Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.

Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.

The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will of particular interest to investors.

Yum! Brands Inc.

Scheduled to report today (Tuesday), the Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take.

As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurant company. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.

Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.

Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.

By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.

KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.

Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.

“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.

An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.

Yum! shares should trade at a premium to their peer group and could climb nearly 25%, a the analyst said.

Shares of Yum! surged 5.13% yesterday to close at $34.85.

Alcoa Inc.

Though its release comes a day after Yum’s, Alcoa’s quarterly report marks the unofficial start of earnings season.

Hit hard by the collapse of commodities prices and sluggish industrial demand, Alcoa has missed earnings expectations in three of the past four quarters. And the company’s latest earnings report will likely show that its struggles continued, albeit at a slower pace.

Alcoa is expected to report a net loss of 12 cents per share for the three months that ended in September. That’s down substantially from a profit of 37 cents a share in the same period last year, but would be a marked improvement on the 32 cents a share loss the company posted in the second quarter.

Indeed, Alcoa’s earnings will provide an important look at just how far global demand for industrial metals has come. Hopes are high, as Alcoa stock has surged more than 143% since mid-March.

Deutsche Bank AG (NYSE: DB) analyst Jorge Beristain has increased his rating of Pittsburgh-based Alcoa to “Buy” from “Hold” and increased his price target to $17 from $12.

The upgrade partially reflects Deutsche Bank’s higher price projections for base metals. The bank sees base metal prices climbing an average of 31% next year, on account of strong third-quarter “price surges” and increased demand from China, Beristain said in a note to clients.

“China’s seemingly insatiable appetite for industrial raw materials has led to record high imports in many metals and a consequent tightening in market balances,” he said.

Alcoa’s stock rose 4.68% in trading yesterday, to close at $13.42 a share.

Costco Wholesale Corp.

Costco is the largest membership warehouse club chain in the world by sales volume. That makes it an ideal choice for cost-conscious consumers. Costco has enjoyed seven straight years of earnings growth, but the company’s past two quarters have disappointed investors.

The third time might be the charm for the nation’s largest warehouse chain. William Blair & Co. LLC analyst Mark Miller last month upgraded the stock to “Outperform” from “Market Perform” and after the company stepped up sales in August.

Sales at established locations declined 2%, beating Wall Street expectations for a larger 5.7% decline.

“With the step-up in sales during August and positive takeaways from our meeting last week with [Costco Chief Financial Officer] Richard Galanti and [Vice President of Financial Planning and Investor Relations] Bob Nelson, we are more confident that sales and earnings could meaningfully surpass Street expectations over the next year,” said Miller.

Like Yum!, Costco could receive a significant bump from its overseas operations, as recent store openings in Asia have been strong and the dollar has weakened.

For the third quarter, the average analysts’ estimate is for a profit of 76 cents a share – a 17% drop from the 92 cents a share it earned in the same quarter last year.

Costco CEO Jim Sinegal said earlier this month in an interview with Motley Fool that he expects his company to turn around regardless of whether or not the economy experiences a quick recovery.

“We can always blame bad sales on weather and on economic conditions and everything else,” he said. “But when we have the right merchandise out on the floor, it sells. … [We] don’t like the fact that the [average customer] basket is down, but we certainly like the fact that the customers are coming back more frequently and, as things turn, they will start to buy again. Now it is on us to get the hot merchandise.”

Costco stock edged up 0.73% yesterday to close at $56.88 a share.

Monsanto Co.

As the world’s largest producer of genetically modified seeds, Monsanto is a closely watched biotech bellwether. Like Alcoa, Monsanto was hit in recent quarters by a drop in commodities prices, as well as a drop in demand for its products.

However, the company announced an acquisition, a partnership, and a divestiture in its fiscal fourth quarter. It is expected to squeeze out a one cent per share profit, compared to three cents per share loss in the same quarter last year.

Monsanto’s acquisition of WestBred LLC – a Montana-based company that specializes in wheat germplasm – will bring wheat into its seeds and traits portfolio, and its joint venture with Dole Fresh Vegetables, Inc. will put more genetically modified vegetables on Monsanto’s plate. Meanwhile, Monsanto’s divestiture of its global sunflower assets to Syngenta brought in $160 million.

