In a paper presented at the Brookings Institution last spring, I examined the post-sample forecasting performance of an equation originally published in 2003, which relates real GDP to past values of GDP and oil prices. I noted in April that if you had known in October 2007 the values of GDP through 2007:Q3 and what was about to happen to oil prices through 2008:Q2, you could have used that historical relation to predict the value of U.S. real GDP for 2008:Q3 with an accuracy better than 99.5%.

Solid line: 100 times the natural log of real GDP. Dotted line: dynamic forecast (1- to 9-quarters ahead) based on coefficients of univariate AR(4) estimated 1949:Q2 to 2001:Q3 and applied to GDP data through 2007:Q3. Dashed line: dynamic conditional forecast (1- to 9-quarters ahead) based on coefficients reported in equation (3.8) in Hamilton (2003) (which was estimated over 1949:Q2 to 2001:Q3) applied to GDP data through 2007:Q3 and conditioning on the ex-post realizations of the net oil price increase measure.

In the figure above I extend the earlier-reported forecast an additional four quarters and compare the projection with what actually happened to GDP through 2009:Q3. The dotted green line is a forecast formed in October 2007 of what would happen to U.S. GDP if you used nothing more than the values of GDP observed through 2007:Q3. Basically that forecast simply extrapolates the recent prior trend. The dashed red line is the forecast that uses GDP values only through 2007:Q3 but also uses knowledge of what was going to happen to oil prices between 2007:Q4 and 2009:Q3. If you treated oil prices as the only thing that matters for the economy, you would have predicted the bottom would be reached in 2009:Q1, flat growth between 2009:Q1 and 2009:Q2, and normal growth resuming in 2009:Q3. That's exactly the trajectory that GDP has taken so far, although the bottom in 2009:Q2 was 2-1/2 percent lower than would be predicted on the basis of oil prices alone.

I have no doubt that the problems with financial markets were a bigger factor than oil prices in the striking collapse in output in 2008:Q4 and 2009:Q1. The other approaches to measuring the contribution of oil to the downturn surveyed in my Brookings paper would estimate a smaller contribution of oil to the downturn than suggested by the figure above. On the other hand, all of the approaches surveyed in that paper suggest that oil made a material contribution to the initial downturn, and it seems hard to deny that that the severity of the financial crisis was exacerbated by the fact that the U.S. had spent three quarters in recession prior to the failure of Lehman in September 2008.

What do these estimates imply looking forward, with oil prices now back up to $80 a barrel? The relation used to produce the figure above assumes that there is a threshold effect before the next oil price shock would begin to do its damage. According to that relation, oil has to get back above $130 before it would matter again for GDP growth. On the other hand, the original research on which that relation is based acknowledged that there's really not a very compelling basis in the data for choosing among various plausible nonlinear possibilities. The other approaches surveyed in my Brookings study assume a simple linear relation, according to which the recent resurgence in oil prices would already begin to exert a drag on spending.

Another magnitude that I think is important to watch is the share of the budget of an average U.S. consumer that is devoted to energy purchases. This had fallen considerably in the 1990s, making it easier for many consumers to largely ignore modest energy price fluctuations. When this share rises above 6%, it seems to become a more significant factor. The consumer energy expenditure share peaked last summer at 6.8%, but collapsing energy prices subsequently brought it back down to 4.7%. The resurgence in oil prices this summer had pushed that share back up to 5.4% in September.

Energy expenditures as a fraction of consumer spending. Calculated as 100 times nominal monthly consumption expenditures on energy goods and services divided by total personal consumption expenditures. Data source: BEA Table 2.3.5U, "Personal Consumption Expenditures by Major Type of Product and Expenditure," obtained from Econstats. Dashed line is drawn at 6.0%.

And the price of oil is up another 15% since September.

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.

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

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

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

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

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

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

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

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

Chicago, IL – October 12, 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: Ford (F), Honda (HMC), Caterpillar (CAT), Boeing (BA) and Chevron Corp. (CVX).

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:

Trade Deficit Improves

While the year-over-year improvement in the trade deficit is very good news, the reason for it is not so good. It was a reflection of the overall collapse in world trade, something that makes everyone poorer. As far as the GDP calculations are concerned, it does not make any difference -- a decline in the trade deficit is a decline in the trade deficit -- and it is something that feeds directly into the calculations.

