Even as the Obama administration is unveiling plans to impose unprecedented pay caps on top officials at the seven U.S. companies receiving the largest federal bailouts, the U.S. Supreme Court is preparing to hear a case that turns on whether to apply analogous pay caps on certain financial advisers.
Even more important, the court’s ruling in the case known as Jones v. Harris Associates — being argued November 2 — will provide insight into how the current roster of justices view the economic question of our day: When should market forces be reined in by government?
Typically, when directors pay a CEO a suspiciously bloated salary, the action raises only state-law questions, not warranting the Supreme Court’s attention.
The upcoming case, however, raises a closely analogous issue that does happen to be controlled by federal law: What happens when ostensibly independent directors of a mutual fund approve bloated fees for the fund’s financial adviser — the same adviser who most likely created the fund and, in most cases, still oversees it? (A 1970 amendment to the federal Investment Company Act imposes a fiduciary duty on fund advisers not to accept excessive compensation and empowers investors to enforce that duty in court.)
The facts of the case are these: In 2004 investors in three Oakmark mutual funds — which had, ironically, each just completed three years of stellar performance — sued the funds’ adviser, Harris Associates, for allegedly accepting too much in fees during that time. (The investors’ law firm also brought similar cases against 11 other leading fund advisers, including those for American Century, Fidelity, Janus (JNS), and Putnam.)
Citing the fact that Oakmark’s fees had been fully disclosed and were well within industry standards — roughly 1% of assets for the first $2 billion invested — the district judge threw the case out before trial in 2007.
Last year the federal appeals court in Chicago affirmed that decision. U.S. Circuit Judge Frank Easterbrook, one of the most eminent jurists of the conservative Chicago School of Law and Economics, explained his ruling bluntly: "A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation." Ho-hum.
Then things took a turn toward the extraordinary. In August 2008, when the full Seventh Circuit Court of Appeals declined to rehear the case, five judges signed a rare dissenting opinion. More remarkable still, the dissent was authored by Judge Richard Posner, another towering intellect of the free-market Chicago school.
Perhaps undergoing a mid-financial-crisis crisis, Posner urged that market forces could not be trusted in this situation. In his view Judge Easterbrook’s analysis was "ripe for reexamination" because of the "feeble incentives of boards of directors to police compensation." He stressed that Harris charged mutual fund investors roughly twice what it charged independent institutional investors.
Seeing the deep rift within the Seventh Circuit and a conflict with other circuit court rulings, the Supreme Court snatched the case up in March.
Even aside from its implications for CEO pay, Jones v. Harris Associates directly affects the $10 trillion mutual fund industry in which 92 million investors participate. At least 14 outside groups have filed friend-of-the-court briefs.
Jones’s supporters include Vanguard founder John C. Bogle, AARP, and the U.S. Securities and Exchange Commission. Rooting for Harris Associates, on the other hand, are various industry trade groups and the libertarian Cato Institute.
We’re wagering that the court will reject Judge Easterbrook’s view — that virtually any fee, so long as it’s disclosed, is okay — but still won’t find Oakmark’s fees to have been illegally out of whack.
Of greater interest will be the straw poll of the Supreme Court’s views on laissez-faire capitalism itself. Is it, too, "ripe for reexamination"?
College costs are higher than ever, according to a new report, putting a degree even further out of reach for many Americans.
Tuition and fees at private 4-year schools rose 4.4% in the current school year to $26,273, according to a survey released by the College Board Tuesday.
Charges at public 4-year universities spiked over 6% for both in-state and out-of state students, to $7,020 and $18,548, respectively.
"We’re in a very strong sellers market for higher education," said Pat Callan, president of the National Center for Public Policy and Higher Education, who noted that the high school graduating class of 2009 was the largest in history.
"Colleges and universities are capitalizing on that more than any other institution in the economy. If you walk around a shopping mall, nobody else is raising prices at the same rate."
Tuition prices are going up at private schools at least in part because those schools have seen their endowments dwindle. Public schools are suffering from a dip in state funding, which declined 5.7% per student this year. (College Cost Finder: Get the latest tuition.)
Less grant money. At the same time, the availability of financial aid isn’t keeping up with these climbing costs. Grant funding grew only 4.7% in the 2008-2009 academic year, the most recent for which data is available, which means that undergraduates’ out-of-pocket costs are higher than ever.
That, combined with higher unemployment and stagnant household incomes, is making it harder than ever to finance a degree.
