The FDIC, Hat in Hand

The Dow slipped backward a bit on Tuesday after the big gains we saw on Monday, but that was hardly Tuesday's most discouraging news. Of more long-term consequence is the fact that the Federal Deposit Insurance Corporation is asking member banks to kick in $45 billion by the end of the year, to cover losses from bank failures that are now projected to reach $100 billion over the next four years.

Bank of America could have to pay $3.5 billion, JPMorgan Chase as much as $2.4 billion, but the hits the banks are taking are the least of our worries. More problematic is the signal that the banking crisis is far from over, with more than 400 banks remaining on the FDIC's problem-child list. Ninety-five banks have already failed so far in 2009, and the problem figures to extend to at least 2013.

The punchline to all this is that for ten years, from 1996 to 2006, the FDIC collected no premiums at all from its member banks. None! Who would have ever guessed, in those heady days of the late 1990s, that American banks would start failing again? Certainly not the FDIC, which could be flush with funds right now if it had bothered to collect the premiums it was owed all along. And those member banks could have chipped in a few billion when they could have afforded to do so, rather than during the current tough times.

The Dow at the Doorstep

The Dow Jones average took another step forward on Monday to close at 9789, tantalizingly close to the magic 10,000 mark that once seemed like a floor rather than a goal. The index was up 124 points on the day.

What was the cause for the rise? It depends on who you ask:

* Two announced mergers helped the market along, supposedly because they're a sign that the credit markets are open again, or because investors have started buying up shares of potential takeover targets.

* Investors are expecting third quarter earnings numbers to be strong.

* The general sense among investment professionals is that the recession is really over.

* Business Week also noted: "Wall Street also weighed a Wall Street Journal report Monday that $35 billion in support of state and local housing agencies will be committed by the White House to provide mortgages to low-income earners."

It could be any of these things, or none of them. The government has pumped plenty of money into the mortgage market in the past, and Xerox, one of the major players in the day's mergers, lost value on the day. Perhaps the best news of the day was how broad-based the optimism was: The S&P 500 and the Nasdaq were up in addition to the Dow, Treasurys were up, the dollar was up. With all that, it was a day full of good news.

Name Recognition

What makes stock prices move? People put an awful lot of effort into reading technical analysis and economic indicators, but one recent study suggested that might be less than half the story. According to professors at the Universities of Michigan and California, the biggest part of a stock's movement is name recognition.

The researchers claim that as much as 70 percent of the variation in stock returns is explained by changes in investor recognition, which they define as the number of investors who know about a stock and hence consider it for their portfolio. “Efficient market theories say sophisticated arbitragers would step in to keep the prices in line with fundamentals, and we show that doesn’t happen," says Richard Sloan, the California professor. "When a lot of investors get excited about a stock, the price moves accordingly."

This is not so surprising, especially to investors who subscribe to the Peter Lynch school of investing, in which people buy into companies that they see doing well. But the magnitude of the effect is eye-opening, particularly if you're trying to choose between buying Apple or buying Air Products & Chemicals Inc.

The Importance of the Business Tax Climate

As we're struggling to emerge from this recession, there was a bit of a slap in the face to New Jersey this week. An organization called the Tax Foundation released its annual list ranking the states according to the State Business Tax Climate Index. Bringing up the rear, ranked 50th out of 50, was the Garden State.

The ranking is based on corporate income, individual income, sales, property and unemployment insurance taxes. New Jersey was downgraded because of the recent enactment of a millionaires' tax, among other things, although it had already ranked in last place last year as well.

At the same time, there's something a bit off about this list. Ranking just above New Jersey, in 49th place, is New York, and California is in 48th place. But at the top of the list is a state that's never been known for its thriving business community, South Dakota, and it's followed by Wyoming and Alaska.

What we really seem to be seeing on this list is that states with solid environments for business growth, like New York and California and, yes, New Jersey, can afford to tax those businesses a little more, while states in desperate need of business growth have to use tax policy to attract that growth.

The Fed States Its Case

The Fed emerged from its two-day meeting yesterday afternoon with a message that was a little unsatisfying: The economy keeps getting better, they said, but not so much better than we can change our tactics. "Economic activity has picked up following its severe downturn," read the Fed's report. "Conditions in financial markets have improved further, and activity in the housing sector has increased."

But conditions haven't improved so much that the Fed is taking its foot off the gas. The Fed is still planning to end its mortgage-bond purchase program - but it will keep going past the end of the year, longer than had been originally announced. They'll also keep interest rates at their near-zero levels for an indefinite period.

This is one of those situations that suggests you should watch what someone does rather than what someone says. When the Fed feels it doesn't need to do things like buy up mortgage debt, then we'll believe the economy has really turned a corner.

If you'd like to read the Fed's full statement, you can find it here.

The Bull Market in Bonds

You may have seen a recent report from Morningstar that investors have put $209 billion into bond mutual funds this year, through the end of August. That's a whopping thirteen times more money than they've put into stock funds. To put that in a little perspective, from 2003 to 2006, when the stock market was roaring, inflows into bond funds totaled just $113 billion.

A big part of that is because people have been reluctant to sink more assets into this stock market, and need some place to put their money. But those bond investments have paid off. Some more numbers:

* The Barclays Capital U.S. Aggregate Bond Index, which mimics the entire bond market, is up nearly 14 percent since October 2007, just before the recession started.

* Over the past five years, bonds have returned an average of 5 percent a year to just 1 percent for the S&P 500.

* Over the past ten years, bonds have had an average annual gain of 6.2 percent, compared to an average annual loss of 0.5 percent for stocks.

* What used to be called junk bonds are on fire; Fidelity’s High Income fund has returned 41 percent so far this year.

New Jersey Housing Trends

The nation's HUD secretary, Shaun Donovan, was in New Jersey yesterday talking about the housing crisis. He pointed out that New Jersey has had a tough time of it in the foreclosure department: We've seen foreclosures rise by 17 percent over the past 12 months, while at the national level, they've declined 16 percent over the same period.

At the same time, though, we've seen prices stabilizing, and the Times ran a piece last week about how the northern half of the state was showing the symptoms of a full-blown housing recovery. They listed seven Jersey counties with the healthiest real estate markets: Bergen, Essex, Morris, Union, Mercer, Middlesex and right here in Somerset county.

What we appear to be seeing is a bifurcated housing market, where the upper end is recovering nicely and the lesser end is still struggling. There's no such thing, really, as a statewide housing market, just as there's no such thing as a national housing market; the people shopping for a home in Basking Ridge are very different from the people shopping for a home in Trenton or in Ocean City.