However, it is not like there has been a big surge in people buying domestically produced Fords (F) rather than foreign produced Hondas (HMC). Rather, the fall in imports has been simply fewer people buying cars, period. Currently, for every dollar of goods and services we export, we import $1.24 -- down from $1.38 a year ago, but still way out of whack.

It was not until the price of oil crashed last fall that we started to see real improvement in the overall deficit. Now that benefit is largely gone. While the price of imported oil has a bit of a lag with the prices in the pits, there is clearly a relationship. The price of imported oil bottomed in February at $39.22 and was $64.75 in August. It will most likely go up again in September.

It is somewhat ironic that the most dramatic part of the improvement in the trade deficit came as the dollar dramatically strengthened a year ago in the flight-to-safety trade. The path of the trade deficit has not yet been greatly affected by the path of the dollar, for two major reasons.

First, a very large part (over half) of our trade deficit is due to oil imports, and when the dollar is weak, the price of oil tends to go up to compensate. Second, our biggest single deficit is with China, which has effectively pegged the Yuan to the dollar. In August, the China deficit fell to $20.2 billion from $20.4 billion, but still represented 65.1% of the total deficit. Put another way: in August, our deficit with China was more than our deficits with OPEC, The European Union, Japan and Mexico...combined!

The flight-to-safety dollar trade is now unwinding, and the greenback is almost back to the levels it was at before the fall of the House of Lehman. Over time, this should lead to further improvements in our non-oil trade deficit -- if not with China, then with the rest of the world. It might even indirectly help with the Chinese deficit even though the value of the Yuan is effectively fixed to the price of the dollar.

This would happen at the expense of the Japanese or the Europeans, as the Chinese decide to buy their heavy earth-moving equipment from Caterpillar (CAT) rather than from Komatsu, or airplanes from Boeing (BA) rather than Airbus.

Chevron’s Positive Upstream Update

Chevron Corp. (CVX) released its third-quarter interim update, covering the first two months of the quarter. On the whole, the update is positive, with earnings expected to be higher than in the previous quarter.

The company expects the upstream segment to benefit from an increase in crude oil prices as well as from gains of about $400 million associated with asset sales and tax items. Downstream results are likely to be relatively flat, as it continues to be hurt by weak refining margins. Chevron further said that unfavorable foreign currency movements will affect the segment profitability.

The best part of the update pertained to upstream volumes, highlighting Chevron’s attractive growth profile among the super-majors. The company reported that oil and natural gas production average 2.687 million oil-equivalent barrels per day – better than estimates and nearly 10% above the third-quarter 2008 level. Compared to the second quarter of 2009, production would be up by about a percentage.

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

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

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

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

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

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

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

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

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

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

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

Chicago, IL – September 17, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include D.R. Horton (DHI), KB Home (KBH), Pulte Homes (PHM), Allstate (ALL), Hartford Financial Services (HIG), Travelers (TRV), Loews (L), Humana (HUM), Stericycle (SRCL), C.R. Baird (BCR), Celgene (CELG), Gilead Sciences (GILD), Anadarko Petroleum (APC), EOG Resources (EOG), AK Steel (AKS), Nucor (NUE), U.S. Steel (X), Fifth Third (FITB), Regions Financial (RF), Suntrust Banks (STI) and Zions Bancorp (ZION).

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

This week: Third-Quarter Earnings Forecast

Though the economy has stabilized, third-quarter results for the majority of companies will still be below year prior levels.

Per share profits for the S&P 500 are projected to fall 15.4%. The median company is forecast to report a 14% drop in per share earnings. (The difference being that the S&P 500 forecast is a weighted projection.) More than 340 companies may have experienced a year-over-year drop in profits.

On a revenue basis, things are not much better. Median company sales are forecast to have dropped 7.2%.* More than 360 companies are expected to report a year-over-year drop in earnings.

It's important to realize that during July and August 2008, the economy was in fairly good shape. Lehman did not collapse until September 2008. Furthermore, the credit crunch's grip severely tightened over the 2-month span of September and October 2008. As a result, many companies are now facing tough comparisons, meaning year-over-over declines in profits now.

It should be noted, however, that not all comparisons will be difficult. In fact, some industries are forecast to report actual earnings growth.

