Personal Income for the month of October increased significantly, by $30.1 billion during the month, or by 0.2%, as was expected, and currently stands at the $12,142.9 billion seasonally adjusted level, following a 0.2% increase in September. Net of taxes, Disposable Personal Income increased by $45.7 billion, or 0.4 percent, in October, compared with an increase of $21.3 billion, or 0.2 percent in September. With the increase in incomes, Personal Consumption Expenditures increased by 0.7%, up $47.2 billion, to a seasonally adjusted annual flow of $10,166.7, better than the expected increase of 0.6%, after a decrease to the same effect in September, revised upward from an originally reported 0.5% decrease. With the increase in spending higher than the increase in income, the Personal Savings Rate decreased to 4.4% in October, from its September level of 4.6%.

Durable Orders decreased by 0.6%, $1.0 billion, during October to $166.2 billion, contrary to the expected increase of 0.6% gain, following a 2.0% increase in September and a 2.6% decrease in August. Machinery had the largest decrease, by 8.0%, $1.9 billion, to $21.8 billion, after two consecutive monthly increases. Over the past 12 months, Durable Orders have dropped by 23.0%.

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The markets only gathered steam in the afternoon after the Fed released minutes from its latest meeting.  While pledging to keep interest rates at record low levels, the Fed policymakers, however, noted record low interest rates could lead to excessive risk-taking in financials markets.  Nevertheless, the Fed raised its outlook for economic growth during the second half of this year, but said unemployment levels will remain high.  The Fed lowered its unemployment estimates to 9.3%-9.7% in 2010 from 9.5%-9.8%, noting the economy continues to improve.

On Tuesday, the Dow Jones industrial average fell 17.24 points, or 0.2%, to 10,433.71.  The Standard & Poor’s 500-stock index fell 0.59 points, or 0.1%, to 1,105.65, and the Nasdaq composite index fell 6.83 points, or 0.3%, to 2,169.18.  The CBOE Vix index dropped to its lowest in fourteen months, off 3.3% to 20.47.  On the NYSE volume dropped to 0.952 billion shares, with declining issues ahead of advancing shares by an eight to seven margin.

Tuesday saw volatile and a low volume trading, a trend that is likely to continue through the holiday-shortened week.  All financial markets are closed Thursday for Thanksgiving.

On Tuesday, healthcare companies helped offset drops in financial and industrial shares.  Medtronic Inc. (NYSE:MDT) jumped more than 7% after the medical device maker reported a surprise 59% increase in its quarterly profit and raised its full-year outlook.  Shares in the company rose $2.94, or 7.3%, to $43.25.

Among financial companies, JPMorgan Chase (NYSE:JPM) led the declining issues in the Dow average, falling 1.9% to $42.48.  Bank of America (NYSE:BAC) fell 1.2% to $16.10, while Morgan Stanley (NYSE:MS) dropped 1.5% to $32.12. Fifth Third Bancorp (NYSE:FITB) fell 1.6% to $10.01.

Safe-haven assets such as Treasuries and gold prices rose.  Treasuries performed well after the $42 billion auction in 5-year notes received a strong response.  Gold prices hit a fresh record close for the eighth consecutive day, closing up $1.90 at $1165.50 per ounce. 

Chicago, IL – November 25, 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), MGIC (MTG), Fannie Mae (FNM), Freddie Mac (FRE) and Hewlett-Packard (HPQ).

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Here are highlights from Tuesday’s Analyst Blog:

Home Prices Continue to Rise

It is encouraging to see home prices rise. If this continues, some of the people in underwater houses (meaning with a mortgage more than the value of the house) might just see the flood recede and regain some positive equity in the house. This would greatly reduce the number of foreclosures in the future. It would make it an economically rational thing for people to pay their mortgages again. As it stands today in big areas of the country, it isn’t.

As a result, mortgage delinquencies have been skyrocketing, and eventually those delinquencies will lead to foreclosures. That could reignite a vicious circle, where the foreclosed houses flood the market, once again depressing prices, which causes more people to think there are better places to put their money than paying their mortgages.

Rising home prices have the potential to turn that into a virtuous cycle. To the extent that happens, it has very positive implications for the entire mortgage complex, from the big banks like Bank of America (BAC) to the mortgage insurance firms like MGIC (MTG) to the wards of the state, Fannie Mae (FNM) and Freddie Mac (FRE).

However, I fear that the increase in home prices is only temporary. That it is the product of extraordinary government efforts to prop up home prices, and that those efforts can not be sustained forever. These include the tax credit (recently expanded to include move up buyers), which is scheduled to end at the end of April, and the Fed’s program of buying up $1.25 Trillion in mortgage-backed paper to manipulate mortgage rates lower. They should finish up their purchases by the end of March.

HP Revenue Down, EPS In-Line

Hewlett-Packard (HPQ) reported fourth quarter EPS of $1.14, exceeding the Zacks Consensus Estimate by a penny.

Revenue for the quarter came in at $30.8 billion, a decrease of 8.0% from the $33.6 billion reported in the year-ago period and down 5.0% on constant currency basis.

Revenue fell across all businesses, including servers and data storage systems, software, PCs and printers. The Americas reported a 3.0% decline in revenue to $13.6 billion. Revenue declined 17.0% in Europe, the Middle East and Africa (EMEA) to $11.7 billion and 1.0% in the Asia Pacific to $5.4 billion. Revenue from China increased more than 20% from the year-ago quarter.

International markets accounted for 64% of total revenue in the fourth quarter, with revenue in the BRIC countries (Brazil, Russia, India and China) declining 4.0% on a year-over-year basis and accounting for 10.0% of total HP revenue.

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The recession is over! In the third quarter GDP grew by 2.8% (3.5%), slightly below (comfortably ahead) of expectations for 2.9% (3.0%) growth. This is a huge improvement over the 0.7% decline in the second quarter and the 6.4% plunge in the first quarter.

The internals of the report were strong as well, although it appears that much of the growth came from things like the Cash for Clunkers program and the extraordinary levels of support that are currently being given to the housing sector.

Growth Rates

The overall 2.8% (3.5%) growth of GDP was almost matched by its biggest component, Personal Consumption expenditures, or PCE, which grew 2.9% (3.4%), a big improvement over the 0.9% decline in the second quarter and the 0.6% increase in the first three months of the year.

It is important to note that during the recession, consumer spending declined far less than did overall GDP, especially in the first quarter, so the consumer was becoming a much bigger part of the overall economy. This is not healthy over the long run, but at this point I think people are happy to get some growth where ever we can find it

Now, you might wonder, what caused the recession to be so nasty last winter when Consumer spending wasn’t really all that bad? The answer is that Investment really fell of a cliff. The good news is that it is starting to come back.

Fixed investment is broken into two parts, Non-Residential or business investment and Residential investment, which is mostly homebuilding.

Overall Fixed investment rose by 0.3% (2.3%) following declines of 12.5% in the 2Q and 39.0% in the 1Q. Business investment, however, continued to decline, but at a much slower rate, falling 4.1% (2.5%) after 9.6% and 39.2% declines in the 2Q and 1Q, respectively. With massive amounts of unused capacity it is not surprising that businesses are cutting back on their capital spending still.

Spending on Equipment and Software (E&S) on the other hand is starting to come back, if only feebly, rising 2.3% (1.1%) after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q. Look for some stability in this line going forward as the new Microsoft operating system will probably generate a new PC cycle, but with capacity utilization still around 70% I would not expect a boom in orders for new factory equipment.

The real star of fixed investment though came on the residential side, which rose 19.5% (23.4%). This is the first increase in almost four years, and follows declines of 23.3% in the 2Q and 38.2% in the 1Q. The long string of declines had brought residential investment to a record low share of GDP. The extraordinary support of the housing sector by the government, including the first time buyer tax credit, the Fed buying up $1.25 Trillion of Fannie (FNM) and Freddie (FRE) backed paper to artificially suppress mortgage rates and the FHA acting like the old New Century Financial or Washington Mutual on their worst days have played a big role in the turnaround. I seriously question the sustainability of it after the support is removed, and I don’t think the support can continue indefinitely.

Government spending grew by 3.1% (2.3%) in the 3Q, a big slowdown from the 6.7% increase in the 2Q, but more than the 2.6% decline in the 1Q. It was all at the Federal level where spending rose at an annual rate of  8.3% (7.9%) down from a 11.4% increase in the 2Q, but up from the 4.3% decline in the 1Q.

Remember this measure of government spending does not include spending on transfer payments like Social Security and Medicare, which are largely captured in the consumption numbers. Defense spending was the big driver -- we are still a nation fighting two wars. It grew at an annual rate of 8.3% (8.4%) down from a 14.0% rate of increase in the 2Q but up from a 5.1% decline in the 1Q.

International trade has started to rebound, and we saw an increase in both imports and exports. Increasing exports are good for GDP and increases in Imports are bad for GDP, and unfortunately imports rose more than did exports. We were able to improve our overseas sales by 17.0% (14.7%) in the 3Q -- a nice turnaround from the 4.1% decline in the 2Q and the 29.9% plunge in the 1Q. Unfortunately we also increase what we bought from overseas by 20.8% (16.4%), a big turnaround from the 14.7% decline in the 2Q and the 36.4% plunge in the first three months of the year. Keep in mind that we import a lot more than we export, so not only was the percentage increase bigger for imports, it was coming off a higher base.

Contributions to Growth

Not all components of GDP are created equal.  Some are very big, and others relatively small. Some tend to be very stable over time, and some tend to swing violently from quarter to quarter. The bigger and more volatile they are, the more they will impact the overall growth rate of GDP. Thus looking at just the percentage changes in the componenets does not tell the full story. Of the 2.8% (3.5%) total growth, how many points were added or subtracted by each part of the economy?

The biggest part of the economy is the Consumer or PCE, over all it contributed 2.07 (2.36) of the 2.80 (3.50) points of total growth. In the second quarter it caused 0.62 of the 0.70 total decline in the 2Q. In the first quarter it actually offset 0.44 points of the 6.40 total decline. In other words, excluding the consumer the economy would have contracted 6.84% rather than 6.40%.

Within consumer spending, spending on goods added 1.60 (1.79) points after subtracting 0.71 points in the 2Q and adding 0.56 points in the 1Q. Spending on durables was the main driver, adding 1.34 (1.47) points after subtracting 0.41 points in the 2Q and adding 0.28 in the 1Q.  Non durable goods added 0.26 (0.31) points after subtracting 0.29 in the 2Q and adding 0.29 in the 1Q.

