3rd-Quarter Results

Revenue was up 10% from last quarter and more than double last year's at $12.4 billion. Earnings also came in strong at $5.25 per share, $1.12 ahead of the Zacks Consensus Estimate. Goldman has beat in each of the last 2 quarters by an average of 34%.

Strength in the company's trading division, with revenues totaling $10 billion helped make up for a 38% decline in Goldman's investment banking division. The company also noted that its Tier 1 capital ratio, a key regulatory financial metric, increased to 14.5% from 13.8%.

Estimates and Valuation

Based on the current-year estimate of $17.70, shares of GS trade with a P/E of 10X, a discount to the overall market.

The Chart

Shares of Goldman have been posting big gains since bottoming out in November of last year. Take a look at the smooth trend higher in the chart below.

Last Week's Momentum Zacks Rank Buy Stocks

Target Corp. (TGT) is jumping higher as the company benefits from its value oriented consumer approach and a resurgence in consumer confidence. Read Full Article.

Legg Mason, Inc. (LM) is surging ahead of its Q3 results set to be delivered on Oct 22, helped by rising estimates and a financial sector recovery. Read Full Article.

E-House China Holdings Ltd. (EJ) has beat in each of the last 4 quarters by an average of 46% and recently projected 100% Q3 sales growth from last year. Read Full Article.

TransMontaigne Partners LP (TLP) has been a steady player over the last year in a very volatile environment, surprising and beating in each of the last 4 quarters by an average of 11 cents, or 24%. Read Full Article. Zacks Investment Research

Australia's decision dented demand for the U.S. dollar, which, in turn, raised commodities prices.  US energy and materials stocks moved up, oil also rose, and gold reached a record high.  Stock investors cheered the drop in the dollar because it boosts corporate profits by making U.S. goods cheaper for overseas buyers. Companies can also get a bump in profits when they convert sales made in foreign currencies to dollar terms. The dollar has been falling for months so that added to expectations for positive corporate profit reports.

Five stocks rose for each that fell on the NYSE.  Producers of energy and raw materials had the two biggest advances in the S&P among 10 industries, rising about 2.1% and 1.9% respectively.

Financial sector shares (up 1.1%) received another boon, over and above Goldman's (NYSE:GS) upgrade of large-cap banks on Monday, as Bank of America/Merrill (NYSE:BAC) upgraded European banks to "overweight".  Gains in the financial sector included a 2.5% increase in JP Morgan (NYSE:JPM), 3.2% in Morgan Stanley (NYSE:MS) and 2% in Wells Fargo (NYSE:WFC).

Deal activity has also picked up steam, lifting confidence in financial markets.  Banco Santander (NYSE:STD) raised over $8 billion in an IPO of its Brazilian subsidiary.  ExxonMobil (NYSE:XOM) announced its has agreed to pay $4 billion for Kosmos Energy's 23.49% stake in the Jubilee oil field off the coast of Ghana.  Societe Generale said it intends to raise $7.1 billion in new shares to repay the French government, buy the 20% of Credit Nord it doesn't currently own, and improve its Tier 1 ratio.

Gold futures advanced as high as $1,045 an ounce in New York, topping the 18 month record of $1,033.90, on speculation that anticipated accelerating inflation will spur demand for the precious metal as a store of value.

The U.S. dollar index was off 0.31 at 76.33 in late trading, but up from its 76.22 session low after the Saudi Arabian central bank chief denied an Independent newspaper report that the Saudis and other Arab producers planned to price oil on a basket of currencies, instead of the dollar.

Observers believe that the decline of just over 4% on the S&P 500 prior to this week’s stellar stock movement seemed to give investors the entry point they were looking for to build positions on stocks.  "I think that most people believe that stocks are going to generally keep drifting higher for the next few months," said Gary Webb, CEO at Webb Financial Group. "So while nothing fundamental has changed this week, investors are taking opportunities to buy on the lows."

Nobel Prize winning economist Joseph Stiglitz added that US unemployment will keep rising and should be the focus for policy makers.  Gains in the stock market show that investors have been “irrationally exuberant" about a recovery.  

New York Fed President William Dudley said a tepid economic recovery should allow the Fed to keep interest rates at rock-bottom lows for a prolonged period.  Because the U.S. economy faces many headwinds, including an anemic labor market and a fragile banking system, Dudley said, inflation will not become a problem in the foreseeable future. "The recovery will turn out to be moderate by historical standards," Dudley said in a speech at Fordham Law School. He added that "the banking system has still not fully recovered."