Industries Likely To Show Growth

Homebuilders

It may sound shocking, but homebuilders are likely to have some of the best year-over-year comparisons in terms of profitability.

There are 2 reasons for this. First, conditions in the housing industry were deteriorating last year, with mortgages becoming increasingly hard to get. Second, the housing market is now stabilizing, as is evidenced by the rising number of new and existing home sales.

This change will allow D.R. Horton (DHI), KB Home (KBH) and Pulte Homes (PHM) to encourage shareholders with bottom line improvements by 50% or more. The improvements are relative, however, since all 3 companies will report sizable losses for Q309.

Insurance

Several insurance companies could impress investors with double-digit growth. Though some, like Allstate (ALL) and Hartford Financial Services (HIG), have the benefit of prior-year losses, others like Travelers (TRV) and Loews (L) are experiencing true growth. (Revenues and earnings will rise for TRV and L).

The surprisingly calm hurricane season (fingers crossed that it stays this way) has helped property and causality insurers. Nearly all insurance companies have also benefited from the rebound in the financial markets. The economy is a drag, though there seem to be certain segments where premiums are rising.

Health Care

Despite all the talk about reform, profits for the entire medical sector continue to rise. The sector is less economically sensitive and less affected by swings in commodity prices. As result, several medical companies are likely growing both revenues and earnings this quarter.

Those with the strongest growth rates will include Humana (HUM), Stericycle (SRCL), C.R. Baird (BCR), Celgene (CELG) and Gilead Sciences (GILD).

Industries Likely to Report Contraction

Commodity-Related

Commodity-related companies face the toughest year-over-year comparisons. Oil peaked in July 2008 and, though the commodity bubble deflated throughout the remainder of the quarter, profits were still very, very strong. As a result, energy and metals companies are projected to report significant drops in Q309 profits.

In the Energy sector, exploration & production (E&P) companies such as Anadarko Petroleum (APC) and EOG Resources (EOG) will report the biggest declines. Among metals companies, AK Steel (AKS), Nucor (NUE) and U.S. Steel (X) could all report losses after large profits in Q308.

Banks

Though government intervention has stabilized much of the financial sector, many banks remain unprofitable. High unemployment, a sustained high level of foreclosures and a weak commercial real estate market are all problem spots for the sector. As a result, analysts are projecting Fifth Third (FITB), Regions Financial (RF), Suntrust Banks (STI) and Zions Bancorp (ZION) to post losses.

It's All About Expectations

The one positive for the third-quarter earnings season is that there is a general expectation that the numbers will be bad. Therefore, even those companies that report losses will be measured up against the consensus estimates and not the year prior results. What we could well see is a repeat of second-quarter earnings season, where brokerage analyst forecasts proved to be too pessimistic.

As always, pay attention to guidance and the level of visibility companies have about the fourth quarter and the early part of 2010. The markets will want assurance that business conditions are starting to improve, even if sales still remain at depressed levels.

*12 companies were excluded from the revenue forecasts due to a lack of broker estimates. The inclusion of these companies would have not significantly altered the median revenue forecast.

Zacks "Profit from the Pros " e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=5611.

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 3:1 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 by going to http://at.zacks.com/?id=5610.

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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

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: Charles Rotblut, CFA
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Per share profits for the S&P 500 are projected to fall 15.4%. The median company is forecast to report a 14% drop in per share earnings. (The difference being that the S&P 500 forecast is a weighted projection.) More than 340 companies may have experienced a year-over-year drop in profits.

On a revenue basis, things are not much better. Median company sales are forecast to have dropped 7.2%.* More than 360 companies are expected to report a year-over-year drop in earnings.

It's important to realize that during July and August 2008, the economy was in fairly good shape. Lehman did not collapse until September 2008. Furthermore, the credit crunch's grip severely tightened over the 2-month span of September and October 2008. As a result, many companies are now facing tough comparisons, meaning year-over-over declines in profits now.

It should be noted, however, that not all comparisons will be difficult. In fact, some industries are forecast to report actual earnings growth.

Industries Likely To Show Growth

Homebuilders

It may sound shocking, but homebuilders are likely to have some of the best year-over-year comparisons in terms of profitability.

There are 2 reasons for this. First, conditions in the housing industry were deteriorating last year, with mortgages becoming increasingly hard to get. Second, the housing market is now stabilizing, as is evidenced by the rising number of new and existing home sales.

