Bank of Canada will lay out its expectations for the economy on Thursday when it releases its monetary policy report. The next decision on interest rates is set for Sept. 10.

Mortgage lenders helped save a record 225,000 at-risk mortgage borrowers from losing their homes during October, according to a report issued Tuesday by a coalition of lenders, mortgage servicers, investors and counselors assembled to fight the foreclosure plague.

The coalition, Hope Now, said the number was up from 212,000 in September.

It claimed its members have helped 2.7 million homeowners have keep their homes since July 2007, with 1.7 million of those coming in the past 10 months alone.

“Our efforts to streamline the foreclosure prevention process are clearly working,” said Faith Schwartz, the coalition’s director.

Workouts offered at-risk mortgages fall into two general categories.

In the first, called repayment plans, lenders grant delinquent borrowers extra time to make up missed bill. Borrowers may be allowed to pay more each month for a set number of months, for example, or payments can be added to the end of the loan’s term.

Of the 225,000 workouts arranged in October, 122,000 were of this type.

The second kind of workout is called a mortgage modification because the actual terms of the contract have to be rewritten. Changes can include freezing or lowering interest rates, extending the life of the loan – say from 30 years to 40 years – or even forgiving some of the balance owed.

Critics say this is a much more viable solution to payment problems because it can lower payments enough to make them affordable.

The number of modifications accomplished over the past three months through October increased 24% over the previous three months while repayment plans were up only 9.8%.

“The growing use of loan modifications is not an accident,” Schwartz said. “The U.S. economy is still troubled and that means that changing the terms of a loan is an increasingly appropriate way to keep more homeowners in their homes. Hope Now members are likely to continue to consider them as long as the broader economy continues to struggle.”

One sign that these efforts may be starting to pay off came in the data for the number of people who lost their homes during the month. That totaled a bit more than 77,000, an approximately 10% improvement over September when nearly 86,000 people had their homes repossessed.

Many lenders have expanded their mortgage modification efforts over the past few months. In August, the Federal Deposit Insurance Corp. announced it would modify many of the loans it is administrated since its takeover of IndyMac Bank.

The FDIC said it would lower payments to no more than 38% of gross income for at-risk borrowers by lowering mortgage rates, extending terms or deferring some of the principal.

That was followed by similar announcements of added help for, among others, Countrywide-Bank of America , Chase Mortgage and Citibank borrowers, as well as a new mortgage rescue plan for borrowers of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500)-backed loans.

Among those changes were plans by the firm to spin-off part of its commercial real estate assets, sell a majority stake of its investment management division and slash its annual dividend.

Following a wild market session Tuesday in which Lehman (LEH, Fortune 500) shares plunged 45% to their lowest levels in nearly a decade, the investment bank said it lost $3.9 billion during the fiscal third-quarter, or $5.92 a share.

The results, which were released more than a week in advance to help quell fears about the firm’s underlying health, were the company’s second consecutive loss and exceeded Lehman’s $2.8 billion second-quarter loss announced in June.

Lehman Chairman and CEO Richard Fuld Jr. described the quarter as “one of the toughest periods” in the 158-year old firm’s history.

Just a year ago, Lehman Brothers, along with the rest of the broader banking industry were in the early days of the credit crisis. In last year’s third quarter, Lehman reported a profit of $870 million, or $1.54 a share.

Analysts were bracing for bad numbers from Lehman, as well as its crosstown rivals Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500), due to sluggish investment banking activity and weakness in stock markets around the globe. But Wednesday’s results surpassed those expectations as consensus estimates anticipated the firm to report a $1.99 billion loss, or $3.35 a share, according to Thomson Reuters.

Lehman shares, which have plunged nearly 88% so far this year, fell nearly 3% Wednesday morning.

A smaller and ‘de-risked’ Lehman
While sluggish investment banking activity and $7.8 billion worth of writedowns weighed on the company’s results, top Lehman execs, including Fuld, blamed the abysmal quarterly numbers on the attempts to shore up the company’s books.

