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We are dedicated to helping you with all of your tax and financial needs.  Minimizing your tax burden is our goal.

We have been helping hundreds of clients save thousands of dollars each on their tax returns.

Why is it important to call today: we are presently offering free review of your 2008 and 2009 tax return and free tax planning for 2010

Act before the following deadlines:
1. October 15, 2010  Last day for extension filing
2. December 31st, 2010  Last  day for tax planning for tax year 2010

Jacques Gendreau, MBA, CETEC
949 500 3460
JacquesGendreau@hotmail.com

Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie

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By Craig Torres

Oct. 26 (Bloomberg) -- For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.
Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower.
Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after the Nov. 2-3 meeting. The danger is that once the Fed kindles price increases, inflation will be difficult to control.
“By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The risk is a late 1970s type of scenario where the inflation genie gets out of the bottle.”
The U.S. Treasury Department yesterday sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Fed will be successful in sparking inflation. The securities drew a yield of negative 0.55 percent.
‘Unacceptable’ Inflation
William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, yesterday repeated that current levels of inflation and a 9.6 percent unemployment rate are “unacceptable” and said the Fed needs to take action, even though expanding the balance sheet isn’t a “perfect tool.”
“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” Dudley said in response to audience questions after a speech in Ithaca, New York. Policy makers haven’t yet decided whether to buy additional assets, he said.
A second jolt of monetary stimulus would expand the Fed’s $2.3 trillion balance sheet to a record and likely work through the exchange rate as well as interest rates, said former Fed governor Lyle Gramley. A weaker dollar would boost U.S. exports and push prices higher as the cost of imported goods rises.
Competitive Exports
“It is a channel that works not only from the standpoint of encouraging more growth and making exports more competitive, but if you’re worried about inflation getting too low, this tends to put a little upward pressure” on it, said Gramley, a senior adviser at Potomac Research Group in Washington.
An index of the dollar versus six major currencies is down 5.2 percent since Sept. 20, the day before Fed officials concluded their last meeting by saying inflation measures were “somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” The Standard and Poor’s 500 Index is up 3.8 percent since then.
A 10 percent decline in the dollar in the first six months of next year would push the economy above estimates of trend growth, moving indicators on inflation and employment more rapidly toward the Fed’s policy goals, according to a simulation run by Macroeconomic Advisers LLC on their model of the U.S. economy.
Effect on GDP
Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent. In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points.
Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast. The consumer price index, minus food and energy, would rise 0.4 percent and 0.7 percent more each year.
A continuing rally in stocks could also provide an added lift to growth, the firm’s simulation showed.
The firm, co-founded by former Fed governor Laurence Meyer, predicts the Wilshire 5000 stock index will jump 14 percent next year and 16 percent in 2012. The index tracks the impact of rising asset prices on household net worth. An additional 10 percent gain in the stock index in the first half of 2011 boosts growth by 0.1 percentage point and 0.3 percentage point more than the firm’s baseline forecast.
‘Transmission Mechanism’
“The transmission mechanisms are risk assets and a lower dollar,” said Steven Einhorn, who helps manage $5 billion at hedge fund Omega Advisors Inc. in New York. “Exports will respond over the next six to 12 months, and a further lift in risk assets will have benefits in more consumer spending as it lifts households’ net worth.”
A weaker dollar won’t be welcomed by U.S. trading partners concerned about the danger of competitive devaluations as nations seek to boost exports and growth.
Bernanke received “criticism” at a meeting of Group of 20 central bankers and finance ministers in South Korea last weekend, said German Economy Minister Rainer Bruederle.
“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”
$500 Billion
Economists Jan Hatzius at Goldman Sachs and Ethan Harris at Bank of America predict the Fed will spread an initial $500 billion in asset purchases over six months. That is the figure mentioned in the Oct. 1 speech by Dudley, who said $500 billion in purchases could have the same effect as cutting the benchmark federal funds rate by as much as a 0.75 percentage point.
The FOMC’s meeting next week could be contentious, with regional bank presidents such as Charles Plosser of Philadelphia and Richard Fisher of Dallas expressing concern in public remarks about a second round of asset purchases. Neither is a voting member of the FOMC this year.
Plosser told reporters Oct. 20 that high unemployment may not be “amenable to monetary-policy solutions” and added that he was “less inclined to want to follow a policy that is highly concentrated on raising inflation and raising inflation expectations.”
Fisher said central bank officials must be mindful of the effect their actions are having on the dollar.
Dollar Impact
“We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies,” Fisher said in an Oct. 22 interview in New York.
The prospect of an easier policy for a long period could prompt foreign investors to use Fed purchases as an opportunity to unload longer-term Treasuries, said Vincent Reinhart, former director of the Fed Board’s Division of Monetary Affairs.
“This might put more pressure on the exchange value of the dollar than the Fed is willing to tolerate,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington.
Some commodity prices have already started to move up in anticipation of further Fed stimulus. Gold futures traded on the Comex in New York have risen 22 percent this year to $1,338.90 an ounce, while silver is up 40 percent.
“The Fed would like to talk up as many asset classes as it can,” said Scott Minerd, the Santa Monica-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion.
Asset Bubbles
“The history of the Fed, over the last 20 years, is one of bubble to bubble: one bubble deflates to create another bubble,” Minerd said. “We are certainly heading into the mother of all bubbles with commodities and gold.”
Another danger for the Fed is that its policy fails to have the intended effect, damaging the central bank’s credibility, Reinhart said.
“What happens if they bulk up the portfolio by another $500 billion in the next six months and there is no material change in markets or the outlook,” he said. “Presumably, the Fed will double-down and buy some more, but at some point, people will ask, ‘Is that all there is?’”
U.S. central bankers cut the benchmark lending rate to zero in December 2008. Seeking more stimulus, they launched a $1.7 trillion program to buy mortgage-backed securities, housing agency debt and U.S. Treasuries. The purchases ended in March.
Jackson Hole
Bernanke told central bankers in Jackson Hole, Wyoming, in August that those purchases “pushed investors into holding other assets with similar characteristics,” lowering interest rates on a broad range of debt.
While a second round of Treasury purchases would also lower nominal rates, the FOMC has been explicit about the need to lower real interest rates through higher inflation, minutes of its Sept. 21 meeting show.
The personal consumption expenditures price index, minus food and energy, rose at a 1.4 percent annual rate in August. That’s below the Fed’s long-run preference range of 1.7 percent to 2 percent. The year-over-year increase in consumer prices jumped as high as 14.8 percent in 1980 during the administration of Jimmy Carter.
Even moderate rates of inflation can shift wealth through the economy. Companies can make more money because their prices rise faster than wages. Households can also benefit as incomes eventually rise while costs on fixed-rate debt stay the same.

