Week In Review

The week that was:

The U.S. markets traded in a tight range and were mostly unchanged this week as it seems that most investors are anxiously awaiting election results and the Fed’s announcement on QE2.

Federal data indicated Friday that the U.S. economy grew at a slightly faster pace in the 3^rd quarter but not by enough to raise hopes that unemployment will decrease.

Stocks:

The S&P 500 rose 0.18 points this week, or 0.02%, to 1183.26.  During October, the S&P was up 3.06%, which constitutes it’s best October performance since 2006.  The Nasdaq Composite rose 28.02 points, or 1.13%, to 2507.41.  It rose 5.86% during October, which equals the biggest October percentage gain since 2003.  The Dow Industrials fell 14.07 points, or 0.13%, to 11118.49.  The Dow is up 3.06% on the month, which equates to it’s best October performance (point and percent) since 2006.    

• Ford (F) reported a 69% jump in third-quarter earnings and said it would pay down $2  billion of debt and use cash to fully prepay the remaining $3.6 billion of debt owed to a health-care trust for retirees.  The stock is up over 100% over the trailing twelve months.
• Microsoft (MSFT) posted a 52% gain in fiscal first-quarter profit as it benefited from widespread adoption of its Windows operating system and Office suite of tools.  MSFT is underperforming the Nasdaq by 22% YTD.
• General Motors said it will buy back $2.1 billion worth of preferred stock held by the U.S. Treasury Department before raising funds in an IPO next month.

Bonds:

End of week bond yields:

2 Year yield = 0.34%, down 2 bps from last week.

3 Year yield = 0.49%, down 4 bps from last week.

5 Year yield = 1.13%, down 2 bps from last week.

10 Year yield = 2.60%, up 4 bps from last week.

30 Year yield = 3.98%, up 5 bps from last week.

• The government auctioned $10 billion in 4 ½ year TIPS at a yield of -0.55%.  This is the first time ever that TIPS have sold for a negative yield.  It means that investors in these bonds are guaranteed to earn a return at 0.55% below inflation in the next four and a half years.  Apparently this is the price for safety.

What to look for next week:

7:30 AM          Monday           Personal Income and Outlays

9:00 AM          Monday           ISM Manufacturing Index

                        Tuesday           Elections

• Republican victories in the midterm elections are likely to increase the ideological gap between the parties in Congress.

1:15 PM          Wednesday     FOMC Meeting Announcement

• The Federal Reserve is expected to announce another round of quantitative easing.  According to a Dow Jones Newswires survey, 11 of the 18 biggest banks in the world believe that the Fed will purchase a total of about $1 trillion in bonds during the course of the program.

7:30 AM          Friday              Employment Situation

• Unemployment is expected to remain at 9.6%.

Yeah U of C !!!

The U of C endowment had a good year!

Story here!

Best Links for the Last Week

The Economist - Buttonwood blog:  The magic bullet

• How the bulls believe quantitative easing will boost asset prices

Barrons - The Real Flash-Crash Culprits

• This article points a finger at brokerage houses...

New York Times - Dealbook blog:  Casting Doubt on Single-Trade Spark in Flash Crash

Reuters - Fed's Yellen:  Possible that low rates feed bubbles

• Duh?

PBS Newshour - Economists Earn Nobel Prize for Asking How Job Market Works

The Economist - Free exchange blog:  And the Nobel goes to...

New York Times - Rising Corn Prices Bring Fears of an Upswing in Food Costs

New York Times - Across the U.S., Long Recovery Looks Like Recession

Barrons - BAC:  Is $59B in Foreclosure Liability a Big Deal?

