Wall Street sinks after election as "fiscal cliff" eyed

Wed Nov 7, 2012 7:40pm EST

NEW YORK (Reuters) – The Dow industrials lost more than 300 points in a sell-off on Wednesday that drove all major stock indexes down over 2 percent in the wake of the presidential election as investors’ focus shifted to the looming “fiscal cliff” debate and Europe’s economic troubles.

The Standard Poor’s 500 Index posted its biggest daily percentage drop since June, with all 10 SP sectors solidly lower and about 80 percent of stocks on both the New York Stock Exchange and the Nasdaq ending in negative territory. Both the Dow and the SP 500 closed at their lowest levels since early August.

Financial stocks and energy shares, two sectors that could face increased regulation after President Barack Obama’s re-election, were the weakest on the day. The SP financial index .GSPF lost 3.5 percent, while the SP energy index .GSPE fell 3.1 percent. An SP index of technology shares .GSPT slid 2.8 percent as the stock of Apple Inc (AAPL.O) entered bear market territory.

Obama’s victory had been anticipated, though many polls indicated a close race between the president and Mitt Romney, his Republican challenger, going into election day.

The election was considered a major source of uncertainty for the market, but now the focus turns to the fiscal cliff, with investors worrying that if no deal is reached over some $600 billion in spending cuts and tax increases due to kick in early next year, it could derail the economic recovery.

The Republican Party retained control of the U.S. House of Representatives, while the Senate remained under Democratic control.

David Joy, chief market strategist at Ameriprise Financial in Boston, said this kind of divided government was disappointing “since that configuration has resulted in gridlock and there’s no clear path towards unlocking that.

“It holds implications for how quickly we resolve the fiscal cliff issue, or whether it gets resolved at all,” said Joy, who helps oversee $571 billion in assets.

The market’s losses were broad, with pessimism exacerbated by overseas concerns after the European Commission said the region would barely grow next year, dashing hopes for improvement in the short term.

Still, some viewed the day’s slide as a buying opportunity, saying it was unlikely that no deal would be reached on the fiscal cliff and arguing that Europe’s troubles were already priced into markets.

“There’s no question that Europe is lagging the rest of the developed and emerging world, but stocks will find a base soon, when investors start seeing through some of the smoke over the region and cliff,” said Richard Weiss, who helps oversee about $120 billion in assets as a senior money manager at American Century Investments in Mountain View, California.

The Dow Jones industrial average .DJI slid 312.95 points, or 2.36 percent, to close at 12,932.73. The Standard Poor’s 500 Index .SPX fell 33.86 points, or 2.37 percent, to 1,394.53. The Nasdaq Composite Index .IXIC lost 74.64 points, or 2.48 percent, to close at 2,937.29.

The SP 500 closed below the key 1,400 level for the first time since August 30, while the Dow ended under 13,000 for the first time since August 2.

About 7.81 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, slightly below last year’s daily average of 7.84 billion, though Wednesday’s volume did surpass that of many recent sessions.

Contributing to the Nasdaq’s decline, Apple shares fell 3.8 percent to $558, off 20.8 percent from an all-time intraday high of $705.07 set on September 21. That slump puts the stock of the world’s most valuable publicly traded company in bear market territory.

Despite Wednesday’s sell-off, all three major U.S. stock indexes were still up for the year. At Wednesday’s close, the Dow was up 5.9 percent for 2012 so far, while the SP 500 was up 10.9 percent and the Nasdaq was up 12.8 percent.

Wednesday’s plunge was a reversal from Tuesday’s rally when voting was under way. Defense and energy shares were among the market leaders that day, causing speculation that some investors were betting on a Romney win.

On Wednesday, an index of defense shares .DFX fell 2.9 percent, its biggest one-day drop in a year. Shares of United Technologies (UTX.N) dropped 2.9 percent to $77.68 while Lockheed Martin (LMT.N) sank 3.9 percent to $91.15.

Energy shares fell as investors bet that the industry may see increased regulation in Obama’s second term, with less access to federal lands and water. Crude oil shed more than 4 percent while an index of coal companies .DJUSCL plunged 8.8 percent. Coal firms Peabody Energy (BTU.N) lost 9.6 percent to $26.24 and Arch Coal (ACI.N) sank 12.5 percent to $7.58.

Among financials, JPMorgan Chase Co (JPM.N) fell 5.6 percent to $40.46 and Goldman Sachs (GS.N) dropped 6.6 percent to $117.98.

“The notion that you may have gotten a respite on the financial services side (with regulation) if Romney had been elected is obviously being unwound,” said Mike Ryan, chief investment strategist at UBS Wealth Management Americas in New York.

