April 20, 2021

Stocks and Bonds: Markets Jump in U.S. and Europe on Hopeful Signs

Analysts said the markets were helped by a successful auction of three-month bills in Spain. Also, a report showing improved business sentiment in Germany, Europe’s largest economy, offered a glimmer of hope.

The Dow Jones industrial average turned positive for the month and bank shares were up more than 3 percent. Over all, it was a reversal of the drag on the entire stock market on Monday, when financial stocks fell by more than 2 percent, partly as focus shifted to a warning by the European Central Bank of a perilous year ahead.

But with no stunning news event or resolution to the financial markets’ persistent irritants, some questioned the reasons behind the size of the surge on Tuesday.

“I cannot explain today’s action in the market,” Gary M. Flam, an equity portfolio manager at Bel Air Investment Advisors, said in the final hour of trading. “There has been no news, either positive or negative, to drive a move of this magnitude. I could try to explain it away, but a move of this magnitude is head-scratching.”

At the close, the Dow Jones industrial average was up 337.32 points, or 2.9 percent, at 12,103.58. The Standard Poor’s 500-stock index showed a gain of nearly 3 percent to 1,241.30. The index’s 35.95 point gain was the seventh-best of this year. The Nasdaq composite index was up 80.59 points, or 3.2 percent, at 2,603.73.

As stocks soared, investors left the safety of government bonds. The Treasury’s 10-year note tumbled 1 2/32, to 100 21/32. The yield rose to 1.93 percent, from 1.81 percent late Monday.

Many analysts also noted that wild swings were a predictable feature of the end of the year as managers balanced underperforming elements in their portfolios at a time of low trading volume. And even after an impasse over extending a payroll tax cut was announced Tuesday in Washington, the markets held on to their gains.

“The market just seems to have no memory from one day to the next,” Mr. Flam said. “To drive a move of this magnitude, you would expect there to be some sort of resolution on the bigger-picture issues.”

The sovereign debt crisis in the euro zone and the prospects of sluggish economic growth have ganged up on the financial markets in recent months. But the data has sometimes broken through the gloom, pointing to a recovery that is sluggish but at least is not stalled.

On Tuesday in the United States, government data showed that housing starts in November hit their highest level since April 2010. They reached 685,000, a seasonally adjusted annualized pace surpassing forecasts of 635,000 and up more than 9 percent compared with October. Building permits also exceeded expectations, reaching 681,000, data from the Commerce Department showed.

And a survey released on Tuesday by the Ifo research group in Munich showed that the business climate for trade and industry in Germany, which is Europe’s largest economy, continued to improve in December. “The German economy seems to be successfully countering the downturn in Western Europe,” the report said.

Stanley Nabi, the chief strategist for the Silvercrest Asset Management Group, said that the economic reports in the United States and from Europe showed they were “not doing as badly as expected, and this morning the housing data came out much stronger than expected.”

In addition to recent higher expectations for growth, he said, “all of these things combined have given a measure of comfort” to investors.

The Euro Stoxx 50 index closed 2.7 percent higher. The major indexes were up 3.1 percent in Germany, 2.7 percent in France and 1 percent in Britain. The German 10-year bond rose 8 basis points to yield 1.95 percent.

In the euro zone bond market, where sovereign debt concerns have been overriding, the Spanish auction of three-month bills priced to yield 1.74 percent helped sentiment, an analyst said.

“We are still a long way from a fix to Europe’s problems, but any ease in funding pressures among member economies is certainly a welcomed development,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company, referring specifically to Spain.

As the euro rose and the United States dollar retreated about 0.5 percent on its index, energy and materials stocks on the broader market surged nearly 4 percent. Oil prices rose more than 3.5 percent, with crude for January delivery on the New York Mercantile Exchange at $97.35.

Bank of America shares, which closed below $5 on Monday, their lowest point since March 2009, were up 3.7 percent Tuesday at $5.17.

ATT was up more than 1.3 percent to $29.12. It announced after the markets closed on Monday that it would end its bid to acquire T-Mobile USA.

