Market Talk

Not looking for loans, just a place to take a load off.

Both businesses and consumers have been less than eager to take out new loans, and banks in their second-quarter earnings discussions universally lamented the weak loan demand environment.

Now it looks as if banks are easing their loan standards to seduce more demand.

The main message in the Fed’s quarterly senior loan officer survey out today is that, in general, banks have eased their credit standards after a long tightening spell. They’re also becoming more competitive on business loan terms and lines of credit as they try to win new loans from a smaller pool of those actually seeking fresh credit, something Paul and I noted in an Upshot column last month.

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I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.

- Kansas City Fed President Thomas Hoenig, arguing the Fed needs to raise interest rates.

- Jobless claims rising 2,000 is a relatively minor change. “The bigger problem is the trend,” James Picerno says at The Capital Spectator, noting claims have jumped 13% since bottoming in mid-July. “For months, it was treading water. That was bad enough. But now it’s rising, raising fears that it could go higher still.”

- Deflation is “overblown fear” and is unlikely for three reasons, writes blogger and MIT professor Simon Johnson.

- Appears the stock market has finally awoken to poor recent economic news. And Fed saying it won’t shrink its balance sheet isn’t generating much confidence. “The Fed seems to be exhibiting a pretty bad case of ‘if all you have is a hammer, every problem looks like a nail’ syndrome, particularly when it has (or perhaps more accurately, had) other tools at its disposal,” Yves Smith says.

- Reuters blogger Felix Salmon wonders if the “twitchy, volatile” stock market is still a worthwhile long-term investment, especially if long-term volatility continues increasing.

- Yesterday’s steep selloff and today’s drop show the “sharp risk-on/risk-off swings in markets are to be expected given the reality of today’s macro context,” PIMCO CEO Mohamed El-Erian writes.

- Treasury Secretary Tim Geithner recently said surging imports “reflect healthy and growing American demand.” So much for that optimism, especially in the wake of yesterday’s trade deficit report. “Combined trends in exports and imports are simply not supportive of economic growth,” Tim Duy writes at Economist’s View. “And, given the current state of the global financial architecture, where the US is expected to be the repository of global savings, it is difficult to see how the external sector contributes positively to the recovery.”

- Microsoft (MSFT), which lately has been knocked for lacking a strong consumer strategy, is launching a studio to develop games for mobile phones. The idea, it appears, is to promote use of the Windows Phone operating system.

- The latest on the rumor mill regarding a Verizon Wireless iPhone comes from Daring Fireball blogger John Gruber, who says Apple (AAPL) is taking part in advanced testing of a CDMA version of iPhone, the type compatible with VZ’s wireless network. “The drumbeat of reports pointing to an impending Verzion iPhone launch is getting louder,” MediaMemo blogger Peter Kafka says. “Which doesn’t mean that it’s true. Just that there’s a lot of drumming going on.”

- With so much information online, it’s easy to read something one day and forget where you’ve seen it the next. But there may be a solution. On Thursday, TechCrunch reviewed Sentimnt, a search engine that tackles the question, “Where did I read that?”

- Jetblue (JBLU) finally ends the silent treatment regarding its flight-attendant-turned-wing-nut Steven Slater. “It wouldn’t be fair for us to point out absurdities in other corners of the industry without acknowledging when it’s about us,” JetBlue says on its blog. “While we can’t discuss the details of what is an ongoing investigation, plenty of others have already formed opinions on the matter. Like, the entire Internet.”

- “The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging,” Paul Krugman says. By maintaining the balance sheet’s size rather than shrinking it, the central bank “has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same,” Krugman says. “Whoopee.”

- Fed’s decision to reinvest proceeds of maturing MBS into Treasurys signals the central bank’s “continued willingness to throw money at the flagging economy,” Yves Smith writes at naked capitalism. “The problem, of course, is that with the Fed having failed to clean up bank balance sheets, all these efforts to throw money at the economy look an awful lot like pushing on a string.”

