November 2011 Archives

In a big psychological boost to the markets, coordinated action by central banks around the world—including the U.S.’s Federal Reserve—to shore up bank liquidity led to big stock market rallies worldwide. Solid economic news in the U.S. also helped to push the major indexes more than 4% higher, essentially erasing last week’s losses, with the ADP Employment report showing bigger-than-expected payroll gains and pending home sales jumping 10%.

The Dow jumped 490 points, with all 30 components higher; the S&P 500 advanced 51; and the Nasdaq was higher by 104. Advancers led decliners by 20 to 3 on the NYSE and by 5 to 1 on the Nasdaq. The prices of Treasuries weakened. Gold futures gained $31.40 to close at $1,750.30 an ounce, and the price of crude oil rose 57 cents to close at $100.36 a barrel.

In Other Business News:

Summary:

• Earlier today, the People’s Bank of China (PBOC) cut reserve requirements for banks, which should provide a small boost to China’s economy.
• The Federal Reserve, along with five other central banks in the developed world, took a small but important step today toward dealing with the problems in Europe by cutting funding costs for dollars to ease strains in the global financial system.
• We likely have seen the lows in the market for the year, provided policymakers don’t backtrack.

John Manley, CFA, recently joined Wells Fargo Funds Management, LLC, as the firm’s chief equity strategist. In this excerpt of the On the Trading Desk^SM podcast from Friday, October 28th, 2011, Peter Nulty introduced John to our listeners. They discussed the current equity market and what’s ahead.

Click here to listen to the full interview.

John, welcome to the team and to On the Trading Desk.
Peter, it's a pleasure to be here. Thank you.  

You spent many years on Wall Street. I wonder if we ever crossed paths.
I was at Smith Barney (or several permutations of Smith Barney) from about '81 through 2009. 

We may have bumped the backs of our chairs at some luncheon table somewhere back in those days.
I’m absolutely certain. Where were you? 

I was at Fortune magazine, in the financial district, talking to you guys, frankly. You lived through a lot of history. The bull market started in August of '82. You remember that?
I remember that Dr. Kaufman over at Solomon Brothers had turned positive on the bond market that day, and that's what set it off. 

Eurozone finance officials met in Brussels today, with Italy high up on the list of topics. Yields on Italian bonds continued their push to new record highs above 7.5%. In an Italian bond auction today, yields on the 3-year rose above the 10-year, signaling that investors believe the near-term outlook is dire. U.S. markets were mixed, with the Dow boosted in part by a surprisingly good consumer confidence report and optimism about the holiday shopping season.

The Dow gained 32 points, with 17 of its 30 components higher; the S&P 500 advanced 2; and the Nasdaq fell 11. Decliners narrowly edged advancers on the NYSE and by 13 to 8 on the Nasdaq. The prices of Treasuries weakened. Gold futures rose $4.40 to close at $1,718.90 an ounce, while the price of crude oil gained $1.58 to settle at $99.79 a barrel.

In Other Business News:

Fresh off the worst Thanksgiving week for stocks since 1932, stocks posted sizable gains as hopes for a solution to the European debt crisis, as well as strong reported Black Friday sales, boosted investor confidence. The Dow gained 291 points, the Nasdaq rose 85, and the S&P 500 jumped 33. The declines were broad-based, and all 30 Dow components were up. Volume was light, with advancers leading decliners by about five to one on both the NYSE and the Nasdaq. Treasury prices fell. Gold futures rose 1% to $1,710.80 an ounce, while crude oil futures increased 1% to $98.21 a barrel.

In Other Business News:

In 1920, poet Robert Frost wrote The Road Not Taken, which has the famous ending:

Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

I wonder if policymakers in Europe are reflecting on this poem as they listen to the cacophony of recommendations coming from market and political pundits.

A report showing that Chinese manufacturing slowed to a 32-month low, a “disastrous” German 10-year bond auction, and lackluster economic data here pressured the indexes from the open. The Dow lost 236 points, the Nasdaq dropped 61, and the S&P 500 fell 26. The declines were broad-based, and all 30 Dow components were lower. Volume was light, with decliners leading advancers by six to one on the NYSE and by five to one on the Nasdaq. Treasury prices rose. Gold futures slipped 0.3% to 1,695.90 an ounce, while crude oil futures fell nearly 2% to $96.17 a barrel.

In Earnings News:

Can gold prices go higher? What are its long-term prospects? In this excerpt of the On the Trading Desk^SM podcast from Friday, November 18th, 2011, Peter Nulty talks with Melissa Duller, CIMA^®, investment analyst with Wells Fargo Funds Management, LLC. Melissa is the author of the white paper "Why gold may have a long-term place in investors' portfolios."

Click here to listen to the full interview.

Let’s answer the first question: Is there room for gold prices to go higher?
I think there is certainly a case to be made for gold prices to go higher. We continue to see a rising middle class in the developing world. At the same time, economic weakness among developed nations and issues surrounding the debt crisis in Europe have created uneasiness and a sense of uncertainty. Since gold has historically been seen as a store of value, it has become increasingly attractive. And given global dynamics and trends, gold prices could continue to move higher. 

