Thursday, September 30, 2010
How to examine your ideas
“Think of and look at your work as though it were done by your enemy. If you look at it to admire it, you are lost”
A growing economy consists of prices falling, not rising.
The stock market does not work the way most people think. A commonly held belief — on Main Street as well as on Wall Street — is that a stock-market boom is the reflection of a progressing economy: as the economy improves, companies make more money, and their stock value rises in accordance with the increase in their intrinsic value. A major assumption underlying this belief is that consumer confidence and consequent consumer spending are drivers of economic growth.
A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.
This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.
In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.
Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.
When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. George Reisman offers us the critical formula for the derivation of economy-wide prices:
In this formula, price (P) is determined by demand (D) divided by supply (S). The formula shows us that it is mathematically impossible for aggregate prices to rise by any means other than (1) increasing demand, or (2) decreasing supply; i.e., by either more money being spent to buy goods, or fewer goods being sold in the economy.
In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; prices are rising due to more money entering the marketplace.
The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits. As Fritz Machlup states:
There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.
The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,
Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.
A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.
Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).
This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.
In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.
Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.
The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.
Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.
Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.
This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.
To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.
For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.
Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).
Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).
In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).
Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.
A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.
In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.
(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)[9]
There are two main reasons for this channeling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.[10] As financial economist Peter Warburton states,
One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."
That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.[13]
A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).
The changes in these valuation indicators I have shown above reveal that the fundamental links between company earnings and their stock-market valuation can be altered merely by money flows originating from the central bank.
Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses, could in turn create new net real wealth — real goods and services — is preposterous.
What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Broken economies suffer from a misallocation of resources consequent upon prior government interventions and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.
Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.
As for the idea that government spending helps the stock market, the analysis is a bit more complicated. Government spending per se cannot help the stock market, since little, if any, of the money spent will find its way into financial markets. But the creation of money that occurs when the central bank (indirectly) purchases new government debt can certainly raise the stock market. If new money created by the central bank is loaned out through banks, much of it will end up in the stock market and other financial markets, pushing prices higher.
A stock-market bust, on the other hand, is held to result from a drop in consumer and business confidence and spending — due to inflation, rising oil prices, high interest rates, etc., or for no reason at all — that leads to declining business profits and rising unemployment. Whatever the supposed cause, in the common view a weakening economy results in falling company revenues and lower-than-expected future earnings, resulting in falling intrinsic values and falling stock prices.
This understanding of bull and bear markets, while held by academics, investment professionals, and individual investors alike, is technically correct if viewed superficially but is substantially misconceived because it is based on faulty finance and economic theory.
In fact, the only real force that ultimately makes the stock market or any market rise (and, to a large extent, fall) over the longer term is simply changes in the quantity of money and the volume of spending in the economy. Stocks rise when there is inflation of the money supply (i.e., more money in the economy and in the markets). This truth has many consequences that should be considered.
Since stock markets can fall — and fall often — to various degrees for numerous reasons (including a decline in the quantity of money and spending), our focus here will be only on why they are able to rise in a sustained fashion over the longer term.
The Fundamental Source of All Rising Prices
For perspective, let's put stock prices aside for a moment and make sure first to understand how aggregate consumer prices rise. In short, overall prices can rise only if the quantity of money in the economy increases faster than the quantity of goods and services. (In economically retrogressing countries, prices can rise when the supply of goods diminishes while the supply of money remains the same, or even rises.)When the supply of goods and services rises faster than the supply of money — as happened during most of the 1800s — the unit price of each good or service falls, since a given supply of money has to buy, or "cover," an increasing supply of goods or services. George Reisman offers us the critical formula for the derivation of economy-wide prices:
In our developed economy, the supply of goods is not decreasing, or at least not at enough of a pace to raise prices at the usual rate of 3–4 percent per year; prices are rising due to more money entering the marketplace.
The same price formula noted above can equally be applied to asset prices — stocks, bonds, commodities, houses, oil, fine art, etc. It also pertains to corporate revenues and profits. As Fritz Machlup states:
It is impossible for the profits of all or of the majority of enterprises to rise without an increase in the effective monetary circulation (through the creation of new credit or dishoarding).[2]To return to our focus on the stock market in particular, it should be seen now that the market cannot continually rise on a sustained basis without more money — specifically bank credit — flowing into it.
There are other ways the market could go higher, but their effects are temporary. For example, an increase in net savings involving less money spent on consumer goods and more invested in the stock market (resulting in lower prices of consumer goods) could send stock prices higher, but only by the specific extent of the new savings, assuming all of it is redirected to the stock market.
The same applies to reduced tax rates. These would be temporary effects resulting in a finite and terminal increase in stock prices. Money coming off the "sidelines" could also lift the market, but once all sideline money was inserted into the market, there would be no more funds with which to bid prices higher. The only source of ongoing fuel that could propel the market — any asset market — higher is new and additional bank credit. As Machlup writes,
If it were not for the elasticity of bank credit … a boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted, since even a large supply is ultimately limited. The supply of funds derived solely from current new savings and current amortization allowances is fairly inelastic.… Only if the credit organization of the banks (by means of inflationary credit) or large-scale dishoarding by the public make the supply of loanable funds highly elastic, can a lasting boom develop.… A rise on the securities market cannot last any length of time unless the public is both willing and able to make increased purchases.[3] (Emphasis added.)The last line in the quote helps to reveal that neither population growth nor consumer sentiment alone can drive stock prices higher. Whatever the population, it is using a finite quantity of money; whatever the sentiment, it must be accompanied by the public's ability to add additional funds to the market in order to drive it higher.[4]
Understanding that the flow of recently created money is the driving force of rising asset markets has numerous implications. The rest of this article addresses some of these implications.
The Link between the Economy and the Stock Market
The primary link between the stock market and the economy — in the aggregate — is that an increase in money and credit pushes up both GDP and the stock market simultaneously.A progressing economy is one in which more goods are being produced over time. It is real "stuff," not money per se, which represents real wealth. The more cars, refrigerators, food, clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods are produced at a faster rate than money, prices will fall. With a constant supply of money, wages would remain the same while prices fell, because the supply of goods would increase while the supply of workers would not. But even when prices rise due to money being created faster than goods, prices still fall in real terms, because wages rise faster than prices. In either scenario, if productivity and output are increasing, goods get cheaper in real terms.
Obviously, then, a growing economy consists of prices falling, not rising. No matter how many goods are produced, if the quantity of money remains constant, the only money that can be spent in an economy is the particular amount of money existing in it (and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).
This alone reveals that GDP does not necessarily tell us much about the number of actual goods and services being produced; it only tells us that if (even real) GDP is rising, the money supply must be increasing, since a rise in GDP is mathematically possible only if the money price of individual goods produced is increasing to some degree.[5] Otherwise, with a constant supply of money and spending, the total amount of money companies earn — the total selling prices of all goods produced — and thus GDP itself would all necessarily remain constant year after year.
"Consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate."
The same concept would apply to the stock market: if there were a constant amount of money in the economy, the sum total of all shares of all stocks taken together (or a stock index) could not increase. Plus, if company profits, in the aggregate, were not increasing, there would be no aggregate increase in earnings per share to be imputed into stock prices.In an economy where the quantity of money was static, the levels of stock indexes, year by year, would stay approximately even, or drift slightly lower[6] — depending on the rate of increase in the number of new shares issued. And, overall, businesses (in the aggregate) would be selling a greater volume of goods at lower prices, and total revenues would remain the same. In the same way, businesses, overall, would purchase more goods at lower prices each year, keeping the spread between costs and revenues about the same, which would keep aggregate profits about the same.
Under these circumstances, capital gains (the profiting from the buying low and selling high of assets) could be made only by stock picking — by investing in companies that are expanding market share, bringing to market new products, etc., thus truly gaining proportionately more revenues and profits at the expense of those companies that are less innovative and efficient.
The stock prices of the gaining companies would rise while others fell. Since the average stock would not actually increase in value, most of the gains made by investors from stocks would be in the form of dividend payments. By contrast, in our world today, most stocks — good and bad ones — rise during inflationary bull markets and decline during bear markets. The good companies simply rise faster than the bad.
Similarly, housing prices under static money would actually fall slowly — unless their value was significantly increased by renovations and remodeling. Older houses would sell for much less than newer houses. To put this in perspective, consider that if our rate of inflation were high enough, used cars would rise in price just like new cars, only at a slower rate — but just about everything would increase in price, as it does in countries with hyperinflation The amount by which a home "increases in value" over 30 years really just represents the amount of purchasing power that the dollars we hold have lost: while the dollars lost purchasing power, the house — and other assets more limited in supply growth — kept its purchasing power.
Since we have seen that neither the stock market nor GDP can rise on a sustained basis without more money pushing them higher, we can now clearly understand that an improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise.
This is not to say that a link does not exist between the money that companies earn and their value on the stock exchange in our inflationary world today, but that the parameters of that link — valuation relationships such as earnings ratios and stock-market capitalization as a percent of GDP — are rather flexible, and as we will see below, change over time. Money sometimes flows more into stocks and at other times more into the underlying companies, changing the balance of the valuation relationships.
Forced Investing
As we have seen, the whole concept of rising asset prices and stock investments constantly increasing in value is an economic illusion. What we are really seeing is our currency being devalued by the addition of new currency issued by the central bank. The prices of stocks, houses, gold, etc., do not really rise; they merely do better at keeping their value than do paper bills and digital checking accounts, since their supply is not increasing as fast as are paper bills and digital checking accounts."An improving economy neither consists of an increasing GDP nor does it cause the overall stock market to rise."
