Dollar gains after grim GDP data

The dollar gained against most currencies other than the yen Friday after government data showed the U.S. economy contracted 6.2% in the fourth quarter, more than market expectations.

"These figures are just awful," said Matt Esteve, currency trader at Tempus Consulting in Washington. "This shows the weak state of the world's largest economy. It will have to boost risk aversion and that will keep sustaining the dollar, in particular against the euro."

The euro was down 0.9% against the dollar at $1.2614 , sterling fell 1.2% to $1.4126, while the dollar gained 0.8% against the Swiss franc to 1.1736 francs.

The yen gained sharply, snapping a string of losses that took it to three-month lows this week against the dollar, with traders citing month-end flows even as weak Japanese data paints a bleak picture of their economy.

The dollar was last down 1.5% against the yen at ¥96.94, close to a session low of ¥96.88.

Obama calls for stricter rules for Wall Street

Financial institutions that pose a serious risk to markets should be subject to serious government oversight, President Barack Obama said Wednesday.

Speaking after meeting with Treasury Secretary Tim Geithner and lawmakers on financial regulatory reform, Obama also said: "But let me be clear - the choice we face is not between an oppressive government-run economy and a chaotic and unforgiving capitalism.

"Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors."

Wall Street retreats

Stocks tumbled anew Monday morning as any enthusiasm that the government may boost its stake in Citigroup was tempered by ongoing worries about the economy.

The Dow Jones industrial average (INDU) lost 62 points, or 0.9%, after ending the last session at the lowest point since Oct. 9, 2002, at the bottom of the last bear market.

The S&P 500 (SPX) index lost 8 points, or 1.1%, ending at the lowest point since Nov. 20, 2008, seen by some as the low of the current bear market.

The Nasdaq composite (COMP) lost 23 points or 1.7%.

Weakness in the technology sector caused the broader market to give up early gains. Intel (INTC, Fortune 500), Microsoft (MSFT, Fortune 500) and Dell (DELL, Fortune 500) were among the big technology losers.

Stocks have tumbled over the last two weeks on worries that the government won't be able to slow the recession, despite announcing a series of programs. On Friday, stocks slipped on worries that Citigroup and Bank of America might have to be taken over by the government altogether.

Some of those worries were tempered Monday after reports surfaced that the government is looking to boost its stake in Citigroup (C, Fortune 500), something that would fall short of full nationalization but would enable it to avoid bankruptcy. Should Citigroup be fully nationalized by the federal government or forced to declare bankruptcy, that would wipe out all shareholder value.

Separately, Treasury said in a statement that the government is ready to offer more money to banks if needed. Treasury begins its Capital Assistance Program Wednesday. The program, previously announced by Treasury Secretary Timothy Geithner, involves giving banks "stress tests" to determine how they are doing and whether they need more money.

Company news: Meanwhile, the Treasury is also considering its options as General Motors (GM, Fortune 500) and Chrysler continue to flounder, despite having received billions in federal aid. According to a Wall Street Journal report Monday, the administration believes the possibility of Chapter 11 bankruptcy filings by the two companies must be seriously considered.

Meanwhile, Ford Motor (F, Fortune 500) has reached a tentative deal with its union on changed to retiree health care benefits, considered to be a critical concession on the part of the UAW. Shares rallied 13%.

Yahoo (YHOO, Fortune 500) could announce a major management reorganization as early as Wednesday, although more likely next week, according to a published report Monday. Yahoo shares were little changed.

Bonds: Treasury prices fell, raising the yield on the benchmark 10-year note to 2.80% from 2.79% Friday. Treasury prices and yields move in opposite directions.

Other markets: In global trading, most Asian markets ended mixed, while European shares fell in afternoon trading.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for April delivery rose $1.27 to $41.30 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $9.20 to $993 an ounce.

The stock market isn't as bad as you think

Happy Presidents' Day! Even if you have to work (like I do), the best part of this holiday is that the stock market is closed. And after last week, we all need a break.

The market tanked, with the S&P 500 falling 4.8%, putting it down 8.5% for the year. This despite a new bank bailout plan and the passage in Congress of the economic stimulus bill.