Investment spending was a big swing factor in the 3Q.  It added 0.91 (1.22) points to overall growth. That is a HUGE improvement over the 3.10 point subtraction in the 2Q and the 8.98 point implosion in the 1Q.  Unfortunately. 0.87 (0.94) points of that contribution came from inventories. Inventory investment is the “worst" type of GDP growth since large increases in one quarter are usually reversed in the next quarter, or in this case, large declines being reversed upwards. 

In the 2Q inventory investment subtracted 1.42 points from overall growth and in the 1Q they subtracted 2.36 points.  Even in the 4Q they subtracted 0.64 points from growth.  Three straight quarters of sharply lower inventories is highly unusual and we were due for a bounce.  Perhaps we have one more quarter of a solid contribution from inventory investment, but I would not expect it to last much beyond that. 

Overall fixed investment added just 0.04 (0.28) points to growth, but that sure was a nice improvement over the 1.68 point subtraction and the 6.62 point disaster that was the 1Q.

However, it was not coming from the business side.  Business investment subtracted 0.40 (0.24) growth points in the 3Q, so it is still very soft, but at least it is not imploding like it was earlier in the year.  In the 2Q it subtracted 1.01 points and in the 1Q it took away 5.29 growth points.  Within business investment it was spending on structures that caused the problem with a deduction of 0.55 (0.32) growth points while spending on E&S offset 0.15 (0.08) points of that.  In the 2Q both sides of business investment were drags on the economy with investment in Commercial real estate subtracting 0.69 growth points and spending on equipment deducting 0.32 points.  The 2Q was in turn a major improvement over the 1Q disaster where spending on structures subtracted 2.28 growth points and equipment spending subtracted 3.01 points.

Housing finally helped the economy in the 3Q, adding 0.45 (0.53) points to growth, after a string of 15 straight quarters where it was a drag on the economy.  In the 2Q it was a 0.67 point drag and in the 1Q it was a 1.33 point drag.  The long decline has, however, made housing a much smaller share of the overall economy.  In the 3Q residential investment totaled only $360.9 billion, or 2.52% of the overall economy.  At the peak of the housing bubble it represented 6.34% of the overall economy.  Thus the 19.5 (23.3%) increase in residential investment had far less of an overall impact than it did in the past.

Direct government spending had a small but positive impact on overall growth in the 3Q, adding 0.63 (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.

The Federal government added 0.65 (0.62) growth points, down from 0.85 points in the 2Q but up from a 0.33 point drag in the 1Q.  The Pentagon was the main factor in all three quarters, with defense spending adding 0.48 (0.45) points in the 3Q following a 0.70 addition in the 2Q and a 0.27 point drag in the 1Q.  Non-defense spending was sort of a non issue, adding just 0.17 (0.17) points in the 3Q, not much difference from the 0.15 point contribution in the 2Q, and up a little bit from the slight 0.06 point drag in the 1Q.

State and Local governments are not allowed to run operating deficits, and so when faced with declining tax revenues they have to cut back, unless Uncle Sam helps them out.  Well Washington is helping, but its not enough and S&L spending was a 0.02 (0.14) point drag in the 3Q.  The Federal help was enough in the 2Q and so the contribution to growth in the 2Q was a positive 0.48 points.  In the 1Q, before the stimulus package could get much traction S&L spending was a 0.19 point drag.

Net exports had been just about the only bright spot in the first half of the year, even though it came the wrong way, from both imports and exports plunging, only with imports falling more than exports did.  That reversed in the 3Q as both showed a nice expansion, but our appetite for foreign goods outstripping the desire for U.S. goods and services abroad.  The increase in exports added 1.71 (1.49) points to growth, but the increase in imports was a 2.53 (2.01) point drag, for a net negative contribution from net exports of 0.82 (0.52) points. In the 2Q falling exports subtracted 0.45 points but plunging imports added 2.09 points, for a net imports net help to the economy of 1.64 points.

Overall

Relative to the first cut at the data, the downward revisions were broad based, with smaller contributions from all major areas of the economy, with the exception of the government.  Of particular concern is that fixed investments contribution to growth virtually disappeared.

 
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

On Monday, the 30-stock Dow Jones industrial average surged 132.79 points, or 1.29%, to 10,450.95.  The broad Standard & Poor's 500-stock index rose 14.86 points, or 1.36%, at 1,106.24 and the tech-heavy Nasdaq composite index jumped 29.97 points, or 1.40%, to 2,176.01. Trading volume was light, with NYSE volume less than 1 billion shares, as advancing shares outran decliners by a four-to-one margin.  Wall Street’s fear gauge, the CBOE Vix, plummeted 4.6% to 21.16.

Treasuries lost ground as investors’ risk appetite grew.  A number of analyst upgrades also helped shares yesterday and after the close Hewlett-Packard (NYSE:HPQ) came out with strong numbers and also announced plans to triple its repurchase plan.

Among the DJIA components, all but two gained, led by Verizon (NYSE:VZ), up 3.0%, AT&T (NYSE:T), up 2.9%, General Electric (NYSE:GE), up 2.9%, and Chevron (NYSE:CVX), up 2.6%.  A Barron's article suggested AT&T (NYSE:T) shares undervalued due to concerns its exclusive iPhone contract with Apple (NASDAQ:AAPL) might not be extended next year; Verizon (NYSE:VZ) shares jumped shot up on hopes the exclusivity agreement might not be extended.  And Chevron (NYSE:CVX) shares gained from the dollar’s retreat.

All ten S&P 500 industry groups advanced, led by consumer services and telecommunications, both up 2.7%, oil and gas, up 1.6%, and industrial and tech shares, both up 1.5%.

Gold prices jumped to fresh highs yesterday, before giving up some ground to settle at $1164.70, up $17.90.  Meanwhile, the greenback dropped 0.7% to 75.13 against a basket of currencies.  This afternoon's FOMC meeting minutes will be scrutinised by investors for any evidence of a timing change for its asset purchase programs.  Such considerations are also key to the trajectory for gold pricing, viewed as an inflation hedge.

Earnings reports are due from Barnes and Noble (NYSE:BKS), Borders (NYSE:BGP), Dollar Tree (NASDAQ:DLTR), Heinz (NYSE:HNZ) and Hormel (NYSE:HRL).

Chicago, IL – November 24, 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: Fannie Mae (FNM), Freddie Mac (FRE), Sherwin Williams (SHW), La-Z-Boy (LZB) and Campbell Soup Co. (CPB).

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Here are highlights from Monday’s Analyst Blog:

Existing Home Sales Soar Again

Lower mortgages rates -- greatly suppressed by the Fed’s policy of buying up $1.25 Trillion of mortgages backed by Fannie Mae (FNM) and Freddie Mac (FRE) but that buying spree is expected to end at the end of the first quarter -- have also helped the existing homes sales market. In October, 30-year fixed rate mortgages fell to an average of 4.95%, down 2.17% from 5.06% in September and down 20.16% from the year-ago level of 6.20%.

A third and very important reason for the rebound in existing home sales is that prices have come down. Overall, median existing home prices are now $173,100, a 7.1% decline from a year ago. Existing single-family home prices have held up a little bit better, down 6.8% from a year ago, while prices for Condos are down 10.4% from last year.

Regionally, existing home sales were up by double digits for the month in every region but the West. The Midwest led the way with sales up 14.4% to an annual rate of 1.43 million. From last year, sales in the region are up 28.8%.

In the very important South region, sales rose by 12.7% and are up 25.7% from a year ago. Sales in the South were at an annual rate of 2.30 million, or 37.7% of the total. While that is well below the over 50% rate that the region accounts for when it comes to new home sales, it still makes it the largest region of the country by a wide margin.

The Northeast is the smallest region, with sales at an annual rate of 1.06 million, but that rate was up 11.6% from September and is up 27.7% from a year ago. The rebound was much more muted out West, where sales were up just 1.6% for the month and just 12.0% year over year. The West has also suffered by far the largest decline in median prices, down 14.7% from a year ago -- more than double the next largest decline (the South -- 14.7%).

In the Northeast, which is the most expensive market (median price of $235,400) prices are down just 2.6% year over year. In the Midwest, the most inexpensive market (median price $146,600) prices are actually up 1.1% from a year ago.

While the news on existing home sales is good, and the existing home market is FAR larger than the new home market, it is also far less significant to the economy than is the new home market. New homes directly stimulate residential investment, which is an important (and volatile) component of GDP. Lots of labor and materials go into building a new home.

Existing home sales have only an indirect effect on the economy. They stimulate sales of things like paint from Sherwin Williams (SHW) and furniture from La-Z-Boy (LZB) as people redecorate, but such spending is much smaller than building a whole new house. In other words, this is good news, just don’t get too carried away about its significance.

Campbell’s Beats, Raises Guidance

Campbell Soup Co. (CPB) reported fiscal first-quarter earnings of 87 cents per share, which was above the Zacks Consensus Estimate of 81 cents. Quarterly earnings were up 14.5% compared to the prior-year quarter.

Quarterly net sales declined 2.1% year over year due to a negative impact of 4% from volume and mix and 1% from increased promotional spending, partially offset by positive contributions of 2% from price and allowances and 1% from currency translation. Gross margin for the quarter expanded 170 basis points (bps) to 41.9% versus 40.2% in the year-ago quarter, reflecting productivity improvements and pricing benefits.

Sales of the US Soup, Sauces and Beverages segment decreased 5% year over year. US soup sales fell 3%, driven by sales declines in condensed, RTS and broth. Prego pasta sauce and Pace Mexican sales dropped due to competitive pressures, while beverage sales declined due to weak sales of V-8 vegetable juice.

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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

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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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...the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

Do we really need to worry so much in the short term?

Six years ago, Jeff Frankel and I examined the implications of the borrow-and-spend policies of the Bush Administration [PDF]. We estimated the following relationship:

(1) i_t ^long = 0.001 + 1 × π_t + 0.077 E(d_t+2) + 0.280 (y_t-y_t^FE) + 0.005 i_t^* - 0.574 int_t

Adj.-R² = 0.51, N=17, Smpl 1988-2004. i is the long term interest rate on ten year bonds, π is the y/y inflation rate, E(d_t+2) is the two-year ahead expected debt-to-GDP ratio and (y_t-y_t^FE) is the output gap (both according to OECD), and i^* is the foreign interest rate, and int is foreign purchases of US Treasury debt. (This specification was also discussed in this March 2007 post.)