The fact that we have to save for the future is, in fact, an outrage. Were no money printed by the government and the banks, things would get cheaper through time, and we would not need much money for retirement, because it would cost much less to live each day then than it does now. But we are forced to invest in today's government-manipulated inflation-creation world in order to try to keep our purchasing power constant.To the extent that some of us even come close to succeeding, we are still pushed further behind by having our "gains" taxed. The whole system of inflation is solely for the purpose of theft and wealth redistribution. In a world absent of government printing presses and wealth taxes, the armies of investment advisors, pension-fund administrators, estate planners, lawyers, and accountants associated with helping us plan for the future would mostly not exist. These people would instead be employed in other industries producing goods and services that would truly increase our standards of living.
The Fundamentals are Not the Fundamentals
If it is, then, primarily newly printed money flowing into and pushing up the prices of stocks and other assets, what real importance do the so-called fundamentals — revenues, earnings, cash flow, etc. — have? In the case of the fundamentals, too, it is newly printed money from the central bank, for the most part, that impacts these variables in the aggregate: the financial fundamentals are determined to a large degree by economic changes.For example, revenues and, particularly, profits, rise and fall with the ebb and flow of money and spending that arises from central-bank credit creation. When the government creates new money and inserts it into the economy, the new money increases sales revenues of companies before it increases their costs; when sales revenues rise faster than costs, profit margins increase.
Specifically, how this comes about is that new money, created electronically by the government and loaned out through banks, is spent by borrowing companies.[7] Their expenditures show up as new and additional sales revenues for businesses. But much of the corresponding costs associated with the new revenues lags behind in time because of technical accounting procedures, such as the spreading of asset costs across the useful life of the asset (depreciation) and the postponing of recognition of inventory costs until the product is sold (cost of goods sold). These practices delay the recognition of costs on the profit-and-nloss statements (i.e., income statements).
Since these costs are recognized on companies' income statements months or years after they are actually incurred, their monetary value is diminished by inflation by the time they are recognized. For example, if a company recognizes $1 million in costs for equipment purchased in 1999, that $1 million is worth less today than in 1999; but on the income statement the corresponding revenues recognized today are in today's purchasing power. Therefore, there is an equivalently greater amount of revenues spent today for the same items than there was ten years ago (since it takes more money to buy the same good, due to the devaluation of the currency).
"With more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing."
Another way of looking at it is that, with more money being created through time, the amount of revenues is always greater than the amount of costs, since most costs are incurred when there is less money existing. Thus, because of inflation, the total monetary value of business costs in a given time frame is smaller than the total monetary value of the corresponding business revenues. Were there no inflation, costs would more closely equal revenues, even if their recognition were delayed.In summary, credit expansion increases the spreads between revenue and costs, increasing profit margins. The tremendous amount of money created in 2008 and 2009 is what is responsible for the fantastic profits companies are currently reporting (even though the amount of money loaned out was small, relative to the increase in the monetary base).
Since business sales revenues increase before business costs, with every round of new money printed, business profit margins stay widened; they also increase in line with an increased rate of inflation. This is one reason why countries with high rates of inflation have such high rates of profit.[8] During bad economic times, when the government has quit printing money at a high rate, profits shrink, and during times of deflation, sales revenues fall faster than do costs.
It is also new money flowing into industry from the central bank that is the primary cause behind positive changes in leading economic indicators such as industrial production, consumer durables spending, and retail sales. As new money is created, these variables rise based on the new monetary demand, not because of resumed real economic growth.
A final example of money affecting the fundamentals is interest rates. It is said that when interest rates fall, the common method of discounting future expected cash flows with market interest rates means that the stock market should rise, since future earnings should be valued more highly. This is true both logically and mathematically. But, in the aggregate, if there is no more money with which to bid up stock prices, it is difficult for prices to rise, unless the interest rate declined due to an increase in savings rates.
In reality, the help needed to lift the market comes from the fact that when interest rates are lowered, it is by way of the central bank creating new money that hits the loanable-funds markets. This increases the supply of loanable funds and thus lowers rates. It is this new money being inserted into the market that then helps propel it higher.
(I would personally argue that most of the discounting of future values [PV calculations] demonstrated in finance textbooks and undertaken on Wall Street are misconceived as well. In a world of a constant money supply and falling prices, the future monetary value of the income of the average company would be about the same as the present value. Future values would hardly need to be discounted for time preference [and mathematically, it would not make sense], since lower consumer prices in the future would address this. Though investment analysts believe they should discount future values, I believe that they should not. What they should instead be discounting is earnings inflation and asset inflation, each of which grows at different paces.)[9]
Asset Inflation versus Consumer Price Inflation
Newly printed money can affect asset prices more than consumer prices. Most people think that the Federal Reserve has done a good job of preventing inflation over the last twenty-plus years. The reality is that it has created a tremendous amount of money, but that the money has disproportionately flowed into financial markets instead of into the real economy, where it would have otherwise created drastically more price inflation.There are two main reasons for this channeling of money into financial assets. The first is changes in the financial system in the mid and late 1980s, when an explosive growth of domestic credit channels outside of traditional bank lending opened up in the financial markets. The second is changes in the US trade deficit in the late 1980s, wherein it became larger, and export receipts received by foreigners were increasingly recycled by foreign central banks into US asset markets.[10] As financial economist Peter Warburton states,
a diversification of the credit process has shifted the centre of gravity away from conventional bank lending. The ascendancy of financial markets and the proliferation of domestic credit channels outside the [traditional] monetary system have greatly diminished the linkages between … credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of serious problems for another.[11]And, as bond-fund guru Bill Gross said,
what now appears to be confirmed as a housing bubble, was substantially inflated by nearly $1 trillion of annual reserve flowing back into US Treasury and mortgage markets at subsidized yields.… This foreign repatriation produced artificially low yields.… There is likely near unanimity that it is now responsible for pumping nearly $800 billion of cash flow into our bond and equity markets annually.[12]This insight into the explanation for a lack of price inflation in recent decades should also show that the massive amount of reserves the Fed created in 2008 and 2009 — in response to the recession — might not lead to quite the wild consumer-price inflation everyone expects when it eventually leaves the banking system but instead to wild asset price inflation.
One effect of the new money flowing disproportionately into asset prices is that the Fed cannot "grow the economy" as much as it used to, since more of the new money created in the banking system flows into asset prices rather than into GDP. Since it is commonly thought that creating money is necessary for a growing economy, and since it is believed that the Fed creates real demand (instead of only monetary demand), the Fed pumps more and more money into the economy in order to "grow it."
That also means that more money — relative to the size of the economy — "leaks" out into asset prices than used to be the case. The result is not only exploding asset prices in the United States, such as the NASDAQ and housing-market bubbles but also in other countries throughout the world, as new money makes its way into asset markets of foreign countries.[13]
A second effect of more new money being channeled into asset prices is, as hinted above, that it results in the traditional range of stock valuations moving to a higher level. For example, the ratio of stock prices to stock earnings (P/E ratio) now averages about 20, whereas it used to average 10–15. It now bottoms out at a level of 12–16 instead of the historical 5. A similar elevated state applies to Tobin's Q, a measure of the market value of a company's stock relative to its book value. But the change in relative flow of new money to asset prices in recent years is perhaps best seen in the chart below, which shows the stunning increase in total stock-market capitalization as a percentage of GDP (figure 1).
Figure 1: The Size of the Stock Market Relative to GDP
Source: Thechartstore.com
Can Government Spending Revive the Stock Market and the Economy?
The answer is yes and no. Government spending does not restore any real demand, only nominal monetary demand. Monetary demand is completely unrelated to the real economy, i.e., real production, the creation of goods and services, the rise in real wages, and the ability to consume real things — as opposed to a calculated GDP number.Government spending harms the economy and forestalls its healing. The thought that stimulus spending, i.e., taking money from the productive sector (a de-accumulation of capital) and using it to consume existing consumer goods or using it to direct capital goods toward unprofitable uses, could in turn create new net real wealth — real goods and services — is preposterous.
What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing. Broken economies suffer from a misallocation of resources consequent upon prior government interventions and can therefore be healed only by allowing the economy's natural balance to be restored. Falling prices and lack of government and consumer spending are part of this process.
Given that government spending cannot help the real economy, can it help the specific indicator called GDP? Yes it can. Since GDP is mostly a measure of inflation, if banks are willing to lend and borrowers are willing to borrow, then the newly created money that the government is spending will make its way through the economy. As banks lend the new money once they receive it, the money multiplier will kick in and the money supply will increase, which will raise GDP.
"What is most needed during recessions is for the economy to be allowed to get worse — for it to flush out the excesses and reset itself on firm footing."
Tuesday, September 28, 2010
Traders Look Ahead With Hope to Consumer Confidence Data
The major U.S. index futures are pointing to a higher opening on
Tuesday, with sentiment likely to remain guarded ahead of the release of the consumer confidence report. Economic data from across the Atlantic has been encouraging, with Germany reporting a strong consumer confidence reading, while earlier in the day the Asian Development Bank gave an upbeat commentary on growth in developing Asian countries. Depending on how the U.S. consumer confidence index comes in, the markets may see a bounce or a retreat, although range bound trading is most likely.
U.S. stocks reversed course and ended Monday’s session on a moderately weak note, as traders showed indecision amid a lack of trading catalysts. The major averages opened lower and remained below the unchanged line for the better of the session before closing moderately lower.
With the markets trading at their highest levels in more than four months, uncertainty weighed on the averages and prevented any follow through buying. The Dow Industrials ended down 48.22 points or 0.44% at 10,812 and the Nasdaq Composite Index fell 11.45 points or 0.48% to close at 2,370, while the S&P 500 Index finished 6.51 points or 0.57% lower at 1,142.
Twenty-four of the thirty Dow components closed the session lower, with Alcoa (AA), Bank of America (BAC), General Electric (GE), JP Morgan Chase (JPM), Pfizer (PFE) and Travelers Co. (TRV) among the notable decliners. On the other hand, AT&T (T) rose over 1%.