Are there any other factors driving gold?
In the developing world and countries, such as China and India, gold is a significant symbol of wealth and is given as gifts for weddings and special occasions. Also, it’s an investment hedge against inflation in these faster-growing nations. And gold is an investment alternative to assets such as real estate, which is often seen as being over-valued, or as an alternative to stocks, which, depending on the exchange, may be subject to heavy government influence. From a developed nation standpoint, investors are especially fearful about the future and are seeking a hedge against potential instability in the traditional equity and bond markets as well as the economy. Some fear that if we see a significant increase in money supply, partly due to government spending, it could lead to currency devaluations. So, what we’ve got here is increased demand of a commodity that is in limited supply.

After falling sharply on Monday in response to the failure of the congressional “Super Committee” to reach an agreement on a plan to cut the federal budget deficit, the U.S. equity markets suffered smaller declines on Tuesday. Investors’ disappointment with a lower-than-expected revised estimate of third-quarter U.S. gross domestic product growth was partially offset by the somewhat mixed—if not upbeat—tone of the minutes from the Federal Open Market Committee’s November 1-2 meeting, which were released today.

In those minutes, the FOMC noted that the near-term threat of recession had subsided but downside risks to economic growth and financial markets continued to outweigh upside risks. Not surprisingly, some of the chief downside risks cited were possible spillover effects from the European sovereign debt crisis, ongoing weakness in business and consumer confidence, and uncertainty surrounding regulatory policy. The individual FOMC participants had differing inflation outlooks and were divided in their views on the merits of possibly providing guidance with regard to future monetary policy. However, a key takeaway was that the Fed seems willing to consider new, innovative approaches to monetary policy going forward.

For the day, the Dow fell 53 points, with 19 of its 30 components lower; the S&P 500 dropped 4 points; and the Nasdaq declined by 1. Decliners outnumbered advancers by about three to two on both the NYSE and the Nasdaq. The prices of Treasuries rose. Gold futures rose $23.80 to close at $1,702.40 per ounce, while crude oil rose $1.09 to settle at $98.01 per barrel.

In Earnings News:

Reminiscent of the markets on Monday, August 8, 2011, when the major U.S. indexes fell more than 5% after Standard & Poor’s downgraded the long-term credit rating of the United States following a congressional impasse on the U.S. debt ceiling, today’s markets were driven sharply lower by the possible failure to comply with one of the results of that August impasse—the Budget Control Act. Apparently, the “Super Committee” appointed to develop a plan to cut $1.2 trillion over the next 10 years from the U.S. budget, as mandated by the Act, fell short of meeting today’s deadline. The failure triggers a variety of automatic cuts totaling the target amount. This apparent gridlock in the Super Committee cast a shadow over the markets from bell to bell, with many investors speculating not only about the potential impact of these automatic cuts but also about the possibility that another downgrade of U.S. debt could happen again.

For the day, characterized by heavy volume, the Dow fell 248 points, with all 30 of its components lower; the S&P 500 dropped 22 points; and the Nasdaq declined by 49. Decliners outweighed advancers by almost five to one on both the NYSE and the Nasdaq. The prices of Treasuries rose. Gold futures fell $46.50 to close at $1,678.60 per contract, while crude oil fell 75 cents to settle at $96.92.

In Economic News:

While I do not know the actual source of this quote, it sounds like something that Ben Franklin or Mark Twain would have said. I know that I learned it from my mother when she was trying to teach me that I would have to make my feelings known to get what I wanted. Speak up! Even an inarticulate expression of displeasure will call attention to your distress. Repeated protestations may change the situation, but silence will do nothing.

I write this because it appears as if the Occupy Wall Street folks are not the only ones who are unhappy with the status quo. We Wall Street folks are also unhappy. When they are unhappy, they bang drums and chant slogans; when we are unhappy, we drive equity markets lower. I think that our way works better.

The Joint Select Committee on Deficit Reduction, named the “Super Committee” by the media, looks doomed to gridlock (which I predicted in this blog post from 8/31). According to the Budget Control Act, which was the deal negotiated in August to raise the debt ceiling, an automatic $1.2 trillion will be cut from the budget deficit over the next 10 years. While some people might look at the Committee’s failure as an opportunity lost, I think it is an opportunity found: Instead of arguing about phantom budget cuts, politicians can focus on avoiding raising taxes as we go into the new year.

First, the budget cuts that could result from the failure of the Super Committee aren’t that significant. The cuts are spread over 10 years and don’t even start to affect programs until January 2013.

The major indexes posted weekly losses despite what turned out to be a very good and reassuring week of economic data in the U.S. As has been the case for months, the culprit was once again Europe. No sooner did the markets rally over the announcement that former Italian Prime Minister Silvio Berlusconi would resign than they appeared to despair that there was anything new Prime Minister Mario Monti could actually do to put Italy on an austere path. The yields on the Italian 10-year rose above 7%, a worryingly high level that prompted the European Central Bank to step in, purchasing Italian bonds in an attempt to drive down yields. The ECB made purchases of Spanish bonds as well. For the week, the Dow fell 2.9%, the S&P 500 was off 3.8%, and the Nasdaq lost 3.9%.