Healthcare stocks were mixed as President Obama’s re-election rules out the possibility of a wholesale repeal of his healthcare reform law, though questions remain as to what parts of the domestic policy will be implemented. The SP health care index .GSPA shed 1.9 percent. In contrast, Tenet Healthcare (THC.N) was the SP 500’s biggest percentage gainer, up 9.6 percent at $27.34.

In 2008, stocks also rallied on election day, but then fell by the largest margin on record for a day following the vote, with each of the three major U.S. stock indexes posting losses ranging from 5 percent to 5.5 percent.

After the bell, both Qualcomm Inc (QCOM.O) and Whole Foods Market Inc (WFM.O) reported results. Qualcom’s revenue beat expectations, sending shares up 8 percent to $62.75 in extended trading, while Whole Foods dropped 3.3 percent to $92.75 after the bell. In the regular session, Qualcomm slid 3.7 percent to close at $58.12, while Whole Foods dropped 2.1 percent to $95.93.

(Additional reporting by Ashley Lau; Editing by Jan Paschal)

Election over, Obama to face same weak economy

Wed Nov 7, 2012 1:36am EST

WASHINGTON (Reuters) – Americans have given President Barack Obama the benefit of doubt that he has the best fix for the ailing economy.

In reality, there may not be much he can do to speed up growth and employment.

Obama edged out Republican Mitt Romney in the race for the White House on Tuesday, a victory made more difficult by voter frustrations over the sluggish pace of the economy’s recovery and worries about sky-high public debt.

The president’s best chance to kick-start faster growth is to remove the recession threat posed by the $600 billion in tax hikes and government spending cuts known as the “fiscal cliff,” which is already weighing on business investment decisions.

And all the better if he can do that in concert with securing a longer-term deal that puts the budget on a more sustainable path – a tall order given the still-divided nature of Washington politics.

“Obama will have to nail down some of these fiscal issues in order to get the economy moving quickly,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “If he is unable to do that, we’re going to be stuck.”

The world’s largest economy has struggled to achieve anything like strong growth since climbing out of the deep 2007-09 recession.

Annual gross domestic product expanded by an average of just 2.1 percent over the last two years. Only about 4.5 million of the 8.7 million jobs lost during the downturn have been recouped. About 23 million Americans are either unemployed or underemployed, many of them having to settle for part-time work.

Not only is government borrowing at an unsustainably high rate, with a debt now towering over $16 trillion, but the recession left lasting scars on the labor market that is likely to keep unemployment elevated for years to come.

What’s more, growth is slowing overseas, crimping U.S. exports.


While Obama’s Democrats retained control of the Senate, Republicans kept their grip on the House of Representatives, maintaining Washington’s political gridlock.

During his first term, Obama was unable to bridge the divide between the two parties over how to trim the budget deficit and there is little to suggest it will be easier this time around.

He has called for slashing the deficit by more than $4 trillion over a 10-year period through raising taxes for wealthy Americans and cutting defense spending, two steps that are unpopular with Republicans.

“Dealing with partisanship and gridlock in Congress will remain a major challenge, today’s election result certainly does not make the situation any easier,” said Harm Bandholz, chief U.S. economist UniCredit Research in New York.

Full implementation of Obama’s deficit-cutting plan would dent growth in 2013, and some economists expect he would offer some form of tax relief for households to soften the blow.


Even if Obama manages to strike a deficit deal with Congress, it would likely add only a few tenths of a percentage point to economic growth given that it would not address the main problem holding the recovery back: the massive loss of wealth during the recession.

Median family net worth dropped 38 percent between 2007 and 2010 as housing prices plummeted, the biggest decline for any period on record, and almost 11 million Americans are estimated to owe more on their mortgages than their homes are worth.

In addition, many of the jobs lost during the recession, particularly in construction and other housing-related areas like finance, may never come back. That could leave much of the U.S. workforce lacking the skills employers need.

“The job situation is going to be problematic because my reading is the unemployment we suffer is to some large degree structural,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago. “Even a strong economy will have a hard time reducing the employment rate to below 7 percent.”

The jobless rate stood at 7.9 percent in October.

The economy is also being buffeted by the debt crisis in Europe and cooling demand in China, which has undermined demand for U.S. businesses. Exports had accounted for about a third of growth since the recession ended.

“We are in a globalized economy with no healthy global engine for economic growth. That’s a problem that cannot be easily fixed by Obama,” said Laurenti.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Paul Simao)

Harsher energy regulations coming in Obama’s second term

Wed Nov 7, 2012 2:08am EST

(Reuters) – Energy companies likely will see more regulation in President Barack Obama’s second term, with less access to federal lands and water even as the administration promotes energy independence.