Among the sector indexes, the NYSE Arca Biotechnology Index fell 1.27%, the KBW Bank Index slipped 1.87% and the NYSE Arca Disk Drive Index moved down 2.09%. However, the NYSE Arca Airline Index rose 1.84%.
Currency, Commodity Markets
Crude oil futures are moving down $0.70 to $75.82 a barrel after edging up $0.03 to $76.52 a barrel on Monday. Gold futures are currently receding $11.40 to $1,287.20 an ounce. In the previous session, the precious metal rose $0.50 to $1,298.60 an ounce.
Among currencies, the U.S. dollar is trading at 84.116 yen compared to the 84.2902 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is currently valued at $1.3468 compared to yesterday’s $1.3454.
Asia
The major Asian markets closed Tuesday’s session lower, as the negative lead from Wall Street overnight weighed on the averages. Negative sentiment prevailed despite the Asian Development Bank giving an upbeat outlook for the developing economies in Asia.
The 45 economies of developing Asia – spanning from countries in the Pacific to Central Asia – are now forecast to expand by an impressive 8.2%, well above the 5.4% growth recorded in 2009 and also above the 7.9% growth ADB forecast in July. The bank attributed the optimism to the region's strong export-based recovery, robust private demand, and the sustained effects of stimulus policies.
Japan’s Nikkei 225 average opened moderately lower and moved sideways until late trading before legging down further. The index closed down 107.38 points or 1.12% at 9,496. The general economic uncertainty and the yen’s strength along with the several stocks turning ex-dividend weighed on the index.
A majority of the stocks declined in the session, with Credit Saison, Eisai, Nippon Electric, Sky Perfect Jsat, Takeda Pharma, TDK and Trend Micro leading the slide. On the other hand, most resource and real estate stocks and some auto stocks closed the session higher.
Australia’s All Ordinaries languished in negative territory for the better part of the session amid some volatility to close down 5.20 points or 0.11% at 4,717. Material and energy stocks saw weakness, dragging the markets lower.
Hong Kong’s Hang Seng Index moved back and forth across the unchanged line in a very narrow range till the afternoon before pulling back sharply in the afternoon. The index closed down 230.89 points or 1.03% at 22,110.
Europe
The major European averages are trading Tuesday’s session on a mixed note, with the French CAC 40 Index and the German DAX Index are moving up 0.28% and 0.18%, respectively, while the U.K.’s FTSE 100 Index is retreating 0.19%.
In economic news, the GfK Institute said its forward-looking consumer sentiment indicator, based on a survey of about 2,000 Germans, jumped to 4.9 in October from 4.3 in September. This was well above analyst expectations for a score of 4.2 and represents a three-year high.
French consumer spending fell 1.6% month-over-month in August after increasing by 2.7% in July, a report from the statistical office INSEE showed. Economists had expected only 0.2% fall. Annually, consumer spending grew 1.2%, faster than the consensus forecast for 0.9% growth.
The U.K. Office for National Statistics reported that the U.K. GDP growth for the second quarter was confirmed at initial estimate of 1.2% compared to the previous quarter. On a year-over-year basis, GDP growth was 1.7%. Meanwhile, a separate report showed that business investment in the U.K. rose by a revised sequential rate of 0.7% in the June quarter.
U.S. Economic Reports
The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 3.3% year-over-year increase in the 20-city composite house price index for July.
The house price index rose 1.3% month-over-month in June, marking the third straight month of growth. On a year-over-year basis, house prices climbed 4.2%.
The Conference Board is scheduled to release its consumer confidence report for September at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index fell to 53 in September.
The consumer confidence index for August rose 2.5 points to 53.5, marking the first increase since May. The present situations index fell 1.5 points to 24.9, but the expectations index rose about 5 points to 72.5.
Stocks in Focus
Walgreen (WAG) is likely to move in reaction to its announcement that its fourth quarter net earnings rose to 49 cents per share compared to 44 cents per share last year. The recent quarter’s results included charges of 5 cents per share compared to 3 cents per share in the year-ago period. Sales rose 7.4% year-over-year to $16.9 billion. Analysts estimated earnings of 44 cents per share on revenues of $16.84 billion.
Jabil Circuit (JBL) receded in Monday’s after hours session after it reported fourth quarter core earnings of 52 cents per share compared to 16 cents per share last year. Revenues rose to $3.86 billion from $2.80 billion last year. Analysts estimated earnings of 49 cents per share on revenues of $3.89 billion. The company expects first quarter core earnings of 53-57 cents per share on revenues of $3.9 billion to $4 billion. The consensus estimates call for earnings of 53 cents per share on revenues of $4.09 billion.
Boeing (BA) may see some activity after it announced that Air China has ordered for four of its long-haul airplane 777-300Ers valued at $1.1 billion at current list prices.
Rackspace Hosting (RAX) is expected to gain ground after Standard & Poor’s announced that the company would replace AmeriCredit (ACF) in the S&P MidCap 400 Index after the close of trading on September 30th. Watsco (WSO) will replace Hewitt Associates (HEW) in the S&P MidCap 400 Index and Super Micro Computer (SMCO) will replace Watsco in the S&P SmallCap 600 Index. Additionally, Riverbed Technology (RVBD) will replace NBTY (NTY) in the S&P MidCap 400 Index.
Pfizer’s (PFE) stock may see some ripples after it announced that it will discontinue the Phase III trials for evaluating its prostrate cancer treatment SUN 1120 in combination with prednisone following an independent evaluation committee’s finding that the combination is unlikely to improve overall survival when compared to prednisone alone.
Research In Motion (RIMM) could see some buying interest after it introduced its version of the Tablet PC named ‘the PlayBook’ at its annual developers’ conference. The company also unveiled other services such as the opening of BBM as a social platform and a BlackBerry Advertising service.
Avis Budget (CAR) is also expected to be in focus after it sent a letter to Dollar Thrifty (DTG) stating that its offer provides shareholders an opportunity to participate in a larger share of the value to be created through a business combination. The company also announced two concrete proposals to counter any opposition posed by anti-trust concerns. Earlier, Dollar Thrifty’s board reaffirmed its support for the offer by Hertz (HTZ).
Valero (VLO) is likely to move in reaction to its announcement that it has signed an agreement to sell the ownership of its 185,000 barrels per day Paulsboro refinery to PBF Holdings for a net sales price of $360 million plus the value of net working capital and inventories.
Alcoa (AA) may see some strength after it announced that is has won a contract to supply alloy sheet and plate for shipbuilder AUSTAL’s vessels, including commercial ships and U.S. Navy ships. The contract will run through 2014.
United Natural Foods (UNFI) could come under selling pressure after it announced that it has commenced an underwritten public offering of 3.85 million shares of its common stock.
Peet’s Coffee & Tea (PEET) may react to its announcement that it will increase prices of most drinks by 10 cents and that of beans sold in Peet’s stores by an average of 8%, effective September 29th. The pricing action follows a 35% increase in green Arabica coffee prices.
Boston Properties (BXP) could see some activity after it said it would buy Bay Colony Corporate Center in Waltham, Massachusetts, for about $185 million.
Paychex (PAYX) is also likely to be in focus after it reported that its first quarter earnings rose 6% to 36 cents per share and revenues climbed 4% to %518.3 million. Analysts estimated earnings of 34 cents per share on revenues of $507.53 million. The company also said it expects net income for the fiscal year to improve over fiscal 2010, while analysts look for a modest rise in earnings to $1.36 per share.
Tuesday, with sentiment likely to remain guarded ahead of the release of the consumer confidence report. Economic data from across the Atlantic has been encouraging, with Germany reporting a strong consumer confidence reading, while earlier in the day the Asian Development Bank gave an upbeat commentary on growth in developing Asian countries. Depending on how the U.S. consumer confidence index comes in, the markets may see a bounce or a retreat, although range bound trading is most likely.
U.S. stocks reversed course and ended Monday’s session on a moderately weak note, as traders showed indecision amid a lack of trading catalysts. The major averages opened lower and remained below the unchanged line for the better of the session before closing moderately lower.
With the markets trading at their highest levels in more than four months, uncertainty weighed on the averages and prevented any follow through buying. The Dow Industrials ended down 48.22 points or 0.44% at 10,812 and the Nasdaq Composite Index fell 11.45 points or 0.48% to close at 2,370, while the S&P 500 Index finished 6.51 points or 0.57% lower at 1,142.
Twenty-four of the thirty Dow components closed the session lower, with Alcoa (AA), Bank of America (BAC), General Electric (GE), JP Morgan Chase (JPM), Pfizer (PFE) and Travelers Co. (TRV) among the notable decliners. On the other hand, AT&T (T) rose over 1%.
Among the sector indexes, the NYSE Arca Biotechnology Index fell 1.27%, the KBW Bank Index slipped 1.87% and the NYSE Arca Disk Drive Index moved down 2.09%. However, the NYSE Arca Airline Index rose 1.84%.
Currency, Commodity Markets
Crude oil futures are moving down $0.70 to $75.82 a barrel after edging up $0.03 to $76.52 a barrel on Monday. Gold futures are currently receding $11.40 to $1,287.20 an ounce. In the previous session, the precious metal rose $0.50 to $1,298.60 an ounce.
Among currencies, the U.S. dollar is trading at 84.116 yen compared to the 84.2902 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is currently valued at $1.3468 compared to yesterday’s $1.3454.
Asia
The major Asian markets closed Tuesday’s session lower, as the negative lead from Wall Street overnight weighed on the averages. Negative sentiment prevailed despite the Asian Development Bank giving an upbeat outlook for the developing economies in Asia.
The 45 economies of developing Asia – spanning from countries in the Pacific to Central Asia – are now forecast to expand by an impressive 8.2%, well above the 5.4% growth recorded in 2009 and also above the 7.9% growth ADB forecast in July. The bank attributed the optimism to the region's strong export-based recovery, robust private demand, and the sustained effects of stimulus policies.
