It was the Best of Times, It was the Worst of Times… (Financial Week in Review, August 8-12, 2011 + Update)
August 15th marks the 40th anniversary of the end of the gold standard in United States currency. On August 15, 1971, President Richard Nixon announced that the U.S. would no longer trade dollars for gold. Forty years later, the gold price is $1765.30, after hitting a record high of $1,817.60 on August 11.
DOLLAR DIPS
“France…rolled with exceeding smoothness down hill, making paper money and spending it.” – Charles Dickens. Those words, from “A Tale of Two Cities,” could have been written today, and not merely about France.
The 40th anniversary coincides with data showing the U.S. dollar lost nearly a point today. The Swiss franc, a currency which has reduced its gold backing in recent years, has seen its value sliding for days and has lost roughly 11 percent overall. The Yen dropped as well, but the euro rose 1.4 percent.
In a statement issued last week, the U.S. Federal Open Market Committee took a less enthusiastic view of the recovery, saying: “economic growth so far this year has been considerably slower than the Committee had expected.”
The Misery Index, a composite of the unemployment and inflation rates, stands at 12.76.
But the market is still rising steadily, thanks in part to the announcement of several mergers and acquisitions, perhaps the most high profile being the Google/Motorola Mobility deal. Among others, Time Warner Cable will purchase Insight Communications.
News that American consumers are still spending has also helped to buoy the markets. According to the U.S. Department of Commerce, retail sales were up significantly in July.
BANKS STRUGGLE, RECOVER
Last Monday, as the Dow dropped 634 points, Bank of America’s stock lost 20 percent as news broke that AIG was suing them over mortgage-backed securities sold to AIG. AIG and Citigroup’s stock took a 10 percent hit, as did many other mortgage lenders. But Bank of America, the nation’s largest bank, rebounded by 7.9 percent at the close of trading today. Following their lead, all of the financial institutions which dropped last Monday showed recovery before the end of the week.
U.S. Equities have proven to be one of the most volatile corners of the market, yo-yoing up and down nearly 4.5 percent for all of last week.
The Federal Reserve Bank of New York’s Empire State Manufacturing Survey painted a grim picture of the manufacturing sector. General business conditions had fallen four points to -7.7, new orders were at -7.8, and price indexes were also down. But there was good news as well. In a statement issued on August 12th, FRBONY President and CEO William C. Dudley said: “The economic recovery in our region continued at a slow pace during the second quarter of 2011, with much of the region performing reasonably well compared with the nation as a whole. Also, despite weak labor market conditions overall, some sectors are enjoying robust growth in the region. In particular, the professional and business services and education and health sectors have continued to add jobs.”
Market circuit breakers, an emergency measure developed after the market crash of October 1987, came into play in the last two weeks. Circuit breakers are designed to stop free falls by rebalancing buy and sell orders. A large and sudden percentage decline in a major stock or index can cause trading to be halted for a set length of time, say 30 minutes or an hour. It takes a pretty significant drop to trigger circuit breakers.
On Monday, August 8, the market was still falling. That day the S&P 500 Index dropped 6.66 percent, the Dow fell 5.56 percent and NASDAQ finished 6.9 percent down.
Worries about an an ensuing banking crisis in the United States and Europe resulted in a brutal day of trading last Wednesday, but turnaround began on Thursday when the Dow gained back 423 points. The Dow, S&P and NASDAQ futures all posted increases in excess of 1%. The gains followed computer network giant Cisco Systems’ favorable forecast for this quarter. Cisco is counting on private-sector spending to substitute for the reduction government spending which has traditionally been their bread and butter. Cisco shares rose 16% on Thursday.
MARKETS RALLY
Markets continue to climb out of the hole worldwide, including across-the-board gains by London’s FTSE 100, Germany’s DAX and the CAC-40 in France, which all rose less than one percent. The Nikkei and Shanghai Composite Indexes experienced higher gains of 1.4 and 1.3 percent respectively.
In the U.S., the big three closed at roughly 2% ahead. The Dow Jones Industrial Average closed at 11,482.90 today, up 214 points from its Friday position of 11,269.02. The S&P 500 has risen 7.5 percent since Aug. 10, closing today at 1,204.49. NASDAQ closed today at 2,555.20, up from 2,507.98 on Friday. The Russell 2000 Index was up 3 percent.
U.S. Inflation Calculator
The Misery Index
