Finance topics

So many times when the big credit-rating companies have embarrassed themselves, the world has sighed and chalked it up to a business model that by design invites corruption and incompetence. Perhaps never before have the public’s expectations for the industry been lower.

The fundamental flaw is that the major rating companies, led by Moody’s Investors Service and Standard & Poor’s, typically are paid by the issuers of the securities they rate, or by other deeply interested parties, such as Wall Street underwriters. Too often the raters seem to be the last to know that a company they dubbed investment grade was going broke, or that a mortgage bond once deemed AAA was about to default. The public sees these things and naturally draws a link between what the raters say and how they are compensated.

Although the government can’t make the credit raters more capable, it can make them more transparent. Here’s a good place to begin: Start requiring disclosures of how much the raters’ clients pay them for their services.

Consider some of the boilerplate in Moody’s reports on MF Global Holdings Ltd., whose credit ratings were the subject of a congressional hearing last week. Moody’s Oct. 27 report — in which it downgraded MF Global to junk, only four days before the futures broker filed for bankruptcy — said most issuers of debt securities pay “fees ranging from $1,500 to approximately $2,500,000″ for “appraisal and rating services.”

It’s anyone’s guess whether the fees MF Global paid to Moody’s fell within or outside this range. The companies know how much money changed hands. They’re just not telling us.

The disclosures in Standard & Poor’s reports are just as useless. The company’s Oct. 26 report on MF Global said “S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors.” Coincidence or not, S&P maintained an investment-grade mark on MF Global until the day it failed.

There’s no such secrecy about the fees other types of opinion vendors charge their clients. For more than a decade, U.S. public companies have been required to disclose the annual fees they pay their outside auditors. Similarly, when companies hire stock promoters or other firms to publish research reports profiling their shares, federal securities laws require disclosures in the reports showing who paid for them, as well as the amount and form of compensation.

The auditor-fee disclosures have been useful. Fannie Mae’s proxy statement for 2003, for instance, showed the housing financier paid KPMG $2.7 million to audit its books that year.

The fee was so tiny, for a company with $1 trillion of assets, that it served as a red flag for investors, signaling that KPMG’s audit quality couldn’t have been all that robust. The next year Fannie Mae had a huge accounting scandal.

At the other extreme, in its first annual report as a public company, Blackstone Group LP said it paid its auditor, Deloitte & Touche, total fees of $159.1 million for 2007, mostly for nonaudit work. The fees were so huge — Blackstone’s total assets were $13.2 billion at the time — it would be reasonable for investors to wonder what influence they might have had on Deloitte’s judgment.

The parallels for credit-rating companies are obvious. Like auditors and stock promoters, they’re paid to express opinions to investors. Whatever their fees are, the public should be told. The credit raters would have us believe there’s nothing wrong with collecting cash from the same customers whose securities they grade, and that this doesn’t cloud their independence or objectivity. If that’s true, they should have no problem with us knowing the actual dollar amounts.

Unfortunately this isn’t the path the government has chosen. The Dodd-Frank Act, passed in 2010, included 19 pages of new provisions governing how credit-rating companies operate.

Numerous federal banking and securities laws were amended to remove statutory references to credit ratings, for instance, so that regulators would reduce their reliance on them. Dodd-Frank didn’t mandate disclosure of the raters’ fees, however.

A rule proposed last year by the Securities and Exchange Commission would require companies such as Moody’s and S&P to disclose in a form accompanying each credit rating whether the grade was paid for by the issuer, underwriter or sponsor of the security being rated — or if it was purchased by someone else, such as an investor. The rating company would also have to disclose if the purchaser had paid it for any other services, such as consulting or advisory work.

Most important, though, no dollar amounts would have to be divulged.

This is a mistake. A big reason that the public doesn’t trust credit ratings is because of the money that changes hands.

What matters most, obviously, is how much. It makes little difference whether the amounts are disclosed by the rating company or by the issuer of the securities as part of its own disclosures, as long as it’s made public somewhere.

The most dubious penny-stock promoters have to disclose what they get paid for their opinions. Credit raters can at least be held to the same standards.

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The Federal Reserve has downgraded its outlook for U.S. economic growth this year but is slightly more optimistic about the unemployment rate.

The Fed expects the economy to grow between 2.2 percent and 2.7 percent in 2012, according to its updated economic forecasts released Wednesday. That’s down from November’s forecast of between 2.5 percent and 2.9 percent.

Many economists expect Europe will suffer a recession this year, which will slow U.S. growth.

Earlier Wednesday, the Fed noted the weak but growing economy when it said it doesn’t plan to raise its benchmark interest rate until late 2014. And some members wanted to push that back even further, according to new interest rate projections released with the quarterly forecasts.