During the quarter, the company said it drastically slimmed down both its commercial and residential real estate holdings by selling billions of dollars worth of assets as part of the multi-prong restructuring plan announced Wednesday.

Lehman said it reduced its residential real estate holdings by nearly a half. Part of that included the planned sale of about $4 billion worth of U.K. residential real estate. Lehman said it was working with asset manager BlackRock (BLK, Fortune 500) on the sale and expected it to be completed in the coming weeks.

Similarly, the Wall Street firm announced it would spin off the majority of the company’s commercial real estate assets into a new, separate public company dubbed Real Estate Investments Global as part of an effort to “derisk” the balance sheet, Fuld said.

While a deal had not been finalized, the company added that it planned to sell a majority interest in its investment management division, which includes the profitable money manager Neuberger Berman. Lehman said it was in advanced discussions with a number of potential partners and that it expected to announce details of the deal “in due course.”

Speculation about a break-up of Lehman have persisted in recent months, including talk that the company would shed its profitable Neuberger Berman money management unit to raise cash.

Also, in an effort to save $450 million, Lehman said it planned to reduce its annual dividend to 5 cents per share from 68 cents.

“Lehman is being forced to make hard decisions now that the various options on the table have narrowed and balance sheet concerns start to bite,” Cubillas Ding, a senior analyst with with financial research firm Celent, wrote in a research note Wednesday.

Putting the rumor mill to rest
The fate of Lehman Brothers has been the subject of much market discussion in recent months following the near collapse of Bear Stearns, which was subsequently sold to JPMorgan Chase (JPM, Fortune 500) at a fire sale price.

On Tuesday, Lehman shares plummeted following a report by Dow Jones that indicated talks between Lehman and Korea Development Bank had ended. It had been widely speculated in recent weeks that the state-run KDB was interested in buying a stake in Lehman.

The stock fell even further Tuesday after credit ratings agency Standard & Poor’s said it was placing Lehman on its CreditWatch list with negative implications, suggesting that S&P may cut its rating on Lehman’s debt.

Lehman’s problems have proven more acute than some of its peers as a result of bad investments in the U.S. commercial and mortgage market such as the apartment developer Archstone.

In June, following the company’s first loss, Lehman silenced many of those critics by announcing plans to raise $6 billion in capital by selling stock.

At that time, investors were not only questioning the company’s accounting but speculating that Lehman may have to sell part or even all of itself to another financial firm.

But some of that speculation persisted in the months that followed. Most recently, there have been news reports that other large global financial institutions besides KDB were eyeing an investment in the U.S. firm, including Tokyo Mitsubishi Bank as well as a group of investors led by the British bank HSBC (HBC).

Lehman chief Fuld told analysts on a conference call Wednesday that he would bring any attractive proposition to the company’s directors provided it offered a compelling value for shareholders.

Fuld, who has faced increasing pressure to take action amid all the uncertainty about the firm’s future, said such speculation and the intense public scrutiny the company has faced in recent weeks has caused “significant distractions” to not only clients and counterparties but employees as well.

But he was quick to point out that morale at the firm remained strong and that employee turnover was nothing “abnormal.” He added that Lehman’s board continued to be supportive.

“We have a long track record of pulling together when times are tough,” he said. “We are on the right track to put these last two quarters behind us.”

If the Fed does so, it would mark a dramatic change in the central bank’s assessment of the economy. As recently as the Fed’s last meeting in August, Fed members indicated that their next move would be to hike rates at some undetermined point in the future in order to fight inflation.

The Fed typically lowers interest rates during an economic slowdown in order to stimulate more borrowing and looks to raise them when it is more concerned about inflation.

The Fed slashed its federal funds rate, an overnight bank lending rate that helps determine how much interest consumers and businesses pay on various types of loans, seven times from September of last year through April in an attempt to minimize the damage from the mortgage crisis and credit crunch.

