Business Blog Posts

With earnings season winding down and a light economic calendar next week, the market will be left to its own devices to sort out its direction.

A rise of more than 16 percent in the S&P 500 .SPX since the start of September had many investors expecting a pullback after the trio of big events. But it appears to have emboldened them instead.

The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog. This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."

With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.

"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.

That feeling permeated the market even before Friday's jobs data, which showed the fastest payroll growth in the private sector since April. It is difficult to see the market fighting Fed-led stimulus, strong corporate results and labor force improvements.

DIAL 'M' FOR MOMENTUM

The Fed's intentions make the search for yield even more intense, which could bolster financial stocks in coming days.

Financials climbed solidly higher on Friday, with the KBW Bank index .BKX up 2.2 percent, on talk the Fed may allow stronger banks to increase dividends. They could continue to climb as they have underperformed the rally since September.

Call volume in the Financial Select Sector ETF SPDR fund (XLF.P) surged, as option traders exchanged about 618,000 contracts in the XLF on Friday, led by the trading of 480,000 call options. The overall options volume was three times greater than its average daily turnover, according to options analytics firm Trade Alert.

A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.

Bespoke Investment Group noted the rally has put the major indexes and sectors into "extreme overbought territory" in the near-term, with the S&P 500 and six sectors at or near two standard deviations above their 50-day moving averages.

The less confrontational tone emerged after a two-day meeting of Asia Pacific finance ministers who gave their backing to last month's Group of 20 agreement to shun competitive currency devaluations and be vigilant against volatile exchange rate movements.

The meeting in the ancient Japanese capital Kyoto came amid growing criticism from a number of countries, notably China and Germany, of U.S. monetary policy and its proposals to solve economic imbalances.

However, China's Vice Finance Minister Wang Jun voiced some support for quantative easing by the United States to help boost its economy.

"And boosting the U.S. economy will play an important role in global economic recovery," he told reporters.

But he added: "At the same time, the quantitative easing policy has already prompted the concern of emerging nations, and we will continue paying attention to the implementation of this policy."

In a clear reference to the United States, which this week announced it would inject an extra $600 billion into its banking system, Wang warned major economies to refrain from excessive issuance of currency.

A number of other leading economies have warned against the latest U.S. moves to lift its economy.

Brazil's central bank head Henrique Meirelles said on Friday that the U.S. Federal Reserve's decision to increase Treasury purchases to boost the economy risked creating asset bubbles elsewhere.

The Brazilian finance minister's warning of a "currency war" in September captured the frustration many policymakers have over the dollar's steady decline and the appreciation in their own currencies due to ultra-easy U.S. monetary policy.

German Finance Minister Wolfgang Schaeuble went further by saying U.S. monetary policy was "clueless."

Federal Reserve Chairman Ben Bernanke has defended the move to buy $600 billion of government debt by saying that boosting the U.S. economy is important for global growth.

REDUCE IMBALANCES

The talks in Kyoto come ahead of a meeting of G20 leaders in Seoul on November 11-12, who will be trying to resolve at least some of their difference over how best to reduce the imbalances that are destabilizing the world economy.

The United States has suggested setting numerical targets for capping current account surpluses and deficits, something Beijing has called outmoded central planning.

He suggested doing so would bolster a dollar whose weakness has sparked cries of foul from Bogota to Beijing.

The Fed's decision to buy $600 billion of government debt has drawn scathing comments from nations which contend it is generating global instability by strengthen their currencies against the dollar, inflating asset bubbles and fueling inflation in their economies.

From Berlin German Finance Minister Wolfgang Schaeuble pronounced, "With all due respect, U.S. policy is clueless."

Bernanke, answering questions from college students in Florida, stressed that Fed policies aimed at giving a boost to the weak U.S. recovery would pay dividends around the world.

"I think it's important to emphasize ... that a strong U.S. economy, a recovering economy, is critical, not just for Americans, but it's also critical for the global recovery," Bernanke said.

G20 TENSIONS

The Fed's easy monetary policy, made even looser on Wednesday with the new bond-buying plan, has rankled emerging market economies and others, and it looks set to be a bone of contention at a Group of 20 nations summit in Seoul next week.

South African Finance Minister Pravin Gordhan said Fed policy "undermines the spirit of multilateral cooperation" that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged.

Bernanke said U.S. policymakers were fully aware of the dollar's importance in the global economy as a reserve currency. The dollar has weakened sharply and did so again after this week's decision on a new round of so-called quantitative easing.

"The best fundamentals for the dollar will come when the economy is growing strongly," Bernanke said. "That's where the fundamentals come from."