The company also shed 9,000 employees in a bid to cut costs, and despite being heavily targeted by anti-trust groups and chief rival E.I. du Pont de Nemours & Co. (NYSE: DD), Monsanto insists it’s on track to more than double its 2007 profit by the year 2012.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” said Monsanto Chairman and CEO Hugh Grant. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

Monsanto has reported better-than-expected earnings in the past three quarters, and at Monday’s close of $74.85 a share is an undervalued stock according to Morningstar.

“Monsanto is a fierce competitor that continues to dominate a market that it essentially created more than a decade ago,” said Morningstar senior analyst Ben Johnson. “Through its ongoing commitment to research and development and assertive capital allocation, the company has positioned itself to grow value for its shareholders over the long haul.”

PepsicCo Inc.

Of all the companies reporting this week, PepsiCo has generated the most buzz. Bullish speculators yesterday piled into PepsiCo call options after Deutsche Bank raised its earnings for the salty-snack-and-soda giant.

Call volume surged by nearly 700%, according to optionMonster.

Deutsche Bank raised its price target for PepsiCo shares, which closed yesterday at $60.85, to $70 from $66. The bank maintained its buy rating on the stock, and said shares have been negatively affected by an “unwarranted deal overhang” related to the company’s acquisition of Pepsi Bottling Group Inc (NYSE: PBG).

PepsiCo in August said it would merge with Pepsi Bottling, as well as invest in Russia, during the three months that ended in September, and is expected to post a profit of $1.02 per share – four cents per share less than a year ago. Revenue for the quarter is expected to come to $11.3 billion, about the same as last year.

PepsiCo has only missed expectations in one of the past four quarters, and by just two cents at that.

Source: The Five Stocks to Watch This Week

Merger Mondays are back. But the markets don’t like the news. Even though a handful of the nation’s most economically sensitive firms are pulling their heads from the sand and shelling out big bucks in the name of growth, the markets started the week deep in the red thanks to a disastrous end-of-the-month selloff in Asia.

As investors across the globe wonder if revenue growth is necessary to prop up current share prices, China’s market dipped by more than 6% on Monday. The bears trounced their way across the globe, taking European markets down by about 1% and the S&P down an equal proportion so far today.

But there is good news, especially if you are a fan of comic books. Word is quickly spreading that Disney (NYSE:DIS) has worked out a $4 billion deal to purchase Marvel Entertainment (NYSE:MVL).

Now Mickey and Donald will have to fight with the likes of Spider Man and Iron Man for the attention of Minnie and Cinderella.

This is an interesting deal for several reasons. First, the move shows Disney needs to find growth any way it can find it. With a nasty recession hurting its theme park sales and its media business, the easiest path towards top-line growth is by purchasing it.

The fact that nearly half of the $4 billion deal will come in the form of Disney shares helps to illustrate Disney top brass feels share price is heading towards overpriced territory.

While the deal will add to Disney’s revenue stream, the news will likely be detrimental to share price over the next few weeks and months. So far today, however, shares are down by just 1.25%, only slightly worse than the overall market.

Cartoons and chemicals

About as far removed from the fast-action world of comic book characters and theme parks is the competitive and rather boring chemical industry.

The nation’s top titanium-dioxide pigment manufacturers may not be a conversation during a Saturday-night date, but come Monday morning, with word of a major acquisition, it is worth checking out, especially for us finance geeks.

Earlier today, Huntsman (NYSE:HUN) announced its $145 million bid for Tronox (PINK:TRXAQ), a bankrupt company with loads of debt but over a billion in annual revenues.

The offer, while agreed on by both sides is anything but final. It still has to be approved by a bankruptcy court, and as a “stalking horse” contract can be outbid by another party, like the industry leader Dupont (NYSE:DD).

Although Huntsman will have to pay for the acquisition through added debt, the move will almost immediately benefit Huntsman’s balance sheet and cash flow.

Shares of Huntsman are down by just over 5% so far today (after tripling since March), but don’t expect the bearishness to persist. Once this deal comes closer to finalization, share price will change direction.