The good news, if it can be called that, is that about two thirds of full time students receive financial aid that doesn’t need to be repaid. After taking grants into consideration, coupled with federal tax benefits, the net cost of college is much lower than the sticker price. On average, students at private schools are paying $11,900, while those attending public schools are spending about $1,600 out of pocket each year.
That still leaves a third of students paying full freight, and every undergrad is still contending with room and board costs that are also climbing, up 5 payday loans with low fees.4% at public schools at 4.2% at private schools this year.
"Tuition is only one part of the picture," said Sandy Baum, a senior policy analyst at Collage Board. "Even though the net tuition might not be rising for students who get grants, the aid is not enough to cover living costs."
More borrowing. To help bridge the gap between what college costs and what families can afford, student loans are also up. Total borrowing increased 5% between the 2007-2008 and 2008-2009 school years, the most recent for which data is available.
If these trends continue, experts say that it will become even harder to get a college degree.
"If we don’t find a way to constrain costs and invest in financial aid at the same time, we won’t have any gain in increasing the accessibility or affordability of higher education," said Pat Callan from the National Center for Public Policy and Higher Education.
Callan and his colleagues say that state governors and legislators have to put pressure on public colleges and universities to limit tuition hikes, while trustees must do the same at private schools.
Simultaneously, Callan adds, schools need to invest more financial aid in students who really need it. For instance, at public schools during the 2007-2008 year, two-thirds of grant money went to students without regard to financial circumstances. Students from the lowest income families got an average of just $570 in non need-based grants, while students from upper-middle income families received $730.
But the College Board’s Sandy Baum is optimistic that this is one challenge that the education community can address.
"I think that the silver lining to the current problem is that we’ll waste less money on kids who don’t need it," she said, "and focus on kids who need the funds."
World oil consumption will rebound next year as the global economy recovers from a deep slump, according to a report released Friday.
The Paris-based International Energy Agency said it expects global oil demand to grow 1.7% in 2010 to an average 86.1 million barrels per day. That’s an increase of 350,000 barrels per day from its previous estimate.
Crude for November delivery rose 8 cents and settled at $71.77 a barrel. Oil prices had slipped earlier in the session as the U.S. dollar recovered some ground on speculation that the Federal Reserve could tighten monetary policy as the economy recovers.
In its monthly oil market report, the IEA said "buoyant economic activity in more oil intensive emerging countries" will help support demand next year. However, the group warned that next year’s economic outlook "is still fraught with uncertainty."
Global oil demand in 2009 is expected to average 84.6 million barrels per day, according to the IEA. That’s up 200,000 barrels per day from last month’s forecast. But overall consumption in 2009 is still expected to be down 1.9% versus the year before.
Oil surged more than $2 in the previous session as the dollar fell to a 14-month low and a surprise profit from aluminum producer Alcoa (AA, Fortune 500) on Wednesday boosted economic recovery hopes no fax pay day loans.
The dollar rebounded Friday after Fed Chairman Ben Bernanke said late Thursday that the U.S. central bank could reverse its easy money policies as economic conditions improve to ward off inflation.
"My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period," Bernanke said. "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road."
The greenback was up 0.3% against the euro to $1.4755. It gained 0.5% versus the British pound to $1.5993. Against the Japanese yen, the dollar rose 0.4% to ¥88.74.
Crude often falls when the dollar strengthens because a more robust greenback makes commodities priced in dollars more expensive for overseas buyers.
Mortgage applications surged last week as interest rates on home loans remained low, an industry group said Wednesday.
The Mortgage Bankers Association said its index of mortgage application volume rose 16.4% last week versus the previous week.
The surge in activity came as rates on 30-year fixed rate mortgages, the most widely used loan, remained below 5% for the third week in a row.
The average interest rate for 30-year fixed-rate mortgages fell to 4.89% last week from 4.94% the week before, according to the MBA. It was the lowest level since May 2009 when 30-year rates were 4.81%.
The MBA said refinancing applications jumped 18.2%, climbing to the highest level since mid-May. Purchase applications rose 13.2% to reach the highest level since January.
The report bodes well for the U low fee pay day loans.S. housing market, which has been stabilizing following a major slump. In addition to low interest rates, home sales have been supported by affordable prices and government tax credits.
But analysts say the market remains hampered by rising unemployment and warn that the budding recovery could falter if a popular $8,000 tax credit is allowed to expire at the end of the year.
Meanwhile, the average rate for 15-year fixed-rate mortgages eased to 4.32%, the lowest rate ever recorded in the survey.