Earnings are due today from Costco (NASDAQ:COST), Family Dollar (NYSE:FDO) and Alcoa (NYSE:AA).

Goldman's well-diversified business model, coupled with a more favorable operating environment resulting from improved equity markets, led to strong growth in fixed income and a turnaround in investment banking activity.

Though losses from the commercial real estate portfolio will likely weigh on the results in the near term, we think Goldman's sturdy capital and liquidity will lead to increased profitability from newer opportunities once the economy recovers.Zacks Investment Research

The economic calendar is also quiet to start the first "real" trading week in September, as Wall Street comes back from August vacations. It's a shortened trading week due to the Labor Day holiday on Monday.

• Monday: Markets closed for Labor Day
• Tuesday: ICSC-Goldman Store Sales, Redbook
• Wednesday: Beige Book
• Thursday: International trade, weekly jobless claims, weekly natural gas inventories, weekly crude inventories
• Friday: Import and export prices, University of Michigan consumer sentiment survey for September, Treasury budget

Companies That Could Issue Negative Earnings Surprises

Smithfield Foods (SFD), the largest hog and pork producer in the U.S., is struggling as pork demand falls due to the recession and worries about pork products somehow being connected to the swine flu. According to a Reuters report, the company has cut its hog breeding herd by 13% this year. Higher feed costs are also pressuring the food manufacturer.

While Smithfield has surprised on estimates 3 out of the last 4 quarters, covering analysts have been lowering the estimates going into the fiscal 2010 first quarter earnings release. In the last month, the Zacks Consensus Estimate has fallen 4 cents to a loss of 55 cents. It is scheduled to report before the market opens on Sep 8.

Keep an eye on the Aerovironment Inc. (AVAV), the maker of unmanned aircraft systems, as it reports its fiscal 2010 first quarter earnings. The Zacks Consensus Estimate has fallen by nearly 50% to 13 cents in the past 90 days. The most accurate estimate is even more bearish at 6 cents per share. The company is scheduled to report on Sep 8 after the market close.

Earnings Calendar

Here is a list of companies that we have confirmed will report during the week of Sep 8 - 11*. Prices are as of Thursday's, Sep 3, market close.

