USA Stocks: Worst week in 2011

Stocks ended Friday's session sharply lower, posting their worst weekly performance in more than a year, as investors grow increasingly worried that Washington may not reach a deal to raise the debt ceiling before the deadline.

At the preliminary close, the Dow Jones industrial average (INDU) fell 97 points, or 0.8%, to close at 12,143. Friday's selling was broad, with 28 out of the Dow's 30 members trading in the red. The blue chips were led lower by shares of drug maker Merck (MRK, Fortune 500) and technology company Hewlett-Packard (HPQ, Fortune 500).

For the week, the Dow sunk 4.2% -- its worst weekly performance since June 2010.

The S&P 500 (SPX) traded down 8 points, or 0.7%, to 1,292; and the Nasdaq Composite (COMP) lost 10 points, or 0.4%, to 2,756. The S&P 500 dropped 3.6% and the Nasdaq lost 3.9% for the week.

Along with the debt ceiling, investors had to work through a disappointing government report showing the U.S. economy grew at a 1.3% annual rate in the second quarter. The data was far worse than expected.

"The GDP number was nothing short of a disaster and worse," said Dave Rovelli, managing

director of US equity trading at Canaccord Adams. "We went from little growth to no growth."

The Triple-A debt club

America's Debt Crisis: Investors remained unnerved after House Speaker John Boehner delayed a vote late Thursday on his plan to raise the debt ceiling. However, after the initial delay, Boehner's bill now has the votes to pass the House. Republican leadership apparently agreed to attach a balanced budget amendment to Boehner's bill to help court the Tea Party.

The market's fear factor -- the CBOE Market Volatility Index (VIX), commonly called the VIX -- jumped up 8.2% in part on both the GDP and debt ceiling news. That's still below 30, which denotes high fear in the marketplace, but the index has shot up more than 46% in just the past five days.

"People are just crossing their fingers that these morons in Congress will get a deal done by Monday," Rovelli added.

But even if Boehner's plan does pass the House, Senate Majority Leader Harry Reid has promised the Democratic-controlled Senate will block it, and President Obama re-emphasized on Friday that he would veto it.

But investors are mostly positive that a deal will get done.

"There's enough ideas in all the bills that have passed in the House and the Senate, that we can cobble something together that everyone can agree to," Orlando said.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 2.83% from 2.95% late Thursday.

Short-term Treasuries saw moderate selling on Friday, as investors pulled money out of securities that would likely be the first affected by a government default. The yield one-month T-bill was up to 0.18% from 0.15% Thursday.

Currencies and commodities: The dollar strengthened against the euro and British pound, but weakened against the Japanese yen.

Oil for September delivery fell $1.74, or 1.8%, to $95.70 a barrel.

Gold futures for August delivery jumped $14.90, or 0.9%, to $1,628.30 an ounce. Earlier in the session, gold hit an intraday record of $1,634.90 an ounce.

Companies: Drugmaker Merck (MRK, Fortune 500) said it plans reduce its workforce by 12% to 13% from 2009 levels by the end of 2015, as the next phase of a restructuring program. Shares fell 2%

Shares of Newell Rubbermaid (NWL, Fortune 500) rose 8% after the company said it earned 46

cents a share in the second quarter, beating forecasts by four cents. The household products company also lowered its full-year guidance, citing higher commodity costs and weaker sales.

Shares of online travel site Expedia (EXPE) jumped 9%, after the company reported better-than-expected earnings.

Economy: The Chicago purchasing managers index fell to a reading of 58.8 in July. Economists had expected a reading of 58, according to Briefing.com. The level still indicates an expansion in the region's manufacturing activity.

World markets: European stocks fell moderately on Friday. Britain's FTSE 100 lost 1%, the DAX in Germany was off 0.4% and France's CAC 40 slid 0.9%.

In a widening of Europe's debt crisis, Moody's said it may downgrade Spanish debt. The credit rating agency said that while the country's sovereign rating was being placed under review, any downgrade would most likely be "limited to one notch."

Asian markets ended lower. The Shanghai Composite edged down 0.3%, the Hang Seng in Hong Kong fell 0.6% and Japan's Nikkei declined 0.7%

U.S. Warned of Possible Downgrade

U.S. lawmakers got another stern warning from a leading credit rating agency on Thursday that there is now a very real possibility that the country's top-notch credit rating could be downgraded in the next three months.

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Standard & Poors said in a statement it was placing the United States' sovereign rating on "CreditWatch with negative implications."

"[O]wing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days," the agency said in a statement.