Still, the Fed said it expects unemployment to fall low as 8.2 percent. That’s an improvement from November’s bottom rate of 8.5 percent.

In December, the unemployment rate fell to 8.5 percent _ the lowest level in nearly three years _ after the sixth straight month of solid hiring.

Inflation has been relatively tame and the Fed doesn’t see that changing over the next three years.

And for the first time, the Fed offered an official target for inflation _ 2 percent _ in a statement of its long-term policy goals. It had previously indicated that inflation between 1.7 percent and 2 percent was acceptable.

The Fed did not specify a target for unemployment. But it said that unemployment between 5.2 percent and 6 percent would be consistent with its goal for a healthy economy instant payday loan.

The updated quarterly forecasts also showed that some Fed members wanted to extend the period of record-low interest rates beyond 2014. Eleven of the 17 members said they don’t see interest rates rising until at least 2015. Only 10 members have a vote on the policy committee.

The Fed said record-low rates are still needed to help boost an improving but still sluggish economy. The extended timeframe is a shift from the Fed’s previous plan to keep the rate low at least until mid-2013.

The economy is looking a little better, according to recent private and government data. Companies are hiring more, the stock market is rising, factories are busy and more people are buying cars. Even the home market is showing slight gains after three dismal years.

Still, the threat of a recession in Europe is likely to drag on the global economy. And another year of weak wage gains in the United States could force consumers to pull back on spending, which would slow growth.

Private economists forecast that the nation’s economy to grow just 2 percent in the first three months of the year, in part because of the recession in Europe. For the year, they expect growth of 2.4 percent, according to a survey by the Associated Press. That’s sluggish for a recovery. But it is better than last year’s likely pace of below 2 percent.

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Everybody knows that January predicts the stock market’s direction for the year and that the best time to sell stocks is at their spring peak. And among stock market experts, it’s a sure bet that the market will soar in the year before an election.

But what passes for stock market wisdom is suspect when given a closer look. The most common error comes when people spot two events and assume that one causes the other.

And it drives economists, math geeks and plenty of money managers nuts.

“If you look at enough data in enough different ways, you’re going to find something that isn’t really true,” says Edward Keon, who leads a mathematics team at Prudential Financial.

The same seasonal patterns seem to pop up year after year. Some are valuable and some meaningless, Keon says _ like saying stocks tend to rise or fall depending on the month, the temperature in New York City or who wins the Super Bowl.

People “are simply being fooled by randomness,” says Burton Malkiel, professor of economics at Princeton University and author of the finance classic “A Random Walk Down Wall Street.”

Spend enough time digging through numbers and you’re bound to find some that always take the same path, he says. “But none can reliably predict the future.”

Here’s an examination of some of the oldest Wall Street aphorisms.

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The claim: As goes January, so goes the year.

The idea is that January works as a barometer for the stock market’s full-year performance: A strong first month often leads to a year of gains, and a weak one to a year of losses.

It comes from Yale Hirsch, father of the Stock Trader’s Almanac, and looks reliable. Since 1929, the calendar year has followed January’s lead 60 out of 83 times, according to Howard Silverblatt, senior index analyst at Standard & Poor’s. That’s a .723 batting average.

The suggestion that January somehow directs the course of the next 11 months is what irks economists and investors, including Dan Greenhaus, chief market strategist at the brokerage BTIG.

Expecting to hear praise for January’s forecasting powers, Greenhaus attacked the idea on his blog Jan. 2, the day before U.S. markets opened for 2012. He took the S&P 500 index’s returns since 1950, including dividends, and found that the four months following January also appeared to work magic. When April is down, the next 12 months return a negative 0.2 percent. When April is up, the S&P 500 returns 12.8 percent. It’s a similar story with February, March and April. But why?

“It’s true that if January is up, the year is up most of the time,” he says. “But if you look at any month, you’ll find the market tends to be up over the next 12 months. And the reason is very simple: the market tends to be up.”

The S&P 500 has climbed in three out of every four years since 1950. Pick nearly any month in which stocks rose and most of the time you’ll find that the year was headed in the same direction.

But what if stocks fall in January? It doesn’t mean the next 11 months will follow. Sometimes, the stock market starts the year in a hole and digs its way out. In 1992, the S&P 500 dropped 2 percent in January, then ended the year with a modest gain of 4.5 percent.

“If you’re starting in the hole, then the 12-month period is starting in the hole,” Greenhaus says. “That should be intuitive. Instead it gets treated as some sort of prognostication tool. It’s just what happens.”

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The claim: Sell in May and go away.

Like a flock of migrating birds, the stock market tends to travel south or north depending on the season. It rises through the winter months and falls late in the spring. Investors struggle through the summer until November rolls around and the market picks up again.