No reason to rush into real estate because inflation will remain low for an other two years...

Inflation to Fall Short of Fed’s Goal Through 2012, Survey Says

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By Timothy R. Homan and Kristy Scheuble

Oct. 13 (Bloomberg) -- Inflation in the U.S. through 2012 will fall short of the Federal Reserve’s long-term goal as growth and employment are slow to rebound, according to economists surveyed by Bloomberg News.
The Fed’s preferred price gauge, which is tied to consumer spending and excludes food and fuel costs, will climb 1.2 percent next year and 1.5 percent in 2012 on average, according to the median forecast of economists polled from Oct. 4 to Oct. 12. Most policy makers project those prices will increase 1.7 percent to 2 percent in the long run.
Economists cut gross domestic product forecasts for the next two years as a lack of jobs limits consumer spending, the biggest part of the economy. Stocks and Treasury securities have rallied since the Fed met last month as investors bet central bankers will pursue large-scale asset purchases to lower borrowing costs, spur the recovery and prevent prices for slowing further.
Low inflation “provides the Fed with additional reason to engage in quantitative easing,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “Price growth will be limited by the moderate recovery expected in consumer spending, and that would be in keeping with expectations of a relatively high unemployment rate.”
The Fed will keep its benchmark interest rate on overnight loans between banks near zero through 2011, according to the survey median, longer than previously estimated. The rate has been in a range of zero to 0.25 percent since December 2008.
Fed Minutes
After its most recent meeting on Sept. 21, Fed policy makers said too-low inflation would warrant looser monetary policy. Minutes of the meeting, released yesterday, said central bankers were prepared to ease “before long” and weighed strategies for raising inflation expectations. The Fed next meets November 2-3.
The Standard & Poor’s 500 Index yesterday closed at the highest level in five months as the minutes showed policy makers were ready to pump more cash into the economy through large- scale asset purchases, a strategy known as quantitative easing. The yield on the two-year note touched a record low 0.327 percent.
The world’s largest economy will expand 2.4 percent next year, down from last month’s 2.5 percent projection and less than the 2.7 percent forecast for this year, according to the median estimate of 60 economists in the Bloomberg survey. In 2012, growth will accelerate to 3 percent, less than September’s 3.1 percent median forecast.
The world’s largest economy grew at a 1.7 percent annual pace in the second quarter after expanding at a 3.7 percent rate the previous three months, according to the Commerce Department. The economy contracted 2.6 percent last year, the biggest decline since 1946.
Number Surveyed
The survey showed 41 economists provided inflation forecasts for 2011 and 27 for the following year.
Household purchases, which account for about 70 percent of the economy, will climb at a 2 percent rate in the last three months of this year and 2.2 percent next year, the same as previously forecast, the survey showed. Consumer spending rose 3 percent on average over the past three decades and fell 1.2 percent last year, the biggest decrease since 1942.
Elevated joblessness will probably keep holding back spending. Unemployment will average 9.3 percent in 2011 and 8.7 percent the following year, according to the survey. A month ago, economists had projected a 9.2 percent average rate for 2011 and 8.3 percent for 2012.
The jobless rate was 9.6 percent in September for a second month, the Labor Department said last week. Joblessness reached a 26-year high of 10.1 percent a year ago.
Fed’s Mandate
“The Fed is definitely going to be missing its mandate in terms of sustainable growth and full employment over the next year to two years,” said John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston.
Levi Strauss & Co., the maker of jeans and Dockers pants, is among companies saying that spending on advertising and promotions to spur sales is hurting net income, which slipped 32 percent to $28 million in the quarter ended Aug. 28. Third- quarter revenue at the San Francisco-based company climbed 6.6 percent to $1.11 billion.
“It’s still very pessimistic out there, still driven primarily by the lack of jobs,” Levi’s Chief Financial Officer Blake Jorgensen said by telephone from San Francisco yesterday. “Consumers are clearly buying products that they need for their day-to-day lives,” said Jorgensen, 50. “There’s not frivolous spending in any way.”
Pessimism on the economy and jobs help explain why Democrats are at risk of losing control of the House of Representatives in the Nov. 2 elections.
The general Republican message of less spending, lower taxes and repeal of the health-care overhaul is connecting with voters in a Bloomberg National Poll. Pluralities of those polled supported overturning the health-care measure -- President Barack Obama’s signature legislative accomplishment -- and back the “Pledge to America” that offers a road map for how Republicans would govern if they win congressional majorities.

Only Greenspan is allowed to tell us how serious is the economic situation...... Watch-out for tightening after the November elections



Greenspan Says U.S. Creating ‘Scary’ Deficit as Borrowing Rises
 

By Caroline Salas and Thomas Keene

Oct. 8 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.S. fiscal deficit is “scary” and the federal government needs to cut spending on entitlements.
“We’re involved in a dangerous game,” Greenspan said yesterday at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.”
U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said.
“You need” austerity, said Greenspan, a paid speaker at the event. “We’re going to have to start to cut” from government entitlement programs, he said, adding that reducing the budget is better than raising taxes in closing the U.S. budget deficit. Still, Greenspan reiterated that he supports allowing tax cuts enacted under President George W. Bush to lapse at the end of 2010.
The White House Office of Management and Budget in July projected the deficit for fiscal 2010, which ended Sept. 30, at $1.47 trillion and the gap for fiscal 2011 at $1.42 trillion. President Barack Obama formed a commission in February charged with presenting a plan by Dec. 1 on how to reduce deficits over the next decade.
Succeeded by Bernanke
Greenspan, 84, was chairman of the Fed from 1987 until 2006, when he was succeeded by Ben S. Bernanke.
“It is crucially important that we put U.S. fiscal policy on a sustainable path,” Bernanke said in an Oct. 4 speech.
“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Bernanke said in Providence, Rhode Island. U.S. lawmakers should consider adopting rules that limit federal spending or debt, he said.
Greenspan said that if the Fed decides to expand its balance sheet through purchases of bonds, a process known as quantitative easing, it may not be enough to get “money moving” and spur growth in the U.S. economy.
Should the Fed increase “excess reserves and they just sit there on the asset side of commercial banks’ balance sheets not being relent, you’ve merely gone through an interesting bookkeeping exercise,” Greenspan said. “You’ve got to break that psychology that prevents that current trillion” in reserves from being relent, he said.
Record Low
Two-year Treasury yields fell to the lowest ever yesterday, setting or matching a record for a fifth consecutive day. Investors have stepped up bets that the Fed will resume buying bonds to keep borrowing costs low.
“It is very difficult to think through the scenario by which you induce” commercial banks to lend, Greenspan said. “If you don’t do this, quantitative easing can’t do anything to speak of.”
U.S. central bankers have kept their benchmark lending rate near zero for almost two years. In March, they finished $1.7 trillion in purchases of Treasuries, mortgage-backed securities and housing agency bonds.
A slowdown in growth in the middle two quarters of this year prompted the Federal Open Market Committee last month to warn that inflation rates were “somewhat below” its mandate to achieve stable prices and full employment.
New York Fed President William Dudley, who is also vice chairman of the FOMC, went further in an Oct. 1 speech when he called current levels of unemployment and inflation “unacceptable.”
“Further action is likely to be warranted,” Dudley said.