In the U.S., two regional reports of manufacturing activity—the Empire State Survey and the Philly Fed Survey—both stayed in expansion territory, although the rate of expansion was fairly tepid. More promising was industrial production in October, which gained a healthy 0.7% on a broad base of activity.

The major indexes closed the session mixed. The Dow gained 25 points while the S&P 500 lost a fraction of a point and the Nasdaq fell 15 points. Twenty-one of the Dow’s 30 components gained ground, led by Hewlett-Packard (HPQ) and Boeing (BA), each of which gained 2%. Volume was light. Advancing issues on the NYSE outnumbered decliners by four to three, while on the Nasdaq they ran neck and neck. The prices of Treasuries weakened, while the price of gold futures gained 0.2% to $1,725.10 an ounce. The price of crude oil on the New York Mercantile Exchange lost 1% to $97.67 a barrel.

For the week, the S&P 500 lost more 3%, the Nasdaq fell almost 4%, and the Dow fell by more than 2%.

In Earnings News:

For every historic high hit by the price of gold recently, another record-breaker comes along. That leaves us investors with two questions: Is there room to run in gold? And what are its long-term prospects? Here with answers is Melissa Duller, CIMA^®. Melissa is an investment analyst with Wells Fargo Funds Management, LLC, and recently wrote the white paper "Why gold may have a long-term place in investors' portfolios."

Listen to the podcast
Download the podcast (mp3)

The major indexes retreated sharply for the second straight session: The Dow lost 134 points, the Nasdaq fell 51, and the S&P 500 declined by 20. Twenty-eight of the Dow’s 30 components declined, led by Alcoa (AA), JPMorgan Chase (JPM), and American Express (AXP), each of which lost more than 3%. Volume was light to moderate, and declining issues outnumbered advancers by about four to one on the NYSE and five to two on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures fell by 3% to $1,720.20 an ounce. The price of crude oil on the New York Mercantile Exchange lost 3% to $98.93 a barrel.

In Earnings News:

• Sears Holdings announced its losses widened, falling from $1.98 a share one year ago to $3.95 a share in the latest quarter. Revenue slipped 1.2%, thanks in part to a decline in demand at the company’s stores in Canada. The price of the shares (SHLD) lost 4% in today’s session.

In Other Business News:

The Economix blog breaks down the three ways the eurozone crisis could affect the U.S. economy.

What’s the right way to greet someone in the workplace or on business trips?  Hugs?  Air kisses?  Chest bumps?  The Wall Street Journal breaks it down and even gives you a handy cheat sheet to cut out and save.

How many hours of work does it take to buy a barrel of oil (or a tank of gas)? Wait—you may not want to know.

When I went to college, my big requests for campus living were a) a clean room and b) being able to spread my arms out and not touch my roommate/wall.  These days, kids are soaking in Jacuzzis and relaxing in their great rooms.

And because we’ll be taking next Thursday off, we’ll leave you with a couple of links about things that make Thanksgiving great…football and turkey.

Ten seconds left, game’s tied, and the kicker lines up for the winning field goal.  The opposing coach calls a time out to “ice” the kicker.  The Freakonomics blog asks how often this strategy really works.  (Here’s hoping that we don’t see this during the Packers/Lions game.)

It will cost you about 13% more to make that Thanksgiving dinner this year—and you can blame most of that hike on the turkey.

Today we have a guest post by Walter Price, CFA, portfolio manager of the Wells Fargo Advantage Specialized Technology Fund.

We are in the midst of a technology revolution that is changing consumer interests and the way people interact with each other. This revolution has paved the way for new investment opportunities. Similar to prior technological advancement periods, such as the internet boom of the late 1990s, this one is being led by a younger generation that either developed or grew up with the new technology. From social media to the cloud to a new breed of mobile communications, new technologies are opening up investment opportunities around the world.

The most profound is the social web created by Facebook. More than 800 million users worldwide are interconnected on Facebook, sharing experiences and areas of interest much more efficiently than email or texting or phone calls (or physical letters, if anyone can remember that far back in history). The monumental shift in advertising capabilities allowed by social networks like Facebook’s should not be underestimated. By monitoring the interests of these 800 million users, Facebook can present offers to them that are valuable and aligned with their interests. There is a famous saying thatn “half of advertising dollars are wasted, but we just don’t know which half.” As these offers are refined and monitored, much of today’s advertising is moving to this new targeted online platform. Advertising enhancements are being developed in areas such as shopping (Amazon’s reviews), music (Pandora), discount offers (Groupon), and recruiting/career enhancement (LinkedIn). These companies have taken ideas from the past and combined them with new developments in connectivity, made available through smartphones, tablets, and the internet to provide a new group of services and experiences, create more efficient uses of time and money, and potentially enable new forms of wealth creation for investors.

