“I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine.” - Ayn Rand, from her novel, Atlas Shrugged

+++
Hindsight
Major market indices finished higher last week. The DJIA rose 1.63%, the S&P 500 added 1.65%, and the Nasdaq gained 1.31%. Value stocks outperformed growth stocks. And the small cap index gained 2.14%. The 10-Treasury yield lost 12 basis points on the week, closing at 2.39%.
The IMF cut its 2011 projections for global growth as advanced economies slash budgets and continued to confront the sovereign debt crisis. But what was revealing was The Wall Street Journal’s note that, while European public debt issues will weigh upon industrialized nations, “emerging markets like China and India are predicted to remain growth champions.” U.S. growth prospects took the largest hit, downgraded 2.3% from a previous estimate of 2.9%.
As earnings season kicks off, equity bulls will look to sustain the current rally. The focus remains squarely on the prospects for further quantitative easing (QEII), which appears to be priced into the market. With the Dow rising above 11,000 for the first time since the May flash crash, the employment picture remains weak—with fewer than estimated private-sector jobs created in September. This seemingly ensures the prospects for QEII.
Alas, following the best September equity performance since 1939, this 3Q earnings season must be strong in order to gird the recent rally and send stocks higher. Stay tuned…
+++
Economically Speaking
- Global economic leaders, meeting for the International Monetary Fund’s annual meeting, failed to resolve differences over global currencies and exchange rates, a topic that dominated this year’s meeting. Treasury Secretary Geithner, People’s Bank of China Governor Xiachuan and their counterparts remained split over whose policies represent the biggest threat to the world economy as nations rely on cheap currencies to sustain growth. China has been accused of undervaluing the yuan, while emerging markets blamed low U.S. interest rates for flooding them with capital. The focus now turns to the upcoming G20 meetings in South Korea.
- Speaking to college students yesterday, Bernanke said additional asset purchases by the Fed could help the economy and called the Fed’s $1.7T purchase of Treasuries and mortgage-backed bonds an “effective program.” His comments are the latest indication that the Fed is likely to move ahead with more asset purchases, perhaps as soon as next month, if the economic outlook remains weak. Separately, Janet Yellen and Sarah Bloom Raskin were sworn in yesterday by the Federal Reserve Board in Washington, and both are likely to be Bernanke allies on more asset purchases or quantitative easing.
- U.S. service companies expanded at a faster pace than projected in September, indicating that the economic recovery may be gathering steam heading into 4Q, Bloomberg reported.
- The IMF cut its 2011 projections for global growth as advanced economies slash budgets and continue to confront the sovereign debt crisis.
- Californian lawmakers have seemingly found a way to end the state’s budget impasse and close a record $19B deficit, but it requires some creative accounting. Instead of relying on new taxes or fees, the proposal counts on the state receiving $5.3B from the federal government, nearly $2B more than Gov. Arnold Schwarzenegger projected in May. Lawmakers also assume the state’s economic recovery will be strong enough to generate an additional $1.4B in state tax revenues. Critics say the creative accounting simply pushes the budget mess onto the desk of the next governor.
- U.S. Treasury Secretary Timothy Geithner spoke at the Brookings Institution on Oct. 6 and outlined Washington’s economic and financial goals for a series of major upcoming international meetings. He called for G-20 countries to continue working together on global economic and financial challenges, and presented three points where the United States sees dangers to the global system.
- Payrolls fell by more than expected in September, losing 95,000 workers, and private business hired 64,000, also less than expected. Declining tax revenues have seen schools firing teachers and administrators, in addition to other public sector jobs lost.
- Global economic leaders, meeting for the International Monetary Fund’s annual meeting, failed to resolve differences over global currencies and exchange rates, a topic that dominated this year’s meeting. Treasury Secretary Geithner, People’s Bank of China Governor Xiachuan and their counterparts remained split over whose policies represent the biggest threat to the world economy as nations rely on cheap currencies to sustain growth. China has been accused of undervaluing the yuan, while emerging markets blamed low U.S. interest rates for flooding them with capital. The focus now turns to the upcoming G20 meetings in South Korea.
- Attorneys general from about 40 states may announce a joint investigation into faulty foreclosures at the largest banks and mortgage firms, Bloomberg reports.
- Attorneys general from about 40 states may announce a joint investigation into faulty foreclosures at the largest banks and mortgage firms, Bloomberg reports.
- The National Association of Realtors Pending Home Sales Index increased 4.3% for August, still 20% below its level at this time last year.