No clear sign of recovery until 2012.......

Goldman Sachs Says U.S. Economy May Be ‘Fairly Bad’ (Update2)

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By Wes Goodman

Oct. 6 (Bloomberg) -- Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months.
“We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.”
The Federal Reserve will probably move to spur growth as soon as its next meeting on Nov. 2-3, Hatzius said. Expectations for central bank action have already led to lower interest rates, higher stock prices and a weaker dollar, according to Goldman, one of the 18 primary dealers that are required to bid at government debt sales.
Fed Chairman Ben S. Bernanke and his fellow policy makers are debating whether to increase Treasury purchases to spur the U.S. economy by keeping borrowing costs low. U.S. five-year yields dropped to a record 1.1755 percent today amid signs the recovery is losing momentum.
The “fairly bad” outlook for slow growth and rising unemployment without a recession will probably be the one that occurs, the e-mail said.
Renewed Recession
Hatzius’ note reiterated comments he made yesterday at a forum in Washington, when he placed the odds of a renewed recession at 25 percent to 30 percent. He told reporters that was up from 15 percent to 20 percent at the start of the year.
Another $1 trillion of asset purchases by the Fed would probably lower long-term interest rates by about 0.25 percentage point, adding a “few tenths of additional GDP growth,” he said yesterday.
The Fed bought $1.7 trillion worth of Treasury and mortgage debt in a program that ended in March. The purchases helped push mortgage rates to historic lows.
New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans have all advocated further Fed action. Bernanke said Oct. 4 that restarting large- scale asset purchases would probably spur growth, after saying last week the central bank has a duty to aid the economy as unemployment holds near 10 percent.
Investors forecasting Fed purchases pushed two-year Treasury yields to a record low of 0.3987 percent on Oct. 4. The Standard & Poor’s 500 Index rose 2.1 percent yesterday to the highest level since May.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, slumped 0.9 percent yesterday to the lowest since January.

According to Jacques Gendreau, Investors will gradually take advantage of low financing cost, rental shortage and positive cashflow. Patience and emerging inflation will be key to a successful real estate program. 

 

US housing shows signs of stabilizing

By James Politi in Washington and Telis Demos in New York
Published: October 4 2010 16:47 | Last updated: October 4 2010 16:47

The US housing market showed further signs of stabilization on Monday after the National Association of Realtors’ index of pending home sales rose by 4.3 per cent in August.
In spite of record low mortgage rates, Americans have been reluctant to buy homes and invest in property during the recovery, amid high unemployment, difficulty securing mortgages, and fresh memories of the decline in house prices during the crisis.