He told the students that while commodity prices have risen sharply, they were the exception amid generally muted prices for other products and should not cause a serious problem.

Bernanke said there was ample slack in the U.S. economy that will prevent producers from being able to fully price costlier commodities into finished products that consumers buy.

"Globally traded commodities like energy, food ... have been going up pretty sharply," he said. "Where there's a lot of slack in the economy ... it's very, very difficult ... for producers to push through those costs to the final consumer."

SLACK TO SPARE

The billionaire investor's Burlington Northern Santa Fe railroad had heavy demand in the quarter to transport a range of commercial and agricultural products, reflecting the growing strength in the manufacturing sector.

Buffett called his purchase of the railroad "an all-in wager on the economic future of the United States," and its contribution to results lent credence to his strategy.

But the sore spot in the quarter was a loss on a portfolio of options tied to a basket of major stock indexes. Despite his distaste for derivative instruments, Buffett has insisted these bets would pay off, given their long time-frame and high upfront fees.

But they generated a loss of $700 million in the quarter, compared to a profit of $220 million a year ago.

Long-time Berkshire investors said the results were "reasonable" but they still took pause from the fall in profits in the quarter.

"I think (a) concern obviously is some of the derivative adjustments that are happening, and it's hard to say why that's the case," said Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, California, which invests $1 billion and owns Berkshire stock.

INVESTMENT PORTFOLIO

Berkshire is better known for its stock portfolio than its derivatives, with Buffett's imprint on some of America's top companies in a range of industries.

He was a net seller of shares in the quarter to the tune of about $1.2 billion. Berkshire's quarterly report Friday showed it trimmed holdings in Procter & Gamble Co but added nearly $500 million to its position in Wells Fargo, among other moves.

At the same time, cash and equivalents rose 23 percent in the quarter to $34.46 billion.

"I don't think it means he's gearing up (for a deal), I think it's more reflective of the investment strategy. This is really just a cash cow," YCMNET's Yoshikami said. He said Berkshire is, for him, two companies -- one to generate cash flow and one to make venture investments.

Those kinds of investment decisions have largely been driven by Buffett, who turned 80 in August.

Frequently called the "Oracle of Omaha," he has run Nebraska-based Berkshire since 1965. The conglomerate owns about 80 businesses and a huge portfolio of stocks valued in the tens of billions of dollars.

As he ages, Buffett's succession has been a concern for Berkshire investors. He eased their fears somewhat by naming hedge fund manager Todd Combs as one of his firm's asset managers on October 25. The little known Combs will oversee a significant portion of Berkshire's holdings.

Nonfarm payrolls rose a solid 151,000 in October, the first gain since May, a government report showed on Friday. Private hiring rose by 159,000, while the government cut 8,000 jobs.

Data for August and September also was revised to show 110,000 fewer jobs were lost than previously thought.

Economists had expected payrolls to increase a tepid 60,000 last month, with private employment rising 75,000.

"This was hugely surprising. It's strong across the board," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York.

The dollar rose on the data, while bond prices retreated. However, stocks slipped as investors pocketed profits after markets hit a two-year high on Thursday.

The solid jobs growth failed to make a dent in the lofty unemployment rate, which remained at 9.6 percent for a third straight month, in line with market expectations.

Concern over the anemic job market was a factor behind the Federal Reserve's decision this week to pump an additional $600 billion into the economy through government bond purchases to push interest rates down further and stimulate demand.

The U.S. central bank, which cut overnight interest rates to near zero in December 2008, had already bought about $1.7 trillion in government debt and mortgage-linked bonds.

Analysts said the data was not strong enough to knock the Fed off its new policy course, but it tempered speculation the central bank might have to step up its bond buying.

"It's still probably not enough to get the Fed convinced the unemployment rate is going to go down or inflation is going to go up," said John Canally, an economist at LPL Financial in Boston. "But this is certainly a good kick-start."

The economy would need to create at least 125,000 jobs a month on a sustained basis to make a noticeable dent in unemployment. Still, private hiring has come in above 100,000 in each of the past four months -- an encouraging sign.

"That's not good enough, the unemployment rate is still unacceptably high and we've got a lot of work to do," President Barack Obama said at the White House.

Anger over joblessness helped the Republican Party wrest control of the House of Representatives from Democrats in elections on Tuesday, which were viewed as a referendum on Obama's economic policies.

In his remarks, Obama renewed a call for small business tax breaks, new infrastructure spending, aid for the jobless and an extension of soon-to-expire tax cuts for the middle class.