Company	Stock	Zacks Estimate	Year Ago EPS	Last Qtr Surprise	Date	Time	Price
Aceto Corp	ACET	0.11	0.32	-33.33%	9/11/2009	BTO	$6.56
Aerovironment	AVAV	0.13	0.22	3.85%	9/8/2009	AMC	$28.99
Brady Corp Cl A	BRC	0.41	0.64	12.12%	9/11/2009	BTO	$29.79
Caseys Gen Strs	CASY	0.6	0.6	-13.89%	9/8/2009	AMC	$28.26
C&D Tech Inc	CHP	-0.13	0.05	-146.67%	9/8/2009	BTO	$2.08
Campbell Soup	CPB	0.26	0.26	14.29%	9/11/2009	BTO	$30.88
Descartes Sys	DSGX	0.08	0.03	28.57%	9/10/2009	BTO	$4.27
Fuelcell Energy	FCEL	-0.25	-0.39	3.33%	9/8/2009	AMC	$3.43
Finisar Corp	FNSR	0	0.04	0.00%	9/10/2009	N/A	$0.86
Hooker Furnitur	HOFT	0.07	0.18	-100.00%	9/10/2009	N/A	$13.25
Harry Winston	HWD	-0.05	0.81	50.00%	9/10/2009	AMC	$6.82
Investors Rl Es	IRET	0.21	0.2	0.00%	9/9/2009	AMC	$9.07
Wiley (John) A	JW.A	0.38	0.5	-4.55%	9/9/2009	BTO	$31.51
Korn/Ferry Intl	KFY	-0.06	0.36	-83.33%	9/9/2009	BTO	$12.84
K12 Inc	LRN	-0.02	-0.01	9.09%	9/9/2009	BTO	$18.88
Lululemon Athlt	LULU	0.1	0.18	12.50%	9/10/2009	BTO	$19.79
Mds Inc	MDZ	0.01	0.06	-33.33%	9/10/2009	BTO	$7.51
Mitcham Inds	MIND	-0.09	0.16	-116.67%	9/8/2009	AMC	$5.39
Mens Wearhouse	MW	0.59	0.72	0.00%	9/9/2009	AMC	$25.25
Nci Bldg System	NCS	0.02	1.63	-164.29%	9/9/2009	AMC	$2.58
Natl Semicon	NSM	0.07	0.33	40.91%	9/10/2009	AMC	$15.39
Omega Navigat-A	ONAV	0.2	0.38	-5.88%	9/8/2009	AMC	$4.02
Ocean Power Tec	OPTT	-0.44	-0.38	33.96%	9/9/2009	N/A	$3.84
Pep Boys M M &J	PBY	0.15	0.11	50.00%	9/8/2009	AMC	$8.70
Piedmont Nat Ga	PNY	-0.11	-0.1	10.61%	9/9/2009	BTO	$24.24
Safe Bulkers	SB	0.61	0.82	75.38%	9/8/2009	AMC	$6.83
Smithfield Food	SFD	-0.55	-0.02	3.51%	9/8/2009	BTO	$12.73
Shuffle Master	SHFL	0.07	0.11	50.00%	9/9/2009	AMC	$7.25
Signet Grp Plc	SIG	0.21	0.24	34.78%	9/9/2009	N/A	$23.51
Stewart Entrp A	STEI	0.08	0.1	37.50%	9/10/2009	N/A	$5.12
Smith & Wesson	SWHC	0.09	0.05	190.00%	9/9/2009	AMC	$5.19
Titan Machinery	TITN	0.18	0.19	-23.08%	9/9/2009	BTO	$11.89
Talbots Inc	TLB	-0.52	-0.34	53.06%	9/9/2009	BTO	$6.42
Utd Natural Fds	UNFI	0.36	0.3	14.71%	9/9/2009	BTO	$27.43
Xinyuan Real Es	XIN	0.05	0.1	140.00%	9/8/2009	BTO	$4.76
Zale Corp New	ZLC	-0.77	-0.48	-57.41%	9/9/2009	BTO	$5.55
Ciena Corp	CIEN	($0.21)	$0.29	(137.5%)	9/3	BTO	$13.62
Cooper Cos	COO	$0.62	$0.67	27.1%	9/3	AMC	$27.87
Del Monte Foods	DLM	$0.03	($0.04)	34.6%	9/3	BTO	$10.50
Esterline	ESL	$0.90	$0.68	(9.6%)	9/3	AMC	$31.43
G-Iii Apparel	GIII	($0.26)	($0.23)	19.6%	9/3	AMC	$15.21
Jackson Hewitt	JTX	($0.69)	($0.69)	(0.6%)	9/3	BTO	$5.90
Krispy Kreme	KKD	N/A	($0.03)	(1000.0%)	9/3	N/A	$3.11
Layne Christens	LAYN	$0.12	$0.78	(135.3%)	9/3	BTO	$26.86
Methode Elect-A	MEI	($0.24)	$0.27	37.5%	9/3	BTO	$8.76
Movado Grp Inc	MOV	($0.23)	$0.39	22.9%	9/3	BTO	$13.27
Quiksilver Inc	ZQK	$0.04	$0.22	25.0%	9/3	AMC	$2.94
Shanda Interact	SNDA	$0.82	$0.56	8.3%	9/3	AMC	$51.16
Uti Worldwide	UTIW	$0.18	$0.28	(28.6%)	9/3	BTO	$13.15
Ata Inc-Adr	ATAI	$0.08	$0.08	57.1%	9/4	N/A	$7.31
Barry R G Corp	GCFB	$0.00	($0.01)	0.0%	9/4	BTO	$8.50

BTO = Before The Market Open, AMC = After The Market Close

*Some of the companies listed in the earnings calendar may not be in the Zacks Rank universe.

Zacks Investment Research

Econbrowser is pleased to host another contribution from Scott Irwin, who holds the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois, and today offers some insights from his research on the current debate concerning commodity speculation.

Index Funds and Commodity Prices... Here We Go Again
by Scott Irwin

Some issues just will not go quietly into the night. The U.S. Senate's Permanent Subcommittee on Investigations released a report on June 23, 2009 concluding that excessive speculation by large index funds in the Chicago Board of Trade (CBOT) wheat futures market resulted in over-valued futures prices, a large "carry" in the futures price structure, and a wide divergence between futures and cash prices during the 2006 through 2008 period. These are serious charges, and judging by recent newspaper headlines, there is a receptive audience in the halls of Congress and on the part of some regulators.

If you read my previous Econbrowser posts on commodity markets ( here and here ) you should not be surprised to discover that I disagree with Subcommittee's conclusions. Rather than citing rigorous academic analysis of the problems in the CBOT wheat contract the Subcommittee chose to rely on finger-pointing by industry participants who were adversely affected by high prices and weak basis and on cursory analysis of temporal price, basis, and trading activity data. You can find an extended commentary on the Subcommittee report here by our research group at the University of Illinois.