We can use these estimates to do a back of the envelope calculation of what happens in a year, going from end FY2009 to end FY2010, by taking the total differential of equation (1). The change will be given by:

(2) Δ i = Δ π + 0.077 Δ E(d_t+2) + 0.280 Δ (y_t-y_t^FE) - 0.574 Δ int

According to the August CBO Economic and Budget Outlook, public debt held by the public two years ahead will rise from 65.2 to 65.9 ppts of GDP (that is, end FY 2011 to end FY2012, in Summary Table 1). The OECD November Economic Outlook reports that the output gap in 2009 was -4.92 ppts of GDP, and is projected to be -5.36 in 2010. If East Asian bank purchases of Treasuries remain constant, then one finds that the inflation adjusted interest rate will rise by:

(0.659-0.652)×0.077 + (-0.0536+0.0492)×0.280 = 0.0005-0.0012 = -0.0007

That is, the interest rate would fall by 7 bps (holding expected inflation constant). In other words, real interest rates would stay roughly constant, ceteris paribus.

Now, what about foreign purchases of US treasury bills and notes? These ran about $333 billion through September [1], or about 2.3% of nominal GDP. Suppose this went to zero (!). Then real rates would rise 1.3%. Of course, one needs net foreign purchases to drop to zero, which seems to me unlikely.

Some caveats: These estimates were obtained using data that spanned a period without extraordinary Federal Reserve credit easing, and in the face of an unprecedented financial collapse. And, the relationship is not precisely estimated. But they're the estimates we -- or at least I -- have.

By the way, CBO predicts only a 0.8 ppts increase in the ten year rate going from 2009 to 2010, and an additional 0.3 ppts by 2011 (Summary Table 2).

I'll further observe that the article gives the impression that the jump in Federal debt was due to the stimulus bill. But in fact, as shown in this post, most of the debt accumulation has been accounted for by the decline in tax revenues associated with the recession.

No doubt, trouble on the fiscal front is real, and has long been brewing -- from the tax cuts of 2001 (if extended) to Medicare Part D. And, indeed, I argued for a lot more fiscal restraint when we were near full employment. [2] But, in my view, apocalypse not quite yet.

Chicago, IL – November 19, 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: D.R. Horton (DHI), Pulte (PHM), Owens Corning (OC), Masco (MAS) and EnCana Corporation (ECA).

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:

Housing Starts, Permits Plunge

Housing prices are still under pressure, despite unprecedented steps by the Federal government and the Federal Reserve to prop up the price of that asset class. Artificial government support is not as durable a way to prop up prices as a better balance between supply and demand would be.

Well, if prices are going down, the last thing you want to see is more new supply on the market. Thus, in the long term, the decline in housing starts is a good thing. If we stop building houses for long enough, then population growth will start to bring the vacancy rate down. On the other hand, as Lord Keynes famously said, “In the long run we are all dead."

One thing is abundantly clear: this report was not good news for the homebuilders like D.R. Horton (DHI) and Pulte (PHM), nor was it encouraging to suppliers to the industry like Owens Corning (OC) or Masco (MAS). It is also bad news for millions of construction workers who are now unemployed.

It is also yet another reason for the Fed to keep interest rates down very low for a very long time. The only reason for the Fed to consider increasing the Fed funds rate would be if we were going to have a very sharp V shaped recovery. With Housing Starts and Permits falling again, that just simply is not going to happen.

EnCana Misses, Profit Tumbles

EnCana Corporation (ECA) – a major Canadian oil and gas exploration and production (E&P) company – reported weak third quarter results, hit by lower prices and volumes. Operating earnings per share, excluding hedging and foreign exchange effects, came in at $1.03. This fell short of the Zacks Consensus Estimate of $1.11 and way behind the year-ago profit of $1.92.

Revenues were down 64.2% year over year to $3.9 billion. During the quarter, total production was down 7.0% to 4,387 million cubic feet equivalent per day (MMcfe/d), of which 81% was natural gas. Natural gas production decreased roughly 9.3% year-over-year to 3,551 million cubic feet per day (MMcf/d), while oil and natural gas liquids (NGLs) production was up 3.7% to 139 thousand barrels per day (MBbls/d).

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Waning risk appetites sent gold prices up 20 cents to a fresh all-time high of $1,139.40.  Treasuries rose, pushing corresponding yields lower.  The yield on the benchmark 10-year note slipped to 3.33% from 3.34% late Monday.  Crude prices closed above $79 per barrel.  Copper prices rose to 14-months highs on expectations that China demand will remain robust.

A perpetual decline in the value of the dollar and record low interest rates in the US have driven stocks higher as investors, seeking higher return on their investments, have sought refuge in equities.  A subdued inflation has also proved welcome for the economy. 

This morning’s stock futures show a mixed opening on the Street.  Dow Jones industrial average futures are down 2 points, or about 0.1%, at 10,396.  Standard & Poor's 500 index futures are up 0.10, or nearly 0.1%, at 1,107.50, while Nasdaq 100 index futures are down 5.50, or 0.3%, at 1.803.25.

On Tuesday, the 30-share Dow Jones industrial average rose 30.46 points, or 0.3%, to 10,437.42, its highest close since October 2, 2008.  The Dow had jumped 136 points Monday after the retail sales report.  The broad Standard & Poor's 500-stock index inched up 1.02 points, or 0.09%, at 1,110.32 and the tech-heavy Nasdaq composite index gained 5.93 points, or 0.27%, to 2,203.78.  Meanwhile, the price of US Treasuries continued to gain, with the 10-year up 7/32 as its yield eased to 3.323%.  On the New York Stock Exchange, volume slowed to 972,000 shares with declining shares ahead of advancing issues by an 8 to 7 margin. The Vix volatility measure fell 2.1% to 22.41.

Six of the ten S&P500 industry sectors managed gains yesterday, led by gains in basic material shares (+1.1%), technology (+0.5%), and telecommunications (+0.5%).  Consumer service shares (-0.4%), oil and gas (-0.2%), utilities (-0.2%) led on the downside, with industrials shedding 0.04%.

The US dollar gained against a basket of currencies yesterday in a delayed reaction to Fed Chairman Bernanke's remarks that the Fed is "attentive to implications of changes in the value of the dollar," as well as indications the Fed may be inching toward more restrictive policy measures as financial markets show signs of improvement.

A cautious holiday season guidance from major retailers such as Target (NYSE:TGT) and Home Depot (NYSE:HD) weighed on retail shares. Target (NYSE:TGT), down 3.0% on Tuesday, said average transaction size has dwindled in November, adding it sees lower fourth quarter same-store-sales.  Home Depot (NYSE:HD), off 2.4%, provided below-consensus fourth quarter guidance, saying its markets remain under pressure.  Ford (NYSE:F) shares, meanwhile, rose to their two-year high on news its Fusion hybrid was named Motor Trend's 2010 Car of the Year.

Gold advanced 2% to fresh record highs; and the price of silver jumped 5.9%.  The initial gains in the equity prices followed strength in Asian markets yesterday.  Strength in Asia was partly helped by reports that said Japanese economy grew at its fastest pace in over two years, up 1.2% during the third quarter.  To add to the bullish mood in the region, leaders of the Asia Pacific Economic Cooperation promised to keep the stimulus measures in place.

On Monday, the 30-stock Dow Jones industrial average rose 136.49 points, or 1.33%, to 10,406.96. The broad Standard & Poor's 500-stock index was up 15.82 points, or 1.45%, at 1,109.30. The tech-heavy Nasdaq composite index gained 29.97 points, or 1.38%, to 2,197.85.  On the New York Stock Exchange, 25 stocks were higher in price for every six that declined.

Bernanke warned of threatening headwinds from rising unemployment and tight credit but added comments supporting the government’s stimulus measures.  Yields on US Treasuries declined, with the yield on the 2-years touching its lowest since last January.  At session's end, Meredith Whitney questioned the fundamentals of the current stock market rally, and said she expected a double-dip recession next year.

Analysts, meanwhile, raised their ratings on number of firms.  Goldman Sachs (NYSE:GS) raised its rating on Nordstrom (NYSE:JWN) from "neutral" to "buy," saying the firm would be a "key beneficiary of a recovery in high-end consumer" demand.  Goldman's analysts also started their coverage on Dell (NASDAQ:DELL) with a "buy" rating, saying the company would benefit from the PC upgrade cycle.  JP Morgan's (NYSE:JPM) added US Steel (NYSE:X) and AK Steel (NYSE:AKS) to its focus list.

A number of key retailer results are slated for today's release, looked to for guidance on current consumer demand. Among companies reporting today are: Home Depot (NYSE:HD), Target (NYSE:TGT), TJ Maxx (NYSE:TJX), Saks (NYSE:SKS), Autodesk (NASDAQ:ADSK), and Salesforce.com (NYSE:CRM).

On Friday, the 30-stock Dow Jones industrial average rose 73 points, or 0.72%, to 10,270.47. The broad Standard & Poor's 500-stock index was up 6.24 points, or 0.57%, at 1,093.48. The tech-heavy Nasdaq composite index advanced 18.86 points, or 0.88%, to 2,167.88.  For the week the Standard & Poor’s 500 Index jumped 2.3% to 1,093.48.  The Dow average rose 247.05 points, or 2.5%, to 10,270.47, following its 3.2% advance the prior week.

The spike in commodities came after the greenback fell Friday on news that the trade deficit widened more than expected in September.  Commodities, which are priced in US dollar, benefit from a decline in the currency.

Nevertheless, the greenback's weakened status remains a foreign policy issue of contention, and is likely to weigh on President Obama’s tone in China.  Meanwhile, brushing aside concerns of potential asset bubbles in China, the Chairman of the China Banking Regulatory Commission, instead, cautioned the weak dollar "is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets."

Treasury Secretary Geithner last week repeated the Administration's commitment towards a strong dollar; nevertheless, the impact of a weak dollar on improving American products' competitive positioning overseas markets is widely expected to help the sustainability of a fragile recovery in the US.

On Friday, the Walt Disney Co. (NYSE:DIS) said quarterly profit rose 18%, helped by higher revenue at its cable, broadcast and movie studio divisions.  Abercrombie (NYSE:ANF) reported better-than-estimated results, while J.C. Penney (NYSE:JCP) raised its earnings and revenue outlook, offsetting a lower-than-expected consumer sentiment post from the University of Michigan.

Among retailers reporting during the week are: Lowe's (NYSE:LOW) and Pacific Sunwear of California (NASDAQ:PSUN) today; Home Depot (NYSE:HD), Target (NYSE:TGT) and TJ Maxx (NYSE:TJX) on Tuesday; BJ's Wholesale (NYSE:BJ) and the Limited (NYSE:LTD) on Wednesday; Sears Holding (NYSE:SHLD), Gap (NYSE:GPS) on Thursday.

