MarketView for March 11

 

 

 

Summary 

 

Wall Street traded flat for most of the session as Chinese inflation rose to a 16-month high, resulting in new arguments for monetary tightening in the world's third-largest economy. At the same time, the S&P 500 index managed to close at a 17-month high as rising bank shares led a late rally that lifted stocks just prior to the closing bell that overcame the day’s concerns over the effects that China may have on the world as it tries to intercede in its overheating economy and take away some of the stimulus involved.

 

Financial stocks were also helped in part by the possibility that brewing legislation in Congress over adding some new controls over banking regulations is likely to be watered down. As a result, Citigroup closed up 5.6 percent to $4.18. 3M closed down 0.4 percent to $81.26.

 

The Nasdaq Composite rose for a sixth straight day, with Amazon.com ending the day up 2.4 percent at $133.58.

 

Retailers in general posted large gains a day ahead of the monthly retail sales data from the Department of Commerce.

 

The U.S. trade deficit narrowed unexpectedly as oil imports fell to their lowest level since February 1999, but exports slipped after rising in the eight previous months.

 

Bank Reform Is Going Nowhere

 

A broad overhaul of financial regulation is going nowhere after bipartisan Senate talks collapsed, jeopardizing a top Obama administration priority. The result on Wall Street was that bank share prices moved higher.

 

Senate Banking Committee Chairman Christopher Dodd said on Thursday that time was running out to pass legislation this year. He said he would unveil his own bill on Monday and try to get it to the Senate floor by Easter.  Dodd will likely have to pick up some Republican support to move the bill forward.

 

"The real problem I am facing is the clock," Dodd said at a news conference. Earlier, Senator Bob Corker, a Republican who had tried to hammer out a compromise with Dodd, said a simultaneous White House push to get healthcare reform through Congress had thrown a wrench into their effort.

 

President Barack Obama had pressed for a rewrite of financial rules to prevent future crises of the type that sent the economy into the most severe recession since the Great Depression.

 

The blow to financial regulatory reform lengthens the list of White House priorities that are now in peril, including climate change legislation and healthcare reform. The top Republican on the banking committee, Senator Richard Shelby of Alabama, said after Dodd's press conference that "an agreement is still very possible," provided that rules keep financial markets competitive while protecting taxpayers.

 

Anything the Senate might produce would have to be reconciled with a measure already passed by the House of Representatives, but Democrats will likely need 60 votes in the Senate to move a bill forward.

 

Bank stocks were higher after the news, and the S&P 500 index closed at a 17-month high. Financial stocks were helped by investor expectations that any new banking rules will be less severe than previously feared, lessening the risk that regulatory reform measures will hurt bank profits.

 

Dodd said he was setting out his own proposals in an effort to keep the process moving in a year cut short by congressional elections in November. He said his committee would begin considering the bill the week of March 22.

 

The bill that Dodd will unveil on Monday contains some elements negotiated with Corker, both senators emphasized, but key stumbling blocks remain, including how much authority to give to a new consumer financial protection agency.

 

Senate Majority Leader Harry Reid said he would try to expedite any proposals that Dodd manages to get out of his committee. "We have to make sure that everyone acknowledges that we can't have institutions that are too big to fail," Reid said.

 

The financial crisis put a spotlight on firms whose failure could jeopardize the entire financial system, with the government spending hundreds of billions of dollars in taxpayer-funded bailouts to rescue big firms and preserve stability. Reid said he plans for the full Senate to consider a bill before lawmakers take a break at the end of May.

 

The House of Representatives has already approved its own bill in December that would bring the most sweeping regulatory reforms since the 1930s.

 

Corker, who had defied some of his Republican colleagues by working with Dodd, laid part of the blame for the impasse on the White House. "There is no question that White House politics and health care have kept us from getting to the goal line," Corker said. However, Democratic Senator Jack Reed said talks came to a halt over the disagreements over content of the legislation.

 

"The reality is there are important, fundamental differences between the two sides when it comes to protecting consumers and preventing the kind of excesses that led to the 2008 financial collapse," he said.

 

Republicans dug in against calls from Democrats for a stand-alone agency to protect consumers from abusive tactics on credit cards, mortgages and other financial instruments. Republicans wanted banking regulators to take the lead in enforcing consumer rules, while Democrats argued that such a system would water down consumer protections.

 

Corker said he and Dodd had achieved bipartisan agreement that the rule-writing and enforcement functions of consumer protection would be separate. He said the main stumbling blocks were in the areas of derivatives regulation and whether to give shareholders greater say in electing corporate officers.

 

Unemployment Claims Fall

 

The number of new claims for unemployment insurance fell by 6,000 claims to 462,000 claims, the Labor Department, indicating a sluggish return to jobs growth. Thursday's reports painted a picture of an economy that was slowly improving.

 

After falling sharply in the second half of 2009, initial weekly jobless claims have stalled around 470,000 in recent months. Analysts say they need to drop to a 400,000 to 450,000 range to signal sustainable private-sector job growth.

 

Still, the uncomfortably high levels of claims did not alter expectations that job creation was set to resume in March, boosted by temporary hiring for a U.S. census and a bounce back from snowstorm-hit February.

 

The economy has lost 8.4 million jobs since the start of the downturn in December 2007. However, government data this week showed jobs opened up in January at the fastest pace in nearly a year and other employment indicators continue to point to an improving trend.

 

Restoring growth to the labor market, hard hit by the most painful economic downturn since the 1930s, is crucial to sustaining the economy's recovery when the boost from government stimulus and a turn in the inventory cycle wanes. There are signs that household finances, ravaged by the recession, are starting to recover, which should boost demand.

 

The net worth of households edged upward by $700 billion to $54.2 trillion in the fourth quarter, gaining for a third straight quarter, on rising stock market prices and a stabilizing housing market, Federal Reserve data showed.

 

Lehman Insolvent Prior to Bankruptcy

 

Lehman Brothers used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, a court-appointed examiner said, but he did not find extensive wrongdoing. In a 2,200-page report made public on Thursday, examiner Anton Valukas, chairman of law firm Jenner & Block, reported the results of his more than year-long investigation into the firm's collapse, which worsened the global financial crisis.

 

The examiner said that while some of Lehman's management's decisions "can be questioned in retrospect" and the firm's valuation procedures for its assets "may have been wanting," those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse. He did not find that Lehman's directors had explicitly violated their fiduciary duty.

 

However, in the report the examiner also revealed explosive allegations about a gimmick, known as "Repo 105," that was used for the sole purpose of manipulating Lehman's books. The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not, partially leading to its collapse.

 

He also said Lehman could have potential claims against JPMorgan and Citibank in connection with demands for collateral and certain changes made to guaranty agreements in Lehman's final days. In addition, Barclays may have received some assets improperly when it took control of Lehman's core brokerage business, he said in the report.

 

The examiner said there was also sufficient evidence to support a possible claim that the firm's auditor Ernst & Young had been "negligent."

 

The report was completed in February and was allowed to be unsealed by the bankruptcy judge overseeing the case earlier on Thursday.