The action on Thursday follows a move in April when S&P changed its outlook on the U.S. AAA rating to "negative" because at the time it couldn't see how lawmakers would create a path to real debt reduction.

Bernanke: Debt ceiling breach 'calamitous'

Since then "the political debate about the U.S.' fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled," the agency said.

"[W]e believe there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling," S&P noted.

Indeed, other warnings from ratings agencies Moody's and Fitch in the interim spurred more rhetoric than action from politicians. Seven weeks' worth of talks between the parties led by Vice President Joe Biden broke down in June after House Majority Leader Eric Cantor left the negotiations.

And regular meetings at the White House between President Obama and Capitol Hill brass over the past two weeks have showed no signs of real progress. Obama will hold a press conference Friday to offer an update on the negotiations.

A downgrade of U.S. credit would mean interest rates on U.S. bonds would go up. And it could have ramifications across global markets because U.S. bonds are considered the world's safe haven investment.

The Treasury issued an immediate response to the news.

"Today's action by S&P restates what the Obama Administration has said for some time: That Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support," Treasury official Jeffrey Goldstein said. (Read: Republican stance on taxes a bust with public)

A downgrade could come for one of three reasons, S&P explained:

-- If Congress and the administration fail to come up with a "credible solution" to U.S. debt and show no signs of agreeing on one in the foreseeable future.

-- If the United States misses any scheduled debt service payments, in which case S&P would issue a "selective default" meaning a default has occurred on some bonds but not others.

-- If S&P concludes that the debt ceiling debate so bogs down that it calls into question policymakers' "willingness and ability to timely honor the U.S.' scheduled debt obligations."

Treasury started sending letters to Congress back in January urging them to raise the $14.3 trillion debt ceiling -- which is the U.S. legal borrowing limit

The Treasury takes in, on average, about $125 billion less than it has to pay out on a monthly basis. To make up the difference it issues U.S. bonds, and because of the country's sterling rating, it is able to do so at very low rates.

If Congress doesn't raise the debt ceiling by Aug. 2, the Treasury will no longer be able to pay all of the country's bills in full and on time without interruption

Debt ceiling: Moody's puts U.S. on notice

The public pressure on lawmakers to raise the debt ceiling was ratcheted up Wednesday when a major rating agency said it would put the sterling bond rating of the United States on review for possible downgrade.

Moody's Investors Services said it had initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling by Aug. 2 -- something that could lead to a U.S. default on its debt.

If the debt ceiling isn't raised by then, the Treasury Department says it will no longer be able to pay all the country's bills in full and on time without being allowed to borrow new money. (Read: Debt ceiling FAQ)

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," Moody's said in a statement.

The United States enjoys its AAA rating in part for having always stood behind its debt and paid its bills on time. As a result, U.S. Treasury bonds are considered the world's safe-haven investment.

The Treasury Department issued an immediate response Wednesday.

"Moody's assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit reduction package," Treasury official Jeffrey A. Goldstein said in a statement.
Debt ceiling: Chaos if Congress blows it

In the still unlikely event the United States would default on any of its interest payments to bondholders, Moody's said it expected the default to be short-lived and the loss to bondholders "minimal or non-existent."

But, the agency added, a default "would fundamentally alter Moody's assessment of the timeliness of future payments." Translation: The United States would be downgraded to AA status.

Beyond the debt ceiling: Even if lawmakers raise the debt ceiling in time, Moody's also made clear that it is expecting progress on the long-term debt.

The agency said it would likely change its outlook on the AAA rating to "negative" from "stable" absent a "substantial and credible" debt-reduction deal.

Moody's had alerted investors in early June that it was considering putting the U.S. rating under review unless it saw forward movement in the debt talks by mid-July. It cited as a concern the "heightened polarization" in the debate.

Since then, negotiations led by Vice President Biden to find a compromise broke down and the prospects for a "grand bargain" have been called into question.

Market reaction: Just how the bond market -- i.e., the investors around the world who lend to the federal government -- will respond to Moody's action is not clear yet.

Bond traders may take note but not blink since the agency already signaled its intention -- "so no surprise factor," said Steve Van Order, a fixed income strategist at Calvert Investments.

And Moody's isn't the ultimate arbiter.

"The bond market will follow its own judgment of how Washington is approaching deficit reduction, not the decisions of the rating agencies," said Jim Vogel, head of interest rate strategies at of FTN Financial.

But, Vogel noted, "Moody's action will focus the market's attention on the debt ceiling more than it has been in recent days. Rating agency actions also may provide a rationale for policy makers to alter their voting stance as deadlines loom."
Bernanke: Default would cause 'major crisis'

Moody's isn't the first ratings agency to announce a negative action.

