March 31, 2023

Market Plummets on Weak Economic Data

Several weak economic reports sent the stock market plunging on Wednesday to its lowest level in a month.

Mining, banking and chemical companies, and other businesses with fortunes tied closely to prospects for growth, led the market lower. That is a sign that investors are becoming less confident in the economy.

The troubling data included weak hiring at private companies, a plunge in mortgage applications and sluggish orders to American factories.

The Dow Jones industrial average fell 216.95 points and finished at 14,960.59, a drop of 1.4 percent. The close was the first below 15,000 since May 6 and the decline was the largest in seven weeks.

Intel fell the most in the Dow, dropping 66 cents, or 2.6 percent, to $24.70.

The Standard Poor’s 500 index ended down 22.48 points, or 1.4 percent, at 1,608.90. The index is 3 percent below its record close of 1,669 reached May 21. It is still up 12.8 percent this year.

The Nasdaq composite index dropped 43.78 points, or 1.3 percent, to 3,401.48. The index closed at its lowest level in a month.

Stocks started lower and declined steadily throughout the day. Some investors said that because stocks rose every month this year and climbed to record levels this spring, a significant pullback was overdue.

“The rally is tired, and people are taking some profits,” said Brad Reynolds, at the investment adviser LJPR.

Investors also were unnerved by an 11.5 percent drop in mortgage applications last week. The decrease was a disappointment because the rebound in housing had been a major factor supporting the stock market’s record-breaking rally this year.

Housing stocks slumped in response. D.R. Horton dropped 27 cents, or 1.2 percent, to $22.65. Beazer Homes fell 60 cents to $18.78, a decline of 3.1 percent.

Applications declined as mortgage rates rose to the highest point since April 2012. The increase was driven by higher yields in the bond market.

The yield on the 10-year Treasury note climbed as high as 2.2 percent last week, the highest in more than two years. On Wednesday, the note rose 17/32, to 96 31/32, and yield fell to 2.09 percent, from 2.15 percent late Tuesday.

News was disappointing on hiring, another one of the major supports for the market rally this year.

A measure of employment in the service sector fell in May to the lowest level since last July, and the payroll provider ADP reported the second straight month of weak gains in jobs.

The stock market’s recent bout of volatility began May 22 as traders studied comments from the Federal Reserve chairman, Ben S. Bernanke, and minutes from the last meeting of the Fed’s policy committee for clues about when the bank may slow its stimulus program.

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Gramercy Funds in Middle of Argentina’s Debt Battle

The fight is over how much Argentina will pay to cover its 2001 default of $82 billion in sovereign debt. Thomas P. Griesa, a federal judge in Manhattan, has ordered Argentina to pay $1.3 billion to investors who hold the defaulted debt and who refused to participate in the country’s subsequent debt restructurings. Argentina has declined to pay.

A group of investment funds that hold Argentine debt created in the restructuring has filed briefs on behalf of the country.

They are led by Gramercy, a $3.4 billion hedge fund that specializes in emerging market investments and that is registered with the Securities and Exchange Commission as an investment adviser. While Gramercy is an advocate for Argentina in court, past legal problems at the firm are coming into focus. They relate to a number of tax problems experienced by clients of Gramercy Advisors, an affiliate that ceased operations in 2011.

According to federal and state court filings, Gramercy Advisors arranged deals involving distressed Brazilian debt that the Internal Revenue Service later ruled to be sham transactions.

Hundreds of millions of dollars in tax losses in these deals have been disallowed for Gramercy’s clients.

Sean F. O’Shea, a lawyer who represents Gramercy, called the tax cases against the firm “stale and meritless.” He added: “No court or regulator in over 10 years has found any merit whatsoever to any allegations raised against Gramercy in connection with these cases.”

Robert S. Koenigsberger, founder and chief investment officer of Gramercy Funds Management, was a principal at Gramercy Advisors, regulatory filings show. He declined to comment, but according to the firm’s Web site, he started Gramercy in 1998 and “led Gramercy’s efforts in conceiving, organizing and facilitating the successful restructuring of Argentina’s defaulted debt,” in 2010.

