The Dow Jones industrial average, which was well supported by strength in its all but one component, rose 203 points, or 2.0%, to a 13-month high of 10,227.  The S&P500 climbed 2.2% for its sixth straight session gain to 1093 and the tech-heavy NASDAQ gained 2.0% to close at 2154.  The market’s measure of volatility, the CBOE Vix, plunged 4.3% to 23.15.

All ten S&P500 industry groups ended in the green, led by gains in basic material shares (+3.5%) and financials (+3.5%).  Crude prices added $2.00 to close at $79.43 even as Hurricane Ida was downgraded to a tropical storm.  Gold prices went past the $1100 level, up $5.70 to $1101.40, as the metal shined brightly on its inflation hedge appeal.  At the same time, greenback took a beating on such concerns, declining 1.0% against a basket of currencies, to a 15-month intraday low of 75.04.  Shares of Freeport-McMoRan (NYSE:FCX) advanced 4.6%; Rio Tinto (NYSE:RTP) surged 5.9%.

A weak dollar helped shares of companies with large exposure to overseas markets.  Caterpillar (NYSE:CAT) jumped 4.2%, DuPont (NYSE:DD) gained 3.7%, Boeing (NYSE:BA) rose 3.4%, and General Electric (NYSE:GE) added 3.4%.

Financials rose 3.5% with American Express (NYSE:AXP) jumping 4.9%, Bank of America (NYSE:BAC) up 4.8%, Discover Financial Services (NYSE:DFS) up 5.9% and Capital One Financial (NYSE:COF) up 5.6%.  The Fed noted that of the ten bank holding companies that underwent US government’s stress tests only GMAC has raised its capital reserves sufficiently to meet the economic risks of higher unemployment and slowing growth. On Thursday, the FDIC meets to address the negative implications of an accounting rule change requiring credit-card firms to bring back on to their books card loans that are bundled into securities and sold to investors.

While the economic calendar remains light and corporate earnings schedule slim, Fed speak schedule is heavy, with Atlanta Fed President Lockhart slated to take the stage at 9:15 ET; San Francisco President Yellen at 10:15. Boston Fed President Rosengren is due to speak at 4:15, Dallas Fed President Fisher at 7:30 and Fed Governor Tarullo at 8:30.  Senate Banking Committee Chairman Christopher Dodd is expected to release a draft of the bill on financial regulatory reform.

Chicago, IL – November 10, 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: JP Morgan Chase (JPM), U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI) and PNC Financial (PNC).

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Here are highlights from Monday’s Analyst Blog:

Bank Failure Tally Reaches 120

The FDIC entered into a purchase and assumption agreement with Ameris Bank, Moultrie, Georgia, to assume all of the deposits of United Security Bank; Liberty Bank and Trust Company, New Orleans, Louisiana, to assume all of the deposits of Home Federal Savings Bank; Alerus Financial, National Association, Grand Forks, North Dakota, to assume all of the deposits of Prosperan Bank; Central Bank of Kansas City to assume all of the deposits of Gateway Bank of St. Louis; and East West Bank, Pasadena, California, to assume all of the deposits of United Commercial Bank.

In order to replenish the declining fund, the FDIC board recently proposed that approximately 8,100 insured U.S. banks and savings institutions should pay fees for three years in advance. Also, the regulators are considering requesting the healthy banks to bail out the government as soon as it is necessary to replenish the deposit insurance fund, which has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%.



In the second quarter of 2009, the number of banks on the FDIC's list of problem institutions grew to 416 from 305 in the first quarter. This is the highest since the savings and loan crisis in 1994. Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. The FDIC anticipates the bank failures to cost about $100 billion over the next four years.



The failure of Washington Mutual last year was the largest in U.S. history. It was acquired by JP Morgan Chase (JPM). Other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB), Zions Bancorp (ZION), SunTrust Banks (STI), PNC Financial (PNC), to name a few.

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Chicago, IL – October 30, 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: Bank of America (BAC), Citigroup (C), Motorola Inc. (MOT), China Mobile Ltd. (CHL) and Mylan, Inc. (MYL).

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Here are highlights from Thursday’s AnalystBlog:

Contributions to GDP Growth

While residential investment is still near a record low share of the overall economy, I have serious questions about the sustainability of the increase. The extension and expansion of the the tax credit by Congress might keep things going for the next few quarters, but after that things are likely to fall apart again. Just like we saw with the "Cash for Clunkers" (C4C) program, it is probably just encouraging those folks who might have bought later to buy now.

It is also tricking people into thinking that a house is more affordable that it really is -- just the way that teaser-rate ARM’s did, and we saw just how well that worked out. The FHA is handing out mortgages with only 3.5% down, and people can use the tax credit for that ridiculously small down payment. This has future disaster of biblical proportions written all over it. The next bailouts will not be of the banks like Bank of America (BAC) and Citigroup (C) but of the FDIC and the FHA.

Direct Government spending had a small but positive impact on overall growth in the 3Q, adding 0.48 points -- a fairly significant slowdown from the 1.33 contribution in the 2Q, but better than the 0.52 point drag in the 1Q. All the help came from Washington, not City Hall or the Statehouse.

Motorola Shows Signs of Revival

Motorola Inc. (MOT) today declared financial results for the third quarter 2009. Quarterly net income from continuing operations was $12 million or 1 cent per share, compared to a net loss of $397 million or 18 cents per share in the prior quarter. Third quarter adjusted (excluding special items) EPS was 2 cents, easily beating the Zacks Consensus Estimate of a break-even quarter.

Improvement in net income was primarily due to the huge reduction in operating expenditure. Quarterly total revenue was $5,453 million, down 27.1% year-over-year and also below the Zacks Consensus Estimates of $5,564 million.

Gross margin in the third quarter was 33.2% compared to 24.1% in the prior-year quarter and 31.1% in the previous quarter. Quarterly operating expenditure was $1.68 billion compared to a massive $2.26 billion in the year-ago quarter.

Quarterly revenue was $2 billion, down 15% year-over-year. Operating income was $199 million compared to an operating income of $263 million in the year-ago quarter. During the third quarter, Motorola conducted the world's first live 2.6GHz TD-LTE mobile demonstration for China Mobile Ltd. (CHL) and shipped 3.3 million digital entertainment devices.