Article source: http://feeds.nytimes.com/click.phdo?i=7450b6c3bb7e626c2d9db68c813203fd

It’s the Economy: The Wild West of Finance

Known formally as the Direxion Russell 1000 Financials Bearish 3X ETF, FAZ follows the gyrations of some of the most twitchy stocks, like banks, insurance companies and real estate firms. As an exchange-traded fund, it takes a security made up of a bunch of underlying assets and makes it behave like a stock. Investors can buy and sell FAZ, moment by moment, to try to grab quick wins.

But FAZ is not a simple basket of financial stocks. It’s composed of odd derivatives and loans that are designed to reverse financial stocks — to go up when they go down and vice versa — and triple gains or losses. It is designed for gunslinger day trading, as investors try to profit by predicting how the market will act in short bursts.

However reckless FAZ may sound, there’s a reason to root for the sector of the financial world that created it. Day trading is part of the often demonized Wild West of investment. It’s a world of online brokers, boutique money-management firms, private-equity companies and others — a gold-rush universe where anybody can sell almost anything as long as you don’t (technically) tell any lies. It isn’t a glamorous life. Day traders, for instance, stare at computer screens all day buying shares, only to sell them seconds or minutes later. Their hope is that if they buy low and sell a tiny bit less low enough times in a day, they can add up some real profit. Surveys indicate that most lose money and give up fairly quickly.

Hedge funds, which allow rich people and institutions to outsource their financial gambling, are the major players in the Wild West. And, contrary to public belief, they are no more likely to succeed than independent day traders. The handful of firms that have made huge and consistent profits hide a remarkable secret: study after study shows that most hedge funds either lose money or make tepid returns. Many — and, some argue, most — actually shut down after a few years.

What’s to celebrate here? The Wild West represents something akin to a normal, thriving market. It is largely overseen by the S.E.C., which takes a forgiving approach to firms that sell products to active investors. The downsides to this lax regulation are well known, but it is not without its benefits. Entrepreneurs with nothing more than a good idea can enter the market relatively quickly and compete against established firms. If they can offer better products than their competitors, they’ll succeed; if not, they go bust (hopefully before they almost blow up the world). One major sales pitch for capitalism is that constant competition makes us all better off. If FAZ — or a hedge fund, for that matter — doesn’t appeal to enough people, it will eventually collapse. And there is nothing wrong with that. Failure is as important to healthy capitalism as success.

The nation’s handful of huge banks, however, are spared the indignity of failure. (Ignore Bear Stearns and Lehman — they were puny compared with the true giants.) Citi and Goldman Sachs both bet against the interests of some of their largest clients and created products designed to fail. It’s extremely likely that all of the nation’s largest banks would have collapsed over the past three years without enormous help from the Federal Reserve. In any normally functioning market, they would have subsequently had trouble making huge profits. Instead, they’ve gotten bigger and richer.

One of the biggest problems is that the big banks are regulated in a manner that, paradoxically, often works to their benefit and against ours. The S.E.C. watches over them but so do a host of other regulators. Every large institution can choose from among the Fed, the F.D.I.C., the Comptroller of the Currency and 50 state banking regulators, all of which compete with one another in turf battles. They also have countless agencies in other countries overseeing them. With so many different regulatory bodies, some things slip through the cracks. (A.I.G., for example, had around 400 different regulators throughout the world and conducted its sketchy financial activity in places where it did slip through.) Remember that the worst excesses of the housing bubble — especially the creation and distribution of those toxic assets — occurred within the highly regulated big banks, not the lightly overseen hedge funds.

When the banking rules are rewritten — as they are every few decades, usually after a crash — the banks also get the chance to play a big role in drafting them. Last year, Congress set broad new guidelines and tasked each regulator with writing specific rules. It was a nominally democratic process — all Americans are invited to express their views about banking regulation — but the main participants are the lawyers and lobbyists for the largest financial institutions. In one example, the S.E.C. held 34 meetings with groups proposing changes to the way the important Volcker Rule, which restricts banks from certain risky investments, is implemented. So far, almost all of these get-togethers have been with big banks and their representatives. Only one has been with a consumer-advocacy group.