An article in The Financial Times that year said Gramercy was believed to be the largest investor in Argentine debt securities.

The Gramercy investments that created tax problems for its clients were known as Distressed Asset Debt deals or DADs. They involved the purchase of old and uncollected Brazilian consumer debt obligations belonging to several retailers. According to the I.R.S., the obligations were purchased by Gramercy clients at a price far in excess of their worth and at a value determined by Gramercy. When the debt was subsequently sold at market value — for pennies on the dollar — the clients using the investment strategy reported sizable tax losses.

The deals were made in the early 2000s. But after the I.R.S. ruled that the shelters did not have an economic purpose other than to generate a tax benefit, back taxes and penalties were levied. About 50 investors in the Gramercy Global Recovery Fund were affected.

Some of these clients have sued the firm. One complaint with fraud accusations was filed against Gramercy by two investors in New York State Supreme Court in September 2011.

Echoing the I.R.S.’s assessments, the investors contend that Gramercy’s investment strategy involved false valuations of worthless instruments; they also say the deals generated illegitimate profits to the firm. The judge heard arguments on a motion to dismiss the matter several weeks ago. She has not yet ruled.

The federal government also took action last year against Gramercy Advisors for failing to provide 1,300 pages of documents subpoenaed in a case related to dubious tax deals like those arranged by Gramercy.

“Gramercy was caught withholding relevant and responsive documents,” the government said in an April 2011 filing. “The transaction the United States is requesting documents for is not an ‘investment’ but an elaborate scheme to claim artificial tax losses for the sole purpose of avoiding large tax liabilities owed by its clients,” the government said.

J. Robert Young, Gramercy’s managing director for accounting, testified that the firm had “sold ‘tax solutions’ to multiple clients to generate approximately $700 million in false losses” for 2002 alone, the government’s filing noted.

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Rally Fades on Bank Profits

Stocks on Wall Street advanced Tuesday but pared gains after Citigroup’s steep drop in profit gave investors a reason to unload bank shares.

The late-day sell-off reflected a reversal in prevailing sentiment, when earlier optimism about the economy and China’s growth prospects drove the major stock indexes up about 1 percent.

The Dow Jones industrial average closed up 0.5 percent to 12,482.07, while the Standard Poor’s 500-stock index was up 0.4 percent, to 1,293.67 The Nasdaq composite index was up 0.6 percent to 2,728.08.

Across the Atlantic, the FTSE 100 in London added 0.7 percent.

The financial sector took a hit from investors’ disappointment with Citigroup’s earnings. Citigroup’s stock slid 8 percent to a session low at $28.16 after the bank reported weaker-than-expected earnings. The KBW Banks Index lost 1.4 percent.

Citigroup’s results followed similarly disappointing earnings on Friday from JPMorgan Chase.

“It was expected that some of the big banks would continue struggling, especially those heavily involved in investment banking, because that part of the financial system has clearly slowed down,” said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management in Champaign, Ill.

Earlier in the day, stocks rallied about 1 percent after data showed China’s economy expanded at the weakest pace in two and a half years, suggesting that officials may try to increase growth in the near term by tweaking monetary policy.

The news followed the widely expected announcement late Friday by Standard Poor’s that it was downgrading the credit ratings of nine euro zone countries.

Also Tuesday, Wells Fargo posted a 20 percent jump in quarterly profit. Wells Fargo’s stock, which earlier had risen to a session high at $30.69, pulled back sharply and was up just 0.7 percent at the close.

The Treasury’s 10-year note rose 4/32, to 101 9/32. The yield fell to 1.86 percent, from 1.87 percent late Friday.

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Bucks Blog: Before You Hand Over Your Money for Investing

Paul Sullivan, in his Wealth Matters column this week, writes about a Seattle investment adviser who is accused of committing securities fraud when he put his clients’ money into investments in private companies without their consent. One reason that Paul wrote about the case is that the adviser, Mark Spangler, is a former chairman of the National Association of Personal Financial Advisors, a group that requires its members to act in their clients’ best interests.