This change will allow D.R. Horton (DHI), KB Home (KBH) and Pulte Homes (PHM) to encourage shareholders with bottom line improvements by 50% or more. The improvements are relative, however, since all 3 companies will report sizable losses for Q309.

Insurance

Several insurance companies could impress investors with double-digit growth. Though some, like Allstate (ALL) and Hartford Financial Services (HIG), have the benefit of prior-year losses, others like Travelers (TRV) and Loews (L) are experiencing true growth. (Revenues and earnings will rise for TRV and L).

The surprisingly calm hurricane season (fingers crossed that it stays this way) has helped property and causality insurers. Nearly all insurance companies have also benefited from the rebound in the financial markets. The economy is a drag, though there seem to be certain segments where premiums are rising.

Health Care

Despite all the talk about reform, profits for the entire medical sector continue to rise. The sector is less economically sensitive and less affected by swings in commodity prices. As result, several medical companies are likely growing both revenues and earnings this quarter.

Those with the strongest growth rates will include Humana (HUM), Stericycle (SRCL), C.R. Baird (BCR), Celgene (CELG) and Gilead Sciences (GILD).

Industries Likely to Report Contraction

Commodity-Related

Commodity-related companies face the toughest year-over-year comparisons. Oil peaked in July 2008 and, though the commodity bubble deflated throughout the remainder of the quarter, profits were still very, very strong. As a result, energy and metals companies are projected to report significant drops in Q309 profits.

In the Energy sector, exploration & production (E&P) companies such as Anadarko Petroleum (APC) and EOG Resources (EOG) will report the biggest declines. Among metals companies, AK Steel (AKS), Nucor (NUE) and U.S. Steel (X) could all report losses after large profits in Q308.

Banks

Though government intervention has stabilized much of the financial sector, many banks remain unprofitable. High unemployment, a sustained high level of foreclosures and a weak commercial real estate market are all problem spots for the sector. As a result, analysts are projecting Fifth Third (FITB), Regions Financial (RF), Suntrust Banks (STI) and Zions Bancorp (ZION) to post losses.

It's All About Expectations

The one positive for the third-quarter earnings season is that there is a general expectation that the numbers will be bad. Therefore, even those companies that report losses will be measured up against the consensus estimates and not the year prior results. What we could well see is a repeat of second-quarter earnings season, where brokerage analyst forecasts proved to be too pessimistic.

As always, pay attention to guidance and the level of visibility companies have about the fourth quarter and the early part of 2010. The markets will want assurance that business conditions are starting to improve, even if sales still remain at depressed levels.

Sector Rank as of Sep 16
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down
Consumer Staples	2.63	2.65	2.40	168	70
Conglomerates	2.73	2.73	4.67	14	3
Retail-Wholesale	2.76	2.74	1.88	506	269
Auto-Tires-Trucks	2.77	2.76	0.73	22	30
Computer and Technology	2.90	2.91	2.19	599	273
Medical	2.93	2.96	1.30	193	149
Construction	2.97	2.97	1.20	53	44
Basic Materials	2.98	3.02	1.55	118	76
Consumer Discretionary	3.00	2.97	1.05	122	116
Oils-Energy	3.00	3.01	0.87	238	274
Utilities	3.02	3.03	0.89	55	62
Industrial Products	3.05	3.03	1.36	87	64
Business Services	3.08	3.01	0.97	30	31
Finance	3.13	3.09	1.07	335	312
Aerospace	3.23	3.23	0.33	19	58
Transportation	3.23	3.23	0.70	81	115

View the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. The table above is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

*12 companies were excluded from the revenue forecasts due to a lack of broker estimates. The inclusion of these companies would have not significantly altered the median revenue forecast.Zacks Investment Research

After closing Thursday at its highest level since October, the Dow Jones industrial average retreated 22.07 points, or 0.2%, to 9,605.41 on a quiet trading day.  The NASDAQ composite index eased 3.12 points, or 0.2%, to 2,080.90, and the broader Standard & Poor's 500 index fell 1.41 points, or 0.1%, to 1,042.73.  On the New York Stock Exchange, 1.29 billion shares exchanged hands and about four stocks rose for every three that fell.  On the week, the DJIA rose 1.7%, the S&P 500 advanced 2.6% and the NASDAQ was the best performer, rising 3.1%.