To begin, the Subcommittee repeats the mistake of other "bubble" proponents by equating index fund money flows into wheat futures with demand for the physical commodity. Simply observing that large investment dollars flowed into the long side of the wheat futures market at the same time that futures prices rose substantially does not necessarily prove anything. Several recent studies use "Granger causality tests" and "cross-sectional" regression tests to establish that lagged position changes by any group, including index traders, do not help to forecast current futures price changes in a statistically significant manner (see our commentary and this paper for a brief review of the studies). This provides compelling evidence that index funds were not responsible for the run-up in grain and oilseed markets, particularly in the wheat market. Historically, price "spikes" have not been uncommon in the grain markets as market participants react to developments that are less permanent than anticipated. Such episodes are frequently attributed to speculation rather than the underlying fundamental factors responsible for the market situation.

If problems in the CBOT wheat futures market were not due to a speculative bubble in futures prices, then what was the problem? Our research at the University of Illinois pinpoints two major factors contributing to the lack of convergence between cash and futures price in wheat. The first factor is the tendency for spreads in the futures market to reflect a relatively high percent of full carry (contango) since 2006. The second factor is long-term structural deficiencies in the delivery system for CBOT wheat.

Large carrying charge markets contribute to lack of convergence by "uncoupling" cash and futures markets when futures prices are above cash prices. The delivery instrument for wheat was a warehouse receipt until recently when it was changed to a shipping certificate (starting with the July 2008 contract). Those longs who receive certificates or receipts from shorts in the delivery process are not required to cancel those instruments for shipment. The instruments can be held indefinitely with the holder paying "storage" costs at the official rates specified by the CBOT in contract rules. The taker in delivery (the long) may choose to hold the delivery instrument rather than cancelling the instrument by load out of physical grain if the spread between the price of the expiring and next-to-expire futures contracts exceeds the cost of owning the delivery instrument. Therefore, as the magnitude of the nearby spread exceeds the full cost of carry for market participants with access to low-cost capital, those participants can (and do) stand for delivery but do not cancel delivery certificates or receipts for load out. The lack of load out, then, means that deliveries do not result in cash commodity purchases by the taker that would contribute towards higher cash prices and better convergence.

The chart below illustrates the relationship between the magnitude of the carry in wheat and the basis (cash - futures price) at the primary delivery location for wheat, Toledo , on the first delivery date of each expiring wheat futures contract over March 2000 through July 2009. The percent of full carry is computed as (price of next-to-expire contract minus price of expiring contract)/(storage plus interest costs).

The chart is constructed so that the zero line for basis on the left y -axis scale corresponds to 80% of full carry on the right y -axis scale. While the pattern is not perfect, there is a consistent tendency towards poor convergence (wide basis) whenever the carry exceeds about 80% and better convergence when the carry is below 80%. Note that this pattern is evident not only during recent years but also in 2000-2001, when wheat experienced another period of non-convergence, albeit at much smaller basis levels. A similar relationship exists for corn and soybeans.

Of course, this only moves the debate back one step to explaining the large carrying charge in the wheat futures contract since 2006. The Senate Subcommittee concludes that the rolling of positions by index funds is responsible for the persistence of the large carry. Rolling refers to in dex funds entering market positions in the nearby contract and then moving the positions to the next contract before the maturity of the nearby contract. The evidence, however, does not support a conclusion that such rolling widened the spreads.

The following chart shows the behavior of nearby spreads for CBOT wheat during the first 13 business days of the calendar month prior to contract expiration for the March 1995 through March 2009 contracts. The time window for the analysis is centered on days 5 through 9, the time period of the so-called "Goldman roll" when index funds tend to roll their positions from the nearby to the next deferred contract.

The averages reveal a consistent increase in the size of the spread to the next contract (expressed as a percent of full carry) during "Goldman roll" days 5 through 9. However, the spike in the magnitude of the spread either disappears entirely or noticeably recedes during days 10 through 13, so rolling did not necessarily lead to a permanent increase in the magnitude of the spread. The spike in the magnitude of the spread during the roll period was also present long before convergence became an issue and before index funds had a major presence in these markets. This is not surprising since the time window when index funds roll to the next contract is also the same time period when many other traders roll their positions.

As noted above, the second factor contributing to recent convergence problems is underlying structural problems with the CBOT wheat delivery system. The fundamental problem is that changes in wheat production patterns, transportation logistics, and trade flows have left the contract with an increasingly narrow commercial flow of wheat to draw upon in the delivery process. For example, annual commercial shipments of wheat at facilities regular for CBOT delivery averaged only 28 million bushels over 2000-2008. By comparison, annual commercial shipments for corn and soybeans at delivery facilities averaged of 260 and 170 million bushels, respectively, over the same time period. This raises substantial doubts about the representativeness of Chicago and Toledo as wheat pricing and delivery points. Furthermore, there is a constant potential for congestion in the delivery process of CBOT wheat futures and the attendant distortion of cash and futures prices.