EDITOR’S CHOICE

Gavyn Davies: Implications of QE2 - Oct-04

Editorial: A new start for US economic policy - Oct-03

US manufacturing hits lowest level this year - Oct-01

US states predict improving tax revenues - Sep-30

US spending and incomes grow - Oct-01

US new jobless claims continue to decline - Sep-30

The US housing market received temporary boosts late last year and early this year when the government was offering an $8000 tax credit to first time homebuyers, but the sector took a big dive again this summer as the economy slowed and the benefit lapsed.
Now, it appears that the housing sector is regaining some ground, albeit from very low levels and at a very slow pace. Although the August pending home sales index – which measures contracts agreed but not closed – has risen for two consecutive months, it remains 20.1 per cent below its level in August of 2009.
The gains in August pending home sales were concentrated in the regions that have been most affected by the housing boom and bust. In the South, sales rose by 6.7 per cent, while in the West they increased by 6.4 per cent in August. In the Midwest, the gains were more muted, with the index rising by 2.1 per cent, while sales declined in the Northeast by 2.9 per cent.
“To be sure, housing continues to face considerable headwinds that will likely keep the sector depressed well into 2011,” economists at RBS said on Sunday in an analysis on the post tax credit housing environment. “Still, while there have been peaks and valleys in both the home sales and housing starts data since late last year, it seems that, for the most part, the underlying pace of housing activity has remained largely steady, albeit at historically low levels.”
“Attractive affordability conditions from very low mortgage interest rates appear to be bringing buyers back into the market,” said Lawrence Yun, chief economist of the NAR said on Monday. “However, the pace of a home sales recovery still depends more on job creation and an accompanying rise in consumer confidence.”
Last week, Standard & Poor’s Case-Shiller index showed that the rebound in home values slowed in July, with home prices in 20 large US cities up 3.2 per cent compared to a year earlier. In June, they posted a 4.2 per cent increase compared to the previous year.

The US recovery is going to stay disappointing until employment is up, until housing excess and consumer debt are down.The largest companies are going to struggle for a couple of years. 

S&P 500 Profits Cut for First Time in Year by Analysts (Update3)

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By Lynn Thomasson, Whitney Kisling and Inyoung Hwang

