Greece's bailout plan to be announced soon . . . . U.S. trade deficit higher than expected . . . . and also making news Wednesday was Federal Reserve Chairman Ben Bernanke's remarks prepared for but not delivered to a House committee, due to the blizzard strafing the mid-Atlantic coast; the Fed released them nevertheless. Bernanke's comments about raising interest rates as soon as the economy firms up didn't come as a big surprise, really, but the first method he mentioned of doing it was kind of interesting. Instead of the customary decades-old method of loosening or tightening credit, namely, raising the federal funds rate -- the interest rate, now near zero, that banks charge each other for very-short-term loans -- one Fed remedy for excess liquidity will be something different: It plans to raise the amount of interest it pays to banks on their excess reserves that are in effect "left" at the central bank.
That rate is currently 0.25%. Raising it would give banks an incentive to keep money parked at the Fed, rather than lend it, effectively reducing the amount of money available for loans (and doubtless forcing the rates for borrowers to rise). It's an effective way of "mopping up" some of the excess cash that may be sloshing around in a financial system without -- it's hoped -- tipping the economy back into a recession.
The indexes mostly sulked all day, not even responding to better-than-expected December export data. Sulky is probably the market's true mode, since yesterday's big gain was mostly attributable to headlines regarding the EU's bailout of Greece. The details of that bailout should be made public Thursday, according to the French press. As for today, the hint at higher interest rates couldn't exactly be expected to cheer the market. Financials managed to get today's gold star, but barely:
INDEX WRAPUP, WEDNESDAY, FEB. 10:
Paying interest on excess reserves is fairly new for the U.S., authorized here only in late 2008 in the depths of the financial meltdown, although many foreign central banks have used it for years. As for when to expect a rise in the record low discount rate, Bernanke said that will depend on economic and financial conditions, but evidently the Fed wants to keep interest rates low until the economy is stronger, with Bernanke repeating his "extended period" trademark phrase.
Many observers seemed to think that raising interest on excess reserves would in effect be a policy tightening, in much the same way an expired tax cut is a tax hike. In addition to pulling money out of the system, the hike would raise rates tied to the prime rate of commercial banks and thus affect many consumer loans, making it more expensive for businesses and you and I to borrow money. And incidentally, whose tax dollars do you think would be paying that higher interest?
U.S. BANKS' EXCESS RESERVES, 1950-NOW:
(Kudos to whoever came up with that in-joke of an acronym for knowing what an excrescence is . . . )
The Dow Jones Industrial Average ended the day down 20.26 points or 0.20% at 10,038.38, far away from the 10,325 or so we need to breathe really easily, and with nothing on the immediate horizon to take it there.
DOW JONES INDUSTRIAL AVERAGE:
The S&P500 lost 2.39 points or 0.22%, closing at 1,068.13, similarly needing a roughly-3% gain to make it to safety.
The Nasdaq fell 3 points or 0.14%, ending at 2,147.87.
The dollar also advanced -- even after the government reported the U.S. trade deficit widened to $40.2 billion in December from $36.4 billion the month before. An interesting equity, the Powershares DeutscheBank US Dollar Index Bullish Fund (UUP), composed solely of long futures contracts, replicates pretty closely the performance of being long the US dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Here's how you'd have done if you bought it in December:
POWERSHARES DB U.S. DOLLAR INDEX BULLISH FUND (UUP):
If you're ever feeling down on the buck, there's also a bearish dollar fund (UDN).
A stronger dollar usually pressures commodity prices, as it makes them more expensive for holders of other currencies and in fact, March crude prices fell Wednesday morning. They later turned around and gained 77 cents to end the day at $74.52. Individual oil company prices were generally flat to down, with Chevron (CVX), BP and Exxon-Mobil (XOM) all off a fraction of a percent.
US OIL FUND (CRUDE FUTURES):
Financial stocks fell immediately after Bernanke's comments were made public but they rebounded faintly and closed mildly higher. Tuesday's big market jump was due mainly to the expected resolution to Greece's debt crisis, for which we have Germany and the other EU partners to thank. Wednesday it seemed banks and others were waiting for the details of exactly how that bailout would work.