A busy Fed calendar includes today's comments from Bernanke; on Tuesday from Lacker, and Pianalto; on Thursday from Plosser, Fisher, Ghosn and Rattner; and on Friday from Plosser. Treasury Secretary Geithner speaks on Tuesday and Thursday.

Chicago, IL – November 16, 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: Nordstrom Inc. (JWN), Abercrombie & Fitch Co. (ANF), The Walt Disney Company (DIS), Wells Fargo & Company (WFC) and Bank of America Corporation (BAC).

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 Friday’s Analyst Blog:

Nordstrom Ups Guidance, Post-Beat

High-end retailer Nordstrom Inc. (JWN) has reported strong third quarter 2009 results with net income of $83 million or 38 cents per share compared to $71 million or 33 cents per share in the year-earlier quarter. The earnings marginally beat the Zacks Consensus Estimate by a penny.

The year-over-year increase in earnings was primarily due to an improvement in same-store sales in each month of the quarter through prudent inventory management policies that focused on sales trends. Quarter-end inventory per square foot declined 10.7% versus the year-ago period. Overall gross profit of the company (as a percentage of sales) increased approximately 90 bps during the quarter compared to the year-earlier quarter.

By segment, same-store sales decreased 4.2% during the quarter in Full-line stores, increased 16.4% in Nordstrom Direct and 3.0% in Nordstrom Rack. During the quarter, the company reported a $10 million increase in retail selling, general and administrative expenses due to an increase in operating costs related to the opening of new stores, along with an increase in variable expenses.

Abercrombie & Fitch Earnings Dip

Abercrombie & Fitch Co. (ANF), a leading international specialty retailer, reported relatively weak third quarter 2009 results with a net income of $38.8 million or 44 cents per share, compared to a net income of $63.9 million or 72 cents per share in the year-earlier quarter.

The year-over-year decline in results was primarily due to the continued economic downturn plaguing the industry that has resulted in reduced consumer discretionary income and cuts in non-essential spending.

Overall net sales of the company during the quarter decreased 15% to $765.4 million from $896.3 million in the year-ago quarter. Total company direct-to-consumer net sales increased 11% year-over-year to $63.9 million, while overall comparable-store sales decreased 22%.

Disney’s Revenue Climbs

The Walt Disney Company (DIS) recently reported fourth-quarter 2009 results, posting mid-single digit growth in both top and bottom lines. Total revenue for the quarter climbed 4% year-on-year to $9,867 million.

The quarterly earnings of 46 cents a share outdid the Zacks Consensus Estimate of 41 cents and jumped 5% from 44 cents delivered in the prior-year quarter. The better-than-expected results followed strong results from its Media Networks segment and effective cost management.

On a reported basis, including one-time items, quarterly earnings came in at 47 cents a share, up 18% from 40 cents posted in the year-ago quarter.

New Rules for Bank Overdraft Fees

According to the new regulations, consumers must be given a notice explaining a financial institution's overdraft services, including an explanation of the fees associated with the services.

The Federal Reserve took this decision primarily based on its investigation which showed that banking customers only want overdraft services if they know the details of what is required. However, some consumers do want overdraft protection services to make sure that some time-sensitive payments like rent and bills are covered, as long as they know the charges.

The Fed's rules appear mostly in line with the new trend that some of the banks have already begun moving toward. In September, Wells Fargo & Company (WFC) said that it will not charge fees from customers if they overdraw their accounts by $5 or less. Following that, in October, Bank of America Corporation (BAC) announced that it will eliminate fees if a customer’s account is overdrawn by less than $10 in a single day.

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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

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The table at the right summarizes the percent change between January 6 and November 11 in the cash prices of 19 commodities reported in the Wall Street Journal (downloaded via Webstract). The average commodity in this list has appreciated 37% since the start of the year.

A recent paper by Ke Tang and Wei Xiong documents an increasing tendency for commodity prices to move together over the last few years. A decade ago, what happened to oil prices was largely unrelated to movements in most other commodity prices. The graphs below show how the correlations between oil prices and the prices of four representative commodities have increased significantly over time.

Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).

One explanation I often see in the popular press is that movements in commodity prices are driven by changes in the value of the dollar relative to other currencies. However, the magnitude of movements in commodity prices greatly exceeds the size of changes in the exchange rate. For example, the table above shows that since the start of this year oil prices have increased five times as much as the dollar price of a euro; see also Steve Gordon's graphs. While the depreciation of the dollar is part of the story, most of the explanation must be found elsewhere.

Another important factor is resurging real economic growth outside the United States, which produces pressures for both the dollar to depreciate and the real price of commodities to appreciate. According to this theory, the increasing correlations between commodity prices results from the fact that countries like China are so much more important for the world economy today than they were a decade ago.

A third explanation is that investors are making increasing use of commodities as an investment class. Although Treasury Inflation Protected Securities offer a hedge against an increase in the U.S. consumer price index, they don't offer protection for foreign investors against depreciation of the dollar. Insofar as increases in the prices of commodities like oil may depress real economic activity, holding commodities as an investment also offers useful diversification against risks to equities. Particularly when interest rates are low, there is an incentive to hoard physical commodities as an investment vehicle.

The paper by Tang and Xiong proposes that the increased use of commodities as a financial investment accounts for the increasing correlation among commodity price changes over time. In support of that claim, they note the growing popularity of investment strategies based on the Goldman Sachs Commodity Index or the Dow Jones Commodity Index. Tang and Xiong document that correlations among commodities included in the indexes have increased faster than those not included. For example, one of the regressions they estimate relates the return on commodity i to equity returns, bond yields, the value of the dollar, and oil prices, where the coefficients are allowed to grow with time at different rates before and after 2004, and with different trends on these coefficients estimated for commodities included in indexes as for those excluded. The figure below shows their estimated time path for the coefficient on oil prices comparing the indexed and non-indexed groups.

Coefficient relating return on average commodity to return on oil as a function of time for commodities included in the GS or DJ indexes (top curve) and those excluded (bottom curve). Source: Tang and Xiong (2009).

For any of the explanations in this third class, one of the important challenges is to reconcile the story of commodity speculation with supply and demand for the underlying physical commodity. If we propose that speculators have driven the price of the commodity up, the physical quantity demanded should decline as a result. In order to be sustained, a coherent speculation-based theory of commodity price appreciation requires increased physical storage of the commodity.

The solid black curve in the figure below plots the typical U.S. crude oil stocks (excluding those held in the Strategic Petroleum Reserve) for each week of the year, based on the average over 1990-2007. The red line gives the actual values for 2008, which were significantly below the historical average, particularly in the spring of 2008 when oil prices were rising so dramatically. Those below-normal inventories were one reason I focused on what was going on to the fundamentals of supply and demand in trying to understand the behavior of oil markets in the first half of 2008.

Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.

On the other hand, inventories of crude oil this year, shown in green above, have been substantially above normal, meaning that in the absence of that oil going into storage, we would have expected to see lower oil prices than we currently have.

Moreover, much of the current stockpiling may be taking place outside the United States. For example, Yves Smith noted this story from Bloomberg last August:

Copper, nickel and other base metals stockpiled by speculative Chinese investors including pig farmers may be sold when "market sentiment turns," said Scotia Capital Inc.

A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to buy copper and nickel for speculation, Liu Na, an analyst with Scotia Capital, wrote in a note dated Aug. 17, citing reports from the state-owned China Central Television....

"These stockpiles are in 'weak hands' as speculators have no real use for base metals," Liu wrote. "When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved."

I also found this November 3 story from the Financial Times of interest:

Gold prices continued to rise on Wednesday extending the all-time highs which followed India's central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country's finance minister warned the economies of the US and Europe had "collapsed".

India's decision to exchange $6.7bn for gold equivalent to 8 per cent of world annual mine production sent the strongest signal yet that Asian countries were moving away from the US currency.

Policy-makers in the Federal Reserve have traditionally thought of inflation as a broad movement in all wages and prices, which to some extent is under their control, and viewed changes in relative commodity prices as outside their control. I believe that this is not the correct understanding of the current situation. Concerns about inflation, particularly on the part of foreign dollar-holders, are likely to show up first in the relative prices of internationally traded commodities. Insofar as these relative price changes can be destabilizing in themselves, it cannot be wise for U.S. policy-makers to ignore them.

The Dow Jones industrial average, which hit an intraday high of 10,341, advanced 44 points, or 0.4%, to close at 10,291.26. The S&P 500 added 6 points, or 0.5%, to close at 1,098.51, and the tech-laden Nasdaq composite rose 16 points, or 0.7%, to end the day at 2,166.90.  On the New York Stock Exchange, 19 stocks were higher in price for every 11 that declined

Nine of the ten S&P500 industry groups ended in the green, with financials (+1.3%), basic materials (+1.0%) and technology (+0.7%) leading the gainers.  Utilities fell 0.2%.  On the DJIA, Bank of America (NYSE:BAC) led the advancing issues as the firm’s CEO noted the integration of Merrill was running ahead of schedule, and will result in greater-than-anticipated cost savings in 2009.  Wal-Mart (NYSE:WMT) advanced 1.3% ahead of this morning's results.

Shares in home building companies rose after Toll Brothers (NYSE:TOL) said late Tuesday that signed contracts for new homes in its latest quarter jumped 42%.  Toll rose $3.02, or 16.4%, to $21.41.  Pulte Homes Inc. (NYSE:PHM) advanced 77 cents, or 8.1%, to $10.23, while Beazer Homes (NYSE:BZH) advanced 63 cents, or 12.4%, to $5.73.

Meanwhile, the greenback plunged to its lowest level since 2008 and ended the day just below $1.50 against the euro.  The steady decline in the greenback has been precipitated by continuing suggestions from the Fed that interest rates will remain low for an extended period as the recovery strengthens.  Across the globe, markets have interpreted this language as suggesting a mid-2010 timetable for raising rates. 

However, gold prices steered clear of wavering sentiment and hit an all-time high Wednesday at $1114.60 per troy ounce, up $12.10.  China reported greater-than-expected industrial output and retail sales, sending resource-related shares higher. Commodity prices also rose, with the broad-based, DJ-UBS index up 0.6% to 133.408. Crude prices gained, up 0.3% to $79.28.

Today's retailers' results will be an indication of consumers' appetites for goods.  Although the third quarter is seasonally slow, the current quarter numbers will be closely watched as the holiday season approaches.  Yesterday's reported loss at Macy's (NYSE:M) was less than anticipated; however, its raised fourth quarter guidance failed to meet expectations. Companies reporting results today include: Kohl's (NYSE:KSS), Nordstrom (NYSE:JWN), Urban Outfitters (NASDAQ:URBN) and another key consumer-driven firm, Disney (NYSE:DIS).
 

