Thursday, March 15, 2007

A Bevy of Tax-Savvy ETFs

News Analysis
March 15, 2007

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A Bevy of Tax-Savvy ETFs

It may be too late for this year, but these five exchange-traded funds earn top marks from analysts and may help soften the tax bite for 2007

The recent global stock sell-off might be investors' biggest worry these days, but it's likely not their only one (see, 3/1/07, "What the Market Is Telling Us"). With this tax season's Apr. 17 (delayed due to a Sunday and Emancipation Day) deadline fast approaching, many taxpayers may also be turning with fearful eyes toward the IRS. While it's probably too late for most of us to reduce any 2006 tax pain related to our investment holdings, a hard look at this year's return can help you assess your portfolio's tax exposure and plan changes to improve things for coming years.

Exchange-traded funds, or ETFs, have long been heralded for their tax-efficiency (see, 1/18/07, "Going Global with ETFs"). Unlike traditional mutual funds, ETFs don't have to sell shares of stocks and possibly incur taxable capital gains when shareholders reduce their stake in a fund. Like index funds, ETFs typically have low portfolio turnover, also cutting down on potential tax hurt.

But new products are hitting the market almost every week, and not all ETFs are created equal. This Five for the Money looks at five ETFs rated in the top of their class for consistent return and tax efficiency by fund tracker Lipper. As part of a well-diversified portfolio, these funds could deliver stable long-term gains and help fend off the tax collector, too.

1. iShares MSCI Austria Index (EWO)
The hills are alive with the sound of the tax man biting into your returns. But a jaunt to Austria, courtesy of the iShares MSCI Austria Index ETF, might result in a sweeter refrain. This ETF has posted average annualized returns of 36.02% in the five years ended Mar. 13, compared to 15.17% for the MSCI EAFE index. The fund carries a low 0.54% expense ratio and lost only an average annualized 0.42 percentage points of its returns to tax costs over the past five years, according to Morningstar (MORN) data.

IShares MSCI Austria Index has posted stunning returns at times, but it probably shouldn't be a big holding for most investors. "That would be for somebody who was either familiar with the European region or felt that they needed to have additional exposure to Austrian equities," explains Lipper senior research analyst Jeff Tjornehoj.

2. iShares Russell 2000 Value Index (IWN)
A multi-year rally for small-cap value stocks—equities of small companies seen trading at lower prices relative to their fundamentals—has lifted many boats. The iShares Russell 2000 Value Index ETF is no exception. For a 0.25% expense ratio, the fund has racked up five-year average annualized returns of 13.01%, vs. 5.58% for the broader Standard & Poor's 500 index.

Like other ETFs listed here, iShares Russell 2000 Value Index also earns Lipper's top score for tax-efficiency. On an average annualized basis, tax costs cut only 0.54 percentage points out of the fund's impressive returns over the past five years. However, investors may want to consider how long small-cap value's winning streak can continue before buying shares (see, 1/3/07, "Style Wars: Growth or Value in '07?").

"It's not surprising to see value indexes showing up on this list," says Lipper's Tjornehoj. "They've had a very good run over the past three years, and they've been able to do that despite the fact that so many value stocks are oftentimes regarded as spinning off too much income for some investors."

3. Vanguard Small Cap Value ETF (VBR)
A like-minded offering from a long-time stalwart of low-cost, passive investing is the Vanguard Small Cap Value ETF. This fund undercuts iShares Russell 200 Value Index with a cheap 0.12% expense ratio and tracks the MSCI U.S. Small Cap Value index, considered by some to be a better benchmark because of its more complex methodology.

Over the past three years, the Vanguard Small Cap Value ETF boasts average annualized returns of 13.62%, or 4.5 percentage points ahead of the S&P 500. Tax costs ate up an average 0.52 percentage points of those returns each year. Top holdings include Northeast Utilities (NU) and OfficeMax (OMX).

4. iShares Russell Midcap Value Index (IWS)
Value has been the name of the game for medium-sized companies' stocks, as well. True to its name, the iShares Russell Midcap Value Index ETF tracks the Russell Midcap Value index, which comprises the value-tilted stocks of the Russell Midcap index. The index is more heavily weighted to larger companies than are some other midcap benchmarks, according to Morningstar, likely helping this ETF generate such consistent returns.

iShares Russell Midcap Value Index has generated average annualized returns of 14.5% over the last five years, topping the S&P 500 by 9.01 percentage points. A modest 0.25% expense ratio and a low 0.66 tax cost ratio mean shareholders can enjoy nearly all of the returns.

5. Vanguard Value ETF (VTV)
Last but not least, the Vanguard Value ETF has built up a solid record of tax-efficient performance in the large-cap segment. The fund tracks the MSCI U.S. Prime Market Value index, made up of value-oriented stocks within a group of the country's 750 biggest companies. In the past three years, the ETF has posted average annualized gains of 13.24%, beating the S&P 500 by 4.12 percentage points.

Vanguard Value ETF can also lay claim to a meager 0.11% expense ratio. And tax costs? The IRS's average annualized hit to the fund's total return over the past three years has been 0.51 percentage points.

Of course, as frustrating as tax season can be, investors shouldn't judge a fund solely on tax efficiency. These ETFs have a track record of dependable returns to go with their tax-savvy advantages. At least that can help investors breathe a bit easier amid the stock market's ongoing gyrations.

Wednesday, March 14, 2007

Stocks Rebound in Topsy-Turvy Day

News Article
March 14, 2007

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Stocks Rebound in Topsy-Turvy Day

Major indexes recovered from sharp midday losses, despite concerns about subprime lenders and declines in overseas stock markets

Wall Street clawed back from steep losses in a wild session Wednesday. Stocks finished higher as investors looked past subprime lending worries and weakness in overseas markets amid a pair of favorable economic reports. Strength in energy- and software-related shares helped boost major indexes.

A massive midsession sell program was followed quickly by short covering and heavy buying, as traders positioned for quadruple witching, the trader's term for when the monthly stock and index option expirations coincide with the quarterly expiration of stock and index futures contracts, says Standard & Poor's Equity Research.

On Wednesday, the Dow Jones industrial average rose 57.2 points, or 0.47%, to 12,133.16, after tumbling below 12,000 earlier in the session for the first time since November. Microsoft (MSFT) paced the blue-chip benchmark higher. The broader Standard & Poor's 500 index added 9.22 points, or 0.67%, to 1,387.17. The tech-heavy Nasdaq composite climbed 21.17 points, or 0.9%, to 2,371.74. (Market action for each index can be viewed by clicking on the accompanying images.)