With a pledge to cut oil imports by half by 2020, Obama during the campaign advocated what he called an “all of the above” approach to developing a range of domestic energy sources. He said, however, that he would roll back subsidies for oil companies and reduce the nation’s reliance on oil by mandating production of more fuel-efficient vehicles.

“You are going to have less access to federal lands and tougher government agencies,” said Dan Pickering, chief investment officer at TPH Asset Management in Houston.

Obama’s energy strategy over the last four years has shifted away from focusing on climate change after a bill establishing a cap-and-trade system to curb carbon emissions died in the Senate in 2010 after a bitter partisan fight. The president’s green policies also suffered a major setback when solar power company Solyndra collapsed last year after receiving a $535 million loan guarantee, unleashing a political firestorm.

Obama’s team of energy advisers include Energy Secretary Steven Chu, a Nobel prize-winning scientist who specializes in alternative and renewable energy technologies but who regularly talks up the government’s role in developing hydraulic fracturing technology. His top White House energy adviser is Heather Zichal, who has been an advocate for creating green jobs and tackling climate change by reducing dependence on oil.

Obama has pledged more support for development of renewable energy technologies like solar and wind, but he will need the support of Congress to extend or renew tax breaks that have underpinned the growth of those industries.

“Obama can love solar as much as he wants, but I don’t know that a whole lot more is going to happen in terms of new, constructive policy,” said Morningstar energy analyst Stephen Simko.

Perhaps most importantly, however, renewable energy faces major obstacles unrelated to policy, such as stiff competition from low-priced natural gas, a lack of infrastructure to connect large projects to the grid, and a global glut of solar panels that is putting their manufacturers out of business.

Here are more details on how companies in various energy sectors will fare under President Obama’s second term:


Obama is expected to tighten rules and regulations governing energy exploration, actions that may add billions in costs for oil and gas companies.

ClearView Energy Partners analysts, in Washington, expect the president to “continue prosecuting energy policy through regulation and administrative action, with only the courts as a check on that agenda,” according to a note sent to clients last week.

Tougher restrictions are expected for companies drilling on federal lands as well as more rules governing water management and methane emissions. Any new rules related to hydraulic fracturing may drive up costs for active drillers including Chesapeake Energy Corp and Exxon Mobil Corp.

Still, throughout the campaign and during the debates, Obama has touted the benefits of increasing production of cleaner burning natural gas, winning him praise from America’s Natural Gas Alliance, an industry lobby group.

Obama has also pledged to eliminate more than $46 billion in subsidies for fossil fuel companies, a plan the industry has vigorously protested.

While the Obama Administration has put approval of TransCanada’s Keystone XL pipeline on hold, eventual approval is expected, an action that will increase the flow of cheaper crude oil from Canada to refineries on the Gulf Coast at Port Arthur, Texas.

Companies with refineries in Port Arthur or in nearby Beaumont include Valero Energy Corp, Shell, France’s Total and Exxon Mobil Corp.


Obama is deemed by opponents to have waged a “war on coal” over the past four years, particularly through stricter Environmental Protection Agency regulation.

Hal Quinn, president of the National Mining Association, criticized Obama for not living up to a 2008 promise to develop clean coal technology. “Current administration policies virtually preclude the construction of new, cleaner coal-based plants that are the necessary platform for the technology the president advocated,” Quinn said. “These same policies have skewed the market against coal.”

The U.S. Chamber of Commerce pointed to estimates of up to 33 gigawatts of coal-fired electricity generation due to be retired – about 3 percent of total U.S. power capacity. While tougher regulation has played a part, cheap natural gas as an alternative power source is also driving that change.


Obama is likely to implement several long-delayed, controversial emissions regulations for industrial boilers that are commonly used by chemical producers.

The centerpiece provision, known as Boiler MACT (Maximum Achievable Control Technology), had been first proposed in 2004 but was effectively shot down by courts before being revived by the Environmental Protection Agency in 2011.

It has been winding its way through courts again, and the EPA is due to issue new rules by December.

Obama’s victory could embolden EPA Administrator Lisa Jackson to further tighten Boiler MACT regulations next month on limits for dioxin, mercury and carbon monoxide emissions. It is not clear if Jackson will stay at the agency in Obama’s second term.

“While we don’t agree with some of the provisions (of Boiler MACT), we think that it will be pushed through more readily than if Romney had won,” said Lawrence Sloan, president of the Society of Chemical Manufacturers and Affiliates, an industry trade group.