Investors that get in over the next week or so will likely get a bargain.

While both stories are creating trading opportunities, the best news is for the overall markets. Increased M&A activity is a sign of a recovering market and a strengthening economy. The more cash we see put on the line, the higher stock prices will go.

I am already looking forward to next Monday.

Source: Let the Buying Begin: Merger Mondays are Back!

The St. Louis-based Monsanto said in June that its fiscal third-quarter earnings fell to $694 million, or $1.25 a share, from $811 million, or $1.45 a share, in the same period a year ago. Sales slipped to $3.16 billion from $3.54 billion last year. The company also said its annual earnings would likely be at the low end of its $4.40 to $4.50 a share forecast range.

That’s not very impressive for a company that last year posted record net sales of $11.4 billion for fiscal 2008, a 36% jump from fiscal 2007. But there’s also good news for Monsanto investors. Chairman and Chief Executive Officer Hugh Grant said last week that his company is poised to achieve its long-term goals by producing more efficient products and streamlining production.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” Grant said. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

“These projects came to be through a disciplined investment in seed and biotech that is unmatched in the industry,” Grant said. “We consistently invest 14% to 15% of our total net sales for seeds and genomics in research and development for breeding and biotechnology.”

It’s true that Monsanto’s commitment to research and development have made it the dominant player in the market for genetically modified seeds. But Monsanto has become a victim of its own success.  It is currently locked in an ugly legal spat with its chief rival in the biotechnology E.I. du Pont de Nemours & Co. (NYSE: DD), which has led to accusations that Monsanto is a monopoly – an accusation that has drawn the attention of the federal government.

DuPont Gets Dirty

Conflict between the agribusiness arch-nemeses erupted earlier this year when Monsanto sued DuPont, and its subsidiary Pioneer Hi-Bred International Inc., for unlawful use of its proprietary “Roundup Ready” herbicide tolerant technologies in soybeans and corn.

DuPont doesn’t deny “stacking” soybeans with the Roundup Ready trait with its own Optimum GAT trait, but instead argues it is not violating Monsanto’s patent by doing so.

“We fundamentally disagree with Monsanto’s position that they can use their current trait monopoly to prevent the introduction of competitive seed products for U.S. growers,” DuPont spokesman Dan Turner told Reuters. “This is yet another example of Monsanto trying to flex its anti-competitive muscle in the market, by stifling healthy competition among seed producers that are looking to grow yields for those that matter most — the farmers,” he added.

The conflict escalated Monday, when Monsanto CEO Grant sent a letter to DuPont Chairman Charles O. Holliday Jr. accusing the company of a “serious breach of business ethics.”

“Your lobbying and communications that paint your company as a victim of limiting technology licenses is dishonest, disingenuous and downright deceitful,” Grant told Holliday in the letter.

Furthermore, Grant decried the use of “masked third parties” to “attack” Monsanto as
“misleading to the public and a serious breach of business ethics far beyond honest competitor behavior.”

It’s likely that by “masked third parties” Grant meant the Organization for Competitive (OCM) Markets, a nonprofit group that claims Monsanto controls 90% of the market for genetically modified seed. The Lincoln, NE-based organization claims to take on big agricultural companies in defense of small farmers and consumers, but it was recently revealed DuPont gives the group financial support.

“We’ve supported OCM for a number of years as we have dozens of organizations that are aligned with our belief around what’s in the best interest of our farmer customers,” DuPont spokesman Dan Turner told St. Louis Today. “However, we don’t disclose the amount that we give to OCM or any other organization.”

Turner couldn’t name any of the other organizations that DuPont supports, the paper said.

Is Monsanto Being Thrown Under the Anti-Trust Bus?

In July 2008, the OCM started the Crop Seed Concentration Project an initiative target specifically at Monsanto, which the group says controls 90% of the market for genetically modified seed, a figure Monsanto disputes.

“Monsanto’s effort to enforce licensing agreements and protect its patent rights has dramatically altered American agriculture,” the OCM says on its Web site. “Monsanto has filed more than 100 patent infringement lawsuits against U.S. farmers.”