NYSE breadth was positive, with 20 issues advancing for every 13 declining. Nasdaq breadth was 17-14 positive.
Subprime lenders' troubles may be part of a broader liquidity crunch, some analysts say. "There is kind of a threat to global liquidity," says Roger Nusbaum, a portfolio manager with Your Source Financial. "Subprime clearly is a piece of the puzzle, but I think what's going on with the yen carry trade potentially stands to be a bigger piece of the puzzle."

The market could be re-testing recent lows, technical analysts say. "A defensive turn into consumer staples sector is to be expected," notes Roger Volz, chief technical analyst at Swiss American Securities.

Other warn the decline might not have hit bottom yet. "Investors should remain alert to the market's actions over the next couple of days as indications of whether or not to take further defensive action or to be ready to buy," observes Richard Dickson, senior market strategist for Lowry's Reports.

In economic news Wednesday, the U.S. current account deficit narrowed to $195.8 billion in the fourth quarter of 2006, below expectations, from a revised $229.4 billion three months earlier.

U.S. import prices inched higher 0.2% in February alongside a 0.7% gain for export prices. The report was "not as hot as expected," says Action Economics.

The economic calendar Thursday brings closely watched inflation data. The producer price index, or PPI, is expected to show a 0.5% headline rise and a 0.2% increase excluding food and energy, says S&P.

Among Wednesday's stocks in the news, General Motors (GM) was lower after the automaker reported a fourth-quarter profit of $950 million, shy of Wall Street expectations.

Lehman Brothers (LEH) was lower despite posting a record first-quarter profit, on the heels of a record earnings report at fellow investment bank Goldman Sachs (GS) a day earlier.

Goldman was higher amid reports the company is looking to buy a subprime mortgage lender on the cheap.

Outside of earnings, H&R Block (HRB) edged higher, recovering from an early slide after the tax preparer delayed filing its quarterly report, citing a needed write-down in subprime mortgage lending unit Option One.

On the M&A front, Citigroup (C) said it will begin a tender offer for Nikko Cordial on Thursday after sharply raising its bid for the Japan-based brokerage.

In analyst calls, Qualcomm (QCOM) was higher after J.P. Morgan upgraded the telecommunications company from underweight to neutral.

Shares of Southwest Airlines (LUV) gained after HSBC upgraded the stock from neutral to overweight.

Elsewhere, China-based Internet search provider (BIDU) was lower after a report by China Intelliconsulting suggested click fraud could limit revenue growth.

In the energy markets, April West Texas Intermediate crude oil futures rose 23 cents to $58.16 a barrel after a weekly inventory report showed a slightly smaller-than-expected increase in crude supplies. Focus now turns to Thursday's OPEC meeting.

European markets finished sharply lower. The FTSE-100 index in London fell 160.5 points, or 2.61%, to 6,000.7. Germany's DAX index dropped 176.29 points, or 2.66%, to 6,447.7. In Paris, the CAC 40 index was down 136.72 points, or 2.52%, to 5,296.22.

Asian markets ended heavily lower. In Japan, the Nikkei 225 index tumbled 501.95 points, or 2.92%, to 16,676.89. In Hong Kong, the Hang Seng index slid 496.21 points, or 2.57%, to 18,836.93. Korea's Kospi index skidded 28.68 points, or 2%, to 1,407.37.

Treasury Market
Treasury prices dipped, erasing early gains amid a drop in the yen's value. The 10-year note fell in price 10/32 to 100-26/32 for a yield of 4.52%, while 30-year bonds dropped to 100-29/32 for a yield of 4.69%. "Yen weakness alleviated concerns that institutions were unwinding carry trades," says S&P.

Tuesday, March 13, 2007

Stocks Tumble on Mortgage Worries

News Article
March 13, 2007

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Stocks Tumble on Mortgage Worries

Bad news about subprime lenders and fourth-quarter foreclosures sparked selling, with the Dow shedding over 240 points

Wall Street's three-day winning streak didn't stand much of a chance Tuesday. Stocks finished broadly, sharply lower, as growing concerns about the subprime mortgage market and a disappointing retail sales report helped spark a sell-off. Volume spiked, likely indicating trading by institutions, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average dropped 242.66 points, or 1.97%, to 12,075.96. The broader Standard & Poor's 500 index slid 28.65 points, or 2.04%, to 1,377.95. The tech-heavy Nasdaq composite tumbled 51.72 points, or 2.15%, to 2,350.57.

NYSE breadth was decidedly negative, with 28 issues declining for every 6 advancing. Nasdaq breadth was 25-5 negative.

Economic worries and options expiration were helping to send stocks lower, analysts say. "Weak retail sales reignite the fear the economy may be slowing a bit more than anticipated, coupled with the still strong short-term inflationary pressures," says Peter Cardillo, chief market economist at Avalon Partners. "Adding to the decline today is that this week we have options expiration, and that may also be adding some selling pressure."

The sell-off was an extension of the market's volatility since Feb. 27, some analysts. "Over the next three months, we can expect lower lows and, eventually, higher highs," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, in a report. "But to get to those better prices, we are going to have to become deeply oversold. Thats a process: rallies near highs that fail, and selloffs to deeper levels.

Others point to a healthy correction underway. "The recent rally occurred on improving volume," says Walter Murphy, senior international market analyst at Merrill Lynch, in a note to clients. "Now a correction has occurred on declining volume... This, plus a still generally constructive momentum and breadth background, suggests that the correction will prove to be a healthy effort to consolidate gains prior to another rally attempt."

In economic news, U.S. retail sales rose 0.1% in February, less than expected, following a flat January. Retail sales were down 0.1% in February excluding autos. "Weather may have weighed on sales, but nevertheless, traders will take the data and run," says Action Economics.

A report showing increases in foreclosures and late mortgage payments weighed on financial-services stocks. The Mortgage Bankers' Assn. said the rate of U.S. foreclosures rose to a record 0.54% in the fourth quarter of 2006, from 0.46% three months earlier. The delinquency rate on U.S. home loans advanced to 4.95% in the fourth quarter from 4.67% in the third quarter.

The National Assn. of Realtors said the the housing forecast is cloudy, with a recovery in the market not likely until late this year.

Separately, U.S. business inventories rose 0.2% in January, slightly more than expected, alongside a 0.7% sales decline.

The economic calendar Wednesday holds reports on February trade prices and the fourth-quarter current account deficit.

Among Tuesday's stocks in the news, the NYSE delisted subprime lender New Century Financial (NEWC), which plunged in pre-market trading Monday before trading in the shares was halted. In addition, New Century said the SEC was seeking documents as part of a probe into accounting errors.

