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.