Before the open came news that the U.S. trade deficit unexpectedly soared in December. But it's not quite as bad as it sounds -- we can mostly blame higher oil prices and restocking oil inventories. The overall U.S. trade deficit ballooned to $40.2 billion from a revised $36.4 billion gap in November, with the December shortfall coming in far worse than forecast, with a $35.7 billion differential. Imports jumped 4.4% but exports rose a heartening 3.3%.
The worsening in the trade deficit was largely due to a widening of the petroleum deficit, which came in at $23.5 billion, due to both higher prices and more barrels imported. The nonpetroleum gap actually shrank to $26.9 billion from $27.2 billion in November. The widening in the petroleum deficit was due to both a gain in prices and more barrels -- a lot more. Physical barrels imported jumped 12.9% after a 5.2% decline in November. The price of imported oil increased from $72.54 a barrel in November to $73.20 in December.
U.S. TRADE DEFICIT, WITH AND WITHOUT PETROLEUM:
Of course, a low starting point helps but until-recent weakness in the dollar combined with Asian economic growth continue to boost U.S. non-petroleum exports. Year-over-year, overall exports in December rose to 7.4% from minus 2.4% the previous month, as imports increased to 4.6% percent from minus-5.6%. In a word, overall trade continues to increase, although both imports and exports are still below the pre-financial crisis levels. The jump in oil imports is likely to reverse next month but the widening trade gap might bode ill for the dollar.
As for earnings, no stories moved the market Wednesday but there were a few items of interest: The New York Times Co. (NYT) reported that fourth-quarter profit more than tripled to $90.9 million, the publisher's highest quarterly earnings since mid-2007. Credit an 18% cut in the company's work force (yikes!) that more than offset the steep slide in ad sales. The company expects more ad erosion this year, probably leading to more job cuts. Investors really don't like that kind of earnings quality; shares fell $1.05 or 9% to $10.62 . . . .
NEW YORK TIMES bleeding ad money:
Berkshire-Hathaway's rating was cut two notches to AA by Fitch ahead of the company's planned acquisition of Burlington Northern Santa Fe. Fitch says is concerned about the deal's effect on Berkshire's "asset profile, capitalization, and interest coverage" as Berkshire-Hathaway sells $8 billion in notes to help finance its purchase. The stock dropped $150, but when you're starting out at $111,700, and when your stock has risen over 10% since the middle of January (yes), that's a mere 0.13% drop . . . . Big Irish drug maker Elan (ELN) lost 10 cents in the fourth quarter but said it expects an operating profit in 2010 for the first time in nearly a decade, thanks in part to its multiple-sclerosis drug Tysabri, although revenue growth would slow before accelerating next year; the stock fell five cents to $7.02 . . . . Advertising conglomerate Omnicom Group (OMC) announced a not-surprising 15% drop in earnings for its fourth quarter due to tight marketing budgets that reduce profits from media and advertising agencies, although international revenue increased slightly (In journalism school I was taught that in tough times you increase advertising) . . . .
European shares gained on Wednesday, helped by hopes that Greece's financial woes won't bring down the EU. Luxembourg's steel mammoth ArcelorMittal (MT) obviously missed that news, as it declined on much-lower-than-expected earnings and a disappointing outlook, with rising costs and lower selling prices offsetting higher shipments, along with an increase in debt for the first quarter.
Many steel stocks on this side of the ocean followed MT down: AK Steel (AKS) fell 27 cents to $20.48, U.S. Steel (X) tumbled $1.64 to $44.37 and Steel Dynamics (STLD) was down 37 cents to $15.06 has fallen 2.3% (note the fair-enough 2% dividend). Hopes that the EU will come to Greece's rescue may be helping, but at the risk of being a spoilsport, what will happen when markets start looking at the debt problems of Spain, Portugal and Italy?
ARCELOR-MITTAL, not a part of Europe's hopeful celebration Wednesday:
Other than Jobless Claims, Thursday will be a slow day as regards economic reports. Pepsi, Viacom, Rio Tinto, McAfee, Diageo and AutoNation are among companies reporting earnings. The EIA's petroleum and natural gas reports have been moved to Friday.