MarketView for October 12

 

 

Summary  

 

The major equity indexes moved somewhat higher on Wednesday as Europe's progress toward bolstering its financial rescue fund brought more battle-weary investors back into the market. Momentum buying was partly in play, analysts said, as investors tried to latch on, or catch up with, what they hoped was a lasting rally, which has been a rare trend this year.

 

The S&P 500 traded above 1,200 for the first time in three weeks, taking the benchmark near the upper end of a range it has been stuck at since early August. Up about 12 percent from its intraday low hit last week on Tuesday, the index had its largest seven-day rally since March 2009. A sustained break above resistance at 1,215 would be seen as a bullish signal.

 

The Dow briefly bounced back into positive territory for the year. Bank shares led the advance again, with Citigroup closing up 5 percent at $29.22.

 

Worries that the euro-zone debt crisis could tip the global economy into another recession have pressured stocks in recent months.

 

Slovak lawmakers struck a deal to ratify more powers for the euro zone's rescue fund, known as the EFSF, effectively ending a crisis that had threatened the euro's survival and has weighed on stocks and other risky assets for months. Slovakia is the last country in the 17-member currency zone left to approve the revamped EFSF.

 

On the earnings front, PepsiCo rose 2.9 percent to $62.70 after it reported slightly better-than-expected earnings and affirmed its full-year target. But Alcoa fell 2.4 percent to $10.05 and ranked as one of the biggest drags on the Dow, a day after reporting results.

 

While Alcoa's results marked the start of the third-quarter earnings period, they often don't reflect what the quarter will look like, analysts said.

 

About 8.5 billion shares changed hands on the major equity exchanges, well above the year's daily average so far of about 8.0 billion shares.

 

Harrisburg, PA Files for Bankruptcy

 

Pennsylvania's capital, Harrisburg, filed for a rare municipal bankruptcy on Wednesday in a desperate bid to resolve its debt crisis, but it now faces a showdown with the state over control of the city.

 

Harrisburg becomes one of the most-high profile cities to opt for the little-used chapter of the U.S. bankruptcy code, most notably used nearly 20 years ago by Orange County, California. Alabama's Jefferson County last month settled with its creditors to avoid what would have been the largest-ever municipal bankruptcy.

 

The Pennsylvania capital's crisis has been a year in the making as the city of about 50,000 struggles to pay for critical services as well as roughly $300 million in debt that funded an incinerator project that failed to generate expected cash.

 

Harrisburg's city council approved the bankruptcy filing in a 4-3 vote. It was opposed by the mayor, and many questioned whether the action, which appears likely to be challenged, was legal.

 

Pennsylvania Governor Tom Corbett has said the city would be better off if it agreed to a rescue plan under the state's program for distressed cities, and his office stressed its opposition to the bankruptcy.

 

Pennsylvania's state senate will vote on a bill next week that calls for an eventual takeover of Harrisburg and the forced implementation of a fiscal rescue plan. The state house has already passed the bill.

 

The city council has rejected rescue plans, one backed by the state and one by the city's mayor. Those plans would have called on Harrisburg to renegotiate labor deals, cut jobs, and sell or lease its most valuable assets, including the incinerator and parking garages.

 

The city council said those plans demanded too much of Harrisburg residents and did not ask enough of the county, bondholders and the bond insurer, Assured Guaranty.

 

A spokesman for Mayor Linda Thompson said the council's actions could accelerate state approval of a takeover. "(The bankruptcy) is hugely unpopular, but the council ... is an independent body," said spokesman Robert Philbin.

 

He also said the city's solicitor had raised questions about the legality of the vote during the meeting on Tuesday. The solicitor, Jason Hess, was not immediately available for comment.

 

City Controller Dan Miller said on Wednesday, however, the filing was the right move for Harrisburg.

 

"I think it's the only real option that we had," said Miller, adding that the previous plans rejected by city council would have benefited creditors at the expense of the city.

 

"They wanted to sell all of our assets and make Harrisburg destitute for decades to come," he said.

