European concerns drive stock market lower

Stock markets were trading lower at midday Wednesday as the optimism over Tuesday's announcement from the Federal Reserve faded and the concern over the European debt crisis grew.

The Dow Jones industrial average fell as much as 474 points. After a slight recovery it was recently trading down 359.57 points, or 3.2%, at 10,880.20. The broader Standard & Poor's 500 index was down less sharply. 

The slide comes hard on the heels of one of the market's best recent days. The Dow soared nearly 500 points before the close Tuesday after the Fed announced its intention to keep interest rates low and to consider using additional policy tools to prop up the economy.

Overnight, stock markets in Asia followed Tuesday's rally in the United States.

Much of the pessimism on Wednesday morning came as investors turned their attention to Europe, and particularly France, which has generally escaped scrutiny as investors focused on Spain, Italy and Greece.

The cost of insuring French debt, an indicator of pessimism about a country's finances, rose to a record high on Wednesday. France is the most indebted of all Europe's AAA rated countries, and unlike the United States, which recently lost its AAA rating from Standard & Poor's, France cannot choose to expand its monetary supply in order to pay creditors.

French President Nicholas Sarkozy called top officials for emergency talks on Wednesday to discuss new ways to cut the country's deficit.

The three major ratings agencies all reiterated on Wednesday that they have no plans to downgrade France.

France's leading stock index ended the day down 5.5%.

French banks have helped lead the market down. Societe Generale, the nation's second-largest bank, fell as much as 23% on Wednesday, but was recently trading down 15%.

The continued whipsawing of stock markets underscores the uncertainty of investors as a growing body of evidence points to a global economic slowdown. A number of market experts, though, have warned that stocks prices have been driven down by panic rather than a change in the economic fundamentals.

"The markets have moved lower based on fear," analysts at First Trust wrote on a note to clients. "As a result, the market is once again presenting a buying opportunity."

RELATED:

China's trade surplus surges

Divided Fed to keep interest rates low for two years

Wariness, anxiety on Main Street threaten economic recovery

-- Nathaniel Popper

Photo: A broker works in a trading room in Paris. Credit: Associated Press

Capital One to buy HSBC’s U.S. credit card unit

Capital One Financial Corp. said Wednesday that it would buy the U.S. credit card division of London-based HSBC Holdings for $32.7 billion as it attempts to expand its own credit card franchise.

HSBC, as part of a strategic narrowing of its retail business, will pass off more than $30 billion of credit card loans and store-branded credit cards to Capital One for a $2.6 billion premium.

The deal is expected to close in the second quarter of 2012. At least in the near future, HSBC customers should be able to use their cards as usual without any service changes.

HSBC has been in a shedding phase, recently selling 195 of its U.S. bank branches and planning to cut 30,000 employees worldwide over the next few years.

Meanwhile, Capital One is on a buying tear, saying in June that it would spend $9 billion snapping up Dutch company ING Group’s American online banking operations.

RELATED:

Former bank rep gets the runaround from Capital One

The hidden costs of credit cards

-- Tiffany Hsu

Photo: Mark Lennihan / Associated Press

Wall Street Roundup: Latest casualties. Municipalities safe.

Gold: Trading now at $1,773 per ounce, up 1.7% from Tuesday. Dow Jones industrial average: Trading now at 10837.36, down 3.6% from Tuesday.

Back down. Stocks headed back down after Tuesday's rally, with attention shifting again to the European debt crisis.

Latest casualties. Bank of New York Mellon is the latest bank to cut staff with its announcement of 1,500 layoffs.

Municipalities safe. Standard & Poor's wrote in a report last night that cities and states could keep their AAA ratings even after the federal government lost its AAA.

Maximum sentence. Prosecutors are asking a judge to send convicted insider trader Raj Rajaratnam to jail for the maximum sentence of nearly 25 years.

Rallying the troops. The CEOs at Citibank and Bank of America have tried to reassure their troops after shares in both companies have plunged.

New Goldman probe. The Securities and Exchange Commission is looking into Goldman Sachs' dealings with the Libyan government, with particular attention to a $50-million fee Goldman agreed to pay.

