January 25, 2022

U.S. Producer Prices Flat, Point to Little Inflation Pressure

The Labor Department said on Wednesday a drop in natural gas and gasoline costs held back its seasonally adjusted producer price index. Analysts polled by Reuters had expected a 0.3 percent increase.

But it was the weakness in the index outside of volatile energy and food components that could garner more attention from Fed Chairman Ben Bernanke, who said last month the Fed might not end a bond-buying stimulus program until inflation begins to trend higher.

These so-called “core” prices, which are seen as indicators of trends in inflation, rose 0.1 percent during the month, below the 0.2 percent gain expected by analysts in a Reuters poll.

“The lower inflation trend could convince Fed officials to go slow on tapering (bond purchases),” said Kevin Logan, an economist at HSBC in New York.

The report helped push yields lower on long-term U.S. government debt, suggesting investors saw it as a sign the Fed might keep the major economic stimulus program in place for longer. U.S. stock prices edged lower.

Inflation has been cooling for much of the last year despite signs of growing strength in the economy, and the Fed warned last month that low inflation could hurt the economy.

Wednesday’s data showed the core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected that reading to fall to 1.4 percent from 1.7 percent in June.

Low inflation is worrisome because it can encourage businesses and consumers to delay purchases. This undermines the Fed’s efforts to boost consumption by lowering borrowing costs.

Central bankers also fear extremely low inflation because it raises the risk a major shock to the economy could send prices and wages into a downward spiral known as deflation. Bernanke pointed out this risk in July.

However, policymakers at the Fed have argued that temporary factors could be behind some of the weakness in inflation. Many private sector economists agree.

A steady fall in the unemployment rate appears to have the Fed nearly ready to begin unwinding its bond-buying stimulus program.

Many economists expect the Fed will begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages, although another report on Wednesday showed mortgage rates fell slightly last week.

(Reporting by Jason Lange; Editing by Chizu Nomiyama and Nick Zieminski)

Article source: http://www.nytimes.com/reuters/2013/08/14/business/14reuters-usa-economy.html?partner=rss&emc=rss

Fed Officials Try to Ease Concern of Stimulus End

The message, delivered in three separate but similar speeches, reflects the Fed’s frustration with a broad rise in interest rates that began in May and accelerated after remarks last week by the Fed’s chairman, Ben S. Bernanke.

“I don’t want to be too cute about a serious matter,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in Marietta, Ga., “but to make an analogy, it seems to me the chairman said we’ll use the patch — and use it flexibly — and some in the markets reacted as if he said ‘cold turkey.’ ”

The speeches, including one by William C. Dudley, president of the Federal Reserve Bank of New York and one of Mr. Bernanke’s closest allies, appeared to make an impression, helped along by upbeat domestic economic data and an easing of concerns about Chinese financial conditions. Stocks rose modestly, ending up for the third day in a row, while interest rates ticked downward, inverting the recent pattern.

On Wall Street, the broad Standard Poor’s 500-stock index had risen for most of the first five months of the year, bringing it to a high of 1,669.16 on May 21. But the next day, after Mr. Bernanke first hinted at an impending change in Fed policy, stock prices began falling, and the S. P. 500 eventually dropped 5.7 percent to a low on June 24, a few days after the most recent Fed policy statement. Since then, as Fed officials have sought to clarify their goals, the index has risen 2.5 percent, including Thursday’s 0.6 percent increase.

On Thursday, the three officials emphasized that the Fed was increasingly optimistic about the durability of economic growth. And they reiterated that they expected to reduce the volume of the Fed’s monthly bond purchases later this year. But the Fed’s overall effort to reduce borrowing costs will continue as long as necessary, most likely for years to come.

Investors, they said, need to gently place interest rates back down on the floor.

“Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy,” said the Fed governor Jerome H. Powell.

Mr. Dudley, who is also the vice chairman of the Fed’s policy-making committee, was even more emphatic. Investors expecting an early exit are “quite out of sync” with the Fed, he said. “A rise in short-term rates is very likely to be a long way off.”

The Fed is struggling in a world of its own creation. The central bank, seeking new ways to stimulate the economy, has sought to manage investor expectations about the path of monetary policy. By convincing investors that it will keep interest rates low tomorrow, it can reduce borrowing costs today.

In essence, the Fed is asking investors to stake vast sums on the proposition that it will do what it says. And investors, unsurprisingly, have become increasingly fearful about any sign that the Fed may change its plans.

