Community banks to get bailout money as Obama seeks to boost small business

 

To spur lending to small businesses, it is 'essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on,' the president says.Reporting from Washington - President Obama, looking to boost lending to small business, will start using some of the leftover federal bailout funds to shore up smaller community banks and induce them to offer credit to firms he called the "backbone of the American economy."


Smaller financial institutions are in greater need of capital to grow and expand, whereas the country's large banks have moved past their need for what's left of the $700-billion Troubled Asset Relief Program, Obama said Thursday at a family-owned storage business in suburban Washington.

"The major banks that were in critical condition a year ago need no new assistance from the government," Obama said, "and so we are winding down that portion of the TARP program."

Less than $140 billion is left from the bailout that Congress approved a year ago. The Treasury will decide how much of that should go to smaller financial institutions by the end of the year after conferring with community bankers nationwide.

To spur lending to small businesses, Obama said, it is "essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on. These are the community banks who know their borrowers, who gave them their first loan, who have watched them grow from down the street, not from Wall Street."

The amount of money still on hand is enough to boost lending significantly to small business, one senior administration official said. That may help to allay Democratic lawmakers' concerns that the bailout money appeared to be skewed too much to big banks.

Some critics questioned whether the president was pursuing the most effective strategy to help small business. Officials of the National Federation of Independent Business said they appreciated the gesture but argued that lower taxes and less government regulation would be more helpful.

Conservative economists pointed out that the bailout was supposed to save banks so big the economy couldn't thrive without them. Already, bailout funds have been used to prop up struggling homeowners and the auto industry.

"Again, they're taking emergency money and using it as a slush fund," said David C. John, senior fellow at the Thomas A. Roe Institute for Economic Policy Studies.

In addition to the shift in bailout spending, Obama also is asking Congress to increase the maximum size of Small Business Administration loans, including those designed to encourage small businesses to invest in machinery, equipment, land and buildings and to expand payrolls.

Increasing the maximum loan size of so-called micro loans from $35,000 to $50,000 would help start-up companies in particular, administration officials said.

"America's 29 million small businesses have been hard hit in this recession," said SBA Administrator Karen Mills. "Increasing maximum loan sizes will allow the SBA to ensure that more small business owners and entrepreneurs can get access to the credit they need to expand their operations and create jobs."

As the stage for his announcement, Obama chose Metropolitan Archives, a small records storage business in Landover, Md., that recently expanded with an SBA loan.

Last February, almost five years after the business opened, co-owners Joe Incarnato and Doug Peters used the money to buy their storage warehouse. Incarnato said the partners would like to expand again, but they need another loan to make it happen.

That's the kind of enterprise the federal government should be trying to help, some lawmakers said Wednesday.

"These actions will help satisfy the capital needs of small businesses looking to start or expand their operations," said Sen. Olympia J. Snowe (R-Maine), whose proposals to raise the caps on SBA loans are part of the president's plan.

"They were good ideas when I introduced them nearly a year ago," she said. "They were good ideas when I reintroduced them in August, and I am pleased that others, including the president, are on board with these critical initiatives."

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Obama Says Small Businesses Must Be at Forefront of Recovery

By Catherine Dodge and Julianna Goldman

Oct. 24 (Bloomberg) -- President Barack Obama called small businesses the “engine” of the U.S. economy and said too many are still struggling to get the credit they need to operate.

In his weekly address on the radio and Internet, Obama said the nation’s banks, supported by taxpayers in the economic crisis, now need “to stand by the creditworthy small businesses.”

“It’s time for those banks to fulfill their responsibility to help ensure a wider recovery,” Obama said. “We’re going to take every appropriate step to encourage them to meet those responsibilities.”

The president this week announced measures to open up credit for small business, such as capital injections for community banks to spur lending. Obama also asked Congress to raise the limits for Small Business Administration loans from $2 million to $5 million and as much as $5.5 million for manufacturing.

“The goal here is to get credit where it’s needed most -- to businesses that support families, sustain communities, and create the jobs that power our economy,” Obama said.

The president has asked Treasury Secretary Timothy Geithner and SBA administrator Karen Mills, to convene a conference of regulators, congressional leaders, lenders, and entrepreneurs to come up with additional steps to improve the flow of credit to small businesses looking to expand.

Business and Insurance

In the radio address, Obama said his health-care overhaul plan would allow small businesses to buy insurance for employees through exchanges that may offer better coverage at lower costs.

The “crushing” costs of health-care are discouraging many entrepreneurs from even trying to start a business and causing others to cut benefits and jobs, or close their doors, Obama said.

“Small businesses have always been the engine of our economy -- creating 65 percent of all new jobs over the past decade and a half -- and they must be at the forefront of our recovery,” Obama said.

In the Republican address, Senator Mike Johanns focused on Obama’s number one domestic priority -- overhauling U.S. healthcare.

The Nebraska Republican said Obama’s plan would drive up costs and lead to higher premiums and more government mandates. Older Americans would see funding for hospice care and home health care services “cut off,” he said.

Impact on Paychecks

“We have a record budget deficit, and many families are working hard just to put food on the table and to pay the bills,” Johanns said. “Yet, there’s no doubt about it: these proposals will negatively impact pocketbooks and paychecks across America.”

The president’s aides worked behind the scenes this week with Senate leaders to merge legislation designed to curb costs while covering tens of millions of the uninsured. The changes could be the biggest since the creation of Medicare in 1965 and would affect one-sixth of the nation’s economy.

Johanns criticized Obama for not fulfilling a campaign promise to hold open and transparent health care negotiations televised on C-SPAN saying, “a 1,500 page bill, full of carve- outs and back room deals, is currently being brokered behind closed doors.”

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UK economy remains in recession

LONDON
The British economy shrank 0.4 percent in the third quarter of the year, according to official statistics released Friday, dashing hopes that the country had emerged from recession.

The fall in gross domestic product for the sixth consecutive quarter takes the total loss of output since the recession began last year to 5.9 percent, leaving Britain in the grip of the longest period of continuous decline since the Statistics Office began taking records in 1955.

Economists had expected the update from the Office for National Statistics to be a close call between growth and contraction -- but most had plumped for slight growth and few had forecast a fall of that size.

The persistent decline comes despite attempts by the government and Bank of England to boost the economy, including holding interest rates at a record low of 0.5 percent since March, an unprecedented 175 billion pound ($290 billion) injection into the money supply and billions more through fiscal measures.



The pound dropped more than 1 cent to $1.65 after the economic update as markets factored in the likelihood that the central bank will now increase the so-called quantitative easing program -- buying assets from banks to boost the amount of money in the economy -- when it meets next month.

"Sterling is taking a hit on surprisingly weak GDP figures which means that the UK is not following France and Germany out of recession," said Arifa Sheikh-Usmani, an equity trader at Spreadex LTD.

Both Bank of England governor Mervyn King and Treasury Chief Alistair Darling have said they expect some modest growth by the end of this year.

But some economists have warned of a so-called "double dip," or "W-shaped" recession as pressures intensify in 2010 as some stimulus measures, like a temporary cut in sales tax, come to an end. Unemployment is also rising.

Friday's figures showed the pressure on hard-hit consumers, with output from distribution, hotels and restaurants falling 1 percent over the quarter.

Overall service output, which represents almost three-quarters of the domestic economy, was expected to register growth after recent gains but instead disappointed with a 0.2 percent decline.

The construction sector also remained in the doldrums, falling 1.1 percent during the period. The industry has now contracted by 14.7 percent since the beginning of 2008.

Industrial production, meanwhile, shrank by 0.7 percent and is down by 13.7 percent since the recession began.

Friday's figures were compiled with around 40 percent of the required data and could be subject to changes in the next two months when more information has been gathered -- the office's first GDP estimate for the previous April to June quarter was a contraction of 0.8 percent, which was later revised to a 0.6 percent drop.

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Many Bailed Out Execs Flee Before Pay Cuts

The administration had tasked Kenneth Feinberg, the Treasury Department's special master on compensation, to evaluate the pay packages of 25 of the most highly compensated executives at each of seven firms receiving exceptionally large amounts of taxpayer assistance.

But Thursday, he ruled only on slightly more than three quarters of the pay packages that were to be under his purview. The balance reflected executives who have left since he began his work in June or will be gone by the end of the year.

Many executives were driven away by the uncertainty of working for companies closely overseen by Washington, opting instead for firms not under the microscope, including competitors that have already returned the bailout funds to the government, according to executives and supervisors at the companies.

"There's no question people have left because of uncertainty of our ability to pay," said an executive at one of the affected firms. "It's a highly competitive market out there."



At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.

Feinberg did not detail how he plans to tackle the politically sensitive issue of nearly $200 million in bonuses due in March to employees at AIG Financial Products, the unit whose complex derivatives contracts led to the collapse of AIG last fall. Feinberg has urged the company to find a way to scale back the bonuses in hopes of preventing another round of public outrage.


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Who cares if Wall Street 'talent' leaves?

NEW YORK (Fortune) -- There's no need to fear a Wall Street brain drain -- despite the crackdown on pay by Washington.

On Thursday, White House pay czar Kenneth Feinberg outlined compensation restrictions at seven firms that got special bailouts, and the Federal Reserve proposed to review pay practices at 28 unnamed giant banks.

Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG (AIG, Fortune 500),Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) could lose their best people.

These firms would then perform even more abysmally, if that's possible, leaving them hard pressed to repay tens of billions of dollars of taxpayer-backed loans.