Stocks with consumer banking operations like Citigroup (C), Washington Mutual (WM), and JPMorgan Chase (JPM) were solidly lower amid market worries about mortgage lending.

General Motors (GM) was lower after the automaker's former finance arm, General Motors Acceptance, said it would get another $1 million from GM and cited pressures from the subprime mortgage market.

Viacom (VIA.B) sued Google (GOOG) and its YouTube video unit for $1 billion over alleged copyright infringement.

Meanwhile, Texas Instruments (TXN) was lower after the chipmaker's forecast for first-quarter sales and profit disappointed some analysts.

Goldman Sachs (GS) was lower despite reporting a record first-quarter profit.

Fabric retailer Jo-Ann Stores (JAS) was sharply higher after the company said it expects to post a fiscal 2008 above Wall Street predictions.

On the M&A front, Citigroup (C) raised its bid for Japan-based brokerage Nikko Cordial by 26%, in a deal valued at up to $13.35 billion.

Medical device maker Boston Scientific (BSX) said it may spin off a minority stake in its endosurgery unit.

Oil prices extended a recent skid, weighing on corresponding stocks. In the energy markets, April West Texas Intermediate crude oil futures fell 98 cents to $57.93 a barrel, reversing early gains after tumbling in the previous session.

European markets finished lower. The FTSE-100 index in London fell 72.1 points, or 1.16%, to 6,161.2. Germany's DAX index dropped 91.5 points, or 1.36%, to 6,623.99. In Paris, the CAC 40 index was down 63.13 points, or 1.15%, to 5,432.94.

Asian markets ended lower. In Japan, the Nikkei 225 index shed 113.55 points, or 0.66%, to 17,178.84. In Hong Kong, the Hang Seng index lost 109.28 points, or 0.56%, to 19,333.14. Korea's Kospi index declined 5.28 points, or 0.37%, to 1,436.05.

Treasury Market
Treasury prices pushed higher amid the soft retail sales data and ongoing subprime worries. The 10-year note rose in price 15/32 to 101-01/32 for a yield of 4.49%, while 30-year bonds climbed 24/32 to to 101-16/32 for a yield of 4.66%.

Monday, March 12, 2007

The Not-So-Small World of Stocks

News Analysis
March 12, 2007

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The Not-So-Small World of Stocks

U.S. and global markets fell in tandem during the late-February slide. Should investors reconsider the value of international diversification?

Wall Street's recent pullback came as part of a slump felt around the world. On Feb. 27, stocks tumbled across Asia, Europe, and the U.S. in the wake of a 9% drop in China's Shanghai composite index (see, 2/28/07, "Stocks' Great Wall of Worry"). The recovery that lifted markets a week later was an equally global phenomenon.

Such highly correlated movements in world markets might seem to contradict the widely touted merits of investing abroad. After all, modern portfolio theory has encouraged investors to pour money into overseas stocks in recent years, based largely on the notion that such diversification would help protect investors against risk (see, 12/18/06, "In Search of a Global Index Fund"). During the latest sell-off, major indexes in Europe and Asia typically fell even further than the top U.S. benchmarks. How's that for diversification?

Not so fast. The world may be getting smaller, but an international component still remains a fundamental piece of a well-diversified retirement portfolio, analysts say. While global markets will likely swing in tandem on some days, weeks, or even months, a broad stake in international stocks could help investors get ahead over the long-term.

"The cliché is, 'Stocks go down together, but they come up one by one,'" explains Brian Gendreau, investment strategist at ING Investment Management (ING). "The same is true of markets."

Global Correlation

Even beyond last month's skid, world markets have become increasingly linked. Correlation between U.S. markets and bourses overseas is up to about 80%, depending on the market, says Alec Young, equity market strategist at Standard & Poor's Equity Research. That's a sharp jump from correlation levels a few decades ago, when the literature on asset allocation started to get established.

Much of the recent correlation between stocks domestically and abroad likely stems from globalization. As of 2005, companies in the Standard & Poor's 500-stock index received an average of 40% of their revenues from overseas, according to the latest data from S&P Equity Research. Global economic cycles also happen to be in similar stages, with inflation relatively low across most major markets. "The issues that are moving the markets are global," Young says.

However, investors with some international holdings also enjoy the benefits of being diversified against currency risk, specifically the chance of a decline in the U.S. dollar. As the value of the dollar falls against foreign currencies, the value of stocks denominated in those currencies increases, even if share prices stay flat in local-currency terms.

The increasing correlation between global markets also underscores the importance of holding not only stocks, but also fixed-income investments. Bond prices tended to rise during stocks' late-February slump, as traders moved toward asset classes perceived as less risky. "Bond diversification does matter," notes Quincy Krosby, chief investment strategist at The Hartford (HIG).

Hot Commodities

Diversification-minded investors may want to consider, too, some alternative asset classes, such as commodities. The price of commodities like crude oil or gold can move independently from stocks, though that wasn't the case during the most recent sell-off.

Barclays Global Investors' (BCS) Dow Jones-AIG Commodity Total Return Index ETN (DJP) is one convenient way to get commodity exposure. Similar to an exchange-traded fund, this exchange-traded note has exposure to 18 different commodities, with no more than 33% allocated to energy. The ETN aims to deliver the return of the Dow Jones AIG Commodity Index, less a 0.75% fee.

In addition, investors should make sure their international holdings are spread across a variety of foreign markets, analysts say. "If you're broad-based, you're going to get the benefits of diversification and the benefits of international growth, and it's going to be a much smoother ride," says Doug Roberts, founder and chief investment strategist for Channel Capital Research.

Investors with long-term goals may want to endure some short-term pain in international stocks. "In terms of longer-term effects, the differences between markets still depend on the fundamentals, and as you go from country to country the fundamentals can be very different," says Jersey Gilbert, financial products analyst at Consumer Reports. To help diversify your portfolio, markets don't necessarily have to move in different directions all of the time—only some of the time.

Thursday, March 8, 2007

Stocks Rise After Overseas Gains

News Article
March 8, 2007

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Stocks Rise After Overseas Gains

Major indexes pushed higher amid strength in European and Asian bourses, ahead of Friday's closely watched payrolls report

Stocks finished higher Thursday amid a global rally that began in Asia on upbeat economic sentiment. Major indexes pared gains in afternoon trading, however, amid concerns about subprime lender New Century Financial's (NEW). Analysts continued to debate whether the market has hit a short-term bottom, with some traders nervous ahead of Friday's employment report, says Standard & Poor's Equity Research.