Japan’s Nikkei 225 average opened moderately lower and moved sideways until late trading before legging down further. The index closed down 107.38 points or 1.12% at 9,496. The general economic uncertainty and the yen’s strength along with the several stocks turning ex-dividend weighed on the index.
A majority of the stocks declined in the session, with Credit Saison, Eisai, Nippon Electric, Sky Perfect Jsat, Takeda Pharma, TDK and Trend Micro leading the slide. On the other hand, most resource and real estate stocks and some auto stocks closed the session higher.
Australia’s All Ordinaries languished in negative territory for the better part of the session amid some volatility to close down 5.20 points or 0.11% at 4,717. Material and energy stocks saw weakness, dragging the markets lower.
Hong Kong’s Hang Seng Index moved back and forth across the unchanged line in a very narrow range till the afternoon before pulling back sharply in the afternoon. The index closed down 230.89 points or 1.03% at 22,110.
Europe
The major European averages are trading Tuesday’s session on a mixed note, with the French CAC 40 Index and the German DAX Index are moving up 0.28% and 0.18%, respectively, while the U.K.’s FTSE 100 Index is retreating 0.19%.
In economic news, the GfK Institute said its forward-looking consumer sentiment indicator, based on a survey of about 2,000 Germans, jumped to 4.9 in October from 4.3 in September. This was well above analyst expectations for a score of 4.2 and represents a three-year high.
French consumer spending fell 1.6% month-over-month in August after increasing by 2.7% in July, a report from the statistical office INSEE showed. Economists had expected only 0.2% fall. Annually, consumer spending grew 1.2%, faster than the consensus forecast for 0.9% growth.
The U.K. Office for National Statistics reported that the U.K. GDP growth for the second quarter was confirmed at initial estimate of 1.2% compared to the previous quarter. On a year-over-year basis, GDP growth was 1.7%. Meanwhile, a separate report showed that business investment in the U.K. rose by a revised sequential rate of 0.7% in the June quarter.
U.S. Economic Reports
The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 3.3% year-over-year increase in the 20-city composite house price index for July.
The house price index rose 1.3% month-over-month in June, marking the third straight month of growth. On a year-over-year basis, house prices climbed 4.2%.
The Conference Board is scheduled to release its consumer confidence report for September at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index fell to 53 in September.
The consumer confidence index for August rose 2.5 points to 53.5, marking the first increase since May. The present situations index fell 1.5 points to 24.9, but the expectations index rose about 5 points to 72.5.
Stocks in Focus
Walgreen (WAG) is likely to move in reaction to its announcement that its fourth quarter net earnings rose to 49 cents per share compared to 44 cents per share last year. The recent quarter’s results included charges of 5 cents per share compared to 3 cents per share in the year-ago period. Sales rose 7.4% year-over-year to $16.9 billion. Analysts estimated earnings of 44 cents per share on revenues of $16.84 billion.
Jabil Circuit (JBL) receded in Monday’s after hours session after it reported fourth quarter core earnings of 52 cents per share compared to 16 cents per share last year. Revenues rose to $3.86 billion from $2.80 billion last year. Analysts estimated earnings of 49 cents per share on revenues of $3.89 billion. The company expects first quarter core earnings of 53-57 cents per share on revenues of $3.9 billion to $4 billion. The consensus estimates call for earnings of 53 cents per share on revenues of $4.09 billion.
Boeing (BA) may see some activity after it announced that Air China has ordered for four of its long-haul airplane 777-300Ers valued at $1.1 billion at current list prices.
Rackspace Hosting (RAX) is expected to gain ground after Standard & Poor’s announced that the company would replace AmeriCredit (ACF) in the S&P MidCap 400 Index after the close of trading on September 30th. Watsco (WSO) will replace Hewitt Associates (HEW) in the S&P MidCap 400 Index and Super Micro Computer (SMCO) will replace Watsco in the S&P SmallCap 600 Index. Additionally, Riverbed Technology (RVBD) will replace NBTY (NTY) in the S&P MidCap 400 Index.
Pfizer’s (PFE) stock may see some ripples after it announced that it will discontinue the Phase III trials for evaluating its prostrate cancer treatment SUN 1120 in combination with prednisone following an independent evaluation committee’s finding that the combination is unlikely to improve overall survival when compared to prednisone alone.
Research In Motion (RIMM) could see some buying interest after it introduced its version of the Tablet PC named ‘the PlayBook’ at its annual developers’ conference. The company also unveiled other services such as the opening of BBM as a social platform and a BlackBerry Advertising service.
Avis Budget (CAR) is also expected to be in focus after it sent a letter to Dollar Thrifty (DTG) stating that its offer provides shareholders an opportunity to participate in a larger share of the value to be created through a business combination. The company also announced two concrete proposals to counter any opposition posed by anti-trust concerns. Earlier, Dollar Thrifty’s board reaffirmed its support for the offer by Hertz (HTZ).
Valero (VLO) is likely to move in reaction to its announcement that it has signed an agreement to sell the ownership of its 185,000 barrels per day Paulsboro refinery to PBF Holdings for a net sales price of $360 million plus the value of net working capital and inventories.
Alcoa (AA) may see some strength after it announced that is has won a contract to supply alloy sheet and plate for shipbuilder AUSTAL’s vessels, including commercial ships and U.S. Navy ships. The contract will run through 2014.
United Natural Foods (UNFI) could come under selling pressure after it announced that it has commenced an underwritten public offering of 3.85 million shares of its common stock.
Peet’s Coffee & Tea (PEET) may react to its announcement that it will increase prices of most drinks by 10 cents and that of beans sold in Peet’s stores by an average of 8%, effective September 29th. The pricing action follows a 35% increase in green Arabica coffee prices.
Boston Properties (BXP) could see some activity after it said it would buy Bay Colony Corporate Center in Waltham, Massachusetts, for about $185 million.
Paychex (PAYX) is also likely to be in focus after it reported that its first quarter earnings rose 6% to 36 cents per share and revenues climbed 4% to %518.3 million. Analysts estimated earnings of 34 cents per share on revenues of $507.53 million. The company also said it expects net income for the fiscal year to improve over fiscal 2010, while analysts look for a modest rise in earnings to $1.36 per share.
The 42 Principles of Ma'at
These predate the 10 commandments by over two thousand years.
I.
Thou shalt not kill, nor bid anyone kill.
II.
Thou shalt not commit adultery or rape.
III.
Thou shalt not avenge thyself nor burn with rage.
IV.
Thou shalt not cause terror.
V.
Thou shalt not assault anyone nor cause anyone pain.
VI.
Thou shalt not cause misery.
VII.
Thou shalt not do any harm to man or to animals.
VIII.
Thou shalt not cause the shedding of tears.
IX.
Thou shalt not wrong the people nor bear them any evil intent.
X.
Thou shalt not steal nor take that which does not belong to you.
XI.
Thou shalt not take more than thy fair share of food.
XII.
Thou shalt not damage the crops, the fields, or the trees.
XIII.
Thou shalt not deprive anyone of what is rightfully theirs.
XIV.
Thou shalt not bear false witness, nor support false allegations.
XV.
Thou shalt not lie, nor speak falsely to the hurt of another.
XVI.
Thou shalt not use fiery words nor stir up any strife.
XVII.
Thou shalt not speak or act deceitfully to the hurt of another.
XVIII.
Thou shalt not speak scornfully against others.
XIX.
Thou shalt not eavesdrop.
XX.
Thou shalt not ignore the truth or words of righteousness.
XXI.
Thou shalt not judge anyone hastily or harshly.
XXII.
Thou shalt not disrespect sacred places.
XXIII.
Thou shalt cause no wrong to be done to any workers or prisoners.
XXIV.
Thou shalt not be angry without good reason.
XXV.
Thou shalt not hinder the flow of running water.
XXVI.
Thou shalt not waste the running water.
XXVII.
Thou shalt not pollute the water or the land.
XXVIII.
Thou shalt not take God's name in vain.
XXIX.
Thou shalt not despise nor anger God.
XXX.
Thou shalt not steal from God.
XXXI.
Thou shalt not give excessive offerings nor less than what is due.
XXXII.
Thou shalt not covet thy neighbor's goods.
XXXIII.
Thou shalt not steal from nor disrespect the dead.
XXXIV.
Thou shalt remember and observe the appointed holy days.
XXXV.
Thou shalt not hold back the offerings due God.
XXXVI.
Thou shalt not interfere with sacred rites.
XXXVII.
Thou shalt not slaughter with evil intent any sacred animals.
XXXVIII.
Thou shalt not act with guile or insolence.
XXXIX.
Thou shalt not be unduly proud nor act with arrogance.
XL.
Thou shalt not magnify your condition beyond what is appropriate.
XLI.
Thou shalt do no less than your daily obligations require.
XLII. Thou shalt obey the law and commit no treason.
I.
Thou shalt not kill, nor bid anyone kill.
II.
Thou shalt not commit adultery or rape.
III.
Thou shalt not avenge thyself nor burn with rage.
IV.
Thou shalt not cause terror.
V.
Thou shalt not assault anyone nor cause anyone pain.
VI.
Thou shalt not cause misery.
VII.
Thou shalt not do any harm to man or to animals.
VIII.
Thou shalt not cause the shedding of tears.
IX.
Thou shalt not wrong the people nor bear them any evil intent.
X.
Thou shalt not steal nor take that which does not belong to you.
XI.
Thou shalt not take more than thy fair share of food.
XII.
Thou shalt not damage the crops, the fields, or the trees.
XIII.
Thou shalt not deprive anyone of what is rightfully theirs.
XIV.
Thou shalt not bear false witness, nor support false allegations.
XV.
Thou shalt not lie, nor speak falsely to the hurt of another.
XVI.
Thou shalt not use fiery words nor stir up any strife.
XVII.
Thou shalt not speak or act deceitfully to the hurt of another.