In April, Standard & Poor's revised its outlook on the country's AAA rating to negative from stable.

S&P's reason: Relative to its peers, the United States has "very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us."

Fitch Ratings, meanwhile, said in early June that if lawmakers fail to raise the debt ceiling by Aug. 2, it would put the country on "ratings watch negative," meaning there is a "heightened probability" of a rating change.

Who would follow Geithner?

Timothy Geithner said Thursday that he plans to stay on as Treasury Secretary for the foreseeable future. But that hasn't stopped speculation about who might take his place later this year.

Sources told CNN and other news outlets Thursday that Geithner is considering leaving the Obama administration later this year, once negotiations on raising the government's debt ceiling and cutting the budget deficit are complete.

Geithner's family is moving back to the New York suburbs where they lived before he took office so his son can finish high school there. And as the head of Treasury through the worst financial crisis in a generation, and the last key member of President Obama's original economic team still on the job, a desire to leave wouldn't be a shock.

Geithner tried to tamp down the reports of his imminent departure when speaking in Chicago Thursday by saying he wasn't planning on leaving anytime soon.

Still, economists and Washington experts were already talking about who might take over the high-profile job.

Near the top of the list is current White House Chief of Staff Bill Daley, a close Obama confidant and someone who was brought in at least partly because of his good relationship with the business community.

Before taking the job in the administration earlier this year, Daley had been an executive at JPMorgan Chase (JPM, Fortune 500). He also served as Secretary of Commerce in the second term of the Clinton Administration.

Also at the top of many lists is Erskine Bowles, the Democratic co-chairman of the president's bipartisan commission on cutting the budget deficit. Bowles, who had served as White House Chief of Staff in the Clinton administration, would be an relatively easy pick to get confirmed given the budget cutting emphasis in Congress today, according some experts.

But when contacted Friday, Bowles, 65, appeared to take himself out of running for the job, saying that he is not interested in any full-time job at this point in his career.

"I am looking forward to being useful in part-time endeavors," he said.

Investment banker Roger Altman is another name that has been mentioned, but his name has surfaced for previous openings on the Obama economic team without ever getting tapped for a position.

And White House Budget Director Jacob Lew, who has been central to negotiations on the debt ceiling and deficit reduction, is another name suggested by experts.

Jamie Dimon, chairman and CEO of JPMorgan Chase, who is often described as "Obama's favorite banker" is another prominent name mentioned. A spokesman for the nation's second largest bank holding company had no comment on whether his boss would be interested in the job.

Greg Valliere, chief political strategist, Potomac Research Group, said he doesn't think it'll be a good idea for Obama to pick someone from Wall Street, given the government help banking giants like JPMorgan -- along with rivals likeCitigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) -- received during the crisis three years ago.

"I just think that Wall Street is not the way they would go. It could be an albatross for this administration," said Valliere. "And having him berating [Federal Reserve Chairman Ben] Bernanke in public three weeks ago certainly didn't help his case."

Valliere said that he thinks Obama should try to go with a high-profile Treasury Secretary outside of banking and Washington -- someone like Berkshire Hathaway (BRKA, Fortune 500) Chairman Warren Buffett, an earlier supporter of Obama four years ago, or New York Mayor Michael Bloomberg.

"I think he should do something bold and swing for the fences. I think Mike Bloomberg would be an electrifying pick," he said. "The only problem is that he could stray from the reservation on the message. But he's an entrepreneur who knows about creating jobs."

Bloomberg has denied interest in an administration post in the past, and has said he intends to complete his term as mayor which runs through 2013. A spokesman in the mayor's press office declined to comment Friday.

But the political reality is that it might be impossible to get any replacement for Geithner confirmed by the Senate in the year before a presidential election, said Jaret Seiberg, a research analyst at MF Global Inc.'s Washington Research Group.

Seiberg pointed out that 44 Republican senators have vowed not to confirm any nominee to head the new Consumer Financial Protection Bureau because they want the new agency's powers substantially trimmed. The same political battle could lead that group to block a Treasury nominee as well, he said. Even Alexander Hamilton would have trouble getting confirmed today, he said.

"The problem is there is no ideal candidate out there," said Seiberg. "I think it's a Herculean task to get anyone through the Senate right now. That's why at the end of the day, we're likely to have Geithner stay in place."