- Consumer credit fell $3.3 billion in August to the lowest level since early 2007, as consumers continue to deleverage.
+++
Foreign Observations
- The Bank of Japan surprised markets Tuesday, cutting its overnight call rate target to a range of 0-0.1% from 0.1%. Labeling its move “comprehensive monetary easing,” BOJ pledged to keep its benchmark interest rate at “virtually zero” until deflation has ended, and will set up a ¥5T ($60B) fund to buy government bonds and other assets.
- South Korea and the United States have agreed to modify a military plan designed to deal with sudden changes that may result from the shift in North Korean leadership announced last week, JoonAng Daily reported Oct. 5. Revisions to the conceptual plan will be formally agreed upon at the annual Security Consultative Meeting, slated to take place Oct. 8 in Washington.
+++
Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week’s Returns:
Information Technology... 1.52%
Materials... 3.24
Consumer Staples... 0.78
Utilities... 0.71
Consumer Discretionary... 2.62
Financials... 1.24
S&P 500... 1.65
Industrials... 2.86
Healthcare... 0.85
Telecommunications... (1.41)
Energy... 2.79
+++
Equity Markets Review
- Alcoa kicked off earnings season with a 21% drop in profits amid higher operating expenses.
- Germany’s Landesbank Baden-Wuerttemberg filed suit against Goldman Sachs over a $37M loss incurred on a collateralized debt obligation composed mostly of subprime and “midprime” mortgages. The complaint said that Goldman, which was the placement agent for the CDO, represented the investment as “safe, secure, and nearly risk free” at the same time that Goldman execs were privately calling it “game over” for subprime lenders and were reducing their mortgage exposure.
- Johnson & Johnson reached an agreement with Crucell to move forward with its €24.75/share ($34.30) offer for the shares of the Dutch biotech firm it doesn’t already own. Some of Crucell’s major shareholders had argued that the roughly €1.75B offer undervalues the firm, but Crucell reiterated today that the J&J bid is in the best interest of the company; from J&J’s perspective, the deal will allow it to better develop and commercialize pipeline of vaccines at a time when vaccine sales are outstripping those of prescription drugs and face less competition from generics. The companies expect the deal to close in Q1 2011.
- Bank of America said Tuesday that it will move away from selling mortgages through brokers to concentrate on direct-to-consumer mortgages. The bank will exit the first mortgage wholesale channel “following an orderly transition of loans currently in process.” BofA holds 22% of the retail market and 8% of the first mortgage wholesale market; its exit from the market is good news for Wells Fargo, which will likely become the dominant player in the wholesale business.
- Verizon will start selling the iPhone early next year, according to media reports, ending the exclusive lock AT&T has had on the popular smartphone since 2007. Sources said Apple plans to produce a new version of the phone based on an alternative wireless technology used by Verizon, and will begin mass production of the model by the end of the year.
- GE has once again become a buyer, announcing Wednesday a $3B acquisition of Dresser, an energy infrastructure technology and service provider, and the purchase of a $1.6B portfolio of retail credit cards from Citigroup
- Rep. Nancy Pelosi and dozens of other lawmakers sent a letter to the Justice Department Tuesday calling for an investigation of the nation’s largest mortgage lenders. The group said recent reports that lenders have initiated hundreds of thousands of questionable foreclosures “amplify our concerns that systemic problems exist,” and specifically cited such lenders as Bank of America and JPMorgan. The move will likely add momentum to a push for a nationwide moratorium on foreclosures, though critics warn such broad measures could overwhelm the court system and scare away potential buyers of foreclosed properties.
- Bain Capital LLC will pay $1.8 billion for children’s clothing retailer Gymboree.
+++
Sports, Culture & Politics
- Economists Peter Diamond, Dale Mortensen and Christopher Pissarides shared the 2010 Nobel Prize in Economics Sciences for their work on matching supply and demand, particularly in the labor market.
- Peruvian novelist Mario Vargas Llosa, one of the Spanish-speaking world’s most renowned authors, as well as a former presidential candidate, won the 2010 Nobel Prize in Literature. He becomes the first South American to win the award since Gabriel Garcia Marquez, a close friend of Llosa’s, did so in 1982.
- A recent increase in U.S. drone missile attacks in Pakistan are linked to efforts to disrupt a suspected al Qaeda plot to attack European targets, Pakistan’s Ambassador to the United States Hussein Haqqani said, BBC reported Oct. 6. Strikes and attempts to attack al Qaeda and other militant groups in North Waziristan are connected to the terror warnings about potential strikes in Europe, Haqqani said. Pakistan is working with European and U.S. intelligence agencies to prevent the suspected European attacks and people should not panic, he added.