The reality is that smaller banks or clever entrepreneurs who want to sell useful products to the general public simply cannot pay the price of admission. They can’t get much market share, because they don’t have the influence; and even more practically, they can’t afford the extraordinary number of lawyers and the lobbyists either. And being too big to fail generally makes the largest institutions fairly impervious to competition. There are nearly 8,000 banks in the United States, but the top 20 control more than 90 percent of the market. The top three alone control 44 percent. This is terrible for customers, who would be better served if banks competed entirely on the basis of serving us better.

Some economists say banking in the United States is a full-on oligopoly, while others say, well, it’s only oligopolesque. Regardless, we clearly need smarter, stronger regulation. But we also need banking upstarts — the Googles of finance — capable of competing with the big banks. Unfortunately, many ambitious newcomers mostly see opportunities in high-risk, high-loss products like FAZ and not in sensible things that the rest of us might want.

Article source: http://feeds.nytimes.com/click.phdo?i=ccd5c59fdb7690bf52dacdfdb0601734

DealBook: MF Global Bankruptcy Rattles Wall St. Firms

The markets were haunted this Halloween by the ghosts of the past financial crisis.

With MF Global filing for bankruptcy on Monday, investors pummeled many financial stocks, fearful that problems were lurking on the books of other Wall Street firms. It was a crisis of confidence, not unlike in 2008 when the markets punished stocks on mere speculation of trouble.

On Monday, companies with perceived exposure to MF Global bore the brunt of the pain. The Jefferies Group, which issued a statement saying it had a minimal stake in the brokerage, fell by nearly 10 percent. The Fortress Investment Group, which proactively disclosed that it had “literally zero” exposure, dropped by more than 11 percent.

“Investors across the financial sector are definitely on high alert trying to avoid or minimize these sovereign debt exposures,” said Ed Ditmire, an analyst at Macquarie Capital.

MF Global made a risky bet in a tumultuous market. Recently, the firm revealed that it had $6.3 billion of sovereign debt in troubled countries like Italy and Spain. The position was nearly five times the firm’s equity of more than a billion dollars. As the sovereign debt crisis reached a peak in October, two rating agencies cut the grades on the company’s debt, saying they questioned the firm’s risk controls given the size of the position.

The downgrades sent the company into a tailspin. Trading partners asked the firm to post more money against their portfolio. Adding to the jitters, MF Global reported a third-quarter loss, which further eroded its stock and made its capital position even more tenuous. The firm drew down a $1.3 billion credit line as it fought to stay afloat. But it proved insufficient, and MF Global was forced to file for bankruptcy.

After Moody’s downgrade last week, MF Global sent a letter to clients trying to reassure them of the firm’s strength. On Monday, as some clients called to ask questions and liquidate their accounts, MF Global was not picking up the phone.

Some financial exchanges prevented MF Global employees from entering Monday, while others, including the Chicago Mercantile Exchange and the IntercontinentalExchange, halted the firm’s trading in the morning. That forced clients of MF Global to sit tight or liquidate their holdings.

“I’m disappointed in the way the Chicago Mercantile Exchange, MF Global and the regulators have handled this bankruptcy,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global. “They had no contingency plan in place and just cut off our trading screens, and we’re forced to liquidate clients’ accounts unfavorably.”

It is difficult to know what other firms could face the same pressure. Most of the small brokerages that clear futures trades like MF Global are private companies, so their capital positions are not as vulnerable to the whims of the public markets. The rest of the industry is dominated by large banks, which analysts say have sufficient capital.

The irony is that MF Global’s sovereign debt may turn out to be right — eventually. The firm was ostensibly making the wager that Europe would come to the rescue of its troubled economies and the countries would not default on their debt.

In such a event, MF Global’s holdings would most likely have paid off. But investors and others just did not have the patience to wait and see.