Still, we say Godspeed to this "talent." After all, the traders and suits in the corner offices don't exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) posted a grand total of $51 billion in losses.

Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses -- including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general's office.



"Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance," the report said.

Meanwhile, it's hard to imagine that defection-hit firms would have a lot of trouble finding qualified replacements in the current job market.

Unemployment has doubled nationally since December 2007, when the recession started. Securities industry employment has fallen 10% nationwide and 14% in New York from a mid-2008 peak, according to Bureau of Labor Statistics data, costing some 90,000 jobs in the U.S. And Goldman Sachs' (GS, Fortune 500) charm offensive notwithstanding, it looks like the official response to runaway pay is just starting.

The Fed's plan to weigh big banks' compensation plans against their potential for undermining the economy could eventually put pressure on pay at all the big banks.

"This could be a game changer," said Simon Johnson, an economist at MIT. "There will be a lot of pressure on them in Congress to stick it to the big firms."

But maybe the best reason not to fret about talent flight is one familiar to cubicle dwellers everywhere: just because someone has a big, high-paying job doesn't mean they're good at it.

Take Bank of America, for instance. The bank's longtime CEO, Ken Lewis, unexpectedly announced his retirement this month, while agreeing to give back his 2009 salary.

Lewis didn't say why he was leaving, but it seems that criticism over his empire building, mishandling of the Merrill acquisition and outsize pay got to him. The Charlotte Observer reported he had grown tired of the "mud being thrown on him day by day."

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Jump in U.S. home sales fails to lift stock market

Ieva M. Augstums and Tim Paradis

New York — The Associated Press Published on Friday, Oct. 23, 2009 7:27AM EDT Last updated on Friday, Oct. 23, 2009 11:29AM EDT

Investors looked past a jump in home sales and strong profits at key technology companies as disappointing forecasts from major railroads stirred unease about the economy.

Stocks zigzagged early Friday as investors found little reason to buy into the market after a strong rally on Thursday.

A huge jump in sales of existing homes last month was seen as an aberration. The National Association of Realtors said that sales rose 9.4 per cent, nearly double the advance that had been expected. It was the highest level in more than two years as buyers raced to complete purchases before a tax credit expires at the end of November.

Profits at Amazon.com (AMZN-Q115.3721.9223.46%) and Microsoft (MSFT-Q28.381.796.73%) sailed past expectations and drew some buyers to tech stocks.

Cautious comments from the leaders of major railroad companies were a cause for worry. Union Pacific (UNP-N57.29-3.83-6.27%) chairman and CEO Jim Young said Thursday that he expects the economy to “limp along” until unemployment starts to fall. Burlington Northern (BNI-N79.27-5.35-6.32%) also issued a tepid forecast after the end of trading Thursday.



Union Pacific said its profit was off 26 per cent, while revenue fell 24 per cent. Burlington reported a 30-per-cent drop in third-quarter earnings, while revenue fell 27 per cent.

Railroads are often seen as a good early indicator of economic activity because of their role in shipping resources and goods to manufacturers and markets.

In midmorning trading, the Dow Jones industrial average (DJIA-I10,005.58-75.73-0.75%) fell 48.29, or 0.5 per cent, to 10,033.02. The broader Standard & Poor's 500 index (SPX-I1,083.59-9.32-0.85%) fell 5.84, or 0.5 per cent, to 1,087.07. The Nasdaq composite index (COMP-I2,164.62-0.67-0.03%) rose 6.43, or 0.3 per cent, to 2,171.72.

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U.S. Stocks Retreat as Oil Slumps; Microsoft, Amazon Rally

By Elizabeth Stanton

Oct. 23 (Bloomberg) -- U.S. stocks fell, wiping out a weekly gain for the Standard & Poor’s 500 Index, as a drop in oil weighed on energy producers and disappointing results at the nation’s largest railroad dragged down industrial shares.

Exxon Mobil Corp. and Schlumberger Ltd. led energy producers lower as crude slid for a second day. Industrial shares in the S&P 500 fell 1.3 percent as a group, led by railroad stocks, after Burlington Northern Santa Fe Corp. forecast profit that missed analyst estimates. Technology shares posted the smallest drop among 10 groups as Microsoft Corp. and Amazon.com Inc. jumped on better-than-estimated earnings.

The S&P 500 dropped 0.7 percent to 1,084.89 at 11:16 a.m. in New York. The Dow Jones Industrial Average lost 67.64 points, or 0.7 percent, to 10,013.67. The Nasdaq slipped 0.1 percent to 2,162.74 after earlier climbing as much as 1.2 percent.

“You have this skepticism in the equity market that is frankly irrational,” said Richard Campagna, chief executive officer of 300 North Capital LLC in Pasadena, California, which manages $600 million. “Given that the third quarter was the tail end of the recession and earnings are this good tells you earnings are going to snap back much faster than people expect.”



The S&P 500 is trading at its highest valuation relative to reported operating earnings in more than five years after climbing 62 percent since March 9 as the U.S. lent, spent or guaranteed $11.6 trillion to combat the worst recession since the 1930s. Worldwide, governments from Beijing to Berlin spent $12 trillion to help end the global contraction, according to data from the Washington-based International Monetary Fund.

The S&P 500 closed at a one-year high on Oct. 19, and earnings at companies from Caterpillar Inc. to Morgan Stanley topped estimates this week.

Earnings Analysis

Profits beat estimates at about 80 percent of the companies in the index that have released results, according to Bloomberg data. That would mark the highest proportion in data going back to 1993. Earnings fell for a ninth straight quarter in the July- to-September period, according to estimates compiled by Bloomberg, and are projected to return to growth in the final three months of the year.

Exxon, the largest oil producer, slumped 1.4 percent to $73.43. Schlumberger, the biggest oilfield-services company, sank 3.5 percent to $66.17.

Crude for December delivery fell $1.04, or 1.3 percent, to $80.15 a barrel in New York Mercantile Exchange trading. Futures are up 80 percent this year and touched a one-year high of $82 a barrel on Oct. 21.

Burlington Northern Santa lost 6.6 percent to $70.05. The largest U.S. railroad forecast fourth-quarter profit of $1.20 a share at most, trailing the average analyst estimate of $1.36 in a Bloomberg survey.

Microsoft climbed 7 percent to $28.44. The world’s largest software maker posted a smaller drop in profit than analysts estimated after slashing costs to make up for falling sales.

Amazon.com soared 23 percent to $114.66. Third-quarter net income increased 69 percent after discounts and the Kindle electronic book reader fueled sales.

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U.S. Stocks Advance as AT&T, McDonald’s Top Earnings Estimates

Oct. 22 (Bloomberg) -- U.S. stocks advanced as better-than- estimated earnings at AT&T Inc. and McDonald’s Corp. overshadowed a bigger-than-projected increase in jobless claims.

AT&T added 1.1 percent after new iPhone and television customers bolstered earnings. McDonald’s climbed 2.4 percent following a better-than-projected increase in global comparable sales. Gains were limited by a Labor Department report that initial applications for jobless benefits rose to 531,000 last week.

The S&P 500 increased 0.1 percent to 1,082.69 as of 9:37 a.m. in New York. The Dow Jones Industrial Average added 30.38 points, or 0.3 percent, to 9,979.74.

The S&P 500 is trading at its highest valuation in five years after climbing 60 percent from a 12-year low in March as the government lent, spent or guaranteed $11.6 trillion to combat the worst recession since the 1930s. The index is valued at more than 20 times the reported operating profits of its companies, twice its price-earnings ration on March 6.



Stocks in Europe and Asia retreated on speculation that China may consider withdrawing stimulus measures after economic growth accelerated.

AT&T, McDonald’s

AT&T added 1.1 percent to $26.23. Third-quarter profit excluding some items was 53 cents a share, beating the average analyst estimate by 3 cents.

McDonald’s rose 2.4 percent to $59.75. Earnings were $1.15 a share. The average analyst estimate in a Bloomberg survey was $1.11 a share.

EBay, the most visited U.S. e-commerce site, sank 4.9 percent to $23.80 after a shift to faster-growing yet lower- margin businesses hampered its profit forecast.

Amgen Inc., the world’s largest biotechnology company, dropped 3.9 percent to $57.06 on lower third-quarter sales.

Europe’s Dow Jones Stoxx 600 Index slid 1.2 percent, while the MSCI Asia-Pacific Index lost 1 percent.

China’s economy expanded at the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession. The acceleration in growth spurred concerns policy makers may consider withdrawing fiscal and monetary measures in coming quarters. Gross domestic product rose 8.9 percent in the third quarter from a year earlier.

U.S. stocks dropped in the final hour of trading yesterday after analyst Dick Bove downgraded Wells Fargo & Co., erasing a rally spurred by better-than-estimated results at Morgan Stanley and Yahoo! Inc.

The U.S. may lose its Aaa rating if the budget deficit isn’t cut within the next 3-4 years, Reuters reported, citing an interview with Steven Hess, head U.S. analyst for Moody’s Investors Service. Hess said the country’s Aaa rating “is not guaranteed,” the news service reported, in a dispatch carried in the Indian Economic Times.

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WORLD FOREX:Dollar Slips Back Again As Risk Appetite Returns

By Nicholas Hastings
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Appetite for risk is returning a little, pushing the dollar lower and higher-yielders, such as the Australian dollar and even the pound, higher in Europe Wednesday.

Optimism about the global economy was also reflected in equities, with most European bourses opening higher.