Rates for one-year adjustable rate mortgages, or ARMs, rose to 6.56%.
ST. LOUIS — The Avalon Theater, dark for a decade and fallen into severe disrepair, is for sale — for $1 million, as is.
Bjaye Greer, listing agent for the property for the Realty Exchange, said that SOPO Corp. put the property up for sale last month. Some clarification of the building’s ownership still needs to be resolved in court, but Greer hopes a redeveloper or preservationist will soon buy the old theater, in the South Kingshighway commercial district near Chippewa Street.
Greer said the 8,500-square-foot building could be sold for renovation and adapted reuse or torn down for redevelopment.
"That’s up to whomever buys it and what they are able to do within city and zoning parameters," Greer said. The entire lot is about 25,000 square feet.
"It was a beautiful building and supposedly one of the best Art Deco buildings in St. Louis to save," Greer added. "I was hoping someone could restore it and save it. But I also know that the area is a real prime spot for redevelopment."
The area around the Avalon, 4225 South Kingshighway, was once a hub of south St. Louis activities, a destination for shoppers as well as moviegoers. The theater opened in 1935 as one of St. Louis’ "movie palaces."
Now, the building is missing large sections of the shingled roof and has a barricade instead of a box office. The property is now condemned, cited scores of times by the city for building code violations.
LANDMARK STATUS?
The Landmarks Association of St. Louis last spring put the theater at the top of its list of most-endangered historic properties. Many neighbors see it as a significant neighborhood landmark that should be preserved.
Others call it an eyesore and a threat to the health and safety of the neighborhood. They want it torn down as soon as possible.
The area’s alderman, Stephen Gregali, believes the building is probably doomed. He called the theater a "a never-ending story."
"I’d like to see some venue there, but we have made numerous attempts," he said. "We’ve tried to take it off their (the owners) hands, but they blew us off."
Gregali said the city also offered business assistance.
"Since the building has deteriorated, we may have no alternative but to tear it down," Gregali said. "The last time I was in the building 18 months ago, I had to wear a mask and a hat — the mold is that bad. It’s like ‘The Blob’ movie come to life.
"It’s really a shame because other than the Chase and Moolah and Hi-Pointe, we don’t really have movie theaters in the city. I have had theater and club groups approach me … but unfortunately, they want the building for nothing."
Richard Dempsey, an attorney representing SOPO, could not be reached for comment.
The attempt to sell the building is proceeding even though the building is the subject of a suit filed by the city in May in St. Louis Circuit Court.
The suit seeks to clarify the property’s ownership.
That is complicated because SOPO Corp., which has owned the theater since 1977, has been defunct since 1983, and its last known principals, Constantin and Kay Tsevis, are deceased.
"We don’t believe anybody has clear title to the Avalon Theater so we’ve asked the court to assign somebody to speak for the defunct corporation and take the necessary steps to transfer title to an actual person or valid legal entity," said Erika Zaza, an assistant city counselor.
Zaza said that at the city’s request, Circuit Judge Robert H. Dierker last month appointed one of the Tsevises’ heirs, Larry Tsevis, as the trustee to act on behalf of SOPO. His role will be to distribute assets to shareholders, or wind down the business. That will require the probate estate to be reopened. Once the probate matters are clarified, city officials say, there should be a clear title, allowing for the sale.
Also the city would have a legal owner that would be responsible for the current condition of the property. City officials said they wanted to make sure there was a clear title and if necessary they want to be able to hold the owners responsible for any neglect.
Dierker will hold another hearing on the matter on Sept. 14.
GE Capital is taking on the doubters. The finance arm of General Electric (GE, Fortune 500) on Tuesday addressed investors skeptical of its fit within the industrial conglomerate.
Chief among the messages: The business is adequately funded; it has enough capital to handle potential loan losses; and it is basically above average in what it does relative to big U.S. banks. But if that’s all true, why does GE Capital need the special treatment it is fighting for on Capitol Hill?
The Obama administration’s regulatory reform plans would ramp up the constraints on financial firms that are big enough to represent a systemic risk. But GE Capital is lobbying to exempt its $650 billion balance sheet from such a high level of oversight. But if it’s so good at what it does, it shouldn’t need that kind of help.
The full-court press the company is unleashing in Washington is also at odds with what GE Capital itself conveyed to shareholders. The first slide of its 63-page manifesto says its loan portfolios are "performing as expected or slightly better" and exhibiting loss rates "most below the Federal Reserve Base Case." It expects loan losses in 2010 to mirror those of the current year, and it doesn’t need more capital "even under adverse scenarios color business cards."