Oct. 4 (Bloomberg) -- For the first time in more than a year analysts are cutting their forecasts for Standard & Poor’s 500 Index earnings, jeopardizing gains from the biggest September rally since World War II.
Estimates for S&P 500 companies’ combined 2011 profit fell as low as $95.17 last month from an August high of $96.16 and posted the first quarterly reduction since the three months ended June 2009, according to more than 8,500 analyst forecasts tracked by Bloomberg. The revision came as the benchmark gauge for U.S. equities rose 8.8 percent last month, the largest September advance since 1939.
Now, money managers at Stifel Nicolaus & Co. and USAA Investment Management Co. are preparing for weaker returns in October as Alcoa Inc.’s Oct. 7 report starts the third-quarter earnings season. Bulls say even with the decline in analyst estimates, equities remain cheaper based on forecast profits than at any time since 1988, excluding the six months after Lehman Brothers Holdings Inc.’s bankruptcy in 2008.
“Earnings forecasts are going to be somewhat more muted in their expectations for future growth,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus, which oversees $90 billion. “It’s not necessarily a bad thing, but it’s certainly not the fuel that will reignite animal spirits.”
U.K., Hong Kong
Analysts cut 2011 profit estimates for benchmark stock indexes in 20 of the world’s 24 developed markets last month as U.S. unemployment remains near the highest in 27 years and European lawmakers enact austerity measures to shrink budget deficits. Income forecasts for the FTSE 100 Index of U.K. companies have fallen 4.9 percent since the end of May, while those in Hong Kong’s Hang Seng Index are down 1.5 percent since February, data compiled by Bloomberg show.
Estimates show S&P 500 earnings may rise 15 percent in 2011, down from a forecast of 20 percent growth in March, Bloomberg data show. The S&P 500 slipped 0.2 percent to 1,146.24 last week amid lingering concern that Europe’s government debt crisis may threaten the economic recovery.
The stock index lost 0.8 percent to 1,137.03 at 4 p.m. New York time today. The average analyst estimate for S&P 500 profit in 2011 has rebounded to $95.95 a share, Bloomberg data show.
Alcoa, the first of 30 companies in the Dow Jones Industrial Average to report third-quarter results, may say on Oct. 7 that it earned 6 cents a share in the past three months, according to the average analyst estimate compiled by Bloomberg. That’s 77 percent less than the 28-cent projection in March for the New York-based aluminum producer.
‘Pretty Fancy’
Companies in the S&P 500 may report profits rose 23 percent on average during the third quarter, according to forecasts tracked by Bloomberg. That’s about half the 49 percent growth during the second quarter and the 52 percent increase from January through March.
“You need pretty fancy GDP numbers to get to $95 a share in earnings next year,” said Robert Doll, vice chairman of New York-based BlackRock Inc., which oversees $3.2 trillion. “Our view is that they’re still a little too high, and that nobody believes them.”
Evidence of slowing global growth has led economists to reduce forecasts for U.S. gross domestic product to 2.5 percent in 2010, down from 3.1 percent in May, according to monthly Bloomberg surveys. The world’s largest economy expanded at an annual rate of 5 percent during the fourth quarter of 2009, the most in almost four years. It slowed to 1.7 percent in the second quarter, the Commerce Department said Sept. 30.
Strategists’ Estimates
Equity strategists that follow broad market and economic trends are less optimistic on the prospects for earnings next year than company analysts. S&P 500 profits may total $87.34 a share in 2011, according to the average of 11 forecasts in a Bloomberg News survey.
Bank of America Corp.’s David Bianco cut his year-end estimate for the S&P 500 to 1,250 from 1,300 on Sept. 22, citing concern the U.S. Congress isn’t likely to extend tax cuts on dividends and capital gains that were enacted during George W. Bush’s presidency. The chief U.S. equity strategist for the Charlotte, North Carolina-based lender predicts S&P 500 companies will earn a total of $90 a share in 2011.