Still, there is a bit of good news

Unlike last year, much of the selling has been contained to shares in financial companies - the S&P Banking Index is down 46% so far this year.

In fact, 172 of the stocks in the S&P 500 are in positive territory.
Talkback: Will the stock market bounce back later this year?

That may not sound great. But in 2008, a mere 25 stocks finished in the black. It's promising to see that more than a third of S&P 500 stocks are holding up reasonably well.

It's not surprising that many of this year's winners are in defensive sectors, companies that should be able to fare okay during a recession.

Several healthcare stocks, for example, are among the market's leaders, such as managed-care provider Cigna (CI, Fortune 500), generic drug maker Mylan (MYL) and cardiovascular-device manufacturer St. Jude Medical (STJ).

There are also a handful of consumer-staples companies, i.e. firms that make everyday items like food, beverage and personal care products.

Shares of tobacco company Lorillard (LO), milk producer Dean Foods (DF, Fortune 500) and soft drink bottler Coca-Cola Enterprises (CCE, Fortune 500) are all up more than 10% this year.

But what you may not have realized is that shares of many more economically-sensitive companies that were pummeled last year have started to bounce back. That could be a sign that bargain hunters may be betting on an economic rebound later this year or in early 2010.

For example, shares of online retailer Amazon.com (AMZN, Fortune 500), which plummeted 45% in 2008, are up more than 23% so far this year. Other beaten down retailers, such as video-game seller GameStop (GME, Fortune 500) and grocery-store chain SuperValu (SVU, Fortune 500), are both up more than 20% in 2009.

A couple of brand name tech companies have also enjoyed a comeback: shares of Corning (GLW, Fortune 500), Google (GOOG, Fortune 500) and EMC (EMC, Fortune 500) are all up at least 15%. And according to fund tracker Morningstar, technology sector funds are up 2% year-to-date. The only other class of stock funds that have gained ground this year are healthcare funds.

Several companies in the oil patch have begun to recover as well -- despite a continued drop in crude prices.

Shares of Tesoro (TSO, Fortune 500), an oil and gas refiner, are up more than 40% this year following a 72% drop in 2008. Other beaten-down energy companies, such as oil-driller Noble (NE) and equipment provider National Oilwell Varco (NOV, Fortune 500), have also enjoyed double-digit percentage pops this year.

And even in the sector that everybody loves to hate -- finance -- there are a few standouts. Shares of Morgan Stanley (MS, Fortune 500) are up 43% while Wall Street rival Goldman Sachs (GS, Fortune 500) has gained 14%.

It's interesting that both stocks have rallied considering that shares of the other troubled big banks that received the first round of bailout money last fall, most notably Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), have continued to sink. Even "healthy" banks such as JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) have been hit hard.

So what's this all mean? Of course, this is not to suggest that the financial pain will be over anytime soon. As I pointed out two weeks ago, the banking sector has to be fixed first for there to be a sustainable recovery in the economy and stock market.

But the fact that investors are bidding up some stocks and not just dumping all equities in favor of safer havens like gold and Treasury bonds is somewhat encouraging.

The indiscriminate selling that was a hallmark of the market at the end of last year appears to be over...hopefully for good.

Obama may subsidize mortgage debt

The Obama administration is looking at subsidizing the mortgage payments of struggling borrowers before they default, according to sources familiar with the discussions.

If it comes to pass, the program would blaze a new trail in the federal government's foreclosure prevention initiatives. Until now, the efforts have focused on helping those already behind in their payments through interest-rate reductions and other loan modifications. The Bush administration had not committed any money to helping borrowers.

Obama, however, has pledged to spend at least $50 billion to help borrowers in trouble. Treasury Secretary Tim Geithner said Tuesday that the administration would release its plan within a few weeks. He and Housing Secretary Shaun Donovan have been meeting with banks, housing advocates and trade organizations this week to listen to their foreclosure prevention proposals.

Details remain scarce, but at this point the subsidy plan entails having struggling homeowners take an affordability test and undergo a re-appraisal to see if they are eligible. The subsidy would allow servicers to adjust the loan terms without having the mortgage's investors take a loss, which should make them more open to the loan modification.

