Various observers have continued to ascribe a central role to real RMB appreciation to effect global rebalancing. I think it's useful to remember that, given a Chinese trade balance in excess of 260 billion USD, appreciation can only have a certain impact. From Cheung, Chinn and Fujii (forthcoming):

...using a single equation error correction model, allowing for coefficient shifts with Chinese accession to WTO, leads to a statistically insignificant estimate of the price elasticity. In the 2000-06 period, the implied price elasticity is zero. Using this point estimate, then a 10% appreciation would actually lead to a shrinkage of the trade balance from 400.9 billion to 355.2 billion. This estimate of 45.7 billion (2000$) is somewhat less than the $88.6 billion current dollars reported in Marquez and Schindler (forthcoming) [working paper version].

The export equations take the form:

Δ exp _t = θ ₀ + ρ exp _t-1 + θ ₁ y^* _t-1 + θ ₂ r _t-1 + θ ₃ k _t-1 + σ ₁ Δ exp _t-1 + 2 lags of first differenced right hand side variables + quarterly dummies + WTO dummy + v _t

Where exp is log exports, y^* is log RoW GDP, r is the real exchange rate, and k is the Chinese capital stock. The import equations take the form:

Δ imp _t = β ₀ + φ imp _t-1 + β ₁ y _t-1 + β ₂ r _t-1 + γ₁ Δ imp _t-1 + 1 lag of first differenced right hand side variables + quarterly dummies + WTO dummy + u _t

Where imp is log imports, y is log GDP.

Separate regressions are run for ordinary and processing trade, over the 1993Q4-07Q1 period. The adjusted R²'s range from 0.77 to 0.92.

If we take the Goldstein-Lardy misalignment estimates of 20% to heart, then a 20% appreciation would lead to an approximately 91.4 billion (2000$) reduction in the Chinese trade balance. As best as I can tell, the export prices from China, and to China (as proxied by unit value indices for Hong Kong) have probably stayed constant relative to 2000; hence the nominal impact is around 90 billion USD (with considerable uncertainty surrounding this point estimate).

This leaves a large Chinese trade surplus in place, around 170 billion even before the rebound in the Chinese surplus anticipated as the world aggregate demand recovers. Now, to the extent that Chinese reserve accumulation is due to a current account surplus and capital inflows, one could hope that a revaluation would have an additional knock-on effect by deterring capital inflows (the argument would be revaluation would eliminate expectations of appreciation that would provide capital gains on holding RMB). That is, recall the balance of payments identity:

CA + KA + ORT ≡ 0

Where CA is the current account, KA is private capital account, and ORT is official reserves transactions.

Figure 2, drawn from Prasad and Sorkin (2009) shows that net inflows were not a major factor, at least in 2008.

This suggests to me that rebalancing requires as much or more Chinese fiscal stimulus and a concerted effort to encourage private consumption via enhancing the social safety net, in addition to RMB revaluation. (This can be seen in a Mundell Fleming framework, as applied to China [3]). And it also requires determined action from the US side as well (see here). If only we'd conducted a sane fiscal policy in 2001-08 [4], our range of action would now be wider in this respect.

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

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

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

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

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

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

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

Cisco Systems’ (NASDAQ:CSCO) CEO John Chambers said he now sees a global economic recovery, fueling a rebound in the company’s sales this quarter.  The Dow average jumped 203 points, or 2%, while the tech-heavy NASDAQ, riding high on Cisco’s forecast, bolted up 50 points or about 2.4%. 

All ten S&P 500 industry groups ended in the green, with banking shares advancing 2.6% as analyst Dick Bove of Rochdale Securities noted the group will double by the end of 2010.  Technology shares advanced 2.2%.  Qualcomm Inc. (NASDAQ:QCOM) jumped 5.4% to $43.85 and Microchip Technology Inc. (NASDAQ:MCHP) gained 3.9% to $25.37 after it was raised to “buy" from “neutral" at FTN Equity Capital Markets.  Research in Motion (NASDAQ:RIMM) jumped on news of its $1.2 billion share buyback plan as well as a Standard & Poor's ratings increase to "buy" from "hold."  A report on the semiconductor industry projected sales growth of 10% in 2010.

On the retail sales front, action was largely mixed.  About half of firms that reported numbers missed expectations as the growth proved selective. Costco (NASDAQ:COST) posted 3% same-store-sales gains excluding gasoline results; Gap (NYSE:GPS) registered a 4% sales growth and raised its third quarter guidance.  Luxury retailers Nordstrom (NYSE:JWN) showed surprising gains with its 6.5% sales increase.

On the political front, President Obama is expected to sign into law today an extension and broadening of the homebuyers' tax credits, to include both first-time buyers' credits of $8,000, and existing homeowners, in residence for over five years, of $6,500.  The measure also includes an extension of unemployment benefits by up to twenty weeks.

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

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

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

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

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

On Wednesday, the Dow ended down 29.92, or 0.3%, at 9,712.28 after falling nearly 134 points at one stage.  The S&P 500 index fell 3.53, or 0.3%, to 1,057.08.  The Nasdaq fell 1.62, or 0.1%, to 2,122.42.  US stocks by and large closed lower as profit taking affected major indexes on the final trading day of what had been a strong third quarter for the market.  Sentiment was essentially dampened by major economic news expected on Thursday.  On the New York Stock Exchange, 18 stocks were lower in price for every 13 that advanced. 

The Dow Jones industrials and S&P 500 index both ended the quarter with gains of more than 15%.  In fact, the market posted its strongest quarter in 11 years.  However, market observers found many investors to still have an ambivalent view of the market as they shuffled between bouts of buying and selling.  The market dipped each time bad news hit the market but subsequently recovered as each dip was generally seen as a buying opportunity.  In addition, a large amount of funds from the sidelines typically entered the market on dips.     