“The positions still have not caused any losses to the best of my knowledge,” said Richard Repetto, an analyst at Sandler O’Neill. “But this risk-taking is just excessive compared to the size of the balance sheet.”

Michael J. de la Merced contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=a5b1b7629ad6284ebd75a0906301c08e

DealBook: MF Global Fights to Stay Afloat After Two Credit Downgrades

Jon S. Corzine, the chief executive of MF Global, has tried to figure out ways to promote the firm's financial strengths.David Goldman for The New York TimesJon S. Corzine, the chief executive of MF Global, has tried to figure out ways to promote the firm’s financial strengths.

9:07 p.m. | Updated

MF Global, the commodities and derivatives brokerage house, was in a fight for its life Thursday night after the firm drew down its main credit line and two major credit ratings agencies cut their ratings on the firm to junk.

MF Global is scrambling to sell some or all of itself. The firm has enough assets to survive for at least the next few days, said a person outside the firm who was briefed on its condition.

The pressure on MF Global is mounting even as a deal over Greece’s debt has provided market relief to other American financial institutions. Investors have grown increasingly worried about MF Global’s capital position given its exposure to $6.3 billion in debt from Italy, Spain, Belgium, Ireland and Portugal.

But during the market day on Thursday, Fitch Ratings cut its credit rating on the firm to junk status, and shares of MF Global tumbled nearly 16 percent, even as other financial stocks surged.

Late on Thursday, Moody’s Investors Service cut its rating on MF Global for a second time this week, to Ba2 from Baa3. The downgrade to junk status, Moody’s said, “reflects our view that MF Global’s weak core profitability contributed to it taking on substantial risk in the form of its exposure to European sovereign debt in peripheral countries.”

The other major credit ratings agency, Standard Poor’s, warned on Wednesday that it might cut its ratings, too. The ratings downgrades could limit the number of counterparties willing to trade with MF Global.

To bolster its cash position, MF Global has tapped a $1.3 billion credit line at the parent company level, people briefed on the matter said Thursday evening. The firm still has financing available, including at least some of a $300 million revolving credit line in its broker-dealer subsidiary as well as bank overdrafts and letters of credit.

An MF Global spokeswoman, Tiffany Galvin, declined to comment.

People close to MF Global said that as of Thursday afternoon, only a small percentage of client funds — in the low single digits — had left the firm. Most of that appeared to be clients spreading their accounts across multiple brokerage houses.

These people added that the firm had adequate liquidity and that it was not contemplating filing for bankruptcy.

For days, analysts and investors have worried that time is running short for MF Global to solve its multiplying problems. The firm has hired Evercore Partners to help it assess strategic options, which include potentially selling its futures brokerage unit to a larger institution, according to people briefed on the deliberations.

But the firm is still considering other alternatives and has not settled on a definitive course of action, these people cautioned.

Within MF Global’s offices in Midtown Manhattan, the mood among the rank and file has been tense but defiant. Many employees have been working through the night talking to clients concerned about the speculation about the firm.

The firm’s chief executive, Jon S. Corzine, has held several firmwide conference calls to disseminate talking points on the company’s financial strength, according to a person with direct knowledge of the matter.

Many lower-level employees say they believe that talk about the firm’s troubles is overblown, and some have even bet on a comeback by buying MF Global shares for their personal accounts, this person said.

Major exchanges including the IntercontinentalExchange and the CME Group said that MF Global remained a clearing member in good standing as of Thursday afternoon, according to representatives for the bourses.

But that was before Bloomberg News reported that MF Global had drawn down its credit line.

Thursday’s downgrade marks the latest blow to MF Global, which Mr. Corzine, the former Goldman Sachs chief and former New Jersey governor, has sought to transform itself from a derivatives and commodities brokerage into a full-blown investment bank. A centerpiece of that plan included taking on additional risk, and potential profit, by making more trades using the firm’s own capital.

That plan has been dealt sharp setbacks over the past week, starting with a ratings downgrade by Moody’s on Monday and MF Global’s announcement of a $186 million quarterly loss the next day.