(Reporting by Anna Driver, Ernest Scheyder, Braden Reddall and Nichola Groom; Writing by Nichola Groom; Editing by Patricia Kranz and Richard Chang)

Wall Street left to rebuild Obama ties after backing Romney

Wed Nov 7, 2012 1:54am EST

(Reuters) – Wall Street firms gambled on Mitt Romney and lost. Now, faced with the prospect of even tougher regulations in President Barack Obama’s second term, they have to build better ties with the new financial regulators he will appoint.

Obama lost the support of many bankers in the aftermath of the 2008 financial crisis and the passage of the 2010 Dodd-Frank financial reform law, which sought to shore up the financial system but also cost banks billions of dollars in annual profit.

The Democratic president has openly stated his distaste for “fat cat bankers” who “don’t get it”, and bankers fears more losses ahead if they cannot influence how the Dodd-Frank rules are implemented.

“He will continue to increase regulation, demonize and vilify businesses, and spend a lot of money, and tax people, and so forth,” said Dick Kovacevich, a former Wells Fargo CEO and supporter of Republican challenger Romney.

Wall Street firms are also worried about Elizabeth Warren, whose victory in the Massachusetts Senate race may galvanize her to push for more regulations on bank lending to protect consumers. Warren was instrumental in creating the Consumer Financial Protection Bureau, which critics say could weigh down the economy with new regulations.

“I think the Obama win, along with Elizabeth Warren, will lead to more accountability and tighter regulation on Wall Street,” said Chris Tobe, who advises pension plans as a principal at Stable Value Consultants and is a trustee of the Kentucky state pension fund. “Especially after a big shift to Romney from Wall Street, Obama I believe will be less likely to hold back on regulation this term.”

People working in the U.S. securities and investment industry gave $20 million to Romney’s campaign, versus $6 million to Obama, according to the Center for Responsive Politics. Four years ago, Obama received $16 million and Republican nominee John McCain only attracted $9 million.

“I voted for Obama in 2008 but obviously believed that Romney would be better able to handle the problems that we’re confronting,” said Scott Sperling, co-president of private equity firm Thomas H Lee Partners. “It is incumbent on us to work with the administration in a productive way to deal with these issues.”


Some banking industry lobbyists say their focus will be on the key regulators Obama is expected to name in his second term.

Among the financial industry’s top complaints are the Volcker rule, which prevents banks from making big bets in financial markets with their own money, and the Durbin amendment, which limits the fees they can charge merchants for processing debit-card transactions.

Banks also want to scale back capital requirements, which cut into the returns banks can earn on their equity capital.

As key details of Dodd-Frank have yet to be ironed out, the banks need good relations with regulators to influence their interpretation of the rules.

Chairmen often determine agendas at agencies such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), so Obama’s choices to fill any open spots could affect how quickly new rules are rolled out.

“If there was a different chair who had a different agenda, you could slow things down,” said Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission.


Major power players under Obama, including Treasury Secretary Tim Geithner, are expected to step down, offering Wall Street a chance to reset relations.

One possible replacement for Geithner, who has said he will not stay for a second Obama term, is White House Chief of Staff Jack Lew, a former Citigroup Inc banker.

“I hope Obama puts someone in who understands fiscal issues and who will have stature to work on the Hill to negotiate some type of package on fiscal reform,” said Sheila Bair, former Federal Deposit Insurance Corp chairman.

SEC Chairman Mary Schapiro’s term does not expire until June 2014, but speculation about her departure has been swirling for well over a year. Last month, she attempted to shoot down the rumors, saying she had not thought about her post-SEC plans.

SEC watchers speculate the job could go to SEC Commissioner Elisse Walter, a close friend of Schapiro’s and a former executive at the Financial Industry Regulatory Authority, an industry-funded watchdog.

CFTC Chairman Gary Gensler’s term technically expired in April. He is allowed to stay on as chairman until the end of 2013 and his renomination is an open question.

Gensler has been assailed by Republicans over his implementation of Dodd-Frank and criticized by lawmakers on both sides of the aisle following the collapse of futures brokerages MF Global and Peregrine Financial Group.

Some Democratic politicians have also criticized Gensler for not doing enough to crack down on oil market speculators, with a few going so far as to suggest he should not be renominated.


Much of Wall Street’s regulatory agenda, however, is set to take a back-seat in the short term due to the looming fiscal cliff — a package of tax increases and federal spending cuts that will begin in January unless lawmakers act.