Sector trends remained relatively constant during the month. The strongest sectors during the quarter were basic materials (up 29.9%), financials (up 29.2%), industrials (up 23.7%), consumer services (up 21.1%) and tech (up 18.9%). During September, the list of top-performers included basic materials (up 8.6%), industrials (up 6.2%), and tech (up 5.0%).  However, financials were at the low end of sector gainers (up 2.0%), followed by oil and gas up by 5.5%.

After the close, General Motors said it is shutting down its Saturn division after a deal to sell it to Penske Automotive Group (NYSE: PAG) fell apart.  Commercial lender CIT Group (NYSE: CIT) was making a last ditch effort to reconcile with its creditors to avoid its demise.

Headwinds to growth continue as unemployment lingers, and President Obama's $787 billion stimulus efforts wind down. Fed Chairman Bernanke joins the long list of central bankers in the limelight this week, which may further point to timing plans for the eventual phase-out of accommodative policy measures.

On Wednesday, the Dow ended down 29.92, or 0.3%, at 9,712.28 after falling nearly 134 points at one stage.  The S&P 500 index fell 3.53, or 0.3%, to 1,057.08.  The Nasdaq fell 1.62, or 0.1%, to 2,122.42.  US stocks by and large closed lower as profit taking affected major indexes on the final trading day of what had been a strong third quarter for the market.  Sentiment was essentially dampened by major economic news expected on Thursday.  On the New York Stock Exchange, 18 stocks were lower in price for every 13 that advanced. 

The Dow Jones industrials and S&P 500 index both ended the quarter with gains of more than 15%.  In fact, the market posted its strongest quarter in 11 years.  However, market observers found many investors to still have an ambivalent view of the market as they shuffled between bouts of buying and selling.  The market dipped each time bad news hit the market but subsequently recovered as each dip was generally seen as a buying opportunity.  In addition, a large amount of funds from the sidelines typically entered the market on dips.     

Sector trends remained relatively constant during the month. The strongest sectors during the quarter were basic materials (up 29.9%), financials (up 29.2%), industrials (up 23.7%), consumer services (up 21.1%) and tech (up 18.9%). During September, the list of top-performers included basic materials (up 8.6%), industrials (up 6.2%), and tech (up 5.0%).  However, financials were at the low end of sector gainers (up 2.0%), followed by oil and gas up by 5.5%.

After the close, General Motors said it is shutting down its Saturn division after a deal to sell it to Penske Automotive Group (NYSE: PAG) fell apart.  Commercial lender CIT Group (NYSE: CIT) was making a last ditch effort to reconcile with its creditors to avoid its demise.

Headwinds to growth continue as unemployment lingers, and President Obama's $787 billion stimulus efforts wind down. Fed Chairman Bernanke joins the long list of central bankers in the limelight this week, which may further point to timing plans for the eventual phase-out of accommodative policy measures.

The 30-share Dow Jones industrial average finished higher by 51 points, or 0.52%, at 9,829.87. The broad Standard & Poor's 500-stock index gained 7 points, or 0.66%, at 1,071.66 and the technology-laden Nasdaq composite index gained 8.26 points, or 0.39%, to 2,146.30.  Treasury prices rallied after the government’s successful auction of $43 billion in two-year notes.

Meanwhile, dollar continued its downward spiral against other major currencies, sending energy and material shares higher.  Gold and crude prices also advanced.  Gold reached $1014 per ounce, up $12.50, and oil, after a 3.3% plunge Monday, went above the $70 level, rising 2.6% to $71.55.  Volume on the NYSE was a modest 1.27 billion shares, with advancing shares ahead of decliners by a seven-to-three margin.

Among the ten S&P500 industry sectors, seven closed higher, led by financial shares (+2.2%), basic materials (+1.9%), industrials (+0.8%).  On the downside, telecommunication shares fell 0.6%, health care stocks eased 0.3%, and utilities edged 0.1% lower.

Twenty of the DJIA's thirty components finished higher yesterday.  On the Dow average, JP Morgan (NYSE:JPM) was the leading gainer, rallying 4.3% to $46.47 after analysts at Bank of America (NYSE:BAC) lifted their third-quarter earnings estimate on the firm to 49 cents per share from 46 cents per share.  Caterpillar (NYSE:CAT) shares jumped 3.6%, following the expected weak dollar benefit to foreign sales.  Bank of America (NYSE:BAC) rose 2.1% after Rochdale Securities’ Richard Bove raised the shares' price target to $25 from $19 due to the firm's recent moves to exit two federal guarantee programs.  However, rumors that CEO Ken Lewis might resign over the Merrill bonus saga kept the stock’s move in check.  Alcoa (NYSE:AA) rose 2.3% after analysts at Goldman Sachs (NYSE:GS) raised price target on the firm, citing projections for higher aluminum prices.

Analyst upgrades also benefited shares of Macy's (NYSE:M) (+5.1%); Citigroup (NYSE:C) lifted its rating on the shares to "buy" from "hold" on higher revenue expectations.  US Steel (NYSE:X) shares increased 4.6% after Bank of America (NYSE:BAC) changed its recommendation on the stock to "neutral" from "underperform," citing expectations the firm should return to profitability in 2010. Clorox (NYSE:CLX) shares gained 2.6% on speculation of a potential Procter & Gamble (NYSE:PG) bid.  AIG (NYSE:AIG) shares fell 5.4% in a late-session sell-off on talks of a possible secondary offering.  Goldman (NYSE:GS) shares rose 1.7% to $185.52, closing at its highest level since July 2008.