The OCD’s crop concentration campaign coincides with U.S. President Barack Obama’s vow to enforce antitrust laws that were neglected by the Bush administration, and its national convention attracted the representatives from the Federal Trade Commission, the Department of Justice, and the Commodity Futures Trading Commission.

“For many farmers and consumer advocates, we understand that there are concerns regarding the levels of concentration in the seed industry–particularly for corn and soybeans,” Philip Weiser, the new Deputy Assistant Attorney General, said at the OCM gathering, which took place in Monsanto’s hometown of St. Louis, Mo.

Weiser said federal regulators are “committed to examining” the level of competition in several agribusiness sectors

The Department of Justice and the Department of Agriculture will have a series of “workshops” to “openly discuss legal and economic issues associated with competition in the agriculture industry,” said Christine Varney, the assistant attorney general in charge of antitrust issues at the Justice Department.

“Monsanto welcomes the opportunity to be an active participant in the discussion and looks forward to these workshops,” the company said on its Web site. “There have been unsubstantiated allegations of a lack of competition in the seed market for several years now. We’re confident an objective review will reveal competition is alive and flourishing in the seed market.”

The workshops are scheduled to begin in January.

Source: Monsanto Focused on Long-Term Growth, but DuPont Dustup Draws Attention from Regulators

Last week’s report could have been worse if the numbers hadn’t been held in check by a burst of federal government hiring of temporary workers to prepare for the 2010 Census.

The report was also skewed by the way the government categorizes the unemployed.  As Money Morning previously reported, if laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the numbers skyrocket.

In fact, if the latest unemployment report had included those workers, the rate would have soared to 15.8% in April, the highest on records dating back to 1994. The total number of  unemployed now stands at 13.7 million, up from 13.2 million in March.

The data released Friday wasn’t as high as the 620,000 job cuts that economists were expecting, but the payroll figures for March and February were revised to show 66,000 more job losses than previously reported.

The report showed job losses across almost all sectors of the economy, but at a slower pace than previous months.  The manufacturing sector lost 149,000 jobs in April, after cutting 167,000 the prior month. Construction industries cut 110,000 jobs after shedding 135,000 in March.

The service industry, responsible for roughly 90% of economic activity lost 269,000 jobs after eliminating 381,000 in March.

The one bright spot was government hiring, with public payrolls soaring by 72,000 after the U.S. Census Bureau began hiring 140,000 temporary workers last month to produce the population count that comes once every 10 years. It will hire more than 1.4 million people to conduct the survey over the next year.

Even though unemployment rolls are now at the highest level since September 1983, many analysts believe the numbers signaled the economy’s steep decline may be easing.

“We appear to have passed the point of the most severe job losses,” Dean Maki, co-head of U.S. economic research at Barclays Capital PLC (ADR NYSE: BCS) in New York told Bloomberg News. “It’s still a weakening labor market but it’s weakening less fast. There are a few headwinds to growth, and a recovery will” likely be “modest.”

The worst financial crisis since the 1930’s has taken a steep toll on U.S. workers and companies, and most economists expect the unemployment numbers will get worse as the housing, credit and financial sectors sort out the mess. The jobs numbers usually don’t rebound until well after an economic recovery begins.

Government “stress tests” to determine whether 19 of the largest U.S. banks had enough capital to weather further economic turmoil used an “adverse scenario” that included an average unemployment rate of 8.9% in 2009 and 10.3% next year.  But economists projected in an April survey that the jobless rate would rise to 9.5% by year-end, Bloomberg reported.

In the coming months, economists expect job losses to continue for most — if not all — of this year. But some are hopeful the cuts won’t be as deep.
“There are glimmers of hope. We are moving in the right direction in terms of layoffs. They are measurably less bad than what we’ve been through,” Mark Zandi, chief economist at Moody’s Economy.com, told the Associated Press.

The biggest impact of job losses on the economy is the threat to consumer spending, the engine that drives 70% of Gross Domestic Product (GDP).  After a first-quarter rebound, Americans could retrench again this quarter before spending shows sustained gains in the second half of 2009, according to economists surveyed by Bloomberg last month.