The major indexes recovered from early morning declines to briefly trade in positive territory before a last-hour rush to the day’s lows. U.S. economic news was encouraging, with industrial production picking up in October while consumer prices fell. But as has been the case recently, continued uncertainty in Europe weighed on the markets, particularly after a last-hour report by Fitch. The report warned that, while U.S. banks’ current exposure to European debt is “manageable,” if the eurozone crisis is not resolved in a “timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen.”

The Dow fell 190 points, with 29 of its 30 components lower; the S&P 500 declined 20; and the Nasdaq lost 46. On light volume, decliners led advancers by 13 to 4 on the NYSE and 11 to 4 on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $7.90 to close at $1,774.30 an ounce, while pipeline news related to a perennial bottleneck in Cushing, Oklahoma, pushed crude oil prices $3.22 higher to settle at $102.59 a barrel.

In Earnings News:

A study on the long-term performance of social investing, conducted by portfolio manager Lloyd Kurtz, CFA, was recently published by The Journal of Investing. In this excerpt of the On the Trading Desk^SM podcast from Friday, November 11, 2011, Peter Nulty talks with Lloyd Kurtz, chief investment officer at Nelson Capital Management, a subadvisor to Wells Fargo Advantage Funds.

Click here to listen to the full interview. (mp3)

Now, we’ll get to the details of your study in a minute, Lloyd, but can you explain, what is the “free good” effect?
The idea is that for investors, corporate responsibility has been a free good. That means that a well-diversified group of socially responsible stocks have had returns that were very similar to the broad market over time. That may not sound like a big deal, but for many years there was a belief that social investors intrinsically faced performance headwinds. And our study wasn’t able to document that. It looks to us as if social investors haven’t faced either headwinds or tailwinds.

What you’re saying is, being moral doesn’t have a financial price in investing?
That’s right, as long as you diversify properly. The argument I think had been that companies would over-invest in social responsibility, that they would spend too much money trying to be socially responsible. And as a result, their financial performance might lag and they might underperform. But we don’t see evidence of that.

For once, good economic data in the U.S. helped the markets float above the worries cascading out of Europe. Yields on Italy’s 10-year bonds reached above 7%, indicating a worrisome lack of confidence in Italy’s ability to gain control over its debt. But investors seemed to focus on the good news in the U.S., which included positive retail sales, a dip in wholesale prices, and a report that showed an expansion of manufacturing activity in the New York area.

The Dow gained 17 points, with 22 of its 30 components higher; the S&P 500 advanced 6; and the Nasdaq was higher by 28. On light volume, advancers led decliners by seven to four on the NYSE and about two to one on the Nasdaq. The prices of Treasuries weakened. Gold prices rose $3.80 to close at $1,782.20 an ounce, and the price of crude oil rose $1.23 to settle at $99.37 a barrel, the highest settlement price since July. 

In Earnings News:

“I’ll gladly pay you Tuesday for a hamburger today.”
-J. Wellington Wimpy in the comic strip Popeye

“Nothing tastes as good as skinny feels.”
-Kate Moss in a 2009 interview

Two sentences, two quotes from two people seldom associated with the financial industry. But there you go: there is the cause of our problems and there is their ultimate solution.

Following the pattern established by Greece, the stock market advance on Friday that followed a bold announcement out of Italy led quickly to skepticism that Italian lawmakers would actually follow through. While Italy held a successful five-year bond auction today, the yields hit euro-era highs, indicating worries about Italy that also surfaced in the major U.S. indexes.

The Dow fell 74 points, with 27 of its 30 components lower; the S&P 500 declined 12; and the Nasdaq lost 21. Decliners led advancers by about three to one on both the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $9.70 to close at $1,778.40 an ounce, while the price of crude oil fell 85 cents to settle at $98.14 a barrel.  

In Other Business News:

Summary:

• Lucas Papademos was named prime minister of Greece, and Mario Monti became the prime minister of Italy.
• The European Central Bank (ECB) is not likely to serve as a “lender of last resort” to quell the problems in the sovereign debt market in Europe.
• The unintended consequence of higher capital requirements on European banks could be a rise in trade financing, which could benefit extremely large, cash rich, global companies.

Last week, I predicted that Lucas Papademos would be named prime minister of Greece and Mario Monti would become the prime minister of Italy (see “The rise of the technocrats?” from November 8). Both are considered “technocrats” because they are expected to focus on implementing the technical requirements associated with receiving further aid from the European Union and the International Monetary Fund. So now that both prime ministers are in place, what’s next?

It’s not every week that sees the downfall of the leaders of two European countries, so investors could perhaps be thankful that the fallout wasn’t more severe than it was. Greece’s Prime Minister George Papandreou resigned after his government lost confidence in his ability to steer the country through the difficult austerity measures that will be necessary to qualify for further European Union and International Monetary Fund aid. Not helping matters was his decision the previous week to call for a national referendum on the bailout, a referendum that was subsequently called off. And then there was the even bigger resignation of Silvio Berlusconi, the Italian Prime Minister who had survived scandal after scandal but couldn’t survive the judgment of Italian bond holders. Yields on the Italian 10-year bonds traded above 7% last week, an unsustainable level that led to talk of Italy being forced from the eurozone. However, the passing of an austerity bill through the Italian parliament sent stocks soaring to close out the week. The major indexes traded wildly during the week. The Dow finished 1.4% higher, the S&P 500 was up 0.8%, and the Nasdaq traded lower by 0.2%.