-- Nathaniel Popper

Credit: National Geographic

Dow falls 400 points in early trading

Stocks resumed their downward slide in early trading Wednesday as investors retreated from the initial optimism that greeted the Federal Reserve's decision the day before to keep interest rates low.

The Dow Jones industrial average was down more than 400 points within half an hour of the opening bell and was recently trading down 407.52 points, or 3.6%, at 10,832.25. The broader Standard & Poor's 500 index was down less sharply. 

The slide comes hard on the heels of one of the market's best recent days. The Dow soared nearly 500 points before the close Tuesday after the Fed announced its intention to keep interest rates low and to consider using additional policy tools to prop up the economy.

The continued whipsawing of stock markets underscores the uncertainty of investors as a growing body of evidence points to a global economic slowdown.

Overnight, stock markets in Asia followed Tuesday's rally in the United States, but Wednesday morning, European markets have headed down, with the leading French index recently down 3%, and Germany's leading index down 2%.

Investors had little new economic data to fix on after the Fed's announcement, but attention appeared to be shifting again from the U.S. economy to the European debt crisis. In addition to the ongoing concerns about Spanish and Italian debt, investors grew more concerned on Wednesday about French government debt. The price of insuring against losses on French debt rose on Wednesday while share prices in French banks fell.

In addition, some investors said that Tuesday's brief surge gave investors who have wanted to get out of the markets an opportunity to sell.

RELATED:

China's trade surplus surges

Divided Fed to keep interest rates low for two years

Wariness, anxiety on Main Street threaten economic recovery

-- Nathaniel Popper

Photo: Justin Lane / European Pressphoto Agency

Complaints against airlines drop more than 20% in June

The number and rate of complaints against U.S. airlines dropped by more than 20% in June, according to new data from the U.S. Department of Transportation.

During that month, the Department of Transportation's Aviation Consumer Protection Division received 935 complaints against U.S. airlines, down from 1,238 complaints in the same month last year, a drop of 24%.

When the total number of complaints is compared with the number of passengers flying in June, the rate of complaints dropped to 1.30 complaints every 100,000 passenger trips in June 2011 from 1.67 complaints in June 2010. That is a drop of 22%.

A Department of Transportation report released Tuesday shows that the biggest drop in complaints were on problems involving airline cancellations, misconnections, baggage, reservations, ticketing and boarding.

Steve Lott, a spokesman for the Air Transport Assn., the trade group for the nation's largest airlines, attributes the drop in complaints on improved efforts by air carriers to keep planes on schedule and deliver luggage on time.

"Many airlines continue to invest significant time and resources in improved baggage-handling processes and systems," he said.

Among the nation's largest airlines, Alaska Airlines had the lowest rate of complaints in June, with .25 complaints for every 100,000 passenger trips, according to the Department of Transportation Report. American Eagle Airlines had the highest rate of complaints, 2.61 complaints for every 100,000 passenger trips.

Hugo Martin

(Photo: Passengers prepare to take off on a flight from Chicago to Cleveland. Credit: Chicago Tribune.)

 

 

 

 

 

The Fed is a Rogue Elephant (wonkish rant)

Ben Bernanke thinks the money data is a `Black Box’

Ben Bernanke has moved the goal posts yet again.

Headline CPI inflation in the US is 3.4pc. There is no deflationary threat at this stage that can justify holding rates near zero until the moon turns into blue cheese, let alone embarking on emergency money printing.

The Bernanke Fed has more or less ignored headline inflation until now, arguing that what matters is “core” inflation. This strips out energy, fuel and food, which none of us consume of course.

Unfortunately, core inflation has been catching up lately. The Dallas Fed’s “trimmed mean” measure known as core PCE has risen (on a six-month annualized basis) from 0.9pc in January to 2.1pc in June.

So what the does the Fed do? It switches tack and says that headline inflation is not such a bad gauge after all. They do this knowing that the oil and food shock has subsided and that the headline rate will fall back for a while. This will create the impression that inflation is abating. “Cheeky,” said ING’s global economist Rob Carnell.

Indeed.

As you can see from the two charts below, the broad M2 money supply is growing robustly at 8pc and narrow M1 is growing at over 15pc.

Yes, I know, Ben Bernanke thinks the money data is a “Black Box” that cannot be understood, and ultimately a form of medieval witchcraft. Well, perhaps he should rethink. This is not picture of an economy facing imminent deflation.