The mainstay of the Fed’s stimulus campaign is its stated intention to hold short-term interest rates near zero as long as the unemployment rate remains above 6.5 percent. It has put further pressure on longer-term rates by amassing more than $3 trillion in Treasury securities and mortgage-backed securities; since last December it has expanded those holdings by an additional $85 billion a month in a process known as quantitative easing, or Q.E.

Interest rates started rising in May after Mr. Bernanke suggested that the Fed might reduce the volume of its monthly purchases later this year. Rates rose much more quickly after he said last week that the Fed was planning to do exactly that.

Mr. Bernanke insisted that the Fed was not altering its plans for short-term rates. He said the Fed was not even altering its plans for asset purchases; it was just publicizing those plans for the first time. And he emphasized that the timetable would change if the economy grew more slowly than expected.

But investors “seem to believe that Fed officials must have become at least somewhat more willing to consider earlier hikes if they are sufficiently comfortable with the economic outlook to preannounce Q.E. tapering,” wrote Jan Hatzius, chief economist at Goldman Sachs.

Nathaniel Popper contributed reporting.

Article source: http://www.nytimes.com/2013/06/28/business/economy/fed-has-not-changed-commitments-official-says.html?partner=rss&emc=rss

Fed Fears Shake Global Markets but Fade on Wall St.

Fears that the Fed is about to reduce its stimulus helped send stock, bond and currency prices on a wild ride on Wednesday and Thursday, with Japanese stocks experiencing their worst one-day decline since the 2011 tsunami and United States indexes slumping before ending the day down slightly.

Japan’s losses were fed in part by disappointing data on the Chinese economy. Around the world, though, traders debated the significance of the statement made on Wednesday before Congress by the Fed’s chairman, Ben S. Bernanke, that a change could come in “the next few meetings” of the central bank’s policy-setting committee.

The stimulus programs initiated by Mr. Bernanke have helped feed a four-year rally in United States stock prices and inspired other central banks to follow suit. But even fans of the Fed’s efforts have said that the size and scope of the stimulus make it hard to know what will happen once the Fed begins to take its foot off the gas, paving the way for unanticipated consequences and more market volatility.

“There are no neat answers, because we’ve never been in this situation before,” said Marshall Front, co-founder of the money manager Front Barnett Associates, who has been preparing his firm’s portfolios for uncertainty.

Fed officials are aware of the confusion that lies in store and have emphasized that any changes are still a ways off and likely to be carried out slowly. The president of the St. Louis Federal Reserve Bank, James Bullard, said in a speech in London on Thursday that even after the central bank begins to slow monetary stimulus, policy makers could step in again if the economy seems to falter.

The nerves of at least some American investors were calmed by the end of Thursday. After starting the day down more than 1 percent, the Standard Poor’s 500-stock index recovered to finish the day down 0.3 percent, or 4.84 points, at 1,650.51. The Dow Jones industrial average dropped 0.1 percent, or 12.67 points, to close at 15,294.50. The Nasdaq composite index fell 3.88 points, or 0.1 percent, to 3,459.42. In the market for United States government bonds, the price of the benchmark 10-year Treasury rose 6/32, to 97 20/32, and the yield fell to 2.02 percent from 2.04 late on Wednesday.

Other stock markets were hit harder. In Tokyo, the benchmark Nikkei index suffered a 7.3 percent rout. Leading indexes were down about 2.1 percent in Germany, France and Britain.

Speculation that the Fed will slow its monthly purchases of government bonds has been growing for months. Investors have known that the central bank’s efforts could not continue forever, and many asset managers have begun to prepare their portfolios for the day when the Fed pulls back.

Mr. Front’s firm has sold all of its long-term bonds to reduce exposure to any future changes in interest rates, and it no longer holds any Treasury bonds. In a more optimistic vein, the firm has been shifting money into riskier stocks on the assumption that rising interest rates will be accompanied by growing economies around the world.

Before this week, even many close Fed watchers assumed that any change would not come before the end of the year. But Mr. Bernanke’s comments on Wednesday led many strategists to bump up their forecasts a few months to September.

“This might be closer than we thought,” said John Bellows, a former Treasury Department official who now works at Western Asset.

When the Fed does shift gears, Mr. Bernanke has indicated, the process will be gradual and will begin with a slow tapering of bond purchases. Even that will commence only if the labor market grows stronger and unemployment falls further.