Joel Naroff of Holland, Pennsylvania-based Naroff Economic Advisors, thinks the numbers will be good for consumer confidence, which should help spending. In a note to investors, Naroff said the unemployment numbers are the latest in a long string of good news/bad news economic reports.

“This is a truly awful report that will likely be taken as a good report because the job losses have slowed,”he said. “As long as we continue to see the silver lining in the black clouds that overhang the data, then confidence will build.  It does look as if we are falling more slowly and we are likely to hit bottom reasonably soon, at least as far as economic growth,”

The job cuts continued this week as steelmaker Severstal International (MCX: CHMF) said it’s shutting plants in Wheeling, W.Va., and Warren, Ohio, forcing 3,100 layoffs due to the  pullback in the steel industry.

E.I. duPont Nemours & Co. (NYSE: DD), the third-biggest U.S. chemical maker, plans to eliminate an additional 2,000 positions, while Microsoft Corp. (NASDAQ: MSFT) started laying off some of the 5,000 job cuts it announced earlier this year and left the door open for more in the future.

“We will continue to closely monitor the impact of the economic downturn,” Microsoft Chief Executive Officer Steve Ballmer said in a e-mail obtained by Bloomberg News. Redmond, Washington-based Microsoft will, “if necessary, take further actions on our cost structure including additional job eliminations.”

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation". "The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out the latest report and find out how you can profit.]

Source: Census Hiring and Reporting Methods Minimize April Unemployment Numbers

• A parade of bellwether U.S. companies reported disappointing earnings results yesterday (Tuesday) and cut their outlook for the future. Caterpillar Inc. (CAT) reported its first loss since 1992 and cut its projection for the full year by 50%. Pharmaceutical giant Merck & Co, Inc. (MRK) and chemical maker E.I. du Pont de Nemours & Company (DD) said profits fell 57% and 59% respectively, as both cut forecasts for the full year.
• After acquiring Citigroup Inc.’s (C) Smith Barney retail brokerage unit, Morgan Stanley (MS) is considering buying U.S. regional banks in a move to boost the company’s retail brokerage operations, MarketWatch reported, citing an article in the Nikkei newspaper. “We are looking for potential opportunities to buy a bank that has a presence in an important market in the United States,” Morgan Stanley’s Chief Executive Offer John Mack said in an exclusive interview.
• Continuing to reel from the shift of advertising to the internet, the New York Times Co. (NYT) reported a first-quarter loss of $74.5 million, or 52 cents a share, MarketWatch reported. Excluding special items, the company reported a loss of 34 cents a share as first-quarter revenue tumbled 19% to $609 million. The Times, like many newspapers and magazines, is having a difficult time coping with an advertising downturn.
• Computer spies were able to copy and siphon data related to the design and electronics systems of the $300 billion Joint Strike Fighter project, The Wall Street Journal reported yesterday (Tuesday).  The newspaper quoted current and former government officials as saying the intruders have repeatedly breached the Pentagon’s computer networks, making it potentially easier to defend against the plane.  The spies could not access the most sensitive material, which is kept on computers that are not connected to the Internet. Lockheed Martin Corp. (LMT) is the lead contractor on the Defense Department’s costliest weapons program.
• Senior officials at the Federal Deposit Insurance Corp. (FDIC) have privately discussed who might replace Citigroup Inc. (C) Chief Executive Officer Vikram S. Pandit if the embattled banking giant needs additional federal capital infusions, The Financial Times and MarketWatch both reported. The FDIC identified Chief Financial Officer Edward J. “Ned” Kelly III and ex-CFO Gary Crittenden as possible successors. However, the published reports also state that any initiatives to change Citigroup’s top management will be initiated by the U.S. Treasury Department.
• The U.S. Treasury Department’s plan to excise $1 billion of so-called “toxic” assets from the balance sheets of U.S. banks is vulnerable to all types of abuse and fraud and needs the protection of tough conflict-of-interest rules, government bailout watchdog Neil Barofsky said in a report released yesterday (Tuesday). Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program (TARP), said subsidies for public-private investment partnerships (PPIP) to buy assets could expose taxpayers to higher losses – without offering accompanying increases in the profit opportunities this program is supposed to create, Reuters reported. During the rest of this week, the Treasury Department is accepting applications from asset managers to manage public-private investment funds to buy the hard-to-value, illiquid securities that are backed by troubled mortgages still owned by banks.
• In a report released yesterday (Tuesday), The International Monetary Fund (IMF) says banks and other financial institutions face aggregate losses of $4.1 trillion in the value of their holdings because of a global financial crisis that is “likely to be deep and long lasting.” In that Global Financial Stability Report – which has become a closely watched barometer of the severity of the crisis – the IMF estimated that financial institutions around the world will have to write down about $2.7 trillion worth of loans and securities that originated in the U.S. financial markets between 2007 and 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and is way up from its October estimate of $1.4 trillion, according to The New York Times. Conditions have especially worsened in the emerging markets – and particularly in Europe – where banks face more write-downs and may require fresh equity, even as companies attempt to refinance existing debt. The IMF said banks will endure two-thirds of the write-downs, but noted that pension funds and insurance companies also face steep losses.
• The Reserve Bank of India yesterday (Tuesday) lowered its key borrowing rate by 25 basis points to 3.25% and its lending rate by 25 basis points to 4.75%.”The further policy rate cuts affected as part of this policy should be a definite signal for banks to reduce lending rates,” RBI Governor Duvvuri Subbarao said at a press briefing.