GE Capital rolled out the numbers to buttress its above-average banking prowess. The company said it has $25 billion of financial receivables to U.S. consumers, with reserves equal to 6.6% of these loans — above the 6.1% average held by the top three American banks. Similarly, it has reserves equal to 1.5% of the $93 billion of loans extended to U.S. businesses, higher than the 1.1% held by the big banks.
But here’s the problem. If GE Capital really is adequately capitalized to handle rising defaults, manages to get more than rivals from customers who can’t pay their bills, and has enough funding to weather ructions in the capital markets, it makes special treatment as a non-bank financial institution seem unnecessary.
The company also considers itself to be an "important source of liquidity to U.S. businesses and consumers." GE Capital’s balance sheet would make it the country’s fifth-largest bank. So GE Capital is right that it’s an important player in the financial system. And that’s how it should be regulated.
Google said Thursday it was seeing signs of stabilization in what has been a very rough advertising environment.
Consumers are still spending less than they were before the recession, but at least they are clicking around and searching for deals, according to Eric Schmidt, the Internet search giant’s chief executive. Compared to the same quarter last year, Google reported an increase in the number of clicks, but the cost per click was down.
Schmidt was speaking to analysts on the company’s conference call following second-quarter results that beat Wall Street’s forecasts.
Net income for the three months ended June 30 rose 19% to $1.48 billion, or $4.66 per share, compared with $1.25 billion, or $3.92 per share, for the same period a year ago.
Without one-time charges, Google (GOOG, Fortune 500) reported earnings of $5.36 per share. Analysts polled by Thomson Reuters, who typically strip out special items from their forecasts, were looking for $5.09 per share.
One analyst said that Google was able to manage such profits due to a lower-than-expected tax rate. Trip Chowdhry, the managing director of Global Equities Research, said in a research note that most analysts were making their estimate based on a 25% tax rate, but Google said its effective tax rate was 20% for the quarter.
Sales rose 3% to $5.52 billion from $5.37 billion for the year ago period. Excluding commissions paid to advertising partners, sales totaled $4.07 billion, which beat analysts estimates of $4.06 billion.
"Google had a very good quarter, especially given the continued macro-economic downturn," Schmidt said in a written statement. "These results highlight the enduring strength of our business model and our responsible efforts to manage expenses in a way that puts us in a good position for the economic upturn, when it occurs."
Analysts were more conservative about the modest uptick in sales that Google posted. Even as the sales edged up in the quarter, Chowdhry said that for the last seven quarters, "growth rates of Google have continue to decline."
Google’s head count dipped modestly in the quarter. The company had 19,786 full-time employees around the globe as of June 30, which was 378 employees less than it had at the end of the first quarter. Executives said on the conference call that this decrease was primarily due to previously announced reductions and that Google was currently hiring.
Ad sales account for almost all of Google’s revenue. In the fourth quarter of 2008, the company posted its first-ever quarterly profit drop, as it was hard hit by a pullback in advertising dollars during the recession.
Shares closed up $4.43 to $442.60 in regular session trade, but in after-hours trade, they fell 3%.
There were signs that the Google’s primary source of revenue was slowing. The number of paid clicks, which include clicks on ads served on Google sites and its partners, increased approximately 15% over the second quarter of 2008 but fell 2% over the first quarter no fax payday loan. And the cost-per-click was down 13% from the same time a year ago, but rose 5% from the first quarter of 2009.
Even if consumers are spending less, the fact that they are clicking is a sign of stabilization, according to Schmidt. "A quarter ago, we had no idea where the bottom was," he said. "Starting roughly Christmas, it became clear that people were spending more time searching and when they did purchase things, they were spending less."
"We are not at the moment, looking at that downward spiral that we thought we were 6 months ago," Schmidt said.
Nikesh Arora, Google’s President of Global Sales Operations and Business Development, said that there have been signs of improvement in the advertising sector, too.
"The small advertisers have stayed fairly consistent," Arora said on the conference call. "Large advertisers have wanted to watch and wait for a while and are now coming back to the table," which given Google’s current dependence on its advertising revenue stream is a positive.
The company remains the dominant Internet search leader, with 65% of market share in June, according to a report released Wednesday by online data tracker comScore. Yahoo (YHOO, Fortune 500) is holding steady in second place, with 19.6%, of the market, and Microsoft’s (MSFT, Fortune 500) new search engine, Bing, scooped up 8.4%.
