MarketView for August 27

Summary

It was certainly Apple’s day on Wall Street. The Company’s shares hit another record on Monday, keeping the Nasdaq index afloat in the lowest trading volume of the year. Apple hit an all-time high of $680.87 during the day after the Company won a $1 billion judgment in a patent lawsuit against Samsung Electronics. The Company said it would contest the verdict. Apple, the world's most valuable company, ended up 1.9 percent at $676.68.

The verdict on Friday jolted shares of Google, as the case could change the dynamics of the mobile device market. Companies using Google's Android system may have to consider design changes. Google fell 1.4 percent to close at $669.22.

Meanwhile, many on the Street remained catatonic as they counted down the days to a key speech by Federal Reserve Chairman Ben Bernanke on Friday at the Fed’s annual meeting in at Jackson Hole, Wyoming. Expectations are for Fed action of some kind next month, but Bernanke is likely to keep markets guessing about the timing of another round of bond purchases.

Stocks have rallied in recent weeks on growing expectations for a third round of quantitative easing from the Fed, as well as possible action from the European Central Bank. News from Jackson Hole could determine whether the rally that took the S&P index to four-year highs will be sustained.

The European Central Bank will meet on September 6 and is expected to take some action to support the region's sputtering economy and tackle the debt crisis. Germany's constitutional court is expected to rule on the legality of the euro zone bailout fund on September 12.

The Dow was led down by shares of IBM, which agreed to buy Kenexa for $1.3 billion. IBM ended the day down 1.1 percent to close at $195.69. Shares of Kenexa were up 41.4 percent, closing at $45.79. In other deal news, Hertz said it would acquire Dollar Thrifty Automotive for about $2.3 billion, ending years of an on-off takeover battle. Hertz ended the day up 8.1 percent to close at $14.21, while Dollar Thrifty chalked up a gain of 7.5 percent to close at $87.08.

Hudson City Bancorp rose 15.7 percent to $7.45 after the company agreed to be acquired by M&T Bank for $3.7 billion in cash and stock. M&T ended the day up 4.6 percent, closing at $89.82.

The day’s trading volume was 4.46 billion shares on the three major equity exchanges combined. The year-to-date average is about 6.6 billion.

“Keep Buying Bonds,” says Evans

The Federal Reserve should launch a fresh round of monetary stimulus immediately, buying bonds for as long as it takes to produce a steady decline in the jobless rate, Chicago Federal Reserve Bank President Charles Evans said on Monday.

Without a change in policy, the unemployment rate, now at 8.3 percent, was unlikely to fall below 7 percent before 2015 at the earliest, Evans said.

"I don't think we should be in a mode where we are waiting to see what the next few data releases bring," Evans told a seminar at the Hong Kong Bankers Club. "We are well past the threshold for additional action; we should take that action now."

Evans, who will have a vote next year on the Fed's policy-setting panel, wants no part of that wait-and-see approach. Like the chiefs of the Fed's regional banks in Boston and San Francisco, Evans sees a case for doing now what the Fed has done only two times before -- buy long-term bonds in an effort to lower long-term borrowing costs.

Evans said he supports an open-ended bond-buying program, an approach that appears to be gaining converts at the U.S. central bank.

The Fed could stop buying bonds after two or three quarters of steady declines in the jobless rate, Evans said, but then should continue to keep rates near zero until the jobless rate falls to 7 percent. Only in the unlikely event that inflation threatens to rise above 3 percent should the Fed change course, he said.

The Fed has bought $2.3 trillion of long-term securities since the Great Recession in an effort to push down borrowing costs and boost the recovery. Any new bond-buying should focus on housing-backed bonds, Evans said.

Some policymakers, like Dallas Fed President Richard Fisher, worry that piling on more bond purchases will do little to help the economy and could make the Fed's eventual exit from easy-money policy more difficult. Other Fed hawks fret that letting inflation rise even a little could open the door to massive, uncontrolled price rises.

Evans sees the possibility that if unemployment remains too high for too long it could permanently sap the U.S. economy's underlying strength, which is much more worrisome than the prospect of temporarily higher inflation.

Evans said he expects inflation to stay at or below the Fed's 2 percent target in the medium term, even as unemployment stays well above the historical norm. The Fed should be willing to let inflation rise above the 2 percent target if doing so can help on the employment front, he said, but it should also be clear about how much of a deviation it would tolerate.

The Fed next meets in mid-September, but markets may get a better read on the likelihood of a new round of quantitative easing as soon as this week, when Fed Chairman Ben Bernanke speaks at the Kansas City Fed's annual gathering of policymakers in Jackson Hole, Wyoming.

It was at Jackson Hole in 2010 that Bernanke signaled that a second round of bond-buying was imminent.

Last year the Fed began a program known as Operation Twist, in which it sells short-term securities and buys long-term ones. The aim of the program, which the Fed in June extended through the end of the year, is to put downward pressure on longer-term rates.

"It is time to take even stronger steps," Evans said on Monday.

And on the Other Side

Dallas Federal Reserve Bank President Richard Fisher on Monday sought to add heft to his opposition to further monetary stimulus with the release of a paper by former Bank for International Settlements head economist William White who has been critical of ultra-easy monetary policy.

Fisher, who does not have a vote this year on the Fed's policy-setting panel, said he commissioned the paper "to inform me in my capacity as a member of the Federal Open Market Committee."

Calling the 45-page paper's findings "most illuminating," Fisher called particular attention to its contention that easy money is ineffective at boosting growth and in fact hurts the economy by encouraging governments to pursue "imprudent behavior" like excessive borrowing.

When central banks use easy monetary policy to buy time for policies like debt reduction that are better placed to foster strong and sustained growth, "The danger remains, of course, that ultra-easy monetary policy will be wrongly judged as being sufficient to achieve these ends," White wrote in the paper.

"The arguments presented in this paper then logically imply that monetary policy should be tightened, regardless of the current state of the economy, because the near term expected benefits of ultra-easy monetary policies are outweighed by the longer term expected costs."

Raising interest rates would be painful, but may be where central banks of developed economies "are now headed, absent the vigorous pursuit by governments" of non-monetary policies to boost growth, White wrote.

Fisher, who has often spoken against further monetary easing, said in May that the time had not yet come for policy tightening. A spokesman on Monday said that view had not changed.