 

About a year ago, many restructuring specialists were gearing up for a wave of municipal bankruptcies to provide much needed work as corporate bankruptcies ground to a halt.

 

The economy was barely growing, towns and counties were burdened with increased demands for services, and revenue was declining.

 

Financial analyst Meredith Whitney, one of the few on Wall Street who foresaw the 2008 financial crisis, said last year she expected a wave of municipal bond defaults.

 

Chapter 9 bankruptcies remain uncommon, however. The process is very expensive, and not all states allow local governments to file for bankruptcy. Governments also have a power ailing companies do not have: the ability to tax.

 

Balance Sheet Expansion Considered

 

Federal Reserve officials mulled a fresh round of bond purchases among other tools to ease financial conditions at their last meeting in September, minutes released on Wednesday showed.

 

"Most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery," the minutes of the September 20-21 meeting said.

 

Fed officials discussed tools to ease monetary policy that ranged from rebalancing the Fed's portfolio to lengthen its average maturity and put more downward pressure on long-term interest rates -- the step they ultimately took -- to providing explicit guidance about their goals for the labor market.

 

In a statement it issued after the meeting, the Fed warned of significant risks to the already weak U.S. economy as it launched its new plan to lower borrowing costs and bolster the battered housing market.

 

Two Fed officials wanted stronger action, while three objected to taking any new measures at all, the minutes said. Ultimately, the three officials -- Dallas Federal Reserve Bank President Richard Fisher, Philadelphia Fed chief Charles Plosser and Narayana Kocherlakota of the Minneapolis Fed -- dissented from the Fed's decision.

 

The central bank has been struggling to find a way to spur a stronger recovery and bring down the U.S. unemployment rate, which remained stuck above 9 percent in September for a fifth straight month.

 

It cut overnight interest rates to near zero in December 2008 and bought $2.3 trillion in bonds to further rekindle economic growth.

 

As its became clear the recovery was faltering, it took the additional step at a meeting in August of committing to hold overnight borrowing costs at rock bottom levels through mid-2013, and then it said it would rebalance its bond holdings.

 

In evaluating the range of options available to them last month, a number of Fed officials felt further bond buying was the most potent initiative the central bank could muster.

 

Large-scale asset purchases -- also called quantitative easing -- have been a lightening rod for controversy abroad and at home, with critics charging the Fed with setting the stage for inflation and debasing the dollar.

 

Policymakers also discussed setting explicit objectives for the Fed's long-range goals for unemployment. While most officials agreed greater transparency was worthwhile, many felt it would be necessary to communicate those objectives in depth -- something for which the Fed's terse post-meeting statement is ill-suited.

 

Officials decided they needed more time to study the potential side-effects of lowering the interest rate the Fed charges banks on excess reserves.

 

Comments from the Fed

 

Philadelphia Federal Reserve Bank President Charles Plosser: "The Federal Reserve's latest easing program is fiscal, not monetary policy, and does not have much credibility. Treasury debt issuance could undo much of the effect of the Fed's attempt to lower borrowing costs, known as “Operation Twist.” It doesn't have a whole lot of credibility attached to it.

Dallas Federal Reserve President Richard Fisher: Inflation looks set to ease in coming months, making unemployment by far the greatest concern for the U.S. economy. However the current unemployment problem was not amenable to monetary policy solutions. The tanks are full on liquidity, indicating he believes the Fed, which not only slashed rates near zero but also bought some $2.3 trillion in securities, has already done enough.

 

Cleveland Federal Reserve President Sandra Pianalto: The central bank must do what it can to help a struggling economic recovery, even if monetary policy is not a panacea. Of course monetary policy alone cannot solve all of the ills of our economy. Nevertheless I do believe that the Federal Reserve has to do what it can to promote a stronger economic recovery. I'm fully supportive of the actions the Fed has taken and feel that we are running the appropriate monetary policy based on the outlook that we have for both growth, employment and inflation.