The underlying structural problems were generally ignored until recently when additional delivery locations were added by the CBOT starting with the July 2009 contract. Whether these additional wheat delivery locations will contribute to improved convergence performance is debatable due to the "safety valve" nature of the new location price differentials. Early evidence from the expiration of the July 2009 CBOT wheat contract is not encouraging.

Fundamental questions still remain regarding the performance of the CBOT wheat futures contract. First, what explains the increase in the level of carrying charges in the wheat futures markets since 2006? I believe it is likely a combination of CBOT contract storage rates that lagged market rates, congestion in the delivery process, and an increase in risk that had a large impact on stockholding behavior. Second, why does t he CBOT wheat contract, the most popular wheat contract in the world, appear to be widely used to trade "wheat" generically when the delivery market locations make the contract a soft red winter wheat contract at maturity? To the extent that world wheat and soft red winter wheat supply and demand fundamentals diverge, this can lead to a systematic tendency towards poor convergence performance. Third , what explains the seemingly anomalous behavior of commercial grain firms (e.g. ADM , Bunge , and Cargill ) during recent episodes of non-convergence? These firms are "regular" for delivery and can create delivery certificates virtually at will. As Craig Pirrong noted recently, it is not clear why these firms have apparently left so much money on the table by not arbitraging the very large differences between cash and futures prices. Understanding the motivation and strategies of these firms would be a far more informative line of inquiry than the current obsession with index funds.

Pre-market futures suggest a higher opening on the Wall Street, following better-than-expected earnings from Home Depot (NYSE:HD), which reiterated full-year guidance and reported a 44% jump in profit despite lower sales.

On Monday, U.S. stocks rallied as Lowe's (NYSE:LOW) improved earnings outlook fueled optimism of a rebound in housing sector.  Chief Executive Robert Niblock advised, "Encouraging signs in recent weeks that suggest perhaps the worst is behind us."  Lowe's (NYSE:LOW) jumped 8.1%. Shares of Home Depot (NYSE:HD) also rallied on the news and ended the day with a 6.6% gain.  Lowe's results beat Street expectations and the firm's full-year guidance was ahead of consensus views. Goldman (NYSE:GS) added Macy's (NYSE:M) to "conviction buy" list, citing its $400 million cost savings plan and a likely recovery in profits as the economic situation rebounds.

On Monday, the S&P 500 gained 3% to 909.71 for its steepest gain in two weeks. The Dow Jones Industrial Average added 235.44 points, or 2.9%, to 8,504.8.  The NASDAQ led the indices with a 3.1% advance to 1,732.

The National Association of Home Builders' latest Housing Market Index which rose to 16 from 14 in April suggested home builders are growing increasingly confident. Citigroup (NYSE:C) raised its rating on Lennar (NYSE:LEN) from "hold" to "buy;" Lennar (NYSE:LEN) shares jumped 13.7%.  Taking the cue, DR Horton (NYSE:DHI) rose 8.8%; Centex (NYSE:CTX) 8.4%, and KB Home (NYSE:KBH) 8.2%.

The 3-month LIBOR declined 4 basis points to 0.79%, its steepest fall since March 19 and market's volatility index, the CBOE Vix, plunged 8.70% to 30.24.  On the NYSE, advancing issues outpaced declining stocks by a seven-to-one margin.  Volume was relatively moderate at 1.42 billion.

Of the thirty DJIA components, twenty-nine closed higher on Monday.  Financials were the leading gainers, up 6.7%, followed by a 4.8% jump in basic materials stocks, 3.9% in consumer services, and 3.4% surge in oil and gas and industrial sector shares.

Among financial components, Bank of America (NYSE:BAC) led the advancing issues with a 9.9% gain, followed by a 7.8% jump in American Express (NYSE:AXP), and a 6.7% advance in JP Morgan (NYSE:JPM) stocks.  Morgan Stanley (NYSE:MS) shares jumped 8.2%, Goldman Sachs (NYSE:GS) added 6.5%, and Wells Fargo (NYSE:WFC) surged 8.3%.  Financials got a boost after Goldman Sachs (NYSE:GS) added Bank of America (NYSE:BAC) to its "conviction buy" list, citing confidence in the banks' ability to come out of the current credit crisis, as well as expectations of improved second quarter results due to strength in refinancing and capital markets.  Citigroup (NYSE:C) raised its price target on Goldman Sachs (NYSE:GS) shares 10% to $160, citing improved debt and equity underwriting activity.

Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) applied for permission to repay TARP funds worth $45 billion.  State Street (NYSE:STT) shares jumped 8.5% in spite of news the firm would take a $3.7 billion loss putting conduits on its balance sheet.  The company said it will sell stocks to pay back funds borrowed under TARP.  However, after the markets' close, American Express (NYSE:AXP) announced plans to cut 6% of its global workforce, or 4000 jobs, citing increased defaults generated by the weak economy.

Today's economic posts include the 8:30 AM ET housing releases on building permits and housing starts. Both the posts are expected to show modest improvements.  April permits are expected to have risen to 530,000 from 516,000, and starts to 527,000 from 510,000. Minneapolis Fed President Gary Stern speaks at 1:15 PM ET on financial conditions. Crude prices hit $60 this morning, following yesterday's 4.8% increase, upon reports of a Sunoco (NYSE:SUN) refinery fire impacting Northeastern US supplies, and Nigerian militant threats to block waterways.

A day before reporting its quarterly results, Goldman Sachs Group Inc. (GS) said it raised $5.5 billion in capital commitments from investors to start a fifth fund for buying private-equity investments on the secondary market.

According to The Wall Street Journal, GS Vintage Fund V is the largest secondary fund ever raised. Limited partners in the fund include existing and new institutional and private investors in the Americas, Europe, Asia and Australia.

Goldman has been looking to pay back the $10 billion in government aid it received last fall. The investment bank is scheduled to report its first-quarter results on Tuesday.

GS Vintage Fund V is expected to reap benefits as banks and institutional investors struggle to boost their liquidity position by selling assets in private equity businesses at steep discounts.

Goldman shares were up nearly 3% to $127.83 in morning trade on the New York Stock Exchange.

I remember some years ago I sat on a panel at the Schwab conference with Bruce Bond and Tony Rochte. In the run-up to the conference, there was a big hubbub about Schwab saying that they were blocking ETF people out of the conference altogether. There was some kind of a skirmish, and then they ended up letting the ETF riffraff in.

But it's been clear for a long time that the big brokers and institutional players are not all that excited about the idea of pushing assets (and an annually recurring revenue stream in the form of an expense ratio) to their (sometimes) competition for the price of a stock commission.

THAT is the reason that Goldman and Morgan announced the "Source" ETF venture (no recent word on that, BTW) and that big institutional players have banded together on ventures like the ICE (which just announced its record 2008 results, BTW).

In short, it's a signal seeing all these big boys getting involved in the ETF business (and with many more now looking at entering the business) that ETFs are the REAL DEAL. And there's gigantic trading volume and assets flowing through these things.

Have a look at the U.S. pipeline only. It's insane. I just went into our ETF Watch feature, and there are 497 ETFs that we list that are in registration at the SEC, and about TEN new issuers queued up to hit the market. And just from what I hear behind the scenes, there are a whole bunch more that are not even in registration yet, but that are actively looking at the ETF business. And you thought we were in a tough market.

Nice blog on USO, Matt. I've been looking at those huge flows and have been slightly baffled by it myself. I really do think a lot of investors in the futures and swaps-based products don't really understand some of the products they're investing in.

Also as another blog side note, Paul and I have been getting into a nice discussion about the massive sales job that's been put on the bailout of some of the robber baron guys & the implications of that. Paul asks, so "Do We Want Free Markets?" to which I answer, apparently we do "Only When We're Winning."

* Global demand rose 18% to 1,133.4 metric tonnes from 963.3 tonnes a year earlier.

* In dollar terms, the jump in demand was even bigger. Dollar demand for gold reached an all time quarterly record of $32 billion in the third quarter, a whopping 45% higher than the previous record … set in the second quarter.

* Identifiable investment, which includes purchases through exchange-traded funds and of bars and coins, climbed 56% year over year to 382.1 tons.

Hank Paulson has just about burned through $300 billion, and it's not clear what the public has got out of it. Perhaps things would be worse without the bailout but they're certainly no better. Wall Street banks have not significantly stepped up their loans to small businesses, college students, car buyers, or distressed homeowners. Much of the auto industry is on the verge of bankruptcy. And the rate of foreclosures is rising.What happened to all the money? About a third has gone into dividends the banks are paying their shareholders. Some of the rest into executive salaries and bonuses. Another portion toward acquisitions designed to raise share values. Another chunk for bailing out giant insurer, AIG. That's not what taxpayers bargained for.