Of key interest today would be the much-expected FOMC policy report, due out at 2:15 ET.  Expectations that the Fed will maintain record low interest rate levels of zero to 0.25% are intact. Most expect the Fed language to support an ongoing accommodative stance.  Moreover, President Obama cautioned that unemployment could even get a little worse in coming months. Therefore, the Fed's $1.75 trillion asset purchase program is likely to remain in place to encourage the recovery's traction.

Chicago, IL – September 16, 2009 – Zacks Equity Research highlights Joy Global (JOYG) as the Bull of the Day and Zions Bancorporation (ZION) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Fannie (FNM), Freddie (FRE) and J.P. Morgan (JPM).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676

Here is a synopsis of all five stocks:

Bull of the Day:

We are confident about the long-term fundamentals of the mining industry, which is further supported by a sustainable secular shift in commodity demand in the emerging economies. This will provide Joy Global (JOYG) substantial growth potential once the global economy emerges from the ongoing turmoil.

Joy Global aims at maximizing operating efficiency and useful life of mining equipment through value-added aftermarket services, which gives the company significant edge over its competitors. Additionally, the stable revenue stream from the high-margin aftermarket operations help Joy Global offset its cyclical original equipment business.

Of late, Joy Global management has implemented several strategies to optimize cost-structure and realign production capacity to cope with the slowing customer orders and stay competitive amid the ongoing global slowdown. The company is pushing its overall inventory and working capital efficiency. Moreover, Joy Global is looking at increasingly relocating production capacity to low-cost regions like China, Poland, and South Africa. These actions will improve operational efficiency, boost profitability and also solidify long term viability of the company.

Bear of the Day:

Given the high competitive pressures in the banking industry, we expect continuous deposit pricing pressures as well as growth in higher cost funding accounts to weigh on Zions Bancorporation's (ZION) net interest margins (NIM), creating headwinds on the revenue front.

Loan growth has remained solid, but slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to lag loan growth and that a portion of future loan growth may be funded from alternative higher cost funding sources.

The growth through acquisition model exposes the company to the risk of overpaying for targets. We are concerned about Zions commercial real estate (CRE) exposure. CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters.

Latest Posts on the Zacks Analyst Blog:

Obama and Market Regulation

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

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

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

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Speaking at a Brookings Institution conference, Bernanke, however, added a note of caution, saying, “Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time."

This morning’s stock futures indicate Wall Street would open with gains, helped by increased M&A activity, optimistic guidance from companies, and words from Warren Buffett that Berkshire Hathaway (NYSE:BRK.A) is "buying stocks right as we speak."

Yesterday, the 30-stock Dow Jones industrial average gained 57 points, or 0.6%, to 9,683.41, its highest point since October 6.  The broad Standard & Poor’s 500 index edged up 0.3% to close at 1,052.63, its highest level in almost a year.  The tech-heavy NASDAQ advanced 10.86 points, or 0.52%, to 2,102.64.  NYSE volume picked up to 1.5 billion shares yesterday from 1.2 billion on Monday, with advancing shares outpacing decliners by a seven-to-three margin.  Treasury prices declined, with the 10-year off 6/32 as its yield rose to 3.447% on increased risk demands.

Best Buy (NYSE:BBY), the country’s largest home-electronic chain, and Kroger (NYSE:KR) painted a mixed picture.  Best Buy reported a 22% plunge in quarterly earnings and its shares shed more than 5% to $38.32.  However, the company lifted its FY10 earnings outlook to a range of $2.70 to $3.00 per share and said it sees full-year revenue of $48 billion to $49 billion.  Kroger shares dived 7.5% after the company reported weaker-than-expected earnings and cut its outlook.  Health care shares declined 0.8% as President Obama reiterated his commitment to medical care reform, sending shares of Coventry Health Care (NYSE:CVH) down 7.1%, and United Health Group (NYSE:UNH) down 3.7%.   

Eight of the ten S&P500 industry groups moved higher on the day.  Basic material (+2.5%) and industrial (+1.1%) sector shares led the advance on improved recovery prospects and higher commodity prices.  The gains in the Dow Average were led by materials and industrial companies like Alcoa (NYSE:AA) and Caterpillar (NYSE:CAT) as the index gained for the seventh time in eight days.  Alcoa (NYSE:AA) shares jumped 8.1% and were the leading gainers on the DJIA; AK Steel (NYSE:AKS) shares advanced 5.7%, and US Steel (NYSE:X) shares gained 4.8%.  Among industrial recovery stocks, Textron (NYSE:TXT) shares gained 6.6%, Caterpillar (NYSE:CAT) rose 6%, Deere (NYSE:DE) advanced 4.4% and General Electric (NYSE:GE) added 4.2%. Oil and gas shares rose 0.9% as weekly crude inventory numbers are expected to show a 2.4 million decline last week.

However, the dollar failed to capitalize on the positive US economic news and sank to fresh yearly lows against a basket of currencies, due to its role as a funding currency given the fall in the benchmark US 3-month Libor rate to its lowest on record and the Fed's well-publicized promise to keep interest rates low.

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.

On Thursday, the Dow Jones industrial average rose 80.26 points, or 0.8%, to 9,627.48, its highest close since October 6.  The broader S&P 500 index advanced 10.77 points, or 1%, to 1,044.14, its first five-day climb since November.  The Nasdaq composite index rose 23.63 points, or 1.2%, to 2,084.02.  With traders eschewing safe havens, yield on the benchmark 10-year Treasury note fell to 3.35%. The yield on the 30-year notes declined to 4.20%.