The economic data coming out of the United States on Thursday showed slight signs of improvement. The number of people who filed for unemployment benefits last week was 340,000, lower than analysts had expected and lower than the week before. And the number of new homes sold rose more than expected, to the highest level since 2010.

David Jolly contributed reporting from Paris, Hiroko Tabuchi from Tokyo, and Bettina Wassener from Hong Kong.

Article source: http://www.nytimes.com/2013/05/24/business/daily-stock-market-activity.html?partner=rss&emc=rss

DealBook: Comparing the Valuations Behind Amazon and Apple Shares

And people wonder why it’s hard to understand the stock market.

Take a consumer sitting at home buying stuff on Amazon.com with his iPhone. To him, Apple’s product is a clear leader in the market, while Amazon is the retailer he uses most. Amazon’s shares are up nearly 40 percent over the last 12 months, while Apple’s are down nearly 30 percent over the same period. So why have their stock prices diverged so much when both companies appear to be at the top of their game?

Growth is the most common answer you’ll hear. When a company convinces investors that its earnings can keep going up, an enthusiasm grows around the shares, and they tend to perform well. Wall Street analysts expect Amazon’s earnings next year to be 66 percent higher than the forecast for 2013. They project a 10 percent uptick for Apple.

But there’s another conversation you need to have.

It revolves around whether the market has already factored the hoped-for growth into the stock price. It is possible to pay too much for excellence.

There are all sorts of ways to gauge how much credibility investors ascribe to a company’s “growth story.” One is to look at what investors are paying now for a company’s free cash flows, or the hard dollars it takes in from profits (minus the spending it does on plant and equipment). The results are stark. Apple’s stock market value is nine times last year’s free cash flows. On this metric, Amazon is at over 300 times. Sane investors would never touch a stock with such a dear valuation unless they felt cash flows were going to soar in the future.

And this brings us to the part of investing that usually separates winners from losers: guessing whether companies will actually do what we expect them to.

Amazon’s believers don’t mind that it’s spending such huge amounts on setting up new operations for its retail and data businesses. At some point, hopefully in the not too distant future, that spending will fall as the expansion reaches its limits. In that case, Amazon will be churning out much bigger cash flows as it enjoys near unassailable dominance.

Sure, but how wondrous will those cash flows be? Amazon’s operations produced $4.2 billion of cash flows last year. Let’s generously assume 10 percent annual growth for them, which would take them to $5.1 billion by the end of 2014.

Let’s be kind again and assume that capital expenditures fall a lot, to, say, $1 billion a year, from last year’s $3.8 billion. Free cash flows in 2014 would therefore total $4.1 billion.

Now, remember, at this future point, Amazon’s growth in free cash flow will have slowed a lot. Investors will probably decide to attach a lower valuation to the company. Being generous, let’s assume they value those hypothetical 2014 free cash flows at 21 times, Google’s multiple today. That would give Amazon a market worth of about $86 billion. That’s 30 percent lower than today.

Of course, the stock market believes what it wants to believe. It may well decide to remain starry-eyed about Amazon and give it a much higher valuation for years to come. But Apple’s recent drubbing suggests even the strongest runs can end nastily.

Article source: http://dealbook.nytimes.com/2013/04/24/comparing-the-valuations-behind-amazon-and-apple-shares/?partner=rss&emc=rss

Incomes Flat in Recovery, but Not for the 1%

WASHINGTON — Incomes rose more than 11 percent for the top 1 percent of earners during the economic recovery, but not at all for everybody else, according to new data.

The numbers, produced by Emmanuel Saez, an economist at the University of California, Berkeley, show overall income growing by just 1.7 percent over the period. But there was a wide gap between the top 1 percent, whose earnings rose by 11.2 percent, and the other 99 percent, whose earnings declined by 0.4 percent.

Mr. Saez, a winner of the John Bates Clark Medal, an economic laurel considered second only to the Nobel, concluded that “the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s.”

The disparity between top earners and everybody else can be attributed, in part, to differences in how the two groups make their money. The wealthy have benefited from a four-year boom in the stock market, while high rates of unemployment have continued to hold down the income of wage earners.

“We have in the middle basically three decades of problems compounded by high unemployment,” said Lawrence Mishel of the Economic Policy Institute, a left-of-center research group in Washington. “That high unemployment we know depresses wage growth throughout the wage scale, but more so for the bottom than the middle and the middle than the top.”