Source: Global Investment News Briefs Wednesday April 22, 2009

At this point, the temptation to work as long as possible, and then blow what remains of your savings on a round-the-world cruise and a suicide pill is considerable.

However, such despair is unwarranted.

Unless you have already given up all paid employment, or absolutely have to retire in the next year or two, the current bear market may have made your eventual retirement prospects more secure, not less.

You see, the most damaging factor for your retirement happiness was not the current downturn, but the preceding decade-long bubble.

Let me explain.

Savers who devote an equal amount each month to their long-term plans benefit from an important mathematical principle: Dollar cost averaging. Under dollar cost averaging, you put in the same amount of money each month, so that amount buys more shares if prices are low than it does if prices are high.

Thus, if a mutual fund trades at $1 in month one, $2 in month two and $1.50 in month three, then a dollar-cost-averaging investor investing $300 per month will buy 300 shares in month one, 150 in month two and 200 in month three. After his month three investment, he will own 650 shares at a cost of $900, for an average cost of $1.3846. Since the average price of the shares over the three months was month three’s $1.50, he has made an extra $0.1154 per share compared with the average share price.

That’s why prolonged bull markets are so bad for retirement investors (unless they are lucky enough to retire before the bubble bursts). In this case, the Standard and Poor’s 500 Index stood at 459.27 at the end of 1994. Then after February 1995, when U.S. Federal Reserve Chairman Alan Greenspan moved to an ever-easing monetary policy with low interest rates, it took off for the stratosphere.  It passed its current level of 825 in early 1996, and except for a short period in 2002 has traded above that level ever since.

So, even though retirement savers from 1996-2008 thought most of the time that they were doing very well, in reality they were buying shares at an over-inflated price, and just about every one of their monthly contributions is currently showing a loss.

It’s not the current bear market that has caused that loss. Stock prices in 1996-2008 were always at excessive prices, so a major correction was bound to happen sometime. If the correction had happened in December 1996, when Greenspan made his famous “irrational exuberance” speech, the market would have on average been substantially lower over the subsequent 12 years. And a retirement investor who had saved over that period would be substantially richer today because he would have owned significantly more shares of the mutual fund in which he had invested.

The wise retirement savers who have a few years to go should hope the current lower stock prices stick around, maybe even go lower still provided they recover before they has to draw on the savings or convert them into an annuity. By continuing to invest regularly at these lower prices, the return from dividends and capital appreciation will compound more quickly, particularly if they buy stocks that have a substantial dividend yield.

Even if their savings remain adequate, they shouldn’t convert them into an annuity because annuity rates are currently very low. With long-term Treasury bonds yielding less than 3%, actuaries factor that exceptionally low return into their annuity calculations.