Mylan Beats, Raises Outlook

Mylan, Inc. (MYL) reported third quarter earnings per share of 32 cents, above both the Zacks Consensus Estimate of 27 cents and 23 cents in the prior-year period. The company reported revenues of $1.26 billion, a 24% decline from the year-ago period.

However, the year-ago period included $455 million of revenue related to the sale of the product rights of Bystolic. Excluding this, total revenues increased 5.2% over the third quarter 2008. Revenues would have increased 9%, but for the unfavorable movement of foreign currency.

From this quarter onwards, Mylan has decided to report its results in two segments -- Generics and Specialty -- following the acquisition of approximately 24% of the remaining interest in Matrix and the related de-listing. The former Matrix segment has been included in the Generics segment. The Generics Segment, accounting for about 88% of total revenues during the quarter, increased marginally (3.7%) to $1.12 billion. Revenues from Specialty recorded a huge increase of 20.3% to $150.9 million.

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(1) Capital adequacy. The key principle for preventing the "bank run" dynamics of the recent financial turmoil is to make sure that financial institutions have a sufficient cushion of equity capital to be able to absorb liquidation and delinquency losses on assets without sacrificing the institution's ability to repay short-term creditors. Equity capital is also a critical tool for addressing the core incentive problems arising from gambling with other people's money. As Chair Bernanke observed:

Through the course of the crisis, it became increasingly clear that many firms lacked adequate capital and liquidity to protect themselves as well as the financial system as a whole.

Professor Blinder elaborated:

the real leverage problems arose with (a) investment banks that operated (under a different regulatory regime [from commercial banks]) with 30 times leverage and more, and (b) gimmicks such as thinly-capitalized SIVs and conduits that (legally) avoided capital requirements...

Both Bernanke and Blinder further called attention to the problems with procyclical capital requirements. Standard capital requirements become looser when times are good, but that is exactly when it's most feasible and desirable for them to strengthen the equity cushion. Blinder advocated reverse convertible debentures proposed by Mark Flannery and the Squam Lake Working Group on Financial Regulation as a way to implement countercyclical capital requirements.

Though a conceptually different issue from equity capital, Blinder also favored requiring both mortgage originators and mortgage securitizers to retain 5% of any assets they create.

(2) Compensation. Blinder observed: "Pay plans that are structured in such a 'heads I win, tails I don't lose' way create powerful incentives for traders to go for broke gambling with OPM ('other people's money')." In his spoken remarks he added, "They did go for broke, and a lot of them achieved that objective."

Here were Bernanke's observations on the subject:

flawed compensation practices at financial institutions also contributed to the crisis. Compensation, not only at the top but throughout a banking organization, should appropriately link pay to performance and provide sound incentives. In particular, compensation plans that encourage, even inadvertently, excessive risk-taking can pose a threat to safety and soundness. The Federal Reserve has just issued proposed guidance that would require banking organizations to review their compensation practices to ensure they do not encourage excessive risk-taking, are subject to effective controls and risk management, and are supported by strong corporate governance including board-level oversight.

(3) Derivatives. Though Bernanke did not say much about the explosion of financial instruments such as credit default swaps and their role in propagating the crisis, Blinder highlighted the desirability of changes:

While the regulation of derivatives is fraught with peril, it is not hard to improve upon what we have now-- which is practically nothing. I have argued for years that the most important step the government could take would be to push as much derivatives trading as possible into organized exchanges....

The Treasury White Paper (p. 48) proposes to subject OTC derivatives to a "robust regime" of regulation that includes "conservative capital requirements," margins, reporting requirements, and "business conduct standards."

(4) Resolution mechanism. Finally, both Bernanke and Blinder stressed the need for a mechanism to supervise the liquidation of failing systemically important financial institutions. Blinder advocated:

we could develop a new resolution mechanism, perhaps patterned on what the FDIC now does with small banks (often before the bank's net worth goes negative), that would enable the authorities to wind down a systemically-important financial institution (including a non-bank) in an orderly fashion-- rather than just throwing it to the Chapter 11 wolves. This last idea is among the key ingredients of the Treasury's reform plan, has substantial support in Congress, and may well become law. If so, it would have several desirable effects.

• The TBTF doctrine would morph into “too big to be put into Chapter 11," but not "too big to be seized and its management thrown out." That change alone would go a long way toward reducing moral hazard.
• Taxpayers would (mostly) be relieved of the burdens of costly bailouts....
• Regulators would no longer have to keep large "zombie banks" (and non-banks) on life support for fear of the systemic consequences of shutting them down.

Bernanke endorsed this reform as well:

the Congress should create a new set of authorities to facilitate the orderly resolution of failing, systemically important financial firms.... In light of the experience of the past year, it is clear that we need an option other than bankruptcy or bailout for such firms.

A new resolution regime for nonbanks, analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks, would permit the government to wind down a failing systemically important firm in a way that reduces the risks to financial stability and the economy. Importantly, to restore a meaningful degree of market discipline and to address the too-big-to-fail problem, it is essential that there be a credible process for imposing losses on the shareholders and creditors of the firm. Any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers.

One detail I'd stress is the need for integration of the approaches to items (3) and (4) above. One of the problems that makes bankruptcy messy for these institutions is that outstanding derivatives contracts can assume a life of their own, sucking assets out of the firm as the market moves against the firm's bets and in practice giving these contracts seniority over conventional debt. From the perspective of society's best interests I don't think such seniority can be justified. I agree with the assertion in Blinder's spoken remarks that the economic costs of the latest recession exceed the cumulative potential efficiency benefits of what he referred to as "fancy finance."

I would propose that instruments such as the credit default swaps entered into by any systemically important financial institution should be subject to a regulatory stop-loss provision. In a standard clearinghouse mechanism, each party delivers collateral against the possibility of the market moving against their original bet. If the market moves too much, the loser either must add collateral or their position is wiped out. If the institution continues to deliver new margin capital, it can become like the compulsive gambler doubling down as the firm's equity cushion essential for financial stability bleeds away. Like the referee protecting a staggering boxer, the regulator needs the authority to declare "no mas" on an institution's commitment of new capital to such positions.

Bernanke concluded with the following:

we cannot lose sight of the need to reorient our supervisory approach and to strengthen our regulatory and legal framework to help prevent a recurrence of the events of the past two years.

To which I would only add, Amen!