In his analysis, Mr. Saez said he saw no reason that the trend would reverse for 2012, which has not yet been analyzed. For that year, the “top 1 percent income will likely surge, due to booming stock prices, as well as retiming of income to avoid the higher 2013 top tax rates,” Mr. Saez wrote, referring to income tax increases for the wealthy that were passed by Congress in January. The incomes of the other “99 percent will likely grow much more modestly,” he said.

Excluding earnings from investment gains, the top 10 percent of earners took 46.5 percent of all income in 2011, the highest proportion since 1917, Mr. Saez said, citing a large body of work on earnings distribution over the last century that he has produced with the economist Thomas Piketty of the Paris School of Economics.

Concern for the declining wages of working Americans and persistent high levels of inequality featured heavily in President Obama’s State of the Union address this week. He proposed raising the federal minimum wage to $9 from $7.25 as one way to ameliorate the trend, a proposal that might lift the earnings of 15 million low-income workers by the end of 2015.

“Let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty,” Mr. Obama said in his address to Congress.

Mr. Obama’s economic advisers say that he has been animated by the country’s yawning levels of inequality, and the administration has put forward several proposals to address the gap. Those include higher taxes on a small group of the wealthiest families and an expansion of aid to lower- and middle-income families through programs like the Affordable Care Act.

The data analyzed by Mr. Piketty and Mr. Saez shows that income inequality — as measured by the proportion of income taken by the top 1 percent of earners — reached a modern high just before the recession hit in 2009. The financial crisis and its aftermath hit wealthy families hard. But since then, their earnings have snapped back, if not to their 2007 peak.

That is not true for average working families. After accounting for inflation, median family income has declined over the last two years. In 2011, it stagnated for the poorest and dropped for those in the middle of the income distribution, census data show. Median household income, which was $50,054 in 2011, is about 9 percent lower than it was in 1999, after accounting for inflation.

Measures of inequality differ depending on whether they are measured after or before taxes, and whether or not they include government transfers like Social Security payments, food stamps and other credits.

Research led by the Cornell economist Richard V. Burkhauser, for instance, sought to measure the economic health of middle-class households including income, taxes, transfer programs and benefits like health insurance. It found that from 1979 to 2007, median income grew by about 18.2 percent over all rather than by 3.2 percent counting income alone.

In an interview, Mr. Burkhauser said his numbers measured “how are the resources that person has to live on changing over time,” whereas Mr. Piketty and Mr. Saez’s numbers measure “how are different people being rewarded in the marketplace.”

“That’s a fair question to ask, but it’s a very different question to ask than, ‘What resources do Americans have?’ ” Mr. Burkhauser said. Notably, many of the Obama administration’s progressive policies have been aimed at blunting the effects of income inequality, rather than tackling income inequality itself.

Mr. Saez has advocated much more aggressive policies aimed at income inequality. “Falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented,” Mr. Saez said in his analysis.

The recent policy changes, including tax increases and financial regulatory reform, he wrote, “are not negligible but they are modest relative to the policy changes that took place coming out of the Great Depression. Therefore, it seems unlikely that U.S. income concentration will fall much in the coming years.”

Article source: http://www.nytimes.com/2013/02/16/business/economy/income-gains-after-recession-went-mostly-to-top-1.html?partner=rss&emc=rss

Stocks and Bonds: Strong Retail Sales Numbers Push Shares Higher

Analysts also said that fear about Europe’s debt crisis had faded somewhat in the last few days.

Both the Dow Jones industrial average and the Nasdaq composite index are higher than they were at the end of 2010. But the broader Standard Poor’s 500-stock index was still in negative territory, down 2.63 percent for the year.

On Friday , the S. P. 500 rose 20.92 points, or 1.74 percent, to 1,224.58; it gained 5.98 percent for the week. The Dow Jones industrials gained 166.36 points, or 1.45 percent, to 11,644.49, and the Nasdaq rose 47.61 points, or 1.82 percent, to 2,667.85. The weekly gains on the Dow and the Nasdaq were 4.88 percent and 7.6 percent, respectively.

Interest rates continued to rise. The yield on a 10-year Treasury note rose to 2.25 percent, from 2.18 percent late Thursday.

