• JP Morgan (NYSE:JPM) plans to reinstate 401K matching programs starting with 2009 as well as plans to hire 1,200 mortgage officers

• Yahoo (NASDAQ:YHOO) CEO Bartz said the company is hiring again as the firm expects to increase its operating profit margin to the 15-20% range on cost cutting and sales growth

• Adobe Systems (NASDAQ:ADBE) said it plans to cut 680 jobs, or about 9% of its workforce, as part of a restructuring plan.  The company said the move would result in pre-tax charges of $65 million to $71 million, with $18 million to $20 million to be taken in the fourth quarter

• Monsanto (NYSE:MON) confirmed its full-year 2010 earnings outlook and said it still sees a 2012 gross profit of at least $8.6 billion, claiming an accelerated launch of new corn and soybean products

• Bond insurer, Ambac Financial Group (NYSE:ABK) warned of a possible bankruptcy protection filing in its 10-Q

• Reports said General Electric (NYSE:GE) is in talks with United Technologies (NYSE:UTX) to sell its security systems unit for over $1.5 billion

• Wells Fargo (NYSE:WFC) upgraded Toll Brothers (NYSE:TOL) with a price target range of $24-$26

• Deutsche Bank (NYSE:DB) upgraded Smithfield Foods (NYSE:SFD) raising the price target from $12 to $20 due to an improving pork market

• Flowers Foods (NYSE:FLO) reported inline earnings of 34 cents a share on revenues of $603 million, off Zacks estimates of $617 million

• Hyatt Hotels (NYSE:H) shares gained 12% on their NYSE debut.  The company sold 38 million shares at $25 per share

• JP Morgan (NYSE:JPM) lifted its price target on Ford (NYSE:F)

• The smartphone marketplace will watch today's launch of Verizon's (NYSE:VZ) much-heralded new "Droid" launch, using Google's (NASDAQ:GOOG) Android operating system

• AIG (NYSE:AIG) reported third quarter earnings of $2.85 ex-items

• Bernstein upgraded General Electric (NYSE:GE) and Amazon.com (NASDAQ:AMZN) shares

• JP Morgan (NYSE:JPM) upgraded Macy's (NYSE:M) shares

• Deutsche Bank (NYSE:DB) upgraded Blue Nile (NASDAQ:NILE) shares, lifting the price target from $30 to $50

According to the National Stock Exchange, U.S. ETNs had $6.9 billion in assets at the end of September. ETFs were literally 100 times more prevalent, with $697 billion in assets. That included $62 billion just in long commodity ETFs.

That’s just crazy. And it highlights investors’ irrational fear of the ETN product structure.

I remember when ETNs first came to market in 2006: Investors couldn’t get enough of them. Barclays Capital launched the iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP) and it quickly gathered assets.

The reason was simple: ETNs offered two huge advantages over commodity ETFs.

First, they promised perfect tracking. If you bought an ETN, you would receive the full return of the benchmark, minus the fund’s expenses. Period. That’s handy, since commodity ETFs have been more prone to tracking error than most equity funds.

But the real advantage of commodity ETNs was (and remains) their tax treatment. The prospectus said (and still says) that ETNs can be treated basically like zero-dividend stocks for tax purposes. If you hold a commodity ETN for longer than a year, you only pay 15 percent long-term capital gains taxes when you sell. What’s more, you don’t have to pay any taxes until you sell.

By comparison, futures-based commodity ETFs like the PowerShares DB Commodity ETF (NYSEArca: DBC) are treated like futures by the IRS. That means that gains are marked-to-market each year, and investors must pay taxes on those gains at a blended 60 percent/40 percent long-term/short-term capital gains tax rate. For a high-earning investor, that puts the blended tax rate at 23 percent, payable every year.

That’s a huge difference. An ETN investor pays a 15 percent tax rate, deferrable until the ETN is sold; the ETF investor pays a 23 percent tax rate, due annually.

Risk Factor

Why don’t we see more assets flow into ETNs? The only possible reason (short of simple ignorance) is the credit risk.

The N in ETN stands for note, and that’s what they are: unsecured debt notes. Like any other uninsured promise-to-pay, their entire value depends on the credit of the issuing bank. If you buy a Deutsche Bank ETN and Deutsche Bank goes bankrupt, you lose all your money.

It’s not a theoretical fear. The very few people who held the three Lehman Brothers ETNs to the bitter end lost their money when the firm went bankrupt. It’s obvious, looking at the numbers, that the credit crisis stopped the growth of ETNs in their tracks.

But let’s be honest: For an investor who is paying attention, the likelihood of losing money in an ETN is vanishingly small. Most ETNs offer daily redemptions at net asset value, meaning that (even ignoring the quoted market) an investor of size (50,000 shares in the case of iPath) can sell out of the product within 48 hours and get the full net asset value of the note from the issuer.

So ask yourself: How likely is it that Barclays Capital or Deutsche Bank, or whomever is underwriting a particular ETN, will go bankrupt with less than 48 hours’ warning? Or to put a margin of safety on it, how likely is it that they will go bankrupt in the next week?

The answer right now is: not very.

For taxable investors who pay attention to the market, read the newspaper, monitor stock quotes, etc., the likelihood of being caught out on an ETN is tiny. Meanwhile, the risk of overpaying the IRS if you buy and hold a commodity ETF is 100 percent.

ETNs don’t make sense for all investors. In nontaxable accounts, I actually prefer ETFs. If you want a truly fire-and-forget investment, where you can walk away for a year or two, ETFs are the way to go. But for taxable investors who pay close attention to their accounts, there’s a lot to be said for the ETN structure.

(One caveat here: There is a risk that the CFTC’s plan to enact new regulations in the commodities market will force some ETNs to shut down. If that happens, investors would get their money back, but they could be hit with short-term capital gains if they’ve held a note for less than a year. It’s tough to gauge how large a risk this is, but it’s legitimate.)

A new ETF giving access to Chinese A shares is to be launched in Singapore next month.

The United FTSE Xinhua China A50 ETF, to be offered by the asset management subsidiary of United Overseas Bank (UOB), will be the first China A-shares fund to be denominated and traded in Singapore dollars.

Chinese A shares are denominated and traded in Chinese yuan and listed on the Shanghai or Shenzhen stock exchanges. Historically, access to the A-shares market in China has been limited to Chinese nationals and qualified foreign institutional investors (QFIIs) approved by the China Securities Regulatory Commission (CSRC).

The FTSE Xinhua China A50 Index is designed to measure the performance of the 50 largest China A-shares companies, based on market capitalization.

ETFs tracking A shares are already dominant in the Asian market. The Hong Kong-listed iShares Asia Trust, which also tracks the FTSE Xinhua A50 Index, is the largest Asian ETF, with $6.7 billion under management. The China 50 ETF, which tracks the Shanghai Stock Exchange 50 Index, has $3.2 billion under management and is the most heavily traded Asian ETF, with an average daily volume of $200 million in the week ending Oct. 16.

According to Singapore’s Business Times, while the upper limit on the QFII quota for any single investor to invest in China stocks is $1 billion, the quota available for the United FTSE Xinhua China A50 ETF is $100 million, as UOB and Rabobank—the counterparty and designated market maker for this ETF—each have a QFII quota of $50 million.

The iShares Asia Trust does not hold A shares directly; rather, it holds Chinese A-Shares access products (CAAPs) issued by a connected person of a QFII. A CAAP is a security (such as a warrant, note or participation certificate) linked to an A share that synthetically replicates the economic benefit of the relevant A share but carries counterparty risk to the CAAP issuer.

Because of the existence of QFII quotas, A-share ETFs have often traded at premiums to net asset value during periods of significant investor demand.

Outside Asia, investors are generally restricted to ETFs tracking H shares (firms that are incorporated in China but listed in Hong Kong); Red Chips (firms incorporated in Hong Kong with substantial mainland interests, controlled by the Chinese government); P Chips (Hong Kong-incorporated firms with substantial mainland interests that are not under government control); and China-related shares listed on overseas stock exchanges. (IndexUniverse.eu recently published a feature on the range of options available to investors interested in the Chinese stock markets.)

According to the issuer, the total expense ratio for the United FTSE Xinhua China A50 ETF is estimated to be 0.95 percent. The iShares Asia Trust has a TER of 1.39 percent and the China 50 ETF has a TER of 0.50 percent, as per the latest edition of Deutsche Bank’s ETF Liquidity Trends report.

CA ≡ (T-G) + (S-I)

Where CA is the current account, (T-G) is the consolidated government budget balance, and (S-I) is the private sector saving-investment balance. Figure 1 depicts the profound shifts that have occurred in these components (normalized by nominal GDP).

Note that I've omitted the statistical discrepancy which makes these items add up exactly.

How much of the recent shift in the net private saving is due to changes in personal saving (as opposed to corporate behavior)? Actually quite a bit. Of the 2.6 ppts shift in net private saving since 08Q1, 2.9 ppts is accounted for by the shift in personal saving.

How persistent will this shift in the personal saving rate be? This is the big question, in terms of the rebalancing issue (keeping in mind that the national saving identity is a tautology). Deutsche Bank provides an interesting set of calculations, which indicates how long it will take to hit the 20 year average net wealth/disposal personal income ratio.