Bankers are worried an impasse in solving the issue could spark an economic downturn that would hit the value of assets and make banks more reluctant to lend.

In the longer term, banking lobbyists and other opponents to Dodd-Frank will try to beat back some rules with technicalities.

Paul Atkins, a Republican and former SEC commissioner, said he expects Dodd-Frank reform critics may have some success making narrow legal challenges and seeking to throttle reforms through congressional oversight.

“Dodd-Frank assigned a lot of powers to the regulatory agencies, so there is not much that Congress can do,” he said.

“I expect that the Republican House would keep the pressure on through hearings, like they are doing now. People will also certainly take the fight to the courts.”

(Reporting By Emily Stephenson and Sarah N. Lynch in Washington, D.C., Rick Rothacker in Charlotte, Lauren LaCapra, Dan Wilchins, Olivia Oran and Katya Wachtel in New York, and Aaron Pressman and Ross Kerber in Boston; Writing by Greg Roumeliotis; Editing by Paritosh Bansal, Tiffany Wu and Richard Pullin)

Obama’s re-election and a path to a tax code revamp

Wed Nov 7, 2012 1:48am EST

WASHINGTON (Reuters) – Now that President Barack Obama has clinched a second term, will he embrace one of the most politically vexing tasks on his to-do list – streamlining the mind-numbing U.S. tax code?

Backers of a top-to-bottom overhaul hope so, with momentum building for such a feat, last accomplished under President Ronald Reagan in 1986. It will be Obama’s choice, those in both parties agree, to make a bold proposal and use his bully pulpit to push it through.

“You need presidential leadership,” said Michael Mundaca, who was Obama’s assistant treasury secretary for tax before returning to Ernst Young. “You need the power of the Treasury tax policy and White House economic team and the IRS (tax-collecting Internal Revenue Service) to do something this massive.”

Obama, who defeated Republican Mitt Romney for re-election, is among those in both parties who say the tax system is overly complex and stifles growth.

Raising new revenue will be a major challenge of Obama’s second term, with a deficit topping $1 trillion. Many say a tax code rewrite is a place to get it but the battle will be uphill, with interests from homeowners to union workers to insurance companies all fighting to keep their benefits.

Not to mention a Republican-controlled U.S. House of Representatives, home to the tax-writing Ways and Means Committee. Many Republicans dispute that new revenue is needed at all.

Besides the deficit push, congressional hearings by the dozens and circulation of reform blueprints have prompted some analysts to predict the odds are the best in decades for a major revamp in the next few years.

The president’s critics argue that he has failed to take the lead, for example, by not endorsing the Simpson-Bowles deficit panel’s recommendations, which included options for major changes.

Jared Bernstein, a former Obama economic adviser, points to Obama’s budget proposals of recent years. Obama backed trimming tax deductions to a maximum of 28 percent of income for the wealthy and sought changes to the tax treatment of debt as one way to pay for a cut in the corporate tax rate.

“He actually has a fairly extensive paper trail on tax reform,” Bernstein said before Tuesday’s elections.

The tax code was last significantly scrubbed clean in 1986, with a significant push by Reagan in his second term. Reagan directed his Treasury Department to prepare a proposal but cleverly pursued it only after he was safely re-elected.

Skeptics and some Republicans caution that Obama will face the same predicament that has dogged him for the last two years: Republicans kept control of the U.S. House of Representatives and the Senate remains closely divided but controlled by Democrats, according to late projections.

Regardless, a 1986-like revamp will be an uphill climb, analysts agree.

(Editing by Howard Goller, Bill Trott and Bernard Orr)

Americans hand Obama a second term, challenges await

Wed Nov 7, 2012 2:32am EST

WASHINGTON (Reuters) – President Barack Obama won a second term in the White House on Tuesday, overcoming deep doubts among voters about his handling of the U.S. economy to score a clear victory over Republican challenger Mitt Romney.

Americans chose to stick with a divided government in Washington, by keeping the Democratic incumbent in the White House and leaving the U.S. Congress as it is, with Democrats controlling the Senate and Republicans keeping the House of Representatives.

Obama told thousands of supporters in Chicago who cheered his every word that “we have picked ourselves up, we have fought our way back” and that for America, the best is yet to come.

He vowed to listen to both sides of the political divide in the weeks ahead and said he would return to the White House more determined than ever to confront America’s challenges.

“Whether I earned your vote or not, I have listened to you, I have learned from you. And you have made me a better president,” Obama said.

The nationwide popular vote remained extremely close with Obama taking about 50 percent to 49 percent for Romney after a campaign in which the candidates and their party allies spent a combined $2 billion.

