Saturday, August 15, 2009

Economic Crisis Update: Stocks Drop As Investors Worry; Bing's Austerity Program for Detroit

Stocks drop as investors worry about consumers

By SARA LEPRO, AP Business Writer

NEW YORK – The fear on Wall Street is that nervous consumers are going to short-circuit the economic recovery.

Stocks fell sharply Friday, taking the major indexes down about 1 percent, after investors were disappointed by reports that the Reuters/University of Michigan index of consumer sentiment fell significantly short of expectations for the first part of August. That's a sign consumers may well keep cutting back their spending as they worry about losing their jobs. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported an unexpected decline in retail sales. Investors were able to shake that off, but Friday's consumer sentiment number had them bailing out of stocks, jeopardizing a summer rally that had lifted the Standard & Poor's 500 index more than 15 percent in about a month. Still, the indexes finished well off their lows of the day, a sign that the mood on Wall Street isn't all that grim, and light volume likely skewed price changes.

Investors also sold off oil and other commodities and moved their money into the relative safety of the dollar and government bonds. Treasury prices jumped, sending their yields lower, while the dollar rose against other major currencies.

After rallying for months on expectations of an economic recovery, investors are worried that they have been too optimistic, given consumers' continuing reluctance to spend. Analysts are predicting that the market may be rocky for some time.

"Valuations were beginning to price in a sunnier a future, but not all the data is sunny yet," said Lawrence Creatura, portfolio manager at Federated Clover Capital Advisors, referring to stock prices. "There is still going to be a tug of war between good news and bad news as we move through the coming months."

The Dow Jones industrial average fell 76.79, or 0.8 percent, to 9,321.40 after falling as much as 165 points after the consumer sentiment survey was released.

The S&P 500 index fell 8.64, or 0.9 percent, to 1,004.09, while the Nasdaq composite index fell 23.83, or 1.2 percent, to 1,985.52.

The drop erased the market's advance of the last two days, and gave the big indexes their first losing week after four weeks of gains. The Dow was down 0.5 percent for the week, while the S&P 500 index fell 0.6 percent and the Nasdaq was off 0.7 percent.

About five stocks fell for every two that rose Friday on the New York Stock Exchange, where volume came to a light 1.09 billion shares. Light volume can exaggerate the market's movements.

In other trading, the Russell 2000 index of smaller companies fell 11.29, or 2 percent, to 563.90.

Bond prices rose sharply. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.57 percent from 3.62 percent late Thursday. The drop in the 10-year yield is good news for consumers because it is closely tied to interest rates on mortgages and other loans.

On the New York Mercantile Exchange, gold and other metals prices fell, while oil prices sank $3.01 to $67.51 a barrel.

Stocks have had a difficult few days, falling in the early part of the week amid anxiety over what the Federal Reserve would say about the economy at the end of a two-day policy meeting. The market turned higher on Wednesday after the Fed reassured investors with a more positive stance on the economy than in the past. The market's gains spilled over into Thursday.

"This week was a great example of what will likely occur for the rest of the year," said Greg Reynholds, a vice president at Lenox Advisors. "Day by day, week by week, month by month we're going to have to try to find direction through this data jungle."

Investors have sent markets higher this summer encouraged by improvements in housing, manufacturing and corporate profits. But without the support of the consumer, the economy's recovery is in question.

"I think you're going to need to see a material stabilization in labor markets before you get meaningful and stable consumer confidence," said Stephen Wood, chief marketing strategist at Russell Investments. "And we're certainly not adding jobs and we're not even at a point where jobs are no longer being lost."

Stocks fell across the board Friday, with the biggest losses among financial, energy and material companies — industries that posted some of the biggest gains in recent days. Losses weren't as steep in more defensive areas like consumer staples and utilities, which tend to hold up better when the economy is weak.