Mr. Spangler’s investments in private companies are for only the wealthiest investors, since all the money put in can be lost. The wealthy, presumably, can continue their lifestyles, even with a losing investment.

But the column has a broader point for all investors: Try to learn as much as you can about your financial adviser before you hand over any money, and make sure you know what you are investing in. The problem is that doing the research takes a lot of time and effort.

If you have made the effort, what did you learn from the experience? Do you have tips for other investors on how best to do the needed research?

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Stocks and Bonds: It Zigs, It Zags: U.S. Market Rises 4% After a Down Day

In a display of wild volatility, the American stock market this week has produced alternating days of collapsing prices — accompanied by speculation of a renewed financial crisis that could be even worse than the one that began in 2008 — and sharply rising prices amid reassurances that banks are healthy and corporate profits strong.

On Thursday, the Standard Poor’s 500-stock index soared 51.88 points, or 4.6 percent to 1,172.64. Traders pointed to a small decline in claims for unemployment insurance in the United States and to reassurances from French officials that their country’s banks were safe.

That gain recovered all of a 4.4 percent decline on Wednesday. For the two days, the index was up 0.11 points, or one one-hundredth of 1 percent. On Monday, the market had fallen by 6.7 percent, only to leap by 4.7 percent on Tuesday. So far this week, the index is down by 2.2 percent.

“It is a very, very tense, emotional and momentum-driven market right now,” said Eric Thorne, an investment adviser at Bryn Mawr Trust, a Pennsylvania bank. The apparent motto, he added, is “shoot first, ask questions later.”

Never before in the history of the S. P. index, which goes back to 1928, had there been alternating gains and losses of more than 4 percent on four days. In most years, there were no such days at all.

There were only two previous times since the Great Depression when the S. P. 500 moved at least 4 percent in four consecutive trading sessions. The first came in October 1987, when the market crashed, and the second occurred in November 2008, as the financial crisis intensified. But neither of those saw alternating gains and losses. In each of those cases, the pattern was two declines, then two gains.

This year, market worries began to intensify in late July, as European leaders reached yet another agreement to provide emergency funding for Greece, which cannot borrow in the markets, and as a Congressional impasse threatened to prevent an increase in the American debt ceiling, which could have led to default. At the same time, sharp revisions in recent economic data raised concerns that the United States economy might be entering a new recession.

The worries accelerated last week, as borrowing costs shot up for two large European economies, Spain and Italy, and Friday night Standard Poor’s credit ratings arm lowered the rating of United States Treasury bonds to AA+, from AAA.

The European Central Bank tried to calm markets by beginning to buy Italian and Spanish bonds on Monday, but then traders appeared to grow nervous about French government bonds. Those worries soon spread to French banks, which hold many such bonds, and their prices fell sharply on Wednesday.

That panic appeared to peak early Thursday morning, New York time, when a Reuters report, which did not identify its sources, said at least one bank in Asia had cut its credit lines to the major French banks and that others were reviewing their lines because of perceived risks. The French stock market, which had been about level for the day, fell more than 3 percent within an hour, and American stock index futures fell sharply.

But there was no confirmation of the report, and it was denied by both bankers and officials in Paris. Prices quickly recovered.

Frédéric Oudéa, the chief executive of Société Générale, whose shares have suffered the most in recent days, told Le Figaro, the French newspaper, in an interview published Thursday that the bank had “suffered a series of attacks in the market,” on the basis of rumors about its financial condition that he denied “most vigorously.”

An announcement that the leaders of Germany and France would meet might have helped stocks strengthen, said Paul G. Christopher, chief international investment strategist for Wells Fargo Advisors. “The markets need to have reassurance from governments that they are going to take care of their budget deficits and going to backstop their banks,” he said.