Right now, a 65-year-old man who buys an annuity can expect to receive only around $74 per $1,000 of investment, without any protection for inflation or guaranteed minimum return if he dies quickly. Once interest rates rise, as they are almost bound to, that annuity rate will rise in step with them.

Rather than convert into an annuity, the retirement saver should simply invest in stocks that are both solid and yield more than 7.4% – and there are still plenty of them out there. That way, he can achieve the same return as an annuity while preserving, and maybe even increasing, his principal – in addition of course to any further monthly payments he can make while still working.

By building a portfolio of such stocks including a selection from emerging markets, he can take advantages of the higher-dividend payouts frequently found outside the United States.

Finding stocks with dividend yields equal to or greater than an annuity yield was tough when the S&P 500 was at 1400. But at 800, it’s a lot easier, even if you want to avoid the financial sector for obvious prudential reasons.

Such solid companies as General Electric Co. (GE), BP PLC (ADR: BP), Du Pont (DD), Newell Rubbermaid Inc. (NWL) and Limited Brands Inc. (LTD) yield well over 7% currently, and that’s without venturing into emerging markets companies.

If your retirement portfolio has been decimated, don’t despair. At these lower stock prices it will be much easier to build its value up again, and because stock yields are higher you won’t need so much capital to generate the income you want to live well.

Source: Retirement Investing: How Bear Markets Can Help Your Retirement Planning

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar

• Dealing with $13 billion in debt and declining revenues, media and sports conglomerate Tribune Co. filed for bankruptcy protection yesterday (Monday). The company – which owns the Chicago Cubs and newspapers The Chicago Tribune, Los Angeles Times and Baltimore Sun – was famously taken private last year by real estate mogul Sam Zell, The Associated Press reported.

• Dow Chemical Co. (DOW) said it will divest several business, close 20 facilities and cut about 5,000 jobs, or about 11% of its workforce. The announcement comes less than a week after rival DuPont Co. (DD) announced cutbacks that it said would save $700 million annually by 2010, Reuters reported.

• Morgan Stanley’s (MS) top executives – CEO John Mack and Co-Presidents Walid Chammah and James Gorman – won’t receive bonuses this year, Bloomberg reported. In addition, the company is lowering compensation for its operating committee 14 members by an average of 75%.

• Sen. Harry Reid (D-Nev.) yesterday (Monday) urged Merrill Lynch & Co. Inc. (MER) to reject its CEO John Thain’s request for a $10 million bonus since Merrill was the recipient of millions of taxpayer money, Dow Jones reported. “While American families struggle to keep their jobs and their homes, I question the chutzpah of asking for a $10 million taxpayer-subsidized bonus,” Reid said.

• After earlier assuring the public that no U.S. jobs would be jeopardized by a merger, Anheuser-Busch InBev NV announced yesterday (Monday) that it would cut 1,400 U.S. jobs — about 6% of its U.S. work force. The move is expected to help save the world’s largest brewer at least $1.5 billion a year.

• Brazil’s Mines and Energy Minister, Edison Lobao, said yesterday (Monday) that China wants to lend Petroleo Brasileiro SA, Brazil’s state oil company, $10 billion to help develop massive new oil fields in deep water off the coast of Rio de Janeiro, The Associated Press reported.

• McDonald Corp.’s (MCD) global same-store sales rose 7.7% in November and U.S. sales climbed 4.5% the company said yesterday in a statement. “I think what you’re seeing is that McDonald’s has so far been relatively immune to the recession,” David Morris, senior analyst at consumer research firm Mintel told The Associated Press.

Source: Global Investing Roundups Tuesday, December 9th, 2008

• AT&T Inc. (T) said it would scale back 12,000 jobs, about 4% of its workforce, between now and the end of 2009 to fight “economic pressures, a changing business mix and a more streamlined organizational structure.” It will also take a severance charge of nearly $600 million for the fourth quarter, Reuters reported.

• Credit Suisse Group AG (ADR: CS) will scale back its workforce, eliminating 5,300 workers, or about 11% of its workforce. Switzerland’s second-largest bank will also nix bonuses for its top executives, Bloomberg reported.