The Dow Jones industrial average oscillated within a 200-point range and briefly touched the 10,000 mark, before some profit taking saw the index squandering the earlier advance and ending the day 104-points lower.  Technology shares, only sector to have recorded gains last week, fell out of favor and slid along with the broader market.  The technology-laden Nasdaq retreated 12.62 points, or 0.6%, to 2,141.63.  The CBOE Vix, the market’s measure of volatility, witnessed its sharpest one-day percentage increase in a month.     

As risk-appetite fell and investors turned to safer bets, the greenback moved further from last Wednesday's 14-month low of $74.94, up 0.7% against a basket of currencies.  Weak demand prospects sent crude prices off $1.82 to a close of $78.68.

The S&P500 witnessed weakness in all ten industry groups, but notable laggards were financials (-2.3%), basic materials (-2.0%), and oil and gas (-1.6%).  A moderate 1.39 billion shares traded on the NYSE, sharply lower than last year's average of 2.28 billion, as declining issues beat those that advanced in price by a three-to-one margin.

Financials came under the hammer as Dick Bove of Rochdale Securities lowered ratings on a number of regional banks, including Fifth Third Bancorp (NYSE:FITB), Sun Trust Banks (NYSE:STI), and US Bancorp (NYSE:USB).  To add to the weakness, a Saturday WSJ article indicated towards disagreements between Bank of America (NYSE:BAC) and the government over capital requirements before the firm could repay its bailout funds.  Rumors surfaced the company might need to sell shares to repay the funds.  Furthermore, FDIC Chief Sheila Bair cautioned banks still face "serious challenges."

Shares in homebuilders also witnessed weakness as the government pondered over whether to extend or possibly wind down the first-time homebuyers' tax credit due to expire November 31.  Concerned about the state of housing minus the catalyst, investors sold off homebuilders' shares, sending Toll Brothers (NYSE:TOL) down 4.2%, Lennar (NYSE:LEN) down 4%, and Beazer Homes (NYSE:BZH) off 4.4%.

Chicago, IL – October 21, 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: Texas Instruments (TXN), State Street Corporation (STT), Zions Bancorporation (ZION), Comerica Inc. (CMA) and Regions Financial (RF).

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Here are highlights from Tuesday’s AnalystBlog:

TI Beats; Guidance Conservative

Texas Instruments (TXN) reported third quarter results that beat the Zacks Consensus Estimate by 3 cents. Revenue beat the consensus by 2.1%.

Revenue of $2.88 billion was up 17.2% sequentially, the second straight quarter of 17%+ growth. However, revenue declined 15.0% on a year-over-year basis, the fourth consecutive quarter of double digit decline.

Then again, the rate of decline slowed somewhat, indicating that the company is coming out of the recession. The sequential increase was driven by normalization in the market, as customers stopped reducing inventory and started increasing production.

State Street Tops Zacks Estimates

State Street Corporation’s (STT) third quarter operating earnings of $1.05 per share were 5 cents ahead of the Zacks Consensus Estimate. Operating results for the quarter exclude $11 million in pre-tax merger and integration costs associated with the Investors Financial Services Corp. acquisition. However, the results were down 15.3% from $1.24 per share in the prior-year quarter.

On a GAAP basis, earnings for the quarter came in at $1.04 per share. This compares unfavorably with earnings of $1.09 in the year-ago quarter.

The year-over-year decrease in earnings was due primarily to an increase in shares outstanding and decrease in revenue, partially offset by reduced expenses.

Zions Shows Continued Losses

Zions Bancorporation (ZION) reported a third quarter 2009 net loss applicable to common shareholders of $179.5 million or $1.41 per share, compared to net loss of $40.7 million or 35 cents per share in the prior quarter and a net income of $33.4 million or $0.31 per share in the prior-year quarter. Results were substantially short of the Zacks Consensus Estimated loss of $1.29.

Results included the acquisition of the failed Vineyard Bank with FDIC assistance in July, which resulted in a pretax acquisition related gain of $146.2 million for the third quarter of 2009. It also included credit-related impairment losses on investment securities of $56.5 million compared to $42.0 million in second quarter of 2009.

Tax-equivalent net interest income for the quarter decreased 3.5% sequentially and 3.2% year-over-year to $482.0 million. Net Interest Margin (NIM) declined 18 bps sequentially and 22 bps on a year-over-year basis to 3.91%. The decline in NIM during the quarter was driven primarily by the discount amortization on the modified subordinated debt and an additional 0.07% for the conversion of subordinated debt to Series C preferred stock.

Comerica 3Q Losses Easing

Comerica Inc. (CMA) reported third quarter 2009 net loss applicable to common shareholders of $15.0 million or 10 cents per share compared to a net loss of $16.0 million or 10 cents per share in the prior quarter and a net income of $28.0 million or 19 cents per share in the prior-year quarter. Results were substantially ahead of the Zacks Consensus Estimated loss of 41 cents.

Continued growth in average core deposits, non-interest income and reduced non-interest expenses were impressive during the quarter. However, an 88.5% year-over-year increase in provision for loan losses and $34.0 million of preferred dividend payment to the U.S. Treasury Department under the Capital Purchase Program were the primary reasons for the loss.

As a result of better-than-expected top line and marginal enhancement of costs, the loss was substantially narrower than our estimates.

Regions Financial Underperforms

Regions Financial (RF) reported a third quarter loss of $437.0 million or 37 cents per diluted share, worse than the Zacks Consensus Estimate of a loss of 26 cents per share. Last year, the company reported a net income of $95 million -- a profit of 13 cents per share.

The results suffered mainly due to increased loan loss provisioning, reflective of continued underlying economic weakness and the related loss implications to Regions' loan portfolio.

Regions reported a net interest margin of 2.73%, up 11 basis points sequentially, benefiting from continued low-cost deposit growth, especially in non-interest bearing products and improving loan spreads due to better pricing discipline. As a result, taxable equivalent net interest income increased 1.7% sequentially to $845.0 million.

According to management, dramatically falling interest rates have worked as a primary headwind for net interest income over the past few quarters. It believes that trends in deposit pricing and loan spreads should continue to support a stable net interest margin during this period of historic low interest rates.

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Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

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Contact:
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312-265-9380
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Chicago, IL – October 9, 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: Target Corporation (TGT), Wal-Mart Stores Inc. (WMT), Hasbro Inc. (HAS), Mattel Inc. (MAT) and Citigroup Inc. (C).