Assisting borrowers before they default would help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.

"This will help put a floor on home values," said one person familiar with the negotiations.

Obama's plan is also likely to include ramping up the streamlining of modifications for borrowers already in default. Already, several banks and Fannie Mae and Freddie Mac are working with homeowners to make their monthly payments more affordable by reducing interest rates, lengthening loan terms and deferring principal to the end of the loan.

Stocks on Wall Street reversed early losses after reports of the plan began to surface.

Meanwhile, lawmakers and regulators are asking financial institutions to halt foreclosures until Geithner unveils his plan. Rep. Barney Frank, D-Mass., said that 95% of banks should put a temporary moratorium in place.

Foreclosure filings - default notices, auction sale notices and bank repossessions - continued to climb in January, though at a slower pace than the month before, according to RealtyTrac. That was still 18% higher than in January 2008.

Lenders repossessed 66,777 homes in January. A total of 1,081,395 homes have been lost to foreclosure since the housing crisis hit back in August 2007.

Stocks jump in early trading

Stocks bounced Wednesday morning, rising after the previous day's battering, as investors continued to mull the outlook for the banking system while some of the industry's key executives prepare to testify before Congress.

The Dow Jones industrial average (INDU) added 0.7% in the early going. The Standard & Poor's 500 (SPX) index gained 0.8% and the Nasdaq composite (COMP) rose 0.7%.

Asian stocks ended lower Wednesday, and European stocks were mixed in morning trading.

Oil edged up 53 cents to $38.08 a barrel. The dollar slipped versus the euro and the yen but rose against the British pound.

U.S. stocks slumped Tuesday, with the Dow industrials ending at a 3-month low, as Treasury Secretary Tim Geithner's bank rescue plan failed to soothe investors. All three major gauges lost at least 4%.

"The investors wanted clarity," said Anthony Conroy, head trader at BNY ConvergEx Group. "They didn't get that, so I think that's why they started to sell."

"We need the government guys to stop talking on TV," said Todd Leone, head trader at Cowen & Co. "Nobody liked what Geithner said, obviously. The perception was not good."

Banks: The banks will be in focus again Wednesday as the heads of eight major institutions testify about the Treasury rescue plan before a House committee.

Industry leaders - including Bank of America's (BAC, Fortune 500) Ken Lewis, Citigroup's (C, Fortune 500) Vikram Pandit and JPMorgan Chase's (JPM, Fortune 500) Jamie Dimon - will face questions about executive pay and how their banks have spent their share of the first $350 billion in the rescue plan.

Stimulus: Senate and House conferees are expected to take up the task of reconciling the stimulus measures passed by the two houses. Proponents hope to get a final vote on a compromise measure completed in time so that President Obama can sign the bill into law on Presidents Day, next Monday.

Economy: The government reported a trade gap of $39.9 billion for December, down from a revised $41.6 billion the prior month. Economists surveyed by Briefing.com had expected the deficit to shrink to $35.5 billion.

Later this morning, the Energy Department releases its weekly oil inventory figures.

Company news: Applied Materials (AMAT, Fortune 500) cautioned late Tuesday that chipmakers will spend 50% less this year for its products. The company also posted a fiscal first-quarter loss of nearly $133 million and said it will cut 14% of its workforce, or about 2,000 jobs. Shares fell 1% Wednesday morning.

Nike (NKE, Fortune 500) said late Tuesday that it may have to cut up to 4% of its workforce, or 1,400 jobs, due to a global restructuring. Shares were little changed Wednesday.

Debt prices creep higher

Bond prices edged higher Tuesday as the market focused on the severity of the recession that has President Obama pushing hard for his stimulus plan to be passed.

Bond prices have been seesawing in recent sessions as recessionary fears compete with the record volume of debt being sold to finance the government's rescue package.

Late Monday, Obama used his first ever prime-time televised news conference as president to garner support for the financial rescue package and emphasize its urgency. Given the weakened private sector, "the federal government is the only entity left with the resources to jolt our economy back to life," he said.