But the Fed has left rates unchanged at its past two meetings and started to indicate that it was growing more worried about rising commodity prices, particularly oil.

However, the U.S. economy, which once seemed on the verge of a recovery in the second-half of the year, has recently shown signs of weakening further.

Inflation fears fade
The unemployment rate jumped to 6.1% in August, the highest level in nearly 5 years. Economic growth is also slowing overseas. That could cut demand for U.S. exports, which was a main driver of the economic growth in the second quarter.

Thomson Reuters forecasts that third quarter corporate earnings will be flat, as losses continue to mount in the financial sector. And troubled mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which own or back more than $5 trillion in home loans, were seized by the Treasury Department this week.

At the same time, oil prices have fallen sharply from their record highs and the dollar has rebounded against the euro. Thus, some think the threat of inflation is receding.

With this in mind, one economist said that so-called inflation doves, those who argue economic weakness is a greater threat than inflation, have ample reason to call for a rate cut.

“Like Prince said, ‘This is what it sounds like when doves cry,’” said Bob Brusca of FAO Economics, who is predicting that the Fed will lower rates before the end of the year.

“Up to this point, the job losses haven’t been that bad. But the measures that the Fed looks at below the surface have got to make them worried,” said Brusca. “When the economy is moving sideways, it’s one thing to leave rates unchanged. When it’s moving lower, it’s another.”

To be sure, there are still inflation hawks on the Fed, those who believe the central bank should be raising rates to keep prices in check.

Dallas Fed President Richard Fisher voted for rate hikes at the Fed’s last two meetings. And in April, he and Philadelphia Fed President Charles Plosser voted against a rate cut.

But Brusca pointed to a recent speech by San Francisco Fed President Janet Yellen as a sign that the Fed may no longer consider rising prices a serious threat.

Earlier this month, Yellen said there has been “a shift in the inflation picture” and that she is now “very hopeful that inflation will come down quite substantially.”

While Yellen is not currently a member of the central bank’s rate-setting Fed Open Market Committee, she attends the meetings and is seen as an influential voice.

“Yes, she’s a dove, but it’s clear the doves are coming out of their shells,” said Brusca.

To cut or not to cut
Investors have noticed. According to interest rate futures on the Chicago Board of Trade, investors are now pricing in about an 8% chance of a rate cut at the Fed’s October meeting, a two-day session that concludes on October 29.

By way of comparison, shortly after the Fed’s last meeting, the futures pointed to a 54% chance of a rate hike at the October meeting.

Of course, the likelihood of a cut is still small. And one economist said that rate cuts could do more harm than good since it might spook investors and businesses already worried about the fragile state of the economy more than it would help lift spending or borrowing.

“It would send a clear signal that [the Fed] felt there were still more shoes to drop, more trouble ahead,” said David Kelly, chief market strategist for JPMorgan Funds.

He added that the Fed wouldn’t want to lower rates much further just yet because it would limit its ability to respond to some future shock to the financial system with more rate cuts.

But another economist suggested that another cut later this year or early next year is justified because of expectations that the economy will continue to get worse.

“If you need it now, you should use it,” said Keith Hembre, chief economist with First American Funds, about the option of a rate cut sooner rather than later. “I don’t know what you’d want to save it for.”

The recent rally in U.S. Treasurys is a sign that the decline in oil prices is probably for real. Unfortunately, it’s also an indication of more economic weakness ahead.

Bond prices have rallied lately. And that’s both a good thing and bad thing.

The encouraging news is that the recent bump in bond prices and resulting dip in yields is probably a sign that the worst of the oil-fueled (pun intended) inflation fears are over.

The yield on the benchmark U.S. 10-year Treasury is now hovering near 3.8% – down from about 4.15% just a month ago.

What’s the bigger economic concern right now: the credit crunch or inflation?
Higher bond prices and lower yields are usually a sign that pricing pressures are waning since inflation eats into the value of fixed-income investments.

And with oil prices falling in the past few weeks and the dollar strengthening, bond investors have had reason to cheer.