Analysts said the retail sales numbers had beaten expectations. Sales rose 1.1 percent in September from August, and 7.9 percent from the previous year — the fastest clip since February, according to the Commerce Department. The rate of growth between July and August was also revised upward to 0.3 percent, after having been initially reported as flat. Total retail sales were $395.5 billion.

Every category of retailers reported higher sales from a year ago except for electronics and appliance stores, whose sales remained flat. Automobiles were particularly strong, with sales rising 3.6 percent from August, and 8.5 percent from September 2010.

The report was another sign that the economy may be in better shape than many economists thought, said Dan Greenhaus, the chief global strategist at BTIG. The recent rise in stock prices reflects the change in the prevailing outlook, he added.

“When the stock market collapsed, you were uncool if you were weren’t saying that the U.S. was going into recession,” he said.

In a surprise, however, preliminary figures for the Reuters/University of Michigan consumer sentiment index showed a drop to 57.5 for October from 59.4 in September. Analysts expected confidence to rise. Instead, sentiment in every category dropped.

Consumer sentiment has been hovering near the levels reached during the recent recession, which economists take as a troubling sign that the perception of a weak economy could end up becoming a self-fulfilling prophecy.

But Russell Price, a senior economist at Ameriprise Financial, said that attitudes could get out of line with how people were actually acting during turning points in the economy. “If people are confident enough to go out and spend $30,000 on a new automobile, it shows they are pretty confident in their own financial situation,” he said.

European markets were also higher Friday, as the Group of 20 finance ministers began a two-day meeting to discuss their approach to the European debt crisis. The benchmark Euro Stoxx 50 was up 1.2 percent. The FTSE 100 in London gained 1.17 percent, while the DAX in Frankfurt rose 0.89 percent.

Optimism about a European rescue plan also continued to push up the price of the euro against the dollar. The euro traded at $1.3876, up 0.92 percent.

The urgency of the G-20 talks was underlined when the Fitch Ratings agency said Friday that it would review its ratings for some of Europe’s most globally interconnected banks. This week the European Commission proposed requiring the Continent’s largest banks to bolster their protection against losses. There has also been discussion of the International Monetary Fund helping to increase the power of Europe’s rescue plan.

The euro zone is entering a critical countdown, with investors in financial markets expecting European officials at a summit meeting on Oct. 23 and leaders of the Group of 20 on Nov. 3 to endorse specific plans to confront the crisis. For now at least, investors have taken heart at perceived progress in Europe. The VIX, which measures volatility in the market, has dropped to its lowest levels since it spiked on Aug. 4. Popularly known as the fear index, the VIX ended at 28.24, down from a peak of over 45 in early October.

Analysts stressed the fragility of investors’ confidence, and some voiced concern that optimism about the prospect of a plan could fade when its specifics were hammered out.

“We’ve been here before,” said Nariman Behravesh of IHS Global Insight. “It’s pretty tenuous right now.”

Article source: http://feeds.nytimes.com/click.phdo?i=23035c0dfc8ce488843d7ff1a6877eb8

Dow Returns to Positive Territory for Year

Both the Dow Jones industrial index and the technology-heavy Nasdaq are now back ahead of where they were at the end of 2010. But the broader Standard and Poor’s 500-stock index was still in negative territory, down 2.63 percent for the year.

On Friday , the S.P. 500 closed up 20.92 points, or 1.74 percent, to 1,224.58; it gained 5.98 percent over the course of the week. The Dow gained 166.36 points, or 1.45 percent, to 11,644.49, and the Nasdaq rose 47.61 points, or 1.82 percent, to 2,667.85. The weekly gains on the Dow and the Nasdaq were 4.88 percent and 7.60 percent, respectively.

Interest rates continued to rise as investors move back into riskier assets like stocks. The yield on a 10-year U.S. Treasury bond rose to 2.247 percent, up 2.86 percent.

Analysts noted that the retail sales numbers had beaten expectations. Sales rose 1.1 percent in September from August, and 7.9 percent from the previous year — the fastest clip since February, according to the Commerce Department. The rate of growth between July and August was also revised upward to 0.3 percent, after having been initially reported as flat. Total retail sales were $395.5 billion.

Every category of retailers reported higher sales from a year ago except for electronics and appliance stores, whose sales remained flat. Automobiles were particularly strong with sales rising 3.6 percent from August, and 8.5 percent from last September.

The report was another sign that the United States economy may be in better shape than many economists thought, said Dan Greenhaus, the chief global strategist at BTIG. The recent rise in stock prices reflects the change in the prevailing outlook, he added.