On Thursday, the Dow Jones industrial average rose 68.57 points, or 0.56%, to 12,261.02, paced by AT&T (T) on an A.G. Edwards upgrade. The broader Standard & Poor's 500 index added 9.92 points, or 0.71%, to 1,401.89. The tech-heavy Nasdaq composite was up 13.09 points, or 0.55%, to 2,387.73.
NYSE breadth was decidedly positive, with 25 issues advancing for every 8 declining. Nasdaq breadth was 18-12 positive.

The market's latest rebound may not signal an end to its recent woes, some analysts say. "While most markets recently reversed their respective intermediate uptrends from last summer's lows, the larger bull market trends from the 2002-2003 low remains intact," says Walter Murphy, Jr., technical research analyst at Merrill Lynch, in a report. "Since medium term momentum is overbought and deteriorating, further weakness appears likely in the weeks ahead."

Others say worries about subprime loans shouldn't spread into a broader crisis. "Poor performance of recent subprime mortgages, ongoing distress among lenders, and the possibility of a broader credit crunch continue to worry market participants," says Goldman Sachs economist Andrew Tilton, in a note to clients. "But we emphasize we do not see this broad 'mortgage credit crunch' as the most likely outcome."

In economic news Thursday, weekly jobless claims fell 10,000 to 328,000 in the week ended Mar. 3, more than expected, following the previous week's 338,000 reading. Investors were awaiting Friday's report on February nonfarm payrolls, which Action Economic sees rising by 90,000.

Overseas, the European Central Bank raised its benchmark interest rate 25 basis points to 3.75%. ECB President Jean Trichet said rates were still on the "accommodative side," likely indicating more hikes to come.

Meanwhile, the Bank of England kept its key lending rate unchanged and signaled it will remain on the sidelines if inflation pressures ease.

The value of the Chinese yuan rose after U.S. Treasury Secretary Henry Paulson said Chinese officials should loosen controls on interest rates, accelerate sales of state-owned banks, and let the exchange rate move more freely.

Among Thursday's stocks in the news, retailers were posting lackluster February sales results. Wal-Mart (WMT), Costco (COST), Limited (LMT), and J.C. Penney (JCP) were among companies reporting lower monthly same-store sales than analysts expected.

On the upside, Target (TGT), Nordstrom (JWN) and Saks (SKS) beat Wall Street sales forecasts.
Chip equipment makers like Applied Materials (AMAT) helped lead the market higher after Morgan Stanley raised its recommendation on the sector from in-line to attractive.

However, New Century Financial was sharply lower amid speculation the subprime mortgage lender might file for bankruptcy, following the resignation of board member David Einhorn.

Elsewhere, Verizon (VZ) was higher after a federal judge ordered Internet phone carrier Vonage (VG) to the pay the company $58 million in a patent-infringement ruling.

Apple (AAPL) edged higher following an American Technology Research report the iPod maker might launch a new laptop this year that will save data on flash memory chips instead of a hard drive.

Shares of Ford (F) gained after Credit Suisse raised its recommendation on the automaker from underperform to neutral.

Monster Worldwide (MNST) was higher after Citigroup raised its recommendation on the staffing provider from hold to buy.

On the M&A front, Citigroup (C) was higher on a report the bank might buy Taiwan's Bank of Overseas Chinese for $425 million. Earlier this week, Citigroup bid $10.8 billion for control of Japan's Nikko Cordial.

CVS (CVS) raised its takeover bid for Caremark Rx (CMX), offering to pay $52.96 a share, plus a one-time dividend of $7.50 per share. The previous dividend offer was $6 per share. The bid follows a $26.84 billion, or $61.73 a share, offer from Express Scripts (ESRX).

In the energy markets, April West Texas Intermediate crude oil futures fell 18 cents to $61.64 a barrel, after running into technical resistance.

European markets finished higher. The FTSE-100 index in London rose 71.2 points, or 1.16%, to 6,227.7. Germany's DAX index added 95.48 points, or 1.44%, to 6,713.23. In Paris, the CAC 40 index was up 69.19 points, or 1.27%, to 5,524.26.

Asian markets ended solidly higher. In Japan, the Nikkei 225 index climbed 325.69 points, or 1.94%, to 17,090.31. In Hong Kong, the Hang Seng index gained 256.53 points, or 1.36%, to 19,175.17. Korea's Kospi index advanced 12.94 points, or 0.92%, to 1,423.89.

Treasury Market
Treasury yields rebounded modestly amid the drop in weekly jobless claims and speculation Friday's labor report may beat expectations. The 10-year note fell in price 05/32 to 100-30/32 for a yield of 4.51%, while 30-year bonds dropped 11/32 to 101-19/32 for a yield of 4.65%.

Stock Signals You Can Use

News Analysis
March 8, 2007

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Stock Signals You Can Use

Look past the red and green arrows. From volatility to odd-lot shorts, here are a few indicators pros watch to figure the market's direction

"Sign, sign, everywhere a sign," as otherwise-forgotten '70s rockers Five Man Electrical Band sang in their only U.S. hit. Stocks' recent turbulence has brought another wave of predictions about where the market could be headed (see BusinessWeek, 3/12/07, "What the Market Is Telling Us"). Investors still focused on all the red and green arrows may find themselves feeling, well, a little lost.

Wall Street analysts (and financial journalists) routinely sift through a variety of indicators for hints about stocks' likely next move. Of course, no forecasting tool can be 100% reliable, as anyone who's ever gone outside without an umbrella after reading the weather report could tell you. Still, certain signals help prognosticators make educated guesses about the market—and, like the proverbial broken clock, sometimes even get it right (see, 12/27/06, "Five for the Money's Best Stock Picks").

In an era of Google (GOOG) and other online tools, savvy investors increasingly have access to the same information the pros use. This Five for the Money finds a few indicators investors might want to check for signs of the market's possible direction. Some are commonsensical, others downright wonky, but all are part of the arsenal of Wall Street pros—and worth a look from ordinary investors.
1. The VIX

The Chicago Board Options Exchange Volatility Index (VIX.X) is commonly referred to as the "fear gauge." Some traders use the VIX to measure the implied volatility of Standard & Poor's 500 index options. A drop in the VIX can signal a rise in investors' risk tolerance, while a jump in the VIX could indicate that investor sentiment has grown more cautious.

The VIX moved to historically low levels in recent months, leading some analysts to worry that investors had grown complacent. The index tumbled to a 52-week low of 8.6 on Dec. 18, 2006, down 64% from its June peak. More recently, the market's latest slump has corresponded with a spike in the VIX. On Feb. 27, the index surged as much as 70%, its biggest single-day increase ever, prompting market observers to forecast a bumpy ride for investors (see, 2/28/07, "Stocks' Great Wall of Worry").
2. The TRIN

If "the trend is your friend," as some traders like to say, perhaps the TRIN could be, too. The Arms Short-Term Trading Index, also known as the TRIN, tracks the relationship between the number of stocks increasing or decreasing in price and the volume associated with those stocks. Simply put, the TRIN shows whether volume is moving into advancing stocks or decliners.

