Business Blog Posts

Stocks have shown remarkable resilience as investors snap up any drop in prices, even in the face of what seem like considerable risks -- an overbought market and a still potentially explosive situation in the Middle East.

Confidence in the economy, strong earnings, and inflows into equities from bond funds have been enough to push indexes to new highs on an almost daily basis even if light volume and slight gains show investors are not making aggressive moves.

Robert Auer, a fund manager at SBAuer Funds in Indianapolis said that after eight months of outflows his Auer Growth Fund had started to see inflows.

"I'm wondering if this is happening at American Funds and Fidelity and everyone else," he said. "I'm having to put it to work because we typically don't hold any cash, so it is causing me to do buying."

Bond funds have seen three months of outflows, the longest streak in more than 2 years.

Over that period $23 billion has moved out of bond funds while $16 billion has flowed into equity funds, according to data from the Investment Company Institute.

A rise in market interest rates has hit bond prices recently and is helping to spur those outflows. During the week the yield on the 10-year Treasury note rose to its highest level since April.

Rising yields have accompanied increasing optimism over the economy that will again be tested with retail sales and industrial output data during the week.

"Investors right now think the pullback is already here and they're not buying stocks - and not selling but not buying at a time of inflows is forcing the market to drift higher," said Thomas Lee, U.S. equity strategist at JPMorgan in New York.

Volume hit its lowest levels so far this year on Tuesday with just over 7 billion shares traded on the NYSE, Amex and Nasdaq compared to last year's average of around 8.5 billion.

Lee is expecting a pullback in the March and April time frame, with the S&P 500 rising to 1,333 before falling to around 1,250, taking the market back to where it was in late December.

"You really need to start buying at the 1,270 level," he said. "You need to be selective and getting ready to buy that dip."

The 1,333 level is the double-your-money mark from the bear market intraday low of 666.79 in March 2009 and is seen as a significant level by some investors.

OPTIONS MARKET SHOWS GROWING CONCERN

The new regulation, which will come into effect in March, is set to install a new red-tape barrier for doing business in China, the world's second largest economy where double-digit growth has attracted more than $105 billion in foreign direct investment last year.

Foreign investments in military, agriculture, energy and resources, key infrastructure, transport systems, key technology sectors and "important equipment manufacturers" may be subject to reviews, according to a statement published on the central government Internet portal, www.gov.cn.

The review will be conducted by a "foreign investment security review board" under the cabinet. Members of the board will come from the National Development and Reform Commission, the Ministry of Commerce and other agencies on ad hoc basis.

The new body could enable China to turn the tables on some countries that have previously blocked its investments on national security grounds.

China suffered the biggest knock to its deal-making confidence in 2005, when state-controlled oil firm CNOOC Ltd withdrew an $18.5 billion bid for U.S. oil firm Unocal after the Senate moved to block it on national interest grounds.

But Beijing, which introduced an anti-trust law in 2008, has also blocked deals that do not conform with its national plans in the past.

China rejected Coca-Cola's $2.4 billion bid for China's top juice maker Huiyuan, in 2009 and buyout giant Carlyle's $375 million bid for Xugong, China's biggest construction equipment maker, in 2008.

The government wants to consolidate many heavy industries such as steel into the hands of a few big players, and it has blocked several foreign attempts to buy into its huge steel sector, by far the world's biggest.

In 2007, it blocked ArcelorMittal from gaining a majority stake in China Oriental Group and in 2009 it forced Russia's Evraz Group to abandon an option to take control of Delong Holdings Ltd, a Chinese steelmaker listed in Singapore, in a $1.5 billion deal.

INVESTOR-UNFRIENDLY?

China attracted $105.7 billion in foreign direct investments in 2010, 17.4 percent more than in 2009, but some foreign businesses have complained that the Chinese government is becoming more unfriendly toward investors.

According to the new regulation, Chinese government agencies, trade associations, competitors, suppliers and other related parties are allowed to apply for the start of a review of a foreign-related M&A deal.

The process will include two parts as "general review" and "special review." For those deals failed to pass the "general review," a "special review" will be started that may last up to 60 days.

If Beijing finds a deal that could potentially threaten national security, it can terminate the deal.

"Related departments and units must enhance the sense of responsibility to guard state and commercial secrets... to effectively safeguard national security," the cabinet said in the notice.