As the holiday-shortened week comes to an end today, investors would look toward extending gains into a sixth consecutive day, buoyed partly by strong reports from China.  This morning’s stock futures show shares opening with modest gains.  Dow Jones industrial average futures rose 9, or 0.1%, to 9,614.  Standard & Poor's 500 index futures rose 1.60, or 0.2%, to 1,039.00, while Nasdaq 100 index futures rose 3.00, or 0.2%, to 1,685.75.

Treasury Secretary Geithner was more forthcoming in a speech before Congress Thursday, as he noted the strategy has shifted to preparing for future growth, adding the economy is back from the brink.  Geithner advised, "We must continue reinforcing the recovery until it is self-supporting and led by private demand."
  
Thursday saw all ten S&P500 sectors moving higher, led by 2.2% gains in telecom shares, 1.7% in basic materials, 1.6% in oil and gas, 1.4% in tech, and 1.2% in consumer services.  On the New York Stock Exchange, volume picked up to 1.49 billion shares as advancing issues outpaced decliners by a 3-to-1 margin.

Among DJIA components, Procter & Gamble (NYSE:PG) shares jumped 4.2% after the company raised its 2010 profit outlook to $3.99 to $4.12.  Shares in Disney (NYSE:DIS) jumped 5.2% after the company reported strengthening ad markets, and hopes from improving consumer-spending trends.  Technology issues rose on increased estimates for top and bottom line results from Texas Instruments (NYSE:TXN) and ASML Holdings (NASDAQ:ASML); on the DJIA Cisco (NASDAQ:CSCO) shares advanced 3.5%. Cigna Corp (NYSE:CI) led healthcare issues higher even as President Obama's speech appeared to have garnered support for his much-talked healthcare initiative.

News from China indicated a V-shaped recovery underway in that country as the National Statistics Bureau reported investments, industrial output and credit expanded in August, alleviating to some extent fears that the government was clamping down on credit growth. Chinese Premier Wen Jiabao noted, "China's economic rebound is unstable, unbalanced and not yet solid," adding, "We cannot and will not change the direction of our policy when conditions aren't appropriate."  The Shanghai Composite closed up 2.2% Friday, with the Hang Seng at its highest in over a year.

The 30-share Dow Jones industrial average rose 56 points, or 0.6%, to 9,497.34 and the S&P 500 index added 9 points, or 0.9%, to 1,025.39, its highest close in 11 months.  The tech-heavy NASDAQ added 19 points, or 0.94%, to close at 2,037.77 points. On the New York Stock Exchange, advancing issues outpaced those that declined three to one on volume of 1.32 billion shares.  However, a jump in the CBOE Vix volatility measure, which rose 1.4% to 25.62, added a note of caution to the upbeat mood.

Dollar’s plunge to an 11-month low was also due to a Monday release from the United Nations, which again called for less dependence on the greenback as the premier global reserve currency. Indications that China would diversify some of its interests into gold also hurt the dollar, although the size of China's reserves mitigates against much impact.  Nevertheless, the news helped gold prices.  This morning's news indicated Barrick Gold (NYSE:ABX) is planning to raise up to $3.5 billion through a new share offering priced at $36.95 per share.

Yesterday, General Electric (NYSE:GE) was the leading gainer on the DJIA after being upgraded by JP Morgan (NYSE:JPM).  Costco (NASDAQ:COST) advanced 2.3% after two brokerages upgraded the stock. Among tech issues, IBM (NYSE:IBM) retreated 0.3% after it was downgraded; however, the firm noted it is "well ahead" of its 2010 earnings target of $10-$11 per share.  Advanced Micro Devices (NYSE:AMD) surged 14.6% as Barclays Capital (NYSE:BCS) upgraded the shares to "outperform."  AIG (NYSE:AIG) shares slumped 10.5% after Credit Suisse (NYSE:CS) downgraded the stock to "underperform," noting "little to no value for common equity" remains.

Nine of the ten S&P industry groups recorded gains Tuesday , with oil and gas (+2.7%) and basic material shares (+2.1%) leading the list of gainers.  Only healthcare shares registered declines, declining 0.3%.  Crude prices spiked $3.31 to $71.33 on expectations today's OPEC meeting will see no change in the production levels.  Moreover, Goldman Sachs (NYSE:GS) maintained a favorable long-term view on the group, saying there is an "increasing evidence of a stronger-than-expected recovery in global industrial activity."  Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) shares gained 2.2% and 2.1%, respectively.  Among basic material issues, Alcoa (NYSE:AA) rose 3.5% to $12.60.

In today's Presidential appearance before a rare joint session of Congress, President Obama will attempt to resuscitate his healthcare reform package and counter the groundswell of centrist opposition, which has driven his ratings to a low 52% point.

Following advances in the overseas markets, US stocks are expected to gain at the opening.  The DJIA futures added 79 points for a gain to 9496; the S&P500 increased 9.9 points heading toward a 1023.80 open.  Markets were closed yesterday for the Labor Day holiday.

On Friday, the 30-stock Dow Jones industrial average rose 96.66 points, or 1.03%, to 9,441.27.  The S&P 500 index rose 13.16 points, or 1.31%, to 1,016.40.  The technology-laden NASDAQ advanced 35.58 points, or 1.79%, to 2,018.78.  However, all three indexes ended the week lower.  During the week, the DJIA retreated 1.1% and the S&P 500 was off 1.2%; NASDAQ was comparatively better, easing only 0.5%.   

As stock prices gained, Treasury bonds lost ground.  The yield on the benchmark 10-year note rose 0.09% to 3.44% and the 30-year bond yield rose 0.11 to 4.27%.  On Tuesday $38 billion in 3-year notes is slated for auction, on Wednesday $20 billion of 10-years, and on Thursday $12 billion in 30-years.