This morning’s stock futures are pointing to a lower opening on the Wall Street amid reports of an escalating trade dispute between China and the US.  Dow Jones industrial average futures fell 61, or 0.6%, to 9,531. Standard & Poor's 500 index futures fell 8.00, or 0.8%, to 1,029.30, while Nasdaq 100 index futures fell 13.75, or 0.8%, to 1,669.75.

Bond prices were mixed Friday after their impressive performance the previous day.  The yield on the benchmark 10-year Treasury note fell to 3.31% from 3.35% late Thursday.  The slide in oil prices sent shares of energy companies lower.  Exxon Mobil (NYSE:XOM) slipped 1% to $69.98.  FedEx (NYSE:FDX) shares jumped 6.4% after the company said it now expects to earn 58 cents a share in the first quarter, compared with its prior view of 44 cents a share.  The company said it sees second-quarter earnings of between 65 cents and 95 cents per share, versus its earlier prediction of 70 cents.

For the week all ten S&P500 sectors recorded gains, led by oil and gas (+4.7%) basic materials (+4.6%), and industrials (+4.1%), the sectors considered most economically sensitive.  The sectors also closely reflected changes in the dollar trade, which experienced a fall to a 52-week low.

Reports that the United States has imposed a new 35% tariff on Chinese tire imports met with a retaliatory Chinese response as Beijing announced a dumping and subsidy probe into U.S. chicken imports.  Such measures, however, are likely to results in trade protectionism that could prove especially damaging to emerging countries' growth prospects.

Companies reporting their results include Best Buy (NYSE:BBY), FedEx (NYSE:FDX), Oracle (NASDAQ:ORCL), and Palm (NASDAQ:PALM).  Those scheduled to speak include Fed's Duke on regulatory reform at 8:35 AM ET, Fed's Lacker on financial regulation at 12:30 PM ET and Fed's Yellen on the economic outlook at 3:50 PM ET. President Obama will also address financial market reform as the anniversary of Lehman's demise is acknowledged.

Premarket futures suggest stocks are likely to fall as profit taking emerges.  Dow Jones industrial average futures are down 46 to 9,202. Standard & Poor's 500 index futures are down 6 points to 994, while Nasdaq 100 index futures are down 10 points to 1,616.

On Monday, the DJIA rose 115 points, or 1.3%, to close at a nine-month high of 9286.  The index is up 42% from its twelve-year lows hit on March 9.  The NASDAQ added 1.5% to close at 2008 and is now up 58% from its March 9 lows.  Volume remained low with only 1.21 billion shares exchanging hands and advancing shares ahead of decliners by five to one. Market’s measure of volatility, the CBOE Vix, fell 1.4% to 25.56.

Long-dated treasuries and US dollar fell as bets that an economic recovery would have a favorable impact on consumption sent prices of oil, copper, aluminum, zinc, lead and nickel higher.  Alcoa Inc. (NYSE:AA) surged 7.1% to $12.60 and Peabody Energy Corp. (NYSE:BTU) jumped 7.4% to $35.57.

As investors turned their focus towards riskier bets such as equities, Treasuries declined and the corresponding yield rose with the 10-year declining the most in almost two months, off 1 7/32, and the yield rising to 3.631%. The US dollar fell to its lowest point since Lehman's collapse against a basket of currencies, while crude prices surged 3% to $71.58.

Automakers reported their best sales level in ten months as the government’s cash for clunkers program pushed annualized sales to an 11.2 million-unit rate. Ford (NYSE:F) said sales rose 2.3% in July, its first monthly sales increase since November of 2007.

Comments from HSBC (NYSE:HBC) that noted improvement in financial sector operating conditions, as a cyclical bottoming appears to have occurred, also helped sentiments. The firm also showed an unexpected first half profit.  However, this morning Xstrata's CEO sounded cautious, noting, "As stock markets rebound and achieve significant gains, it would be tempting to believe that the world is returning to pre-financial crisis conditions...However...I fear that this belief is somewhat premature."

Today's economic calendar is heavy.  A number of companies are scheduled to report their earnings today.  First on the docket, ICSC-Goldman (NYSE:GS) store sales are due out, giving an up-to-the-moment look at spending. The figures posted in negative territory, off 0.7% y/y versus the -0.5% prior; for the week the drop was 0.2% reversing a 1% increase the earlier week.