Romney, the multimillionaire former private equity executive, came back from a series of campaign stumbles to make it close after besting the president in the first of three presidential debates.

The 65-year-old former Massachusetts governor conceded in a gracious speech delivered to disappointed supporters at the Boston convention center. He had called Obama to concede defeat after a brief controversy over whether the president had really won Ohio.

“This is a time of great challenge for our nation,” Romney told the crowd. “I pray that the president will be successful in guiding our nation.”

He warned against partisan bickering and urged politicians on both sides to “put the people before the politics.”

Obama told his crowd that he hoped to sit down with Romney in the weeks ahead and examine ways to meet the challenges ahead.

The president Obama scored impressive victories in the crucial state of Ohio and heavily contested swing states of Virginia, Nevada, Iowa and Colorado. They carried the Democrat past the 270 electoral votes needed for victory in America’s state-by-state system of choosing a president, and left Romney’s senior advisers shell-shocked at the loss.

Obama, America’s first black president, won by convincing voters to stick with him as he tries to reignite strong economic growth and recover from the worst recession since the Great Depression of the 1930s. An uneven recovery has been showing some signs of strength but the country’s 7.9 percent jobless rate remains stubbornly high.

Obama’s victory in the hotly contested swing state of Ohio – as projected by TV networks – was a major step in the fight for the 270 electoral votes needed to clinch the White House and ended Romney’s hopes of pulling off a string of swing-state upsets.

Obama scored narrow wins in Ohio, Wisconsin, Iowa, Pennsylvania and New Hampshire – all states that Romney had contested – while the only swing state captured by Romney was North Carolina, according to television network projections.

Romney initially delayed his concession as some Republicans questioned whether Obama had in fact won Ohio despite the decisions by election experts at all the major TV networks to declare it for the president.

The later addition of Colorado and Virginia to Obama’s tally – according to network projections – meant that even if the final result from Ohio were to be reversed, Romney still could not reach the needed number of electoral votes.

While Obama supporters in Chicago were ecstatic, Romney’s Boston event was grim as the news was announced on television screens there. A steady stream of people left the ballroom at the Boston convention center.


At least 120 million American voters had been expected to cast votes in the race between the Democratic incumbent and Romney after a campaign that was focused on how to repair the ailing U.S. economy.

The same problems that dogged Obama in his first term are still there to confront him again.

He faces a difficult task of tackling $1 trillion annual deficits, reducing a $16 trillion national debt, overhauling expensive social programs and dealing with a gridlocked U.S. Congress that kept the same partisan makeup.

Obama’s Democrats held their Senate majority – taking hotly contested Republican-held seats in Massachusetts and Indiana – while the Republicans kept House control.

Democrat Claire McCaskill retained her U.S. Senate seat from Missouri, beating Republican congressman Todd Akin, who stirred controversy with his comment in August that women’s bodies could ward off pregnancy in cases of “legitimate rape.

Democrats gained a Senate seat in Indiana that had been in Republican hands for decades after Republican candidate Richard Mourdock called pregnancy from rape something that God intended. Democratic congressman Joe Donnelly won the race.

In another high-profile Senate race, Democrat Elizabeth Warren, a law professor who headed the watchdog panel that oversaw the government’s financial sector bailout, defeated incumbent Massachusetts Republican Senator Scott Brown.

Former Maine Governor Angus King won a three-way contest for the Senate seat of retiring Republican Olympia Snowe. King ran as an independent, but he is expected to caucus with Democrats in what would amount to a Democratic pick-up.

Florida Democratic Senator Bill Nelson easily beat back a challenge from Republican congressman Connie Mack to win a third term, while Democratic congressman Chris Murphy beat Republican Linda McMahon, a businesswoman who had served as chief executive of a professional wrestling company.

Democrats were also cheered by several state referendums. Maryland voters approved same-sex marriage, the governor said, and a similar measure in Maine appeared on track to pass as well – marking the first time marriage rights have been extended to same-sex couples by popular vote.

In addition, Wisconsin Democratic congresswoman Tammy Baldwin became the first openly gay U.S. Senator, defeating Republican former governor Tommy Thompson.

(Additional reporting by Jeff Mason in Chicago, Patricia Zengerle in Boston, Edith Honan in New York, Brendan O’Brien in Milwaukee, Dave Warner in Philadelphia, Philip Barbara in New Jersey, Matt Spetalnick, Lisa Lambert, Susan Heavey, Thomas Ferraro, Susan Cornwell, Anna Yukhananov and Roberta Rampton in Washington; Writing by Steve Holland and John Whitesides; Editing by Claudia Parsons and Will Dunham)

Fed’s Williams: Policies have aided growth without undue fallout

IRVINE, California |
Mon Nov 5, 2012 11:06pm EST

IRVINE, California (Reuters) – The U.S. Federal Reserve’s unconventional monetary policies have lowered borrowing costs and boosted growth without creating unwanted inflation, a top Fed official said on Monday, predicting the Fed’s latest round of asset-buying will exceed $600 billion.