Last week, Tax preparer (NYSE:HRB) saw its shares fall after the firm reported a wider-than-expected loss of 39 cents a share.  Apple (NASDAQ:AAPL) shares rose ahead of its media event next week where it is expected to introduce iPod Nano and Touch models that include digital cameras.  Societe Generale sharply raised its price target on the iPhone maker.

Traders return to their desks in a holiday-shortened week with last September’s collapse of Lehman Brothers absorption of Merrill and a government bailout of AIG still fresh in their minds.  Although a lot of water has passed under the bridge since then, traders still remain skeptical about the prospects of a full blown economic recovery.

This week, healthcare and insurance stocks may take a cue from President Obama's attempt to garner support for his much-talked-about healthcare initiative in a rare joint session of Congress Wednesday.  Remarks from Saudi Arabia's oil minister that crude markets are "in good shape" indicate further production cuts are not expected at this week's OPEC meeting.

Moreover, a Credit Suisse (NYSE:CS) report noting, "This is the ideal phase of the economic cycle...There is more of a positive growth surprise to come over the next three to six months," could be viewed in positive light.  Credit Suisse projected a 13% gain in the S&P500 to 1150 by mid-2010.

The Dow Jones industrial average edged up 3.32 points, or 0.03%, to end at 9,509.28.  The Standard & Poor’s 500-stock index fell 0.56 points to end at 1,025.57, and the NASDAQ fell 2.92 points, or 0.14%, to 2,017.98.  On the New York Stock Exchange, winners narrowly edged losers on volume of 1.23 billion shares.

Shares of auto-related companies were under pressure as the government’s cash-for-clunkers program was set to end.  Financial stocks retreated 0.9% after an influential banking analyst noted that the current economic crisis could see another 150-200 banks failing.  Moreover, SunTrust Bank (NYSE:STI) CEO warned of further pressure among US banks from troubled commercial real estate loans throughout 2010.  Its shares fell 3.8%. The news outweighed a report from Barclays Capital (NYSE:BCS) in which ratings on three credit card firms were raised to "overweight," due to estimates that a peak in write-offs is near at hand.  The firm raised its American Express (NYSE:AXP) rating to "overweight," and increased its price target to $38 from $28.

A rise in crude prices to almost $75 per barrel helped oil and gas shares lead the gainers on the S&P 500 with a 1.3% advance.  Shares of ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) rose 2.0% and 1.5%, respectively.  Defensive health care and utility shares also advanced, with gains of 0.3% and 0.2%, respectively.

President Obama's anticipated, 9:00 AM ET announcement from Martha's Vineyard, where he is on vacation with his family, regarding the reappointment of Fed Chairman Bernanke could boost sentiments today.  Many on the Wall Street like Bernanke’s calming presence and have grown increasingly confident in his ability to avoid further financial missteps. Moreover, the early nomination offers the Chairman the opportunity to make plans beyond the end of his term, which would include the exit strategies needed as the economy improves.

Chicago, IL – August 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: Citigroup (C), American Express Co. (AXP), Bank of America (BAC), Discover Financial Services (DFS) and JP Morgan Chase & Co. (JPM).

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 Thursday’s Analyst Blog:

Citi May Levy Annual Charges

In order to offset potential losses from new legislation signed by President Obama, rising credit card defaults and increasing unemployment, Citigroup (C) is considering charging its credit card customers an annual fee.

In May, the president signed the Credit Card Accountability, Responsibility and Disclosure -- Credit CARD Act -- of 2009 into law. The legislation will improve consumer disclosures and end some egregious practices in the credit card industry but stops short of capping interest rates and fees. Most of the provisions go into effect from Feb. 22, 2010, unless otherwise stated.

Despite being touted as a victory for consumers, the bill could have unintended consequences as credit card companies look for ways to make up for potential lost revenue.

Credit card companies have been gearing up for the new landscape for months, mailing consumers a spate of warnings about fee and interest rate changes. Citigroup is in the process of informing some cardholders that it will institute an annual fee, about $30, on certain accounts.

American Express Co. (AXP) recently sent out notice that it will eliminate over-the-limit fees on its consumer credit cards in October.

Competitors Bank of America (BAC), Discover Financial Services (DFS) and JP Morgan Chase & Co. (JPM) have yet not decided to levy annual charges on its card holders.

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The broad-based S&P 500 index rose 13 points, or 1.3%, to its highest point since October 6 as the Labor Department noted nonfarm payrolls tapered off in July.  Results from a separate survey showed an unexpected decline in unemployment rate, indicating an improving employment picture.  The Dow Jones industrial average rose 114 points to 9,370.07 and the technology-laden NASDAQ rose 27 points, or 1.4%, to 2,000.25.  Volume remained moderate as 1.5 billion shares exchanged hands on the New York Stock Exchange where winners topped losers three to one.

The S&P 500 is now up 49.4% from its twelve-year lows hit on March 9.  Last week, the DJIA advanced 2.2%, for a 6.8% year-to-date climb; the NASDAQ tacked on 1.1% for a 26.8% gain on the year; the S&P500 rose 2.3%, now standing on a 11.9% increase in 2009.

Better-than-expected earnings reports from companies, manufacturing data and growing signs that the economy is on a path to recovery have boosted sentiments on the Street and indicated that a recovery might indeed be underway.  Then, Friday’s employment numbers positively surprised and indicated that the most vexing issue of the economy, unemployment, is showing some sings of moderation.  As President Obama happily noted after release of Friday's employment numbers, "the worst may be behind us."     