Chicago, IL – July 21, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Goldman Sachs (GS), JP Morgan (JPM), AIG (AIG), Bank of America (BAC) and Citigroup (C).

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 Monday’s Analyst Blog:

Do We Cheer Banks’ Earnings?

It appears that the divide in the banking landscape between the “haves" and “have-nots" is increasing. Even among the big banks, there is now a clear two-tier system.

On one hand, we have Goldman Sachs (GS) and JP Morgan (JPM), which delivered record profits from their trading and investment banking revenues. There is no doubt that these two managed their affairs well, have increased their market share after the collapse of Lehman and Bear Stearns and also have benefitted tremendously from the various programs by the Treasury and the regulators. And, we should not forget the generous AIG (AIG) payout to Goldman.

On the other hand, the second-quarter profits of Bank of America (BAC) and Citigroup (C) were reliant on several one-time gains, resulting from asset sales etc, while weaknesses in some businesses and continued credit deterioration showed that there is more pain to come.

Bank of America’s credit-card unit lost $1.6 billion amid rising delinquencies, compared with a year-ago profit of $582 million. Its home-loan and insurance unit lost $725 million. The bank reported $8.7 billion in credit losses, up from $3.6 billion in the year-ago quarter. Its nonperforming loans jumped to 3.3%, up from 1.1% a year ago.

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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 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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Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=4579.

Here are highlights from Friday's Analyst Blog:

Optimistic on Osiris

Osiris Therapeutics, Inc. (OSIR) reported financial results for the first quarter 2009 on May 7, 2009. Total revenues in the quarter were $12.7 million, up from $0.4 million for the same period for 2008, and slightly above our forecasts of $11.8 million.

Revenues include the recognition of $10.0 million in amortized license fees from Genzyme Corp. (GENZ) and $2.6 million related to the contract with the U.S. Department of Defense. The company reported net income of $14.8 million, or $0.45 per share for the quarter. This figure is comprised of losses from continuing operations of $7.9 million, or $0.24 per share, and income from discontinued operations of $22.7 million, or $0.69 per share.

Barclays Boosted by Lehman Ops

Today, Barclays PLC (BCS, or Barclays) posted a 15% year-over-year increase in pretax profits to £1.4 billion, driven by a 361% gain in pretax earnings to £907 million at Barclays Capital, stemming from the acquisition and integration of Lehman's North American operations. While net income attributable to shareholders rose 12%, diluted earnings per share dropped 33% due to dilution caused from the sale of additional shares last year.

Net revenues increased 42% year over year due to the Lehman acquisition and strong growth at the international businesses in Global Retail and Commercial Banking on growth in assets. However, profits at all of Barclays' retail and commercial banking operations were hit by a sharp deterioration in credit quality and higher loan impairment charges, particularly in the UK, Spain, and India. Total impairment charges rose 79% year over year to £2.3 billion, including £1.1 billion at Barclays Capital, which was up 45% year over year and included credit market write-downs of £754 million.

Intersil Corporation Looks Ahead

Intersil Corporation (ISIL) is an OEM of analog and mixed signal semiconductor ICs. Management expressed confidence that the bottom is behind it, and judging from the increasing order rates and growing backlog, we are inclined to agree.

The High Performance Analog market is a key reason we are bullish on the shares.

Isis Our Top Mid-Cap Biotech Pick

We are keeping our Buy rating and $22 price target on Isis Pharmaceuticals (ISIS). We are big fans of antisense technology and believe that the number of potential therapeutic applications is enormous. Antisense drugs may have significant potential to treat a number of diseases where small molecule and biologic compounds have failed.

Although still early-stage, antisense technology as a platform for developing drugs reminds us greatly of the promise of biologic drugs over a decade ago. Potential mechanisms such as siRNA, RNAi, alternate splicing and micro RNA have the potential to change how we treat disease in the years to come.

Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://at.zacks.com/?id=2649.

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 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=2677

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=4580.

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

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
312-265-9380
Visit: www.zacks.com

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

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

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

IndexUniverse.com: Does this rally have legs?

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

IU: Do you see more bumps in the round?

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

IU: Do you see a pullback coming, though?

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

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

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

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

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

IU: How about emerging markets?

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

IU: How do you see Europe?