The rallies mark the end of the downturn that swept through financial markets Tuesday after the Bank of Canada disappointed investors with its decision to leave interest rates unchanged.

The BOC had widely been expected to follow the Reserve Bank of Australia with a rate hike - a move that would have reinforced the view that G10 economies had recovered enough for the unwinding of emergency credit-crunch policies.

Instead, the Canadian central bank warned of the risks that the recent strength of the Canadian dollar posed to the economy and lowered its growth forecast for the next year or two.

After that, a spate of third-quarter earnings results from the U.S. failed to live up to expectations, giving investors more reason to sell equities and preventing the euro from having enough momentum to break resistance at $1.50.



The gloom spread into Asian trading with the Nikkei ending virtually flat and the Shanghai Composite falling 0.5%.

The price of crude oil, which had previously rallied up over $80 a barrel briefly, fell back again to trade as low as $78.46 before rebounding to $78.65.

The euro, meanwhile, lost its upward momentum and failed to make a sustained break over $1.50.

However, as European trading got underway some of the gloom appeared to be lifting with analysts suggesting that the euro - and even the pound - should be bought on dips.

Whether or not risk appetite recovers to former levels remains to be seen.

Sue Trinh, senior currency strategist with RBC Capital Markets, said this could depend on whether the S&P500 can break and hold over the 1100-1200 range. It is now just under 1100.

The currency strategist team at UniCredit Markets and Investment Banking said that firm gross domestic product data out of China later Wednesday could keep risk appetite high.

By 0930 GMT, the dollar was up at Y90.93 from Y90.71, according to EBS, while the euro was up at $1.4945 from $1.4929 and at Y135.85 from Y135.40. The dollar was also down at CHF1.0115 from CHF1.0127.

The pound rose to $1.6569 from $1.6361. At one stage it hit a one-month high of $1.6544 after the Bank of England published bullish minutes from its last meeting that suggested there is little pressure for quantitative easing to be extended next month as many had expected.

See chart at

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Investors waiting for more clues about consumers

By STEPHEN BERNARD
AP Business Writer

NEW YORK -- After getting worrisome signs about consumers from bankers' earnings reports, investors will be looking at a broad range of companies this week for further insights into the outlook for the economy.

Consumer-focused companies including Apple Inc., McDonald's Corp., appliance maker Whirlpool Corp. and toy maker Hasbro Inc. are among those reporting results during the week. Airlines, drug companies and more big banks are also scheduled to release their earnings.

The market is so focused on companies' third-quarter results and their outlooks for the coming months that economic data like the September existing home sales report expected this week isn't likely to move the market much.

"Right now earnings are critical," said Channing Smith, a vice president at Capital Advisors in Tulsa, Okla. "Earnings, revenues give us a better picture of what's happening. If the economic data turns out well, its just the cherry on the sundae."



Investors got a surge of optimism from results in the early part of last week and bought stocks enthusiastically, betting that the reports still to be released by hundreds of companies would also point to a recovering economy. The buying Wednesday sent the Dow Jones industrials over 10,000 for the first time in a year.

On Thursday and Friday, though, the news from Citigroup Inc. and Bank of America Corp. gave investors a reality check, as both banks reported billions of dollars in loan losses because consumers are struggling to pay their bills. They also reiterated warnings that the losses will continue.

Meanwhile, General Electric Co. said Friday its financial services business was weighed down by credit card and commercial real estate losses. Commercial real estate defaults are the latest wave of loans to start defaulting en masse.

That spate of bad news brought the market's rally to a halt, and the Dow, down as much as 151 points on Friday, closed with a loss that day of 67.

Despite that end-of-week slide, the Dow still rose 1.3 percent for the week, while the broader Standard & Poor's 500 index gained 1.5 percent. The tech-dominated Nasdaq composite index rose 0.8 percent.

The fear in the market is that consumers will not only keep adding to banks' losses, but that their inability to spend beyond the necessities will curtail sales at other companies.

That is making investors particularly anxious to see how businesses in general are making their money. Traders are trying to determine if year-over-year or even quarter-over-quarter earnings increases "are due to cost cutting or really due to market expansion," said Walter Gerasimowicz, CEO of Meditron Asset Management in New York. And, if companies are seeing their sales pick up, is that improvement likely to continue in the fourth quarter and beyond.

Since the stock market tends to trade based on expectations six or nine months into the future, the concern on Wall Street remains whether investors who have sent stocks soaring since early March might have been ignoring or underestimating the many problems in the economy. If companies' own expectations match investors', that is likely to reassure investors and keep them buying. But any more doses of reality are likely to put the rally on hold for at least a while.

While investors aren't concentrating on economic data right now, they will be interested in what the Federal Reserve has to say about where the economy is now and where it's like to be in the near future.

Fed Chairman Ben Bernanke is scheduled to give two speeches during the week. Bernanke speaks Monday at the Federal Reserve Bank of San Francisco Asia Economic Policy Conference and Friday at a Fed conference in Boston on financial regulation and supervision after the credit crisis.

The Fed is scheduled to release its beige book report on Wednesday, which breaks down economic activity on a regional basis.

Among the other reports expected are the Commerce Department's September housing start data on Tuesday. The report is expected to show housing starts rose to annual rate of 610,000 in September from 598,000 the previous month, according to economists polled by Thomson Reuters.

Another housing report comes from the National Association of Realtors, which releases its existing home sales numbers from September on Friday. Economists forecast sales rose to an annualized rate of 5.3 million from 5.1 million in August.

A private research group releases data on leading indicators, which project economic activity for the next three to six months. The Conference Board's index is likely to show continued signs of growth.

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BEFORE THE BELL:US Stock Futures Point Lower Again

By Steve Goldstein

U.S. stock futures on Wednesday pointed to a second straight day of declines, ahead of a slate of earnings from Wells Fargo and Morgan Stanley and an assessment of the economy from the Federal Reserve.

S&P 500 futures fell 5.7 points to 1,083.70 and Nasdaq 100 futures dropped 8.5 points to 1,749.70. Futures on the Dow Jones Industrial Average fell 47 points.

U.S. stocks on Tuesday returned a portion of the prior day's advance, with the Dow Jones Industrial Average down 51 points, the S&P 500 off 7 points and the Nasdaq Composite down 13 points. Disappointing economic data offset mostly well-received earnings updates from the likes of Caterpillar and Apple.

"Markets are being pulled between generally better corporate results, and occasional disappointments on the macro economic data. This is not perhaps unexpected, if the economic profile resembles the Nike 'swoosh' more than the classic V," said Paul Donovan, senior economist at UBS.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the U.S. equity rally from the lows of March can continue. He sees nominal GDP rising and unit labor costs declining next year.



"If we're right, the spread between sales and cost growth next year should be nearly six percentage points, which is consistent with S&P earnings rising by around 25%," he said. That would put the S&P 500 on a forward earnings multiple of about 14.2%.

"On that basis, it is hard to argue that U.S. equities are overvalued."

Wednesday's focus will turn to the Beige Book, the Fed's release of economic anecdotes from across the country at 2 p.m. Eastern.

Two more speakers from the Fed will take to the podium, and weekly energy inventories data will be released as oil futures traded above $78 a barrel.

The dollar was up against most rivals save the British pound, as minutes from the last Bank of England meeting showed unanimity in keeping unchanged its money-printing quantitative easing program.

Wednesday's wave of results include Altria (MO), Wells Fargo (WFC), Morgan Stanley (MS), Boeing (BA), and after the close, eBay (EBAY).

Yahoo (YHOO) rose 4% in Frankfurt after it said its profit more than tripled as it clamped down on costs.

Deutsche Bank (DB) declined in Frankfurt after forecasting a third-quarter profit well ahead of estimates due to tax gains.

Overseas, the Hang Seng slipped 0.3% as China Mobile dropped after lower-than-forecast profit, and the pan-European Dow Jones Stoxx 600 weakened 0.8%.

-Steve Goldstein; 20 7842 9424; AskNewswires@dowjones.com







Among the companies whose shares are expected to actively trade in Wednesday's session are SanDisk Corp. (SNDK), Yahoo Inc. (YHOO) and SLM Corp. (SLM).



SanDisk swung to a third-quarter profit on surprisingly strong product sales and margins. Shares jumped 9.6% to $23.54 in after-hours trading as the flash-memory maker said "improving industry fundamentals" are likely to mean more growth in the fourth quarter and next year.



Yahoo's third-quarter earnings more than tripled despite a double-digit revenue decline, as the company reported smaller unusual charges. Shares rose 5.2% to $18.07 after hours.



SLM swung to a third-quarter profit as interest-rate spreads returned to more normal levels. Shares of SLM surged 7.8% to $9.59 in late trading.



Cree Inc.'s (CREE) fiscal first-quarter profit more than tripled on surging margins and revenue as the semiconductor and light-emitting-diode, or LED, lighting company easily topped estimates. The company also projected fiscal second-quarter results above analyst's expectations. Shares increased 3.7% to $42.67 after hours.



Gilead Sciences Inc.'s (GILD) third-quarter profit soared 36% on sales growth in all its product lines as results beat analysts' expectations. The company, which dominates the HIV treatment market, continued to post solid growth for those treatments despite the difficult economy. Shares slipped 2.2% to $45.10 in after-hours trading.



Seagate Technology Inc. (STX) posted its first profit in a year as its fiscal first-quarter earnings tripled on higher margins. The computer disk-drive maker also forecast fourth-quarter revenue generally higher than Wall Street expected. Shares fell 2.6% to $15.15 in after-hours trading.