If more volume is flowing into advancing stocks, the TRIN will be below 1.0. Conversely, if more volume flows into decliners, the TRIN will be above 1.0. How far the index moves below or above 1.0 dictates how overbought or oversold the market is seen to be. (Analysts use the terms "overbought" and "oversold" to describe when technical indicators suggest stocks are overvalued or undervalued, respectively.)

Amid last week's sell-off, the TRIN reached as high as 8.0 in intraday trading, well into oversold territory. Such a high reading could signal a short-term bottom for stocks, says Chris Johnson, CEO and chief investment strategist of Johnson Research Group. "If everybody's selling in an orderly fashion, it tells you we're probably going to see an extended period of selling," Johnson explains. "You want to see people running out of the theater after someone starts shouting 'fire,' rather than people coming out single-file."

3. Odd-lot shorts

Some market pros gauge investor sentiment by looking at the level of odd-lot short sales, or the amount of bets against the market made in batches of fewer than 100 shares. A spike in odd-lot short interest reputedly shows that average investors, not just the so-called "smart money," are taking a bearish position on the market. This information is released daily by the exchanges.

Because these investors are seen as less sophisticated, traders often use odd-lot short activity as a contrary indicator. Odd-lot short interest surged amid last week's market slide, possibly signaling the rally that followed on Mar. 6.
4. Moving averages

Technical analysts frequently monitor the relationship between major indexes and their moving averages for further indications about possible market direction. Moving averages are calculated by adding the current day's closing price of a security with the like figures for the rest of the days in the average period, and then dividing the total by the number of days in the period. This process is repeated or "moved" each day and a new average is developed.

Comparing the performance of the S&P 500 index against its 50-day exponential moving average may yield some clues for investors. "Almost every individual in the world can now go onto the Internet and pull up a chart and do this for free," says Mark Arbeter, chief technical analyst at S&P Equity Research.

When the S&P 500 is below its 50-day moving average, as it was in afternoon trading Mar. 6, that's typically perceived as a negative sign for the market. Not until the S&P 500 climbs above its 50-day average and the average itself starts to rise again would this indicator become positive for investors, Arbeter observes.
5. Relative strength

Investors who aren't afraid to delve into even more highly technical terrain may be interested in watching the relative strength index, or RSI. This measure is available from nearly any online stock-charting service and can indicate when stocks have touched bottom.

To show a market bottom, the 14-day RSI must fall below 30, which is considered oversold territory. Then, if the S&P 500 rebounds and subsequently suffers a pullback, the RSI must stay above its initial low. "Let's say the market rallies this week up to 1,410," Arbeter explains. "Then the S&P reverses and goes back and tests the low we saw [Mar. 5] and in fact closes below the low of 1,374. You want to see the [RSI] indicator be above yesterday's low."

Once again, none of these indicators can be used with certainty to predict upcoming market action. Still, investors who take them under consideration as one piece of a larger puzzle may find them a handy way of keeping up with the pros.

Wednesday, March 7, 2007

Stocks Falter Despite Fed Report

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March 7, 2007

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Stocks Falter Despite Fed Report

Major indexes slipped following Tuesday's sharp gains, though the Fed's Beige Book report showed moderate growth in most regions

Stocks finished modestly lower Wednesday, failing to build on Tuesday's bargain-hunting rally despite the Federal Reserve's moderately upbeat Beige Book report. Oil prices climbed on a bullish inventories report, while investors also looked ahead to Friday's payrolls report for further clues about the economy.

On Wednesday, the Dow Jones industrial average slipped 15.14 points, or 0.12%, to 12,192.45, despite a 1.9% gain by Hewlett-Packard (HPQ). The broader Standard & Poor's 500 index fell 3.44 points, or 0.26%, to 1,391.97. The tech-heavy Nasdaq composite shed 10.5 points, or 0.44%, to 2,374.64.
NYSE breadth was flat, with as many issues advancing as declining. Nasdaq breadth was 18-13 negative.

The market's recent turbulence could be more noise than substance, some analysts maintain. "The sharp decline in share prices has enhanced the already attractive valuation of the S&P 500, as has the decline in bond yields," says Abby Joseph Cohen, chief U.S. investment strategist at Goldman Sachs, in a note to clients. "Commentators have provided long lists of possible catalysts, both domestic and global... but U.S. fundamentals have changed very little."

Other analysts remained skeptical despite Tuesday's rally, citing technical factors. "Enough damage has been done to the daily and weekly charts to cause us to be suspicious of Tuesday's move as being a one-day wonder," notes Roger Volz, chief technical analyst at Swiss American Securities.

In economic news Wednesday, the Fed's Beige Book report showed moderate growth in most districts, despite "some slowing" in about a third of regions. The report is consistent with the Fed keeping interest rates steady, says Action Economics.

Treasury Secretary Henry Paulson reiterated his forecast of stable growth for the U.S. economy during remarks in Seoul, South Korea, according to a Reuters report. Paulson added that world economic fundamentals were strong despite fluctuations in global equity and foreign exchange markets, South Korea's financial ministry said in a statement.

Former Fed Chairman Alan Greenspan was also back in the headlines. Greenspan suggested the U.S. housing market has experienced an "inventory recession" but that the home sales decline has reached bottom, according to wire reports.

Meanwhile, the ADP National Employment Report said U.S. private nonfarm employment grew 57,000 in February to 115,111, following a downwardly revised 121,000 gain in January. The numbers don't change an expectation Friday's nonfarm payrolls report will show an increase of 90,000, says Action Economics.

The economic calendar is light Thursday, highlighted by weekly jobless claims data ahead of the payrolls release on Friday.

Among Wednesday's stocks in the news, Toll Brothers (TOL) was higher after the homebuilder said it may "burn off" its inventory in four or five months in most of its markets.

Take-Two Interactive (TTWO) was higher on news investors who own 46% of the video-game maker are joining in an attempt to take over its board and ask for a new CEO.

Citigroup (C) was modestly lower after running into a hurdle in its bid for Japan's Nikko Cordial.

Harris Associates, which owns about 7.5% of the brokerage, said it won't accept Citigroup's bid.

Google (GOOG) was modestly lower even after UBS raised its recommendation on the Internet search company from neutral to buy.