Meanwhile, Treasury Secretary Tim Geithner is set to unveil the new financial sector stabilization plan Tuesday. He is expected to offer plans to shore up losses in the banking system and to support homeowners struggling with foreclosure.

And as both Obama and Geithner look to spend cash on an economic recovery, the Treasury market is set to start its first day of quarterly refunding auctions. Last week, the Treasury announced a record-sized $67 billion refunding plan, adding longer-term maturity bonds to the auction schedule in an effort to pay for the government's stimulus spending.

Tuesday, $32 billion of 3-year notes are set to be auctioned. On Wednesday, the government will auction $21 billion of the 10-year note and $14 billion worth of 30-year bonds will be sold Thursday. Meanwhile, the government is also set to auction $84 billion of shorter-term notes this week as well.

Debt prices: The 10-year benchmark bond was up 10/32 to 106-24/32 and its yield dipped to 2.95%. Bond prices and yields move in opposite directions.

The 30-year bond rallied 14/32 to 115-23/32 and its yield fell to 3.63%. Meanwhile, the 2-year note ticked up 1/32 from 99-24/32 and its yield dipped to 1.01%.

The yield on the 3-month note rose to 0.33%. Demand for the shorter-term note has been seen as a gauge for investor confidence.

Lending rates: Bank-to-bank lending rates were largely unchanged. The 3-month Libor rate ticked lower to 1.22% from 1.23% Monday, according to data on Bloomberg.com. The overnight Libor rate, meanwhile, dipped to 0.30% from 0.31% Monday.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London and is used to calculate adjustable rate mortgages among other consumer loans. More than $350 billion in assets are tied to Libor.

Two credit market gauges showed increased confidence in the marketplace. The "TED" spread narrowed to 0.89 percentage point from 0.94 percentage point the day before. The smaller the TED spread, the more willing investors are to take risks.

Another market indicator, the Libor-OIS spread, dipped to 0.95 percentage point from 0.96 percentage point the day earlier. The narrower the spread, the more cash is available for lending.

Time for Geithner to show his cards

The Obama administration is about to face its first significant financial test.

Treasury Secretary Tim Geithner is expected to lay out the government's strategy for reviving the banking system in a speech Monday.

Since taking office last month, top Obama administration officials have promised to present a comprehensive plan to address the problems in the financial system, which has been struggling with losses on bad loans and souring mortgage-related securities.

Fixing the problems at the banks won't be simple or cheap. Economists say it will likely take more than the $350 billion remaining under the Troubled Asset Relief Program to fund the next round of federal programs.

One senior administration official told CNN the package being put together by Geithner and other top economic advisers to the President would "be an overhaul of the whole program."

Whatever shape the plan takes, it's crucial that officials reassure investors worried about the health of financial institutions and their capacity to extend credit to consumers and businesses.

Bank stocks have fallen sharply again this year, deepening a plunge that started in late 2007. Some fear that a plan the market deems insubstantial or ill-advised could lead to another leg down.

"We have to repair the banking system," said George Kaufman, an economics professor at Loyola University Chicago. "You have to do that first before you can address any other problems."

A number of options have been under discussion in Washington, notably a government-funded bad bank that would remove toxic assets from bank balance sheets as well as a taxpayer-funded insurance plan to cover losses on troubled bank investments.
Skepticism growing about bad bank idea

The bad bank idea has gotten the lion's share of the attention, with officials including Federal Deposit Insurance Corp. chief Sheila Bair speaking out in favor of a variation of the plan. Proponents say the nation's banks won't be able to lend aggressively and support economic growth until troubled assets like illiquid trading securities are removed from their balance sheets.

Recently, though, there has been some talk of a shift toward a program that focuses more on the asset guarantee approach.

Sen. Charles Schumer, D-N.Y., said earlier this week that the upfront cost of a bad bank approach -- projected by some observers to run into the trillions of dollars -- was among the factors leading legislators and administration officials to turn increasing attention to the guarantee concept. The government has already guaranteed some troubled assets held by Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500).

Whatever their merits, the bad bank and guarantee approaches share a common Achilles heel: They would commit hundreds of billions of additional taxpayer dollars at a time when Americans are wondering if aiding well-paid bank employees is the best use for their money.

