September 30, 2009

Economic Outlook: Third quarter chops

The end of the third quarter Wednesday found U.S. markets at heights few expected six months ago when stock values were hitting recessionary lows.

The Dow Jones industrial average, while slipping and sliding during the last two weeks on its way toward 10,000 points, closed down Wednesday, but closed out July through September with its best quarter since 1998 and its best third quarter since 1939, The Wall Street Journal reported.

In the past three months, the DJIA has jumped 15 percent, adding 1,265.28 points in the quarter. The Standard & Poor's 500 also climbed 15 percent, adding 137.76 points from July through September.

A low starting point is a contributing factor, as is the extraordinary action taken by the government to put brakes on last year's free fall. While investors analyze what went up highest and what has room to expand, the next financial riddle is to predict how corporations will fare as the Federal Reserve and the Treasury unwind programs that have kept the financial system on life support for the past six months.

More than a few policy makers will breathe easier with news that financial firms took the lead in the third quarter, rising 25 percent as a group.

That group, however, will have to pay the fiddler. The Federal Deposit Insurance Corp. said this week it would request banks pay three years of fees by the end of the year to give its depleted reserves a $45 billion lift -- its well running dry after more than 100 banks failures in the past 18 months, The New York Times said.

The three-year tap is a budgetary fix that allows the FDIC to avoid raising fees or running to the U.S. Treasury for a handout.

Even with financial firms rolling on the stock market, the FDIC raised its estimate of bank failures in the next five years by $30 billion to $100 billion. FDIC Chairman Sheila Bair, however, said it was time for the industry to pay its for its own cleanup.

I think that the American people would prefer to see an end to policies that look to the federal balance sheet as the remedy to every problem, she said.