Shares of Kellogg (K) gained after Goldman Sachs upgraded the the cereal maker from neutral to buy.
On the earnings front, American Eagle Outfitters (AEOS) was lower despite reporting a 40% jump in fourth-quarter net income.

Payless ShoeSource (PSS) was sharply higher after the discount shoe retailer said it swung to a fourth-quarter profit.

Shares of Saks (SKS) climbed after the department store operator posted a fourth-quarter profit, up from a year-ago loss, on a 17% increase in sales.

Companies set to report quarterly results after the closing bell Wednesday included TiVo (TIVO).
In the energy markets, April West Texas Intermediate crude oil futures rose $1.13 to $61.82 a barrel, after a weekly inventory report showed crude supplies unexpectedly fell.

European markets finished modestly higher. The FTSE-100 index in London rose 18 points, or 0.29%, to 6,156.5. Germany's DAX index added 22.75 points, or 0.34%, to 6,617.75. In Paris, the CAC 40 index was up 17.94 points, or 0.33%, to 5,455.07.

Asian markets ended mixed. In Japan, the Nikkei 225 index lost 79.88 points, or 0.47%, to 16,764.62. In Hong Kong, the Hang Seng index declined 139.92 points, or 0.73%, to 18,918.64. Korea's Kospi index gained 8.02 points, or 0.57%, to 1,410.95.

Treasury Market
Treasury prices moved higher late in the session, after the Fed's Beige Book indicated evidence of slowing economic growth in some districts. The 10-year note rose in price 08/32 to 101-00/32 for a yield of 4.5%, while 30-year bonds climbed 12/32 to 101-26/32 for a yield of 4.64%. Trading could be slow Thursday ahead of Friday's payrolls report, says S&P.

Tuesday, March 6, 2007

Stocks Rally Amid Overseas Gains

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March 6, 2007

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Stocks Rally Amid Overseas Gains

Major indexes built on the global equity rebound for their biggest one-day gain of 2007, despite weak productivity data and a plunge in factory orders

A return to volatility was good news for Wall Street on Tuesday. Stocks finished broadly higher, bouncing back from a weeklong correction amid a rebound in global markets and a recovery in the dollar against the yen. Treasury Secretary Henry Paulson and Japanese officials declared the global economy solid, though investors were also digesting some disappointing economic reports. Investors were apparently hunting for bargains, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 157.18 points, or 1.3%, to 12,207.59. The broader Standard & Poor's 500 index added 21.29 points, or 1.55%, to 1,395.41. Both benchmarks posted their biggest one-day gain performance since July, 2006. The tech-heavy Nasdaq composite climbed 44.46 points, or 1.9%, to 2,385.14, its strongest day since October, 2006.

NYSE breadth was decidedly positive, with 28 issues advancing for every 6 declining. Nasdaq breadth was 25-6 positive.

The bull market may still have legs despite the recent slump, some analysts say. "There is insufficient evidence to declare the market has entered a bear phase," says Richard Dickson, senior market strategist at Lowry's Reports. "The best chance for a clarification of the market's status could be in a rebound rally and test of the current lows."

In economic news Tuesday, Treasury's Paulson said the global economy is as strong as he's ever seen it, according to the AP. Paulson, in Tokyo on the first leg of a three-nation Asian tour, reportedly said reforms in China would help reduce the the type of volatility that has recently shaken world markets.

Meanwhile, former Federal Reserve Chairman Alan Greenspan said there's a "one-third probability" of a U.S. recession this year, Bloomberg reports. "We are in the sixth year of a recovery," Greenspan reportedly said. "Imbalances can emerge as a result."

U.S. fourth-quarter nonfarm productivity was revised down to 1.6%, from a 3% rate in an earlier reading and -0.1% in the third quarter. Unit labor costs were revised up to a 6.6% rate, from an initial 1.7% print and a 3.2% pace in the third quarter.

Separately, U.S. factory orders fell 5.6% in January, more than expected after a revised 2.6% increase in December.

The National Association of Realtors' index of pending home sales fell 4.1% to 108.7 in January, after jumping to 113.3 in December.

However, focus this week will likely be on Friday's February nonfarm payrolls report, preceded by ADP's employment survey on Wednesday. The calendar Wendesday also holds data on January consumer credit.

Among Tuesday's stocks in the news, CBS (CBS) announced plans to buy back about 47 million shares of its Class B stock for $1.4 billion.

ADC Telecom (ADCT) was higher as the telecom equipment maker's fiscal first-quarter results topped analyst expectations.

Xilinx (XLNX) was higher after the chipmaker raised the bottom end of its forecast for fourth-quarter sales.

On the M&A front, Citigroup (C) announced a bid of up to $10.8 billion for full control of Japanese brokerage Nikko Cordial, of which the banking giant already holds a 4.9% stake.

K&F Industries (KFI) agreed to be acquired by a unit of London-based military aerospace company Meggitt for $1.1 billion in cash.

In analyst calls, Texas Instruments (TXN) was higher after Bear Stearns raised its rating on the chipmaker from peer perform to outperform.

Altria (MO) was higher after Deutsche Bank upgraded the cigarette maker from hold to buy.
In the energy markets, April West Texas Intermediate crude oil futures rose 62 cents to $60.69 a barrel amid cold weather in the Northeast, rebounding from their recent slide on worries about a slowing global economy.

European markets finished higher. The FTSE-100 index in London rose 79.8 points, or 1.32%, to 6,138.5. Germany's DAX index added 60.43 points, or 0.92%, to 6,595. In Paris, the CAC 40 index was up 52.1 points, or 0.97%, to 5,437.13.

Asian markets ended sharply higher. In Japan, the Nikkei 225 index rebounded 202.25 points, or 1.22%, to 16,844.5. In Hong Kong, the Hang Seng index climbed 393.68 points, or 2.11%, to 19,058.56. Korea's Kospi index advanced 26.78 points, or 1.95%, to 1,402.93.

Treasury Market
Treasury prices moved lower as assets flowed back into stocks. The 10-year note fell in price 09/32 to 100-25/32 for a yield of 4.52%, while 30-year bonds dropped 12/32 to 101-17/32 for a yield of 4.65%.

Monday, March 5, 2007

Profits: A Silver Lining for Stocks?

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March 5, 2007

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Profits: A Silver Lining for Stocks?

While major equity indexes have gone wobbly, corporate earnings have quietly posted another quarter of double-digit growth

One modestly upbeat statistic went mostly unnoticed during the past week's global equity gyrations. The Standard & Poor's 500 index appears poised—albeit just barely—to record a 19th consecutive quarter of double-digit earnings growth, trumping many forecasts to the contrary (see, 2/1/07, "Will Profits Snap Their Hot Streak?"). While corporate profits may post smaller gains going forward, the outlook isn't all gloomy for Wall Street.