In the U.S., it was a fairly quiet week in terms of economic news. The employment pictured brightened somewhat. The Labor Department reported that the number of job openings hit the highest level since September 2008, the month the financial crisis began in earnest with the collapse of Lehman Brothers. Still, there were about 4.18 unemployed for every job opening, so many more jobs openings will be needed to meaningfully bring the unemployment rate down. Perhaps just as important as the number of openings is the number of layoffs, which decreased by 10,000 the prior week to 390,000.

Italy’s Senate approved an austerity plan and sparked a rally in the major indexes. The Dow gained 259 points, the Nasdaq rose by 53, and the S&P 500 advanced 24. All of the Dow’s 30 components gained ground, led by Walt Disney Co., which rose 6%. Volume was light, and advancing issues outnumbered decliners by six to one on the NYSE and by more than four to one on the Nasdaq. The prices of Treasuries were mixed, while the price of gold futures gained 1.6% to $1,788.10 an ounce. The price of crude oil on the New York Mercantile Exchange gained 1.2% to $98.99 a barrel.

For the week, the Dow gained 1.4% and the S&P 500 rose by 0.8%. The Nasdaq edged fractionally lower.

In Earnings News:

The MSCI KLD 400 Social Index, once commonly referred to as the "Domini 400 Index," has been a key benchmark for social investors. The index turned 20 in May 2010, and, days after, today's guest launched a study into the long-term performance of the social investment universe, which was recently published by the Journal of Investing. Here to explain its findings and the "free good" effect is returning guest Lloyd Kurtz, CFA. Lloyd is the chief investment officer at Nelson Capital Management.

Listen to the podcast
Download the podcast (mp3)

Today we have a guest post by Lyle Fitterer, CFA, head of the Tax-Exempt Fixed-Income team at Wells Capital Management.

Yesterday, Jefferson County, AL declared the largest municipal bankruptcy in U.S. history, with a total of $4.15 billion in municipal debt. News stories have highlighted that the county was a victim of the financial crisis. That is only partially true. First and foremost the construction and cost overruns on a federally mandated sewer project that was too expensive for the residents. Second, the scale of the project and cost overruns were exacerbated by misguided derivatives contracts. These derivatives were sold to the county under the assumption that they could keep the large debt burden from being prohibitively expensive for residents, but unfortunately, the financial crisis worked against the county’s new derivative contracts.  Finally, fraudulent dealings between a bank and the county leaders further increased costs and landed people in jail.  Sewer rate hikes would not have been enough to counteract the bad decisions, illegal behavior, and jail sentences, and now bankruptcy is the result. Needless to say, this combination of extraordinary circumstances is rare.

Proposals have swirled in recent months regarding a resolution. The insurers, banks, and bondholders had agreed upon concessions to aid in restructuring the county’s debts and make strides for resolution. The State of Alabama’s legislature was unable to agree about how the state would support a problem like Jefferson County.

A better-than-expected jobs report and falling interest rates on Italy’s debt appeared to spark a rally in the major indexes. The Dow gained 112 points, the Nasdaq rose by 3, and the S&P 500 advanced 10. Twenty-seven of the Dow’s 30 components gained ground, led by Cisco (CSCO), which rose 5%. Merck’s shares (MRK) gained 3% after the big pharmaceutical company raised its dividend for the first time since 2004. Volume was light and advancing issues outnumbered decliners by two to one on the NYSE and by three to two on the Nasdaq. The prices of Treasuries weakened while the price of gold futures lost 1% to $1,759.60 an ounce. The price of crude oil on the New York Mercantile Exchange gained 2% to $97.78 a barrel.

In Earnings News:

Who’s been the largest purchaser of Treasuries over the past 20 years?

The U.S. stock market has taken investors on a wild ride the last few years, but would you believe that our markets have been more volatile than China’s markets?

Choosing the right college major can dramatically affect your future career. The Wall Street Journal created an interactive tool that shows earning potential and the current unemployment rate by major based on 2010 Census data.

The iPod celebrated its 10th birthday a few weeks ago, and the Financial Times created an innovative way to look back at the iPod’s history using the iPod itself.

What’s the longest time you’ve ever had to wait for the cable guy? Did you ever think to put a price on your wasted time?  A recent survey did, and the numbers are startling.

I thought my Kindle felt heavier after I downloaded the Steve Jobs biography.  I can’t imagine how it will feel after I download the entire Harry Potter series.  (For my kids, of course.)

The promised resignation of Italian Prime Minister Silvio Berlusconi couldn’t stave off dangerously high Italian bond yields today, as investors were skeptical that Italy’s high debt load could be adequately tamed and that a suitably austere budget could make it through parliament. The 10-year Italian bond traded at record highs above 7%, a level at which Greece, Ireland, and Portugal were forced to ask for bailouts. The problem for Italy is that its more than $2 trillion in debt eclipses the combined debt of those countries, making a suitably big bailout—if it’s needed—hard to come by from a Europe that’s already stretched thin. Although, as Dr. Brian Jacobsen notes, there are still options available to Italy to avert a more serious crisis. The major indexes in Europe and the U.S. traded sharply lower for the day in response to worries about the threat to the eurozone.