In other economic news Friday, the Labor Department said the Consumer Price Index was flat in July after a slight increase in June. That had little effect on stocks but did help bond prices. Wall Street also shrugged off a report showing a bigger-than-expected increase in industrial production as investors have come to expect an improvement in manufacturing.

Overseas, Asian markets were mostly higher, with Japan's main index hitting a ten-month high amid mounting optimism about a global economic recovery. The Nikkei stock average rose 0.8 percent.

European markets gave up early gains and finished lower. Britain's FTSE 100 dropped 0.9 percent, Germany's DAX index fell 1.7 percent, and France's CAC-40 lost 0.8 percent.

The US economy is still struggling

August 14 2009 18:54
Financial Times

Is the worst over for the US economy? Some recent figures point that way, and much US economic commentary is growing cautiously optimistic. For the moment, though, the emphasis needs to stay on caution not optimism.

Certainly, the economy is levelling off: output is no longer in free-fall, and unemployment is no longer growing at post-war record rates. But it is unclear whether the bottom for output has quite been reached. Once it has, growth may be slow for some time. As for jobs, whatever happens, unemployment is likely to rise further before it falls back to more normal levels.

If things are still getting worse, albeit much more slowly than before, one can hardly argue that the worst is over, only that the rate of decline has moderated. And since unexploded ordnance still litters the financial landscape, one cannot be sure that there will be no more sudden setbacks.

This week the Fed did sound a little more cheerful. It said that the longest period of US economic decline since the Great Depression was coming to an end, prompting speculation that the recovery has begun. But the central bank also left its benchmark interest rate at zero, and said it would stay there “for an extended period”. That monetary stance seems right – but one can hardly call this an expression of confidence.

The headline unemployment rate fell in July from 9.5 to 9.4 per cent, welcome news that was widely noted. But the monthly rate of job losses – about 250,000 in the private sector, down from more than 600,000 at the beginning of the year – was still at the high end of the range for a normal recession. The unemployment rate dropped because more than 400,000 workers dropped out of the labour force altogether, and are no longer looking for work. The labour market has not yet turned the corner.

An even more sobering statistic was the number of mortgage foreclosures in July. At 360,000, it set a new record. In the first seven months of the year, notices of default, auction or repossession totalled 2.3m. The still-crippled housing market, and the damage it has inflicted on the net worth of US households, continue to depress the prospects for the recovery in consumer spending on which everything else depends.

Normally, the faster the downturn, the more vigorous the recovery. A few economists expect that pattern to hold this time, but most do not. Continuing stresses in financial markets, the fear that there may be shoes to drop in other sectors, and the lingering effects of the crash on households’ income all suggest the recovery may be sluggish even by normal standards, let alone compared to the slump that preceded it.

The US economy is still desperately weak and will most likely continue to struggle for months.

AUGUST 14, 2009

Mayor Courts Resistance in Detroit

Former NBA Star Bing Counts on Election Mandate to Push Through Already Unpopular Budget Cuts

Wall Street Journal

DETROIT -- Dave Bing has made a career against long odds.

He was a skinny kid with blurred vision who became a standout student-athlete at Syracuse University and a professional-basketball legend. He started an auto-supply company in Detroit in 1980, at a time when manufacturers were streaming out of the city, and built the business into an empire. Born into poverty, he has become a wealthy philanthropist and a local icon.

In his latest role as mayor, he once again faces long odds.

Detroit will go broke in 60 to 70 days, the 65-year-old mayor warned this week, unless it can fill a budget hole of more than $250 million. The city could end up in state receivership a month before Mr. Bing comes up for re-election in November.

"In order to keep our head above the water and not drown, there are drastic measures that we're going to have to take," Mr. Bing, a Democrat, said in an interview this week. "We've been doing the same thing a long, long time, and that's the reason we are where we are."

Mr. Bing is proposing a 10% cut in municipal wages across the board by late August and is scaling back such key city services as busing. He said the city could no longer afford to run buses on Saturday evenings or Sunday.