The stock market collapse during the financial crisis in 2008 and 2009 is still fresh in the minds of many investors, but so too is the sharp rebound in share prices that began in the spring of 2009, when the credit crisis was at its height. Those competing memories appear to have contributed to the wild swings, with investors alternately fearful of a collapse and worried that they might get out at the bottom.

While the American economy has been stumbling since the last recession officially ended in June 2009, corporate profits have risen to record levels. Cisco, the large American technology company, reported surprisingly strong earnings on Wednesday, and its share price leaped 16 percent. But that gain still left the price a little lower than it was two weeks ago.

Eric Dash contributed reporting.

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Wealth Matters: Managing an Investment Portfolio for Risks, Not Only Returns

The debt debate fell into the category of events that could hurt your portfolio, with you having little control over it. The same goes the drop in stock prices at the end of the week; even if you did everything right with your own finances, your portfolio still could lose value.

Yet there are many risks in people’s investments that they can control. How many investors, for instance, know what is in their portfolios and, more important, how those assets work — or do not work — together? How many people use several financial advisers who do not know what the other managers are doing? These and other common mistakes can expose a portfolio to unintended risks.

“This is a primary issue for individual investors,” said Stephen M. Horan, head of private wealth management at the CFA Institute, an association of investment professionals. “We have a much clearer sense of what return is than what risk is. But losses govern the accumulation of wealth to a dramatic extent.”

Here are three areas of risk that often get overlooked:

SECURITY SELECTION The classic example of unintended risk in a portfolio is the investor who buys six different mutual funds and thinks that equals diversification. What the investor may not realize is that all six funds can own 10 of the same stocks. Instead of diversifying risk, the investor has concentrated it.

Mr. Horan said investors needed to know what their holdings actually were. It is easy. Look up the funds’ Top 10 holdings, available on the fund’s Web site, and the sector concentrations. Then, investors need to have the courage of their convictions. Lynn Ballou, an investment adviser and also an ambassador for the Certified Financial Planner Board of Standards, said investors inadvertently increased their risk by being swayed by people who had little knowledge of their portfolio.

“It’s, ‘I went out to lunch with someone and he said, wink, wink, nod, nod, I’ve heard about this company and I’m going to buy some and you should, too,’ ” Ms. Ballou said. “All that is what I call sexy noise. And 99 times out of 100, it’s just fun lunch talk.”

But should investors act on those supposedly hot tips, they are at risk of a problem that Chris Walters, executive vice president at Citizens Trust , calls “portfolio happens,” the accumulation of investments that are not part of an overarching strategy and do not work together.

At the extreme, he said, was a client who recently bought $1 million of gold bullion without telling anyone. “We said, ‘How are you going to get it home? What are you going to do with it?’ ” Mr. Walters said. But the best advice to reduce this behavior risk is to have a personal benchmark, pegged to when you will need the money, like in retirement. Thomas J. Pauloski, national managing director in the wealth management group at AllianceBernstein, said he urged his clients to do that.

“You want to get people away from focusing on the day-to-day jousting,” he said. In doing this, an investor hopes to reduce the risk of buying high and selling low.

MANAGING SECURITIES The market crash of 2008 has instilled a fear of being overly concentrated with any one manager or firm. But spreading out everything among different people is not the solution, either.

“We think about the best fund managers and do a pretty good job at the beginning of finding them,” Ms. Ballou said. “But we don’t stay on top of them. And then, it’s, ‘I just read my famous fund manager retired or got indicted — what do I do now?’ ”

She said more people should think about who is managing their portfolios the way they would think about a garden: after spending time planting beautiful flowers, they don’t let it go without pruning and weeding.

This discipline is not easy, even among the wealthiest. One investor, whose family’s wealth came from an agricultural products company and inheritance, said it was not until the family decided to move to another financial firm that they found out how much unintended risk was in their portfolio.

The investor, who asked not to be name to protect his family’s privacy, said the family had 5 percent of its $50 million of liquid wealth in Microsoft and 7 to 8 percent in Oracle. But since the stocks were held in various accounts, they did not realize how concentrated they were.