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

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

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

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

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

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

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

IU: What about the U.S.?

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

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

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

Matt—that's a great question ... and it's one that seems apt, as PowerShares and SSgA launch mortgage-backed securities-ish ETFs whose underlying forefathers are the toxic underpinning of this whole mess we're in. INVESTMENT GRADE ONLY! Like that means anything these days. Heck, AIG was AAA. 5,000 companies should have gone bankrupt before there was a whiff of a problem at AIG.

So believe it, and believe it now, the credit issues are REAL. And I'm still REALLY nervous about getting into anything that's got major credit issues. But it's a bit like the fear of flying. How real is the threat that Barclays is really going under? Just about nil, I'd say. Paul and I talked about this at length off-line and he's right on this (see his original You Can't Choose Your Parents blog here). Because even if it HEADS that way, your likely worst-case scenario is having the British government on the board of directors of your fund company.

So that's the reality.                                                                                                        

And the other reality is that zero tracking error is a pretty neat feat in the commodities space, as is long-term capital gains treatment. If THAT is a given (and it's not just yet, quite), the DJAIG product is a far superior product in terms of what it delivers (and it also tracks the appealingly broad, widely accepted DJAIG index). And what a sweet brand mix of AIG with a little Lehman spice thrown into the cooking over there.

So that's my take. Good product, unlikely default, but a real issue. Do I own ETNs? Not at the moment, no. Would I? Yes. I'd say the chances of my XLF or other parts of my equity portfolio dropping another 40%, for example, are probably greater than the chance of a Barclays default.

But you if you are not weighing out that very real risk against the positives, you're being foolish.

Lee Kranefuss, chief executive officer of BGI's iShares business, recently took time to discuss with IndexUniverse's Murray Coleman the future of exchange-traded funds and recent developments relating to the industry's dominant product line.

IU:  Barclays recently renamed the Lehman-based bond indexes to the Barclays Capital moniker. Will the iShares Lehman ETFs change?

Kranefuss:  Barclays Capital completed its acquisition of Lehman Brothers' North American Investment Banking and Capital Markets businesses. As part of the transaction, Lehman Brothers' indices have become part of Barclays Capital. The Lehman indexes are now Barclays Capital indexes. iShares will be renaming those ETFs. It's our practice to include the index provider in the name of the funds; we think that transparency is important for investors. People ought to know which index a fund is following.

IU: BGI's market share as a percentage of assets under management has dropped in 2008 by more than 5% through October. At the same time, State Street Global Advisors and Vanguard have recorded more than 1% gains. What do you attribute this to?

Kranefuss: You've really got to look at these pieces of data over time. SSgA's ETF assets, for instance, are concentrated in a couple of large funds that have huge swings in assets due to a large institutional base and general market sentiment.

Eight out of every $10 dollars in ETFs have flowed into iShares for several years. We built the industry, and that obviously invited competition. One wouldn't expect that sort of concentrated asset gathering to continue. In the long run, we're still the leading ETF provider by far in the U.S. and globally. And competition is a good thing for a new product category. ETFs are a relatively new product to a lot of people. So more assets coming into the industry is good for BGI and everyone else. It validates what we're doing with ETFs and keeps us on our toes.

IU: BGI has 24 ETFs in registration that haven't come out yet. Do you expect most of those to still launch?

Kranefuss:  While I'm very limited in what I can say about funds in registration, we are committed to building out the product line in the U.S. which currently has 178 ETPs. We expect that to include equities and especially fixed income, which only represents about 20% of our lineup right now. We've got lots of room for many new products, particularly in areas of the market that are traditionally more difficult for retail investors to access. ETFs are a huge democratizing force in the marketplace.

IU: The longer-term picture is that bid/ask spreads keep widening for ETFs. Do you see this as a systemic problem?

Kranefuss: The current widening of bid/ask spreads is reflective on the volatile markets. Typically, correlations between the spread for the ETF and the spread of the underlying securities widen by the illiquidity of the underlying markets. So dealers have to make wider spreads on the ETF. That having been said, there are times when an ETF's spread can actually be tighter than on the underlying securities. For example, a few weeks ago the spread on the iShares iBoxx High Yield Corporate Bond Index Fund (NYSE: HGY) was 26 basis points. At the same time, the spread on the underlying basket of bonds was trading at 56 basis points. The spreads on the ETF was much tighter than if investors bought the underlying bonds as individual issues.