Earlier this week, Mr. Bing met with representatives of the city's unions, who balked at his proposals, despite the threat of mandatory unpaid furloughs as an alternative. "We're going to fight that," said Henry Gaffney, president of the city's transit union, who accused the mayor of "trying to slam this down our throats."

The mayor has gone to Chicago to ask bond-rating firms not to downgrade Detroit's rating, which was already at "junk" status before Mr. Bing's warning about the city's finances. A downgrade would add at least $30 million a year to the city's debt-service costs.

This week, Mr. Bing made his 111 political appointees take the same pay cut he is asking the city's unions to swallow. It will save between $8 million and $11 million, he said. For his part, Mr. Bing is accepting $1 a year for the job, the legal minimum.

Mr. Bing took office in May after a special election to succeed Democrat Kwame Kilpatrick, who went to jail for perjury in a sex scandal that paralyzed city government for nearly a year. Before his departure, Mr. Kilpatrick was a vocal advocate for Detroit, announcing high-profile development deals and ambitious plans to revitalize the city's downtown and neighborhoods.

In Mr. Bing, Detroiters have embraced very much the opposite. A political novice and suburbanite -- he moved to an apartment downtown to qualify for the ballot -- the mayor has been mostly out of view since his election, huddled with advisers.

None of Detroit's economic problems are new, but they have accelerated markedly in recent years. The city has been steadily losing residents, businesses and tax revenue for a half century. Unemployment is more than 28%.

Under Mr. Kilpatrick, the city relied heavily on casino revenue, as well as asset sales and other one-time boosts to balance its budget. But casino revenue is easing, and Mr. Bing has little left to sell.

"A lot of it's out of his control," said Dennis Archer, Mr. Kilpatrick's predecessor as mayor and a strong Bing supporter.

Mr. Bing insists he is no stranger to adversity, or Detroit's woes. "All my businesses are in the city of Detroit, in very tough, tough areas," he said. "I've never tried to get away from some of the issues that we have."

Mr. Bing grew up in Washington, D.C. His mother was a domestic worker and his father a bricklayer. At age 5, in an accidental fall, a nail on a piece of wood pierced Mr. Bing's left eye, fogging his vision for good. Still, he went on to All-America honors at Syracuse and was drafted second overall in 1966 by the National Basketball Association's Detroit Pistons, where he played nine seasons. A second injury as a pro required surgery to fix a detached retina in his right eye, but Mr. Bing still thrived, going toe-to-toe with such legends as Oscar Robertson and cementing a place in pro basketball's Hall of Fame.

Yet even as a player, Mr. Bing was planning his future. He took off-season jobs at the National Bank of Detroit and at Chrysler. After his career ended, he worked for a steel company before launching his own business.

Bob Lanier, his former Piston teammate, recalls questioning the decision to run for mayor. "I called him and said, 'Dave, do you understand how difficult this task is going to be?'" said Mr. Lanier.

Mr. Bing narrowly won the May special election against an interim mayor. But in a six-way primary last week to seek a full term, he won nearly three-quarters of the vote, becoming the prohibitive favorite for the November election. He is counting on that mandate, along with his local popularity, to be able to push through wrenching overhauls in the city's finances.

Mr. Bing hopes to offer Detroit's voters a break from the scandal and political wrangling that has stifled progress in the city in recent years, and he resists campaigning publicly. "Business will bring the city back, not politics," he said.

But he knows the task will require him to vary his game a bit. At an event announcing more than $1 billion in stimulus money for car-battery development in Michigan this month, Vice President Joe Biden, a contemporary of Mr. Bing's at Syracuse, marveled at the opportunity to meet the basketball legend. He asked whether the mayor could still drive to the left, tough for a right-handed player. "I am now," the mayor quipped.

"I better be able to go left," Mr. Bing said when asked about that meeting. Right now, "it's necessary not just to be able to go one way."

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