The Economist - Basket cases

The Economist - Free exchange blog:  Of course you realise this is nothing like war

Bloomberg - Foreclosure Fiasco's Trail Leads to Washington

New York Times - Bankers Ignored Signs of Trouble on Foreclosures

The Economist - Corn fed

• Another agricultural commodity surges

InvestmentNews - Raymond James' Jeffrey Saut:  'Manage the risks - not the returns'

Week In Review

The week that was:

Problems continued to mount this week for banks involved in delayed foreclosure proceedings.  Investors sold off U.S. banks stocks after seeing the huge cost that financial institutions might face to put the foreclosure crisis behind them.  According to a report from Branch Hill Capital, Bank of America might be hit with more than $70 billion in losses if it is forced to buy back mortgage assets from investors. 

On the economic policy front, Ben Bernanke sounded cautious when he spoke on Friday about a second round of quantitative easing, but most economists think that some sort of stimulative program will take place in the next few months.

Stocks:

The S&P 500 rose 11.04 points this week, or 0.95%, to 1176.19.  The Nasdaq Composite rose 66.86 points, or 2.78%, to 2468.77.  The Dow Industrials rose 56.30 points, or 0.51%, to 11062.78. 

• Standard Chartered Bank is hoping to raise about $5.2 billion through a rights offering, as they prepare for implementation of Basel III rules.  Shares will cost existing investors 33% less than the bank’s most recent closing price.
• Google (GOOG) shares rose sharply on Friday after the company posted a significant increase in 3^rd quarter profit, attributable to rising demand for online advertising.  GOOG shares are up more than 30% over the past six weeks.
• Google and others back a 350-mile transmission line to collect power from offshore wind farms.  Experts say this could transform the electrical system along the U.S. Atlantic seaboard.  Transmission company Trans-Elect hopes to begin building the $5 billion project in 2013.

Bonds:

End of week bond yields:

2 Year yield = 0.36%, up 10 bps from last week.

3 Year yield = 0.55%, up 3 bps from last week.

5 Year yield = 1.19%, up 9 bps from last week.

10 Year yield = 2.56%, up 17 bps from last week.

30 Year yield = 3.98%, up 23 bps from last week.

• A recent study by economists at Northwestern University and the University of Rochester has forecasted that Chicago’s pension will run out of assets in 2019.  Municipal retirement plan obligations across the country are estimated to be about $574 billion in aggregate. Certain cities’ taxpayers fall into multiple districts, raising the amount that households in that area fund with their tax dollars. For example, Chicago residents would have to pay $42,000 per household to cover the unfunded liabilities of seven different municipalities’ retirement plans each of which receives tax dollars from the residents. If you add in the state shortfall, it raises the total for each household to $71,000.

What to look for next week:

• Look for earnings releases from Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Johnson & Johnson, Abbott Laboratories, Eli Lilly, AT&T, Verizon, IBM, Apple, and many others…

8:15 AM          Monday           Industrial Production

7:30 AM          Tuesday           Housing Starts

• Expected to show declines from August when they reached the highest level since the end of the homebuyer tax credit in April

9:00 AM          Thursday         Philadelphia Fed Survey

Best Links for the Last Few Days

JP Morgan Insights: Rising Rates: Why Worry Now?

GMO 7-Year Asset Class Return Forecasts

Financial Times: 'Flash crash' was sparked by single order

Harvard Business Review: Why Wal-Mart Went Shopping in Africa

NPR: The Flash Crash, Explained

WSJ MarketBeat: Here's Why You Should Care about Dividends: 'Bladder Theory'

The Economist - Democracy in America: Did we forget to try growth?

Xinhua.net: U.S. policymakers need farsightedness on currency issue

Fortune: The ugly reality of lowering debt by default

Bloomberg: Dividend Deals Most Since 2007 as Loans Heat Up

The Economist: Currency brinkmanship

The Washington Post: Foreign profits of U.S. firms could help at home, economists say

The Washington Post: Walking away with less

Week In Review

The week that was:

The buzzword on the Street over the past week seemed to be QE2, which stands for quantitative easing, round two.  Many of the Fed Presidents spoke about further easing, and most seemed in favor of taking further action in the form of purchasing longer-term Treasury securities.  In terms of when QE2 might actually happen, most analysts expect it to arrive on November 3^rd when the next FOMC statement is released.