- When analyzing the “flash crash” and what should be done to prevent it in the future, NYT’s Floyd Norris says the solution is to fix markets, not tell investors they need to protect themselves against bad markets. “Markets are fragmented and depend on ‘liquidity providers’ who have no obligation to hang around when the going gets tough. We have somehow taken markets that worked and substituted markets that do not.”

- “It is important to remember that the Fed did not ease monetary policy yesterday,” former Dallas Fed chief Bob McTeer writes. “It acted to limit the tightening that would automatically have taken place with the run-off of mortgage backed securities.” And he cautions that the central bank’s recent actions may not be enough. “We need gradual growth in the balance sheet to support gradual growth in the money supply.”

- Google’s (GOOG) holding press event tomorrow where it will “unveil a couple of cool new mobile features,” which prompts All Things D blogger Kara Swisher to wonder what GOOG has up its sleeve. Some speculate integrated video calling will be released, but according to Swisher’s sources, that won’t be the case.

- That surging trade deficit number “was simply so awful that almost no one in the mainstream was ready for it,” Josh Brown writes at The Reformed Broker. “The implications of this number will work their way into GDP calculations and recalculations and the end result will not be pretty.”

- The Fed is failing in two aspects: Policy is too tight and it’s communication has been miserable, Ryan Avent says at The Economist’s Free Exchange blog. Stocks and commodities tumble, while safe havens, like the dollar, rise. Perhaps FOMC members are realizing they have “reinforced the economy’s disinflationary, pessimistic mood,” Avent adds. “The question is: come September, what are they going to do about it?”

- “I don’t buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion,” Tyler Cowen writes.

- “Part of what propels stocks is confidence that they will do better than other investments,” Stephen Gandel notes. “That’s what created the equity premium in the 1980s and 1990s. And that has slowly slipped away. That’s bad news for the stock market. But it might not say anything about the economy.”

- WSJ’s Juliet Chung writes about “the shrinking second home” as the affluent turn to smaller, less expensive homes.

US stocks drop sharply, and it wasn’t just yesterday’s admission by the Fed that the economy stinks.

There was enough news today on its own to fuel the sell-off. There was the news out of China that its economy continues to slow (albeit, still growing.) The Bank of England cut its growth outlook for the UK. Then there was that trade deficit report here in the US, which ballooned out much more than people expected, and seeing as it was the June report, the odds are that the 2Q GDP report is going to be revised lower; a lot lower. So much for that recovery meme.

All the major indexes fall back into the red on the year, as well as the small-cap indexes as well. DJIA slides 265 (2.5%) to 10379, S&P 500 loses 32 (2.8%) to 1090, Nasdaq Comp drops 69 (3%) to 2209. The Dow and S&P smash through their 200-day moving averages, which had been providing some support, and now the Dow is between this band of support from 10350 to 10400. It seems destined now, our colleague Tomi Kilgore writes, to test support at 10150-10250.

But Treasurys rally, as they have been doing pretty much all year. Ten-year yield falls all the way to 2.68%, which apart from the panic-induced lows of 2009 is the lowest level in, like, well, a very long time. Maybe ever, I forget offhand. If you’re in the mood to refinance, now’s your time, although not many people are in that mood, apparently.

I’ll be honest with you. I was just looking over what we’ve written on this blog today, and even I started getting depressed. I feel like I should write something inspirational. Hey, like Scarlett O’Hara said in “Gone With the Wind,” tomorrow is another day.

Y'er out!

There’s just something about today’s selloff that feels worse than usual.

US stocks sinking deep into the red on the Fed’s cautious tone regarding the economic recovery as well as mounting fears about global growth. That’s the soundbite, but there’s also a real dark tone surrounding this sell-off.