- Afghan President Hamid Karzai’s government is holding preliminary, high-level talks with Taliban representatives to negotiate a comprehensive agreement to end the war and enable withdrawal of U.S. and NATO troops, according to Afghan and Arab sources, The Washington Post reported Oct. 6. Sources said they believe that Taliban representatives are fully authorized to speak for the Quetta Shura and are serious about negotiations that may include Taliban participation in the government.
- Taliban commanders and U.S. officials accused the Pakistani Inter-Services Intelligence (ISI) of pressuring militant leaders not to surrender, The Wall Street Journal reported Oct. 7. A Taliban commander said the ISI wants to arrest commanders who are not obeying orders. Captured militants said the ISI wants them to kill policemen, soldiers, engineers, teachers and civilians to intimidate people, according to U.S. officials.
- Palestinian President Mahmoud Abbas will resign from his post, Palestinian negotiations team member and Fatah official Nabil Shaath said Oct. 8, Maan News reported. Abbas will not backtrack on his national stance and anyone who thinks he is remaining in his post in exchange for national consensus is wrong, Shaath stated as he denied rumors that Palestinians accepted a U.S. proposal for a two-month extension to Israel’s settlement freeze in exchange for remaining in talks. He said a scheduled meeting between Hamas and Fatah leaders to solve a disputed point on the Egyptian security document was postponed until after ratification.
- A U.S. Senate investigation by the Armed Services Committee revealed Afghan private security forces with ties to the Taliban, criminal networks and Iranian intelligence were hired to guard U.S. bases in Afghanistan, The New York Times reported Oct. 7. EOD Technology operates a security training center for Afghan police in Adraskan, hiring local Afghans who were allegedly providing information to Iran, the Senate report stated. Defense Secretary Robert Gates said the Pentagon recognized the problems and created new task forces to overhaul the contracting procedures that benefit ground forces while “not providing aid to the enemy.”
- Israeli Ministry of Defense Director General Ehud Shani signed a contract in New York on Oct. 7 that gives Israel 20 F-35 stealth fighters for a price of almost $3 billion. The contract states that Israel will receive the warplanes in 2016 and gives Israel an option for the purchase of 75 more planes. The contract signing was an expression of Israel’s strategic alliance with the United States to maintain Israel’s military edge, Shani said, adding that Israel plans to pick up on the option to buy more planes.
- An Iraqi security source has revealed that U.S. forces have given orders for U.S. officers to join key military units in Baghdad as advisers due to fears of an attempt to overthrow the government, Asharq Al-Awsat reported Oct. 8. Armed forces and security forces, currently divided by sectarian and political loyalties, are now on a state of alert. The anonymous source also revealed that there is a clear conflict between former Iraqi army officers and young officers who have obtained high rank due to political or sectarian affiliations.
- In a statement released by the White House, U.S. President Barack Obama praised the Nobel Committee’s decision to award imprisoned Chinese dissident Liu Xiaobo the 2010 Nobel Peace Prize. The United States respects the culture and traditions of other countries, and it will continue to support the ideals that are universal to all people, Obama said. While China has made progress in improving its citizens’ quality of life over the past 30 years through economic reform, the awarding of this prize serves as a reminder that political reform in China has not kept pace, Obama added. Obama then called upon the Chinese government to release Liu as soon as possible.
- U.S. President Barack Obama confirmed Oct. 8 that his national security adviser, Gen. James Jones, has resigned and will be replaced by Deputy National Security Adviser Tom Donilon, CBS reported. Obama said he relied upon Jones’ advice every day, and that Jones reformed the White House national security staff during his tenure. Jones’ resignation will be effective in two weeks.
- After holding the world’s number one ranking for 279 straight weeks, Tiger Woods will be supplanted by England’s Lee Westwood on October 31st.
- The Cincinnati Reds went down to the Phillies 2-0 last night, so completing a sweep at the hands of the most talented team in baseball.
- Alabama lost its number one NCAA football ranking after losing to number 19 South Carolina, 35-21. The Ohio State Buckeyes, who beat Indiana 38-10, take over the number one ranking.
The weekend’s top-five box office performers as reported by The New York Times were:
1) The Social Network, Columbia TriStar, $15,500,000
2) Life As We Know It, Warner Bros., $14,635,000
3) Secretariat, Walt Disney, $12,600,000
4) Legend of the Guardians, Warner Bros., $7,015,000
5) My Soul to Take, Rogue Pictures, $6,918,680