With $95 billion in Treasury auction slated for this week and investors turning to equities, US Treasuries lost their safety appeal.  Treasuries dropped to their lowest levels since October as prices marked their sharpest weekly fall in six years.  After a broad decline on the week, the US dollar jumped 95 cents to close at $79.105 against a basket of currencies, following bullish economic news on the employment front.  In another development, the Senate provided a $2 billion extension of the "cash-for-clunkers" program.

The coming week will provide more data on the consumer, with key retailers' results and July monthly sales figures. Among those firms, Wal-Mart (NYSE:WMT) will report results.  The major discounter had decided to eliminate release of monthly comparable sales numbers, so its numbers will be closely watched. Also on the docket are: Abercrombie & Fitch (NYSE:ANF), JC Penney (NYSE:JCP), Kohl's (NYSE:KSS), Macy's (NYSE:M), Nordstrom (NYSE:JWN), and Urban Outfitters (NASDAQ:URBN).

Let's start with the good news. I first called attention to the favorable turn in new claims for unemployment insurance on April 9, noting that in each of the previous 6 recessions, an economic recovery began within 8 weeks of the peak in new claims. On May 7, I concluded we had enough statistical evidence to predict with 85% confidence that new claims for unemployment insurance had indeed peaked at the beginning of April. Although there was some concern as to whether seasonal adjustment could be confounding the July readings, it's pretty clear now that the substantial decline in new claims is the real deal.

Black line: 4-week average of seasonally adjusted weekly initial claims for unemployment insurance, from Department of Labor via Webstract. Vertical lines mark the first month of an economic expansion as ultimately determined by the National Bureau of Economic Research.

And many cheered Friday's BLS release showing that nonfarm payroll employment fell by 247,000 workers in July, the smallest drop since August, 2008. But the problem is, if a traditional economic recovery had actually begun in June (8 weeks after the April peak in claims), the number of people with jobs should have increased in July rather than fallen by another quarter million.

To put this in perspective, I took a look at where nonfarm payroll employment stood relative to where it had been at the time of the peak in unemployment claims for the current and each of the previous 6 episodes. I calculated the percentage change (measured as the change in the logarithm) in nonfarm payrolls between the month of the claims peak and the value 3 months later. To make sure we are looking at something comparable to the current real-time data available, in each case I used the figures as they would have actually been reported at the time (for example, the 2002 numbers come from the March 8, 2002 BLS release as reported by ALFRED). The current episode, in which employment has fallen by 0.75% since the April peak in new claims, is a clear outlier, even relative to the "jobless recoveries" of 1991 and 2002. President Obama had it exactly right when he declared, "As far as I'm concerned, we will not have a true recovery as long as we're losing jobs."

Jeff Frankel is cheered that the BLS index of the total number of hours worked held steady in July. That's better news than if hours were still dropping, to be sure, but it's far from enough to convince anybody that the tide has really turned if they weren't already sold on the conclusion; see also Dean Baker on that ever-pesky seasonal adjustment issue.

Source: FRED.

Perhaps the loudest cheering over the BLS report was because the unemployment rate improved from 9.5% in June to 9.4% in July. But let's look at how the net flows behind that calculation break down. The BLS only counts you as "unemployed" if you both (1) don't have a job and (2) have taken active steps within the last 4 weeks to try to find a job. According to the household survey from which the unemployment rate is constructed, there were 155,000 Americans on net who quit or lost their jobs in July but didn't immediately look for a new job, so those people newly without jobs don't contribute positively to a higher unemployment rate. And 267,000 Americans who reported themselves to be unemployed in June still weren't working in July but had also stopped actively looking for a job, so they're no longer counted as unemployed. That last development is the reason the unemployment rate went down. But given the current environment, it's hardly appropriate to interpret the fact that many people have simply stopped looking for jobs as reflecting an improving economy. Unless we get much better employment reports in September and October than we did in August, the unemployment rate is sure to climb back up.

Rising unemployment could mean more foreclosures and bankruptcies, putting new stress on financial institutions. Calculated Risk notes that even the increases we've already seen put us above the "more adverse scenario" from the recent stress tests.

Source: Calculated Risk.

So party if you feel like it. The popular meme that the recession is now over could ultimately prove to be correct.

But it's by no means guaranteed.

On August 10, 2009, Ocwen shareholders will receive a pro rata distribution of one share of Altisource common stock for every three shares of Ocwen common stock they hold as of July 30, 2009. As of July 15, 2009, there were 67,512,096 shares of Ocwen common stock issued and outstanding.

Shares of Altisource common stock are expected to begin trading on The Nasdaq Global Select Market starting on August 10, 2009, the distribution date.

Ocwen Financial Corporation is a financial services company engaged in the servicing of residential and commercial mortgage loans. Ocwen acquired mortgage-servicing rights (MSRs) for performing, sub-performing and non-performing residential mortgage loans, for which it earns fees such as annual servicing fee and late fees.

Ocwen is approved as a loan servicer by the Department of Housing and Urban Development, Freddie Mac (FRE) and Fannie Mae (FNM).

Ocwen rescheduled the release of its second-quarter earnings results on August 4, 2009 from August 6 announced earlier. We think the company may be a major beneficiary of President Obama’s loan modification plan. Ocwen was also recently appointed by FRE as a special servicer for the new pilot initiative launched to identify borrowers who are at risk of foreclosure.

Further, the Government is considering the inclusion of securities backed by servicer advances in the expanded TALF program. We expect these initiatives to be significantly accretive to both Ocwen’s revenue and earnings in 2009 and beyond, as they will also improve liquidity.

Ahead of the second-quarter results, we are maintaining our Buy recommendation on the shares.