“One thing helping Treasurys out is the performance of the dollar,” said Steve Van Order, chief fixed income strategist with Calvert Funds in Bethesda, Md.

“People aren’t looking at the rearview mirror on inflation or the yield on the 10- year would be well above 4% right now. The inflation concern has moved away a bit,” Van Order added.

But, of course, behind the bond rally lurks a big dose of gloomy news: The United States may remain in an economic funk for some time and the rest of the world is starting to slow down as well.

“Inflation pressures may have eased slightly. But more important is the outlook for the economy,” notes John Canavan, an analyst with Stone & McCarthy Research Associates, a fixed-income and economic research firm. “It will remain weak. The situation in housing will pressure economy well into next year.”

With fears of an imminent government takeover of beleaguered mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) pushing down both stocks to fresh new 52-week lows Wednesday morning, there is ample reason to believe that bond yields may fall even lower.

With money fleeing once-hot commodities, Treasurys may benefit from the proverbial “flight to quality” – the notion that U.S. government debt, despite the nation’s economic woes, are one of the least risky bets an investor can make in turbulent times.

“In this environment, Treasurys could do well for people looking for safety,” Van Order said. “If you’re taking money out of the commodities market and looking for a place to put it, Treasurys would be it.”

So what’s this all mean? As long as the 10-year yield remains this low, the Fed is likely to keep holding interest rates steady as it has for the past two meetings. If inflation fears continue to wane, the central bank probably won’t want to upset the fixed-income markets.

And that, unfortunately, means more of the same for the economy for the foreseeable future.

But the one bright spot, if you could call it that, is that the markets may finally be nearing a point where most of the bad economic and financial news – even what now seems to be an almost inevitable bailout of Fannie and Freddie – is priced into bonds.

To that end, Canavan predicts that 10-year yields could fall a little further – to about 3.6% – if the credit crisis deepens and the economy continues to weaken.

However, he does not think that long-term yields will fall as low as 3.28%, the level they hit back in March just before the Federal Reserve stepped in and engineered JPMorgan Chase’s (JPM, Fortune 500) fire sale “takeunder” of investment bank Bear Stearns.

“There is the potential for further downside in yields. But most of the fears are already priced in even though the troubles in financial sector will remain,” Canavan said. “There will be more write downs but they are no longer the surprise they once were.”

Van Order agrees. “There has been a renewal of uncertainty – which therefore leads to fear regarding financials in general. That said, the level of fear is less than it’s been before,” he said.

Comments by Federal Reserve Chairman Ben Bernanke that persistent problems in the financial markets threaten the nation’s economy did little to change the dollar’s upward move.

The 15-nation euro traded at $1.48, down from $1.49 late Thursday. The greenback bought ¥110.08, up from ¥108.44.

Global economies slow: The dollar was sharply higher versus the pound after the United Kingdom’s 2nd-quarter gross domestic product was revised to no growth, below economists’ forecast of a 0.2% increase, according to Tom Benfer, director of foreign exchange at Bank of Montreal.

The pound was trading at $1.8526 Friday, sharply below $1.8778 late Thursday. When “one currency moves that far, the other currencies follow to an extent,” said Benfer.

This follows reports showing economic declines in the quarter in both Japan and the euro zone, said Vassili Serebriakov, currency strategist at Wells Fargo.

“We have seen strong evidence that economic growth is slowing globally,” he said.

As other economies struggle, the dollar has had an opportunity to climb. “A number of economies are slowing sharply – that has helped the U.S. dollar over the past couple weeks,” said Serebriakov.

The dollar has been trending higher for the past 2 weeks. “The events of the previous 2 weeks strongly suggest that we have seen the cyclical bottom in the U.S. dollar,” said Serebriakov.

Bernanke: The Fed Chairman spoke about the economy at an annual Jackson Hole, Wyo., symposium sponsored by the Kansas City Federal Reserve.

“Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole [last August] has not yet subsided,” Bernanke said. “Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.”