The Dow fell 389 points, with all 30 components losing ground; the S&P 500 declined 46; and the Nasdaq lost 105. Decliners led advancers by more than nine to one on the NYSE and just under seven to one on the Nasdaq. The prices of Treasuries strengthened in response to European uncertainty, as did the U.S. dollar. Gold futures fell $7.60 to close at $1,791.60 an ounce, while the stronger dollar pressured the price of crude oil, which fell $1.06 to settle at $95.74 a barrel.

In Earnings News:

In this excerpt from the On the Trading Desk^SM podcast of Friday, November 4th 2011 host Peter Nulty asks Tom Price how, in such a volatile market, high quality might help investors in the high-yield bond market. Thomas M Price, CFA, is Managing Director and Senior Portfolio Manager on Wells Capital Management’s Fixed Income Team.

Click here to listen to the full interview.

Let’s get right to the headline question, Tom. What does high quality mean to you, and how will it help high yield?
When we talk high quality within the high-yield space, we’re generally talking about double-B bonds, and I would say most of the single-B bonds. And combined, those bonds make up roughly about 70% of our market. The answer to, “Will high quality help?” is really dependent on the economic strength of the U.S. economy. In today’s low-growth environment, where we’re growing 1½ to 2½%, I would argue that high quality will definitely help investors, relative to reaching into the aggressive CCC space.

You’ve been on this program long enough for us to know that you take a conservative approach to investing in the high-yield space. How does that help you, and how does it help investors?
The first thing I’d say is, obviously, there’s no guarantee we’ll always take that conservative approach. But we’ve had a meaningful underweight in the CCC component of the market since mid-2006. Why? We believe over that time period there’s been enough economic uncertainty that the risk you get for reaching for yield does not justify the potential reward. We think it’s more important that we can provide some stability for our shareholders in the high-yield space. A lot of shareholders are looking for that lower volatility. So we think that that’s been good for our shareholders.

Summary:

• In October, China’s Consumer Price Index increased 5.5% year-on-year, providing policymakers cover to ease credit conditions in an attempt to spur growth.
• This policy could put the economy in the uncomfortable position of too much inflation with not enough growth, leading Chinese officials to resort to additional and stricter price controls.
• In Italy, a dramatic rise in interest rates led to increased margin requirements from one of Europe’s largest clearinghouses of fixed-income securities.
• Italy may need to cancel or modify its scheduled auction of five-year notes or seek assistance from the International Monetary Fund (IMF) or the European Financial Stability Facility (EFSF).

Another European leader fell victim to the European sovereign debt crisis, with Italian Prime Minister Silvio Berlusconi announcing he will resign once a 2012 budget bill is passed. Berlusconi had lost the confidence of both the markets and his majority government. The major indexes were prodded higher by the news. Greece, meanwhile, still was struggling to settle on a new prime minister for its unity government.

The Dow gained 101 points, with 27 of its 30 components higher; the S&P 500 was up 14; and the Nasdaq rose 32. Advancers led decliners by just under three to one on the NYSE and five to two on the Nasdaq. The prices of Treasuries weakened. Gold futures gained $8.10 to close at $1,799.20 an ounce. The price of crude oil jumped $1.28 to settle at $96.80 a barrel, pushed higher by news that the Organization of the Petroleum Exporting Countries raised its demand forecast and that the United Nations’ nuclear agency officially charged Iran with developing technology to create nuclear weapons.

In Earnings News:

Summary:

• Greek Prime Minister George Papandreou agreed to step down to form a unity government.
• Italian Prime Minister Silvio Berlusconi failed to get a majority of the country’s lower house of parliament to support his budget and has agreed to step down if his budget measures pass.
• The most likely scenario is that the president or parliament in each country would appoint a technocrat to the post on an interim basis.

In Greece, Prime Minister George Papandreou agreed to step down to form a unity government that will seek to implement austerity measures and secure another payment tranche from the International Monetary Fund (IMF) and the European Union (E.U.). In Italy, Prime Minister Silvio Berlusconi failed to get a majority of the country’s lower house of parliament to support his budget and has agreed to step down if his budget measures pass. Are these changes a setback for resolving the crises in Europe or a step forward? I think they are a step forward.

Yesterday was the birthday of the economist Frank Knight (born November 7, 1885). In 1921, Dr. Knight wrote a book called Risk, Uncertainty, and Profit, an extension of his dissertation describing the differences between "risk" and "uncertainty." Risk is a situation where you know the possible outcomes and their associated probabilities, and you can usually manage risk with things like insurance or options. Uncertainty, on the other hand, is much more ambiguous. Uncertainty is a situation where you might know the possible outcomes, but not the probabilities. It could also be a situation where the possible outcomes are unknown. Dr. Knight argued that entrepreneurs profit because they grit their teeth and confront uncertainty. Investors should read, learn, and hopefully profit from Dr. Knight.