Peter Hooper, Torsten Slok and Christine Dobridge write:

To try to gauge historical norms that households may aim for we appeal once again to average values that have prevailed over time. The 20-year average of household net worth is 533% of income. On this basis, net worth has returned about half way to its historical norm from the low reached in Q1. Chart 6 shows two prospective paths of adjustment back to the 20-year average, a 3-year path and a 5-year path. To follow these paths, we assume that households use half of their saving to pay down debt, and the other half to purchase assets. We also assume that income grows at 1% a year and asset values grow at the same rate. In order to rebuild wealth in three years then, households would need to raise their saving rate to 7% immediately and to 8% by 2012. In order to rebuild wealth in 5 years, however, households would need only a 2% to 3% saving rate. The saving rates implied by this wealth calculation are lower than the rates implied by the debt calculation. This is because net worth has risen since Q1 because of the rebound in the stock market. Net worth-toincome looks to have been about 500% in Q3; households have already made good progress towards their wealth target.

This set of calculations suggests at least a few years of relatively muted consumer behavior. The key factor is the rate at which households seek to reestablish their target net worth/income ratios.

It's interesting to contrast this perspective with that the "Blame it on Beijing" view, which holds Rest-of-World excess saving as the driver. I believe that when considering the US economy -- which is about three times as large as that of China (according to IMF WEO data) -- one can reasonably argue that what happens here is at least as important as what happens in East Asia (in contrast to some observers, I take Chairman Bernanke's recent speech, focusing on raising US national saving, as a welcome return to thinking about the primacy of US factors [speech text]).

The Dow Jones industrial average, which rose as high as 9931.82 points in the morning, gained 20 points to close at 9885.80.  The broad S&P 500 index rose 4.70 points, or 0.44%, to close at 1,076.19 and the tech-heavy Nasdaq ended the day little changed.  Bond markets were closed for the Columbus Day holiday.  On the New York Stock Exchange, 16 stocks were higher in price for every 14 that fell.

Eight of the ten S&P500 sectors finished higher in yesterday's session. Oil and gas shares led the gainers, adding 1.2% following a 2.1% rise in crude prices to $73.55, its highest since August 24.  DJIA components Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) rose 1.3% and 1.2%, respectively.

Meanwhile, equity prices appear to be taking into consideration upside surprises in last quarter's numbers.  The National Association for Business Economics' survey of its members showed majority believed the recovery has begun, but concerns remain over federal debt and rising unemployment.  Nevertheless, the greenback’s decline is expected to help results of multinational firms with significant overseas exposure.

Also, news emerging from the geopolitical front appears to be less motivating as the head of Homeland Security noted Al-Qaeda members likely within US borders and North Korea reportedly shot off five missiles off its east coast; the reports said the country is preparing to fire more.  Although stocks have had their steepest rally in more than 70 years, doubts remain over an exit strategy from simulative policies amid increasing unemployment levels and housing worries.

Black & Decker (NYSE:BDK) jumped 7.6% Monday after the company's raised its third quarter earnings guidance to 91 cents a share from 35- 45 cents a share on better-than-expected sales, operating margins and tax rate. UBS (NYSE:UBS) downgraded SanDisk (NASDAQ:SNDK) shares to "sell" from "neutral," on concerns of peaking chip demand leaving little scope for price increases.  Ford (NYSE:F) shares jumped 7% after the automaker reported that European sales jumped 12% on strong sales of its subcompact models Ka and Fiesta. Google (NASDAQ:GOOG) shares rose 1.5% after Goldman Sachs (NYSE:GS) raised its price and earnings target, saying the firm will benefit from next year's recovery in online activity.

Financial shares continued their upward run, adding 0.7%.  A number of banks report their earnings in the coming sessions, including JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C).  According to analyst Dick Bove, large-cap banks are expected to perform well, helped by strong trading activity, but Bove noted regional banks could be under pressure due to commercial real estate losses. 

Meanwhile, shares of Deutsche Bank (NYSE:DB) fell 1.6% yesterday after the company’s CEO Ackermann’s comments raised concerns of a capital raising.  This morning influential analyst Meredith Whitney took a cautious stance on Goldman Sachs (NYSE:GS) and lowered her rating on the bank to "neutral" from "buy" with a $186 price target. 

Today's list of releases includes quarterly earnings reports from companies such as Altera (NASDAQ:ALTR), CSX (NYSE:CSX), Intel (NASDAQ:INTC), and Johnson & Johnson (NYSE:JNJ).

• Barclays (NYSE:BCS) reported plans to spin off a $6.35 billion portfolio of complex credit assets as it seeks to clean up its balance sheet

• Phillips Electronics (NYSE:PHG) reported better-than-expected third quarter earnings, helped by cost-cutting measures, although the company said most markets are yet to see recovery

• Deutsche Bank (NYSE:DB) lifted Johnson & Johnson's (NYSE:JNJ) price target to $67 from $63 and maintained its "buy" rating on the stock, as the analyst noted "Ahead of Tuesdays earnings call we are raising our price target to $67 (prior $63) based on improving comparable multiples, new product approvals, stabilization in the global economy, and FX tailwinds all [of] which should add to earnings in 4Q and next year. We expect management will focus on continued healthy trends in its Medical Device & Diagnostic division, which will be the highlight of Tuesday's earnings meeting"

• Goldman Sachs' (NYSE:GS) removed Johnson Controls (NYSE:JCI) from its Conviction Sell list in anticipation of optimism after its October 13 analyst day.  Goldman raised its price target on the firm to $20 from $18

• Deutsche Bank (NYSE:DB) raised its price targets on numerous applications software firms, noting positive signs for the second half. Included in this group were: Adobe (NASDAQ:ADBE) with its target lifted to $22 from $20; Oracle (NASDAQ:ORCL) hiked to $44 from $40; and Salesforce.com (NYSE:CRM) raised to $80 from $65

• Bristol-Myers-Squibb (NYSE:BMY) coverage was initiated by Wells Fargo (NYSE:WFC) with "outperform," rating noting that, "strategic repositioning ahead of patent cliff, new product flow between 2009-2012, broadening R&D portfolio through selective risk-sharing, and high dividend yield underlie our positive thesis"

• Wells Fargo (NYSE:WFC) initiated coverage of Eli Lilly (NYSE:LLY) with "market perform," and with a $33-$35 valuation, noting concerns over a "steep and lengthy patent cliff and recent clinical setbacks."  The firm cautioned its Alzheimer's program and the Imclone pipeline "do not come soon enough to mitigate the patent cliff"

• Bassett Furniture (NASDAQ:BSET) reported a third quarter loss of 30 cents versus last year's 23 cent loss on revenue of $57.7 million versus $70.2 million a year ago

• Infosys Technologies (NASDAQ:INFY) reported better-than-expected second quarter results of 56 cents, beating consensus estimates of 50 cents, on revenue of $1.15 billion which was in line with estimates. The firm raised its earnings expectations for 2009 due to clients' growing outsourcing demand and stable pricing

We covered the story here.

The move wasn't that surprising. After all, when the CFTC revoked DB's position limits back in August, it was really just a matter of time before the two funds either got a makeover or shut down entirely.

But DB's restructuring plans are more than just a new coat of lipstick. The revisions, slated to take effect between Oct. 19 and 31, will significantly change the commodities exposure these funds can give investors.

DBA and DBC, currently worth $2.2 billion and $3.3 billion, respectively, are two of the most popular commodities ETFs. With their high concentrations in just a few key contracts, the funds are ideal for gaining exposure to the Big Guns of the commodity markets.

DBA, for example, tracks the world's staple crops—corn, wheat and soybeans—as well as everyone's favorite additive, sugar. DBC, on the other hand, tracks two staple crops (corn and wheat), two crucial energy sources (WTI crude and heating oil), the most widely used industrial metal (aluminum) and a universally beloved safe haven, gold.

Basically, the old versions of DBA and DBC cover only the A-List commodities, the ones with the highest liquidity and rock-solid, diversified demand pictures.

New-vintage DBA and DBC, however, will incorporate commodities with a little more volatility and a little less liquidity into their composition. DBA will halve its four core agricultural positions to make room for coffee, cocoa and livestock futures, while energy-heavy DBC will drop its current 35 percent weighting in WTI crude to just 12.4 percent, adding in contracts for gasoline, Brent crude and natural gas. (See the full weightings here.)

It's not like DB is dipping into something as illiquid as lumber or uranium here. And by diversifying the portfolio, they lessen the impact of a massive swing in one of the bigger commodity contracts.

But adding in these new markets also has the potential to pump more volatility into the mix, and potentially very different returns. We've all been paying attention to what's going on in natural gas lately, right? And what about livestock? It’s been on a straight path downward for more than two years now.

Even the impact on something like Brent crude will be interesting: Brent is a popular European contract, but it's by no means as widely traded as WTI crude. (By my count, this is the first time a major commodity ETF has invested in a non-U.S. energy contract. The first, but probably not the last.)

In short: DBA and DBC won't look much like themselves anymore. They’ll look more like the more diversified commodity ETFs that are already on the market, such as the iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) and iShares S&P GSCI Commodity Indexed Trust (NYSEArca: GSG).

Of course, from the fund's perspective, any weighting overhaul is better than liquidation, and as the CFTC crackdown continues, I'm sure we'll see many more funds try similar alchemy in the future.

But the change is not without consequences. Investors are losing a degree of choice in the commodities market, forfeiting the option of investing only in the biggest of big commodities. And by making a foray into more narrow contracts, DBA and DBC may be potentially exposing investors to added volatility—or at least a very different pattern of returns—as well.

The chart below shows the Counterparty Risk Index (CRI) history since the beginning of 2008. The index is an unweighted average of the credit default swap spreads of 14 major financial institutions. The left-hand scale gives the cost (in basis points) of insuring against default for a five-year term.

The three big spikes on the chart mark the near-failure of Bear Stearns (in March 2008), the Lehman default (September 2008) and renewed concerns over bank safety at the market’s nadir in March 2009.

If crises appeared at six-monthly intervals since last spring, this time we appear to have broken out of the cycle.