The Standard & Poor's 500 Index shed 0.01%, to 1,093.01 and the technology-laden Nasdaq Composite Index slipped 2.98 points, or 0.14%, to close at 2,151.08.  On the New York Stock Exchange, three stocks declined in price for every two that rose.  Volume was light as only 990 million shares exchanged hands.

Record low interest rates and a sliding dollar have helped stocks in recent months as investors have taken their focus away from some of the persistent worries of the economy.  Also, with the Federal Reserve continuing its highly accommodative monetary stance and the G20 finance ministers pledging to keep economic stimulus in place, risk appetites have received a boost lately. 

Of the $81 billion in Treasury auction scheduled for this week, yesterday’s $25 billion sale of 10-year notes witnessed decent demand, following robust demand for the $40 billion in 3-year notes on Monday. Bond markets are closed today for Veterans Day.

Shipping company FedEx Corp. (FDX) yesterday said it expects to ship more than 13 million packages on December 14, its busiest shipping day of the year.  United Parcel Service Inc (NYSE:UPS) said it sees growth in its volumes next year as the global economy recovers.  American Express (NYSE:AXP) said cardholder spending grew in October, with billing up 3%.

Meanwhile, Bank of America's (NYSE:BAC) Ken Lewis noted his firm is "keeping its head above water" this year.  Bob Toll of Toll Brothers (NYSE:TOL) noted, "Home buyers began to emerge from their bunkers in late March 2009 and the market continued to gain momentum up to Labor Day.  Since then demand has been volatile. This may be due in part to typical seasonality, but the more likely cause is concern about unemployment and the overall economy."

A number of Fed speakers yesterday sung the tone of caution, while mostly agreeing on the fragility of the economic recovery.  Both Lockhart and Yellen warned unemployment rate may remain high for the next several years.  Rosengren warned that with high unemployment levels, the US economy is not yet in a position to warrant exit strategies.  This morning Treasury Secretary Geithner reiterated the importance of the dollar strength for the health of the US economy.

Chicago, IL – November 11, 2009 – Zacks Equity Research highlights Amdocs Ltd. (DOX) as the Bull of the Day and Molina Healthcare, Inc. (MOH) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Fannie Mae (FNM), Freddie Mac (FRE) and Ford (F).

Full analysis of all these stocks is available at http://at.zacks.com/?id=5506

Here is a synopsis of all five stocks:

Bull of the Day:

We maintain our Outperform recommendation for Amdocs Ltd. (DOX), following its strong results for the fiscal fourth quarter of 2009. The company has industry-leading technology integration products for managed services and large transformational projects.

We believe long-term fundamentals for Amdocs remain firm due to the transition of telecom service providers to converged and consolidated solutions. Amdocs maintains a very strong financial position with healthy order backlog.

Recently, the company has won a series of large managed services contracts in various parts of the world. Except Europe, operations in other regions have started gaining momentum.

Bear of the Day:

Molina Healthcare, Inc. (MOH) reported third-quarter earnings of $0.33 per share, which was well below the Zacks Consensus Estimate of $0.53. The company earned $0.60 in the year-ago quarter.

The decline in profit for the quarter was attributable to higher operating expenses coupled with losses from the company's California health plan. The increase in medical costs was attributable to the H1N1 flu virus and costs associated with recently enrolled members. The impact of the H1N1 epidemic is significant and has the potential to worsen in the coming quarters.

We are also concerned about the intense competition facing Molina. We have an Underperform rating on the stock with a price target of $19.

Latest Posts on the Zacks Analyst Blog:

Notes on Janet Yellen Speech

These policies are likely to stay in place for a while to come, and will only gradually be lifted, particularly the low fed funds rate. What happens to mortgage rates once the Fed stops buying every scrap of paper ever issued or backed by Fannie Mae (FNM) and Freddie Mac (FRE) is very much of an open question. Oh, the buying of longer-term treasuries was just to bring private rates down -- it had nothing to do with keeping the interest costs to the government down .

Big firms that can tap the credit markets on their own are in much better position than small firms that have to rely on bank loans. Remember that spreads on low-grade corporate debt last winter were higher than the spreads during the Great Depression. While the Fed intervention has not helped everyone, it clearly has helped many.

It is hard to tease out how much of the increased demand for housing and autos is due to the government subsidies, and how much is "real" pent-up demand. The October auto sales were somewhat encouraging in this regard, since Cash for Clunkers was not a factor. The rebound to profits at Ford (F) was real, even if it could be laid at the feet of the Clunkers program. The inventory bounce is real, but is probably temporary.

Get the full analysis of all these stocks by going to http://at.zacks.com/?id=5507.

About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

About the Analyst Blog

Updated throughout every trading day, the Analyst Blog provides analysis from Zacks Equity Research about the latest news and events impacting stocks and the financial markets.

About Zacks Equity Research

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 analyst 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 by visiting http://at.zacks.com/?id=5508.

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=5509.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Follow us on Twitter: http://twitter.com/zacksresearch

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact:
Mark Vickery
Web Content Editor
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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.

Today, we're fortunate to have Joe Gagnon, senior fellow at the Peterson Institute for International Economics, as a guest contributor.

With short-term risk-free interest rates essentially at zero in the major developed economies, conventional monetary policy is in a liquidity trap. As a number of commentators have observed, printing zero-interest-rate money to buy zero-interest-rate assets has no real economic effect because the assets are near-perfect substitutes for money. But does that mean that central banks have lost their power? Jim Hamilton asserts that central bank purchases of other assets, with positive yields, can always create inflation, though he is silent as to whether they can affect output. Building on Gauti Eggertsson and Michael Woodford, Scott Sumner argues that central banks can boost output and inflation despite zero interest rates by raising the public's expectations of future inflation and thus lowering the real rate of interest. According to Sumner, purchases of a variety of assets are one way central banks can bolster these expectations.

Is there any evidence on the effect of central bank purchases of longer-term or riskier assets?

In recent months, central banks have purchased large quantities of longer-term assets. These purchases appear to have been effective at pushing down longer-term interest rates, which should stimulate economic activity. For example, the Federal Reserve (Fed) has purchased large quantities of longer-term agency-backed securities and Treasury bonds. The following table shows that Fed communications about such purchases had substantial effects on a range of long-term interest rates, including on assets that were not included in the purchase program, such as interest rate swaps and corporate bonds.

Since March 19, the Fed has not made any substantive changes to its planned purchases of longer-term assets. Over this period, the 10-year Treasury yield has risen about 75 basis points and the corporate yield has fallen about 200 basis points, reflecting a relaxation of the extreme financial strains and flight-to-quality that characterized the first few months of this year. Conventional fixed mortgage rates, a key target of the Fed's policy easing, have changed little on balance since late March.

Paul Krugman has argued that potential gains and losses when long-term interest rates move make a policy of purchasing such bonds especially risky, and that fiscal stimulus is a safer bet. However, central banks, including the Fed, have always held risky assets, including long-term bonds, foreign exchange reserves, loans to private banks, and even equities. In many cases, such assets comprise the bulk of the central bank's portfolio.

A good definition of expansionary monetary policy is the printing of money to purchase financial assets. Expansionary fiscal policy is the selling of financial assets to purchase goods and services, to cut taxes, or to increase transfers. On these definitions, both monetary and fiscal policy can be effective when short-term interest rates are zero.

This post written by Joe Gagnon

On Friday, the Dow Jones industrial average rose 17.46 points, or 0.2%, to 10,023.42 and the Standard & Poor's 500 index added 2.67 points, or 0.3%, to 1,069.30.  The Nasdaq composite index advanced 7.12 points, or 0.3%, to 2,112.44.  For the week, the Dow and the S&P 500 index advanced 3.2%, while the Nasdaq rose 3.3%. 

On the New York Stock Exchange, 1.1 billion shares exchanged hands Friday as advancing shares narrowly edged ahead of those that declined in price.  Surprisingly, as investors' apprehension in front of the key economic and earnings data grew, the CBOE volatility index declined over 20%, closing at 24.19 on Friday.

Analyst upgrades helped a number of stocks Friday.  Analysts at Bernstein raised their ratings on both General Electric (NYSE:GE) and Amazon.com Inc. (NASDAQ:AMZN) to “outperform," sending shares in those companies up 6.2% and 4.6%, respectively, and helping give major averages a lift.  General Electric, which also received a rating upgrade from Oppenheimer, was the leading gainer in the Dow average as analysts saw reduced risks to its finance unit.  Lowe’s Cos (NYSE:LOW) jumped 4.3% and Home Depot (NYSE:HD) added 1.8% after analysts at Bank of America Corp. (NYSE:BAC) raised the two companies to “buy" from “underperform."

The coming week, though devoid of any substantial economic event, does contain a number of corporate posts that are likely to give an indication about the health of the consumer as markets enter the key holiday season.  Disney (NYSE:DIS) and Wal-Mart (NYSE:WMT) report their numbers on Thursday.  Wal-Mart (NYSE:WMT), which has not been posting monthly comparable sales reports, will be watched closely for how the retailer fared during the third quarter.  Kohl's (NYSE:KSS) also reports on Thursday, with Macy's (NYSE:M) numbers expected on Wednesday and JC Penney's (NYSE:JCP) on Friday.  Most analysts expect favorable results, as shoppers remain on a bargain hunting spree.  Setting the fire to the latest advance in stocks was the estimate-topping numbers from 80% of the S&P500 firms that have so far reported their numbers.

This morning’s futures suggest stocks are likely to open with gains of at least 1%.  The healthcare package passed the House by the narrowest of margins, with much wrangling still expected before any decision is reached within the Senate.  The G-20 meeting of Finance Ministers promised extended government stimulus measures.  Meanwhile, the Moody's Investor Services (NYSE:MCO) upgraded its rating on China and Hong Kong to positive from stable.

What are some of these positives that I am referring to?

As we pointed out in the weekly Roundtable Review video, Friday's jobs report was overall quite bad, but it had a few positive aspects as well. We should not lose sight of the fact that the monthly job losses exceeded half a million each month from November 2008 to April 2009. In fact, the 190,000 jobs lost in October was the second smallest monthly loss in the last 12 months. I view the deceleration in the monthly job loss totals as a positive sign that all the remedial fiscal and monetary measures are having a positive impact.

Another positive in the jobs report was the 34,000 temporary positions created during the month. While temporary positions are not the most desirable type of employment in the economy, they typically work as a leading indicator for full-time employment going forward. I don't want to sugarcoat the headline-grabbing jobs report, but the overall improving trend remains unmistakable.