“Sell in May and go away” is a well-worn saying, but the numbers seem to back it up. Since 1990, the three months starting in July have been the worst quarter for the S&P 500. Last year, the S&P hit its peak on April 29, then hit bottom Oct. 3, right on cue.

Even many skeptics think “sell in May” probably has something going for it _ but they can only guess why.

“It’s harder to debunk this one,” says Nick Colas, chief market strategist at ConvergEx Group.

The flow of money into retirement plans and mutual funds may have something to do with it. Colas says databases that track cash moving into stock funds show patterns similar to the stock market trend: A strong start that evaporates as the year progresses.

In the first four months of 2011, Americans added $13 billion to U.S. stock funds, according to the Investment Company Institute. But they pulled $6.5 billion in May and then began withdrawing much more. By the end of the year, retail investors had pulled $131.8 billion out of U.S. stock funds.

Some tie the summer sluggishness to vacation season. Trading desks are thinly staffed in the weeks before Labor Day. Fewer traders means a drop in trading volume, which makes it easier for markets to take bigger swings, often down.

Here’s where that explanation falls short. Traders return to their desks after Labor Day in September and trading picks up. But for all major stock indexes, September is historically the worst month of the year. Since 1950, it’s the only month in which the stock market has fallen more than it has risen.

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Consumer confidence in the U.S. rose last week to the highest level in more than five months and the pace of firings declined, showing an improving job market is bolstering the biggest part of the economy.

The Bloomberg Consumer Comfort Index (COMFCOMF) climbed to minus 44.8 in the period ended Dec. 31, the best reading since mid-July, from minus 47.5 the prior week. Applications for jobless benefits (INJCJC) decreased by 15,000 during the same time to 372,000, according to Labor Department figures.

A pickup in hiring will further lift Americans

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Asian stocks climbed Monday, buoyed by a robust start to the U.S. holiday shopping season and reports that European leaders are considering legal means to force debt-ridden euro countries into fiscal discipline.

Japan’s Nikkei 225 index jumped 1.9 percent to 8,314.45. South Korea’s Kospi gained 2 percent to 1,811.99 and Hong Kong’s Hang Seng index rose 1.8 percent to 18,012.29. Australia’s S&P/ASX 200 added 2 percent to 4,067.

Benchmarks in mainland China, Singapore, Indonesia and Taiwan were also higher.

German media reported over the weekend that German Chancellor Angela Merkel and French President Nicolas Sarkozy were studying legal changes _ possibly amendments to the European Union growth and stability pact _ to force nations using the euro common currency to comply with strict rules for budget discipline and tough sanctions for violators.

Traders were awaiting more details on such a possible plan, as well as the results of a key meeting Tuesday of finance ministers from the 17 euro nations.

Worries about Europe’s debt crisis flared anew Friday after Italy had to pay 7.8 percent to borrow for two years at a debt auction. It’s another sign that investors are increasingly hesitant to lend to European countries.

Higher interest rates on government debt of Italy, Spain and other European countries have rattled stock markets in recent weeks. Greece, Ireland and Portugal had to seek financial lifelines when their interest rates crossed the 7 percent mark.

Meanwhile, a record 226 million shoppers visited stores and websites during the four-day U.S. holiday weekend starting on Thanksgiving Day, up from 212 million last year, according to early estimates by The National Retail Federation.

The results for the first holiday shopping weekend show that retailers’ efforts to lure shoppers during the weak economy are working. The question remains whether retailers’ will be able to hold shopper attention throughout the remainder of the season, which can account for 25 to 40 percent of a merchant’s annual revenue.

During a shortened post-holiday trading session on Friday, the Dow Jones industrial average fell 0.2 percent to close at 11,231.78. The S&P 500 lost 0.3 percent to 1,158.67. The Nasdaq composite dropped 0.8 percent to close at 2,441.51.

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U.S. stock futures are lower on worries about the broker MF Global and about Italy’s ability to repay its debts.

Bank stocks dropped sharply in premarket trading after the New York Federal Reserve said it suspended MF Global Holdings from conducting new business as a Treasury bond dealer.

Trading in MF Global shares was halted in premarket trading.

The Wall Street Journal reported Monday that MF Global would seek Chapter 11 bankruptcy protection after large investments in sovereign bonds issued by European countries went against it guaranteed high risk personal loans.

Before the opening bell, Dow Jones industrial average futures are down 106 points, or 1 percent, at 12,062. S&P 500 index futures are down 14, or 1.1 percent, at 1,266. Nasdaq 100 futures are down 23, or 1 percent, at 2,374.

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Chase is joining the list of banks that won’t be charging customers to use their debit cards, as the backlash over Bank of America’s planned $5 monthly fee continues.