“When the stock market collapsed, you were uncool if you were weren’t saying that the U.S. was going into recession,” he said.

In a surprise, however, preliminary figures for the Reuters/University of Michigan consumer sentiment index showed a drop to 57.5 for October, down from 59.4 in September. Analysts had expected confidence to rise. Instead, sentiment in every category dropped.

Consumer sentiment has been hovering near the levels reached during the recent recession, which economists take as a troubling sign that the perception of a weak economy could end up becoming a self-fulfilling prophecy.

But Russell Price, a senior economist at Ameriprise Financial, said that attitudes can get out of line with how people are actually acting during turning points in the economy. “If people are confident enough to go out and spend $30,000 on a new automobile, it shows they are pretty confident in their own financial situation,” he said.

European markets were also higher Friday, as the Group of 20 finance ministers began a two-day meeting to discuss their approach to the European debt crisis. The benchmark Euro Stoxx 50 was up 1.24 percent. The FTSE 100 in London also gained 1.24 percent, while the DAX in Frankfurt rose 1.27 percent.

Optimism about a European rescue plan also continued to push up the price of the euro against the dollar. The euro was trading at $1.3884, up 0.78 percent.

The urgency of the G20 talks was underlined when the Fitch ratings agency said Friday it would review its ratings for some of Europe’s most globally interconnected banks. This week the European Commission proposed requiring the Continent’s largest banks to temporarily bolster their protection against losses. There has also been discussion of the International Monetary Fund helping to increase the power of Europe’s rescue plan.

The euro zone is entering a critical countdown, with investors in financial markets expecting European officials at a summit meeting on Oct. 23 and leaders of the Group of 20 at on Nov. 3 to endorse specific plans to confront the crisis.

For now at least, investors have taken heart at perceived progress in Europe. The VIX index, which measures volatility in the market, has dropped to its lowest levels since it spiked on Aug. 4. Popularly known as the fear index, the VIX ended at 28.24, down from a peak of over 45 in early October. But analysts stressed the fragility of investors’ confidence, and some voiced concern that optimism about the prospect of a plan could fade when its specifics were hammered out.

“We’ve been here before,” said Nariman Behravesh of IHS Global Insight. “It’s pretty tenuous right now.”

Article source: http://www.nytimes.com/2011/10/15/business/daily-stock-market-activity.html?partner=rss&emc=rss

Shares Are Bolstered by News From Europe

Some traders say that the market is gaining momentum from its recent gains and have begun pointing to signs that the market’s extreme volatility may be giving way to a calmer period. But with all eyes on Europe, even optimists acknowledge the fragility of the recent confidence.

The Dow Jones industrial average closed up 102.55 points, or 0.9 percent, at 11,518.85. It spent much of the day in positive territory for the year before giving up some of its gains in the last hour.

The index was positive for most of the year before plunging in early August. Since then, stock prices have experienced a series of wrenching ups and downs, closing in positive territory for the year only once.

The index closed on Wednesday 0.5 percent below its level at the beginning of 2011.

The Standard and Poor’s 500-stock index, seen as a more complete barometer of the overall market, was up 11.71 points, or 1 percent, at 1,207.25. It remains down more than 3 percent for the year. The Nasdaq composite index rose 21.70 points, or 0.8 percent, to 2,604.73.

Banks continued to make particularly strong gains. Citigroup gained 4.9 percent, while Wells Fargo’s shares were up 3.5 percent.

The European Commission president, José Manuel Barroso, proposed that Europe’s biggest banks be required to temporarily bolster their protection against losses, as part of a broader plan to restore confidence in the European financial system. He also called on the 17 European Union members that use the euro to maximize the capacity of their bailout fund, a clear hint that he favors leveraging the fund to increase its power.

Slovakia is expected to approve changes to the rescue fund, known as the European Financial Stability Facility, on Thursday or Friday.

Lawmakers there initially rejected the bill shortly after markets in the United States closed on Tuesday. The vote led to the collapse of the country’s coalition government, but the parties in the departing government reached an accord with the main opposition party to permit the bill to pass in exchange for early elections.

The other 16 E.U. members that use the euro have approved the measure, which requires unanimous support.

Analysts said recent turmoil in the markets had effectively forced European leaders to show real progress in addressing problems related to sovereign debt.