My sense is that we should start seeing positive jobs numbers toward the end of the first quarter or early second quarter. Given the extent of the job losses in this downturn, it may be a very long time before employment gets anywhere near pre-crisis levels.

We also got strong productivity numbers, a good ISM report, and positive October retail sales figures last week. And the Fed told us that they plan to keep interest rates low for an 'extended period'.

All this news flow is enough to keep the market in a cheerful mood; at least for now. It remains to be seen if this trend can be sustained in the coming days. With the earnings season winding down and few major economic events on the near-term calendar, I would expect the market to find excuses to pocket some of its recent gains.

Portfolio Updates

We made five changes to the Focus List; adding one and dropping four stocks. We also added one stock to the Growth & Income portfolio.

Apple (AAPL) was added to the Focus List to reflect its stellar earnings performance and continuing momentum. The company has beaten estimates in each of the last four quarters and remains well-positioned in each of its product categories.

CGI Group (GIB) was removed following the stock's drop to a Zacks #4 Rank ("Sell"), a clear signal for removal from the portfolio.

Pharmerica Corp. (PMC) was also sold for the same reason; it had dropped to a Zacks #4 Rank.

JDA Software (JDAS) was removed to account for negative estimate revisions - three of four covering analysts have cut their fourth-quarter estimates in the past month.

Tim Hortons (THI) was removed after the company's weak quarterly results and lower estimates. The stock is still a Zacks #3 Rank ("Hold"), but if estimates continue this trend, it will soon be a Zacks #4 Rank.

Aflac (AFL) was added to the Growth & Income portfolio after the company's better-than-expected third-quarter results. Estimates have been trending higher for this insurer, who has paid a growing dividend (currently yielding 2.7%) for over 25 years now.

Zacks Investment Research

Sterling's paper is in part a response to earlier analyses by John Taylor (2008, 2009) and John Cochrane and Luigi Zingales who noted that the spread between the LIBOR interest rate (London Interbank Offered Rate) and the OIS (Overnight Index Swap) rose only gradually following the Lehman bankruptcy, leading these scholars to see Lehman as just one of many relevant developments at the time. But Sterling questions the meaningfulness of the LIBOR or OIS indicators during these weeks given that markets seized up and little trading activity was occurring in these instruments. Sterling instead proposes to take a look at Bloomberg Financial Conditions Index, which Bloomberg launched in August 2008. The index is based in part on the observations by Rick Mishkin on some of the regularities observed in earlier historical financial crises. The components of the Bloomberg index are as follows:

Source: Sterling (2009)

Here's Sterling's graph of the behavior of the Bloomberg index, in which the remarkable character of events following September 12 is pretty striking.

Source: Sterling (2009)

Even if the Lehman failure is agreed to as a definitive event, it is not clear to me that this establishes that all would have been fine if the Fed had only bailed out Lehman as they had Bear Stearns and AIG before. That question is inherently and unavoidably counterfactual. We can't know-- and decision-makers at the time couldn't know-- which domino might have been next to fall had this one been propped up.

But I think it is fair to conclude that the middle of September of 2008 marked a clear turning point in the unfortunate sequence of events through which we have recently come.

Fortunately during recessions, the federal government usually will step in and provide emergency extended benefits. However this recession has gone on for so long, and we have so many long-term unemployed, that millions were in danger of losing even those extended benefits. Fortunately the Senate finally got around to extending those benefits for up to another 20 weeks (depending on the overall level of unemployment in that state). Still, unemployment benefits only replace a fraction of what people were earning before they lost their jobs. This means that as soon as people get their pink slips, they will reduce their spending. However, depending on how long they expect to be out of work, they do not bring their spending levels down all the way to their new unemployment insurance income level. There are all sorts of spending categories that are at least semi fixed. If you think you will get a new job soon, you don't cancel little Jimmy's ballet lessons, or Betty's karate lessons. Instead you draw down your savings and use your American Express (AXP) card more.

However, as the weeks go by and you get no response from all the resumes you sent out, more and more things start to go by the wayside. But still does it make sense to quit the country club and lose the $20,000 initiation fee you paid, especially now that you actually have time to use it? Well after a few months you have to bite that bullet too. In the meantime, your non-retirement savings are probably about gone. Going into this recession the savings rate had been close to zero, so it is a pretty safe bet that most people did not have a lot of savings outside their 401-ks or IRAs. You have probably run up your balance on your credit card, but the card companies are getting wise to that and are starting to cut back the available credit limits for millions of accounts. That is a wise move on their part individually, but collectively for the economy, it acts to reduce overall demand.

Oh, and since a big factor in your credit rating is how much credit card debt you have relative to your available limit, both increasing your balance and the bank cutting back your maximum availability will conspire to knock off more than a hundred points from your FICO score. In past downturns, especially recent ones, if the unemployed person were a homeowner, he could tap the equity in the house. Now with millions and millions of homes worth less than the amount of the mortgage, or at least very close to it, that option is not open. Indeed this time around it seems that people are more likely to go in the other direction.

To survive, they are simply not paying on their mortgage and waiting for the sheriff to show up at the door to kick them out. Given the huge numbers of people who are falling behind on their mortgages, and to political efforts to slow the rate of foreclosures, this is actually a very rational strategy. In many parts of the country it has been possible to live rent and mortgage free for well over a year before actually getting kicked out of the house. That can free up a lot of cash to spend on other things. However, it is very bad news for the banks that lent the money like Bank of America (BAC) and Wells Fargo (WFC). It is also going to become a serious issue for the Federal Reserve since it is in the process of buying $1.25 trillion worth of mortgaged backed paper. True, the paper is guaranteed by Fannie (FNM) and Freddie (FRE), but since the taxpayers own 80% of both of them, what is the difference? People have to start tapping their 401-ks and IRAs. While the stock market has recovered nicely, it is still far below its peak, making that option even more painful, along with the 10% penalty imposed if you start to withdraw money from those accounts before retirement age.

By the time people have been out of work for six months or more, they have usually depleted their financial resources. Remember that on average, someone who is out of work has been out of work for 26.9 weeks now, and half of all the unemployed have been looking for work for more than 18.7 weeks. That smashes any record prior to this downturn. At the worst point in the Reagan recession, half of all the unemployed were out of work for more than 12.3 weeks. In fact, since the median duration started being tracked at the beginning of 1967, the median duration has only been in the double digits for 36 of those 502 months, and 14 of those have been during his downturn.

To those who say the stimulus bill has not helped, tell that to the almost 5.6 million people who have been out of work for more than six months. If not for the emergency benefits in that bill, they would be left with no income as soon as they passed that mark. I suspect that the vast majority of people who are in that category assumed that they would have found a new job by now when they first got laid off, and thus did not cut back their spending as fast as, in retrospect, they should have when they first got their pink 
slip.



It is long term unemployment that is the hallmark of a recession. The graph below shows the number of unemployed (in thousands) in each duration group back to 1960. This is not adjusted for the rather substantial increase in the total population over that period, so some upward trend to the numbers would be normal. Notice how stable the pink short term unemployment line is. There are always people getting laid off, and people getting hired. In good times, the number of people becoming unemployed does not really fall that much, it is just that they don't stay unemployed for all that long. They are either able to find a new job quickly, or in the case of many manufacturing jobs, get called back to work by their previous employer.

The light blue line of moderate length unemployment (5 to 14 weeks) shows a little bit more cyclical behavior, but nothing like the two longer term measures, the yellow 15 to 26 week group and the dark blue over 26 week long term group. What is striking about this recession is just how high that long term dark blue line has soared. While these graphs do not have the recession bars in, I would note that the level of long term unemployment usually continues to rise for many months after a recession ends. The shorter term groups tend to turn down well before the long term group does. This means that the situation is likely to continue to get worse before it gets better.



When these people do return to work, it is highly unlikely that they will be earning anything close to what they were earning before they got laid off. Many will be homeless, without any savings and in pretty desperate shape. We have already seen a steep rise in the poverty rate, which rose to 13.2% in 2008 from 12.5% in 2007 (see Census Bureau: Poverty Rising and Income, Poverty & Health Insurance).

Among children, the poverty rate rose to 19.0% in 2008 from 18.0% in 2007. I would be shocked if it does not exceed the one in five level when the statistics come out next summer for 2009. Since health care coverage is largely tied to employment in this country, the rising number of unemployed means that the number of people without health insurance, already at 46.3 million in 2008, is likely to jump further. While it is true that the stimulus package did subsidize COBRA insurance by as much as 65%, by the time people are unemployed for more than six months, it is very difficult for most of them to be able to afford even those subsidized premiums. When those people get sick, their only option is to go to the hospital emergency room, which is a very expensive and inefficient way of being treated. It is not free either, the hospital will try to bill them for the services, and even send debt collectors on them, although in most of these cases they will be trying to get blood from a stone.

For many, it simply means that they go without treatment, other than over-the-counter medicines they buy at Walgreen's (WAG). If it turns out to be something more serious, it very often results in death. A Harvard study recently estimated that 46,000 Americans die prematurely each year because of a lack of health care coverage. That is a national disgrace.

While unemployment is a lagging indicator of the economy, it does play a role in the economy going forward. It will be very hard to sustain the surprisingly strong growth we have seen in recent months if we don’t start to see some improvement in the employment picture. Yes, huge improvements in productivity are good, but people on the ground need jobs.

After the house vote, financials slumped 1.5% and led the decliners among the S&P 500 industry groups.  Analyst Meredith Whitney noted the biggest U.S. banks may face declining values on home-loan bonds with government backing as the Fed moves towards ending its $1.25 trillion purchase program.  Whitney said bank earnings are far from approaching "normalcy," and will reflect regulatory changes for an extended period.  JPMorgan (NYSE:JPM) fell 1.2% to $42.21 and Wells Fargo (NYSE:WFC) retreated 3.1% to $26.82.  Citigroup (NYSE:C) slipped 1.7% to $3.97.

On Wednesday, the 30-stock Dow Jones industrial average closed up 30.23 points, or 0.31%, at 9,802.14.  The broad Standard & Poor's 500-stock index edged was up 1.09 points, or 0.10%, at 1,046.50.  The tech-heavy Nasdaq ended the day almost unchanged.  On the New York Stock Exchange, eight stocks advanced for every seven that declined as volume slowed to 1.35 billion shares.

Meanwhile, gold prices continues their upward run and hit an intraday record high of $1098.50, before giving up most of that gain to settle at $1087.30.  The US dollar retreated 0.5% against a basket of currencies.

Yesterday, investors breathed a sigh of relief after the Fed’s announcement to keep interest rates near historically low levels for an extended period.  The Fed, in its policy assessment, noted the economic activity was likely to remain weak for some time and ruled out any plans of a premature exit.  As it continued with its highly accommodative monetary stance, the Fed offered a reminder that the current recovery still lacks strength to be self-supportive.