“If analysts are lowering estimates on a broad basis, the market should reflect that,” said Wasif Latif, vice president of equity investments at USAA, which oversees $45 billion in San Antonio. Part of the reason companies beat profit forecasts in prior quarters was because they reduced expenses, he added. “You can only cut costs so much before you start cutting into bone,” Latif said.
Longest Streak
More than 70 percent of S&P 500 companies have exceeded the average analyst profit projection for four straight quarters, the longest streak in Bloomberg data going back to 1993.
Changes in earnings projections have historically been correlated with swings in U.S. share prices. The S&P 500 climbed to an all-time high of 1,565.15 on Oct. 9, 2007, and profit projections for the next year peaked about three months later. After the index slumped to a 12-year low in March 2009, the forecasts bottomed out in the following two months, data tracked by Bloomberg show.
While estimates for U.S. corporate profit fell last quarter, they still indicate that firms in the S&P 500 will report record earnings in 2011. The equity benchmark is valued at 12 times projected income for 2011, according to data compiled by Bloomberg. That’s the cheapest level since 1988, excluding October 2008 to March 2009 after New York-based Lehman’s bankruptcy, relative to reported profit from the past 12 months.
‘Equities Are Cheap’
Michael Levine of OppenheimerFunds Inc. says the outlook for lower earnings is already reflected in stock prices after the S&P 500 fell as much as 16 percent between April 23 and July 2. He predicts equity prices will keep rising as investors grow more confident that the U.S. economy isn’t headed for the second recession in three years.
“Equities are cheap,” said Levine, a money manager at New York-based OppenheimerFunds, which oversees about $165 billion. “The broader markets are assuming there’s a slow but gradual recovery. As long as that’s the message, the markets will be fine.”
Marshall & Ilsley Corp. and Vulcan Materials Co. had the biggest reductions in profit estimates for 2011 among S&P 500 companies since June 30.
Marshall & Ilsley, Vulcan
While the projection for Marshall & Ilsley was cut 87 percent since June, the average indicates the Milwaukee-based regional bank will post the biggest jump in earnings -- 102 percent -- since at least 2000 next year. Vulcan Materials, a Birmingham, Alabama-based producer of asphalt and concrete, may grow income by 207 percent, the most in at least a decade, analysts say. Its per-share earnings forecast for 2011 was cut by 75 percent in the past seven months.
Analysts reduced 2011 profit estimates for New York-based Verizon Communications Inc. by 4.5 percent in the past three months to $2.29 a share, according to data compiled by Bloomberg. While shares of the second-largest U.S. phone company have soared 24 percent, the biggest quarterly advance since 2002, projections show income may fall 8 percent this year and rise 4 percent the next.
Forecasts for West Chester, Ohio-based AK Steel Holding Corp.’s income next year dropped 27 percent between July and September to $1.27 a share, data tracked by Bloomberg show. The jump in earnings next year from an estimated 7 cents a share in 2010 would be the biggest since at least 2000. The third-largest U.S. steelmaker by sales predicted an operating loss for the third quarter on Sept. 15 after iron-ore prices increased.
“Stocks go up and they raise their earnings estimates, the markets go down they start reducing estimates -- a lot of it has to do with the psychology,” said Jeff Saut, chief investment strategist at Raymond James & Associates, which manages $235 billion in St. Petersburg, Florida. “Over the long run, investing is indeed all about the earnings, but over the short term it’s all about psychology.”