What about the individual banks that make up the index? Here is a chart, courtesy of CMA Datavision, of the CDS spreads of the U.S. bank members of the index, plus Barclays and Deutsche Bank, the leading players in the U.S. exchange-traded note market.

Citigroup now ranks as the riskiest U.S. bank, and JP Morgan as the least risky, though it’s fair to say that the CDS spreads have converged significantly and there is far less difference between individual names than there was a year ago.

For the record, here are the levels from earlier today, ranked from least to most expensive to insure against default: JP Morgan (72bp), Barclays (76bp), Deutsche Bank (82bp), Goldman Sachs (107bp), Bank of America (120bp), Merrill Lynch (137bp), Morgan Stanley (140bp) and Citigroup (200bp).

(The fact that the Merrill Lynch CDS trades at a slight premium to that of Bank of America, its owner, is interesting.  This reflects speculation that the broker may yet be spun off from the parent bank, in which case the CDS would follow the reference entity, Dave Klein of Credit Derivatives Research told me.)

The levels should matter to exchange-traded product investors: All of these banks except Citigroup underwrite exchange-traded notes.

Is the worst now over? As Gillian Tett noted in a column in last week’s Financial Times, the concentration of overall (gross) risk in the credit derivatives market amongst the leading banks has actually risen since the AIG bailout of last September, and regulators are still finding it difficult to assess whether banks are handling their net risk exposures sensibly.

And, in what sounds like the ultimate reinsurance spiral, banks have become net sellers of protection on sovereign debt; hardly reassuring if one remembers that the banks are themselves propped up by the governments concerned. Lloyd’s, anyone?

So, while the reduction in overall default risk so far this year will come as a reassurance to investors, these are charts that are worth keeping an eye on.

• Deutsche Bank (NYSE:DB) cut AutoZone (NYSE:AZO) price target to $150 from $175 but maintained its “hold" rating on the stock

• Reports say modifications on the Boeing (NYSE:BA) 787 Dreamliner test plane suggest the first flight is possible by late October or early November

• The corporate head of Microsoft's (NASDAQ:MSFT) Game Studios division ruled out plans to acquire video game publisher Electronics Arts (NASDAQ:ERTS)

• Abbott Laboratories (NYSE:ABT) has offered to buy the drug unit of Belgian's conglomerate Solvay SA

• Deutsche Bank (NYSE:DB) raised its price target for HB Fuller (NYSE:FUL) to $23 from $18, while maintaining its "hold" rating

• Goldman Sachs (NYSE:GS) raised its price target on Buffalo Wild Wings (NASDAQ:BWLD) to $46

• Nintendo lowered its Wii price by 20% to $199.99 in the US after meeting increased competition from Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE)

• Palm (NASDAQ:PALM) said an offering of 20 million shares of its common stock was priced at $16.25 apiece, a 5% discount to Tuesday's closing price

• BlackRock (NYSE:BLK) shares rose 1.4% Wednesday on a Deutsche Bank (NYSE:DB) recommendation

• Cisco (NASDAQ:CSCO) shares fell 2.6% on failure to offer current quarter guidance and comments made by CEO Chambers that "it looks like a gradual recovery," but also warning of a risk that the economy could still retreat

Chicago, IL – August 27, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: China Life Insurance Company (LFC), American International Group (AIG), Deutsche Bank (DB), Morgan Stanley (MS) and Amgen (AMGN).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Wednesday’s Analyst Blog:

China Life’s Profits Grow

China Life Insurance Company (LFC), the leading life insurer in China, has posted a 15% rise in profits in the first half of 2009 compared to the prior-year period. The company earned 18.2 billion yuan ($2.7 billion) in the first half of 2009 driven by gains realized on financial investments. The gains stemmed from the capital market rally in China.

Gross yield on its investments in the period was up 3.27% from 2.31%. Gross written premiums and policy fees were up 11% to 87.86 billion yuan. The increase was mainly attributable to an increase in its insurance business. Renewal premiums grew 23% year-over-year, while the proportion of renewal premiums to gross written premiums increased to 66.84% in the first half of 2009 from 60.44% in the year-ago period.

The company said that it may invest in AIA, which is planning a Hong Kong initial public offering (IPO). AIA is the Asia unit of American International Group (AIG), Deutsche Bank (DB) and Morgan Stanley (MS) have been appointed by AIG as its joint global coordinators for a more than $4 billion IPO for AIA. The company is also eyeing an equity tie-up with Agricultural Bank of China. However, the company does not intend to sell its 5.1% stake in Minsheng Banking Corporation.

The company is also a leading provider of annuity products and life insurance for both individuals and groups and a leading provider of accident and health insurance. China Life’s market share in the first half of 2009 was approximately 39.2%.

Amgen’s Kidney Drug Fails

Yesterday, Amgen (AMGN) said that Aranesp failed in a large, randomized, double-blind, placebo-controlled, phase III study that was conducted in patients with chronic kidney disease (not requiring dialysis), anemia and type II diabetes.

The study, referred to as the Trial to Reduce Cardiovascular Endpoints with Aranesp Therapy (TREAT), had two primary endpoints. The first evaluated time to all-cause mortality or cardiovascular morbidity including heart attack, congestive heart failure, hospitalization for angina, or stroke. The second primary endpoint evaluated time to all-cause mortality or chronic dialysis.

Aranesp could not show statistically significant improvement in either. While a higher number of strokes were observed in the Aranesp-treated group compared to the placebo arm, we note that drug’s label already carries a warning regarding the stroke events.

Full efficacy and safety analyses are yet to take place. Amgen will present full results at an upcoming medical meeting later this year.

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• Freddie Mac (NYSE:FRE), which had reported its first profit in two years, yesterday warned that the Taylor, Bean & Whitaker Mortgage Group collapse might cause it "significant" losses

• State Street (NYSE:STT) cautioned that $625 million that it set aside to address claims from losses linked to subprime mortgages might be exhausted

• General Motors (NYSE:GM) and eBay (NASDAQ:EBAY) announced hundreds of California dealers are starting online car auctions

• Cumberland Pharmaceuticals announced that an initial public offering of its 5.0 million shares was priced at $17 per share.  The stock will start trading with the symbol CPIX

• American Capital Agency priced its 3.75 million common offering at $23.30 per share with the symbol AGNC

• Tellabs (NASDAQ:TLAB) announced a $200 million share buyback plan; its Chairman plans to sell 3 million shares

• Deutsche Bank (NYSE:DB) initiated Kroger (NYSE:KR) with a "buy" rating and a $28 price target

The Dow Jones industrial average lost 25 points, or 0.3% and the broader S&P 500 index fell 5 points, or 0.6%. The technology-focused Nasdaq retreated 20 points, or 1%.    

This morning, the July jobs report surprised as the Labor Department reported that U.S. employers shed fewer jobs in July.  That unemployment rate dipped to 9.4% against expectations of a 9.6% fall helped calm shaky nerves and pushed stock futures sharply higher.  The Labor Department noted that US employers cut 247,000 jobs in July, the fewest in a year.  Dow Jones industrial average futures are up 61, or 0.7%, at 9,290. Standard & Poor's 500 index futures are up 8.30, or 0.8%, at 1,003.20, while Nasdaq 100 index futures are up 16.50, or 1%, at 1,617.75.

Yesterday, poor July retail sales data and apprehension about the monthly non-farm payrolls report sent S&P500 shares lower and the index retreated back under the 1000 level.  Only utilities, up 0.1%, and industrials, up 0.04%, showed some strength as even financials, a major support sector over the past five sessions, headed lower.  Health care sector and telecommunications issues declined 1.1%, with oil and gas, consumer goods, and technology issues easing 0.9%.  Crude prices eased three cents to $71.94, following the downward drift of equity prices and US dollar gains.

Among the DJIA components, Procter & Gamble (NYSE:PG), off 4.5%, continued to decline as investor remain concerned over its sales outlook.  Copper prices declined sending Alcoa (NYSE:AA) down 3.6%.  Cisco's (NASDAQ:CSCO) cautious outlook weighed on technology stocks as Hewlett-Packard (NYSE:HPQ) eased 2.4%.  JP Morgan (NYSE:JPM) shares dropped 2.5%, despite news Deutsche Bank (NYSE:DB) had initiated its coverage with a "buy" rating.  American Express (NYSE:AXP) rose 3.1% after Citigroup (NYSE:C) upgraded the stock on news of a slowing pace of credit loans losses. 

In a Thursday CNBC interview, Goldman Sachs (NYSE:GS) strategist Cohen announced, "We do think the new bull market has begun," setting sights on a rise in the S&P500 of as much as 10% by year-end.

So now, there'll be even a greater need for reasoned analysis. One addition to the discussion is a Symposium on China's impact on the global economy just published in Pacific Economic Review (August 2009). From my introductory chapter to the symposium:

Over the past decade, China's presence in the global economy has grown increasingly large. Along many dimensions, China is, rightly or wrongly, perceived to have an enormous impact. In the trade arena, China is now widely considered to be the world's workshop, displacing some traditional exporters of labour-intensive goods, even as its economy is ever more closely woven into the fabric of the increasingly fragmented chain of production....

The development of trade linkages has been accompanied by such rapid economic growth that the resulting demand for inputs has driven up commodity prices: at least that is the popular view. China has also become a large net saver in the world economy, as its current account has expanded in recent years. Figures 1 and 2 highlight these trends.

In this volume, our contributors examine several aspects of China’s economic interactions with the world economy. In so doing, they cast some light on the Chinese economy's prospects.