Healthcare shares Wednesday rose 1% and led the gainers within the S&P500 industry sectors as Republican gubernatorial wins were seen as votes against President Obama's healthcare initiative, likely to result in further delays to changes to the healthcare program. The Senate unanimously voted to extend jobless benefits and broaden homebuyer tax breaks, with the Congress expected to vote before week's end. Helped by the news housing shares finished higher, with Pulte Homes (NYSE:PHM) up 3.5%, Lennar (NYSE:LEN) up 3.4%, and DR Horton (NYSE:DHI) adding 3.2%.

Chicago, IL – November 5, 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: Time Warner Inc. (TWX), Fannie (FNM), Freddie (FRE), Citigroup (C) and Bank of America (BAC).

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 AnalystBlog:

Time Warner Tops Zacks Consensus

Despite tough macro-economic conditions, Time Warner Inc. (TWX), the global leader in media and entertainment businesses, reported better-than-expected third-quarter 2009 results that topped the Zacks Consensus Estimate.

The quarterly earnings of 61 cents a share beat the Zacks Consensus Estimate of 52 cents, but dropped 6% from 65 cents delivered in the prior-year quarter. On a reported basis, including one-time items, quarterly earnings came in at 55 cents a share, sharply down by 38% from 89 cents posted in the year-ago quarter.

On account of better-than-expected results at its Content Group -- comprising Networks, Filmed Entertainment, Publishing and Corporate segments -- Time Warner boosts its business outlook. The company now expects its full year 2009 earnings to be $2.05 per share, up from $1.98 previously anticipated.

The Fed Stays on Easy Street

The Fed did back off its quantitative easing program slightly. It is done with the program of buying $300 billion of longer-term T-notes, and is continuing its program of buying $1.25 trillion of mortgaged-backed securities. It did, however, slightly reduce its planned purchases of Fannie (FNM) and Freddie (FRE) debt, from $200 billion down to $175 billion. In the overall context of the quantitative easing program, the reduction is trivial. It is, however, a sign that the program will not be expanded, nor is it likely to be renewed after the current program is completed by the end of the first quarter.

There had been a few Fed types who had been making speeches about the need to bring things back to normal sooner rather than later, but when the rubber hit the road, they are still on board with the program.

Overall, the Fed seems to understand that the weak economy is the overriding problem. Yes, things are getting better, but given the sluggish pace of improvement, this is not the time to be taking away the punch bowl.

This would be in keeping with historical precedent. Following the end of the 2001 recession, the Fed waited 32 months before it started to raise rates, and then it did so at a very gradual 25 basis points at a time. Following the 1991 recession it waited 35 months.

So assuming that the NBER eventually determines that the recession ended in July 2009, history suggests that the Fed will not begin to raise rates until the first quarter of 2012. The last two recessions were far milder than this one, which would argue that the Fed should stay on easy street for even longer this time around.

The problem is that keeping rates so low for so long the last time was a key factor in allowing the housing bubble to form. Still, the balance of risks seems to be on the side of an economic relapse, not of an overheating that causes inflation to soar.

Keeping rates low means that we will have a steep yield curve. A steep yield curve allows banks to make a lot of money, since their economic function is to borrow short term, and lend long term. The idea is that if the curve is kept steep enough long enough, even basket-cases like Citigroup (C) and Bank of America (BAC) will be come solvent again.

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The FOMC Policy statement is scheduled today at 2:15 PM EST at the conclusion of the Board of Governors 2-day meeting, where the basis of discussion will be the Fed's Beige Book which was published 2 weeks prior.

Upcoming Releases
ISM Non-Manufacturing Index (11/04 at 10:00 AM EST)
FOMC Policy Statement (11/04 at 2:15 PM EST)
Initial Claims (11/05 at 8:30 AM EST)
Unemployment Rate (11/06 at 8:30 AM EST)

On Tuesday, the 30-stock Dow Jones industrial average closed down 17.53 points, or 0.18%, to 9,771.91.  The broad Standard & Poor's 500-stock index added 2.53 points, or 0.24%, to 1,045.41 and the tech-heavy Nasdaq advanced 8.12 points, or 0.40%, to 2,057.32.  On the NYSE, volume slowed to 1.38 billion shares.  

The news of a sale of 200 tons of gold to India sent gold futures surging $32.10 to $1086.  Treasury prices declined with the 10-year off 16/32 to 101-08/32 and the corresponding yield surging to 3.47% from 3.41% Monday.      

Burlington Northern (NYSE:BNI) surged 28% to $97 after the $26 billion offer from Berkshire.  Technology stocks were under pressure following a Morgan Stanley (NYSE:MS) analyst downgrade of semiconductor companies. Intel (NASDAQ:INTC), the world’s biggest computer-chip maker, fell 2.7% to $18.50 and Novellus Systems Inc. (NASDAQ:NVLS) declined 5.2% to $19.71.  Shares in basic materials, oil and gas and industrials rose 1.8%, 1.5%, and 1.3%, respectively in yesterday's trade.  Meanwhile, automakers reported October sales numbers mostly higher from a year ago.  General Motors (NYSE:GM) posted its first y/y sales gain, in nearly two years, as its sales rose 5%; Ford (NYSE:F) said its sales rose 3%; Toyota (NYSE:TM) sales, although flat, were ahead of estimates of a 6% decline.  Chrysler sales fell 30%.

Nevertheless, corporate earnings so far have continued to beat Wall Street estimates, with 84% of the S&P500's 358 firms reported so far currently beating Street estimates.  Meanwhile, the S&P 500 is currently trading 55% above its 12-year low hit on March 9. 

Today’s earnings calendar includes quarterly reports from the following: Comcast (NASDAQ:CMCSA), Time Warner (NYSE:TWX), News Corp. (NYSE:NWS), Prudential (NYSE:PRU), Qualcomm (NASDAQ:QCOM), Devon Energy (NYSE:DVN), and Becton Dickinson (NYSE:BDX).

The strong third-quarter earnings season to date and the equally strong third-quarter GDP report are evidence that the market's impressive run up from its March lows had a basis - that it was not based on wishful thinking. The recession's unofficial end, albeit with substantial government help, was important.

With temporary fiscal stimulus measures, particularly the cash-for-clunkers and first-time home buyer credit programs, accounting for a big chunk of the third quarter growth. It is fair to be concerned about the sustainability of economic growth going forward. There is still substantial fiscal stimulus in the pipeline, which should keep the economic engine running, at least through the middle of next.

We need to see the growth baton passed on from the government to the private sector, with some favorable evidence that trends in investment and hiring are on the mend. Later this week (Friday), we will get the October employment. With about a tenth of the workforce out of work, the labor market weakness remains a major problem. We have been steadily seeing the job loss rate come down, with October losses expected to be around 166,000, down from the September level of 263,000 jobs lost.

What it all comes down to is that the economy is on the mend and further evidence of the sustainability of the economic growth will help push the broader markets higher. While lack of visibility and conviction is expected to keep the market range bound, I do not see any major downside risk near term.

Portfolio Updates

Last week, we added one and sold three stocks from the Focus List.

Cantel Medical Corp. (CMN) was added to the Focus List. This medical supply company specializes in preventing and controlling infections, including H1N1. The company's estimates are going up, after a 65% jump in quarterly earnings.

China Fire and Security Group (CFSG) was removed from the portfolio to cut losses resulting from the loss of momentum in Chinese equities.

Canadian Natural Resources (CNQ) was removed to take profits in the face of negative estimate revisions, as two out of the five covering analysts cut their estimates in the last 30 days.

Carter's Inc. (CRI) was removed following the company's announcement of a delay in its quarterly earnings report due to an accounting issue around its wholesale customers. While the stock had already lost around 25% of its value after the announcement, we are not comfortable owning names grappling with issues like these.

Zacks Investment Research

Revisions

We're all tempted to make predictions on the basis of the last data point. And even more difficult to resist is the temptation to make definitive statements on the basis of data that are sure to be revised. For instance, we see this question from Casey Mulligan, "Where's the GDP Disaster?".

Last October, when we were told that spending and incomes were about to collapse, I predicted that "real GDP will not drop below $11 trillion (chained 2000 $)."

Professor Mulligan provides this graph.

I think this is an excellent time to recapitulate the hazards of making definitive assessments on the basis of data that are sure to be revised [0] [1]. To illustrate this point, I go back to the last recession, which according to the NBER extended from 2001Q1-01Q4.

I plot the vintages of GDP in Ch.1996$ available as of April 2002 (the advance release for the first quarter after the recession ended), and October 2003 (advance release for 2003Q3).

Note that GDP in the latter vintage was 1.6% lower (in log terms) in 2001Q2 than it was in the corresponding period according to the earlier vintage. This amounted to a 5 148.6 [corrected 11/1, 10:35am] billion Ch.1996$ difference.

Now, I replicate Professor Mulligan's graph. I draw Professor Mulligan's floor, along with real GDP, and an alternate for 09Q1-09Q2 that would obtain if GDP turned out to be 1.6% lower in a later vintage.

I calculate GDP in Ch.2000$ by dividing the 2005-base chained price index by the average value of the index in 2000, which is 88.648, and then dividing nominal GDP by this base-year-2000 index.

The graph indicates that in 09Q2, GDP was only 2.3% above Mulligan's floor.

And Conditional Forecasts

In some sense, the critical aspect of Professor Mulligan's argument that the events of 2008-09 were never going to be disasterous is that he made his projection conditional on none of the extraordinary measures undertaken by the Fed, nor on the the fiscal stimulus by the Federal government being implemented. It's useful to recap his statement from October:

NO DEPRESSION; NO SEVERE RECESSION

The medium term fundamentals point toward more real GDP, more employment, and (to a lesser degree) more consumption. Some employment and real GDP declines may occur in the short run, but they will be small by historical standards. Professor Cooley recently explained "The losses to date represent less than .5% of the work force. In the relatively mild recession of 2001 to 2002, job losses equaled about 1% of the work force. In the much more severe recession of 1981 to 1982, job losses totaled nearly 3% of the labor force--six times today's figure. And in the (truly) Great Depression--invoked, now, with an alarmist frequency--job losses between 1929 and the trough in 1933 were 21% of the labor force." Note that 21% over 3 1/2 years is an average decline of 2% every quarter for 14 consecutive quarters! If employment declines 2% in even one quarter, or 5% over a full year, I will admit well before 2010 that a severe recession is happening and that my 2010 forecasts are unlikely to be attained.