Intuitive Surgical Inc. (ISRG) posted a 12% increase in third-quarter earnings, boosted by higher revenue and a gain from deferred revenue, offsetting lower margins. Shares fell 6.5% to $250.14 in late trading.



Tupperware Brands Corp.'s (TUP) third-quarter profit grew 18% on higher margins, though its revenue was hurt by foreign-currency exchange rates. Shares jumped 4.5% to $46 in after-hours trading as the personal-products maker's results topped its forecast and it raised guidance above analysts' estimates.



STMicroelectronics NV's (STM, STM.MI) third-quarter loss--its seventh in a row--narrowed despite a double-digit revenue decline on smaller one-time items. Shares rose 3.7% to $10.10 after hours as revenue came in just above the high end of the company's expectations, although the loss was bigger than Wall Street expected.



Stryker Corp.'s (SYK) third-quarter earnings fell 16% on restructuring charges, while revenue was flat. The company also shaved the top half of its full-year guidance. But shares gained 3.4% to $46.80 in after-hours trading.



NuVasive Inc. (NUVA) swung to a third-quarter profit as the medical-device company posted surging revenue and fewer charges. The company again boosted its 2009 guidance, but shares fell 3.9% to $42.11 in late trading.



Polycom Inc.'s (PLCM) third-quarter earnings fell 24% on lower sales and margins, but the maker of audio and data conferencing products pointed to sequential revenue growth and a sharp increase in orders from the second quarter. Shares fell 5.2% to $25 after hours.



South Financial Group Inc. (TSFG) estimated its third-quarter loss widened sharply as the company recorded big credit provisions and a tax-related write-down. Shares fell 17% to $1.19 in after-hours trading.



Watch List:



Amylin Pharmaceuticals Inc.'s (AMLN) third-quarter loss narrowed more than expected on cost-cutting, while revenue fell short of analysts' expectations.



C.H. Robinson Worldwide Inc.'s (CHRW) third-quarter profit climbed 2% as the trucking and logistics company again reported higher margins, offsetting sliding revenue.



Sonic Corp.'s (SONC) fiscal fourth-quarter profit dropped 17%, hurt by lagging sales at partner drive-ins, though results still topped Wall Street estimates.



Sun Microsystems Inc. (JAVA) said it plans to cut up to 3,000 jobs in the next year to align resources with its business plan as the closing of Oracle Corp.'s (ORCL) acquisition of Sun has been delayed.

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Wall Street ends lower on profit taking

NEW YORK (Reuters) - Stocks retreated from 12-month highs on Tuesday as disappointing housing and inflation data prompted investors to book recent gains despite strong results from bellwethers including Apple and Caterpillar.

New construction of U.S. homes rose less than expected in September and U.S. producer prices posted an unexpected decline, both pointing to an anemic economic recovery.

DuPont shares fell 2.2 percent to $33.87, making it a top drag in the S&P materials sector and the Dow industrials after the chemical maker posted higher-than-expected third-quarter profit, but revenue fell short of Wall Street estimates.

After the closing bell, Yahoo Inc, one of the largest sellers of online display advertising, said third- quarter profit more than tripled from a year ago, beating Wall Street's estimates and sending its stock up 4.1 percent to $17.88.



Flash memory maker SanDisk Corp also reported results after the bell that easily topped Wall Street's expectations. Its stock soared almost 10 percent in extended trading to $23.62.

During regular trading, shares of companies in the materials sector declined as commodity prices fell. The Reuters/Jefferies CRB commodity index was off for the first time in seven sessions and crude oil settled lower for the first day in nine.

Shares of home builders also fell, with the Dow Jones home construction index down 2.1 percent.

"The market is trying to absorb all the earnings news and see where the economy stands. The market has rallied recently pretty good, so it's giving back some of the gains," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois.

"Off the weaker housing data, people are forecasting a little bit weaker economy and that is hurting commodities, as the economy may not be as strong as previously expected."

Caterpillar Inc shares hit a 12-month high after the machinery maker's third-quarter earnings soared past expectations.

Caterpillar, up 3 percent at $59.61, was the Dow's best performer.

But the blue-chip Dow Jones industrial average dropped 50.71 points, or 0.50 percent, to end at 10,041.48. The Standard & Poor's 500 Index fell 6.85 points, or 0.62 percent, to 1,091.06. The Nasdaq Composite Index shed 12.85 points, or 0.59 percent, to close at 2,163.47.

Among other Dow components reporting on Tuesday, United Technologies Corp dipped 0.1 percent to $65.40 after its profit fell from the year-ago quarter. Pfizer Inc fell 0.3 percent to $17.93 despite beating profit expectations.

Coca-Cola Co fell 1.3 percent to $54.07 after reporting sales that also missed expectations.

Crude oil fell and hurt shares of energy companies. U.S. November crude oil futures expired at the close and settled at $79.09 a barrel, down 0.65 percent, or 52 cents

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Stocks slide, but Dow holds 10,000

Mixed profit reports, a stronger dollar and a weaker housing market report are among the factors dragging on Wall Street.
NEW YORK (CNNMoney.com) -- Stocks dipped Tuesday as a stronger dollar and some disappointment about DuPont and Coca-Cola's results gave investors a reason to retreat from the recent rally.

A weaker-than-expected housing market report added to the downward pressure.

The Dow Jones industrial average (INDU) lost 50 points, or 0.5%, according to early tallies, after ending the previous session at the highest finish since Oct. 3, 2008.

The S&P 500 (SPX) index lost 7 points, or 0.6%, after ending Monday's session at the highest point since Oct. 2, 2008. The Nasdaq composite (COMP) fell 13 points, or 0.6%, after ending the previous session at the highest point since Sept. 26, 2008.

After the close, Yahoo (YHOO, Fortune 500) reported higher quarterly earnings that beat forecasts on weaker revenue that also beat forecasts.

Also after the close, Sun Microsystems (SUN, Fortune 500) said it was cutting 3,000 jobs related to its purchase by Oracle (ORCL, Fortune 500).



Tuesday brought quarterly results from five Dow components: DuPont, Pfizer, Coca-Cola, Caterpillar and United Technologies. Apple and Texas Instruments were among the names who reported after the closing bell Monday.

Stocks gained Monday, with the Dow reclaiming 10,000 in response to a weak dollar, higher commodity prices and some earnings optimism. But the path higher over the last week has been choppy as investors have sifted through a mix of profit reports. That choppiness put pressure on stocks Tuesday.

"I'm impressed we've managed to stay above 10,000 as I would have expected a bigger pullback after the last few days," said Gary Webb, CEO at Webb Financial Group.

Webb said that after better-than-expected quarterly results last week from the likes of Goldman Sachs (GS, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Intel (INTC, Fortune 500) raised investors' expectations for the reports this week. As such, even companies that have reported strong results this week have seen a mixed stock reaction.

"When we see an economy that's going in the right direction at a stronger pace, we'll see a more positive reaction to the profit reports," he said.

Since bottoming at a 12-year low on March 9, the S&P 500 has risen more than 62%. But some worry that the Dow's move above 10,000 has been a ruse and that investors should beware.

"We've traded up on some optimism about the global recovery and there are technical reasons why the market could keep rallying," said Brian Battle, vice president at Performance Trust Capital Partners.

However, he said that a lot of the improvement in the economy and profits is being clouded by the enormous amounts of government stimulus. "Once you remove all the stimulus, the underlying economy is not as strong."

Wednesday brings reports on crude inventories, state-by-state unemployment rates and the release of the Fed's "beige book" report on the economy. Fed Governor Daniel Tarullo speaks about the economy in Washington D.C., starting around 1 p.m. ET.

Wells Fargo (WFC, Fortune 500) and eBay (EBAY, Fortune 500) are the biggest companies reporting quarterly results Wednesday.

Blue-chip results: DuPont (DD, Fortune 500) reported higher third-quarter earnings that topped estimates on weaker revenue that missed forecasts. The chemical maker used cost-cutting to temper the impact of weak sales and surging crude and energy costs.

Looking forward, DuPont narrowed its full-year earnings guidance to a per-share range of between $1.95 and $2.05. Shares fell 2.2%.

Coca-Cola (KO, Fortune 500) reported modestly higher third-quarter earnings that met estimates on weaker revenue that missed forecasts. The company was hit by weaker sales amid the impact of the recession.

Coke was also hurt by the comparatively strong dollar, at least versus a year ago. A stronger dollar hurts companies like Coke because the majority of its profit comes from sales overseas. Those sales then convert back to less U.S. dollars. Coke shares fell 1.3%.

Pfizer (PFE, Fortune 500) reported higher third-quarter earnings and weaker revenue, both of which surpassed analysts' estimates. Although the maker of Lipitor, Viagra and other drugs saw a decline in sales due to the recession, that was offset by aggressive cost-cutting. Shares fell 0.3%.

Caterpillar (CAT, Fortune 500) reported weaker quarterly earnings that topped estimates on weaker quarterly revenue that missed forecasts, due to lower sales. But the heavy-equipment maker also lifted its full-year earnings forecast to a range of $1.10 to $1.30 per share, versus its previous guidance of 95 cents per share. Caterpillar gained 3%.

United Technologies (UTX, Fortune 500) reported weaker quarterly earnings and revenue that missed estimates. Looking forward, the company said it expects earnings of $4.10 per share, in the middle of its previous guidance. UTX runs jet engine maker Pratt & Whitney, Otis elevators and other businesses. Shares were little changed.

