Business Blog Posts

A data-heavy week could give investors hard evidence to justify a rally that lifted the S&P 500 16.8 percent from its August 31 close to the 2010 closing high hit last week.

But the index has been unable to move above 1,228, a key resistance level, and its chart is brewing a double-top formation, a very bearish signal.

"We're susceptible to a pullback if we don't get any clarity on fiscal policy and if any of this economic data disappoints next week," said John Lynch, chief equity strategist at Wells Fargo Funds Management in Charlotte, North Carolina.

"I would think you're going to see some, not all, smart money pull their investment (out of stocks) the closer we get to 1,228. These guys recognize we still have above 9 percent unemployment, sovereign credit risks, a consumer deleveraging and no clarity as to what businesses should do with their cash."

For the week, the Dow Jones industrial average .DJI and the Standard & Poor's 500 index .SPX each fell 2.2 percent. The Nasdaq Composite index .IXIC lost 2.4 percent.

The S&P 500 brushed the 61.8 percent retracement of its slide from the historic highs in 2007 to the low in March 2009.

This was the second time the index backed away from the 1,228 area and its chart could be drawing a bearish "double top" formation. The last retreat from that level, in April, was the start of a correction that took the S&P to its 2010 low in July.

The S&P 500 dipped on Friday below its 20-day moving average for the first time since September 1 but managed to close above it in a sign that that level, currently just above 1,194, could provide strong technical support.

LET'S TALK ABOUT TAXES

Investors will closely watch a meeting next Thursday between U.S. President Barack Obama and congressional leaders to discuss policy, including tax cuts.

Republicans will take control of the House of Representatives starting in January following their strong gains in the November 2 elections. They have vowed to force a full extension of all tax cuts enacted during the administration of President George W. Bush. Otherwise, the tax cuts expire at the end of 2010.

Most of Obama's Democrats favor extending tax cuts only for the first $200,000 of income of individuals and $250,000 for families.

"Bush tax cuts are very important for the market," said Michael Yoshikami, president and chief investment strategist at YCMNET Advisors in Walnut Creek, California.

"If they're not renewed, that could cost 0.75 percentage point per year in GDP (growth). I don't think any other proposal would have that kind of significant impact. If dividend taxes were raised, that would be a still important but more minor issue," he said.

Hu told a regional business forum in Japan on Saturday that China "will make vigorous efforts to establish lastingly effective means for expanding domestic demand, especially consumer demand."

China's rapid growth has helped to shore up the global economy and spur on Asia while the United States and Europe have struggled with high unemployment and financial woes.

But international tensions over China's growing clout and how it plans to use it spilled over into a summit of the Group of 20 (G20) leading economies in Seoul that ended on Friday.

"China will continue making encouragement of a balanced international balance of payments an important task in ensuring macroeconomic stability," Hu told a business forum in the port city of Yokohama, which is hosting the Asia-Pacific Economic Cooperation (APEC) summit over the weekend.

China has also been at odds with Japan after a sea territory dispute flared in September, and the United States has pressed China over its yuan exchange rate, which Washington argues is held artificially low, unfairly boosting Chinese exports.

"China will continue going forward with reform of the renminbi exchange rate formation mechanism on the basis of retaining initiative, controllability and gradualness," Hu said.

CURRENCY REFORM

China has maintained a drumbeat of criticism of U.S. easy money policies over recent days, claiming that Washington could destabilize the global economy and inflate asset bubbles after the U.S. Federal Reserve announced it was going pump as much as $600 billion into the economy.

Treasury Secretary Timothy Geithner last month put off a decision on whether China is manipulating its currency for trade advantage until some time after the G20 summit and the APEC gathering in Yokohama.

"China will adhere to open development, to a fundamental national policy of opening up," Hu said.

The Chinese president also pointed to the importance of newly emerging economies in the global economy.

"Especially in responding to the international financial crisis, the emerging market economies led the way in economic recovery and have maintained quite fast growth," Hu said.

Separately, Hu met a senior Taiwanese politician, Lien Chan, on the sidelines of the APEC summit to discuss economic relations, which have been at odds since 1949 when Nationalist, or Kuomintang, forces fled to the island from the mainland to escape victorious Communist forces.

Taiwan and China this year signed an Economic Cooperation Framework Agreement, which may pull the island economically closer to the fast-growing mainland and eventually open the way for discussion of their political future.

The robust demand for shares of GM, the American industrial icon which filed for bankruptcy in June 2009, underscores growing investor confidence the auto industry has come through the punishing downturn of the past two years with sharply lower costs and higher profit potential.

GM's IPO is expected to price on Wednesday. The shares are expected to start trading on the New York and Toronto stock exchanges on Thursday.

The landmark IPO will likely price around the top end of the $26 to $29 per share range and the full overallotment option -- additional shares underwriters can sell to help stabilize the stock after it begins trading -- will likely be exercised, three people familiar with the matter said.

There is also "excess demand" for the $3 billion worth of preferred shares GM plans to sell, the sources said.

The strong response also bodes well for upcoming initial public offerings by other auto industry companies that restructured in bankruptcy, such as Chrysler and auto parts suppliers Delphi and Visteon, analysts said.

Just over a year after a politically unpopular $50 billion bailout that left the U.S. Treasury with a 61 percent stake, GM filed to sell about $10 billion worth of common stock and $3 billion of preferred shares. Such an offering would mark the second-biggest U.S. IPO ever after Visa Inc and one of the largest, globally.

The full overallotment could take the total IPO amount to as much as $15.65 billion. It would also cut the U.S. Treasury's stake to just over 40 percent.

Pricing at the top end of the range and based on a diluted share count of roughly 1.9 billion, GM would have a market value of just over $55 billion, roughly on par with smaller rival Ford Motor Co

For U.S. taxpayers to break even, GM needs a market value of roughly $70 billion.

GM is still accepting investor orders for shares in the IPO and is not expected to close the order books until early next week, the sources said. The sources did not have permission to speak publicly and declined to be named.

"There's already a tremendous amount of interest because (GM) restructured themselves completely," said Mirko Mikelic, a fixed-income portfolio manager at Fifth Third Asset Management, who plans to buy GM's preferred shares.

GM lost $88 billion from 2005 through just before its 2009 bankruptcy. Underscoring its turnaround it earned a $4.1 billion net profit in the first nine months of the year and is on track for its first full-year profit since 2004.

GM has said it can now break even at U.S. industry auto sales as low as 10.5 million vehicles. That means the restructured GM would have made money in 2008 when the old GM lost $31 billion.

Industry sales are expected to rise to 11.5 million vehicles this year from 10.4 million last year and are widely expected to recover to the pre-recession level of more than 15 million units in the next few years.