Right now, investors will probably take all the good news they can get. On Mar. 2, the Dow Jones industrial average finished its worst week since March, 2003, while the S&P 500 capped off its biggest weekly decline since January, 2003. Downbeat economic reports, a plunge in Chinese equities, and concerns about a sharp rise in the Japanese yen all helped snap a market rally that had gone on nearly uninterrupted since mid-2006.

Fourth-quarter earnings, at least, may have defied skeptics. If the reporting season ended today, Corporate America squeaked out another quarter of double-digit earnings growth. With more than 92% of results in as of Mar. 2, S&P 500 companies have posted an average earnings increase of 10.05% for the period, according to S&P.

Down to Earth

The streak may be running down, but investors shouldn't necessarily worry. While analysts expect earnings growth to slow in the months ahead, a dramatic, 2001-style turnaround in U.S. corporations' bottom lines probably isn't in the cards. Stocks could still have upside surprises in store, providing opportunities for savvy investors, even in the current volatile market environment (see, 3/12/07, "What the Market Is Telling Us").

Ashwani Kaul, chief market strategist at Reuters Estimates, sees earnings growth dropping off sharply in the first three quarters of 2007, then returning to double digits in the fourth quarter. "Corporate profits are still going to grow, but they can't just keep growing at the astronomical levels they have been," Kaul explains. Wall Street might not punish stocks too severely for the slowdown, he adds, because earnings should remain high in absolute terms following their 19-quarter run.

In fact, investors might keep stock prices afloat in anticipation of a potential rebound for profits in 2008. A couple of quarters of single-digit earnings growth won't necessarily pose a big hurdle for further S&P 500 gains, observes Goldman Sachs (GS) strategist David Kostin, who cites an expected 11% growth rate next year. "We believe the market in 2007 will focus on the prospect of accelerating earnings growth in 2008," Kostin says in a Feb. 20 note.

Further Volatility Ahead?

Meanwhile, the market may have already factored a slowing economy into stock prices. The long-term earnings growth expectations embedded in large-cap U.S. stocks imply potential GDP growth of just 2.25%, according to Citigroup (C) and S&P estimates. "We may be below that growth rate for a short time, but that doesn't represent a particularly difficult long-run valuation hurdle or growth requirement," notes Citigroup senior economist Steven Wieting in a Mar. 1 report.

That isn't to say economic concerns might not continue to create upheaval for the market. Further volatility could be in store in coming days, as investors assess data on employment, nonmanufacturing business activity, and January international trade, along with the Federal Reserve's Beige Book report. The Chicago Board Options Exchange Volatility Index (VIX.X), a measure of investors' risk tolerance often classified as a "fear gauge," rose 15.6% to 18.29 in afternoon trading Mar. 2, more than doubling its 52-week low of 8.6 set Dec. 18, 2006.

Counting on Corporate Profits

Former Fed Chief Alan Greenspan grabbed headlines this past week as he asserted a recession is "possible," but not "probable" in 2007 (see, 3/1/07, "Greenspan vs. Bernanke: Hold Your Bets"). The Institute for Supply Management's strong manufacturing report Mar. 1 may have eased some economic fears, but the housing market remains a question mark for investors. "The market should be moving up again once it becomes clearer that the housing recession and the subprime mortgage credit crunch are not spreading," says Ed Yardeni, chief investment strategist at Oak Associates, in a Mar. 2 report.

Until then, risk aversion bodes well for defensive plays, some analysts say. Health care and consumer staples were the only sectors to receive net analyst upgrades in the most recent week, following several months of sharp downgrades for staples, says Merrill Lynch (MER) analyst Brian Belski in a Mar. 2 report. As a further-from-consensus play, Belski recommends the telecom sector.

Investors should likely brace themselves for continued turbulence in the weeks ahead. The market's eight-month run of low volatility and steady gains may be over, but investors would do well to remember that one pillar of the market's strength, corporate profits, probably isn't crumbling just yet.

Stocks End Lower in Seesaw Session

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March 5, 2007

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Stocks End Lower in Seesaw Session

Late selling tripped up the major indexes. Investors fretted about the global economy, subprime lenders, and stock losses overseas

U.S. stocks finished lower Monday, giving up an early rebound attempt amid a global slump that began in Asia overnight on news China wants to slow economic growth. European stocks were down, as last week's yen "carry trade" position unwinding continued. Worries about the U.S. subprime mortgage industry also weighed on sentiment.

On Monday, the Dow Jones industrial average fell 63.69 points, or 0.53%, to 12,050.41, paced lower by Alcoa (AA). The broader Standard & Poor's 500 index dropped 13.05 points, or 0.94%, to 1,374.12. The tech-heavy Nasdaq composite slid 27.32 points, or 1.15%, to 2,340.68.

NYSE breadth was negative, with 28 issues declining for every 6 advancing. Nasdaq breadth was 25-6 negative.

Stocks' recent slide comes as investors have begun factoring in downside risks, some analysts say. "Having fully discounted a 'Goldilocks' global economic outlook over the course of an uninterrupted rally that began last July, markets were priced to perfection, leaving little room for further gains, by our analysis," says Alec Young, equity market strategist at Standard & Poor's Equity Research. "Concern regarding a potential global economic slowdown has taken hold amid weaker U.S. economic data and fears the Chinese government may succeed in slowing China's red-hot growth."

Chinese Premier Wen Jiabo said overnight Monday the government was working on the assumption that gross domestic product would grow by about 8% this year, the same target it set last year, when GDP actually climbed 10.7%, according to a Reuters report. Wen said the target had been set to remind local officials of the need "to avoid seeking only faster growth and competing for the fastest growth." He did not rule out raising interest rates.

After the close Friday, Federal Reserve Chairman Ben Bernanke indicated the Fed was keeping a close eye on global markets. Bernanke said the subprime mortgage industry's problems haven't spilled over to prime mortgages.
Treasury Secretary Henry Paulson, in a TV interview over the weeekend, said the economy is healthy. He downplayed the risk of a downturn.

In other economic news, the Institute for Supply Management's non-manufacturing business activity index fell more than expected to 54.3 in February, down from 59.0 in January.

Separately, St. Louis Fed President William Poole reiterated the importance of low inflation, while Fed Governor Kevin Warsh said financial markets have shown "extraordinary resilience." Fed Governor Randall Kroszner also said markets are working well.

The calendar Tuesday holds reports on January factory orders and fourth-quarter nonfarm productivity growth.