“The initial reaction as far as the dollar is concerned is muted,” according to Benfer. The stock market firmed after the speech, however, and he said that is “generally supportive of the dollar.”

“He did indicate that the Fed is watching developments very, very closely – they are not taking their eye off the ball,” said Benfer.

“The markets are looking for a blueprint, a battle plan, a sense of direction,” said Benfer. “If the markets get some sense that the central bank, the Treasury have their arms around this – even if it takes a long time – that will be a positive.”

Dollar and oil: Oil prices tumbled by the 2nd-largest 1-day drop ever, in dollar terms, on the back of the stronger dollar. Crude futures closed $6.59 per barrel lower to settle at $114.59 on the New York Mercantile Exchange.

The drop in the price of oil was the biggest single-day fall in dollar terms since Jan. 17, 1991, when oil fell by $10.56.

On Thursday, the dollar lost ground on fresh concerns about the financial sector. As the dollar weakened, investors moved their funds into the commodity market, helping oil prices jump more than $6 a barrel.

“The key short-term driver [for the dollar] has really been the oil price,” said Serebriakov.

High oil prices hurt U.S. companies and consumers, affecting economic growth.

“Higher oil prices have significant effect on the U.S. growth – that is the primary reason why oil is bad for the dollar,” said Serebriakov.

In addition, a weaker dollar makes oil cheaper to foreign investors, because crude oil is traded in U.S. currency globally. In addition, when investors watch the dollar fall, commodities appear to be a safe haven for their assets.

“The oil and the dollar have moved together, but it is not a simple answer as to what is driving what,” said Serebriakov. “They go hand in hard, and it is the chicken-and-the-egg problem.”

First Published: August 22, 2008: 9:39 AM EDT

Crude turns lower as dollar gains

Gas price average below $3.70

Bernanke: Financial storm not yet over

Which is why I was particularly curious to take a joy ride in July on the brand-new Hawker 4000, the first plane to offer big-jet safety and technology features at a midsized-jet price.

Okay, so it’s still $21 million. But consider: It’s $2 million cheaper than a Gulfstream G200 and $7 million less than a Falcon DX, and it has a range of 3,280 nautical miles – that’s coast to coast or New York to London nonstop.

The 4000 boasts cutting-edge avionics, auto throttle, and multiple duplicate systems (for safety) unavailable in comparable-size jets – only on the big boys.

A body like no other
Hawker Beechcraft is also the first manufacturer to certify a composite-body jet with the FAA. “It was six steps back to do composite,” says chairman and CEO Jim Schuster of the 20-year, $1 billion development process. But the resulting body is 70% stronger than aluminum, doesn’t corrode, is easier to repair, and has no life limit.

Amazingly, the fuselage is composed of three enormous pieces – vs. more than 10,000 on a traditional competitor. It’s also three times thinner, meaning there’s noticeably more room inside the standup, flat-floor ten passenger Hawker.

Tucked into its fine leather – HBC offers limitless leathers, woods, and exotic materials – I felt the obvious power during takeoff. The next thing I noticed was the relative peace: The 4000 has the quietest cabin in its class.

There’s already a two and a half year wait list, in part thanks to orders from fractional-jet companies like NetJets and BJETS, so even those who won’t be buying a 4000 may still be able to hop aboard one soon.

Private jet etiquette
So you have friends in high places, and they’ve offered to bring you along. Follow these rules if you want to be invited back.

Ask in advance how much luggage you may bring.
Don’t take your seat until after the owners find theirs.
Never tip the staff. That’s entirely up to the owner.
Nix bringing your own meal. But offering to feed everyone – preferably by air caterer – is a nice gesture.
Skip the red wine. You don’t want your hosts to remember you every time they see the stain on the carpet.
Arrange for transportation when you land. Asking for a lift is an inconvenience.
Show your thanks. One owner gives a gift equal to a first-class commercial ticket when she flies with other owners. You may not need to go so far, but don’t skimp either. — Diane Tegmeyer