Article source: http://feeds.nytimes.com/click.phdo?i=9d1464a4fcbadeeaeff83abcd42f8125

Wall Street Slides After Jobs Figures

The monthly Labor Department report, released Friday, showed there was no job growth in the United States economy in August. In addition, analysts said financial stocks were hurt by the prospect, reported by The New York Times, that a federal agency was set to file lawsuits against more than a dozen big banks over their handling of mortgage securities.

Many investors had sold stocks ahead of the government’s Labor Department report, which analysts in a Bloomberg News survey had forecasted would show a gain of 68,000 nonfarm payrolls. The flat performance t was down sharply from a revised 85,000 new jobs in July. The unemployment rate stayed constant at 9.1 percent in August.

The suits by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

When the stock market opened, all three major Wall Street indexes slid lower and stayed there. By midday, the Dow Jones industrial average was down 169.34 points, or 1.5 percent. The Standard Poor’s 500-stock index was down 1.7 percent, and the Nasdaq composite index fell 1.6 percent.

The financial sector dragged down the broader market, with the five most actively traded banks in the sector each down about 3 percent or more. Bank of America was about 6 percent lower; Wells Fargo was down nearly 4 percent, and JPMorgan was down more than 3 percent.

“This is not good news from the perspective of the banking sector,” Phil Orlando, chief equity market strategist at Federated Investors, said about the potential for the mortgage-security lawsuits.

The jobs report, too, was “very disappointing. It was much weaker than expected. We were thinking that if today’s jobs number was poor we would start to see a pull-back.”

The markets in the United States followed declines in Asia and Europe.

The Euro Stoxx 50 index plunged 5.5 percent, while the DAX in Germany lost 3.4 percent and the CAC 40 in France fell 3.6 percent. The FTSE in Britain was down by 2.3 percent. In Asia, the Shanghai, the Nikkei and the Hang Seng indexes each closed down by more than 1 percent.

“The latest fall follows a highly volatile August period which saw global markets take substantial hits over political uncertainty over the U.S. debt ceiling and subsequent credit downgrade,” John Douthwaite, chief executive officer of SimplyStockbroking, said in a research note.

In August, all three indexes in the United States had their worst monthly performance since 2001. Shares took a beating for reasons that included fears of an economic slowdown and fiscal problems in the United States as well as continuing concerns over debt issues in Europe.

Mr. Douthwaite said market turbulence was set to continue in September because of weak economic data from the United States and Europe.

The decline in stocks on Friday came just ahead of the start of the three-day Labor Day weekend in the United States. It followed a lackluster day of low trading volume on Thursday, when banks led the market down, ending a four-day rally.

The three major indexes extended their losses from Thursday, when they closed more than 1 percent lower.

The worse-than-expected jobs report led some economists to forecast new policy action by the Federal Reserve at its next meeting on Sept. 20-21.

Economists from Goldman Sachs said that it now was more likely the Fed would lengthen the average maturity of its balance sheet, with sales of relatively short-dated Treasuries and purchases of relatively long-dated Treasuries.

Mr. Orlando said the central bank could also cut the premium on banking reserves to force banks to lend more.

The price of the 10-year Treasury note rose Friday morning, and the yield fell to 2.043 percent from 2.13 percent late Thursday.

Shaila Dewan and Nelson D. Schwartz contributed reporting.

Article source: http://www.nytimes.com/2011/09/03/business/daily-stock-market-activity.html?partner=rss&emc=rss

European Market Regulators Extend Bans on Short-Selling

The three countries, along with Belgium, imposed bans on short-selling, or bets on falling prices, of some financial stocks in an effort to stabilize markets after the shares of some European banks, like Société Générale, hit their lowest levels since the credit crisis of 2008.

Belgium’s financial markets regulator said Thursday that it would examine lifting its ban as soon as market conditions allowed.

The restrictions cover the short-selling of shares and equity derivatives in some financial firms. Short-sellers borrow shares and sell them with the intention of buying them back later at a lower price, a practice politicians and some investors have blamed for roiling markets. The initial restrictions introduced by France, Spain and Italy were temporary, lasting 15 days. Belgium’s is indefinite.