The contributors include Jeffrey A. Frankel (Harvard University); Steven Dunaway (Council on Foreign Relations), Lamin Leigh (IMF), Xiangming Li (IMF); Charles P. Thomas, Jaime Marquez, Sean Fahle (all Federal Reserve Board); Willem Thorbecke (George Mason University and RIETI), Hanjiang Zhang (University of Texas); Francois Lescaroux (GDF Suez), Valerie Mignon (University of Paris Ouest and CEPII); and Joshua Aizenman (UC Santa Cruz), Yothin Jinjarak (Nanyang Technological Institute). Also in the issue are two other China-related papers, by Michael Dooley (UC Santa Cruz), David Folkerts-Landau (Deutsche Bank), Peter Garber (Deutsche Bank); Yin-Wong Cheung (UC Santa Cruz), Xingwang Qian (SUNY Buffalo). Many of these contributors have had their research discussed on Econbrowser posts dealing with China.

The entire introduction is here, while the table of contents and articles are here. Below are the abstracts from the papers in the symposium.

New Estimation of China's Exchange Rate Regime (p 346-360)

Jeffrey A. Frankel

The present paper updates the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the US dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach of estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the US dollar or some other single major currency. Because the RMB and many other currencies today purportedly follow variants of band-basket-crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing 'exchange market pressure' to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the US dollar's weight onto the euro. The implication is that the appreciation of the RMB against the US dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.

Since the paper was written (late-2008), Frankel has observed that the Chinese have essentially reverted to a dollar peg.

How Robust Are Estimates of Equilibrium Real Exchange Rates: The Case of China (p 361-375)

Steven Dunaway, Lamin Leigh, Xiangming Li

Assessments of a country's real exchange rate relative to its 'equilibrium' value as suggested by 'fundamental' determinants have received increasing attention. Using China as an example, the present paper illustrates models commonly used to derive equilibrium real exchange rate estimates. The large variance in the estimates raises serious questions about the robustness of these results. The basic conclusion is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Therefore, such estimates should be treated with great caution.

In this article, the authors cover some of the same ground Cheung, Fujii and I surveyed, with largely the same conclusions, but different approaches.

Measures of International Relative Prices for China and the USA (p 376-397)

Charles P. Thomas, Jaime Marquez, Sean Fahle

In this paper we assemble a measure of international relative prices to gauge the average amount by which prices in China and the USA differ from the prices of their trading partners. Our estimated weighted average of relative prices for China and the USA are the first to use the significantly revised purchasing power parities embodied in the price data from the World Bank's World Development Indicators. Our analysis reveals several findings of interest. First, interactions between the structure of trade and the levels of relative prices are sufficiently important to induce divergences between the weighted average of relative prices and conventional real effective exchange-rate indexes. Second, revisions embodied in World Development Indicators price data generally lower the estimate of US international relative prices. Third, net exports are inversely related to the estimate of US international relative price, but, for China, the correlation is positive. Estimating this correlation for other countries reveals no systematic pattern related to the level of development alone. Fourth, unlike previous work, using our price measures we find that an increase in US prices relative to Chinese prices raises the share of China's exports to the USA. Finally, there is a distinct possibility of eliminating the long-standing differential in income elasticities of US trade in empirical applications.

The Effect of Exchange Rate Changes on China's Labour-intenstive manufacturing exports (p 398-409)

Willem Thorbecke, Hanjiang Zhang

Chinese policy-makers fear that an RMB appreciation will reduce low technology exports. We investigate this issue using data on China's exports to 30 countries. We find that an appreciation of the RMB would substantially reduce China's exports of clothing, furniture and footwear. We also find that an increase in foreign income, an increase in the Chinese capital stock, and an appreciation among China's competitors would raise China's exports. Because Europe is the second leading exporter of labour-intensive manufactures behind China, these results indicate that the appreciation of the euro relative to the RMB since 2001 has crowded out European exports.

These two articles provide different perspectives on the issue of how exchange rate changes impact Chinese trade flows. For recent discussion of this subject, see [7].

Measuring the Effects of Oil Prices on China's Economy: A Factor-Augmented Vector Autoregressive Approach (p 410-425)

Francois Lescaroux, Valerie Mignon

The aim of this paper is to investigate the impacts of oil prices on the Chinese economy. To this end, we rely on the factor-augmented vector autoregressive methodology, which allows us to evaluate the response of various macroeconomic variables to an oil price shock. Our results suggest that an oil price shock leads to: (i) a contemporaneous increase in consumer and producer price indexes, inducing a rise in interest rates; (ii) a delayed negative impact on GDP, investment and consumption; and (iii) a postponed increase in coal and power prices.

The USA As the 'Demander of Last Resort' and the Implications for China's Current Account(p 426-442)

Joshua Aizenman, Yothin Jinjarak

The present paper evaluates the current account patterns of 69 countries during 1981-2006. We identify an asymmetric effect of the USA as the 'demander of last resort': a 1% increase in the lagged US imports/GDP is associated with a 0.3% increase in current account surpluses of countries running surpluses, but results in insignificant changes in the current accounts of countries running deficits. The impact of US demand variables is larger on the current accounts of developing countries than that of OECD countries. We also contemplate China's current account over the next 6 years, and project a large drop in its current account/GDP surpluses.

Also related are the two other papers in the issue. The first is an update on the Bretton Woods II argument, by my former colleague, Mike Dooley and his coauthors:

Bretton Woods II Still Defines the International Monetary System (p 297-311)

Michael Dooley, David Folkerts-Landau, Peter Garber

In this paper we argue that net capital inflows to the USA did not cause the financial crisis that now engulfs the world economy. A crisis caused by such flows has been widely predicted but that crisis has not occurred. Indeed, the international monetary system still operates in the way described by the Bretton Woods II framework and is likely to continue to do so. Failure to properly identify the causes of the current crisis risks a rise in protectionism that could intensify and prolong the decline in economic activity around the world.

They focus, rightly, on "catastrophic failure of risk management", on the part of both private and public (my emphasis) sector agents. In other words, they are quite skeptical of what I called the "Blame it on Beijing" meme favored by the previous Administration (see Economic Report of the President, 2009) and many other observers.

The second is by another former colleague, Yin-Wong Cheung and his coauthor

Empirics of China's Outward Direct Investment (p 312-341)

Yin-Wong Cheung, Xingwang Qian

We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.

Chinese outward FDI must be a hot topic. Another study, by a former colleague of mine from EOP days, Dan Rosen, has just published China's Changing Outbound Foreign Direct Investment Profile PB09-14 (with Thilo Hanemann).

By the way, a slightly older but still very relevant, compendium is the volume entitled China's Growing Role in World Trade, edited by Rob Feenstra and Shang-Jin Wei

The Dow Jones industrial average rose 15.27 points, or 0.2%, to 9,108.51 and the broader Standard & Poor’s 500-stock index edged up 2.92 points, or 0.3%, at 982.18.  The Nasdaq rose 0.1% or 1.93 points, at 1,967.89.  Treasuries declined as the government began a record auction of $115 billion in notes. Yield on the benchmark 10-year jumped to 3.72%.  On the NYSE, 1.04 billion shares exchanged hands and advancing issues outpaced decliners by a two-to-one margin.     

Lowered guidance from Aetna (NYSE:AET) and Honeywell (NYSE:HON) were digested by investors as offsetting those concerns were comments from Corning (NYSE:GLW) regarding its top and bottom line results as well as production resumptions.  Helping the sentiment further was an unexpected 11% jump in new home sales, the highest since December 2000.  Homebuilders rallied following the jump in new home sales.  Centex (NYSE:CTX) soared 9.1%, Pulte Homes (NYSE:PHM) jumped 8.6%, and Lennar (NYSE:LEN) rose 6.8%.

Further influencing the sentiments on the Street was the overhang of the record $200 billion in government notes to be auctioned this week, even as the largest holder of US Treasuries, China, engages in policy talks with the US.  Yesterday's auction of $6 billion in inflation-protected securities brought a higher-than-expected yield of 2.387%, with the highest-ever bid-to-cover ratio of 2.27.

According to Thomson Reuters, 77% of the one-third of the S&P500 firms having reported topped estimates, up from a 61% average. However, according to Nomura, the number of better-than-estimated revenue posts merely equals that of the negative top-line surprises.

Financials rose 1.5% and were the leading gainers among the S&P 500 industry groups.  The index closed at its highest level since November 4.  Financials got a boost after the jump in housing numbers.  On the DJIA, Bank of America (NYSE:BAC) shares led the gainers with a 4.6% advance.  Morgan Stanley (NYSE:MS) analysts said BofA is a "top pick" among banks, due to its improved capital levels and a cheap valuation.  Also Stifel Financial reiterated its "buy" rating on the shares.  Nevertheless, Bank of America (NYSE:BAC) CEO Lewis warned of credit problems likely in the second half. According to Deutsche Bank (NYSE:DB), "We have witnessed stabilization of the world's banking industry and financial markets. Increased liquidity and lower volatility in financial markets are both supportive for our business," even as the company credit losses increased compared to a year ago, and the firm declined 2009 guidance.

Today's economic calendar cover weekly store sales, the Redbook report, S&P Case-Shiller home prices for May, and the day's key economic post - July consumer confidence. San Francisco Fed President Yellen is slated for a 10:00 AM ET speech. Key companies reporting their earnings include Dreamworks (NYSE:DWA), Smith International (NYSE:SII), US Steel (NYSE:X), and Viacom (NASDAQ:VIA).

If you are anything like me you have spent more than a year avoiding anything with "bank", "financial", or "investments" in the company's name. However, over the past week some of Wall Street's giants have exceeded expectations and have a brighter outlook on the future.

Equity markets have been on a tear since early March, rising roughly 40% in just a few months. Prior to several key bank announcements the indices have leveled off as investors began to seek validation for the sharp rise and it looks like they have found it.