This from the Daily Reckoning:

You’ll recall that the credit crisis began in the summer of ’07. Before that the ‘war’ between inflation and deflation had been an even match. But then, sub-prime debt came upon the battlefield like a new tank. In a matter of days, deflation seized the high ground and has been winning ever since.

Of course, you have to give the feds credit. They’ve fought a…

• Microsoft Corp.’s (MSFT) quarterly profit rose 2% from a year ago, the company said yesterday (Thursday) in a statement. The world’s largest software maker earned $4.37 billion, or 48 cents per share, in the quarter ended Sept. 30. Sales rose 9% to $15.1 billion.

• Goldman Sachs Group Inc. (GS) is cutting 3,200 jobs, or 10% of its work force, as the firm struggles with the credit crisis and transitions into a holding company. The cuts add to more than 130,000 jobs eliminated in the financial industry since mid-2007, topping the 83,000 lost after the Internet bubble burst in…

This from The Daily Reckoning’s Desidooru Saloon blog:

Remember when speculators were getting blamed for high oil prices?  Remember how I thought it was bogus?  Now oil is down more than 50% from its summer highs.  And this time, I think it’s safe to say speculators have a hand in it.

It looks as if the…

• Standard & Poor’s yesterday (Monday) reduced the credit rating of Royal Bank of Scotland PLC (ADR: RBS), lowering the rating of both the Edinburgh-based bank’s long-term and short-term debt. “The rating actions reflect Standard & Poor’s expectation that RBS’s financial profile may continue to weaken,” the analysts said, citing a “combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions” in which to shore up its capital, Bloomberg News reported. RBS stock sank over 20% on the downgrade.

• Shares of biotech firm Dendreon Corp. (DNDN) soared 33% yesterday (Monday) on news of a good drug trial. Provenge, Dendreon’s experimental prostate cancer drug, reduced the risk of death in 20% of trial participants, Reuters reported. Dendreon shares gained $1.73 to close at $6.93.

• Eli Lilly & Co. (LLY) announced yesterday (Monday) that it plans to buy ImClone Systems Inc. (IMCL) for $6.5 billion in a deal that values the biotech firm at about $70 share. This latest offer from Eli Lilly beat out Bristol Myers Squibb Co.’s (BMY) competing bid of $62 per share. However, Bristol Meyer’s will receive approximately $1 billion in cash for its 17% stake in ImClone, The New York Times reported.

• AgFeed Industries Inc. (FEED) announced yesterday (Monday) a $10 million share repurchase program to commence immediately. AgFeed, which does most of its feed and hog production business in China, will fund the share buyback with current cash reserves, Trading Markets reported.

• Bank of America Corp. (BAC) yesterday (Monday) reported third-quarter results earlier than planned, and revealed a 68% drop in profit, as well as plans to boost capital by selling stock and halving its dividend. Profit fell to $1.18 billion, or 15 cents per share, for the July-to-September period from $3.7 billion, or 82 cents per share, in the same period last year.

• U.S. Treasury Secretary Henry M. Paulson selected Neel Kashkari, a former Goldman Sachs Group Inc. (GS) executive and current assistant secretary to be the interim head of Treasury’s new Office of Financial Stability, The Associated Press reported. Kashkari will be in charge of the office created by the emergency legislation enacted Friday to fund the largest government bailout. Paulson was the head of Goldman before joining the Bush administration in 2006.

Source: Global Investing Roundups Tuesday, October 7th, 2008

Sheraz Mian, senior oil & gas industry analyst: That's an interesting idea, using the $700B to buy common equity. If nothing else, it completely side-steps the thorny issue of pricing the mortgage-related securities plaguing the balance sheets at present. In a way, it is plain-vanilla version of what the 'Oracle of Omaha' did with Goldman (GS).

They key question, however, remains whether so re-capitalized entities will be able/willing to lend. Wouldn't that take us to where the Japanese banking system was in the 90's -- they were well capitalized, but couldn't/wouldn't lend due to their awful balance sheets. After all, they would still be saddled with a whole lot of toxic stuff on their balance sheets -- difficult to price and get rid of.

From whatever angle we look at this problem, we can't ignore these mortgage-related assets. One way or the other, we need to create a market where these assets can be priced and traded.

Dirk van Dijk: Yes there is still the possibility that banks would continue to hoard the cash they got, but with 49% ownership, perhaps the government could persuade them otherwise.