XVIII.
Thou shalt not speak scornfully against others.
XIX.
Thou shalt not eavesdrop.
XX.
Thou shalt not ignore the truth or words of righteousness.
XXI.
Thou shalt not judge anyone hastily or harshly.
XXII.
Thou shalt not disrespect sacred places.
XXIII.
Thou shalt cause no wrong to be done to any workers or prisoners.
XXIV.
Thou shalt not be angry without good reason.
XXV.
Thou shalt not hinder the flow of running water.
XXVI.
Thou shalt not waste the running water.
XXVII.
Thou shalt not pollute the water or the land.
XXVIII.
Thou shalt not take God's name in vain.
XXIX.
Thou shalt not despise nor anger God.
XXX.
Thou shalt not steal from God.
XXXI.
Thou shalt not give excessive offerings nor less than what is due.
XXXII.
Thou shalt not covet thy neighbor's goods.
XXXIII.
Thou shalt not steal from nor disrespect the dead.
XXXIV.
Thou shalt remember and observe the appointed holy days.
XXXV.
Thou shalt not hold back the offerings due God.
XXXVI.
Thou shalt not interfere with sacred rites.
XXXVII.
Thou shalt not slaughter with evil intent any sacred animals.
XXXVIII.
Thou shalt not act with guile or insolence.
XXXIX.
Thou shalt not be unduly proud nor act with arrogance.
XL.
Thou shalt not magnify your condition beyond what is appropriate.
XLI.
Thou shalt do no less than your daily obligations require.
XLII. Thou shalt obey the law and commit no treason.
ARROW OFFERS A MARKET-NEUTRAL MULTI-STRATEGY FUND
| ||||
| Arrow Curvature Market Neutral Fund, advised by James Hodgins of CHS Asset Management Inc., targets investors seeking a market-neutral strategy with above-average growth and moderate volatility. TORONTO, Sept. 28 /CNW/ - Arrow Hedge Partners Inc. today announced the launch of Arrow Curvature. The Fund will invest in securities of small- and mid-cap companies, primarily in Canada and the United States. The Fund's investment objective is to remain market neutral while maximizing absolute return on investments, with less than half the volatility of broad equity markets. Arrow Hedge completed its due diligence process on this manager and allocated to this Fund through their Arrow Multi-Strategy Fund mid-2009. The Fund is advised by James Hodgins of CHS Asset Management Inc., and is now available for purchase on a stand-alone basis by accredited investors. "This Fund performs best in down markets or markets with normal to high levels of volatility and employs a proven proprietary, model-driven strategy developed and refined from over a decade of institutional investing and trading," says Mark Purdy, Managing Director and Chief Investment Officer of Arrow Hedge Partners. The fund manager invests using three distinct, synergistic sub-strategies. The first strategy is a research-intensive fundamental strategy that studies and analyzes the change in factors affecting the value of a stock. These changes may be macroeconomic in nature or company specific. The second strategy is a model-driven systematic strategy designed to focus on company-specific changes so as to identify profitable opportunities given the macroeconomic backdrop. Lastly, the fund uses an event-driven strategy that captures arbitrage opportunities created as a result of mergers, restructurings and other corporate events. "We have entered a period of higher volatility," claims Purdy. He goes on to add, "It is important to invest your capital with proven managers who have protected on the downside and generated positive returns in varying market conditions." "The key to this process is that it provides a return stream that is typically not correlated with equity markets or traditional relative value hedge fund strategies," says James Hodgins, Chief Investment Officer of CHS Asset Management Inc. "Further, it provides our investors with protection against systemic declines in risk assets as seen in 2007-2008 and which we have seen recently." About Arrow Hedge Partners Inc.Arrow Hedge Partners Inc. is an investment management company that specializes in providing access to high-quality hedge fund managers and multi-manager funds of funds to a wide range of clients, including family offices, institutions, pension funds and high net-worth individuals. Arrow Hedge Partners Inc. is a member of AIMA (Alternative Investment Management Association) and is a substantial co-investor in its own funds. Arrow Hedge Partners Inc. is headquartered in Toronto, Canada, with sales offices in Vancouver, Calgary and Geneva. Arrow Hedge currently manages over CDN$850 million on behalf of high net-worth and institutional investors globally. About CHS Asset Management Inc.Curvature is a Toronto-based market-neutral hedge fund, focused on generating alpha in the Canadian and U.S. small- and mid-cap equity markets (defined as less than approximately $2.5 billion market cap). The Fund was founded in December 2008 and current assets are approximately $22 million, through Canadian and offshore entities. Current key investors are large, highly respected Canadian funds of funds. For further information: << Arrow Hedge Partners Inc. Jim McGovern (416) 323-0477, ext. 222 jmcgovern@arrowhedge.com Mark Purdy (416) 323-0477, ext. 223 mpurdy@arrowhedge.com >> | ||||
Monday, September 27, 2010
Stocks Modestly Lower In Mid-Morning Trading
Stocks Modestly Lower In Mid-Morning Trading
Stocks are showing modest weakness in mid-morning trading on Monday, as traders are taking some profits following last week’s strong gains. Nonetheless, selling remains subdued amid the lack of significant economic news.
The major averages have all seen choppy movement recently as they linger just below the flat line. The Dow is currently down 18.51 points or 0.2 percent at 10,841.75, the Nasdaq is down 5.62 points or 0.2 percent at 2,375.60 and the S&P 500 is down 2.13 points or 0.2 percent at 1,146.54.
In M&A news, discount retail giant Wal-Mart (WMT) revealed a bid to acquire South African Massmart Holdings Ltd. for roughly $4.25 billion or $21.13 per share. Massmart is a leading African retailer of general merchandise, home improvement equipment and supplies.
Southwest Airlines Co. (LUV) also announced that it entered an agreement to acquire AirTran Holdings Inc. (AAI) for approximately $1.4 billion, including debt.
Additionally, Anglo-Dutch consumer products maker Unilever PLC (UL) announced a definitive deal to acquire U.S.-based Alberto-Culver Co. (ACV) for $3.7 billion in cash. Unilever expects the acquisition to be accretive to earnings in the first full year, excluding restructuring costs.
In earnings news, Cal-Maine Foods Inc.’s (CALM) reported first-quarter net income of $4.76 million or $0.20 per share compared with a loss of $3.83 million or $0.16 per share in the same period last year. On average, analysts expected loss per share of $0.07 for the quarter.
Cal-Maine reported net sales for the quarter of $190.4 million, just above expectations for $190.08 million.
Sector News
Electronic storage stocks are among the markets worst performers in the early going, with the NYSE Arca Disk Drive Index posting a 1.6 percent loss. Within the sector, NetApp, Inc. (NTAP) is down by 1.1 percent, falling from a nine year closing high set in the previous session.
Commercial real estate and housing stocks are also seeing moderate weakness, with the Morgan Stanley REIT Index and the Philadelphia Housing Sector Index down by 1 percent and 0.6 percent, respectively.
Banking, gold and tobacco stocks are also trading lower, while airline stocks are markedly higher after Southwest agreed to acquire AirTran. The NYSE Arca Airline Index is up by 2.3 percent and is on pace for a fresh two and a half year closing high.
Stocks Driven By Analyst Comments
Online advertiser ValueClick (VCLK) is trading lower after being downgraded at Merriman from Buy to Neutral. The stock is down by 2.5 percent, slipping from its best closing level in more than two years.
Fair Isaac (FICO) is also under pressure after analysts at Northland Securities lowered their rating on the stock from Outperform to Market Perform. The stock is currently posting a loss of 3.9 percent, falling from Friday’s five-month closing high.
On the other hand, DryShips (DRYS) is trading higher after Morgan Stanley upgraded the stock to Equalweight, citing an improved market for potential asset sales. The stock is up by 5.5 percent, setting a three-week intraday high.
Other Markets
Overseas, the major stock markets in the Asia-Pacific region ended on the upside. Japan’s benchmark Nikkei 225 Index gained by 1.4 percent, while Hong Kong’s Hang Seng index advanced by 1 percent.
Meanwhile, the major European markets are seeing modest losses. The French CAC 40 Index, the German DAX Index and the U.K.’s FTSE 100 Index are all down by roughly 0.3 percent.
In the bond markets, treasuries are moderately higher. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.542 percent, posting a loss of 7 basis points.
Canadian Market Reports
Toronto Stocks Look To Rise Monday Morning
Canadian stocks will look to extend their strong gains from the previous session Monday morning in Toronto, but early signals are mixed as a rally in commodity prices paused in early dealing.
Rising gold and oil prices have helped Canadian stocks rise for five weeks out of the last six. On Friday, the S&P/TSX Composite Index advanced 103.07 points or 0.9% to 12,204.86, notching up a modest gain for the week.
Energy stocks look to proved support this morning, with Light sweet crude oil for November delivery presently quoted at $76.55 a barrel, up $0.06 a barrel from Friday.
Gold stocks will continue to shine, as bullion prices peaked above $1300 an ounce for the first time ever last week, and remain near that mark Monday morning, Analysts are saying $1500 gold is just around the corner, as investors continue to be spooked by the possibility of runaway inflation further up the road.
Stocks in the news this morning include Angiotech Pharma, which said that Boston Scientific Corp’s three year follow up data from the Horizon -AMI trial of Taxus Express Paclitaxel-Eluting Stent recorded significant reductions in re-intervention at three years compared to bare-metal Stent in patients experiencing heart attack or acute myocardial infarction.
Boston is the corporate partner of Angiotech. The randomized study in 3006 patients worldwide showed that the paclitaxel-eluting stents were more efficient than bare metal stents.
In the mining sector, moly minerThompson Creek Metals Company Inc. announced that the Supreme Court of British Columbia has issued a final order to approve its acquisition of Terrane Metals Corp.