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Here are highlights from Thursday’s Analyst Blog:

Target Lowers Toy Prices

In order to woo customers this holiday season, major discount retailer Target Corporation (TGT) recently announced an aggressive price cut on toys. The announcement came on the back of the Wal-Mart Stores Inc. (WMT) news on offering 100 toys for $10 each through the Christmas holiday, up from 10 toys offered last year.

Target slashed the price of selective toys by up to 50%, which include the Barbie Fashion Doll ($5), GI Joe Tough Troopers Figure ($14.99), and the Fisher-Price Little People Play 'N Go Farm Set 50th Anniversary edition ($11).

The holiday seasons are generally important for toymakers and retailers, who expect an uptick in demand with more children splurging in toy stores. However, toy companies did not reap any benefit in the 2008 holiday sales season due to recessionary effects, as consumers cut back their spending and prioritized their purchases.

Realizing the fact that customers may be reluctant to shell out more for toys, toy companies like Hasbro Inc. (HAS) and Mattel Inc. (MAT) are introducing new items at lower prices, and retailers are offering discounts to offset the impact of economic headwinds.

Citi's External Review - A Positive

The management team of Citigroup Inc. (C) received a positive review in an outside appraisal but some shuffling of senior executives could be on the anvil.

The review was conducted this summer for Citi's board by recruiting and consulting firm Egon Zehnder International. It was triggered by the government's stress tests on top banks. Companies found to be in need of additional capital were required to conduct assessments of their management and report the findings to federal regulators. The Federal Deposit Insurance Corp. (FDIC), which had concerns about the qualifications of Chief Executive Vikram Pandit and his top management team, required Citigroup to hire an outside firm to perform the review.

The report, delivered to Citigroup's board on last Friday, gave strong overall marks to Citigroup's management team and to CEO Vikram Pandit in particular.

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Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

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Contact:
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Visit: www.zacks.com

Chicago, IL – September 30, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include Agrium (AGU), CF Industries (CF), Intrepid Potash (IPI), Mosaic (MOS), Potash of Saskatchewan (POT) and Market Vectors Agribusiness (MOO).

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

This week: Fertilizer's Farming Problem

During the past 90 days, the Zacks Consensus Estimates have been revised downwards on several fertilizer companies, including Agrium (AGU), Intrepid Potash (IPI), Mosaic (MOS) and Potash of Saskatchewan (POT).

The most recent cuts were related to a warning from POT. The company predicted that its full-year profits would be in the range of $3.25 to $3.75 per share, instead of the prior guidance of $4 to $5 per share. The company blamed "continued slow demand and limited restocking by fertilizer distributors" as the reasons for the revised forecast.

All Is Not Well on the Farm

The big reason why profit projections for fertilizer companies have been falling is not weaker demand for fertilizer, but rather why demand is down. After enjoying very strong profits in 2007 and 2008, many farmers are now seeing their incomes drop. Even after adjusting for a recent rebound, corn futures are down substantially from the start of the year. Wheat prices are also down. Soy prices have plunged over the past few months.

Supply is a big reason why. Though the spring planting season was delayed, favorable weather patterns resulted in bumper crops throughout the summer. At the same time, a decline in oil prices hurt demand for ethanol, which, in turn, impacted farmers.

Compounding matters is the economy. The worldwide contraction likely reduced food consumption. (Did you notice how there were not any headlines about food shortages this year?) Plus, consumers have looked for cheaper ways to feed their families. These factors have kept cattle prices weak, which contributed to weaker demand for grains.

Then there is the banking crisis. Bank closures affect rural areas worse than urban areas because of a lack of competition. In some rural communities, the only nearby bank was seized by the FDIC. Not to mention the increased difficulty of securing loans.

The net result is lower farm profitability. In late August, the Department of Agriculture forecast that farm profits would fall 38% this year. There has been relatively little since then that would cause a big, positive revision to that forecast.

Mergers Are the One Positive

The one positive for the group are the proposed deals.

CF Industries (CF) announced on Monday that it bought 7% of Terra Industries' outstanding stock over the past 2 weeks. CF wants TRA shareholders to accept a merger agreement that would represent an approximate 15% premium over TRA's current share price.

However, Agrium wants to purchase CF. AGU recently extended the deadline for its acquisition offer of CF to Oct 22. (The offer represents approximately a 4% premium over CF's current price.) It is probable that if AGU were to buy CF, CF's acquisition of TRA would be called off.

Compounding matters is the fact that TRA recently announced a special $7.50 per share dividend, payable in the fourth quarter. CF's offer for TRA would be adjusted to reflect this dividend.

The merger activity makes shorting these stocks risky over the very near-term, even with the falling estimates. On the other hand, much of the upside from the proposed deals appears to be priced in. Overall, the downside risks outweigh probable short-term upside, particularly if neither acquisition offer is accepted.

Zacks Rank

IPI, MOS and POT are Zacks #5 Rank ("strong sell") stocks. AGU and CF are Zacks #3 Rank ("hold") stocks. They are all classified in Fertilizers, which has a Zacks Industry Rank of 206, placing the group near the bottom of the Industry Rank List.

Fertilizers stock also account for a significant portion of Market Vectors Agribusiness (MOO), something to consider when evaluating this ETF.

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The most recent cuts were related to a warning from POT. The company predicted that its full-year profits would be in the range of $3.25 to $3.75 per share, instead of the prior guidance of $4 to $5 per share. The company blamed "continued slow demand and limited restocking by fertilizer distributors" as the reasons for the revised forecast.

All Is Not Well on the Farm

The big reason why profit projections for fertilizer companies have been falling is not weaker demand for fertilizer, but rather why demand is down. After enjoying very strong profits in 2007 and 2008, many farmers are now seeing their incomes drop. Even after adjusting for a recent rebound, corn futures are down substantially from the start of the year. Wheat prices are also down. Soy prices have plunged over the past few months.

Supply is a big reason why. Though the spring planting season was delayed, favorable weather patterns resulted in bumper crops throughout the summer. At the same time, a decline in oil prices hurt demand for ethanol, which, in turn, impacted farmers.

Compounding matters is the economy. The worldwide contraction likely reduced food consumption. (Did you notice how there were not any headlines about food shortages this year?) Plus, consumers have looked for cheaper ways to feed their families. These factors have kept cattle prices weak, which contributed to weaker demand for grains.

Then there is the banking crisis. Bank closures affect rural areas worse than urban areas because of a lack of competition. In some rural communities, the only nearby bank was seized by the FDIC. Not to mention the increased difficulty of securing loans.