“The market has screamed loud enough to make the European authorities stand up and listen,” said Andrew Wilkinson, chief economic strategist for Miller Tabak Company.

Some traders also pointed to the falling level of the VIX, which measures volatility, as a sign that markets could be stabilizing. The VIX, popularly known as the fear index, ended at 31.26, its lowest level since mid-September. In addition to positive signs in Europe, the markets were adjusting to a slightly brighter picture of the domestic economy, said Michael Church, president of Addison Capital. A recent spate of economic data has eased fears among economists that a recession is imminent.

“At some point you had to question that thesis, especially when it had become exceptionally popular,” Mr. Church said.

The minutes from the most recent Federal Open Market Committee meeting were released on Wednesday. They showed that two members had favored more aggressive action to stimulate the economy, essentially putting fears of a further slowdown ahead of inflation concerns.

European markets closed higher Wednesday. The benchmark Euro Stoxx 50 index was up 2.43 percent; the FTSE 100 in London rose 0.85 percent; and the DAX in Frankfurt gained 2.2 percent.

The euro, which has been gaining against the dollar for over a week, rose 1.1 percent to $1.3677.

Yields on United States Treasuries also continue to rise. The yield on the benchmark 10-year note was 2.21 percent, up from 2.16 late Tuesday.

This article has been revised to reflect the following correction:

Correction: October 12, 2011

An earlier version of this article erroneously reported the yield on the 30-year bond —   rather than the 10-year note —   as 2.214 percent.

Article source: http://feeds.nytimes.com/click.phdo?i=83b46f659556953133f08d64b0422e81

As Trade Volumes Soar, Exchanges Cash In

But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.

Businesses like the New York Stock Exchange and the Chicago Mercantile Exchange skim cents off each stock or contract bought or sold over their trading floors or computers. With the daily volumes of financial market contracts sent surging through their systems by nervous traders and investors up by billions, the latest trading rush is directly polishing their bottom line.

The effect, however, may be fleeting. The rising volumes have generally not translated into higher stock prices for the exchanges, and they and some analysts are worried that the volatility and downbeat economic news may frighten away investors in the long term.

“Volume is positive on a short-term basis but because it is based on negative macroeconomic factors, these volumes are not necessarily sustainable,” said Joseph M. Mecane, executive vice president for cash trading at NYSE Euronext, which operates the New York Stock Exchange.

The latest swings came Friday when the Standard Poor’s 500-stock index fell 2 percent in the morning, but climbed back up in the afternoon to finish 1.5 percent higher, as investors digested remarks by Ben S. Bernanke, the Federal Reserve chairman, that left the door open to further support for the economy. The Dow Jones industrial average swung about 363 points during the day, closing up 1.2 percent, to 11,284.54.

Across United States stock markets — including the big electronic exchanges like Nasdaq, BATS and Direct Edge — trading volumes so far in the latest quarter are 17 percent ahead of the same period last year, according to figures from Credit Suisse. Volumes have been hitting levels almost double what they normally are at this usually quiet time of year, Mr. Mecane said.

Markets have been sent wild this summer amid a number of exceptional events, like the showdown over the debt ceiling in Washington, the downgrade by the credit rating agency Standard Poor’s of the United States’ long-term debt on Aug. 5, the global fallout from Europe’s debt crisis and a raft of data pointing to a stalling United States economy.

On a couple of days earlier in August, stock market volumes touched about 15 billion daily trades, although volumes are now back to about eight billion or nine billion daily.

The stock exchanges on average charge 3.5 cents for every 100 shares traded, according to Credit Suisse. That has declined in recent years with greater competition between the exchanges, so the pop in volumes is not delivering as much to them in increased profits as it would have just a few years ago. The exchanges have also diversified into other business like providing trading technology to banks. That means revenue from stock and derivatives trading accounts for a smaller proportion of overall income. In the case of Nasdaq, for example, it makes up a third of overall sales.

The exchanges, most of which are public companies, generally will not comment on the effect these increased volumes will have on profits.

But analysts like Howard Chen, a financial analyst at Credit Suisse who watches the exchanges, said that because volumes were already tracking 15 to 20 percent above what he had been expecting, earnings should be up a similar amount.

It’s not just the stock market that is experiencing a lift.

Traders have been busily betting on interest rates, commodities, currencies and even volatility itself.

The Chicago Mercantile Exchange where these and other products like United States Treasury futures are in large part traded has recorded a big pick-up in trading volumes recently.