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Europe Concerned as Dollar Decline Continues

A number of European countries have embarked on a slow recovery following the economic collapse late last year. But with the euro now at a 14-month high against the dollar, euro zone officials worry exports could suffer.

The signs of a recovering global economy are everywhere. Global stocks are up 75 percent from the deep lows seen in the darkest days of the financial crisis, many banks and other financial institutions are reporting a return to profits and a number of countries have emerged from recession.

But one development has some in Europe concerned that the path to recovery in Europe's single currency zone could be riddled with obstacles: The dollar continues to weaken against the euro. The result is that European exports -- one of the primary engines behind Europe's fragile recovery -- are becoming more expensive in the United States and in a number of Asian countries that have pegged their currency to the dollar.



On Tuesday, a euro was going for $1.4976, just off its 14-month high of $1.4994 seen on Monday. Many, though, expect the dollar to continue its fall against the euro with a return to the $1.60 rate seen in the summer of 2008 a possibility.

'Excessive Volatility'

Finance ministers from countries belonging to the 16-member euro zone addressed the issue at a Monday meeting in Luxembourg. "It is a problem that we are working on," Jean-Claude Juncker, Luxembourg's finance minister and chairman of the euro group, told reporters. "We spent quite a long time discussing exchange rates."

Jean-Claude Trichet, head of the European Central Bank, said that Europe has "a vested interest in a solid and stable currency system" adding that "excessive volatility and disorderly movements on exchange markets are bad for economic and financial stability."

The development is of particular concern in Germany, whose economy is heavily reliant on exports. The euro's strength against the pound likewise pushes up the price of German goods in the euro zone's largest trading partner, Britain. The German government expects the country's economy to grow by a modest 1.2 percent in 2010 after an expected drop of 5 percent in 2009. The country's economy left recession behind with 0.3 percent growth in the second quarter and a further 0.75 percent up-tick in the third.

'Unbearable'

The euro zone economy as a whole, however, remains moribund, with the International Monetary Fund projecting just 0.3 percent growth for the region in 2010. Henri Guaino, a special counsellor to French President Nicolas Sarkozy, said the US was "flooding the world" with dollars. He added that dollar weakness may become "unbearable," according to the financial newswire Bloomberg.

US officials have insisted that they are interested in strengthening the dollar. US Treasury Secretary Timothy Geithner said earlier this month that a strong US currency was "very important."

"We all note with considerable attention the statements made by American authorities as regards their support in favor of a strong dollar," Trichet said on Monday.

Lexembourg's Juncker told reporters the same day that he, Trichet and European Commissioner for Economic and Monetary Affairs Joaquin Almunia would travel to China later this year to discuss exchange rate policy. Beijing's currency, the yuan, has been virtually pegged to the dollar since the global economy plunged into crisis in 2008.

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Dutch government, Deutsche Bank in ABN AMRO deal

By Ben Berkowitz and Edward Taylor

AMSTERDAM/FRANKFURT (Reuters) - Deutsche Bank AG (DBKGn.DE) agreed in principle to buy some ABN AMRO assets from the Dutch state in a deal which should clear the way for a merger of nationalized banks ABN and Fortis Bank Nederland.

Under the deal, 15 months and two ABN owners in the making, the acquisitive German lender will boost its Dutch operations by acquiring commercial bank HBU, 13 advisory branches, two corporate client units and a factoring business.

The pact, which is not final and depends on negotiations and a host of regulatory approvals, is the same in terms of assets as the deal Deutsche, Germany's biggest bank, agreed with former ABN owner Fortis in July 2008.

The European Commission mandated the sale of those assets in late 2007 to preserve competition in the Dutch market after a consortium took over ABN AMRO that year.

The financial terms of the proposed deal were not disclosed. The Dutch government said on Tuesday it will seek an extension of the EU deadline to finalize agreement. The commission had no immediate comment, and ABN AMRO said it could not comment beyond the finance ministry's statement.

The merger of ABN and Fortis, followed by an eventual IPO, is core to the Dutch state's exit strategy for the banks, which it nationalized in October 2008 for 16.8 billion euros ($25.16 billion).



DEUTSCHE OPPORTUNISTIC

Deutsche Bank said it does not intend to raise capital for the purchase of the assets.

Deutsche Bank CEO Josef Ackermann has recently urged his board to look for targets but cautioned them to be selective.

"Don't buy distressed assets, buy from distressed investors," he said.

Deutsche already has its eye on money manager Sal. Oppenheim and has a foot in the door at retail bank Deutsche Postbank (DPBGn.DE), where it holds a stake of just under 30 percent and the option of increasing that to a majority by 2012.

The Dutch acquisitions by Deutsche will make it the fourth-largest provider of corporate and investment banking services in the country, the bank said.

Konrad Becker, a banking analyst with Merck Finck & Co. said Deutsche's targeting of Dutch assets appeared opportunistic rather than signaling a shift in strategy.

"The original deal was struck at an attractive price for Deutsche and gives them a foothold in a business area they know well, lending and advising to small to medium sized companies," he said. "Key questions remain on pricing but Deutsche is in a strong position as conditions favor the seller given the pressure from the EU Commission."

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Deutsche Bank says it will buy parts of ABN Amro

FRANKFURT — The biggest German bank, Deutsche Bank, said Tuesday it would buy parts of the state-owned Dutch lender ABN Amro's activities in the Netherlands for an undisclosed amount.

"The assets to be acquired remain the same as those in the original agreement announced on July 2, 2008. Negotiations continue on final terms and conditions" with the Dutch finance ministry, a statement said.

The deal, targeting parts of the Dutch bank's commercial banking activities, is subject to approval by ABN Amro, Deutsche Bank's supervisory board, the Dutch central bank and regulatory authorities, it added.

In September, Deutsche Bank had said it would abandon negotiations for the purchase of parts of ABN Amro.

In July 2008, the Belgian-Dutch banking and insurance group Fortis had announced the sale of a portion of ABN's commercial activities to Deutsche Bank for 709 million euros, a requirement under fair competition conditions set by the European Commission.



Fortis was itself nationalised in October 2008, a move which included its stake in ABN Amro.

Earlier on Tuesday, the German business daily Handelsblatt cited financial sources as saying that Deutsche Bank was interested in subsidiaries of the Italian bank Monte dei Paschi di Siena (MPS).

A Deutsche Bank spokesman contacted by AFP declined to comment on what he called "rumours."

Deutsche Bank is actively seeking to bolster its retail banking activities and reduce its dependence on a globally significant investment bank unit that is vulnerable to financial market volatility.

The German bank is also in talks on taking a stake in compatriot Sal Oppenheim, which specialises in banking services to the wealthy.

Those talks are expected to wrap up later this month or in early November.

Deutsche Bank has already acquired a minority holding in Germany's Postbank, which has the largest retail network in the country. It is expected to gain full control in the coming years.

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Stock Market Boosted by Better than Expected Corporate Earnings

Risky assets remained in favor during the past week, generally helped along by fairly robust economic data and better-than-expected corporate earnings reports. A number of bourses, crude oil, inflation-linked bonds and high-yielding corporate bonds and currencies recorded fresh highs for the year, whereas gold hit an all-time high of $1,070.20 per ounce.

Assets such as government bonds and the US dollar saw fading demand as safe havens, now that the global economy is on the mend. Similarly, credit default spreads tightened markedly and the CBOE Volatility Index (VIX) declined to its lowest level since early September 2008.
The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year, although it then declined again to fall shy of the roundophobia number by four basis points by the closing bell. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!

Meanwhile, according to the Financial Times, a survey of 44 leading economists by the National Association of Business Economics (NABE) showed the jobs that were lost during the Great Recession are not expected to return before 2012, while anemic wage growth of only 1% this year and 2.2% next year is forecast - the slowest two-year period on record. “But the way that investors are almost relying on unemployment to stay high [and central banks not to start exiting from the exceptionally low interest rates any time soon] demonstrates that the recovery, in markets and the economy, remains on shaky foundations,” warned FT’s investment editor, John Authers.
The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates an increase in risk appetite.
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.4%) and MSCI Emerging Markets Index (+2.1%) both made headway last week to take the year-to-date gains to +25.6% and an impressive +70.4% respectively. Interestingly, Chile is now only 1.5% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.

Notwithstanding a down-day on Friday, US indices closed higher for the week. The year-to-date gains remain firmly in positive territory and are as follows: Dow Jones Industrial Index +13.9%, S&P 500 Index +20.4%, Nasdaq Composite Index +36.8% and Russell 2000 Index +23.4%.

Click here or on the table below for a larger image.
Top performers among stock markets this week were Sudan (+22.6%), Kazakhstan (+8.9%), Cyprus (+7.6%), Egypt (+6.0%) and Hungary (+5.5%). At the bottom end of the performance rankings countries included Nigeria (‑4.2%), Thailand (-4.0%), Qatar (-3.2%), Bahrain (-2.8%) and Ireland (‑2.4%).

Of the 99 stock markets I keep on my radar screen, 76% recorded gains, 21% showed losses and 2% remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Gasoline (UGA) (+11.1%), United States Oil (USO) (+8.9%), PowerShares DB Energy (DBE) (+8.8%) and iShares S&P GSCI Commodity (GSG) (+7.4%).

On the losing side of the slate, ETFs included iShares MSCI Thailand (THD) (-6.0%), Market Vectors Solar Energy (KWT) (-2.8%), Claymore/MAC Global Solar Energy (TAN) (-2.6%) and ProShares Short MSCI Emerging Markets (EUM) (-2.5%).