“We looked at the stock statements and not what was in the funds,” he said. “Microsoft and Oracle are great companies, but we didn’t have any other significant holdings.”

BNY Mellon Wealth Management performed the risk audit on the portfolio and the family moved their money to that firm. But Timothy E. Sheehan, senior director for business development at the firm, said the risk audits he did for clients were something anyone could do.

“All of this is public information,” he said. “But when you tell them they own 30,000 different equity shares, they say, ‘How did that happen?’ ”

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Talk: Bubble? What Bubble?

Contrary to all the recent hype about a bubble, you’ve said that tech companies are actually undervalued. So in true 1999 fashion, should I take my life savings out of mutual funds and toss it into tech stocks?

I’m certainly not an investment adviser, but on a 30-year basis, these things are cheap. If you compare how big industrial companies like G.E. are valued compared with big tech companies like Microsoft, Cisco, Google and Apple, tech stocks have never been valued more poorly in comparison. So not only is there no bubble — these prices are reflective of the fact that the market still hates tech. This bubble talk is about everybody being unbelievably psychologically scarred from 10 years ago.

Your venture-capital firm, Andreessen Horowitz, is heavily invested in Twitter, Facebook and Foursquare. You’re hardly an unbiased observer.

True, but the counterargument is I put my money where my mouth is.

The nearly $3 billion I.P.O. of Netscape, a company you helped found, has been cited as the beginning of the 1990s tech bubble. Do you recall a moment back then that felt like the last days of the Roman Empire?

There was a point in the late ’90s where all the graduating M.B.A.’s wanted to start companies in Silicon Valley, and for the most part they were not actually qualified to do it. They brought the whole sideshow of the hype and parties and all that crap. M.B.A. graduating classes are actually a reliable contrary indicator: if they all want to go into investment banking, there’s going to be a financial crisis. If they want to go into tech, that means a bubble is forming.

How has the M.B.A. migration been lately?

It’s heating up again, but it’s still not anything near like it was in ’99. And even though people love to badmouth ’99 and 2000, you also have to remember that’s when Google got built.

After hearing a story about Foursquare’s co-founder, Dennis Crowley, walking into a press event in athletic wear and eating a banana, I developed a theory that bubbles might be predicted by fashion: when tech founders can’t be bothered to appear businesslike, the power has shifted too much in their favor.

Believe it or not, this goes deep into the interior mentality of the engineer, which is very truth-oriented. When you’re dealing with machines or anything that you build, it either works or it doesn’t, no matter how good of a salesman you are. So engineers not only don’t care about the surface appearance, but they view attempts to kind of be fake on the surface as fundamentally dishonest.

That reminds me of Mark Zuckerberg’s criticism of ‘‘The Social Network.’’ He said that ‘‘filmmakers can’t get their head around the idea that someone might build something because they like building things.’’

Aaron Sorkin was completely unable to understand the actual psychology of Mark or of Facebook. He can’t conceive of a world where social status or getting laid or, for that matter, doing drugs, is not the most important thing.

People view you as an oracle in the valley. I was hoping you’d blow my mind with something you see in the future. Gordon Bell at Microsoft is working on wearable computing, where it literally records everything around you all the time — video, your conversations. He wants to get to where it’s like a pendant around your neck. We also have a company called Jawbone that makes peripherals for smart phones and tablets. Today, they sell Bluetooth headsets and speakers, but soon they will sell all kinds of wearable computing devices.

Will we soon be dealing with antigaming laws so that drivers can’t play wearable video games while driving down the highway?

That assumes they’re driving. Google is working on self-driving cars, and they seem to work. People are so bad at driving cars that computers don’t have to be that good to be much better. Any time you stand in line at the D.M.V. and look around, you’re like, Oh, my God, I wish all these people were replaced by computer drivers. Ten to 20 years out, driving your car will be viewed as equivalently immoral as smoking cigarettes around other people is today.


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