JPMorgan Chase (JPM) reported a 36% rise in net income as earnings per share of 28 cents easily beat the consensus of 4 cents. Goldman Sachs Group (GS) also topped forecasts. On July 14 the investment bank announced second-quarter results that included earnings per share of $4.93, well above the consensus of $3.52. Earnings were up 35 cents year-over-year.

So...Rush Back to Financials?

Not so fast. After you look deeper into the numbers you will see that these record revenues stem from a favorable trading environment, which is not always the case. Not to mention the life line thrown to banks by the government in an effort to prevent an, arguably, inevitable financial collapse.

Also, JPMorgan's earnings are still down from last year.

And don't forget about the turmoil surrounding commercial lender CIT Group (CIT) which is facing a possible bankruptcy and/or a government bail out.

What's Your Point?

What I am trying to say is that while the financial industry is no longer the investment quick sand it used to be, but as with any area due diligence and common sense is still king. Smaller banks remain volatile as the titans of the industry soak up marketshare and government funding.

I screened for a few companies in the sector that hold a Zacks rank of #1 or #2, price-to-book ratio of between 0.5 and 2.0, and upward movement in the full-year consensus estimate for this year.

Some of the companies I currently like are:

Goldman Sachs Group (GS) in addition to the brief earnings info I mentioned before, I also like Goldman because of favorable upgrades from analysts, including Meredith Whitney. The consensus estimate for 2009 is up $3.59, to $13.61, over the past 3 months, including 54 cents since the announcement. Estimates for next year are averaging $14.50, up from $12.08 over the same time period.

Deutsche Bank (DB) is trading at a good value and has massive upward revisions. The consensus for this year is pegged at $6.36, up from $3.78 over the past 3 months. Compared to the $11 loss from last year and you have solid growth. Not only that, but shares will cost you just 7.5 times earnings.

Piper Jaffray (PJC) is another investment bank that is turning the corner and emerging from the abyss. Estimates for this year are now averaging a $0.25, up from a 17 cent loss after all 4 covering analysts have raised forecasts. The consensus estimate for next year is $1.40, up 45 cents after 6 revisions amongst the analysts. Compare this to the $2.35 loss last year, and you have triple-digit growth for the next 2 years.

In Closing

Like I said earlier, it is time to pull our heads out of the sand and start considering financials again. Now, more aggressive investors probably did this a while ago, so this is geared toward those of us burned by financial institutions in the recent past.

However, don't just dump it into a diversified fund that contains those banks still suffering. Pick a handful of solid financials and beef up the once neglected segment of your portfolio.

Additional Resources

Research Wizard Trial Offer - Screen for you own stocks for FREE, with a 2-week trial offer. Zacks Investment Research

The Dow Jones industrial average closed at its lowest level since April 28, plunging 161 points, or 1.9%, to close at 8,163.60.  Among DJIA components, only four managed to register gains yesterday.  The S&P 500 index dropped below its 200-day moving average, losing 18 points or 2%, to close at its lowest point since May 1.  The Nasdaq declined 41 points, or 2.3%, to close at 1,746.17, its lowest close since May 27.  Declining shares outran advancing issues on the NYSE by a four-to-one margin as trading remained seasonally light.

All ten industry groups on the S&P 500 ended lower, with only defensive areas of consumer goods and healthcare recording declines of less than 2%.  Oil and gas issues fell 2.6% and technology stocks declined 2.5% as a number of ratings upgrades were ignored by traders. Industrials led the decliners with a 3.2% fall on concerns that the recent rally has gone ahead of any economic recovery. 

Alcoa (NYSE:AA), which reports its earnings after today’s close, tried to brush aside analyst worries, advising it was optimistic about its sales, as the Chinese economy and US automotive industry begin to recover. Barclays (NYSE:BCS) raised its price targets on Exxon Mobil (NYSE:XOM) and Murphy Oil (NYSE:MUR). Furthermore, traders will look toward this week's US and the International Energy Agency updates on demand forecasts, looking for indications of stabilization in their downward revisions.

According to Thomson Reuters (NYSE:TRI), analysts have lowered their second quarter earnings expectations to a 35.5% decline, inline with first quarter results.  Basic material shares are expected to register a 79% earnings decline, versus a year ago, while energy companies are expected to report a 65% slide and financials a 53% drop.

Bank of America/Merrill (NYSE:BAC) also raised its ratings on a number of semiconductor shares, including Intel (NASDAQ:INTC), noting recent macro trends suggest a "definitive turn in end demand." But Gartner Inc predicted a 6% fall-off in information technology this year. Financial stocks, however, are expected to face turbulence as a cautious Deutsche Bank (NYSE:DB) report estimates credit pressures likely to result in losses at ten of the sixteen banks covered.  The report also estimates losses for the second half of 2009 and much of 2010.  KeyCorp (NYSE:KEY), Marshall and Ilsley (NYSE:MI), SunTrust (NYSE:STI) and Zion Bancorp (NASDAQ:ZION) may show the weakest results.  However, Wells Fargo (NYSE:WFC) is expected to benefit from strength in its mortgage and trading operations; Meanwhile, KBW upgraded KeyCorp (NYSE:KEY) shares noting the bank has now exceeded Treasury requirements following its capital raising.

Today's calendar covers a G8 summit without Chinese President Hu Jintao who has rushed back home to attend to the Xinjiang crisis. Other items include the weekly MBA mortgage applications post, a 10.9% weekly gain, EIA Petroleum statistics, and consumer credit.

Martin Feldstein has recently raised the possibility that we might experience a relapse into recession in 2010 (a perfect symmetrical W), with the next dip in 2010. In my view, this means (1) we should have opted for a bigger and better composed stimulus package, and (2) the timing of expenditures in the stimulus package might not be as problematic as many commentators have indicated.

"I think we"re going to see a temporary substantial improvement," Feldstein, the former head of the National Bureau of Economic Research and a Reagan administration adviser, said today in an interview on Bloomberg Radio. "I emphasize the words temporary and substantial."

Feldstein -- a member of the private panel that dates the start of recessions and recoveries -- suggested the economy will contract into next year, and that the pattern of economic turnaround will be more of a seesaw than what he called "a beautiful symmetrical W."

Interestingly, neither the OECD nor Deutsche Bank project such a "W" shaped trajectory. Nor do any of the forecasters in the May WSJ survey.

That doesn't rule out the possibility of this occurring. I can think of several reasons for thinking a W shaped recession would be plausible. The most plausible in my mind would be if the world economy failed to rebound sufficiently to provide enough externally generated aggregate demand via exports. The other possibility is that monetary policy tightens too soon, as inflation hawks press their case (see FRBSF President Janet Yellen's assessment, as well as this post).

The Timing of Stimulus Spending, Again

At this juncture, it's useful to recall that the peak in spending would be in FY2010. As shown in this figure from this post, roughly half of the stimulus occurs in from October 2009 to September 2010.

I know that there's going to be a big group of commentators who will argue the multiplier is 0, but I'll go with the CBO and assert there will be some impact of indeterminate amount. In addition, if the critics who have argued that the spending is occurring much too slowly are correct [0], then the actual spending will more likely occur in this "dip" period that Feldstein is predicting. (Previously, I argued that the recession was likely to be long, so speed would not be of the essence [1]).

Mendacity Alert

Figure 1 also demonstrates why the critics of the stimulus bill that cite today's nonfarm payroll losses are being disingenuous. It was understood that most of the spending would not occur in FY2009, and even that which occurred within FY2009 would be toward the end of the year. (Really, did anyone expect the impact to be discernable in four months after the bill's passage?).

The series in Figure 3 are plotted in log terms. This means that changes in the slope indicate changes in the percentage rate of change in the indices. The fact that the slopes for the blue and green lines means the rate of deterioration in employment is declining. However, there was little evidence before that the labor market was improving even before this morning's release [2], and that point is reiterated today by Jeff Frankel.

Interestingly, if the critics of the stimulus bill focus on changes in trends post ARRA [i] [ii] [iii], they might regret it in the future (well, assuming they're interested in internal consistency of argument). That's because the rate of GDP decline does look like it's stabilizing in 2009Q2, at least based on early readings from e-forecasting and Macroeconomic Advisers. (Once again, the series are plotted in log terms, so changes in slope can be identified as changes in the percentage growth rates.)

Valid, and Not so Valid, Criticisms of the Stimulus Bill

I do think the one big failings of the stimulus package that I highlighted back in March is now coming to light: the cut in the transfers to states that came about as a result of the compromise with the Senate Republican moderates [3]. As the states grapple with truly challenging budget shortfalls [4] [5] [6], they are cutting spending and raising taxes – exactly the measures that the textbooks say are not ideal from a countercyclical stabilization policy standpoint.

One digression on bureaucratic procedures. In the day before yesterday's NYT, David Leonhart chastises the Administration for using models that were too optimistic. I certainly agree in retrospect the Administration's baseline forecast was too optimistic. Two observations: First, it's important to realize that the end-February assessments were based upon early January forecasts completed by the previous (Bush) Administration, and finalized on February 3 [7]. When taken in that light, I don't believe the forecasts were that much out of line with private sector forecasts [8]. Second, (in my limited experience) if one is to deviate from a model, it helps to have a formal alternative model to use. It's not clear to me an alternative formal model that had widespread acceptance exists, so, it's all fine and good to say a more pessimistic model should've been used, but it's hard to make a case for that in a bureaucratic setting, especially if it deviated from the Blue Chip.