Since 2003, Jacques Gendreau has been recommending investing in emerging markets .......

World Economy Decoupling From U.S. Returns as Wall Street View

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By Simon Kennedy

Oct. 4 (Bloomberg) -- Wall Street economists are reviving a bet that the global economy will withstand the U.S. slowdown.
Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc., Credit Suisse Holdings USA Inc. and BofA Merrill Lynch Global Research are forecasting that this time will be different. Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 percent in 2011, even as expansion in the U.S. falls to 1.8 percent from 2.6 percent.
Underpinning their analysis is the view that international reliance on U.S. trade has diminished and is too small to spread the lingering effects of America’s housing bust. Providing the U.S. pain doesn’t roil financial markets as it did in the credit crisis, Goldman Sachs expects a weakening dollar, higher bond yields outside the U.S. and stronger emerging-market equities.
“So long as it doesn’t turn to flu, the world can withstand a cold from the U.S.,” Ethan Harris, head of developed-markets economic research in New York at BofA Merrill Lynch, said in a telephone interview. He predicts the U.S. will expand 1.8 percent next year, compared with 3.9 percent globally.
That may provide comfort for some of the central bankers and finance ministers from 187 nations flocking to Washington for annual meetings of the International Monetary Fund and World Bank on Oct. 8-10. IMF chief economist Olivier Blanchard last month predicted “positive but low growth in advanced countries,” while developing nations expand at a “very high” rate. He will release revised forecasts on Oct. 6.
‘Partially Decoupled’
“The world has already become partially decoupled,” Nobel laureate Joseph Stiglitz, a professor at New York’s Columbia University, said in a Sept. 20 interview in Zurich. He will speak at an IMF event this week.
Sixteen months after the world’s largest economy emerged from recession, the U.S. recovery is losing momentum, with declining factory orders, a slowdown in pending home sales and rising unemployment, according to the median forecasts of economists in Bloomberg News surveys taken ahead of reports this week. Their predictions don’t include another contraction, with growth estimated at 2.7 percent this year.
Emerging markets are showing more strength. Manufacturing in China accelerated for a second consecutive month in September, and industrial production in India jumped 13.8 percent in July from a year earlier, more than twice the June pace.
Emerging-Markets ‘Outperformance’
“It seems that recent economic data help to confirm the story of emerging-markets outperformance,” said David Lubin, chief economist for emerging markets at Citigroup Inc. in London.
The gap in growth rates between the developing and advanced worlds is widening, he said. Emerging economies will account for about 60 percent of global expansion this year and next, up from about 25 percent a decade ago, according to his estimates.
The main reason for the divergence: “Direct transmission from a U.S. slowdown to other economies through exports is just not large enough to spread a U.S. demand problem globally,” Goldman Sachs economists Dominic Wilson and Stacy Carlson wrote in a Sept. 22 report entitled “If the U.S. sneezes...”
Take the so-called BRIC countries of Brazil, Russia, India and China. While exports account for almost 20 percent of their gross domestic product, sales to the U.S. compose less than 5 percent of GDP, according to their estimates. That means even if U.S. growth slowed 2 percent, the drag on these four countries would be about 0.1 percentage point, the economists reckon. Developed economies including the U.K., Germany and Japan also have limited exposure, they said.
Room to Grow
Economies outside the U.S. have room to grow that the U.S. doesn’t, partly because of its outsized slump in house prices, Wilson and Carlson said. The drop of almost 35 percent is more than twice as large as the worst declines in the rest of the Group of 10 industrial nations, they found.
The risk to the decoupling wager is a repeat of 2008, when the U.S. property bubble burst and then morphed into a global credit and banking shock that ricocheted around the world. For now, Goldman Sachs’s index of U.S. financial conditions signals that bond and stock markets aren’t stressed by the U.S. outlook.
The break with the U.S. will be reflected in a weaker dollar, with the Chinese yuan appreciating to 6.49 per dollar in a year from 6.685 on Oct. 1, according to Goldman Sachs forecasts.