Valliere said if confirmation becomes the major hurdle to a new Treasury chief, he could see Secretary of State Hillary Clinton moving over to Treasury, with Sen. John Kerry taking her spot at State. Past and current senators have an easier time winning confirmation than do outsiders, he said. And he said that the Treasury job has become a diplomatic job as much as a finance job in the current interconnected global economy

Stock Rally due to Manufacturing Report

Stocks went into rally mode Friday, following a stronger-than-expected report on the nation's manufacturing sector.

After starting the day barely changed, the Dow Jones industrial average (INDU) gained 115 points, or 0.9%, after the manufacturing data was released. 3M (MMM, Fortune 500), Alcoa (AA, Fortune 500) and Caterpillar (CAT, Fortune 500) were the biggest gainers on the blue chip index.

The S&P 500 (SPX) added 10 points, or 0.8%; and the Nasdaq composite (COMP) gained 22 points, or 0.8%.

The Institute of Supply Management's manufacturing index jumped to 55.3 in June -- well above the 51.1 that economists had expected.

"Investors thought the economy would continue to be fairly weak through the summer, but the Chicago PMI number yesterday and the national manufacturing data this morning caused a huge swing in investor sentiment," said Michael Sheldon, chief market strategist at RDM Financial Group.

A strong manufacturing sector will help drive economic growth and corporate profits, he added.

Volume is expected to be light as many market participants head out for the holiday weekend. U.S. markets are closed Monday in observance of Independence Day.

Market outlook: More turbulence ahead

Stocks ended the first half of the year solidly higher Thursday, following a turbulent six months. Regional manufacturing data helped fuel Thursday's rally.

Economy: The University of Michigan consumer sentiment survey for June fell to a reading of 71.5, slightly below the initial reading of 71.8.

Construction spending fell 0.6% in May, after rising 0.4% the prior month. Economist were expecting spending to hold steady in May.

Companies: University of Phoenix operator Apollo Group Inc. (APOL, Fortune 500) was the best performing stock on the S&P 500 and Nasdaq. Shares of the education company jumped more than 7%, after it reported better-than-expected third-quarter earnings late Thursday.

Major auto makers including General Motors (GM, Fortune 500), Toyota (TM) and Ford (F, Fortune 500) are scheduled to report their May sales figures starting around 11 a.m. ET. Shares of Ford were up 0.3% in morning trading.

Meanwhile, shares of Eastman Kodak (EK, Fortune 500) slid 14%, a day after the company received a mixed ruling on the company's patent infringement suit against Apple (AAPL, Fortune 500) and Research in Motion (RIMM).

Cablevision (CVC, Fortune 500) spun off AMC Networks (AMCX), known for popular hits like Mad Men. AMC started trading on the Nasdaq Friday under the ticker "AMCX." Shares fell 8% on the news. Cablevision shareholders are getting one share of AMC Networks for every four shares of Cablevision.

World markets: European stocks were mostly higher in afternoon trading. Britain's FTSE 100 rose 0.3%, the DAX in Germany rose 0.1% and France's CAC 40 was flat.

Asian markets ended the session mixed. The Shanghai Composite ticked down 0.1%, while the Hang Seng in Hong Kong soared 1.5% and Japan's Nikkei added 0.5%.

Currencies and commodities: The dollar rose against the euro, the Japanese yen and the British pound.

Don't fear the commodities bear

Oil for August delivery slipped $1.02 to $94.40 a barrel.

Gas prices snapped a 27-day streak of declines Friday. The price of regular unleaded gasoline increased nine tenths of a cent to $3.550 a gallon, according to motorist group AAA.

Gold futures for August delivery fell $17.40 to $1,485.40 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury edged higher, pushing the yield down to 3.14% from 3.16% late Thursday

Tim Geithner considering leaving White House

Tim Geithner is considering leaving his post as Secretary of the Treasury after a deal to raise the debt ceiling is reached, a source familiar with the discussion told CNN Thursday.

Geithner is the lone remaining member of President Obama's original economic team.

Asked by former President Bill Clinton on Thursday at a Clinton Global Initiative event about his future plans, Geithner said he would be doing his job "for the foreseeable future."

A Treasury official said that Geithner will not make any decisions while he's focused on negotiations over the debt limit and deficit reduction.

Another source familiar with the discussions between Geithner and the White House said it could be a while before Geithner's ultimate departure. "You have to have somebody lined up for the job -- you can't just leave," this source said. "And there's a relative scarcity of people who would fit the bill."

Obama nominated Geithner to be the 75th Secretary of the Treasury, and the Senate confirmed him on Jan. 26, 2009.

Geithner went on to spearhead the administration's response to the financial crisis that threatened to unravel economic growth around the globe.