Investing involves not only taking on risk, but also bearing with uncertainty. When markets seem to be driven by politics instead of corporate profits, that is emblematic of an uncertain environment. Some people deal with uncertainty by freezing. I think a better way to deal with uncertainty is to acknowledge what it is and look for opportunities. Don't fool yourself into thinking that all the possible outcomes can be determined and their associated probabilities precisely identified. Instead, we can make educated guesses about what might happen. Occasionally—or often—as investors, we must just plug our noses and jump in based on incomplete and imperfect information. By confronting uncertainty, we would make Dr. Knight proud. It could also be profitable.

I think it is likely that the eurozone will remain intact and U.S. government officials will agree not to raise taxes in the midst of a miserable recovery. Can I assign probabilities to these outcomes? No, because they are uncertain. However, I think they are the most reasonable outcomes, and outcomes that will benefit those who are willing to grit their teeth and confront the uncertainty.

The good news is that the problems simmering in Greece took a backseat today. The bad news is that they took a back seat to the problems simmering in Italy, which might need a solution on an entirely different order of magnitude. Yields on Italian bonds hit euro-era highs, while calls intensified for Italy’s Prime Minister Silvio Berlusconi to step down.

Despite the worrisome indications out of Europe, the major indexes advanced on a choppy day of light-volume trading. The Dow rose 85 points, with 24 of its 30 components higher; the S&P 500 was up 7; and the Nasdaq gained 9. Advancers led decliners by about six to five on the NYSE, and decliners edged advancers by about five to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures jumped $35 to close at $1,791.10 an ounce, while the price of crude oil rose $1.26 to settle at $95.52 a barrel.

In Other Business News:

The historic bailout package agreed to at the end of October that was supposed to kick Greece off the front pages turned out to lead to no more than half a week of optimism. Last week, Greece’s Prime Minister George Papandreou made a surprise call for a national referendum on the bailout. The prospects of a such a deeply unpopular bailout passing by a popular vote in Greece were questionable, and so the conversation turned quickly from relief over the bailout to whether or not Greece would be kicked out of the eurozone and whether the eurozone would survive. The chaotic turn of events helped sink U.S. stocks and end a five-week winning streak, with the major indexes all losing ground. The Dow fell 2%, the S&P 500 was off 2.5%, and the Nasdaq declined 1.9%.

Major economic releases last week cemented the picture of a slowly growing economy that is not in any immediate danger of slipping into recession (with the disclaimer “barring any unforeseen circumstances,” and, as Greece has shown the past week, it seems like all the circumstances insist on being resolutely unforeseen at this point).  The Institute for Supply Management indexes (manufacturing and services) both showed that the economy was modestly expanding, although the pace of that expansion gave back some ground. The indexes now hover just above the breakeven point of 50.

The major indexes closed the week in retreat. The Dow lost 61 points, the Nasdaq fell by 11, and the S&P 500 declined 7. Twenty-five of the Dow’s 30 components lost ground, led by Bank of America (BAC), which fell 6%. Volume was light, and advancing issues outnumbered decliners by about two to one. The prices of Treasuries strengthened, while the price of gold futures lost 0.5% to $1,756.10 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.2% to $94.26 a barrel.

For the Week, the Dow and the S&P 500 each lost more than 2% and the Nasdaq declined by 1.8%.

In Other Business News:

The high-yield bond market has seen its share of volatility in recent months. What’s driving it? And how important is quality? Here to explain is Thomas M. Price, CFA, managing director and senior portfolio manager with Wells Capital Management’s Fixed-Income team.

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Nonfarm payrolls increased by 80,000 in October, according to the Bureau of Labor Statistics, and the August and September numbers were revised up by a total of 102,000. The unemployment rate nudged down from 9.1% to 9.0%. The 80,000 increase in payrolls was below the 12-month average of 125,000 per month. Though it is lower, the pattern is the same as in previous months: private-sector payrolls improved (in this case, by 104,000) and public-sector employment declined. While not an outstanding report, it is encouraging to see that the U.S. economy is continuing to amble along. The employment situation report will likely be overshadowed by the main attraction of what’s going on in Europe. The European Central Bank cut rates by 0.25 percentage points and the Greece’s prime minister called off a referendum on whether Greece should stay in the eurozone. These are small steps along what will be a very long path to solving the problems in Europe.

The major indexes rallied as the European Central Bank cut interest rates in an effort to boost the European economies, even as the Greek prime minister backed away from his plan to hold a public referendum on the Greek bailout plan. The Dow gained 208 points, the Nasdaq rose by 57, and the S&P 500 advanced 23. All of the Dow’s 30 components gained ground, led by Hewlett-Packard (HPQ), which rose 3%. Volume was light to moderate, and advancing issues outnumbered decliners by three to one on the Nasdaq and by about four to one on the NYSE. The prices of Treasuries weakened, while the price of gold futures gained 2% to $1,765.10 an ounce. The price of crude oil on the New York Mercantile Exchange gained 1% to $94.07 a barrel.