According to the BLS, national nonfarm employment was 136,783,000 (SA) at the end of 2006, as the housing price crash was getting underway. Real GDP was $11.4 trillion (chained 2000 $). Barring a nuclear war or other violent national disaster, employment will not drop below 134,000,000 and real GDP will not drop below $11 trillion. The many economists who predict a severe recession clearly disagree with me, because 134 million is only 2.4% below September's employment and only 2.0% below employment during the housing crash. Time will tell.

Now, I assume that Mulligan feels free to compare a forecast conditioned on no fiscal policy against one with fiscal policy to the extent he believes multipliers are near zero or even negative. And perhaps he believes money is neutral in the short run. If so, then of course it's fine to make the comparisons he does. But for those of us who believe that monetary and fiscal policy have textbook effects, then making that comparison is problematic. In the absence of these stimulus measures, I believe we may very well have breached that 11 trillion floor.

To see this, consider CBO's assessment that by 2009Q4, the stimulus package would have an impact of between 1.4 to 3.8 ppts of baseline GDP. The midpoint is 2.6 ppts. That's well within the range of the Mulligan floor.

So, to conclude, in my view, a "GDP disaster" would have occurred in the absence of aggressive actions by the Federal Reserve, the US Government, as well as fiscal and monetary authorities abroad.

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: Moody’s (MCO), Microsoft (MSFT), Fannie Mae (FNM), Freddie Mac (FRE) and ExxonMobil Corporation (XOM).

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Here are highlights from Thursday’s AnalystBlog:

GDP Notes – In Depth

With massive amounts of space sitting idle in offices and empty strip malls littering the landscape, look for new investment in commercial real estate to continue to decline in coming quarters. Moody’s (MCO) has estimated that the value of commercial real estate has plunged by 41% since the peak a little over a year ago, and that is hardly an inducement to build more. If a business needs the space, it's far cheaper to just buy some that already exists.

Spending on Equipment and Software (E&S), on the other hand, is starting to come back, if only feebly -- rising 1.1% after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q. Look for some stability in this line going forward as the new Microsoft (MSFT) operating system will probably generate a new PC cycle, but with capacity utilization still around 70% I would not expect a boom in orders for new factory equipment.

The real star of Fixed investment, though, came on the residential side, which rose 23.4%. This is the first increase in almost four years, and follows declines of 23.3% in the 2Q and 38.2% in the 1Q. The long string of declines had brought residential investment to a record low share of GDP. The extraordinary support of the housing sector by the government, including the first-time buyer tax credit -- the Fed buying up $1.25 Trillion of Fannie Mae (FNM) and Freddie Mac (FRE)-backed paper to artificially suppress mortgage rates, and the FHA acting like the old New Century Financial or Washington Mutual on their worst days -- have played a big role in the turnaround. I seriously question the sustainability of it after the support is removed, and I don’t think the support can continue indefinitely.

Exxon Misses, Production Up

ExxonMobil Corporation (XOM) reported third quarter 2009 earnings of 98 cents per share, below the Zacks Consensus Estimate of $1.04 and year-earlier earnings of $2.58.

Though the earnings came in below expectations, the company maintained its quarterly dividend of 42 cents per share and repurchased $4 billion worth of XOM common stock. With a sound cash position, solid credit profile and diversity of its asset base, both in terms of business mix as well as geographical footprint, Exxon remains better positioned than any of its peers.

The steep fall in oil prices and weak product margins caused a 65% drop in earnings from the year-earlier quarter to $4.7 billion. The production of oil and natural gas averaged 3.69 million oil-equivalent barrels per day, up approximately 3% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was up about 5%. Its refinery throughput averaged at 5.35 million barrels per day, flat from the year-earlier level.

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Chicago, IL – October 29, 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: Beazer (BZH), Lennar (LEN), Fannie Mae (FNM), Freddie Mac (FRE) and WellPoint, Inc. (WLP).

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Here are highlights from Wednesday’s AnalystBlog:

New Home Sales Sink, Credit Rising

For the month, median prices rose 2.45%, although they are still down 9.1% from a year ago. Average prices posted an even stronger rise, up 10.1% on the month and down just 1.6% from a year ago. That probably is mostly a reflection of the regional trends, as housing is far more expensive in the Northeast than it is in the South.

This report should take some of the wind out of the sales of the homebuilders like Beazer (BZH) and Lennar (LEN), which have had spectacular rallies off their lows earlier this year. While new home sales are just a small fraction of the total home sales (existing home sales were at an annual rate of 5.57 million in September while new home sales were at a rate of just 402,000), they do make a much bigger difference to GDP growth. Residential investment has been a consistent drag on GDP for almost four years now. Even with this month's weak report, the level of drag from housing on GDP should be much less in the third quarter than it has been in a long time.

One would have expected a much stronger month for new home sales with the end of the first-time home buyer tax credit looming at the end of November. It now looks like the credit is not only going to be extended, but it is going to be expanded.

The program so far has been extremely expensive and has for the most part rewarded people who would have bought anyway. It has also been riddled with fraud. However, the realtors are a strong lobby and have members in every Congressman’s district.

The extension is even worse economics than the original program and just plain bad when it comes to equity, as it will be available to move-up buyers now, including people who are earning as much as five times the median household income. At least with first-time buyers it was moving people from being renters to being owners. While that will have some adverse unintended consequences of driving up rental vacancy rates and putting more pressure on rents (and thus making commercial real estate even more of a mess than it is now), at least it does sop up some fo the inventory of formerly foreclosed homes.

With move-up buyers there is no impact on inventories, as they will be putting one house on the market for every one that is taken off. Now it is just subsidizing people who want to move up to a bigger house.

Why should taxpayer money be spent for this? I see no social good that comes from this expenditure, except that it props up the value of housing assets. With millions of vacant houses across the country, and millions of people homeless, why is the nation so afraid of housing that people can actually afford?

Trying to use tax money to prop up asset values, especially for an extremely large asset class is in the long run doomed to failure. What happens after April of 2010 -- do we expand this turkey of a program even more? If not, housing prices are likely to resume falling then. By then as well, the Fed is supposed to be finished with its $1.25 Trillion purchase program of mortgage backed paper issued by Fannie Mae (FNM) and Freddie Mac (FRE).

When that program ends, mortgage rates are likely to rise sharply. We could be looking at some serious ugliness come next spring as a result. In the meantime, at a time of very problematic federal deficits, we are spending billions to subsidize the relatively well-off for what, in most cases, they already would have done.

WellPoint Beats, But Revenue Dips

WellPoint, Inc. (WLP) reported third quarter earnings of $1.78 per share, which was above the Zacks Consensus Estimate of $1.39, and the year-ago earnings of $1.58.

Total operating revenues declined 0.7% to $15.2 billion. The decline was primarily attributable to the lower fully insured enrollment in 2009, including WellPoint‘s withdrawal from certain State Sponsored programs.

Operating gains for the Commercial Business segment decreased 30.9% to $628 million in the reported quarter. The decline was due to higher overall administrative costs, a reduction in fully insured enrollment and an increase in the benefit expense ratio for the Local Group business. Operating gains for the Consumer Business segment increased 115.2% $520.0 million in the quarter.

Operating improvements in the senior business helped drive growth in this segment. The Other segment reported a 68.8% year-over-year increase in operating gains, which was driven by growth in the company’s NextRx pharmacy benefit management operation.

We were disappointed to see a significant decline in medical enrollment in the reported quarter. Medical membership for the quarter came in at 33.9 million, which represented a decrease of 4.2% from the year-ago quarter.

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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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Web Content Editor
312-265-9380
Visit: www.zacks.com

Matt’s argument is that “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 ETNs) can sell out of the product within 48 hours and get the full net asset value of the note from the issuer.”

In other words, even if you become concerned about the credit risk of the issuer and there is insufficient liquidity in the secondary market for you to trade, you can get out of a position by selling it back to the ETN issuer.

I agree with Matt that the tax treatment of ETNs gives them a huge advantage for US investors (ETNs are taxed at long-term capital gains tax rates and only on a deferred basis when sold, rather than annually like ETFs). ETNs also offer superior tracking ability since the issuer bank guarantees to pay you the relevant index return.

It’s also undoubtedly true that the credit risk component in banks’ unsecured debt (of which ETNs are a part) has dropped substantially this year, as can be easily seen by plotting a chart of credit spreads or from a glance at the counterparty risk index, so the market is telling investors that the risks of ETNs are nowhere near as large as they were (less than a third the levels of February this year, in fact, if you look at an average of issuers’ CDS spreads).

All the same, I’m a little uneasy about his argument.

Matt’s reassurance that you can put back an ETN holding to the issuer within two days, giving you time to get out if there are problems, sounds fine in theory but may not offer you full protection in practice.

There was a fascinating article yesterday on Bloomberg in which reporters Richard Teitelbaum and Hugh Son tell us that during the summer months of last year, AIG was trying to write down – by up to 40% – the value of credit default swaps it had written to banks.

The central thrust of the Bloomberg article is that the Fed, which paid out AIG’s unsecured creditors at par, was more generous than it needed to be by paying out counterparties in full rather than enforcing a “haircut”.

The reporters quote Janet Tavakoli, a credit market specialist, as saying, “There’s no way they should have paid at par. AIG was basically bankrupt.” As an example of a haircut being applied in similar circumstances, the article cites a case involving Citigroup Inc., which last year agreed to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a US$1.4 billion CDO.

What’s the relevance of all this to ETNs? Well, the whole question of whether unsecured bank creditors (such as ETN holders) should be protected by the authorities or forced to accept some cut in the amount they are due if the institution concerned gets into difficulties (or, for example, to suffer a forced conversion into equity) has been swept under the carpet since credit market concerns peaked earlier this year, but it hasn’t gone away.

If anything, given public disquiet at the way banks have gone back to “normal” in their pay policies while still relying on taxpayer support, I’d argue that it would be much harder for governments to convince the public that financial institutions must be saved at all cost should we enter a second round of the credit crisis.

But, more importantly, the Bloomberg article tells us that a writedown of creditors’ claims against AIG could quite conceivably have been negotiated and then imposed across the board with little or no warning. Such negotiations were apparently going on in private and, while they didn’t lead to any settlement, it would be foolish to imagine that such a scenario could not happen again.

So, all in all, Matt, while I agree that unsecured debt exposure to banks via ETNs may well make sense for a number of reasons, this type of investment instrument is likely to remain a poor cousin to ETFs in the tracker market. With almost all ETFs, investors are collateralised and shouldn’t have to lose sleep at night over credit risk.

[This blog originally appeared on IndexUniverse.eu, the leading source for insight and analysis into the European ETF market.]