* Deutsche Bank (NYSE:DB) began coverage of Cisco Systems (NASDAQ:CSCO) with a "buy" rating and a price target of $26, noting, "We anticipate accelerating growth to be driven by customer upgrades as network traffic strains installed products. We also anticipate good uptake for the new initiatives around unified computing and video networking"

* Sepracor (NASDAQ:SEPR) announced that its experimental depression drug SEP-225289 failed to meet primary efficacy endpoint of reduced depression symptoms after eight weeks of treatment

* Morgan Stanley (NYSE:MS) is expected to post a second quarter loss of between $400 million and $1 billion, on lower trading profits and higher charges, according to analysts

* Google's (NASDAQ:GOOG) CEO Schmidt in a interview noted the impact of government stimulus funds starting to work, 2009 economic conditions expected to remain "difficult," with a recovery in 2010, and Google results to be impacted by changing tax policies

Notice that the USD share has not declined, despite a decline in the dollar's value against major currencies. Following Brad Setser's observation that the reason the demand for the dollar as a reserve currency rose is because total demand for reserves increased, I also plotted the levels -- rather than shares -- for the most recent data.

I think it's an interesting that reserves have been shrinking for the past three quarters -- and at a pretty rapid clip. They were declining by an annualized 10.3% in 2009Q1 (q/q in log terms; 9.8% in base terms). This development suggests that, even if the dollar retains its share of total reserves, demand for dollar assets might still decline.

While this might constitute a secular force for dollar weakness, it's important that there are forces in working in the other direction, including cyclical factors. Deutsche Bank for instance projects 12.7% appreciation in the DB dollar index by end-2009 (16.1% against the euro, both in log terms). Their forecast implies only a slight depreciation in the dollar index by end-2010, and further appreciation against the euro (20.4% relative to June 26).

The Down Jones industrial average advanced 91 points or 1.1% and the S&P 500 increased 0.9%.  NASDAQ edged up 0.3%.  Volume on the NYSE was light with only 1.07 billion shares exchanging hands and advancing issues outpacing declining stocks by a three-to-two margin.  The measure of market volatility, the CBOE Vix, retreated 2.2% to 25.35%, its lowest level since mid-September.  Treasury prices jumped, with the yield on the benchmark 10-year note declining to 3.48%.  Crude prices jumped to more than $71 per barrel on higher demand expectations and reports that Nigerian militants partly shut down an offshore oil facility.    

Trading is expected to remain volatile this week as some money managers do last minute adjustments to their portfolios, a phenomenon known as "window dressing."  The week, cut short by the Independence Day holiday, also brings a spate of economic data and is likely to provide a sense of where the markets are headed.  Of key importance is the monthly employment report that is due on Thursday.  There are expectations that unemployment in US rose at a slower pace than projected.   

The jump in crude prices boosted energy stocks, sending shares of Chevron (NYSE:CVX) up 1.4% and ExxonMobil (NYSE:XOM) up 2.2%.  A WSJ report that said banking firms are expected to report higher second-quarter profits boosted financials. Moreover, SLM (NYSE:SLM) shares rallied 8.5% on pricing details of its student loan services contracts, announced yesterday by the Department of Education.

Meanwhile, Apple Inc. (NASDAQ:AAPL) announced that CEO Steve Jobs has returned to work.  The iPhone maker said Jobs will work at Apple offices "a few days a week" and work from home the other days.  Microsoft (NASDAQ:MSFT) rose 2.2% after Deutsche Bank (NYSE:DB) raised its price target on the software maker.  General Dynamics (NYSE:GD) rose 2.8% to $57 and Eastman Chemical (NYSE:EMN) jumped 3.7% to $38.79. 

Among DJIA components, all but Alcoa (NYSE:AA) advanced.  Hewlett-Packard (NYSE:HPQ) led the gainers with an advance of 3.5%, followed by Bank of America (NYSE:BAC), which rose 3.5% and Merck (NYSE:MRK), which added 3.2%.  The $22.4 billion Magellan Fund reported it raised its holdings of Bank of America (NYSE:BAC) in May. Merck (NYSE:MRK) rose after reporting it has returned to normalized shipments of its Zostavax shingles vaccine.  However, Alcoa (NYSE:AA) declined after analysts at FBR Capital, downgraded the stock to "underperform" from "market perform", citing valuation and oversupply concerns.

All ten S&P500 industry groups recorded gains, with utilities rising 1.3%, oil and gas adding 1.2%, telecom rising 1.2%, and financials advancing 1.1%.  Home builders also rose after Credit Suisse (NYSE:CS) upgraded KB Homes (NYSE:KBH), which had reported signs of moderation in certain negative housing trends. Lennar (NYSE:LEN), which reported new home sales and orders picked up during the quarter, jumped 5.8%.  Morgan Stanley (NYSE:MS) upgraded JC Penney (NYSE:JCP) shares to "overweight" from "equal-weight", noting the company was "the most likely candidate" among department store chains to outperform current margin projections for the second quarter.

Right now, in the wake of MSCI’s reclassification of Israel as a developed market, I’m working on a rundown of the country classifications of four major index providers: MSCI, Dow Jones, FTSE and Standard & Poor’s.

The evolution of emerging markets (and sometimes devolution of developed markets—see Greece, which could lose developed-market status in the FTSE indexes) is just particularly fascinating to me. Take some of the frontier/emerging markets that the index providers cover at the very bottom rungs of the investability ladder: Latvia? Slovakia? Trinidad & Tobago? Mauritius?

Frankly, I’m dying to know what the investment stories are behind these tiny, tiny markets. And while I believe frontier markets (like, say, Vietnam) offer some awesome investment opportunities, is anyone really itching to sink some funds into an obscure eastern European country that probably has a smaller population than the number of visitors to my local mall on the day after Christmas?

I realize there are different rules and methodologies that each of the index providers use, but it all seems rather mysterious. For example, Dow Jones—which generally uses the International Monetary Fund’s designations—classifies Slovenia as a developed market, while MSCI has it labeled as a frontier market. That’s quite a disparity.

Lately, the majority of the focus has been on Israel and South Korea, though, and whether they will transition to developed-market status within the various classification systems. MSCI, of course, just promoted Israel to developed status last week, while keeping Korea in the emerging category. Given that the majority of internationally invested funds are benchmarked to MSCI indexes (at least in the U.S.), this issue has been followed fairly closely by investors. At the end of March, Israel was the ninth-largest country in the MSCI Emerging Markets Index, with a 4.0% weighting, and South Korea was the fourth-largest, with a 12.4% weighting.

Given the amount of money benchmarked to that index and the even greater amount benchmarked to the MSCI EAFE Index, which Israel now joins, that’s an awful lot of funds shifting around. South Korea is up for reconsideration in 2010 (as is Taiwan, another country straddling the emerging/developed divide).

But MSCI seems to be on the tail end of the trend: Dow Jones, S&P and FTSE all classify South Korea as a developed market, while only Dow Jones and FTSE put Israel into the developed bucket. S&P still has Israel as emerging. Of course, FTSE, S&P and Dow Jones have a lot fewer funds tracking or measured against their global indexes.

They can shift their country classifications with relative ease, as they deem appropriate, without a lot of reverberation. But if MSCI decides to promote a country to developed status, many, many billions of dollars are going to be moving around, with all sorts of economic consequences.

And not all of them will be positive: In Israel, there is concern that the country moving from relatively big-dog status in the emerging markets index to a minor position in the developed markets index will actually result in outflows from the local stock market.

(Read an article on the latest MSCI moves here. Also of interest might be a Bloomberg article on the subject here, and another article from an Israeli publication about a Deutsche Bank study on the potential negative impacts of the switch.)

Teva Pharmaceutical, Israel’s largest company, saw its price spike in June shortly before the official MSCI announcement, but there’s no telling what the longer-term effects will be. It will be interesting to see what happens with that, and even more interesting to compare the outcomes with what happens when South Korea—and its big stock, Samsung Electronics—is finally promoted to developed status.

Yeah, that was definitely the unrepentant nerd talking …

* McDonald's (NYSE:MCD) posted comparable sales numbers for May of 5.1%, which failed to equal April's 6.9% advance

* Goldman Sachs (NYSE:GS) downgraded shares of Burlington Northern (NYSE:BNI), and raised CSX (NYSE:CSX)

* Morgan Stanley (NYSE:MS) downgraded shares of Nucor (NYSE:NUE)

* Google (NASDAQ:GOOG) and eBay (NASDAQ:EBAY) will present at the Credit Suisse (NYSE:CS) convergence conference

* Qualcomm (NASDAQ:QCOM) will present at the UBS (NYSE:UBS) Tech and Service conference at 12:45 PM ET

* Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO) are due to present at the Deutsche Bank (NYSE:DB) global consumer and Food Retail Group

Meanwhile, U.S. markets lost ground yesterday as financials, telecom and technology shares failed to lift sentiments.  Yields on 30-year bonds fell the most since February as Treasury's $14 billion bond auction met with pricing resistance. Tech-heavy Nasdaq declined 2.4% and S&P 500 slid 1.3%; the DJIA lost 1.2%. Volume on the NYSE was a heavy 2 billion with declining shares ahead of advancing issues by a two-to-one margin.  The CBOE Vix, market's measure of volatility, surged 3.1%.

With investors turning to risk aversion, defensive plays like healthcare and utilities gained.  On the downside, telecom shares declined 3.6% after JP Morgan (NYSE:JPM) downgraded AT&T (NYSE:T) and Verizon (NYSE:VZ), citing concerns over subscriber growth and pricing pressures. Financials followed telecom stocks with a 3.5% fall.  Tech-shares declined 3.3% as cost-cutting measures failed to improve top-line weakness, as reported by bellwethers Cisco Systems (NASDAQ:CSCO) and Symantec (NASDAQ:SYMC).  Micron Tech (NYSE:MU) was cut to "hold" from "buy," by Deutsche Bank (NYSE:DB), after the brokerage averred the firm may miss consensus sales projections.