The net result is lower farm profitability. In late August, the Department of Agriculture forecast that farm profits would fall 38% this year. There has been relatively little since then that would cause a big, positive revision to that forecast.

Mergers Are the One Positive

The one positive for the group are the proposed deals.

CF Industries (CF) announced on Monday that it bought 7% of Terra Industries' outstanding stock over the past 2 weeks. CF wants TRA shareholders to accept a merger agreement that would represent an approximate 15% premium over TRA's current share price.

However, Agrium wants to purchase CF. AGU recently extended the deadline for its acquisition offer of CF to Oct 22. (The offer represents approximately a 4% premium over CF's current price.) It is probable that if AGU were to buy CF, CF's acquisition of TRA would be called off.

Compounding matters is the fact that TRA recently announced a special $7.50 per share dividend, payable in the fourth quarter. CF's offer for TRA would be adjusted to reflect this dividend.

The merger activity makes shorting these stocks risky over the very near-term, even with the falling estimates. On the other hand, much of the upside from the proposed deals appears to be priced in. Overall, the downside risks outweigh probable short-term upside, particularly if neither acquisition offer is accepted.

Zacks Rank

IPI, MOS and POT are Zacks #5 Rank ("strong sell") stocks. AGU and CF are Zacks #3 Rank ("hold") stocks. They are all classified in Fertilizers, which has a Zacks Industry Rank of 206, placing the group near the bottom of the Industry Rank List.

Fertilizers stock also account for a significant portion of Market Vectors Agribusiness (MOO), something to consider when evaluating this ETF.

Sector Rank as of Sep 30
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down
Consumer Staples	2.67	2.68	2.69	164	61
Conglomerates	2.73	2.69	1.56	14	9
Auto-Tires-Trucks	2.79	2.69	1.00	27	27
Retail-Wholesale	2.82	2.80	2.15	295	137
Computer and Technology	2.89	2.90	2.60	613	236
Basic Materials	2.97	3.00	1.57	149	95
Construction	2.98	2.98	1.25	55	44
Medical	2.98	2.96	1.48	208	141
Consumer Discretionary	3.01	3.00	1.27	123	97
Oils-Energy	3.03	3.01	0.85	235	275
Finance	3.05	3.11	1.26	360	285
Industrial Products	3.07	3.04	1.46	105	72
Business Services	3.08	3.06	1.43	43	30
Utilities	3.08	3.05	0.71	51	72
Aerospace	3.10	3.18	0.43	18	42
Transportation	3.21	3.23	0.89	111	125

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Zacks Investment Research

In general I liked the speech, but think that the steps he has proposed are, at best, only a good first step. I hope that the proposals are strengthened in Congress, but have zero hope of that happening. More likely they will be watered down significantly. The end result is that we will face another market meltdown in the future; the only question is when.

Regulation of the financial industry is one of those extremely important, yet dry and dull subjects, that the general public will ignore, and the lobbyists will own. The bank lobby is extremely powerful and is going to fight things tooth and nail. Obama got a distinctly cool reception from the financial executives in the audience, with only a single round of applause.

However, one year after the government spent hundreds of billions to save the banking system, not a single major bank CEO even bothered to show up for the speech. The sense of entitlement and the lack of gratitude by Wall Street is simply stunning. Look for a big push by the industry to preserve the status quo, probably with folksy TV ads full of dishonest scare tactics. It could include stuff about killing innovation and all that, attempting to convince people they are safer without someone in D.C. trying to protect consumers from abusive financial products. How many really useful financial innovations have there been in the last 30 years that have helped consumers?

The big useful innovations like credit cards and ATMs all happened back in the 1960s and 1970s, when banks were more closely regulated. Back in the days of 3-6-3 banking, when a banker would borrow at 3% in the form of checking and savings deposits, lend at 6%, and be on the first tee by 3 PM. When that was the shape of banking, we didn't have to worry about meltdowns.

On the other hand, bankers were just members of the upper middle class, not regularly bringing home 8 figure compensation packages. The proposed consumer protection agency for financial products is probably the most important part of the reform package. It is also the one that the banks are going to try the hardest to kill. It is the acid test if the reform package is real, or just a fig leaf. I'll go one step further and say that any congressman of either party who votes against this is representing his big campaign contributors on Wall Street, and not the interests of his or her constituents.

Some of the proposals that Obama has made sound reasonable and possibly workable, but the real devil is in the details. He will attempt to solve the 'too big to fail' problem by requiring the bigger, TBTF banks to hold higher levels of capital than smaller non-systemically important banks. The big question is how much higher?

If it is only a nominal difference, then the big banks will be in a great position. The Federal government will be in effect guaranteeing the debt of those banks (just like it did for Fannie (FNM) and Freddie (FRE) before taking them over). This will result in a much lower cost of capital for a TBTF bank like J.P. Morgan (JPM) than for your average mid sized bank. The big banks will then be free to take the money and pile it all on 23 red on the roulette wheel (metaphorically). If they win, the bank makes a fortune, which it will then share generously with its top executives. If they lose, the taxpayers will pick up the tab if the amount lost exceeds the bank's capital. Debt obligations of the big banks will be almost as safe as treasuries.

On the other hand if the higher capital requirements are big enough, the lower leverage will greatly reduce the ROE of the big banks. The big banks will have more of their shareholders money at risk and might want to play it much safer.

Putting the Fed in charge of being the overall systemic risk regulator is somewhat problematic, given how slow the Fed was in recognizing the severity of the problems last year. However, I don't see a better alternative among the existing agencies.

A case could perhaps be made for the FDIC, but their expertise is only with the banks, and the shadow banking system was a big part of the problem. Putting it in the hands of a committee of different agencies is just an excuse to do nothing. Would you be reassured if it was in the hands of some inter agency council? I know I would not be. I would however couple the increased authority for the Fed with the requirement that the Fed actually be audited, a proposal that Rep. Ron Paul has been pushing.

So given how complicated financial regulation is, how should consumers try to follow it? Perhaps the best way is to look at who is pushing for what. If the mortgage bankers association is pushing for a change in the regulation package, you should know that it is not in the best interests of consumers.

For more on this subject, I highly recommend reading this post by Simon Johnson, the former chief economist at the IMF over at the Baseline Scenario.

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.

In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.