Many taxpayers are up in arms about the gobs of money being made by employees of failing financial firms, despite President Obama's proposed new rules to cap compensation at banks requiring federal assistance.

Meanwhile, U.S. workers are losing their jobs at a sobering clip, and states and municipalities are cutting back on services as tax receipts plunge.

"The bad bank idea is just ridiculous," said Len Blum, a managing director at New York investment bank Westwood Capital. "The problem with these sorts of approaches is that for the government to help the institutions, it has to overpay -- which is bad for taxpayers and adds to this lack of transparency."

Having the government provide financing for private-sector purchases of troubled assets is another idea that may come into play.

This approach, in which private investors could commit funds and then borrow from the Fed or other government bodies to expand their buying power, could accomplish two important objectives. It could draw new capital into the markets, and help establish market prices for securities that have traded only infrequently and at deeply distressed prices in recent months.

One question mark hanging over this concept is how willing the banks will be to sell toxic assets at the market prices.

If the newly established market prices are below the prices at which the banks have marked the assets on their balance sheets, the banks could face more writedowns -- which could force the government to pour in even more capital.
Shouldn't some banks be allowed to fail?

Whatever the government does, there is a rising call to get taxpayers more than they got in return for the first round of TARP funding under former Treasury Secretary Henry Paulson.

"There has been a reticence on the part of the government to give out capital with appropriate restrictions," said Blum. "The problem with that approach is that it is bad for taxpayers and adds to the lack of transparency."

Estimates by the Congressional Budget Office and the Congressional Oversight Panel put the federal overpayments in the first half of TARP -- which focused on buying preferred stock from both troubled and healthy institutions -- in the range of $64 billion to $78 billion.

With questions about how taxpayer funds are being used growing, some observers say the best answer is to stop trying to prop up troubled institutions and instead resolve failing banks through the existing FDIC process - essentially letting banks fail and finding new buyers for them after the FDIC has taken them over.

The advantage to this approach, said Garett Jones, an economics professor at George Mason University in Fairfax, Va., is that it would help to spread the losses in the financial system to shareholders and bank creditors, instead of leaving the whole tab with taxpayers.

He said the government should force debt-for-equity swaps at institutions needing assistance. Existing shareholders would be wiped out and current creditors would give up some of their debt claims in exchange for ownership of the restructured firm.

In addition to being fairer, Jones said, swapping debt for equity would reduce the amount of debt weighing on the economy. That's a crucial concern at a time when the amount of domestic nonfinancial debt outstanding more than doubles gross domestic product, according to Ned Davis Research data - a ratio that's well above its long-run average.

"Why should taxpayers be bailing out firms when debtholders have plenty of skin in the game?" Jones said. "In the current bailout, what you're really doing is converting the debt of these problem banks to government debt -- and that's not what you need to do."

Stimulus: What got cut

A coalition of Democrats and some Republicans reached a compromise Friday that trimmed billions in spending from an earlier version of the massive economic recovery package.

Here is an initial list of some of the items cut, according to a Democratic leadership aide.

Items Cut:

-- $3.5 billion for energy-efficient federal buildings (original bill was for $7 billion)

-- $75 million for Smithsonian (original bill was for $150 million)

-- $200 million for Superfund (original bill was for $800 million)

-- $100 million for National Oceanic and Atmospheric Administration (original bill was for $427 million)

-- $100 million for Law enforcement wireless (original bill was for $200 million)

-- $300 million for federal fleet of hybrid vehicles (original bill was for $600 million)

-- $100 million for FBI construction (original bill was for $400 million)

Items Fully Eliminated:

-- $55 million for historic preservation

-- $122 million for new Coast Guard polar icebreaker/cutters

Stocks look to extend rally

U.S. stock futures were modestly higher Friday, ahead of a key reading on employment.

At 6:42 a.m. ET, Dow Jones industrial average, Standard & Poor's 500 and Nasdaq 100 futures were up slightly.

Futures measure current index values against perceived future performance and give an indication of how markets may open when trading begins in New York.

Jobs: The mood on Wall Street is likely to be influenced by the Labor Department's monthly employment report, due out at 8:30 a.m. ET.