Referring to the declining US dollar, the quote du jour this week comes from 85-year-old Richard Russell, author of the Dow Theory Letters. He said: “Now I’ll let you in on an awful secret. The US, despite all its BS talk, really wants a lower dollar. The fact is that the US is doing absolutely nothing to defend the dollar. Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.

“But let’s be rational - how in God’s name is the US going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina - unthinkable. But there is a way - they’ll try to minimize the importance of the debt with a cheaper, devalued dollar. That’s the time-honored US way, but loyal Americans don’t believe it. If they did, gold would be selling at $4,000 an ounce.”

Russell added: “It’s all so smarmy, but c’mon, what do you think the Fed has been doing since World War II? It’s been systematically inflating. They can’t fool me, I was around after the War, and I remember prices in 1945. Maybe the chief culprit was Alan Greenspan, but Bernanke is carrying on. There’s a lot of inflating coming up. ‘Strong dollar policy.’ Bite your tongue, and give me a break.”

Other news is that the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of US bank failures in 2009 to 99 (124 since the beginning of the recession). Meanwhile, CreditSights, which tracks the dismal data, predicts (via MarketWatch) that we could be no more than 10% of the way through this cycle of bank collapses, which is sure to be the worst run of closures since the Great Depression.

Next, a quick textual analysis of my week’s reading. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months. “Recovery” is also gaining in prominence.
The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading marginally below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The US indices are creeping closer to the so-called 50% retracement levels (i.e. regaining half the loss suffered between the October 2007 highs and March 2009 lows). The levels are: 10,346 for the Dow Jones Industrial Index and 1,121 for the S&P 500 Index.

The September highs and October lows are also given in the table as these levels could define a support area for a number of the indices.

Click here or on the table below for a larger image.
“We regularly note that the earnings reporting season often marks the end of the market trend into earnings announcements. The reversal tends to occur during the second week [last week] of reporting. Given this is expiration week, which often creates a short-term peak on the usual manipulation, the odds favor a short-term stock market peak late this week or next week. Of course any unexpected ugly news, like negative revenue, earnings or guidance from several key companies could commence a stock downdraft,” said Bill King (The King Report).

Talking of earnings, the third-quarter earnings season has progressed on an upbeat note since Alcoa’s results announcement on October 7 marked the onset of the reporting cycle. It is still early days in this period, but 85% of US companies have so far beaten earnings estimates. According to Bespoke, the current beat rate is well above any other quarter since at least 1998. ”Even with analysts raising estimates significantly leading up to the earnings season, companies have still managed to come in better than expected so far,” they said.
Additionally, Bespoke also highlighted that while the earnings per share numbers grab the headlines, it is what companies say about future quarters that impacts equity prices most on their reporting days. As shown in the graph below, 20.3% of US companies have raised guidance so far this earnings season. Bespoke’s report said: “The highest reading for this number has barely broken 15% in any prior quarter this decade. And if we compare the percentage of companies raising guidance versus the percentage of companies lowering guidance, no other quarters come even close to this one. It will be hard to keep this up as the earnings season progresses, but it’s also shaping up to be a record-breaking quarter on the positive sid
Importantly, one needs to assess what is priced in by the stock market. Useful research comes from David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, who said: “We re-ran our regressions with the latest tightening in spreads and breakout in equity valuation and found that US investment grade credit is now priced for 2.5% GDP growth in the coming year (was 2.0% two months ago) and the S&P 500 is now de facto pricing in 4.8%, which, by the way, is now basis points shy of what it was discounting in the summer/fall of 2007. And, backing out the fair-value P/E from the corporate bond market, and yields have been backing up sizably in recent weeks, we can see that the S&P 500 is now pricing in $85 of operating earnings, which we think will be, at best, a 2013 story. In other words, the rally continues to move further away from the fundamentals.”

However, Rosenberg’s bearish prognostications are not universally accepted. In a rebuttal (via Clusterstock), Eddy Elfenbein created the chart below of profits as a share of GDP. “They’re clearly compressed, and if they revert to a historical standard, it means earnings have some spring in them,” said the report.
Jeremy Grantham, who has just announced his retirement as chairman of GMO, put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip com­panies, where valuations are most attractive.”

As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.

Economy
“After improving steadily this past summer, global business sentiment has remained largely unchanged so far this fall, consistent with a global economy that is experiencing a tentative economic recovery. The recession is over but the nascent recovery is not quickly gaining traction,” according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. “Businesses remain more upbeat about the outlook into next year and broader economic conditions, and dourer when considering the strength of their sales and intentions to hire. South Americans are the most positive and North Americans generally the most negativ
As far as hard data are concerned, China’s economy gained new impetus, according to US Global Investors. “Passenger car sales in September rose 84% year on year to 1.02 million units. Housing starts jumped 56% in September from a year earlier, the fastest pace of growth in at least five years.

“China’s exports declined 15.2% year on year in September, the smallest contraction in nine months, while imports dropped only 3.5% year on year as the domestic economy continued to recover. Exports rose 7.7% on a month-on-month basis, adjusted for seasonality.” The stronger export performance follows a similar trend in South Korea, Taiwan and Vietnam.

“Singapore, which led Asia into recession, on Monday pointed the way to further regional recovery with strong third-quarter economic growth … The Monetary Authority of Singapore (MAS) said GDP expanded 14.9% on a seasonally adjusted quarter-on-quarter annualized basis in the June to September period, after a comparable revised increase of 22% the previous quarter,” reported the Financial Times.

Further good news on the global economic front came from Eurozone industrial production that expanded for the fourth month in a row in August. Output rose by 0.9% from July, when it increased by a revised 0.2%.

A snapshot of the week’s US economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Friday, October 16
• Widespread strength in factory report

Thursday, October 15
• Inflation remains a non-issue, for now
• The quandary between initial claims and total continuing claims

Wednesday, October 14
• Minutes of September 22-23 FOMC meeting - more of the same
• Q3 consumer spending expected jump likely, but muted growth in Q4
• Import prices are turning around
• Restocking - one of the conduits of economic growth in the months ahead

Further evidence that the recession that began in December 2007 has ended, came from the Philly Fed report that was positive for the third straight month. According to Bespoke, “the last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession”.
Dissecting the retail sales data shows that trends improved all over, with the exception of auto-related sales due to “Cash for Clunkers”. The chart below, courtesy of Clusterstock takes September’s year-on-year sales change (Sep 09 versus Sep 08) and subtracts August’s year-on-year sales change (Aug 09 versus Aug 08). It thus shows the change in the retail sales trend. “Yes, this matters: American retail trends have to become less negative before they go positive,” said the report.
The minutes of the Federal Open Market Committee’s (FOMC) September meeting indicated that most participants thought the recession was over. Although they expected the recovery to be weak initially, most members also upgraded their expectation for near-term growth.

Participants generally expected inflation to remain low in the near term. “The Fed is in the most favorable spot in the near term with regard to inflation because the excess capacity in the economy allows the Fed to maintain a focus on economic growth and leave inflation on the back burner, for now,” said Asha Bangalore (Northern Trust).

Cautioning against bullish expectations, David Rosenberg said (via MoneyNews) that the economy was being held together by very strong tape and glue provided by the Fed, Treasury, and Congress, and that the recovery would be weak.

He predicted the economy would stagnate this quarter and then grow no more than 2% in 2010. The economy won’t take on the “V” shape of previous rebounds, Rosenberg said. “It’s going to look like this whole string of lowercase Ws for the next five years.”
Click here for the full article.

Source: Financial Times, October 12, 2009.

Asha Bangalore (Northern Trust): Minutes of September FOMC meeting - more of the same
“The minutes of the September 22-23 FOMC meeting contain the typical pros and cons of Fed policy, with nothing standing out. The willingness of some members to enlarge the size of the mortgage-backed securities purchase plan could be raised to ‘reduce economic slack more quickly than in the baseline outlook’. At the same time, another member held the opinion that improvements underway implied a reduction of these purchases. The importance of ‘flexibility’ to expand purchases of assets in the event of a deterioration of economic conditions was noted.

“The FOMC’s views about inflation are noteworthy. The majority of the FOMC views the inflation outlook during the next few quarters as roughly balanced. There were those belonging to the significant disinflation camp, but they had lowered the probability of this occurrence in the intermeeting period. In the longer term, a few were reported to see ‘risks tilted to the upside’. Inflation expectations have been stable and allow the Fed to watch and wait and focus on economic growth.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 14, 2009.

CNN Money: Foreclosures - worst three months of all time
“Despite concerted government-led and lender-supported efforts to prevent foreclosures, the number of filings hit a record high in the third quarter, according to a report issued Thursday.

“‘They were the worst three months of all time,’ said Rick Sharga, spokesman for RealtyTrac, an online marketer of foreclosed homes.

“During that time, 937,840 homes received a foreclosure letter - whether a default notice, auction notice or bank repossession, the RealtyTrac report said. That means one in every 136 US homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008.

“Nevada continued to be the worst-hit state with one filing for every 23 households. But even tranquil Vermont, where the foreclosure crisis has barely brushed the housing market, saw foreclosure filings jump nearly 170% compared with the third quarter of 2008. Still, that resulted in just one filing for every 5,023 households in the state - the best record in the country.

“The RealtyTrac report also unveiled the results for September, and it found that there was slight relief from foreclosure filings. Last month, notices totaled 343,638, down 4% compared with August. Unfortunately, that total accounts for 87,821 homes that were repossessed by lenders.