Remember that at the end of 2008, the Federal Reserve Board estimated that there was $12 Trillion of mortgage debt on residential properties in the US, with the Federal government and its agencies providing about 5% of the total, individuals 9% and the rest coming from the financial sector. The Case-Shiller composite index of housing prices has fallen 1/3 from its peak in 2006 and the latest the Mortgage Banker Association survey finds that 13.5% of residential mortgages in their survey are delinquent or in foreclosure.

Even if losses in the end are only 5% of mortgage debt, that's a $600 Billion drop in equity on private sector balance sheets. It's easy to see how losses of half a trillion dollars or more could push some banks into insolvency and many into illiquidity. That's the recipe for a banking crisis. Remember that the FDIC's Deposit Insurance Fund had reserves of just over $50 billion at the start of 2008 and of which approximately zero is left today. That's the recipe for a costly banking crisis.

Like heart disease, there may be many different significant risk factors for banking crises. However, the evidence to date suggests that real estate volatility is one of the most important, if not the most important. Reducing the risk of future crises (and their drain on the public treasury) requires that something be done to address this risk factor. As I'll discuss in a minute, there seem to be lots of ways to do this, but they boil down to some combination of (1) reducing the volatility of real estate prices, and (2) reducing banking sector exposure to real estate. But first, stop and think about the kinds of proposals that are currently under discussion. There's a long list that includes things like

• The creation of a new Consumer Financial Protection Agency, a National Bank Supervisor, and an Office of National Insurance, which would join with several other agencies in a Financial Services Oversight Council.
• Requiring reporting of all OTC derivative transactions, as well as clearing and transparent trading of all standardized OTC derivative products.
• Expanding the mandate of the Federal Reserve to explicitly include all firms that pose systemic risks to the financial system.
• Requiring registration of advisors to hedge funds and other pools of capital.
• A reform of executive pay in the financial sector to reduce incentives for excessive risk-taking
• The provision of explicit government insurance to mortgage derivatives
• A ban on "naked" short-selling
• Restricting the sale of CDSs and similar instruments to those with long position in the underlying asset.
• [your favorite goes here]

Now ask yourself which of these will be effective in reducing the volatility of real estate prices? Which will effectively reduce the banking sector's exposure to that volatility? With the exception of #6 on the above list, it's not obvious that any of these proposals will do either (and #6 doesn't appear to be high on the public agenda as far as I can tell.) Understand that the word "obvious" is an important caveat; for example, it's conceivable that improving clearing of OTC derivatives might reduce the exposure of the banking sector to real estate collapses by preventing contagion within the banking sector, but it's hard to know how much this will help. The same can be said for most of the items of the list; they might help or there might be other sound reasons for those reforms, but there is little that looks like it will reliably reduce volatility in the real estate market or reduce the banking sector's exposure to those fluctuations.

What I find most surprising about the financial reform debate is that so much of it has focused on reform of regulatory agencies, banking laws and trading environments while so little attention has been paid to reform of mortgage regulations and mortgage-related securities. So to stimulate the debate on such reforms, let me suggest two kinds of measures that deserve further consideration.

1. Highly-leveraged mortgages increase the systemic risk in the financial sector and should be discouraged. This could be done in a number of ways, such as a tax on high loan-to-value mortgages, or compulsory insurance, or via regulation limiting the value of liens that can be attached to real estate, or simply by limiting mortgage-interest deductibility. Doing so should reduce the banking system's exposure to the real estate market by ensuring that borrowers have greater equity investments (or are backed by insurance.) The reduction in leverage may also reduce real estate price swings.

2. The insurance of mortgages and mortgage-related products (including credit-default swaps on mortgage derivatives) requires tighter regulation. Such insurance is a critical buffer between downturns in the real estate market and the solvency of the banking system. While some mortgage risk is diversifiable, a substantial portion is a macroeconomic risk that is not diversifiable. This is particularly true for mortgage-backed securities, which pool risks across many individual mortgages. In the event of a national downturn in housing prices, it is not obvious that private-sector insurers will have the resources to honor their policies. At a minimum, the government needs to impose capital requirements for mortgage insurance and related financial derivatives that require a level of financial reserves commensurate with the degree of macroeconomic risk in this market. Others (such as Mehrling 2009) have argued that the government should simply provide such insurance themselves.

This post written by Simon van Norden.

The Dow Jones industrial average, which at one point had given up as much as 84 points, rose 37.11 points, or 0.4%, to close at 9,580.63, its eighth consecutive advance.  The broad Standard & Poor's 500-stock index rose 2.86 points, or 0.28%, to 1,030.98.  The tech-heavy NASDAQ composite index edged up 3.30 points, or 0.16%, to 2,027.73, helped by a late-session rally in technology shares.  Treasuries fell, pushing the yield on 10-year notes up 0.3 point to 3.46%.  On the New York Stock Exchange 1.16 billion shares exchanged hands and advancing shares were ahead of those that declined eight to seven.

This morning’s stock futures suggest moderate gains on the opening.  Dow Jones industrial average futures are up 29, or 0.3%, at 9,596. Standard & Poor's 500 index futures are up 4.40, or 0.4%, at 1,033.70, while Nasdaq 100 index futures are up 6.50, or 0.4%, at 1,645.50.

Technology issues rose in anticipation of better-than-expected earnings from Dell (NASDAQ:DELL).  Leading the sector gains, however, were financial issues, up 0.9%, helped by a 27% surge in insurer AIG International’s (NYSE:AIG) shares.  Rumors of ex-CEO Greenberg's collaboration in asset sales, and the new CEO’s remarks suggesting there was no plan of any fire sale of the company's assets generated an influx of interest in the stock that has risen more than 400% since July 9.  CIT Group Inc. (NYSE:CIT) jumped 29 cents, or 22.8%, to $1.56. Citigroup Inc. (NYSE:C) rose 42 cents, or 9.1%, to $5.05 on reports in the New York Post that hedge fund manager John Paulson has acquired a 2% stake in the company.

Action was somewhat balanced on the DJIA where 16 stocks advanced and 13 declined with one ending the day unchanged.  Boeing (NYSE:BA) led the advancing issues, as the company said it sees first test flight of its much-delayed 787 Dreamliner by the end of this year and first delivery by the fourth quarter of 2010.  American Express (NYSE:AXP) shares rose 2.5%, helped by an advance in financial shares; a rise in commodity related stocks sent shares of Alcoa (NYSE:AA) up 1.1%.  However, home construction shares lost favor on reports of a wider-than-anticipated loss at Toll Brothers (NYSE:TOL), as well as lower sales guidance for the fourth quarter.