The objective facts are far easier to handle in the models than the shifting, subjective expectations of people trying to deal with radically uncertain futures. This is what may get reflected in financial markets. Attempting to understand all of this requires conceding that some knowledge will be imprecise and will lie outside of the box (model). The model is simply a toy that can be thrown out when it no longer suits. This means that it is indeed possible to have valuable knowledge outside of hyper-models (although, of course, all thinking proceeds in terms of assumptions and simplifications).

But this will give the "scientists" among us headaches. As John Maynard Keynes famously said about the econometrician Jan Tinbergen, "[H]e is much more interested in getting on with the job than in spending time in deciding whether the job is worth getting on with."

As long as this is the dominant attitude, macroeconomics will remain "other-wordly." Instead, the way to greater realism is through more attention to the methodology of science and to whether "the job is worth getting on with." Paradoxically, greater philosophical sophistication would put economists is closer touch with the real world. (Or so I hope.)

Lean, mean DSGE machines?

Reading the recent characterizations of Ph.D. education in our top departments, one would conclude that all one ever learned in a program is how to write out and calibrate dynamic stochastic general equilibrium (DSGE) models, or for the older among us, calibrate a real business cycle model. I have to say that this all seems a little like an all too convenient caricature (and, as I have said repeatedly in the past, these types of models have led to important insights for issues besides crises [4]).

I won't deny that in the past 20 years, I haven't seen more than a few models that struck me as pretty irrelevant for analysis of real world issues. But I think that some mathematical training, and the use of models, is essential to economic analysis. After all, one can think of completely irrelevant frameworks for looking at the world even without a model, just as one can with a model.

Furthermore, perhaps my experience in a Ph.D. program is atypical but I don't remember being forced into a particular mode of analysis in writing my dissertation (University of California, Berkeley, 1985-1991). In macro/international/econometrics, my teachers included Roger Craine, George Akerlof, Jeffrey Frankel, Andy Rose, and Richard Meese. We studied Euler equations as well as the market for lemons. We knew what Arrow-Debreu markets were, but we also learned about the Great Depression (from Bernanke's paper as well as Friedman and Schwartz). The time series econometrics taught did not presuppose optimizing behavior. We even studied models with sticky prices (gasp!). Doesn't sound too doctrinaire to me.

So what was a common theme in the curriculum? For me, the defining feature in thinking about what model to use was whether the analysis answered the question posed, and whether the question posed was of interest. Now, whenever I read a dissertation prospectus, the key question I ask the student is: "What is the question being asked?", not what is the methodology. (Admittedly, the subdisciplines have different "characters", as alluded to by Paul Krugman; my focus was open economy macroeconomics, rather than macroeconomics/monetary economics.).

How monolithic?

I wonder if indeed the macroeconomic mainstream is as monolithic as conveyed by various observers. For instance, one certainly perceives a certain homogeneity amongst Ph.D.'s trained at certain universities. And there's a certain similarity in the mode of analysis preferred by economists in financial firms. Since the financial press tends to focus on Wall Street economists, one gets a misleading impression regarding the degree of uniformity of views.

To make this more concrete, let's consider whether academic economists differ in their views regarding the economy, as compared to those in the financial sector. I have some indirect evidence, pulled from Dilbert's survey of economists in the American Economics Association (see also [5]). Scott Adams, with the assistance of Joshua Libresco of the OSR Group, was kind enough to have the stats pulled. Last summer, academic economists believed that a President Obama administration would promise more progress on the economy than a McCain administration, by a 2 to 1 margin (n=314); in contrast financial sector economists were equally split. The sample in the latter case is quite small (n=29) (I dropped the undecided/no difference responses). Nonetheless, a difference in means test (recalling the variance of a binomial is (1/4)/n) rejects the null hypothesis of equality at 6%, using a two tailed test.

(As an aside, this finding further suggests that when the WSJ says most economist oppose a second stimulus, that probably characterizes Wall Street economists better than all AEA economists. Even for Wall Street economists, it's interesting to note that a majority of economists feel the stimulus package has already improved economics prospects, and will have a bigger impact in subsequent months. Hence, opposition to a second stimulus among WSJ-surveyed economists is not necessarily rooted in skepticism about the aggregate demand enhancing effect of the ARRA. (One would need a cross-tabulation of responses to verify that assertion.))

Concluding thoughts

If my conjecture is correct, then the supposed failure of macroeconomics is more the failure of macroeconomics as described in the popular press, rather than of the discipline itself (after all, Joseph Stiglitz is as much of the economics discipline, if not more, than Eugene Fama.) My conclusion: Not quite time to jettison the apparatus of modern macroeconomics.

For a less personal perspective, see Brad Delong and Paul Krugman, as well as my April post on "macroeconomic schisms".

Cree is as close to an LED pureplay as one can get. The LED City initiative was intended to demonstrate the company’s technology to individuals and companies. We think this strategy is likely to be effective, and expect demand for LED lighting to increase at an accelerated rate.

The company is also pursuing other strategies to popularize its technology. Earlier this month, CEO Chuck Swoboda met President Obama to discuss energy efficient technologies. The Department of Energy has done a study according to which the rapid adoption of LED lighting in the next 20 years would reduce electricity demand by 62%, eliminate 258 million metric tons of carbon emission, avoid the building of 133 new power plants and result in financial savings in excess of $280 billion.

The company plays in a nascent market, and its main competitors -- Lumileds Lighting, Nichia Corporation and Toyoda Gosei -- are privately held companies. Therefore, the potential for growth both in the U.S. and abroad is enormous.