Note how weak M2 was fifteen months ago (and broader M3 – which Bernanke has abolished, but others track – was actually contracting at 1930s rates). That was a very good lead indicator of the economic relapse we saw in the first half of 2011.

I am wary of Bernanke’s sudden change of heart on headline inflation. It confirms my suspicion (shared by many readers) that the Fed is deliberately bringing about inflation and currency debasement to cushion the effects of debt-deleveraging. This amounts to a soft default on America’s debts.

QE1 was an entirely appropriate response to the threat of spiralling collapse and an implosion of the money supply. I backed it whole-heartedly, and make no apologies for doing so.

QE2 was a different animal. The threat of imminent deflation was bogus. The effect was to juice stock prices and increase the asset wealth of the rich, hoping for a trickle down. In reality it punished poor people through rising food and fuel costs long before any trickle came through.

Needless to say, it also punishes prudent savers in order to rescue improvident and promiscuous borrowers. This has immense social and moral consequences over time, and risks undermining the virtues that made America the world’s paramount power.

Dallas Fed chief Richard Fisher said in a speech last March, further QE would “only prolong the injustice that we have inflicted on savers.”

He warned of the risk that the Fed will be viewed as “a pliant accomplice to Congress’ and the executive branch’s fiscal misfeasance,” if it carries on down this road. “Barring some frightful development, I will vote against any program that might seek to extend or enlarge the substantial monetary accommodation we already have provided. The liquidity tanks are full, if not brimming over. The Fed has done its job. What is needed now is for business to be incentivized to commit that liquidity to creating American jobs. This is the task of the fiscal authorities, not the Federal Reserve.”

Mr Fisher stuck to his word. He voted against the Fed’s promise yesterday to keep rates near zero until mid-2013.

The Fed is engaged in dangerous forms of social engineering. Central banks should never enter this territory.

Yes, I have been critical of the ECB for other reasons. It allowed the Club Med bubble to build up from 2004-2007, misread both the oil spikes of 2008 and 2011, has allowed M3 to gyrate wildly, but the ECB is not — or not yet — a rogue elephant trampling social norms under foot.

An intellectual case can be made that inflation should be raised to 4pc to 6pc in the western world to lift us out of our debt trap. EX-IMF chief economist Ken Rogoff and others have made exactly that argument. Fine. Let debate be joined.

But if so, the Fed needs to state this openly and not carry out a social revolution by subterfuge. Any such decision should be subject to democratic endorsement by elected parliaments.

How can we bring these the central bankers to heel?

Oil takes a tumble as Fed declines to offer new stimulus

Crude oil declined below $79 a barrel to its lowest levels since September on the New York Mercantile Exchange, extending the drop after the Federal Reserve pledged to keep interest rates at a record low through mid-2013.

U.S. benchmark crude for September delivery, West Texas Intermediate, dropped $2.01 to $79.30 on the New York Mercantile Exchange. That was the commodity's lowest settlement since Sept. 29, 2010. Futures have fallen 17% so far this month and are now down 13% for the year.

European benchmark Brent North Sea oil for September delivery dropped $2.35, or 2.3%, to $101.39 a barrel on the ICE Futures exchange in London. Earlier, it had fallen as much as $5, to $98.74, briefly drifting below $100 for the first time since Feb. 8.

Phil Flynn, an analyst at PFGBest Research, said "the market was hoping it would see some more Fed stimulus."

Flynn added, "The Fed didn't need to tell us they were keeping rates low. We already know that. There is a little bit of disappointment about that. Add to that the numerous reports from sources like the Energy Department on lower oil demand and we have another decline. Oil can be a safe haven, but only if you believe the global economy is going to move up reasonably and steadily."

Retail gasoline prices continued to decline, falling to a national average of $3.652 for a gallon of regular from $3.703 a week ago, according to the AAA Fuel Gauge Report. In California, the average price of a gallon of regular gasoline was $3.783, down from $3.816 a week ago.

RELATED:

Fed statement: 'Exceptionally low' short-term rates until at least mid-2013

-- Ronald D. White

Chart: The 12-month rolling average for the price of regular unleaded gasoline in California and in the U.S. Credit: AAA Fuel Gauge Report