Although the economy is showing signs of easing, employment continues to paint a grim picture. Yesterday's report on continuing claims, which rose to 6.35 million, the fourteenth consecutive weekly record, showed new hirings were still not on employers' agenda. And employment scenario is likely to remain sluggish.  Today's monthly non-farm payrolls report, therefore, remains a major market hurdle. The numbers are expected to drop to 600,000 from 663,000 prior; however, unemployment is expected to have risen to 8.9% from 8.5%.

Same-store sales reports yesterday showed warm weather in April and an early Easter sent retailers' April same-store-sales up 1.2% from a year ago.  Nevertheless, Wal-Mart (NYSE:WMT), which reported a better-than-expected 5.0% gain in comparable sales, boosted industry totals; excluding Wal-Mart (NYSE:WMT), comparable sales declined 2.7%.  Moreover, Wal-Mart's (NYSE:WMT) first quarter sales projection of $93 billion was below estimates of $96.82 billion. Target's (NYSE:TGT) 0.3% gain in comparable sales were inline with expectations, but the company said its first quarter earnings will be "well above" the current consensus estimate of 52 cents a share.

Release of the much-heralded stress test results showed ten of the nineteen financial firms are in need of further capital cushions. Among those not needing cash injections are: BB&T (NYSE:BBT), Capital One (NYSE:COF), Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM), MetLife (NYSE:MET), State Street (NYSE:STT), and US Bancorp (NYSE:USB). Goldman Sachs (NYSE:GS) promptly upgraded Capital One (NYSE:COF) and Bank of America (NYSE:BAC) was upgraded by Morgan Stanley (NYSE:MS) to "overweight" from "underweight;" the company announced plans to raise $17 billion in equity. Morgan Stanley (NYSE:MS) needs to raise $1.8 billion, and plans to sell $5 billion in common equity and non-US-guaranteed bonds. Citigroup (NYSE:C) will expand its existing offer to convert preferred shares into common shares; the firm was asked by regulators to raise $5.5 billion.

Besides the nonfarm payrolls post, key economic posts include wholesale inventory data, due out at 10:00 AM ET, with Fed's Lacker to speak on the economy at 1:00 PM ET.

Ed Yardeni is president of Yardeni Research  Inc., a provider of independent investment strategy research and data. He has worked as chief investment strategist at Deutsche Bank, Prudential Equity Group and Oak Associates. Yardini has also served as chief economist for C.J. Lawrence, Prudential Securities and E.F. Hutton.  

His resume also includes working as an economist with the Federal Reserve Bank of New York. He also held positions at the Federal Reserve Board of Governors and the U.S. Treasury Department.

Earlier this week, IndexUniverse.com's Murray Coleman caught up with the market-oriented economist and investment analyst Thursday afternoon to find out his take on macrotrends going forward.

IndexUniverse.com: Does this rally have legs?

Ed Yardeni:  I think it does. It has already traveled a fair distance. I think 1,000 on the S&P 500 is likely. We're probably going to take-out the Jan. 6 high for the year fairly soon, which was 934.70.

IU: Do you see more bumps in the round?

Yardeni: Yes, but they're the same bumps we've seen in the bear market. The banking system still has its issues as evidenced by the most recent stress test given by the government. And unemployment is still a concern. But there's a sense that these problems might not stop the economy from recovering after all.

IU: Do you see a pullback coming, though?

Yardeni: I don't try to be a technician. But sure, there could be a pullback. Remember, though, that we're coming back from a huge fall. What is encouraging is that stock prices in many industries are gaining back their losses from the September 2008 levels. That's when Lehman and AIG really hit the fan and panic took over.

IU: What sectors seem the best-positioned at this point?

Yardeni: Being defensive doesn't make much sense with a global recovery in sight. So I think materials and industrials should do well. The price of oil has done well recently. It should continue to rise. In the next six- to 12-months, prices could get up into the $75-$80 per barrel range. The metals and mining as well as specialty chemicals also look attractive now. Diversified chemicals still appear rather sluggish and I don't see a lot of upside in that industry.

IU: Do you think gold has more room to run?

Yardeni: Not necessarily. Gold and the trade-weighted U.S. dollar have been flight-to-safety plays. We've seen more interest in risk-taking lately. If that continues to be the case, the trade-weighted dollar and gold may go nowhere fast. I'm not enthusiastic about either one at this point.

IU: How about emerging markets?

Yardeni: They've had a great run and I think they'll continue to outperform from here. We started to see at the beginning of this decade a great global boom. That was interrupted by the credit crisis, but it looks like global growth might be resuming again. China, India and Brazil look best at this point. Asia will be the region that really leads the global economy out of this recession, more so than the U.S., Japan or Europe.

IU: How do you see Europe?

Yardeni: It's going to be a slow-growth story. They don't have much going on over there in terms of domestic demand. The demographics are against them with an aging population. And on the whole, they tend to have a more conservative consumer base. Other than in Spain, the U.K. and a scattering of other countries, Europe hasn't seen the kind of housing boom in recent years as the U.S. underwent this decade. Eastern Europe seems to continue to be mired in some of the credit excesses they've been through in recent years.

IU: What do you see taking place in those markets where housing did spurt before the credit crisis?

Yardeni: Now that we've seen the housing bubble burst, economies that used to have very active real estate markets -- such as Spain, the U.K. and Ireland -- are going to slow even more.

IU: Which markets appear in relatively better shape in Europe?

Yardeni: France and Germany have been heavily reliant on exports. But they should show better strength than other European countries because a global recovery will provide a lift to their exporting capabilities. That should put them in a better relative position than Spain, Ireland and the U.K.

IU: What sort of chance to do you see for a turnaround in Japan?

Yardeni: Not much. The main hope for Japan is strong growth in China. They've got one of the worst demographic situations of any industrialized economy. And they don't have any real serious domestic demand. They're working on their second lost decade. Japan stands to lose much of their economic influence in the next decade.

IU: What about the U.S.?

Yardeni: This is going to be the first global recovery not led by the U.S. Our economy will recover, but it will be lackluster and take some time to complete. The good news is that the U.S. remains a very dynamic economy. We've still got plenty of entrepreneurs who are going to make money even with the government playing a larger role in the private sector. But even once employment growth builds, we still could be looking at a recovery about half the strength of what we've seen in the past.

IU: What other types of investments are you recommending to institutional investors these days?

Yardeni: Corporate bonds, junk bonds and leveraged loans all look interesting. If you can get involved in funds that invest in companies benefitting from TALF, those would seem to be an attractive way to invest right now. That's assuming that you think that we're on a course heading towards a global recovery. I certainly do, which makes me believe that some sectors considered at the moment to be more risky look very attractively priced. This would seem to be a good time to take advantage of some of those opportunities.

Well, Matt—if your research holds any water, today must have been a BOOM day for the (RAFI) fundamentalists out there.

And this huge rally for XLF? I don't believe it for a second. In fact, the same dangerous impulses that led me to buy XLF at $15.07 (and see it promptly drop to below $6) are urging me to sell now that we're almost touching $12. After all, in that October binge of ETF buying (heavy on XLF and FXI—that would be the SPDRs Financials and the FTSE/Xinhua iShares for the less-ETF-focused among you), I'm actually AHEAD right now ... after a disastrous start.

In this environment, I'm looking forward to talking to Rob Arnott this Thursday at 1:00 p.m., where he'll be doing a webinar discussing bonds' recent 40-year outperformance of equities (register for free here) as well as current market conditions. Rob is working hard as always and has done some great recent research. He's one of the people in the mix in our world who I always listen to when he has something to say.

OK, so let's get to it. For what it's worth (and I've already shown I can be as humbled as anyone by market swings), here are five reasons I don't believe this rally will last:

1. We are up (SPY is up) 35% since the bottom. Thirty-Five Percent. The markets are supposed to lead the economy by six months. I just don't believe our prospects have magically come up 35% off the bottom of this economic cycle.
2. There is still no concrete evidence that the administration really knows what they're doing. The TED spread has really come in—to less than 100 basis points. But we're still well higher than where we'd been a couple years ago and stretching into the past. We all want to believe in the stimulus plan. But I suspect it gets tougher before it gets easier. Be prepared for that.
3. I mentioned SPY being up 35% from the bottom. For XLF, that number is 100%. XLF has flat DOUBLED from the bottom. Indeed, the Deutsche Bank team today recommended that investors buy its short STOXX 600 Financials db x-trackers as its "idea of the day."
4. Everybody and their mom are buying right now on the retail side, but there's not much institutional conviction (see the MarketWatch article I mention below). Consensus there says bear market rally. My money is with the big boys.
5. Don Friedman says, "looking for an opportunity to short as we near 9,000" ... and I ALWAYS use Don as my contrarian indicator. So maybe we should stay long after all. In the same breath, though, Don adds: "Hoping that USO has started a bull move as it busted through $30 today." Sounds like Don might be running some very sophisticated market neutral-strategies down there in Atlanta.

Basically, nearly everyone is saying "bear market rally" and that the "Smart money starts to bail on stocks' rally."

In short, this market is again telling us why it's so irresistible to watch, and while we're tempted into the same dumb mistakes again and again.

A MONTH ago the same MarketWatch ran this "Holy Hindenburg" story on the market's imminent plunge. So don't hold your breath on calling the top or the bottom.

But DO get your ducks in a row. Because if you can't take the market losing back 30% or 40% ... or even 50% ... from here (which it absolutely could), then you should not be in it. Go buy some of grandma's CDs.

Better, yet, as I've been saying for months ... get a plan and stick to it. The odds are, you're in the vicinity of what is very likely going to be a historic buying opportunity for equities.