Aug. 9, for example, was a record day for the Chicago exchange, when nearly 25.7 million contracts were traded, beating the last record, which was during the so-called flash crash on May 6 last year, when 25.3 million contracts were traded, the exchange said.

So far during the third quarter, volumes on the Chicago exchange are up 39 percent compared with the same period a year ago, Credit Suisse said.

Futures in gold, oil and the broad stock market index, the S. P. E-Mini, are all up.

In an era when volatility has become the new norm, another instrument that has had a surge in volumes is the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the short-term implied volatility of options on the S. P. 500. Financial instruments based on the VIX are traded both electronically and in the exchange’s trading pits in Chicago — where there is a special VIX pit, and 60 dedicated VIX traders.

Article source: http://www.nytimes.com/2011/08/27/business/as-trade-volumes-soar-exchanges-cash-in.html?partner=rss&emc=rss

High & Low Finance: Korea Clamps Down on Traders for Playing Games

It should be something else entirely. Finance ought to provide an economy with an efficient means of allocating capital. It should provide a means of price discovery of assets, whether real or financial. It should provide a safe and reliable payments system. Financial innovations are worthwhile if, and only if, they help in those areas.

All too often, players see financial innovations as providing ways to manipulate the system and make money off less savvy traders. If the players are caught, the scheme is usually deemed too complicated and wrongdoing too hard to prove to justify any more than a civil case. That ends in a fine — sometimes a large one — but perhaps one that may be seen as a cost of doing business.

In South Korea, they seem to be adopting a different attitude.

This week prosecutors in Seoul announced indictments on market manipulation charges of a Korean affiliate of Deutsche Bank and of four Deutsche Bank employees who were blamed for intentionally causing a sudden collapse in Korean stock prices last November.

In a separate case in June, two former Credit Suisse employees were indicted by Korean prosecutors on charges of manipulating stock prices.

People could go to prison for playing market games.

The Deutsche Bank case sounds like a classic example of people knowing how to profit from a game and having no appreciation at all of the larger dimension of what they planned to do. The game caused the Korean stock market to tumble in the last few minutes of trading last Nov. 11. That happened to be the same day the leaders of the Group of 20 nations were meeting — in Seoul.

Having its market crumble for no apparent reason with world leaders and world press in town was more than a little embarrassing to the Koreans, and they began immediate investigations.

The names of the Deutsche Bank employees involved have not been publicly disclosed. But only one of them is based in Korea, with three in Hong Kong. The Koreans sent a letter to the Securities and Exchange Commission about another Deutsche employee, who is based in New York, but he was not indicted.

The traders probably paid little attention to the plans for the Group of 20 meeting. They chose Nov. 11 because it was a day when stock index options and futures expired. They had a way to make a lot of money with little if any financial risk.

The strategy did not involve taking positions based on expectations of corporate performance, or the path of the Korean economy, or interest rates, or anything that matters to the real economy. In other words, it had nothing to do with the legitimate functions of finance.

Here’s what prosecutors claim took place. The Deutsche Bank traders established a huge index-arbitrage position, and placed a huge side bet on prices falling. Then they closed out the arbitrage position in a way designed to cause prices to collapse. They cleaned up.

In the more formal language that Korean market regulators used in their report, the traders “constructed speculative derivatives positions in advance through the combination of short synthetic futures and long put options.” Then in the final 10 minutes of trading on Nov. 11, they sold $2.2 billion worth of stocks, selling every stock in the Kospi 200 index, which includes all major Korean stocks.

That selling had a huge impact. The Kospi 200 index fell 2.8 percent in those 10 minutes, providing $40.5 million in what the Koreans called “illegal profits” on the derivatives position, which settled based on the closing prices.

Ten minutes before the close, the Korean stock market was down only a very small amount from the previous day. At the close, it was the worst day in nine months.

Index arbitrage is supposed to be a neutral strategy. A trader buys stocks and sells the equivalent amount of stock index futures, taking advantage of small discrepancies in prices in the two markets. Or he sells the stocks and buys the future. Either way, at expiration, the two positions will be worth the same, and a small profit will be realized. The strategy used by Deutsche appears to have amounted to index arbitrage done in a way that local regulators might not see coming. A synthetic future uses options or forward contracts to replicate the financial position of normal futures contracts. Going synthetic can cost more, but it may also avoid margin requirements and regulatory disclosure rules on large positions.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

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