• Capital One Financial Corp. (COF) said it will acquire privately-held Chevy Chase Bank for $520 million in cash and stock, The Associated Press reported. Bethesda, Md.-based Chevy Chase Bank has branches primarily in Maryland, Virginia and Washington, D.C., and has about $11 billion in deposits.

• Argentine President Cristina Fernandez de Kirchner said the government will offer 13.2 billion pesos ($3.9 billion) for an economic stimulus. The plan seeks to reduce loan costs to manufacturers, help finance new auto purchases and reduce export taxes on corn and wheat, Bloomberg reported.

• The number of U.S. workers on unemployment benefits rolls soared to 4.09 million last month, the highest level in 26 years, according to the Labor Department. The four-week moving average of initial claims, a less volatile measure, climbed to 524,500, also the highest since 1982.

• E.I. du Pont de Nemours & Co. (DD) said yesterday (Thursday) that it will not turn a profit in the fourth quarter, and consequently, will be forced to cut 2,500 jobs and release 4,000 contractors by the end of this year. “We expect 2009 to be a very challenging year,” said DuPont chief financial officer Jeff Keefer.

• Williams-Sonoma Inc. (WSM) beat analysts’ third-quarter expectations, but the company’s revenue still fell 16% from a year ago, to  $752.1 million. The company lost $11 million, or 10 cents a share, for the in the three months ended November 2, compared with a profit of $27.1 million, or 25 cents a share, a year earlier. Analysts’ average forecast was a loss of 11 cents a share, according to Reuters Estimates.

• Crude oil prices fell more than 5% yesterday (Thursday) as employment and manufacturing data indicated the U.S. recession would be severe. Light, sweet crude for January delivery fell $2.49 to settle at $44.30 a barrel on the New York Mercantile Exchange.

Source: Global Investing Roundups, Friday, December 5th, 2008

• Nationwide home prices fell a record 5.3% in July compared with a year ago, the Federal Housing Finance Agency said yesterday (Tuesday). Prices were down 0.6% from June on a seasonally adjusted basis, and are now at October 2005 levels.

• Chrysler LLC yesterday (Tuesday) unveiled three prototype electric cars, including a Dodge sports car, a four-door Jeep Wrangler, and a Chrysler minivan, The Associated Press reported. The company hopes to put one of them on sale in the United States sometime in 2010 to compete with General Motors Corp.’s (GM) much-hyped Chevrolet Volt.

• Oil prices pulled back more than 2% yesterday (Tuesday) after Monday’s record setting rally. Light, sweet crude for November delivery fell $2.76 to settle at $106.61 on the New York Mercantile Exchange, after as low as $104.05 earlier in the day. The contract jumped $6.62 to settle at $109.37 on Monday.

• Lennar Corp. (LEN) yesterday (Tuesday) reported a loss of $89 million, or 56 cents per share, compared with a loss of $513.9 million, or $3.25 per share, a year ago. The loss was less than the 63 cents per share expected, according to Reuters Estimates. Lennar’s revenue plunged 53% to $1.11 billion in the quarter, beating estimates of $1.07 billion.

• E.I. du Pont de Nemours & Co. (DD), more commonly known as DuPont, yesterday (Tuesday) announced Ellen Kullman as its new president and chief executive officer. Kullman is the first woman to hold the chief post in DuPont’s 206-year history, Reuters reported. Kullman, who has been with DuPont since 1988 was seen as the likely successor to the retiring Charles Holliday.

• ImClone Systems Inc. (IMCL) stock shot up almost 7% yesterday (Tuesday) after a late-night Monday bid boost from Bristol Myers Squibb Co. (BMY). The latest offer of $62 per share for ImClone is a $2 boost over Bristol’s prior offer. Bristol also went hostile with the offer, taking the new bid directly to ImClone shareholders, Forbes reported.

• The Wall Street Journal yesterday (Tuesday) reported that Electricite de France SA (PINK: EICFF) would pay $23 billion (12.4 billion pounds) for British Energy Group PLC. EDF refused to comment on the report, but has scheduled a press conference for today (Wednesday), BusinessWeek
  reported.

Global Investing Roundups Wednesday, September 24th, 2008