That response included a bailout of the U.S. auto industry, a massive economic stimulus package and a landmark Wall Street reform effort. So-called stress tests of the nation's largest banks in early 2009 also helped shore up confidence in financial markets.

Geithner's first days in the administration were not without stumbles, as markets met his efforts to support the banking industry with skepticism, and giant bonuses paid to executives at bailed-out insurer AIG sparked public outrage.

But Geithner emerged as one of the strongest voices on Obama's economic team.

"I think he has done a great job in a backbreaking position," Clinton said Thursday.

Another member of Obama's original team, Council of Economic Advisers chairman Austan Goolsbee, has said he will leave the administration in August to return to the University of Chicago.

That leaves the administration with two holes to fill in the months leading into the 2012 presidential race, where the economy is expected to be issue No. 1.

National Economic Council director Lawrence Summers, and Office of Management director Peter Orszag left the administration last year. Christina Romer, the original chair of the Council of Economic Advisers, has also left.

Before joining the administration, Geithner held the top post at the Federal Reserve Bank of New York, where he played a crucial advisory role during the financial crisis of 2008.

Before joining the Fed, he held posts at the IMF and worked in the Clinton administration Treasury Department.

Stocks end the first half with a bang

Stocks ended the first half of the year solidly higher Thursday, as investors put a turbulent six months behind them.

All three major indexes rallied for the fourth day in a row, helped by a strong economic report on business activity in the Midwest and the latest positive developments out of Greece.

The Dow Jones industrial average (INDU) added 153 points, or 1.3%, led by Intel (INTC, Fortune 500), Caterpillar (CAT, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500). Shares of all three companies rose about 3%.

The S&P 500 (SPX) rose 13 points, or 1%, and the Nasdaq composite (COMP) gained 33 points, or 1.2%. First Solar (FSLR) and eBay (EBAY, Fortune 500) were among the best performing stocks on both indexes.

All three major indexes reached the mid-year mark on a high note. The Dow is up more than 7% while the S&P and Nasdaq are up 5%.

Meanwhile, Wall Street's most widely cited measure of volatility and fear, the VIX (VIX), has dropped nearly 7% during the first six months of the year.

Interactive: A stormy year for stocks

The second quarter has been difficult, however. Stocks struggled over the past two months amid jitters about Europe's sovereign debt problems and an economic slowdown in the United States.

The Dow ended the quarter up 0.8%, while the S&P 500 and Nasdaq finished about 0.3% lower. That quarterly performance was the worst in a year for all three indexes.

Economy: The Chicago purchasing managers index, which measures business activity in the Midwest, jumped to 61.1 in June from 56.6 the prior month. Economists were expecting the measure to slip to 54.

"Based on the series of poor economic reports we've had the last several weeks, expectations were low, so this was a nice surprise," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

Don't fear the commodities bear

Strong regional data is especially welcome news ahead of the national Institute for Supply Management manufacturing index due Friday, but it's only one data point, Saluzzi cautioned.

Adding to the welcome news, Greece voted in favor of implementing the austerity measures approved on Wednesday. The measures aim to keep the debt-ridden country from defaulting.

But as anti-government protests grow worse, some investors worry that Greece's problems are far from over.

There's still a lot to sort out with Greece and we're not out of the woods yet," Saluzzi said. "There are a lot of major global economic concerns, and I think markets will be choppy for the rest of the summer."

The Labor Department reported that weekly jobless claims edged down slightly in the latest week, but fell short of economists' expectations for a bigger drop.

Currencies and commodities: The dollar fell against the euro, the British pound and the Japanese yen.

Oil for August delivery rose 65 cents to settle at $95.42 a barrel.

Gold futures for August delivery slipped $7.60 to settle at $1,502.80 an ounce.

10-year yield at one-month high

Bonds: The price on the benchmark 10-year U.S. Treasury edged down, pushing the yield up to 3.16% from 3.11% late Wednesday.

Companies: Shares of eBay (EBAY, Fortune 500), which owns PayPal, jumped more than 4% a day after the Federal Reserve imposed caps on debit card swipe fees that weren't as high as expected.

Shares of the First Solar (FSLR) gained more than 2%, after the company won $4.5 billion in loan guarantees from the Department of Energy.

World markets: European stocks ended higher. Britain's FTSE 100 gained 1.5%, the DAX in Germany added 1.1% and France's CAC 40 rose 1.5%.

Asian markets also ended the session higher. The Shanghai Composite jumped 1.2%, the Hang Seng in Hong Kong gained 1.5% and Japan's Nikkei rose 0.2%