Forex Top Story
Dollar On The Ropes, Unable To Fight Back Monday Morning
The dollar failed to make up any ground versus Monday morning, following big losses in the previous week. With no first-tier economic data on tap from the US today, trading is expected to remain subdued.
Last week the Federal Reserve signaled it is prepared to bolster the economic recovery through quantitative easing measures. Interest rates are expected to remain near zero for an extended period, making the dollar less attractive.
The buck touched a fresh 5-month low of 1.3494 against the euro late last night, and was little changed from that mark approaching mid-morning.
The eurozone’s leading economic indicator climbed 0.4% in August compared to July, the Conference Board said on Monday. This followed a 0.8% increase in July and a 0.5% rise in June.
“The [leading index] for the euro area suggests that the slowdown in economic activity should be moderating in the near-term,” said Jean-Claude Manini, Conference Board senior economist for Europe.
The European Central Bank considered a rescue of Ireland before deciding not to, according to German daily Handelsblatt.
Against the sterling, the dollar hit 1.5845 — its lowest since August 10.
The dollar stood still against the yen around Y84.20. The buck hit a 15-year low of 82.86 earlier this month, and has failed to rally despite an intervention from Japanese officials to devalue the yen.
Bank of Japan Governor Maasaki Shirakawa on Monday said the central bank “will pay close attention” to developments in currency markets and may have a second go at intervention.
“The Japanese government has made it clear that it will continue to pay due attention to developments in the foreign exchange markets, and will take decisive actions, including interventions, if it deems it necessary,” he told business leaders in Osaka.
While there is little economic news for the markets to sink their teeth into today, later this week the focus should turn to the final reading on second quarter GDP, along with reports on jobless claims, consumer sentiment and manufacturing activity.
Asia Market Reports
Asian Markets End In Positive Territory
Asian markets open for trading on Monday, the first day of the fresh trading week, in positive territory with moderate gains, but off the day’s high, on optimism about global economic recovery and expectations of quantitative easing measures from the Federal Reserve to support the economy. Positive closing on Wall Street in the previous session, driving the major averages to a four-month high, helped lift market sentiment across the region.
In Australia, the benchmark S&P/ASX200 Index surged up 73.40 points, or 1.59%, and closed at 4,675 points, while the All-Ordinaries Index ended at 4,722, representing a gain of 70.60 points, or 1.52%.
Banks led the gains in the market on optimism about sustaining global economic recovery. ANZ Bank gained 2.54%, Commonwealth Bank of Australia advanced 2.01%, National Australia Bank added 1.76% and Westpac Banking Corp was up 1.96%. Investment banking company Macquarie Group climbed 2.61%.
Mining and metal stocks also advanced on expectation of higher demand. BHP Billiton advanced 1.59%, Rio Tinto climbed 2.05%, Fortescue Metals gained 1.79%, Gindalbie Metals rose 2.81%, Iluka Resources surged up 4.78%, Macarthur Coal added 0.98%, Mincor Resources increased 2.30%, and Oz Minerals was higher by 2.48%. However, Murchison Metals bucked the trend and plunged 10.22%.
Oil-related stocks ended in positive territory. Woodside Petroleum added 0.79%, Santos Ltd advanced 1.33%, ROC Oil Ltd gained 1.25%, Oil Search Ltd rose 1.49% and Origin Energy climbed 1.81%.
Gold-related stocks, however, bucked the trend and ended in negative territory. Newcrest Mining was down 0.55% and Kingsgate Consolidated shed 0.50%.
Stocks of retailers also ended in positive territory. David Jones added 1.21%, Harvey Norman advanced 1.58%, JB Hi-Fi Ltd gained 0.79%, Reject Shop climbed 1.79%, Wesfarmers surged up 2.90% and Woolworths was higher by 1.59%.
In Japan, the benchmark Nikkei 225 Index gained 131.47 points, or 1.39%, to close at 9,603.14 while the broader Topix index of all First Section issues was up 10.89 points, or 1.30% to 849.
On the economic front, a report released by the Ministry of Finance revealed that Japan posted a merchandise trade surplus of 103.2 billion yen in August, down 37.5% on year, and well below the analysts’ expectations for a 200 billion yen surplus, following a revised 802.0 billion yen surplus in July. The report revealed that exports were up 15.8% on year – again missing forecasts for a 19.0% increase following the 23.5% surge in the previous month. Imports jumped 17.9%, exceeding expectations for a 175% gain after collecting a revised 15.7% a month earlier. The adjusted merchandise trade balance showed a surplus of 589.7 billion yen, beating forecasts for a 522.1 billion yen surplus following the 594.8 billion yen surplus in July.
A statement released by the Bank of Japan revealed an index measuring corporate service prices in the country was down 1.1% on year in August, posting a score of 96.8. That was slightly better than forecasts for a 1.2% annual contraction following the revised 1.1% fall in July – which had an original reading of -1.2 percent on year. On a monthly basis, corporate service prices eased 0.4 percent following the revised 0.3 percent decline in July.
Electric machinery stocks led the gains in the market on optimism about sustaining global economic recovery and pick-up in global demand. Fanuc Ltd surged up 3.17%, Kyocera Corp. climbed 2.89%, Tokyo Electron gained 2.00%, Advantest Corp. rose 1.93%, Denso Corp. was higher by 2.90% and Mitsumi Electric Co., increased by 1.83%.
Exporters also ended in positive territory. Canon Inc. climbed 2.50%, Sony Corp. advanced 1.43%, Sharp Corp. gained 1.89% and Panasonic Corp. surged up 3.02%.
Automotive stocks also ended higher. Honda Motor Co., climbed 2.87%, Toyota Motor added 1.14%, Suzuki Motor Corp. advanced 1.05%, Nissan Motor Co. gained 2.44%, Isuzu Motors surged up 3.37%, Mazda Motors rose 2.02% and Mitsubishi Motors advanced 0.93%.
Trading companies ended in positive territory. Mitsubishi Corp. soared 3.24%, Mitsui & Co. Ltd climbed 3.31%, Sumitomo Corp. surged 3.10%, Itochu Corp. was up by 3.63% and Toyota Tsusho Corp. increased 1.45%.
The Indian market closed firm on Monday, extending its upward momentum for a fourth consecutive week, as encouraging reports on U.S. durable goods and new home sales eased concerns that the U.S. economic recovery is faltering. That said, the benchmarks pared their early gains, as profit taking crept in at higher levels. After climbing over a percent to a fresh 32-month high of 20,268 earlier in the session, the 30-share Sensex closed off the day’s high at 20,117, up 72 points or 0.36%, with 19 of its components edging higher. Likewise, the broader Nifty shed most of its early gains to end higher by 17 points or 0.29% at 6,036.
Among the other markets in the region, China’s Shanghai Composite Index gained 36.42 points, or 1.41%, to 2,628, Jakarta Composite Index in Indonesia surged up 70.41 points, or 2.07%, at 3,468, the Strait Times Index in Singapore advanced 20.78 points, or 0.67%, to close at 3,113, and Taiwan Weighted Index gained 24.92 points, or 0.31%, to close at 8,192.
European Market Updates
French Market Erases Early Gains
The French market erased early gains and is currently losing in afternoon trading Monday, as firm cues from Asia were overshadowed by the re-emergence of economic worries.
Crude for November delivery is trading higher by $0.26 at $76.75 per barrel and December gold is adding $1.6 at $1299.7 an ounce.
In economic news, data from the European Central Bank showed loans to Eurozone firms and households increased in August at the fastest pace since June 2009 and the growth in broad money supply improved more than expected. Total credit extended to euro area residents rose 2.2% annually, up from 1.8% increase in July.
Meanwhile, the eurozone’s leading economic indicator climbed 0.4% in August compared to July, the Conference Board said. This followed a 0.8% increase in July and a 0.5% rise in June.
The latest survey from the Confederation of British Industry and PricewaterhouseCoopers LLP showed the UK financial services sector activity during three months to September improved at the fastest pace since June 2007. Around 37% of respondents said business volumes rose, while 9% said they fell during the period. The resulting balance of positive 28% was the most positive since June 2007.
House prices in England and Wales dropped for the third straight month in September, due to supply continuing to outstrip demand, survey results revealed. The average asking price for a home decreased 0.4% month-over-month to 157,600 pounds, reports said citing data from Hometrack. This represents the biggest recorded fall in house prices since March 2009 after a 0.3% fall in August.
The Swedish trade balance showed a shortfall of SEK 2.8 billion in August after recording a surplus of SEK 10.2 billion in July, Statistics Sweden said. Shipments in August climbed at a pace of 15% on an annual comparison to SEK 85.3 billion, while imports rose 27% to SEK 88.1 billion.
Chinese industrial profits leaped 55% in the first eight months of 2010 to 2.6 trillion yuan compared with the same period last year, the National Bureau of Statistics said.
After opening higher at 3,797, the CAC 40 has remained in positive territory for most of the session, but is currently losing 0.01%.
Grocery retailer Carrefour is losing 1.9%, reportedly on an analyst downgrade. Insurer Axa and drug maker Sanofi-Aventis are sliding 1.4% and 1%, respectively. The Wall Street Journal reported that Sanofi-Aventis is seeking additional funding to raise its offer for U.S. biotechnology company Genzyme.
Among lenders, Natixis and Credit Agricole are sliding 0.6% and 0.5%, respectively. However, BNP Paribas is adding 0.6% and Societe Generale is adding 0.01%.
Hotel group Accor is gaining 2.2%, thus leading the gainers on the index. Car maker Peugeot is adding 1.95% and Renault is rising 0.84%.
Beverages firm Pernod-Ricard is adding 1.8% and telecom equipment maker Alcatel Lucent is rising 1.4%. Cement giant Lafarge is up 1.3% and building materials maker Saint-Gobain is rising 1%.
Elsewhere in Europe, the UK’s FTSE 100 is falling 0.13% and the German DAX is adding 0.01%.