I'll take my chances with a well-considered asset allocation plan.

Why wonder? Well, in the final chapter of the text, I outlined the use of Taylor rule fundamentals to explain exchange rates (see this paper and these posts [1], [2], [3]). However, the fact that several central banks have hit the zero interest rate bound, and instituted quantitative easing (QE), makes the plausibility of such models limited in the near future.

At the same time, we are witnessing a substantial increase in government debt, as documented in this post. Working off a portfolio balance model, as discussed in this post, one would expect a depreciation of the dollar or an increase in the exchange risk premium. However, all developed countries are expanding debt to GDP ratios.

(Notice that gross debt differs from net debt, so these figures are not comparable to those in this post.)

Deutsche Bank, in its most recent Exchange Rate Perspectives (March 27, 2009) [not online], concludes:

Fiscal expansion combined with QE

What is the implication of fiscal expansion combined with QE? We have argued that history suggests the implications of higher fiscal deficits for the dollar will depend on whether or not the higher deficits are accompanied by higher relative US longer-term rates (Fiscal Deficits and the Dollar, ERP, September 2008). So if relatively more activist fiscal policy in the US raises relative US yields, history suggests this should be positive for the dollar. But there is widespread concern that if the higher deficits are accompanied by expectations of or actual QE, this will be negative for the dollar. This is essentially a "risk premium" argument that even with higher relative US yields, because of or under QE, this will be negative for the dollar. Looking at historical experience for episodes of risk premia against the dollar by examining the correlation between daily returns in EURUSD versus the longer-term rate differential indicates six episodes of negative correlations between the differential and the dollar. Four of these are episodes of risk premium in favor of the dollar, with declines in the dollar rate differential associated with a higher dollar. There have only been two episodes—in the late summer and early fall of 1998 and in the summer of 2003 -- when a move in rate differentials in favor of the dollar was associated with a weaker dollar. There have thus historically been very few episodes of such a risk premium. Presently this correlation between changes in the yield differential and the dollar is running around zero to very modestly negative. This is consistent with the view that most of the recent sharp depreciation in the dollar has been in line with the decline in US rate differentials and there is little or no evidence that higher expected fiscal deficits in the US combined with QE have created a risk premium against the dollar …

Interestingly, this perspective contrasts with Charles Wyplosz's view, who argues that QE is basically a beggar thy neighbor policy. Perhaps it is, but when many countries are undertaking QE [4] [5] the effects cancel out.

What about China? As Brad Setser points out, China has slowed accumulation of Treasurys. How this will play out depends on how much the currency composition of assets changes as a consequence. And indeed whether the slowdown in accumulation persists.

Returning to the question that inspired this post, DB asserts that the long term yield differential will drive the dollar. That seems to be a hypothesis that one will be able to test as the data roll in. So I remain hopeful that the empirical methods of the past will prove yet again useful in the future, despite the changed nature of the world.

[Addition, 8:15pm Pacific It turns out that Barry Eichengreen has already observed this nullification effect -- but adds that it would be better to coordinate QE across countries. See this article from last month.]

By the way, if you're looking for estimates of increased debt-to-GDP stocks on interest rates, see Table 3.5 of the OECD, Economic Outlook (March 2009) [pdf]....you'll see a reference to this paper.

Technorati Tags: zero interest rate policy, quanitative easing, exchange rates, Taylor rule, and portfolio balance.

U.S. markets closed modestly lower Monday paring losses recorded earlier in the day amid banking worries and investor concerns that gloomy earnings and outlook will hurt technology, commodities and industrial shares.  The KBW Banking index slipped 3.8% after a prominent banking analyst advised selling banking stocks.  Calyon Securities analyst Mike Mayo in a report titled "Seven Deadly Sins of Banking" warned bank losses could exceed levels seen during the Great Depression.  Stocks advanced in the late afternoon session paring some losses but the rally was checked after reports emerged that talks for IBM Corp.'s (NYSE: IBM) $7 billion deal to buy Sun Microsystems (NASDAQ: JAVA) had hit a roadblock. Sun Microsystems (NASDAQ: JAVA) shares plunged 23%.

Mayo started coverage on several banking stocks with an "underperform" or "sell" rating.  Among securities initiated with a sell rating were: BB&T Corp (NYSE:BBT), Fifth Third Bancorp (NASDAQ:FITB), KeyCorp (NYSE:KEY), SunTrust Banks (NYSE:STI) and US Bancorp (NYSE:USB). Underperform ratings were assigned to Bank of America (NYSE:BAC), Citigroup (NYSE:C), Comerica (NYSE:CMA), JP Morgan (NYSE:JPM), PNC Financial Services Group (NYSE:PNC), and Wells Fargo (NYSE:WFC).

Toward the end of the day, however, banking analyst Meredith Whitney supported the outlook for the banks, expecting a rise in share prices upon realization of the group's rising tangible book values, although still maintaining that the sector may not get "out of the woods" until mid-2010.  This morning a London newspaper report cited an IMF projection likely to place banks' toxic debt level at as much as $4 trillion, up from its January estimates of $2.2 trillion.

Among declining banking stocks, JP Morgan Chase (NYSE: JPM) lost 3.7% to $28.20, Well Fargo (NYSE: WFC) dropped 6.7% to $15.25 and SunTrust Banks (NYSE: STI) fell 8.1% to $12.70. The Dow Jones Industrial Average slid 41.74 points, or 0.5%, to 7975.85. Tech-heavy Nasdaq declined 15.16 points or 0.93% at 1,606.71. The Standard & Poor's 500 Index .SPX lost 7.02 points, or 0.83 percent, to 835.48.

Investors preferred to remain on the sidelines on the eve of the earnings season which kicks off today with Alcoa's (NYSE:AA) expected post of a quarterly loss after the close. NYSE volume slowed to 1.3 billion shares, as declining issues outpaced advancing shares by more than two to one. The Vix volatility measure headed up from Friday's two-month lows, with a 3.1% jump to 40.93.

The Baltic Dry Index, widely interpreted as a measure of world trade, fell to its lowest point since February 4, down 1.3% on Monday, sending economically-sensitive oil and gas and basic material sector stocks down 2.2% and 1.7%, respectively. Rio Tinto (NYSE:RTP) announced plans to slow construction of an aluminum refinery and cut bauxite production citing dwindling demand.  Deutsche Bank (NYSE:DB) slashed its projections for steel maker earnings, citing lower prices and demand.

Automakers remained in focus as Ford (NYSE:F) reported results of a tender offer which reduced the firm's debt by 28% from $25.8 billion at the end of 2008. The auto maker's shares topped the list of S&P performers Monday, rising 16%, upon its elimination of $9.9 billion in debts. Nevertheless, S&P dropped its credit ratings on the company. Moreover, a Barron's article noted the company likely to benefit from problems at General Motors (NYSE:GM) and Chrysler. General Motors (NYSE:GM) shares gained 8.1%, topping the list of gaining issues on the DJIA.

Goldman Sachs (NYSE:GS) removed Cisco Systems (NASDAQ:CSCO) from its "conviction buy" list, saying growth expectations were "largely priced in."

Today's expected reports include February's consumer credit figures (2:00 PM ET). Consumer credit is expected to show a contraction of $3.0 billion following its $1.8 billion increase in January. The SEC meets tomorrow at 9:00 PM ET to address the uptick rule. Among companies due to release quarterly results are: Alcoa (NYSE:AA), Bed Bath and Beyond (NASDAQ:BBBY), Chattem (NASDAQ:CHTT), and Mosaic (NYSE:MOS).

Note that forecasted GDP (in the tan shaded area) is above the level implied by e-forecasting. E-forecasting's estimate is that GDP will be down by 9.9% (SAAR) in 2009Q1. If this more dire forecast proves accurate (Deutsche Bank predicts -8.0% SAAR), then -- as Brad Delong likes to say -- we'll need a bigger stimulus package.

See also Calculated Risk's discussion of the employment report: [1], [2], [3].

Side note: for those wanting to hear my take on the G-20 meetings, Minnesota Public Radio had an hour with me on the air yesterday (link here).

Investars calculated that Zacks Equity Research's buy-recommended stocks rose 23.9% over the past 5 years, nearly 200% better than the Russell 2000.

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I know my more serious colleagues—Jim Wiandt and Murray Coleman—will accuse me of falling short of the desired journalistic reserve. To that, I plead guilty. The list of potential suitors I lay out below is rank speculation, based on nothing more than my intuition about the industry and a few silly hunches.

But the fact that Barclays is shopping iShares around is big news in the ETF industry. There are important ramifications. And besides, this is a blog, and if I can't speculate here ...  

So let's get it out of the way. Here is my list of potential suitors. This is borrowed from my own speculation, and that reported by John Spence and others in the media yesterday:

• Big Broker-Dealers: Goldman Sachs, J.P. Morgan, Morgan Stanley
• Big Banks: State Street, Deutsche Bank, Northern Trust
• Brokers: Charles Schwab
• Fund Companies: Fidelity

There are a dozen more options, including private equity firms, but those are some of the hot names.

Make no mistake: iShares would be a jewel for any of them. It controls 46% of all ETF industry assets, including six of the top 10 funds. Its iShares MSCI Emerging Markets ETF (NYSE Arca: EEM) is the second-highest grossing ETF in the world, pulling in over $110 million per year; only the SPDR Gold Shares (NYSE Arca: GLD) does better, grossing $125 million. And it sits at the heart of one of the fastest-growing segments of the financial services industry.

Whoever buys iShares, assuming it's sold, I hope for one thing: They continue pouring money and effort into educating investors about ETFs. The ETF industry has been built in large part on the outreach efforts of iShares, and it would be a shame to lose that.