“That deluge contributed significantly to the quarter’s record 237,052 repossessions, a 21% jump from the previous three months. So far this year lenders have taken back 623,852 homes.’

“The foreclosure crisis may not diminish anytime soon. ‘The fastest growing area is in the 180 days late-plus category, the most seriously delinquent borrowers,’ Sharga said. ‘It’s going to be a lingering problem.’”

Source: Les Christie, CNN Money, October 15, 2009.

Financial Times: Slow US recovery blamed on low demand
“Weak demand from battered consumers will be a ‘major constraint’ on the US economy for the foreseeable future, a key White House adviser said on Monday, as the administration mulls over further ways to spur demand and create jobs.

“Lawrence Summers, the director of the National Economic Council, has been banging the drum for the $787 billion stimulus package in the face of Republican criticism that it is not creating the jobs it promised.

“With political pressure building as unemployment nears 10%, the administration is looking for additional ways to mitigate the problem, though it insists there will be no ’second stimulus’.

“‘It is not for me … to preview policies that President Obama will announce in coming weeks,’ said Mr Summers in a speech to an economics conference on Monday. But he said that while the economy had improved substantially, people had to recognise that demand was hobbled and US consumers and exports should be supported.

“‘We need to recognise that lack of demand will be a major constraint on output and employment in the American economy for the foreseeable future,’ he said at the National Association for Business Economics conference. ‘Direct public investment has a crucial role at a time like this.’

“His speech was made as a survey of 44 leading economists by the NABE showed many were worried about the effects of unemployment and the budget deficit on the US economy.

“Four in every five said that the worst recession since the 1930s was over. But while they expected the stock market and corporate profits to rise next year, they saw unemployment hitting double digits and did not expect all the jobs that have been lost to return until 2012.

“Wage growth will be only 1% this year and 2.2% next year: the slowest two-year period on record. That leaves the outlook for consumer spending, which typically accounts for two-thirds of gross domestic product, fairly bleak. Next year it will grow at an anaemic 1.6%, the economists predict, while car sales will not bounce much from this year’s 40-year low.

“‘From a technical standpoint [the recession] is probably over, but that doesn’t mean in any way shape or form that it’s over from the point of view of an awful lot of people,’ said Dr Tony Cherin, finance professor at San Diego State University.

“But they upgraded their expectations for real gross domestic product growth, forecasting it to rise at a pace of 2.9% in the second half of this year and 3% next year. They think the housing market will recover enough in 2010 to contribute to overall growth for the first time in five years.

“Business investment will also pick up next year, they reckon, while corporate profits will rise 11% and the S&P 500 will add 7.5%.”

Source: Sarah O’Connor, Financial Times, October 13, 2009.

MoneyNews: Soros - bankrupt banks hamper recovery
“Economic recovery in the United States will be sluggish thanks to ‘bankrupt’ financial institutions and debt-laden consumers, says billionaire investor George Soros.

“US financial institutions in the Americas have written down or lost $1.1 trillion in the last two years, while savings rates have risen to the highest levels in 24 years as wary consumers tighten their purse strings, according to Bloomberg.

“‘The United States has a long way to go,’ Soros said at an International Monetary Fund and World Bank meeting in Istanbul, Turkey.

“Soros urged leaders to stick with plans to beef up regulation, which could become difficult once recovery moves ahead.

“‘It will be very difficult to accomplish,’ Soros says.”

“‘The crash of 2008 now seems like a bad dream and people like to treat it like a bad dream and forget about it and get back to business as usual.’

“Economic indicators suggest recovery is taking place and the recession is thawing or even ending.

“‘I see the risk of a stock market correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped,’ says Nouriel Roubini, a New York University economic professor who is said to have accurately predicted the extent of the current financial crisis.

“‘That might be in the fourth quarter or the first quarter of next year,’ says Roubini, according to Marketwatch.”

Source: Forrest Jones, MoneyNews, October 12, 2009.

Bespoke: Long-term downtrend in confidence continues
“It’s increasingly becoming a glass half empty mood in the US. This month’s index of Consumer Confidence by IBD/TIPP showed that sentiment declined 7.2% from 52.5 to 48.7. For this index, readings above 50 indicate net optimism and readings below indicate pessimism. While the index is still near its recent highs, from a longer-term perspective, the five-year downtrend is somewhat concerning. As shown in the chart below, the index peaked above 60 in 2004, then made a lower high back in late 2006, and now is showing signs of another lower high in 2009. Is it a faulty index, or to borrow a line from former President Carter, are American consumers stuck in a crisis of confidence?”
Clusterstock: The government debt explosion
“The growth of government debt has ‘decoupled’ from the rest of the economy.

“While households, businesses and the financial sector reduce leverage, public sector debt growth has simply exploded. As you can see from the chart, every non-governmental sector of the economy is now in debt reduction mode while governmental debt is growing a breakneck speeds.”
Asha Bangalore (Northern Trust): Q3 consumer spending expected jump likely, but muted growth in Q4
“Retail sales in September fell 1.5% after a 2.2% gain in August. These headline numbers reflect the swings in auto sales brought about by the lift from the temporary ‘Cash for Clunkers’ program. Excluding autos, retail sales increased 0.5% in September following a 1.0% increase in August.

“Furthermore, the sharp increase in gasoline prices in August translated into corresponding gains of gasoline purchases in the retail sales report. Excluding autos and gasoline, retail sales increased 0.4% in September after a 0.6% advance in August.

“The main message is that retail sales in September have been impressive with purchases of furniture (+0.9%), apparel (+0.5%) and general merchandise (+0.5%) posting significant increases which will add up to a strong increase in consumer spending in the third quarter (+3.0%) compared with a 0.9% drop in the second quarter. The absence of the ‘Cash for Clunkers’ program implies that consumer spending will be positive but show only muted growth in the fourth quarter.
Clusterstock: The retail sales second derivative is on fire
“Dissecting today’s [Wednesday] advance retail sales data shows that trends improved for everything, except auto-related sales due to cash for clunkers. This is strong.

“The data beat expectations, with overall retail sales down 1.5% vs. an expected negative 2.1%. While 1.5% is the largest drop since December of last year, it was due to the end of cash for clunkers.

“The chart below takes September’s year over year (YoY) sales change (Sep 09 vs. Sep 08) and subtracts August’s year over year sales change (Aug 09 vs. Aug 08). It thus shows the change in change. Yes, this matters: American retail trends have to become less negative before they go positive.

“And that’s exactly what is happening. While sales continued to fall for many categories, the rate of decline slowed down substantially, improving by the amount in green shown below for each.”
Asha Bangalore (Northern Trust): The quandary between initial claims and total continuing claims
“Initial jobless claims fell 10,000 to 514,000 during the week ended October 10. This reading is the lowest since March 2009 when initial jobless claims peaked at 674,000. This is good news, firms are not hiring but the pace of firing has slowed. Continuing claims, which lag initial claims by one week, declined 75,000 to 5.992 million and the insured unemployment rate moved down one notch to 4.5%. Continuing claims have held above the 6-million mark for six straight month
However, total claims including continuing claims and claims under the Extended Benefits Program and Emergency Unemployment Compensation Program have advanced to nearly 10 million. The good news here is that total continuing claims appear to have peaked; they have held between 9.86 million and 9.89 million for the four weeks ended September 26, with the latest weekly reading at the lower end of this range. We will be tracking these numbers closely for signs of improvement in the labor market.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 15, 2009.

Asha Bangalore (Northern Trust): Widespread strength in factory report
“Industrial production increased 0.7% in September, following an upwardly revised 1.2% gain in the prior month. The industrial production index hit the cycle low in June and has since risen every month.
“In the third quarter, industrial production rose at an annual rate of 5.2%, the first increase since the first quarter of 2008. Production at the nation’s mines (0.7%) advanced while that of utilities (-0.7%) fell in September.

“Factory activity, which excludes mining and utilities and makes up roughly 85% of industrial production, moved up 0.9% after revised gains of 1.2% in each of the prior two months. In the third quarter, factory production advanced at an annual rate of 8.9%, the largest gain since the fourth quarter of 1987!

“The operating rate of the factory sector has increased to 67.5% in September from a record low of 65.1% in June 2009. The overall tone of the industrial production report is positive and confirms that an economic recovery is underway.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 16, 2009.

Bespoke: Philly Fed positive three months in a row
“If you needed more evidence that the recession that began in December 2007 has ended, this morning’s [Thursday] Philly Fed report should provide it. While the actual number came in below forecasts (11.5 vs 12.0), it was still positive for the third straight month. The last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession.”
Asha Bangalore (Northern Trust): Restocking - one of the conduits of economic growth in the months ahead
“Business inventories dropped 1.5% in August, marking the twelfth consecutive monthly drop. In the meanwhile, business sales have risen for three straight months, inclusive of a 1.0% increase in August.