The U.S. House voted to approve a bill that would open the door for punishment of China for clinging in to currency policy that many have said is costing the U.S. thousands of jobs.  The yuan has been strengthening against the dollar for 13 days, but China’s central bank cut the yuan’s value against the dollar immediately after the House vote.

The SEC and CFTC released a report on the “flash crash” and revealed that it was sparked by a single, rapidly executed $4.1 billion sale of e-mini futures contracts by a single institutional investor (Waddell & Reed) who was hedging against the risk of a market downturn.  The report is sure to fuel further debate on whether greater regulation of high-speed trading is necessary to protect the interest of retail investors.   

Stocks:

The S&P 500 fell 2.43 points this week, or 0.21%, to 1146.24.  The Nasdaq Composite fell 10.47 points, or 0.44%, to 2370.75.  The Dow Industrials fell 30.58 points, or 0.28%, to 10829.68. 

• Wal-Mart (WMT) and sub-Saharan Africa discount retailer Massmart said they have signed an exclusivity agreement to discuss Wal-Mart’s nonbinding offer to buy the chain for $4.76B in cash.  The offer is Wal-Mart’s latest move in a long-standing strategy to expand principally through sales outside the U.S.  The acquisition won’t come cheap, though; the price offered works out to a premium of 26 times Massmart’s earnings. 

Bonds:

End of week bond yields:

2 Year yield = 0.40%, down 4 bps from last week.

3 Year yield = 0.62%, down 6 bps from last week.

5 Year yield = 1.26%, down 9 bps from last week.

10 Year yield = 2.51%, down 10 bps from last week.

30 Year yield = 3.72%, down 7 bps from last week.

• Bloomberg recently reported the structured note sales to individual investors are on the rise again.  Structured notes, such as reverse-convertible notes with knock-in put options, can often pay what looks like very favorable yields, but often carry high fees and complex risks that are difficult to quantify. Structured notes have become popular as the Federal Reserve has kept its Fed Funds target rate at close to zero and investors seek higher yields for their savings. One issue, a three-month reverse convertible note, looks attractive as it pays 12.3% annualized interest and is tied to the stock of U.S. Steel Corp. However, further examination of the prospectus reveals buyers of the issue were charged a fee of 5.1%, more than half of which compensated other brokers. Bottom line: Beware of complex securities that offer what seem like high yields, as often times they carry much higher credit risk than one would expect and are usually better deals for the broker that is selling the security.

What to look for next week:

           

9:00 AM          Monday           Pending Home Sales Index

7:30 AM          Friday              Employment Situation

• The September unemployment rate is seen rising slightly.

Booth Links

The last post inspired me to share some of the other recent research and news articles I've enjoyed from current/former professors:

• Steven Kaplan discusses the recent pick-up in M&A activity
• Eugene Fama questions the luck/skill of fund managers
• My favorite professor, Lubos Pastor, discusses uncertainty and stock prices
• Another article citing Lubos Pastor
• Christopher Hsee on happiness
• Richard Thaler's "nudge theory"

Research on Pay

My former Corporation Finance professor, Josh Rauh, along with Steven Kaplan, recently published some very interesting research on pay.  The link to the full study is here.

The most astounding sentence in the entire paper:

In 2007, it is likely that the top five hedge fund managers earned more than all five hundred S&P 500 CEOs combined.

The take on this trend taught by more than one of my professors at Booth is that due to technological changes and an increasingly interconnected world, these top hedge fund managers are able to scale up and apply their skills across a larger asset base.  This theory certainly makes sense to me, but the question remains:  Is it fair that these folks pay the capital gains tax rate on a large percentage of earnings and take 2 and 20 as their funds are appreciating but refuse to refund any principal if their funds blow up??