In Earnings News:

MF Global’s bankruptcy filing on Monday will most likely go down in history as one of the ten largest U.S. corporate bankruptcies, just ahead of Chrysler.

Germany has been taking the lead in creating a solution to the current debt crisis in the eurozone; however, it appears that they’re having trouble balancing their own books.

For the first time since before the Civil War, the 30-year return on bonds is higher than stocks.

According to this tool on the BBC’s website, I am the 78,279,724,439th person to have lived since history began.  How about you?

“The bogeyman is rarely stopped with conventional weapons” and other lessons economic policy makers can learn from horror flicks.

Black Friday will be here before you know it—here’s a look at how much we’ll be spending this holiday season.

The continuing uncertainty about the future of Greece after yesterday's surprise call for a referendum on the bailout deal couldn't hold the markets back today. A better-than-expected private-sector jobs report helped matters, as did an assessment of the economy from the Federal Open Market Committee that was upbeat in some respects but left open the possibility of further easing.

The Dow gained 178 points, with 29 of its 30 components higher; the S&P 500 rose 19; and the Nasdaq was higher by 33. Advancers led decliners by five to one on the NYSE and seven to two on the Nasdaq. The prices of Treasuries weakened. Gold futures broke a four-day losing streak, gaining $17.80 to close at $1,729.60 an ounce, while the price of crude oil futures rose 32 cents to settle at $92.51 a barrel.

In Earnings News:

Welcome to the latest and newly revamped edition of the Market Roundup. Joining Dr. Brian Jacobsen and Jim Kochan this month is our new chief equity strategist, John Manley, CFA, who gave us his analysis yesterday of the extended period of volatility in the equity market. This month, our strategists look at how gross domestic product numbers show that we’ve officially avoided a double-dip recession, examine the effects of the European situation, assess the banner month of October for equities, and compare how fixed income did against such a booming equity backdrop.

Also this month, we have a new section on asset allocation. Our strategists give their recommendations on the various dimensions of asset allocation decisions (equities vs. fixed income, large caps vs. small, domestic equities vs. international, growth vs. value, etc.), and beyond simple recommendations, they lay out their rationales. They also break down the recommended allocations relative to an investors’ time horizon, so please check out the new feature and let us know what you think in the comments section.

View the full report (pdf)

The Federal Open Market Committee (FOMC) is keeping monetary policy unchanged from its last meeting. The FOMC gave a slightly more upbeat assessment of the economy, pointing to stronger consumer spending and spending on business equipment and software. Despite the more optimistic assessment, the FOMC seems to be developing a bias towards greater easing rather than less.

The Committee said, "There are significant downside risks to the economic outlook, including strains in global financial markets." This statement was not new, since it was in October's statement, but it seems to have a bit more buy-in amongst the Committee members. The most important thing to note is that there was only one dissenting vote, and that was from Charles Evans, who wanted more policy accommodation at this time. The previous dissenters did so primarily on the basis of wanting less accommodation. Perhaps they have been persuaded otherwise.

If things continue to stay gummed up in Europe, the Fed is more likely than not to do more easing. Would that be quantitative easing round 3 or 4? It's hard to keep count!

Barring any unforeseen difficulties, last week’s Greece bailout deal was supposed to have taken Greece off the front pages for the near term. Today, Greek Prime Minister George Papandreou decided to create one of those unforeseen difficulties out of the blue by calling for a national referendum on the deal, which significantly raised the possibility of a disorderly Greek default on its debt. The major indexes retreated as a result, only regaining some positive momentum once other politicians in Greece vowed that the referendum would not be held.

The Dow fell 297 points, with 29 of its 30 components losing ground; the S&P 500 was off 35; and the Nasdaq lost 77. Decliners led advancers by about six to one on the NYSE and five to one on the Nasdaq. The prices of Treasuries rose. Gold futures declined 0.77% to $1,711.80 per ounce, while crude oil futures lost 1% to settle at $92.19 per barrel.

In Earnings News:

We’d like to introduce John Manley, CFA, who has joined our firm as chief equity strategist. Mr. Manley has more than three decades of investment experience, almost all of which were with Smith Barney and its successor firms, where he held a variety of roles, including chairman of the Investment Policy Committee, chief U.S. portfolio strategist, and quantitative investment strategist. He is a seven-time member of the Institutional Investor All-America Research Team and was voted “Most Popular Analyst” in the Smith Barney Financial Advisor poll for several years running.

For the stock market, September came early this year and October seems to have ended before its time. Historically, a stock market swoon in September is often followed by a three-month rally to end the year—not so this time around. Late July and early August brought the kind of sickening downdraft that has typically made the ninth month of the year the worst for postwar equity performance. The rapid rise in prices we’ve seen so far in October would normally have been spread out over three months. Everything seems to be happening sooner and with greater ferocity than historical norms would suggest.

This volatility hasn’t done anything to improve the public perception of the capital markets. While high volatility may be loved by “traders” (at least the ones who get it right every time), it is a vexation for investors who are seeking unattended value or underappreciated growth. It pushes natural buyers to the sidelines and, everything else being equal, tends to decrease valuations. Also, it begs the questions: “Why is this happening and when will it end?”