Traders had worried that Germany might also ban short-selling. But on Thursday, Dominika Kula, a spokeswoman for BaFin, the German markets regulator, said the agency had “all the regulation in place” for the short-selling of equities. Some market followers questioned the effectiveness of the short-selling bans, saying they would have little effect on equities. “Short-selling equities is not a significant danger to financial stability, so these bans are irrelevant,” Richard Portes, a professor of economics at London Business School, wrote in an e-mail.

Euro Stoxx 50, a barometer of European blue-chip stocks, has gained less than 0.1 percent since Aug. 11, the day the bans were announced. It fell by almost 1 percent on Thursday.

Article source: http://feeds.nytimes.com/click.phdo?i=ed11c7eba2527160db7eab678934e056

DealBook: The Trouble With Financial Stocks

Sell now — ask questions later.

That appears to be the mind-set of many nervous investors when it comes this week to financial stocks, which are down more than the broader market. Goldman Sachs is down almost 12 percent since Monday’s open. Morgan Stanley and Bank of America are both down roughly 17 percent. Citigroup dropped 15 percent and JPMorgan Chase shares sank almost 9 percent.

Some market insiders feel the sell-off is overdone. Bank executives are grumbling about it. There is nothing systemic seemingly going on here, they say. In some cases, banks have record-high capital levels thanks to recent regulatory rules requiring them to put up more capital against riskier businesses. Leverage, or how much money a firm borrows to fund its business, is down significantly since the financial crisis. An optimist may even argue these stocks are a screaming buy right now. All of the country’s biggest financial stocks are trading below book value, or crucial financial measure that refers to the liquidation value of a company’s assets if it were forced to sell everything.

So what gives? No one cares about all that right now.

“What you are seeing is the manic ‘I remember 2008’ selling,” said Glenn Schorr, a banking analyst with Nomura. “And the only thing that worked then was to get out of the way and not come back too early. The more cash they have, the safer people feel right now.”

Holders of financial stocks, burned by what happened in 2008, don’t want to stick around and see how this latest bump in the road ends, especially given the questions surrounding bank exposure to Europe, continued litigation stemming from the credit crisis and the potential impact of a possible recession, which threatens to crimp big money makers for the banks, including M.A., underwriting and beyond.

Mr. Schorr said while most banks have stated they have bought protection to hedge against their exposure in Europe, bank investors are worried it may not matter. “There may be a voluntary restructuring instead of an actual bankruptcy so the protection they have bought might not pay off,” he said.

Richard Bove, an analyst with Rochdale Securities, is downright pessimistic, saying concerns over Europe and litigation are just a symptoms of larger problem, one that is systemic.

“This is a continuation of 2008,” he said. “We are finally coming to grips with the fact we have a massive debt problem that needs to be dealt with. This is not a problem for our grandchildren. It is our problem. We have a financial system structured on a bankrupt currency and that system is now breaking down and a new system will arise to replace it, but we don’t yet anything to replace it. “

Mr. Bove said recently moved all his holdings into cash.

While everyone’s hair seems to be on fire this week, major players including Fidelity, Wellington Management and AllianceBernstein have been big sellers of financial stocks for months now, regulatory filings show. This selling points perhaps to another concern about these stocks. Financial firms, with lower leverage levels and more rigorous capital requirements, simply won’t be able to generate anywhere near the returns they did before the financial crisis. Goldman’s return on equity was just 8 percent in the second half of this year, down from more than 30 percent in 2006.

Banks argue that big shareholders are always selling in and out of their stocks. This week’s hubbub aside, the selling by some of these long-term holders suggests that concerns run deep. And even though the country’s banks are well capitalized and have significantly lowered their leverage levels since the crisis, it may be some time before investors wade in again.

Article source: http://feeds.nytimes.com/click.phdo?i=44e6c4364a046d168abf4ddd42cf9efc