OPPORTUNITIES

Since product demand is relatively stable, the companies should report earnings in line with expectations and, hence, the stocks have outperformed. Generally speaking, food companies generate earnings growth at a mid-to-high single-digit rate.

Beverage companies, however, are structurally able to grow faster at the high single-digit to low double-digit rate. But, cosmetics companies can grow earnings a percentage point or two above beverage companies.

At year-end of 2008, Consumer Staples sector has outperformed the market on a total return basis for five consecutive years; therefore, the positive performance disparity is long-in-the-tooth. In addition, the relative performance has seasonal attributes with almost all the relative gain coming in the fourth quarter as investors flee more cyclical investments, which tend to disappoint near the end of the year.

In 2009, it is highly probable that Consumer Staples will underperform as stocks begin to discount the recovery out of the current economic abyss. During the second quarter of 2009, Consumer Staples stocks were only up 11.7% versus the 15% gain for the S&P 500.

WEAKNESSES

The outlook for the tobacco industry is negative due to the impact of a 150%+ increase in the federal excise tax, the high probability of additional federal regulation, and the recent losses in product liability lawsuits. In February, President Obama signed the congressional SCHIP (State Children's Health Insurance Program) bill that included a $0.6166 per pack increase in the federal tobacco tax. Hence, the federal excise tax per pack of 20 cigarettes was increased from $0.39 to $1.01 per pack.

When federal excise taxes are increased, it is estimated that industry volume will decline by at least 8%, but the magnitude of the decline could be much greater, especially considering the backdrop of the weak economy. During the first quarter, industry cigarette volume declined 10.4% due to wholesale inventory reductions associated with the federal tax increase. A tobacco tax increase of this magnitude is unprecedented.

Additional regulation of tobacco products by the U.S. Federal Government is now expected. On June 8, 2009, the U.S. Senate again passed legislation, empowering the U.S. Food and Drug Administration (FDA) to regulate cigarettes and other tobacco products. Over the last several years, the House had not passed a similar bill, but in April, the House finally passed a comparable measure, indicating a more stringent regulatory framework for all domestic tobacco companies in the future.

The tobacco companies are losing product liability law suits. In late March 2006, the U.S. Supreme Court refused to hear an appeal in the Boeken case; therefore, Altria (MO) paid the $50 million judgment, despite claiming the judgment was excessive. Altria also lost the Bullock case; however, a new trial is scheduled to revise the amount of initial punitive damages of $28 million.

Lastly, in March 2009, Altria lost the Williams case when the U.S Supreme Court dismissed the AltriaÕs appeal of a 1999 punitive damages award of $79.5 million. However, the company is delaying payment by disputing an Oregon state law that requires 60% of any punitive damages should be paid to the state.

As a result of these negative developments, the ratings on both domestic tobacco companies, Altria and Reynolds American (RAI), are rated Sells.Zacks Investment Research

OPPORTUNITIES

Since product demand is relatively stable, the companies should report earnings in line with expectations and, hence, the stocks have outperformed. Generally speaking, food companies generate earnings growth at a mid-to-high single-digit rate.

Beverage companies, however, are structurally able to grow faster at the high single-digit to low double-digit rate. But, cosmetics companies can grow earnings a percentage point or two above beverage companies.

At year-end of 2008, Consumer Staples sector has outperformed the market on a total return basis for five consecutive years; therefore, the positive performance disparity is long-in-the-tooth. In addition, the relative performance has seasonal attributes with almost all the relative gain coming in the fourth quarter as investors flee more cyclical investments, which tend to disappoint near the end of the year.

In 2009, it is highly probable that Consumer Staples will underperform as stocks begin to discount the recovery out of the current economic abyss. During the second quarter of 2009, Consumer Staples stocks were only up 11.7% versus the 15% gain for the S&P 500.

WEAKNESSES

The outlook for the tobacco industry is negative due to the impact of a 150%+ increase in the federal excise tax, the high probability of additional federal regulation, and the recent losses in product liability lawsuits. In February, President Obama signed the congressional SCHIP (State Children's Health Insurance Program) bill that included a $0.6166 per pack increase in the federal tobacco tax. Hence, the federal excise tax per pack of 20 cigarettes was increased from $0.39 to $1.01 per pack.

When federal excise taxes are increased, it is estimated that industry volume will decline by at least 8%, but the magnitude of the decline could be much greater, especially considering the backdrop of the weak economy. During the first quarter, industry cigarette volume declined 10.4% due to wholesale inventory reductions associated with the federal tax increase. A tobacco tax increase of this magnitude is unprecedented.

Additional regulation of tobacco products by the U.S. Federal Government is now expected. On June 8, 2009, the U.S. Senate again passed legislation, empowering the U.S. Food and Drug Administration (FDA) to regulate cigarettes and other tobacco products. Over the last several years, the House had not passed a similar bill, but in April, the House finally passed a comparable measure, indicating a more stringent regulatory framework for all domestic tobacco companies in the future.

The tobacco companies are losing product liability law suits. In late March 2006, the U.S. Supreme Court refused to hear an appeal in the Boeken case; therefore, Altria (MO) paid the $50 million judgment, despite claiming the judgment was excessive. Altria also lost the Bullock case; however, a new trial is scheduled to revise the amount of initial punitive damages of $28 million.

Lastly, in March 2009, Altria lost the Williams case when the U.S Supreme Court dismissed the AltriaÕs appeal of a 1999 punitive damages award of $79.5 million. However, the company is delaying payment by disputing an Oregon state law that requires 60% of any punitive damages should be paid to the state.

As a result of these negative developments, the ratings on both domestic tobacco companies, Altria and Reynolds American (RAI), are rated Sells.Zacks Investment Research