It’s tough to pinpoint why today’s declines seem more dire than usual, but the negative sentiment among analysts, strategists, economists and bloggers seems to have reached a new level. But, as Paul just mentioned in the newsroom, the Fed proclaiming the economy is recovering at a “more modest” pace than previously expected is the latest in a trifecta of announcements throughout the last few weeks that’s made the majority of America wake up and realize this recovery has one tough slog ahead.

First came the GDP report on July 30, which showed the economy grew at a slower pace in 2Q (and likely to be revised lower; see below,) while the government said the recession was deeper than earlier believed. Strike One.

Then came the July jobs report last Friday, which showed the economy shed more jobs than expected, while the unemployment rate remained perched at 9.5%. Strike Two.

Lastly, the Fed announcing yesterday it will stop shrinking its portfolio by taking steps to reinvest the proceeds of maturing MBS into Treasurys signals the central bank doesn’t see the recovery continuing on its own anytime soon.

Strike Three.

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Central bankers speak in such dull tones, they use such flat words, that no matter what they’re saying, they make it sound like the most benign thing in the world. “Information  received … indicates that the pace of recovery in output and employment has slowed in recent months,” the FOMC wrote yesterday.

Doesn’t sound so bad, does it? Compare it to this statement from Richard Russell, who writes the Dow Theory newsletter, from back in May:

Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country.

Bit of a difference, right? The Fed can’t afford to sound concerned, or alarmed, or worried, or anything that might suggest to the globe that the world’s foremost central bank is not in complete control of the situation, whatever the situation may be at whatever time. That’s why Alan Greenspan always couched his opinions in that Alice-in-Wonderland gobbledygook, so nobody could ever figure out what he actually meant.

This central bank has been bending over backwards in an attempt to fix the economy, in its ever-so-calm words and ever-so-drastic deeds. Now, they’ve bent so far they’re in a full Marinelli Backbend. It’s painful to watch, and probably even more painful to attempt. Because it involves doing things your body wasn’t designed to do, and if you get it wrong, well…

…snap.

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Where troubles melt like lemon drops...

It’s been building for a few weeks now, this sense that the economy is slowing down, stalling, crumbling, call it what you will. That the economy didn’t achieve “escape velocity,” as Larry Summers put it back in the spring. You had the second-quarter GDP report two Fridays ago. Then the July jobs report last Friday. Then the Fed put its official imprimatur on it yesterday.

We’ve reached the tipping point in public sentiment. The tipping point in the economy was reached some time in the second quarter. Now everybody knows it.

Remember what we said last September? “I see a recovery that looks like Pinocchio: it wants to be a real little boy, but it’s really just a wooden toy that moves only when somebody pulls its strings. But everywhere, we hear people talking up the recovery as if the economy is sprinting into a new bull market.”

“Washington’s hope is that the stimulus will eventually give way to a natural momentum that will pull the economy out of recession,” we added. That hasn’t happened, that natural momentum never built. Quite the contrary, people are growing more concerned, more inclined to hold back. People are concerned, businesses are concerned, the Fed is concerned.

The trade deficit report only added fuel to the fire, and the odds that 2Q GDP gets revised down from the initial 2.4% print – far, far down – is a distinct possibility that should have the V-shapers and other recovery boosters hiding under their desks.

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Today’s sell-off is about more than just that Fed statement. The global growth story is getting clipped, and you can see it in the UK and in China, and in the tech sector as well, which is coming under a lot of pressure this week.

The FOMC yesterday finally got around to formally acknowledging something that most already knew — that the US economic recovery isn’t so hot, and the Fed’s largely symbolic action (reinvesting in Treasurys as agency assets on its balance sheet mature) won’t be much help.

Negative reaction in Asian markets overnight to Fed’s assessment of the economy, and stocks now sharply lower in Europe, with the euro tanking, briefly dipping below $1.30 after a knee-jerk rally late yesterday. Yen hit a 15-yr high vs USD.

June trade deficit widens to a record 21-month high.

S&P futures down 18.20; Dow futures off 146. Ten-year note still rising, yield down to 2.72%.