The Fed will want to see sustained jobs gains and a consistent drop in the unemployment rate before it stops buying assets, making it likely the purchases will continue until “well into next year,” John Williams, president of the San Francisco Federal Reserve Bank, told reporters after a lecture at the University of California, Irvine.

The U.S. central bank’s prior round of quantitative easing totaled $600 billion; its first one was about $1.7 trillion.

The Fed began its third round of quantitative easing, known as QE3, in September, beginning with $40 billion a month in mortgage-backed securities and promising to continue or expand the purchases if the labor market does not improve substantially.

Although asset-buying and other non-traditional monetary policies pose potential risks, “the available evidence suggests they have been effective in stimulating growth without creating an undesirable rise in inflation,” Williams said at the lecture. “We are not seeing signs of rising inflation on the horizon.”

The policies also have not stimulated excessive risk-taking, he said.

The Fed lowered short-term interest rates to zero in December 2008, and has bought more than $2 trillion in long-term securities to lower borrowing costs even more.

August 2011 it moved further into unconventional territory by saying it planned to keep rates ultra-low for about two more years, a form of policy easing known as forward guidance.

In September, the Fed launched a third round of asset purchases and promised to keep rates low until at least mid-2015.

The latest asset purchase program kicked off with an initial $40 billion a month in mortgage-backed securities, and the Fed said it will continue or expand the program until the jobs situation improves substantially.

Unemployment was 7.9 percent last month, considerably higher than the 5 percent to 6 percent that most economists see as the norm for the U.S. economy. Inflation has averaged below the Fed’s 2 percent target over the past year.

Williams told the largely student audience that the Fed’s first two rounds of asset-buying likely shaved 1.5 percentage points from the unemployment rate. They also probably kept the U.S. economy from falling into deflation, he said.

Forward guidance has also become a key monetary policy tool, he said. The Fed’s first stab at it, in August 2011 when it promised low rates until mid-2013, pushed down borrowing costs sharply, equivalent to cutting short-term interest rates by 3/4 to 1 percentage point, he said.

Such guidance only works if the public believes the central bank will do what it says, he added.

“If the public doesn’t understand the central bank’s intended policy path, then forward guidance may not work so well,” he said.

One way for the central bank to reinforce public expectations is to buy assets on a large scale, effectively “putting its money where its mouth is,” he said. Buying assets shows the Fed is “determined to ease monetary conditions,” he said – and helps push down rates further.

Quantifying the effects of the Fed’s policies is difficult, he added, but “the presence of uncertainty does not mean that we shouldn’t be using these tools.”

Williams has been a strong supporter of the U.S. central bank’s super-easy monetary policy and is a voter this year on the Fed’s policy-setting committee.

Once it comes time to exit its super-easy monetary policy, the Fed will target a “soft landing,” raising rates and then selling the assets it has accumulated in its bid to push borrowing costs lower, Williams said.

(Reporting by Ann Saphir; Editing by Leslie Adler and Lisa Shumaker)

U.S. judge tosses Apple vs. Google lawsuit over patents

Mon Nov 5, 2012 7:14pm EST

(Reuters) – An Apple lawsuit against Google’s Motorola Mobility unit over alleged patent abuse was thrown out on Monday just hours before trial, a setback for the iPhone maker in its efforts to gain leverage in the smartphone patent wars.

The two rivals were set to square off in a Madison, Wisconsin federal court over the library of patents Google Inc acquired along with Motorola for $12.5 billion in May. Apple Inc claimed Motorola’s licensing practices were unfair.

However, late last week District Judge Barbara Crabb questioned whether she had the legal authority to hear Apple’s claims, and on Monday she dismissed the case.

A Google spokeswoman said the company was pleased with the order, while an Apple representative declined to comment. In a legal brief filed after Crabb’s ruling, Apple contended that the judge does indeed have the authority to hear its claims.

Lea Shaver, an intellectual property professor at Indiana University School of Law, said a ruling against Google would have diminished Motorola’s patents as an effective bargaining chip in settlement negotiations.

“This puts Apple back into the position it was before,” Shaver said.