As Microsoft steps into Google’s domain, Google is also venturing into what has traditionally been Microsoft’s dominant domain: operating systems.
Google unveiled its Internet-based Chrome OS last week, but some analysts think that it could be a while longer before computer users are ready to make the switch en masse. Chrome won’t be ready to launch until the fall of 2010, and its first target is netbooks.
Some analysts question how Google plans to make money back from all of the money it is spending to research and develop this new technology.
Schmidt said that as long as the new technology drives people to the Internet, it doesn’t have to necessarily pay for itself. There are numerous products that Google has offered without charging. "We do not require each project to be profitable," he said, but if the product is "making the Web a better place," then ultimately, he said, that is good for Google.
Analysts doubted Google’s approach. "New innovation from Google is exciting, but without a business model next to it, it is pretty much a non-event," said Chowdhry. "Its innovation in vacuum."
Retail sales rose for the second straight month in June, the government reported Tuesday, but the gains came mostly from auto purchases, higher gas prices and a modest pick up in electronics sales.
The Commerce Department said total retail sales rose 0.6% last month, compared with May’s gain of 0.5%.
Economists surveyed by Briefing.com had been expecting June sales to increase 0.4%.
Sales excluding autos and auto parts also rose 0.3%, softer than expected, compared to a 0.5% increase in the measure in May.
Economists had forecast a gain of 0.5% in June sales, excluding auto purchases.
The report showed auto sales rose 2.3% in June while gasoline station sales jumped 5% in the month. Electronics sales rose 0.9%, while sales at sporting and music stores also increased 0.9%.
But June was a disappointment in most other retail categories. Sales at clothing sellers were flat in June versus the prior month, department store sales slumped 1.3% and sales at general merchandise stores slipped 0.4%.
Back-to-school jitters: The sales declines in these core retail sectors will likely heighten concerns about the upcoming back-to-school shopping season, which is the second most-important sales event of the year for merchants after the year-end holiday shopping period affordable health insurance.
In that regard, the National Retail Federation (NRF) on Tuesday forecast more dour news for the industry. The trade expects expects back-to-school spending to drop 7.7% this year as more households cut back on purchases amid pay cuts and continuing job losses.
"I would expect back-to-school sales to be soft this year because there’s just not a lot of support for consumers," said Adam York, economist with Wells Fargo Securities.
The biggest insecurities consumers are facing right now are weakness in the job market and weak or even declining income growth, York said.
Still, York is feeling somewhat more optimistic about the year-end holiday shopping period. That two-month period of November and December can account for 50% or more of merchants’ sales and profits for the full year.
"Maybe closer to Christmas, consumers will be in better shape and they are feeling more secure about their incomes and jobs," York said. "Hopefully, we’ll also see some growth in the economy or at least the end of declines by then."
French consumers cut spending on everything from restaurants to gambling last year as inflation and an economic slump took their toll.
Shoppers, the main contributors to the euro-region’s second-largest economy, increased spending at the slowest pace in 11 years, a report by statistics office Insee in Paris showed. They trimmed expenditure at cafes and scaled back visits to beauty salons, Insee said.
France’s economy slipped into recession in the third quarter and unemployment is the highest since 2006. While the government expects welfare payments and state aid to buoy spending, households are likely to keep to grip on consumption.
“Spending is going to suffer,” Insee’s chief forecaster Eric Dubois said in a phone interview yesterday. While he still expects consumption to increase this year, “superfluous” spending and “expenses that are the easiest to postpone” may be the first to disappear, he said.
The French government expects the economy to contract 3 percent this year before expanding 0 low fee payday advance.5 percent in 2010. It expects consumer spending to increase 0.3 percent in 2009 and 0.7 percent next. Consumers added 0.5 percent to growth in 2008, when the economy expanded 0.4 percent, Insee said.
Spending on restaurants and cafes dropped 2 percent last year, partly because of a smoking ban that started Jan. 1, Insee said. Spending at hair and beauty salons slipped 1.3 percent, according to the report.
Gambling fell 5 percent, the first drop since 1986. Lottery games were particularly hurt by the falling number of customers at cafés, where gambling is often available, Insee said.
Households’ tapped into their savings last year, helping limit the slowdown in spending. Households may instead start building up their savings this year as unemployment rises, Dubois said.
Investors shouldn’t mistake an economy that’s sliding less rapidly downhill for one that’s poised to start climbing, say Bank of America Corp.’s David Rosenberg and Deutsche Bank AG’s Joseph LaVorgna.