IU: You recently launched asset allocation funds. Who is the market for these and how will advisors use them in a portfolio?

Kranefuss: One of our key target markets is advisors. There are some segments of their business that would benefit from an ETF that offers a premixed diversified portfolio targeted to a particular date such as a child's entering college or to a specific risk level. There are numerous other types of examples. These are another set of tools to build out a diversified portfolio. Life cycle funds are gaining increased interest in 401(k) plans and we think that the iShares asset allocation funds are an excellent option for small 401(k) plans that are often advised by financial advisors. Currently ETFs have small penetration into the 401(k) market, so we'll see how the new funds take off.

IU: Are there any plans to lower the expense ratio on the iShares MSCI Emerging Markets Index (NYSE: EEM)?

Kranefuss:  Through time we've lowered expense ratios as warranted. We're always looking for opportunities. Right now, we feel that all of our products are well-priced. You can see by how asset flows are going into funds. Emerging markets are complicated and not easy to operate a fund against in terms of benchmarking. So people have done an assessment and found that EEM is fairly priced. And EEM is a bit more institutional driven. It has been one of our fastest growing funds, even in the current environment.

IU: What do you see as the big trends for ETFs going to be in 2009?

Kranefuss: One big trend is going to be a shakeout in the industry. There are a lot of people who entered the business a year or two ago who don't have sustainable business models. People want to invest with experienced, stable, long-term focused managers.

Another trend will continue to be the growth of ETFs. Mutual funds are losing assets. As people continue to learn the advantages of ETFs - transparency, relatively low costs, and tax-efficiency - they're going to keep moving to ETFs. And as people face end-of-year capital gains possibilities, those advantages are going to become even more apparent.

The Dow, however, dipped under its October 27 low of 8,176 while the S&P 500 Index was far below its 848.92 low last month.

The CBOE Volatility Index - which measures options traders’ sentiment on the S&P 500 Index - plunged 10% to 59.83. That’s still a highly elevated level with the VIX in record territory since Lehman’s collapse in mid-September. In 2008, the VIX has surged 113% and has…

This from The Rude Awakening:

The American people voted for change…and now they’re going to get it. But the change they get may not be the change they expect Obama to deliver. Something more sinister may be coming our way.

After an historic election and inauguration, president-elect Obama will enter office with a huge list of challenges. These challenges — from a contracting economy to large-scale corporate bankruptcies to soaring national indebtedness — will…

This from Taipan Daily:

Last week, I wrote to you as to how our local hausfraus had found a convenient way to raise funds without the trouble of visiting such sordid places as pawnshops. Their solution: gold-selling parties wherein nice men would come to the house and relieve them of their excess jewelry.

Apparently the need to convert baubles to dollars is not limited to the Maryland upper middle class these days. According to Bloomberg, the pawn business is…

With the acquisition of Lehman Brothers and its indexing unit, Barclays Capital said on Monday it's folding those benchmarks under a new brand name: Barclays Capital Indices.

The new index family will unite the combined Lehman platform with existing benchmarks run by Barclays Capital to provide a common reference point for the industry, says Larry Kantor, head of research for the firm.

"We have combined two great franchises to create a leader in the index business that covers the whole spectrum from benchmark to strategy indices," he said in announcing the changes. "We are very excited by the enormous opportunities afforded by this expanded index platform, across the full range of products and our locations around the world."

Under the unified brand, Barclays Capital will continue to calculate and publish the existing Barclays Capital benchmarks as well as the former Lehman indexes.

In addition, Barclays Capital will maintain the associated index calculation, publication and analytical infrastructure and tools that were part of the ex-Lehman Brothers platform.

During the process of combining the two index families, Barclays Capital said in a statement that "index production and publication for the former Lehman indices has been addressed as the highest priority, resulting in minimal interruption of service."

Barclays Capital will work closely with its clients and partners to appropriately address the process of re-branding index-linked products and benchmarks, the company added.

More from Whiskey & Gunpowder:

There are only two things gold bulls should worry about from this point forward, now that the general commodity correction is out of the way and the froth has been worked out of the market: deflation in the strict sense of the term (monetary, not asset deflation) or a suddenly brightening economic outlook, both of which, in this writer’s…