Employers are expected to have cut 540,000 jobs in January after dropping 524,000 jobs in December. The unemployment rate, generated by a separate survey, is expected to have risen to 7.5% from 7.2% the previous month.

Stimulus: The Senate is set to resume deliberations Friday morning over a nearly $900 billion stimulus bill. Lawmakers generally agree that an economic recovery package is required but there are concerns about the size of the bill and some of its measures.

President Obama is also expected to name members of his Economic Recovery Advisory Board Friday. The panel, which will be headed by former Federal Reserve chairman Paul Volcker and made of a mix of leaders from the business world, will advise the White House on reviving the ailing U.S. economy.

Bank bailout: Treasury Secretary Tim Geithner is expected to detail the Obama administration's strategy for reviving the banking system on Monday. Several options have been under discussion, including a government-funded "bad bank" that would remove toxic assets from bank balance sheets.

Corporate results: After the market close Thursday, News Corp. (NWS, Fortune 500) reported a quarterly loss of $8.4 billion. Excluding charges, the media conglomerate reported earnings of 12 cents per share, which was short of Wall Street's estimates.

Toyota Motor (TM) warned of a much bigger yearly loss Friday, hurt by a sharp decline in automotive sales around the globe. The Japanese firm said it expects to report an operating loss of $4.95 billion when it reports its full-year results in March.

World markets: Global stocks mostly rose, boosted by hopes that the U.S. was close to taking more steps to bolster its economy. In Asia, the Nikkei and Hang Seng rallied. Stocks in London, Paris and Frankfurt were modestly higher in early trading.

Oil prices retreated towards $40 a barrel Friday, falling $1.05 to $40.12 a barrel in NYMEX electronic trading.

In currency trading, the dollar was little changed versus both the euro and the British pound, and was slightly weaker versus the yen.

Higher open seen for stocks

U.S. stocks were set for a higher open Tuesday ahead of the January auto sales reports, aided by better-than-expected Merck earnings.

At 8:17 a.m. ET, Dow Jones industrial average, Standard & Poor's 500 and Nasdaq 100futures were higher.

Futures measure current index values against perceived future performance and offer an indication of how markets will open trading begins in New York.

Peter Cardillo, chief market economist for Avalon Partners, said that investors appeared to be reacting to Merck's relatively strong earnings.

Merck (MRK, Fortune 500) reported net income of more than $1.6 billion for the fourth-quarter, compared to a loss in the year-earlier quarter. The drugmaker announced earnings of 78 cents per share, excluding charges related to restructuring. Analysts had expected Merck to report earnings of 74 cents per share, according to a survey from Thomson Reuters.

This follows mixed trading on Monday, when investors were focused on the Senate debate over the $885 billion stimulus package. The debate continues Tuesday.

"The moving factor today, initially, will be earnings and car sales and then, as we move through the rest of the day, the rhetoric out of Washington," said Cardillo.

Corporate results: Dow Chemical (DOW, Fortune 500) reported a loss of $1.55 billion for the fourth quarter, or a loss of $1.68 per share. The company blamed nearly $1 billion in charges stemming from restructuring costs, the impact of Hurricanes Gustav and Ike, and other factors.

Motorola (MOT, Fortune 500) reported a fourth-quarter net loss of $3.6 billion, or $1.57 per share, and said it was suspending its dividend. The company said it would cut $1.5 billion in costs this year, and appointed an acting chief financial officer.

UPS (UPS, Fortune 500) reported adjusted diluted earnings of 83 cents per share for the fourth quarter, down 22% from the year-ago quarter. Chief Executive Scott Davis blamed "a severe decline in economic activity around the world" resulting in "sharply lower package and freight volume for UPS."

Economy: The National Association of Realtors' pending home sales index for December is due after the opening bell. Auto sales, which are expected to plunge, are due beginning at midday.

World markets: Stocks closed lower in Asia, despite new measures from the governments of Australia and Japan to boost economic growth. European indexes were higher.

Oil and money: Oil prices rose 32 cents a barrel to $40.40 in electronic trading. The dollar rose versus the yen and the British pound, but fell against the euro.