Rob Plaza, CFA, senior retail industry analyst: As far as I can tell, these plans being discussed still ignore the fact that the crux of the problem is that house prices continue to fall. The proposed bailouts will help the balance sheets of the surviving banks, but none of them do anything to address the declining value of the underlying assets. As Sheraz wrote, the banks may not be willing to lend even with all the toxic paper off their balance sheets.

Why would they want to lend to consumers? Consumers' balance sheets are still overleveraged. Their largest asset (housing) continues to drop in price, while the amount owed remains constant. The government buying the toxic paper does not improve consumers' balance sheets.

A real bailout that actually helps the economy will have to include the government reducing the principal to a level close to current market value of mortgages for homeowners. Those homeowners could refinance the new lower amount. This would help eliminate a huge chunk of problem debt in the system (mortgages that exceed the value of homes) as well as reduce monthly payments. This would allow the consumer to de-lever and clean up its balance sheet without impacting the real economy. With vastly improved consumer balance sheets, banks would have more of an incentive to lend to the consumer.

Of course, there are problems with this type of plan, but we're talking bailouts, for crying out loud. For one, the government would end up eating a lot of bad debt and we taxpayers would end up paying for that. Two, what happens if a homeowner sells his home at a profit above the government-authorized refinanced amount? But this solution beats the alternative: Consumers will de-lever on their own. That means higher savings rates in order to pay down existing debts, more frugal spending behavior, limiting the amount of new debt taken on, and a more pessimistic attitude about how crappy their lives are with all that debt hanging around their necks. This de-levering process will take years, and consumer spending will decline throughout the de-levering process.   

Dirk van Dijk: Part of the problem is that houses are still overpriced and will continue to fall until they reach historical norms based on ratios of both income and the rent on a similar property.  I figure we are about half-way through the housing decline.  The idea of reducing the principal and/or modifying the interest rate could be handled in Bankruptcy court, but that proposal has been blocked by the Banking lobby and the GOP.  I agree that it is a good idea.  Bankruptcy courts have the latitude to adjust principal and interest on every form of secured lending EXCEPT the mortgage on a primary residence, including second homes.  The homeowner would pay a heavy price, namely having to go through bankruptcy, and would not be walking away scot-free, thus reducing moral hazard issues.

The crisis, and the bungled attempts of the government to 'fix' it, is setting up some great contrarian investment plays.

"All it takes to make money on Wall Street these days is a 'for sale' sign," says Andrew Snyder. "Companies in every industry are hurting from the financial crisis. Their only way out is to hope a buyer comes along. The action is creating a lot of great profit potential for investors."

There are lots of big-name companies making big gains today. With all major indices soaring, it comes as no surprise investors are making money. What may be surprising is why these companies are surging in value.

Normally, share prices make double-digit leaps on earnings increases, product developments, or other positive news events. Lately however, a giant “for sale” sign is all it takes to catch the eye of the bulls.

Two companies making their investors happy today are Transmeta Corp. (NASDAQ:TMTA) and Top Ships (NASDAQ:TOPS). Both are selling for 20% more than they were yesterday thanks to news that the firms are on the auction block.

Transmeta, which tried to run its business in nearly every direction imaginable in the past few years, is waving the white flag, hoping it gets the attention of a suitable buyer. The company had a $15.50 per share offer on the table in February, but refused it looking for a higher bidder. One never came and now times are much more desperate.

It is a similar story at Top Ships, but one that may prove more lucrative to shareholders. With one bidder already willing to cut a check for $6 per share (a 50%+ premium) and rumors of more to come, investors that rode the plummet from over $10 have a chance at profits, albeit a small one.

Mega-gainer

And as you may have heard, shares of the troubled bank, IndyMac Bancorp (OTC:IDMC), are rumored to be a possible target of Goldmach Sachs (NYSE:GS) as it ramps up its banking operations. Shares of the company, which were selling for nearly $50 less than two years ago, were trading at $0.23 at the closing bell, a 228% gain on the day.

IndyMac could be a quick way into the banking industry and its desperately needed cash flows for Goldman. It will be interesting to see if the rumors are true.

The situation is similar across the investment spectrum. Wall Street is no different than the real estate market. Once values start to drop, they will continue to fall, dragging everything with them.

Remember, if your neighbor’s house plummets in value, so does yours. It is the same concept in the business world.

With so many companies hurting from the nation’s economic slowdown, more and more companies are going to look for buyers. It will create some real bargains and some fantastic opportunities for savvy investors.

Seek out the companies you think are ripe for a sale, invest appropriately and hang on for the ride. There is some big money to be made as this fire sale continues.

Source: Business for sale: Dozens of companies on the auction block