Among Monday's stocks in the news, New Century Financial (NEW) was down nearly 70% after the subprime lender said it faces a criminal investigation.

Fellow real estate lender Fremont General (FMT) was lower by about 32% after the company said it plans to exit the subprime home-loan business.

Meanwhile, Research in Motion (RIMM) was lower after the BlackBerry maker said it expects to record about $250 million of charges as it restates earnings following a review of its stock-options grants.

Advanced Micro Devices (AMD) was lower as the chipmaker said it probably won't meet its previous first-quarter revenue forecast of $1.6 billion and $1.7 billion.

On the M&A front, Pathmark Stores (PTMK) agreed to be acquired by rival grocer Great Atlantic & Pacific Tea (GAP) in a deal valued at about $1.3 billion in cash, stock, and debt assumption.

In analyst calls, Palm (PALM) was lower after the J.P. Morgan cut its recommendation on the company from neutral to underweight.

In the energy markets, April West Texas Intermediate crude oil futures fell $1.57 to $60.07 a barrel amid worries a slowing global economy would reduce demand.

European markets finished lower, but improved from their weakest levels. The FTSE-100 index in London dropped 42.6 points, or 0.7%, to 6,073.6. Germany's DAX index slid 81.07 points, or 1.23%, to 6,522.25. In Paris, the CAC 40 index was down 46.53 points, or 0.86%, to 5,378.17.

Asian markets ended sharply lower. In Japan, the Nikkei 225 index skidded 575.68 points, or 3.34%, to 16,642.26. In Hong Kong, the Hang Seng index tumbled 777.13 points, or 4%, to 18,664.88. Korea's Kospi index shed 38.32 points, or 2.71%, to 1,376.15.

Treasury Market
Treasury prices drifted lower after climbing overnight amid weakness in global equities. The 10-year note edged down in price 01/32 to 100-31/32 for a yield of 4.5%, while 30-year bonds slipped 03/32 to 101-24/32 for a yield of 4.64%. The decline in Treasury prices may reflect some profit-taking following last week's big gains, says S&P.

Thursday, March 1, 2007

Greenspan vs. Bernanke: Hold Your Bets

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March 1, 2007

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Greenspan vs. Bernanke: Hold Your Bets

The former Fed chairman and the current central bank chief might not be as far apart on the state of the economy as investors imagine

It sounded like an economic clash of the titans. In one corner: Former Federal Reserve Chairman Alan "the Maestro" Greenspan, who warned on Feb. 26 that the U.S. economy could stumble into a recession by yearend. And in the other: current Fed chief Ben "the Professor" Bernanke, whose soothing words helped the markets rebound two days later.

Investors might have had ringside seats, but they were also the ones who took a beating. The day of Greenspan's bearish blow stocks couldn't hold their ground, despite the biggest leveraged buyout deal in history—a $31.8 billion bid for Texas power company TXU (TXU). Then on Feb. 27, a 9% plunge in China's stock markets combined with economic worries to deal a one-two punch that sent the Dow Jones industrial average to its biggest point drop since Sept. 17, 2001 (see, 2/28/07, "Stocks' Great Wall of Worry").

Dig a little deeper, though, and there's a different story. While investors may have to get used to possible tension between the present Fed chief's statements and those of his legendary predecessor, they also need to read beyond the headlines. The opinions of Bernanke and Greenspan on the economy probably aren't as different as you think.

More Upbeat

First, Greenspan hasn't forecast a recession. What he did Feb. 26 was respond to a question by saying it was "possible" the U.S. economy would go into recession in the second half of 2007. The retired Fed boss also indicated it would be "very precarious" to try to predict so far into the future, and noted that most economists don't forecast a recession. Still, he declined to rule one out.

On March 1, Greenspan clarified his outlook further. "By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession," Greenspan told an audience in Tokyo, according to a Bloomberg report. This wasn’t exactly the gloom and doom implied by press reports earlier in the week.

Bernanke's statements don't necessarily contradict his predecessor's position. On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier. However the slump didn't change policymakers' overall view of an economy with "moderate growth going forward," the Fed chief said (see, 3/1/07, "Testimony of Fed Chairman Ben S. Bernanke").

In other words, short-term traders probably took Greenspan's comments out of context. "I would be surprised if there was a significant difference in opinion on the likely path of the economy between Bernanke and Greenspan," says Conrad DeQuadros, senior economist at Bear Stearns (BSC), noting that Greenspan's other recent comments have actually been more upbeat, not less, than Bernanke's. "If you were to ask any economist if there was a possibility of recession, they're going to say yes."

Hogging the Spotlight?

That's because the probability of a recession is never zero. In other words, the market may have been reacting to Greenspan's comments in the manner of Jim Carrey's goofy protagonist in 1994 movie Dumb & Dumber. Told the odds he will end up with actress Lauren Holly's character are one-in-a-million, Carrey lights up: "So you're saying there's a chance!"

At the same time, Greenspan's outspokenness remains unusual for a former head of the world's top central bank. A year after erstwhile Fed chief Paul Volcker stepped down in 1987, he wasn't making similar market-moving statements. By contrast, Greenspan remains much in demand on the public speaking circuit and has seized the spotlight with other economic pronouncements since his retirement. The highly visible former chairman could prove a challenge for his successor even when their outlooks don't widely differ (see, 2/14/07, "For Bernanke, Capitol Hill's No Easy Street").

"For the lifecycle of most people on the Street, Greenspan's words will always carry weight," says Peter Rodriguez, a Darden Graduate School of Business economist and one of Bernanke's former students. "If you're Bernanke, what you would hope is that you will grow to fill those shoes in such a way that investors begin to listen at least as much to you as to him."


There's little else Bernanke can do about the other Fed eminence in his midst, some economists observe. "It's certainly the case that it's possible for people outside the central bank to make central bankers' jobs harder or easier," says Stephen Cecchetti, a professor at Brandeis International Business School. "That's life in the big city."

This time, any difference between Greenspan's remarks and Bernanke's doesn't seem to have left the market with too much lasting damage. "It just so happens that [Greenspan] made one comment that ends up being right in front of a big stock market move," says Charles Jones, a finance professor at Columbia Business School. "I think that's more coincidence than anything."

Stocks recovered modestly on Feb. 28. The Dow bounced 0.43% to 12,268.63, just 1.6% below where it ended in 2006 (see, 2/28/07, "Stocks: A Half-Hearted Rebound"). Whether the market can make up more lost ground will depend more on corporate earnings and the extent of the housing market's weakness than on a war of words between two central bankers—no matter which one comes up with the snappier sound bite.

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