Banks, which have suffered the most in the current economic turmoil, came under further scrutiny as The FDIC announced that it has added more banks on its "problem" list. The agency said it had 416 banks on its "problem" list at the end of the second quarter, up from 305 at the end of March. However, the three-month Libor, a global measure of liquidity for short-term borrowings by companies and consumers, continued to signal improved liquidity in the credit markets.  On Thursday, Libor sank to a fresh, all-time low of 0.36%, down from 0.41% a week ago and an all-time high of 4.82% on October 10, 2008.

Here's the argument Paul Krugman gave for why $9 trillion maybe isn't as huge a sum as it sounds:

even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.

Political Math (hat tip: Russ Roberts) takes a closer look at Paul's first comparison:

implicit in his observation is the concept that since we did fine after WWII, we'll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world.... Back in 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

Source: Political Math.

And whereas in 1945 Americans could reasonably look ahead to a huge decrease in military expenditures, in 2009 when I look ahead what I see is a looming increase in federal medical expenditures.

I also believe it is relevant to compare these deficits not just with GDP but also with current federal tax revenues. $1 trillion is approximately the total personal income tax receipts of the federal government in 2006. My preferred metric for what each additional trillion dollars would require from me personally is to take what I paid in federal income taxes in 2006 and double that amount. To pay off $9 trillion, I'd have to do that for 9 years.

Unfortunately, $9 trillion may not be the whole iceberg. Diane Lim Rogers highlights the Concord Coalition estimate that current policy would imply a cumulative $14.4 trillion deficit over the next ten years.

You also can't ignore the off-balance sheet federal liabilities, such as the $5 trillion in debt and loan guarantees from Fannie and Freddie. A quarter trillion dollars worth of those loans we've guaranteed are currently nonperforming. That's just Fannie and Freddie-- doesn't include FHA, FDIC, Federal Reserve,...

If the government tries to double taxes on people like me, it's in real political trouble. If it doesn't try to double taxes on people like me, it's in real solvency trouble.

It looks like we may have a problem here.

Chase, the US consumer and commercial banking brand of JPMorgan Chase & Co., now has a total of 239 branches and 1,025 ATMs in Florida.

Chase also upgraded products and technology to connect the former WaMu branches in Florida and six other states with its own network, giving customers full service at 4,200 Chase branches in 21 states.

So far this year, Chase has converted and rebranded 1,037 former WaMu branches in 11 states. By the end of 2009, about 1,800 former WaMu branches across the country will be operating under the Chase brand and on the Chase computer system, allowing customers to conduct their business at more than 5,100 Chase branches in 23 states.

After Washington Mutual was declared bankrupt last September, JP Morgan acquired its banking operations (minus unsecured debt or equity claims) from the Federal Deposit Insurance Corp. (FDIC) for $1.9 billion.

The basic power of the Fed derives from its ability to create money, which it can use to buy assets or extend loans. We can summarize the Fed's actions in terms of either the asset side of its balance sheet (the assets and loans it holds), or the liabilities side (the money or other obligations it has created). Let's start with the asset side. Up until January of 2008, by far the most important assets held by the Fed were short-term Treasury bills. As last year wore on, the Fed significantly expanded its loans in the form of currency swaps with foreign central banks, direct lending to U.S. banks through term auction credit, and the Commercial Paper Lending Facility. Altogether such measures more than doubled the various asset holdings of the Fed by the end of the year, despite the fact that the Fed sold off 40% of its original T-bills.

Figure 1. Factors supplying reserve funds, in billions of dollars, seasonally unadjusted, from Jan 1, 2007 to July 15, 2009. Wednesday values, from Federal Reserve H41 release. Agency: federal agency debt securities held outright; swaps: central bank liquidity swaps; Maiden 1: net portfolio holdings of Maiden Lane LLC; MMIFL: net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility; MBS: mortgage-backed securities held outright; CPLF: net portfolio holdings of LLCs funded through the Commercial Paper Funding Facility; TALF: loans extended through Term Asset-Backed Securities Loan Facility; AIG: sum of credit extended to American International Group, Inc. plus net portfolio holdings of Maiden Lane II and III; ABCP: loans extended to Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; PDCF: loans extended to primary dealer and other broker-dealer credit; discount: sum of primary credit, secondary credit, and seasonal credit; TAC: term auction credit; RP: repurchase agreements; misc: sum of float, gold stock, special drawing rights certificate account, and Treasury currency outstanding; other FR: Other Federal Reserve assets; treasuries: U.S. Treasury securities held outright.

In 2009, the Fed has been winding down some of these programs, with significant declines in swaps, CPLF, and TAC, replaced by big increases in items such as mortgage-backed securities and agency debt. The changes over the last few months should not by any stretch be described as a return to "plain vanilla" central banking. The risk on MBS and agencies is greater than that for T-bills, and the asset level today remains 130% above its value at the start of 2007.

Where did the Fed obtain the funds with which it acquired all these new assets? To say that it did so by "printing money" would be inaccurate. The Fed doesn't lend a half trillion in term auction credit by handing out big bundles of green paper with Ben Franklin's picture on them. Instead, it creates an entry in an account that the recipient bank has with the Fed known as the bank's Federal Reserve deposits. The bank could, if it wanted, use those credits to ask the Fed for those Ben Franklin souvenirs. Instead the bank presumably used the new deposits to pay for some obligations or make some loans, either of which it would instruct the Fed to implement by transferring those reserves to some other bank. That bank in turn could use the reserves to ask for C-notes, or pass them on to somebody else through its own loans or any other expenditures.

And the buck stops-- where? In normal times, the process of banks putting any excess reserves to use would continue until there's enough expansion of banking and economic activity that ultimate recipients did want to turn those reserves into green currency. And once that happens, it would not be a misleading summary of the bottom line to say that the Fed eventually paid for its original asset purchase by "printing money".

But in the fall of 2008, the Fed did not want that to happen. It wanted to extend a trillion in new loans, but it did not want to see currency held by the public go up by a trillion dollars, out of fear the latter would be very inflationary. The Fed's thinking was that we didn't need a traditional inflationary expansion of credit, but instead needed to allocate credit to particular functions without having conventional measures of the money supply swell.