Apple and Microsoft Corp have been litigating in courts around the world against Google and partners like Samsung Electronics Co Ltd, which use the Android operating system on their mobile devices.

Apple contends that Android is basically a copy of its iOS smartphone software, and Microsoft holds patents that it contends cover a number of Android features. Microsoft is set for a trial against Motorola in Seattle next week in a case with similar issues as the Apple matter in Wisconsin.

Apple and Microsoft accuse Google of demanding too high a royalty for some of its so-called standard essential patents. Motorola promised to license those patents on fair terms, they argue, in exchange for Motorola technology being adopted as an industry standard.

In Wisconsin, Crabb had ruled during the run-up to trial that she might decide what a fair royalty for Motorola’s patents should be.

However, in a court filing last week, Apple argued that it would not consider itself bound by Crabb’s rate if it exceeded $1 per Apple phone.

Given Apple’s position, Crabb questioned whether she had the power to issue merely an advisory opinion. “It has become clear that Apple’s interest in a license is qualified,” Crabb wrote on Friday.

Microsoft, by contrast, has agreed to live with whatever terms U.S. District Judge James Robart sets at the Seattle trial.

In Wisconsin, the trial was scheduled to begin Monday afternoon in Madison, but Crabb dismissed the case during a morning hearing. If Apple cannot convince Crabb to reconsider, then the matter could be appealed.

In its statement, Google said Motorola has long offered licensing at reasonable rates. “We remain interested in reaching an agreement with Apple,” the company said.

The case in U.S. District Court, Western District of Wisconsin is Apple Inc. v. Motorola Mobility Inc., No. 11-cv-178.

(Reporting By Alexei Oreskovic in San Francisco; Additional reporting by Dan Levine in San Francisco; Editing by Leslie Adler and Tim Dobbyn)

Service sector growth slips in October, hiring picks up

Mon Nov 5, 2012 2:08pm EST

NEW YORK (Reuters) – The pace of growth in the U.S. services sector slowed modestly in October, though a measure of employment improved to its highest in seven months, underscoring expectations the economic recovery will remain modest.

The Institute for Supply Management said its services index eased to 54.2 last month from 55.1 in September, shy of economists’ forecasts for 54.5, according to a Reuters survey.

A reading above 50 indicates expansion in the sector.

The forward-looking new orders gauge fell to 54.8 from 57.7, but the measure of employment rose to its highest since March at 54.9 from 51.1.

The vast services sector has fared better than its manufacturing counterpart, which contracted during the summer. Still, this was the first time since June that the rate of growth in services firms has cooled.

While manufacturing has begun to grow again, the services sector is expected to remain stronger as it feels less of an impact from weaker exports.

Taken together, the two reports point to an economy that is growing at around a 2 percent pace, analysts said, maintaining the third quarter’s rate of growth and reinforcing the view that the United States is holding on to a modest recovery.

“Moderate growth in the U.S. economy continues,” said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.

New export orders contracted to 47.5 from 50.5 against the backdrop of slower global growth and the euro zone’s ongoing debt crisis.

Financial markets saw little reaction immediately following the data. Wall Street was little changed in late morning trading as investors were wary of taking aggressive bets the day ahead of the U.S. presidential election.

Services companies in other parts of the world also saw slower growth in October, separate reports showed on Monday. The pace of activity in China slipped, while Britain’s sector grew at its slowest in almost two years. (Reporting by Leah Schnurr Additional reporting by Ryan Vlastelica; Editing by James Dalgleish)

Marks & Spencer profits fall on mistakes, economy

Tue Nov 6, 2012 2:27am EST

LONDON (Reuters) – Bellwether British retailer Marks Spencer (MKS.L) posted a second consecutive year of falling first-half profit, reflecting mistakes in its clothing offer and the pressure facing UK consumers.

The 128-year-old group, Britain’s biggest clothing retailer which also sells homewares and upmarket food, said on Tuesday it made a profit before tax and one-off items of 297 million pounds ($474.4 million) in the 26 weeks to September 29.

That compares with analyst forecasts of 250-305 million pounds, with a consensus of 280 million pounds, according to a company poll, and a pro-forma 307 million pounds in the same period last year.

Sales from MS’ British stores open over a year were flat in the second quarter, with a 1.8 percent fall in general merchandise sales partially offset by a 1.6 percent rise in food.

The general merchandise performance represented an improvement on a 6.8 percent slump in first quarter like-for-like sales blamed on wet summer weather and stock management issues that left stores short of bestselling womenswear lines.

MS said recent trading had been “volatile”, making it cautious about the outlook for the rest of this year.

(Reporting by James Davey; editing by Neil Maidment)