“As a result of the drop in inventories and gain in sales, the inventories-sales ratio plummeted to 1.33 in August from 1.36 in July and it is a sharp reduction from the cycle high of 1.46 in January 2009. Starting from the end of the third quarter of 2008 businesses have been liquidating stocks in response to the weakness in demand conditions. As the economy recovers, inventories will add to real GDP growth, some of which is already apparent, particularly in the auto sector.”
Asha Bangalore (Northern Trust): Inflation expectations non-threatening
“The Fed is in the most favorable spot in the near term with regard to inflation because the excess capacity in the economy allows the Fed to maintain a focus on economic growth and leave inflation on the back burner, for now. Moreover, inflation expectations are also non-threatening at the present time. Inflation will emerge as a major concern after there is self-sustaining economic growth.”
Asha Bangalore (Northern Trust): Inflation remains a non-issue, for now
“The Consumer Price Index (CPI) increased 0.2% in September after a 0.4% increase in the prior month. In the third quarter, the CPI has increased 3.6% after a 1.3% gain in the second quarter. On a year-to-year basis, the CPI fell 1.3% in September. The food price index dropped 0.1% during September vs. a 0.1% increase in August. The energy price index moved up 0.6% in September compared with a 4.6% jump in the previous month.
“The core CPI, which excludes food and energy, increased 0.2% in September after two consecutive monthly gains of 0.1%. The core CPI has risen 1.5% from a year ago in September, following a cycle low gain of 1.44% in August.”

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 15, 2009.

MarketWatch: Banks cutting back on loans to businesses
“US banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts.

“According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

“Last autumn, bank lending temporarily expanded when other sources of funding from the shadow banking system dried up after the collapse of Lehman Bros. Since then, however, total outstanding bank loans have dropped at an accelerating pace.

“The decline in bank lending mostly affects smaller businesses. Larger corporations have alternative sources of funding, including retained earnings, corporate bonds, securitized loans and new equity. Those other sources of capital have increased in recent months, but not enough to offset the decline in bank lending.

“In the first and second quarters, the US private sector consumed more capital than it raised for the first time in more than 60 years. Negative net investment is ‘the hallmark of depression and difficult to reverse’, said economist Leigh Skene of Lombard Street Research.

“The big drop in credit also shows up as slower money growth. In the past 13 weeks, the money supply has fallen 0.3%. Most new money is created by borrowing, as banks credit the borrower’s account with the proceeds of a loan. Conversely, the money supply is reduced when debts are paid off or written off. Deflation is not a threat - it’s already here.

“The question is whether the decline in lending will be reversed soon.

“If the drop-off in lending is mainly due to weak demand by businesses, then there’s some hope that the recent upward momentum in industrial output and sales could lead to more optimistic business sentiment, greater demand for capital, and more lending by banks.

“But if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks’ balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans.”

Source: Rex Nutting, MarketWatch, October 9, 2009.

Financial Times: US bank results highlight recovery gap
“Bumper third quarter profits at Goldman Sachs and another loss for Citigroup on Thursday highlighted the gap between the financial resilience of Wall Street and the woes of Main Street, fresh evidence that two Americas are emerging from the crisis.

“The diverging performance of investment banks such as Goldman and the retail banking operations of the banks such as Citi is problematic for an Obama administration that wants a strong Wall Street but is also under pressure to tackle the plight of ordinary people.

“‘When you have unemployment creeping towards 10% and a sluggish economy, stories of huge profits and huge bonuses … could create difficulties if [the president] needs any more stimulus,’ said Norman Ornstein, a political analyst at the American Enterprise Institute.

“Goldman announced near-record earnings of $3.2 billion, boosted by surging profits in bond and currency trading - two activities that have become more profitable after the crisis reduced competition in financial markets and governments injected emergency funds into the banking system.

“Goldman’s profit, which was nearly four times higher than in the third quarter of 2008, underscores its status as one of the winners from a crisis that eliminated two rivals - Lehman Brothers and Bear Stearns - and hobbled others such as Citi, Merrill Lynch and UBS.

“Citi, by contrast, suffered its seventh loss in eight quarters as US consumers continued to fall behind on credit card bills and mortgage payments.

“‘US consumer credit remains the number one issue affecting our near-term results,’ said Vikram Pandit, Citi’s chief executive, after announcing the bank had suffered credit losses of $8 billion in the three months to September, largely in its consumer business.

“Citi, which has been bailed out with $45 billion of US taxpayers’ money, has suffered a total of more than $42 billion in credit losses since the beginning of 2008.

“The contrasting fortunes of Goldman and Citi suggest that Wall Street, which played a major part in the crisis and was one of its first victims, is recovering much faster than the rest of the US economy.”

Source: Francesco Guerrera, Greg Farrell and Anna Fifield, Financial Times, October 15, 2009.

The Wall Street Journal: Wall Street on track to award record pay
“Major US banks and securities firms are on pace to pay their employees about $140 billion this year - a record high that shows compensation is rebounding despite regulatory scrutiny of Wall Street’s pay culture.

“Workers at 23 top investment banks, hedge funds, asset managers and stock and commodities exchanges can expect to earn even more than they did the peak year of 2007, according to an analysis of securities filings for the first half of 2009 and revenue estimates through year-end by The Wall Street Journal.

“Total compensation and benefits at the publicly traded firms analyzed by the Journal are on track to increase 20% from last year’s $117 billion - and to top 2007’s $130 billion payout. This year, employees at the companies will earn an estimated $143,400 on average, up almost $2,000 from 2007 levels.

“The growth in compensation reflects Wall Street firms’ rapid return to precrisis revenue levels. Even as the economy is sluggish and unemployment approaches 10%, these firms have been boosted by a stronger stock market, thawing credit market, a resurgence in deal making and the continuing effects of various government aid programs.”
Source: Aaron Lucchetti and Stephen Grocer, The Wall Street Journal, October 14, 2009.

Bespoke: 30-year fixed mortgage rate back below 5%
“For those worried that they missed the bottom in mortgage rates a few months ago, you’ve now got a second chance to refinance or lock in that home loan at less than 5%. As shown below, after spiking nearly 100 basis points off its low in late April, Bankrate.com’s national average for 30-year fixed mortgage rates hit 4.97% on Friday.”
Clusterstock: Besides the Fed, nobody is buying agency debt
“Where would we be without the Fed and its printing press? There’s been a lot of debate about the appetite of foreign investors of our debt - Treasury auctions continue to be strong, even as noises emanate from overseas about wanting to dump the dollar.

“But here’s a stark fact, via the Council on Foreign Relations: Only the Fed is buying agency debt. Foreign buyers, who once consumed it voraciously, have been net sellers so far this year.”
Bloomberg: Pimco’s Gross boosts government debt, cuts mortgages
“Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. (Pimco), bought government debt last month and cut mortgage bond holdings to the lowest level since 2005 after he said this year that the US recession will lead to a period of less-than-average growth.

“Gross boosted the $185.7 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other government-linked bonds to 48% of assets in September from 44% in August, according to Pimco’s website. The holdings are the most since August 2004.

“‘We’ve exchanged our mortgages for the government’s check,’ Gross, who is based in Newport Beach, California, said in an interview last month. He said he was buying longer-maturity Treasuries because of deflation concern.

“Treasuries rose in July, August and September, offering their first three-month gain in a year, Merrill Lynch & Co. indexes show, as optimism waned about the pace of economic recovery. Federal Reserve Vice Chairman Donald Kohn said this week inflation and growth will probably stay below the central bank’s objectives for some time, warranting very low interest rates for an ‘extended period’.

“The Total Return fund cut mortgage debt to 22%, the lowest level since February 2005, from 38%, according to the website.”

Source: Wes Goodman and Susanne Walker, Bloomberg, October 15, 2009.

Bespoke: Investment-grade corporate bond ETF breaks down

“Investment-grade corporate bonds have generally moved alongside the stock market throughout the bull market. In recent days, however, investment grade corporates have moved lower even as stocks have risen. Below is a chart of the iShares iBoxx Investment Grade Corporate Bond Fund ETF (LQD) since the March lows. As shown, the ETF had been in a tight uptrend for months until just last week when it broke below its 50-day moving average. With the uptrend now broken, it will be interesting to see what, if any, impact this has on equity markets.”
Clusterstock: Investors are only interested in high-yield junk
“Today’s chart shows not only that high-yield junk debt (HYG) has decimated safe debt (LQD) since the market lows, but that in recent days the situation has gotten really extreme.

“Investment-grade debt has started to break down over the past couple of weeks, clearly breaking an uptrend, while the risky stuff keeps on powering higher
Bespoke: Bull market check-up

“Below we have updated our table of historical S&P 500 bull markets (at least a 20% gain that was preceded by at least a 20% decline) since index data begins in 1927. The table is sorted by bull market length. The current bull market that started on March 9 is now 219 calendar days with a gain of 61.41%. As shown, the median gain for all bull markets has been 68%, and the median length has been 308 days. The current bull is still below the median in terms of both gains and days. However, there aren’t a lot of bulls bunched up around the median, and there is a pretty big deviation between all of them. Bottom line though is that this is definitely a bull market.”
Bespoke: Break out the Dow 10,000
“For the fourth time in the index’s history, the Dow has broken above 10,000 after trading below that level for at least a month. While the media would have you believe otherwise, the more this occurs the less exciting it becomes. Call us at Dow 100K.”
By Dr Prieur du Plessis

Dr Prieur du Plessis is an investment professional with 25 years' experience in investment research and portfolio management.

More than 1200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns (including his blog, Investment Postcards from Cape Town : www.investmentpostcards.com ). He has also published a book, Financial Basics: Investment.

Prieur is chairman and principal shareholder of South African-based Plexus Asset Management , which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries.

Plexus is the South African partner of John Mauldin , Dallas-based author of the popular Thoughts from the Frontline newsletter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

Prieur is 53 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town , South Africa . His leisure activities include long-distance running, traveling, reading and motor-cycling.

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