Stocks in Focus
Southwest Airlines (LUV) is expected to be in focus after it announced a deal to buy AirTran Holdings (AAI), the parent of AirTran Holdings in a cash and stock deal for $7.69 per share or a total of $1.37 billion.
Allergan (AGN) could see some activity after Unilever (UL) announced that it would buy the former for $3.7 billion in cash. Separately, on Friday, Allergan announced that the FDA has approved OZURDEX 0.7 mg for the treatment of non-infectious ocular inflammation affecting the posterior segment of the eye.
Wal-Mart (WMT) may move in reaction to its announcement that it has made a preliminary, non-binding proposal to buy South Africa’s Massmart Holdings for 148 South African rand per share.
Cracker Barrel Old Country Store (CBRL) is likely to be in focus after it announced a 10% increase in its dividend to 22 cents per share.
U.S. Economic Reports
With recent economic reports generating some optimism regarding economic recovery, the markets now turn their attention to the unfolding week. The weekly jobless claims report, the Institute for Supply Management’s manufacturing purchasing managers’ index, the ISM-Chicago’s manufacturing index, the Conference Board’s consumer confidence report and the final report of the Reuters/University of Michigan’s consumer sentiment survey are among the key economic reports of the unfolding week.
The S&P Case-Shiller house price index, the final second quarter GDP report, the Bureau of Economic Analysis’ personal income and outlays report, the Commerce Department’s construction spending report, a few Fed speeches and the Treasury auctions of 2-year, 5-year and 7-year notes round up the other economic events of the week.
The ISM’s manufacturing index is expected to pull back from the previous month’s levels, as the results of the regional manufacturing surveys suggest that the manufacturing sector is seeing some degree of stabilization, while the national manufacturing index remains elevated.
Economists expect the two consumer confidence readings of the week to send mixed signals. The Reuters/University of Michigan’s survey is expected to show a modest improvement in consumer sentiment, while the Conference Board’s survey is likely to show a slight deterioration in consumer confidence.
The FOMC’s announcement last week that inflation is trending below levels that it considers consistent with the central bank’s twin objectives of maximum employment and price stability shifts the market focus to the core personal consumption expenditure price index. The personal income and spending report is expected to show that the measure rose 0.1% in August, keeping the annual rate unchanged at 1.4%.
BMO Capital markets believes that sub-par economic growth will likely guide core inflation lower and the Fed on a path towards further quantitative easing. Personal spending should receive some support from the increase in average hourly earnings and the number of hours worked.
Stocks are showing modest weakness in mid-morning trading on Monday, as traders are taking some profits following last week’s strong gains. Nonetheless, selling remains subdued amid the lack of significant economic news.
The major averages have all seen choppy movement recently as they linger just below the flat line. The Dow is currently down 18.51 points or 0.2 percent at 10,841.75, the Nasdaq is down 5.62 points or 0.2 percent at 2,375.60 and the S&P 500 is down 2.13 points or 0.2 percent at 1,146.54.
In M&A news, discount retail giant Wal-Mart (WMT) revealed a bid to acquire South African Massmart Holdings Ltd. for roughly $4.25 billion or $21.13 per share. Massmart is a leading African retailer of general merchandise, home improvement equipment and supplies.
Southwest Airlines Co. (LUV) also announced that it entered an agreement to acquire AirTran Holdings Inc. (AAI) for approximately $1.4 billion, including debt.
Additionally, Anglo-Dutch consumer products maker Unilever PLC (UL) announced a definitive deal to acquire U.S.-based Alberto-Culver Co. (ACV) for $3.7 billion in cash. Unilever expects the acquisition to be accretive to earnings in the first full year, excluding restructuring costs.
In earnings news, Cal-Maine Foods Inc.’s (CALM) reported first-quarter net income of $4.76 million or $0.20 per share compared with a loss of $3.83 million or $0.16 per share in the same period last year. On average, analysts expected loss per share of $0.07 for the quarter.
Cal-Maine reported net sales for the quarter of $190.4 million, just above expectations for $190.08 million.
Sector News
Electronic storage stocks are among the markets worst performers in the early going, with the NYSE Arca Disk Drive Index posting a 1.6 percent loss. Within the sector, NetApp, Inc. (NTAP) is down by 1.1 percent, falling from a nine year closing high set in the previous session.
Commercial real estate and housing stocks are also seeing moderate weakness, with the Morgan Stanley REIT Index and the Philadelphia Housing Sector Index down by 1 percent and 0.6 percent, respectively.
Banking, gold and tobacco stocks are also trading lower, while airline stocks are markedly higher after Southwest agreed to acquire AirTran. The NYSE Arca Airline Index is up by 2.3 percent and is on pace for a fresh two and a half year closing high.
Stocks Driven By Analyst Comments
Online advertiser ValueClick (VCLK) is trading lower after being downgraded at Merriman from Buy to Neutral. The stock is down by 2.5 percent, slipping from its best closing level in more than two years.
Fair Isaac (FICO) is also under pressure after analysts at Northland Securities lowered their rating on the stock from Outperform to Market Perform. The stock is currently posting a loss of 3.9 percent, falling from Friday’s five-month closing high.
On the other hand, DryShips (DRYS) is trading higher after Morgan Stanley upgraded the stock to Equalweight, citing an improved market for potential asset sales. The stock is up by 5.5 percent, setting a three-week intraday high.
Other Markets
Overseas, the major stock markets in the Asia-Pacific region ended on the upside. Japan’s benchmark Nikkei 225 Index gained by 1.4 percent, while Hong Kong’s Hang Seng index advanced by 1 percent.
Meanwhile, the major European markets are seeing modest losses. The French CAC 40 Index, the German DAX Index and the U.K.’s FTSE 100 Index are all down by roughly 0.3 percent.
In the bond markets, treasuries are moderately higher. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.542 percent, posting a loss of 7 basis points.
Canadian Market Reports
Toronto Stocks Look To Rise Monday Morning
Canadian stocks will look to extend their strong gains from the previous session Monday morning in Toronto, but early signals are mixed as a rally in commodity prices paused in early dealing.
Rising gold and oil prices have helped Canadian stocks rise for five weeks out of the last six. On Friday, the S&P/TSX Composite Index advanced 103.07 points or 0.9% to 12,204.86, notching up a modest gain for the week.
Energy stocks look to proved support this morning, with Light sweet crude oil for November delivery presently quoted at $76.55 a barrel, up $0.06 a barrel from Friday.
Gold stocks will continue to shine, as bullion prices peaked above $1300 an ounce for the first time ever last week, and remain near that mark Monday morning, Analysts are saying $1500 gold is just around the corner, as investors continue to be spooked by the possibility of runaway inflation further up the road.
Stocks in the news this morning include Angiotech Pharma, which said that Boston Scientific Corp’s three year follow up data from the Horizon -AMI trial of Taxus Express Paclitaxel-Eluting Stent recorded significant reductions in re-intervention at three years compared to bare-metal Stent in patients experiencing heart attack or acute myocardial infarction.
Boston is the corporate partner of Angiotech. The randomized study in 3006 patients worldwide showed that the paclitaxel-eluting stents were more efficient than bare metal stents.
In the mining sector, moly minerThompson Creek Metals Company Inc. announced that the Supreme Court of British Columbia has issued a final order to approve its acquisition of Terrane Metals Corp.
Forex Top Story
Dollar On The Ropes, Unable To Fight Back Monday Morning
The dollar failed to make up any ground versus Monday morning, following big losses in the previous week. With no first-tier economic data on tap from the US today, trading is expected to remain subdued.
Last week the Federal Reserve signaled it is prepared to bolster the economic recovery through quantitative easing measures. Interest rates are expected to remain near zero for an extended period, making the dollar less attractive.
The buck touched a fresh 5-month low of 1.3494 against the euro late last night, and was little changed from that mark approaching mid-morning.
The eurozone’s leading economic indicator climbed 0.4% in August compared to July, the Conference Board said on Monday. This followed a 0.8% increase in July and a 0.5% rise in June.
“The [leading index] for the euro area suggests that the slowdown in economic activity should be moderating in the near-term,” said Jean-Claude Manini, Conference Board senior economist for Europe.
The European Central Bank considered a rescue of Ireland before deciding not to, according to German daily Handelsblatt.
Against the sterling, the dollar hit 1.5845 — its lowest since August 10.
The dollar stood still against the yen around Y84.20. The buck hit a 15-year low of 82.86 earlier this month, and has failed to rally despite an intervention from Japanese officials to devalue the yen.
Bank of Japan Governor Maasaki Shirakawa on Monday said the central bank “will pay close attention” to developments in currency markets and may have a second go at intervention.
“The Japanese government has made it clear that it will continue to pay due attention to developments in the foreign exchange markets, and will take decisive actions, including interventions, if it deems it necessary,” he told business leaders in Osaka.
While there is little economic news for the markets to sink their teeth into today, later this week the focus should turn to the final reading on second quarter GDP, along with reports on jobless claims, consumer sentiment and manufacturing activity.
Asia Market Reports
Asian Markets End In Positive Territory
Asian markets open for trading on Monday, the first day of the fresh trading week, in positive territory with moderate gains, but off the day’s high, on optimism about global economic recovery and expectations of quantitative easing measures from the Federal Reserve to support the economy. Positive closing on Wall Street in the previous session, driving the major averages to a four-month high, helped lift market sentiment across the region.
In Australia, the benchmark S&P/ASX200 Index surged up 73.40 points, or 1.59%, and closed at 4,675 points, while the All-Ordinaries Index ended at 4,722, representing a gain of 70.60 points, or 1.52%.
Banks led the gains in the market on optimism about sustaining global economic recovery. ANZ Bank gained 2.54%, Commonwealth Bank of Australia advanced 2.01%, National Australia Bank added 1.76% and Westpac Banking Corp was up 1.96%. Investment banking company Macquarie Group climbed 2.61%.