Lower Yields
The bank is also betting that yields on U.S. 10-year debt will be lower by June than equivalent yields for Germany, the U.K., Canada, Australia and Norway. U.S. notes will rise to 2.8 percent from 2.52 percent, Germany’s will increase to 3 percent from 2.3 percent and Canada’s will grow to 3.8 percent from 2.76 percent on Oct. 1, Goldman Sachs projects.
Goldman Sachs isn’t alone in making the case for decoupling. Harris at BofA Merrill Lynch said he didn’t buy the argument prior to the financial crisis. Now he believes global growth is strong enough to offer a “handkerchief” to the U.S. as it suffers a “growth recession” of weak expansion and rising unemployment, he said.
Giving him confidence is his calculation that the U.S. share of global GDP has shrunk to about 24 percent from 31 percent in 2000. He also notes that, unlike the U.S., many countries avoided asset bubbles, kept their banking systems sound and improved their trade and budget positions.
Economic Locomotives
A book published last week by the World Bank backs him up. “The Day After Tomorrow” concludes that developing nations aren’t only decoupling, they also are undergoing a “switchover” that will make them such locomotives for the world economy, they can help rescue advanced nations. Among the reasons for the revolution are greater trade between emerging markets, the rise of the middle class and higher commodity prices, the book said.
Investors are signaling they agree. The U.S. has fallen behind Brazil, China and India as the preferred place to invest, according to a quarterly survey conducted last month of 1,408 investors, analysts and traders who subscribe to Bloomberg. Emerging markets also attracted more money from share offerings than industrialized nations last quarter for the first time in at least a decade, Bloomberg data show.
Indonesia, India, China and Poland are the developing economies least vulnerable to a U.S. slowdown, according to a Sept. 14 study based on trade ties by HSBC Holdings Plc economists. China, Russia and Brazil also are among nations with more room than industrial countries to ease policies if a U.S. slowdown does weigh on their growth, according to a policy- flexibility index designed by the economists, who include New York-based Pablo Goldberg.
‘Act Countercyclically’
“Emerging economies kept their powder relatively dry, and are, for the most part, in a position where they could act countercyclically if needed,” the HSBC group said.
Links to developing countries are helping insulate some companies against U.S. weakness. Swiss watch manufacturer Swatch Group AG and tire maker Nokian Renkaat of Finland are among the European businesses that should benefit from trade with nations such as Russia and China where consumer demand is growing, according to BlackRock Inc. portfolio manager Alister Hibbert.
“There’s a lot of life in the global economy,” Hibbert, said at a Sept. 8 presentation to reporters in London.
Asset Bubbles
The increasing focus on emerging markets may present challenges for their policy makers as the flow of money into their economies risks fanning inflation, asset bubbles and currency appreciation. Countries from South Korea to Thailand have already intervened to weaken their currencies, along with taking steps to restrict capital inflows.
Stephen Roach, nonexecutive Asia chairman for Morgan Stanley, remains skeptical of decoupling. He links the optimism to a snapback in global trade from a record 11 percent slide in 2009. As that fades amid sluggish demand from advanced economies, emerging markets that rely on exports for strength will “face renewed and formidable headwinds,” he said.
“Decoupling is still a dream in much of the developing world,” said Roach, who also teaches at Yale University in New Haven, Connecticut.
The Goldman Sachs economists argue history is on their side. The U.K., Australia and Canada all continued growing amid the U.S. recession of 2001 as the technology-stock bust passed them by, while America’s 2006-2007 housing slowdown inflicted little pain outside its borders, they said. The shift came when the latter morphed into a financial crisis, prompting Goldman Sachs to declare in December 2007 that 2008 would be the “year of recoupling.”
The argument finds favor with Neal Soss, New York-based chief economist at Credit Suisse. While the supply of dollars and letters of credit that fuel international commerce dried up during the turmoil, that isn’t a problem now, so the rest of the world can cope with a weaker U.S., he said.
“Decoupling was a good idea then and is a good idea now,” Soss said.

http://www.bbc.co.uk/news/business-11462018