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Cruel summer

Money | What was supposed to be a season of recovery is turning into a time of concern

Issue: "Broken beyond repair?," Sept. 25, 2010

Dogged by worries about future economic growth, the U.S. stock market suffered through its worst August in nine years, with the Dow Jones Industrial Average falling more than 4 percent and the tech-heavy Nasdaq off more than 6 percent. Yields on the 10-year Treasury note fell below 2.5 percent, the lowest yields since March 2009, evidence that huge numbers of investors are willing to opt for low-yield safety rather than take risks in other investments.

Despite the Obama administration's high hopes for a "summer of recovery," much of the economic data refused to cooperate. Unemployment ticked up to 9.6 percent (from 9.5 percent in July). U.S. auto sales were stuck in low gear, enduring the slowest August since 1983, according to Autodata Corp. And, despite record low mortgage rates, sales of new homes plunged, hitting a record low in July. Meanwhile, the Commerce Department revised its second-quarter GDP figure down to 1.6 percent from an initial estimate of 2.4 percent.

Not all the economic news was bad, however. Manufacturing activity rose in August, according to the Institute for Supply Management, and consumer confidence inched upward (bouncing off a five-month low in July).

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In addition, the FDIC reported that banks had their most profitable quarter (April-June) since 2007. That news, however, was tempered by FDIC data showing 829 banks on the government's watch list for possible failure-nearly double the number of "problem institutions" listed a year ago.

So far this year, 118 banks have gone under. The most recent failures include ShoreBank (slogan: "Let's change the world"), a community development bank that focused on inner-city areas in Chicago, Cleveland, and Detroit. Regulators seized the bank on Aug. 20 because of what the FDIC termed "asset quality problems." A new company, Urban Partnership Bank, took over most of ShoreBank's deposits.

Sorry, we can't pay

Unable to close a $9 million budget gap, Pennsylvania's capital city, Harrisburg, prepared to default on a $3.29 million municipal-bond payment due in mid-September. "[Our] current financial situation precludes us from making . . . these debt service payments at this time," the city's interim business administrator, Robert Kroboth, wrote in an Aug. 30 letter to the paying agent, Bank of New York Mellon.

Even though Harrisburg's bond-insurance company is expected to make good on the mid-September payment, some city officials have floated the idea of having the city file for bankruptcy, an idea Pennsylvania Gov. Ed Rendell has tried to discourage (although the state has not offered any direct financial help).

The Harrisburg Authority, a separate legal entity from the city, has already missed several debt payments related to an ill-fated $288 million incinerator project.

Municipal bonds usually are considered low-risk investments, largely because cities have the power to institute tax increases to meet their obligations.
-Joseph Slife is the assistant editor of SoundMindInvesting.com

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