The retail banking arm of JPMorgan Chase & Co. will stop charging $3-per-month fees for using debit cards when its current pilot in Wisconsin and Georgia is completed in November, a source with knowledge of the bank’s plans told The Associated Press.

The test program involves an “a-la-carte” checking account that allows customers to choose what banking products they want, said the individual, who asked not to be identified because the bank has not officially announced the program will not go forward.

Chase, which operates in 23 states, began its test in February. It’s not alone. Wells Fargo & Co. began a similar pilot in five states on Oct. 14, testing a flat $3 fee for using debit for purchases.

Other banks already have more widespread fee policies. SunTrust Banks charges $5 a month for debit cards used to make purchases, and Regions Financial Corp. charges $4.

But it was Bank of America Corp.’s plan to start charging $5 per month that lit the issue on fire. The Charlotte, N.C.-based bank, last month said it will begin assessing the fee in 2012.

Banks are justifying the fees by stating that they need to recoup revenue lost to new regulations that limit the fees they can collect from retailers for handling debit card transactions. But the new fees sparked a huge backlash.

Signs like, “I bailed out the banks and all I got was a $5 debit card fee” have been spotted the Occupy Wall Street protest in New York and its sibling protests around the country. The author of the regulations, Sen. Richard Durbin, D.-Ill, called the fee an “outrage” on the floor of the Senate.

`”It is hard to believe that a bank would impose such a fee on loyal customers who simply are trying to access their own money on deposit,” he said no teletrack payday loan. “Especially when Bank of America for years has been encouraging their customers to use debit cards as much as possible.”

Durbin encouraged customers of banks that charge fees to “vote with their feet,” but consumers were already ahead of him. Credit unions and community banks nationwide are reporting huge spikes in new accounts as consumers seek no-fee options.

“People are literally walking into branches and cutting up their Bank of America cards,” Kirk Kordeleski, CEO of Bethpage Federal Credit Union in Long Island, N.Y., said last week.

The backlash hasn’t gone unnoticed by other banks.

Citigroup Inc. almost immediately pointed to its policy of not charging for debit, although at the same time it changed requirements for its mid-tier checking accounts to make it harder to avoid a $20 per month service fee.

Huntington National Bank, Ally Bank, USAA and on Friday, TD Bank, are among those that are publicizing that they will not charge debit card fees. And institutions like CDC Federal Credit Union in Atlanta are sending emails out with “No Debit Card Fees” in the subject line to entice people to move their money.

The anger appears to be resonating.

On Friday, Bank of America bent. A source at the bank, who asked not to be identified because the policy is still evolving, said it likely it will offer ways for its customers to avoid debit card fees through using direct deposit, maintaining minimum balances or using Bank of America credit cards.

But a good deal of damage is already done. “Too little, too late,” one angry customer posted on Facebook. “I’ve already switched to USAA!”

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Appliance maker Whirlpool Corp. says it will cut 5,000 jobs in an effort as it faces soft demand and higher costs for materials.

The jobs to be cut are mostly in North America and Europe. They include 1,200 salaried positions and the closing of the company’s Fort Smith, Ark., plant.

The company expects the moves will save $400 million by the end of 2013.

Whirlpool also says its third-quarter net income more than doubled to $177 million, or $2 payday loans in one hour.27 per share, from $79 million, or $1.02 per share. Adjusted earnings of $2.35 per share fell short of analyst expectations for $2.75 per share.

The company, whose brands include Maytag and KitchenAid, has been squeezed by higher costs for materials such as steel and copper.

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China’s trade with its close ally North Korea nearly doubled in the first seven months of the year compared with the same period in 2010, state media reported Sunday.

The 87 percent increase to $3.1 billion was announced at the start of a visit to the North by Chinese Vice Premier Li Keqiang that reaffirms strong ties between the communist neighbors.

Li said China was hoping for better relations between North and South Korea and a resumption of long-stalled six-nation nuclear disarmament talks.

China wants to work with all parties in promoting the denuclearization of the Korean peninsula and safeguarding regional peace and development, the official Xinhua News Agency quoted Li’s statement as saying.

North Korea relies heavily on China for food and fuel aid and many consumer products. Chinese companies are the main investors in North Korean mining, and the sides recently signed agreements on road building and jointly developing an industrial park on an island near the Chinese city of Dandong.

“The economic and trade cooperation between the two countries has shown great potential, with bilateral trade and investment volume reaching new highs,” Xinhua said, citing the Chinese ambassador to Pyongyang, Liu Hongcai.

Bilateral trade between China and North Korea still is dwarfed by economic ties between China and South Korea. China is South Korea’s largest trade partner.

Trade between Beijing and Seoul rose more than 20 percent in the first eight months of the year to $159 billion and is expected to hit about $250 billion for all of 2011.

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