The graph below describes how the Fed did that, looking now at the liabilities side of the Fed's balance sheet. The height of Figure 2 at any date is identical, by definition, to the height of Figure 1, but whereas Figure 1 was looking at what the Fed did with its funds, Figure 2 summarizes how the Fed obtained those funds. In other words, Figure 2 looks at where the reserve deposits the Fed created ended up, and explains why the dramatic actions of Figure 1 haven't yet shown up as currency held by the public.

Figure 2. Factors absorbing reserve funds, in billions of dollars, seasonally unadjusted, from Jan 1, 2007 to July 15, 2009. Wednesday values, from Federal Reserve H41 release. Treasury: sum of U.S. Treasury general and supplementary funding accounts; reserves: reserve balances with Federal Reserve Banks; misc: sum of Treasury cash holdings, foreign official accounts, and other deposits; other: other liabilities and capital; service: sum of required clearing balance and adjustments to compensate for float; reverse RP: reverse repurchase agreements; Currency: currency in circulation.

One big factor has been the accounts that the U.S. Treasury holds with the Fed. Essentially, the Fed asked the Treasury to borrow some money through public auctions, which it did. Banks paid for these new T-bills by instructing the Fed to transfer to the Treasury the Federal Reserve deposits that they'd received from the Fed as a result of the programs in Figure 1. The Treasury then just left the funds sitting there in its accounts with the Fed. In effect, the Fed obtained the funds for some of its actions on the asset side not by "printing money" but instead by having the Treasury borrow funds on its behalf on the liabilities side.

However, an even bigger volume of the deposits that the Fed created are still just sitting on the banks' books. The way the fed funds market functioned in 2007, that would never have happened. Why close your bank's books for the day with funds just sitting there in an account with the Fed, earning no interest, when you could loan them out overnight instead? A big bank would never do such a thing in 2007. But they're happy to do so in 2009, in part because the overnight lending opportunities are not particularly attractive at the moment, and in part because the Fed now pays interest on those reserves. From the bank's point of view, funds left on deposit with the Fed at the end of the day aren't idle at all, under the new system adopted in the fall of 2008.

One of the points that Bernanke makes in his op-ed is that the Fed could continue to use this device, if need be, to prevent essentially any volume of its asset side activity from showing up as an increase in currency held by the public, simply by raising the interest rate the Fed offers to pay on reserves to whatever level is necessary to persuade banks to continue to hold these funds idle overnight. In effect, the Fed is through this device borrowing directly from the public to fund its asset-side activities rather than by "printing money".

Should that allay any inflationary concerns people may have about the doubling in the size of the Fed's balance sheet? In a narrow mechanical sense, perhaps. It is true that the new assets have not yet shown up as an increase in the money supply, and it is true that the Fed has the power to prevent them from doing so in the future. But my concerns about inflation are not that the Fed would lose the ability to target a particular level for the money supply, and certainly are not concerns about the next six months, where I still see deflation as a bigger worry than inflation. Instead, my concern is that the current fiscal trajectory is fundamentally inconsistent with the Federal Reserve choosing to keep inflation under control. Both devices, ballooning of the Treasury's account with the Fed and enabling the Fed in effect to borrow directly on its own, are indeed as much fiscal measures as they are monetary. But to someone worried about the increasing co-mingling of monetary and fiscal policy, that blurring of the lines is not a reassuring development.

My specific worry is that we will eventually face a crisis of confidence in the Treasury and the dollar itself. It is true, as Bernanke suggests, that raising the interest rate paid on reserves in such a setting would be a policy tool that could be used in response. But it would be an unattractive measure to the point of perhaps being impossible to use in practice, for the same reason other countries have dreaded raising interest rates in the face of collapsing real economic activity and a flight from their currency.

I fear that the United States government is mistakenly assuming that it can borrow essentially unlimited sums without undermining confidence in the dollar itself. The real question of a successful exit strategy, in my opinion, is how do we extricate ourselves from the joint fiscal commitments currently assumed by the Treasury, the Fed, the FDIC, the Medicare and Social Security trust funds, and various and sundry implicit and explicit federal guarantees?

The answer, in my opinion, is not to be found in the Treasury doing even more borrowing on behalf of the Fed or the Fed doing even more borrowing on behalf of itself.

Chicago, IL – July 20, 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: Bank of America (BAC), Goldman Sachs (GS), JP Morgan (JPM), Biogen Idec (BIIB) and Acorda Therapeutics (ACOR).

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Here are highlights from Friday’s Analyst Blog:

BofA “Beats," But…

Bank of America (BAC) reported its 2Q09 income at $3.22 billion, or $0.33 per share, down from $3.41 billion, or $0.72 per share, a year earlier. The results were down 5.5% on higher merger charges and credit costs, but were ahead of analysts' expectations of $0.28 per share.

We may add that the analysts’ estimates ranged from a loss of 11 cents per share to a profit of 70 cents per share, and with so many one-time items it is difficult to conclude which items were included or excluded in the estimates and whether the results actually exceeded the expectations.

Results were driven by strong performance in the wholesale capital markets and home loans businesses, gains on the sale of China Construction Bank shares and the sale of the company's merchant processing business to a joint venture, but were partly offset by high credit costs, and a special FDIC assessment.

During the current year, banks have seen record revenues from trading actives, as we saw in the recent results of Goldman Sachs (GS) and JP Morgan (JPM) and also from the ongoing boom in mortgage financing. For BAC, sales and trading revenue rose to a record $6.7 billion during the quarter. The bank funded $110.6 billion in first mortgages, of which approximately 29% were for purchases and rest for refinancing.

Biogen Beats Consensus

Yesterday, Biogen Idec (BIIB) reported financial results for the second quarter of 2009. Non-GAAP diluted earnings per share (EPS) came in at $0.75, beating the consensus estimate of $0.68. EPS declined on a y-o-y basis due to a $110 million charge (EPS impact of $0.32) taken by Biogen related to its recently signed deal with Acorda Therapeutics (ACOR). GAAP EPS, which includes stock-based compensation and amortization of intangibles, declined 30% to $0.49.

Although EPS declined from the year-ago quarter, revenues jumped 10% to 1,093.3 million, slightly above ours and the Street’s estimate of $1.07 billion. Avonex and Tysabri were the primary growth drivers.

Avonex sales increased 12% to $591.2 million (U.S. sales increased 20%; ex-U.S. sales increased 2%). New long-term efficacy data and increased promotional efforts should drive Avonex sales going forward.

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