Improvements in consumer spending and home sales have been taken by some investors as signs that the recession, now in its 17th month, may be near a turning point. Partly as a result, the Dow Jones industrial average climbed as much as 22 percent from the recession low it set on March 9.
The data, however, are at best a signal that the worst of the contraction is over, said Rosenberg, chief North American economist at Banc of America Securities-Merrill Lynch in New York.
“Investors seem to have confused an actual recovery with the fact that the economy isn’t detonating anymore,” Rosenberg said in an interview yesterday. “Markets right now are dangerously extrapolating an improvement in the rate of change to an improvement in the actual level of economic activity. These are two very different events.”
The Dow Jones industrials lost 186.29 points, or 2.3 percent, to close at 7789.56 in yesterday’s trading. The index still stands 19 percent above its March 9 level.
The economy shrank at a 6.3 percent annual pace in the fourth quarter, the worst performance since 1982. Economists surveyed by Bloomberg estimate that the rate of contraction slowed in the first three months of this year to 5.2 percent. The Commerce Department will report its initial estimate of first-quarter growth on April 29.
Rate of Decline
“In most cases, what we’re seeing is the rate of decline in activity is diminishing, not that the level of economic activity is rising,” David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York, said in an interview yesterday.
He points to business surveys such as the Institute for Supply Management’s factory index as evidence of a slowing rate of decline. The ISM index has climbed for three months in a row, while still remaining below 50, the dividing line between contraction and expansion.
“There is a pronounced improvement in key aspects of the surveys, but they remain at levels consistent with steep contraction,” said Hensley.
Similarly, an index of consumer confidence, as measured by the Conference Board, increased to 26 in March from a record low of 25.3 set in February.
‘Not Here Yet’
Even when the economy does hit bottom, it may take a while before robust growth resumes, LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said in an April 6 interview. “A bottoming out is no longer consistent with an imminent recovery, as it has been in the past. Investors are making the assumption history will repeat itself, yet recovery is not here yet.”
That hasn’t kept investors from viewing better-than- forecast economic indicators as an opportunity to buy. A March 12 Commerce Department report that retail sales decreased 0.1 in February, less than the 0.5 percent drop economists had forecast. The data helped spark a 4.1 percent rally in the Standard & Poor’s 500 Index that day faxless payday loan.
“It’s good to see anything in the economic front that beat expectations,” David Heupel, who helps manage $60 billion at Thrivent Financial for Lutherans in Minneapolis, said that day. “Any news that is not bad right now is good for the market.”
Not every investor buys that view.
‘Very Low Levels’
While the market’s rally shows a sense of some economic stabilization, “we’re talking about stabilization admittedly at very low levels,” Leo Grohowski, chief investment officer at Bank of New York Mellon Wealth Management, which oversees $140 billion, said in an interview on Bloomberg Television yesterday. “Investors should continue to position their portfolios for a prolonged period of subdued economic growth.”
The Dow added 178 points, or 2.5 percent, on March 17 after a government report that housing starts unexpectedly jumped 22 percent in February from the previous month, snapping the longest streak of declines in 18 years.
“There’s a feeling that maybe the economy has hit the bottom,” Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio, said that day. “For the first time in a while we aren’t looking at mostly negative headlines.”
Even so, economists warn that the negative will continue to dominate the news for months.
Warsh’s View
“Though the pace of decline is likely to abate, I am decidedly uncomfortable forecasting a sharp and determined resumption of growth in the coming quarters,” said Federal Reserve Governor Kevin Warsh in an April 6 speech in Washington.
Rosenberg agrees. “I really don’t believe the contours of this recession will achieve clarity until we’re in the opening months of 2010 at the earliest,” said Rosenberg. That leads him to predict a stock market bottom sometime in the fall.
Since 1949, the average time between the stock market cycle low, as measured by the S&P 500 Index, and the end of a recession is 5.3 months, according to Westport, Connecticut- based Birinyi Associates Inc. In 2001 the economy turned up just 2.3 months after the stock market did.
Between the crash of October 1929 and the market’s bottom in July 1932 there were five rallies of 20 percent or more, with one of them a 48 percent jump.
“There were peaks where that market got started again only to get knocked back down,” said Charles Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History.” He said this stock market reminds him of the early years of the Great Depression.
“There’s a false optimism out there,” Geisst said in an interview yesterday. “It’s a sign that we don’t understand much about what’s happening in the economy.”
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