Mining and metal stocks also advanced on expectation of higher demand. BHP Billiton advanced 1.59%, Rio Tinto climbed 2.05%, Fortescue Metals gained 1.79%, Gindalbie Metals rose 2.81%, Iluka Resources surged up 4.78%, Macarthur Coal added 0.98%, Mincor Resources increased 2.30%, and Oz Minerals was higher by 2.48%. However, Murchison Metals bucked the trend and plunged 10.22%.
Oil-related stocks ended in positive territory. Woodside Petroleum added 0.79%, Santos Ltd advanced 1.33%, ROC Oil Ltd gained 1.25%, Oil Search Ltd rose 1.49% and Origin Energy climbed 1.81%.
Gold-related stocks, however, bucked the trend and ended in negative territory. Newcrest Mining was down 0.55% and Kingsgate Consolidated shed 0.50%.
Stocks of retailers also ended in positive territory. David Jones added 1.21%, Harvey Norman advanced 1.58%, JB Hi-Fi Ltd gained 0.79%, Reject Shop climbed 1.79%, Wesfarmers surged up 2.90% and Woolworths was higher by 1.59%.
In Japan, the benchmark Nikkei 225 Index gained 131.47 points, or 1.39%, to close at 9,603.14 while the broader Topix index of all First Section issues was up 10.89 points, or 1.30% to 849.
On the economic front, a report released by the Ministry of Finance revealed that Japan posted a merchandise trade surplus of 103.2 billion yen in August, down 37.5% on year, and well below the analysts’ expectations for a 200 billion yen surplus, following a revised 802.0 billion yen surplus in July. The report revealed that exports were up 15.8% on year – again missing forecasts for a 19.0% increase following the 23.5% surge in the previous month. Imports jumped 17.9%, exceeding expectations for a 175% gain after collecting a revised 15.7% a month earlier. The adjusted merchandise trade balance showed a surplus of 589.7 billion yen, beating forecasts for a 522.1 billion yen surplus following the 594.8 billion yen surplus in July.
A statement released by the Bank of Japan revealed an index measuring corporate service prices in the country was down 1.1% on year in August, posting a score of 96.8. That was slightly better than forecasts for a 1.2% annual contraction following the revised 1.1% fall in July – which had an original reading of -1.2 percent on year. On a monthly basis, corporate service prices eased 0.4 percent following the revised 0.3 percent decline in July.
Electric machinery stocks led the gains in the market on optimism about sustaining global economic recovery and pick-up in global demand. Fanuc Ltd surged up 3.17%, Kyocera Corp. climbed 2.89%, Tokyo Electron gained 2.00%, Advantest Corp. rose 1.93%, Denso Corp. was higher by 2.90% and Mitsumi Electric Co., increased by 1.83%.
Exporters also ended in positive territory. Canon Inc. climbed 2.50%, Sony Corp. advanced 1.43%, Sharp Corp. gained 1.89% and Panasonic Corp. surged up 3.02%.
Automotive stocks also ended higher. Honda Motor Co., climbed 2.87%, Toyota Motor added 1.14%, Suzuki Motor Corp. advanced 1.05%, Nissan Motor Co. gained 2.44%, Isuzu Motors surged up 3.37%, Mazda Motors rose 2.02% and Mitsubishi Motors advanced 0.93%.
Trading companies ended in positive territory. Mitsubishi Corp. soared 3.24%, Mitsui & Co. Ltd climbed 3.31%, Sumitomo Corp. surged 3.10%, Itochu Corp. was up by 3.63% and Toyota Tsusho Corp. increased 1.45%.
The Indian market closed firm on Monday, extending its upward momentum for a fourth consecutive week, as encouraging reports on U.S. durable goods and new home sales eased concerns that the U.S. economic recovery is faltering. That said, the benchmarks pared their early gains, as profit taking crept in at higher levels. After climbing over a percent to a fresh 32-month high of 20,268 earlier in the session, the 30-share Sensex closed off the day’s high at 20,117, up 72 points or 0.36%, with 19 of its components edging higher. Likewise, the broader Nifty shed most of its early gains to end higher by 17 points or 0.29% at 6,036.
Among the other markets in the region, China’s Shanghai Composite Index gained 36.42 points, or 1.41%, to 2,628, Jakarta Composite Index in Indonesia surged up 70.41 points, or 2.07%, at 3,468, the Strait Times Index in Singapore advanced 20.78 points, or 0.67%, to close at 3,113, and Taiwan Weighted Index gained 24.92 points, or 0.31%, to close at 8,192.
European Market Updates
French Market Erases Early Gains
The French market erased early gains and is currently losing in afternoon trading Monday, as firm cues from Asia were overshadowed by the re-emergence of economic worries.
Crude for November delivery is trading higher by $0.26 at $76.75 per barrel and December gold is adding $1.6 at $1299.7 an ounce.
In economic news, data from the European Central Bank showed loans to Eurozone firms and households increased in August at the fastest pace since June 2009 and the growth in broad money supply improved more than expected. Total credit extended to euro area residents rose 2.2% annually, up from 1.8% increase in July.
Meanwhile, the eurozone’s leading economic indicator climbed 0.4% in August compared to July, the Conference Board said. This followed a 0.8% increase in July and a 0.5% rise in June.
The latest survey from the Confederation of British Industry and PricewaterhouseCoopers LLP showed the UK financial services sector activity during three months to September improved at the fastest pace since June 2007. Around 37% of respondents said business volumes rose, while 9% said they fell during the period. The resulting balance of positive 28% was the most positive since June 2007.
House prices in England and Wales dropped for the third straight month in September, due to supply continuing to outstrip demand, survey results revealed. The average asking price for a home decreased 0.4% month-over-month to 157,600 pounds, reports said citing data from Hometrack. This represents the biggest recorded fall in house prices since March 2009 after a 0.3% fall in August.
The Swedish trade balance showed a shortfall of SEK 2.8 billion in August after recording a surplus of SEK 10.2 billion in July, Statistics Sweden said. Shipments in August climbed at a pace of 15% on an annual comparison to SEK 85.3 billion, while imports rose 27% to SEK 88.1 billion.
Chinese industrial profits leaped 55% in the first eight months of 2010 to 2.6 trillion yuan compared with the same period last year, the National Bureau of Statistics said.
After opening higher at 3,797, the CAC 40 has remained in positive territory for most of the session, but is currently losing 0.01%.
Grocery retailer Carrefour is losing 1.9%, reportedly on an analyst downgrade. Insurer Axa and drug maker Sanofi-Aventis are sliding 1.4% and 1%, respectively. The Wall Street Journal reported that Sanofi-Aventis is seeking additional funding to raise its offer for U.S. biotechnology company Genzyme.
Among lenders, Natixis and Credit Agricole are sliding 0.6% and 0.5%, respectively. However, BNP Paribas is adding 0.6% and Societe Generale is adding 0.01%.
Hotel group Accor is gaining 2.2%, thus leading the gainers on the index. Car maker Peugeot is adding 1.95% and Renault is rising 0.84%.
Beverages firm Pernod-Ricard is adding 1.8% and telecom equipment maker Alcatel Lucent is rising 1.4%. Cement giant Lafarge is up 1.3% and building materials maker Saint-Gobain is rising 1%.
Elsewhere in Europe, the UK’s FTSE 100 is falling 0.13% and the German DAX is adding 0.01%.
Stocks in Focus
Southwest Airlines (LUV) is expected to be in focus after it announced a deal to buy AirTran Holdings (AAI), the parent of AirTran Holdings in a cash and stock deal for $7.69 per share or a total of $1.37 billion.
Allergan (AGN) could see some activity after Unilever (UL) announced that it would buy the former for $3.7 billion in cash. Separately, on Friday, Allergan announced that the FDA has approved OZURDEX 0.7 mg for the treatment of non-infectious ocular inflammation affecting the posterior segment of the eye.
Wal-Mart (WMT) may move in reaction to its announcement that it has made a preliminary, non-binding proposal to buy South Africa’s Massmart Holdings for 148 South African rand per share.
Cracker Barrel Old Country Store (CBRL) is likely to be in focus after it announced a 10% increase in its dividend to 22 cents per share.
U.S. Economic Reports
With recent economic reports generating some optimism regarding economic recovery, the markets now turn their attention to the unfolding week. The weekly jobless claims report, the Institute for Supply Management’s manufacturing purchasing managers’ index, the ISM-Chicago’s manufacturing index, the Conference Board’s consumer confidence report and the final report of the Reuters/University of Michigan’s consumer sentiment survey are among the key economic reports of the unfolding week.
The S&P Case-Shiller house price index, the final second quarter GDP report, the Bureau of Economic Analysis’ personal income and outlays report, the Commerce Department’s construction spending report, a few Fed speeches and the Treasury auctions of 2-year, 5-year and 7-year notes round up the other economic events of the week.
The ISM’s manufacturing index is expected to pull back from the previous month’s levels, as the results of the regional manufacturing surveys suggest that the manufacturing sector is seeing some degree of stabilization, while the national manufacturing index remains elevated.
Economists expect the two consumer confidence readings of the week to send mixed signals. The Reuters/University of Michigan’s survey is expected to show a modest improvement in consumer sentiment, while the Conference Board’s survey is likely to show a slight deterioration in consumer confidence.
The FOMC’s announcement last week that inflation is trending below levels that it considers consistent with the central bank’s twin objectives of maximum employment and price stability shifts the market focus to the core personal consumption expenditure price index. The personal income and spending report is expected to show that the measure rose 0.1% in August, keeping the annual rate unchanged at 1.4%.
BMO Capital markets believes that sub-par economic growth will likely guide core inflation lower and the Fed on a path towards further quantitative easing. Personal spending should receive some support from the increase in average hourly earnings and the number of hours worked.
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