Stocks don’t look that cheap if you ditch Greenspan model - Marketwatch Stocks don’t look that cheap if you ditch Greenspan model - Marketwatch

Monday, July 16, 2012

Stocks don’t look that cheap if you ditch Greenspan model - Marketwatch

Stocks don’t look that cheap if you ditch Greenspan model - Marketwatch

Lots of investment strategists have been making the argument that U.S. stocks are cheap relative to Treasury bonds – and that kind of makes sense whether you look at stocks’ richer dividend yields or near-record-low bond yields. But the comparison doesn’t make sense in today’s investing environment because global deleveraging — getting away from debt-fueled growth — is a bigger influence than it was when that valuation model took hold, says Steven Ricchiuto, chief economist at Mizuho Securities.

In a note Monday, he said:

“The common refrain among strategists is that stocks are cheap relative to bonds. This model can be traced back to Chairman [Alan] Greenspan who used the ratio of the dividend yield to the 10-year Treasury as the basis for his irrational expectations assessment in the mid-1990s, and this relative asset valuation model has been a mainstay of equity strategists ever since.”

Ricchiuto pointed out that irrational exuberance continued longer than Greenspan argued it could have, based on that, and continues to do a “a poor job of predicting stock valuations since it was first introduced.”

“Although the logic behind this model makes sense when inflation is the major driver of the business cycle, it breaks down when deleveraging is the primary economic determinant. During an inflation cycle, a declining 10-year note signals a slowing in inflation and a shift towards accommodation by the Fed. When deterioration in credit quality drives the business cycle, the decline in long-term rates represents a collapse in credit demand and a lack of qualified borrowers. As a result, declining long-term rates are a symptom of rather than the driver of the business cycle.”

On Monday, the 10-year Treasury note’s yield touched record lows, recently trading at 1.45%. The dividend yield on the S&P 500 sp50 /quotes/zigman/3870025 SPX was 2.1%.

It’s just something to ask an adviser about next time they say stocks are cheaper than bonds. Read more on stocks and bonds.

– Deborah Levine

Follow The Tell blog on Twitter @thetellblog

Follow Deborah @dlevineMW

Stocks edge lower after consumer spending slides - AP -

Stocks are heading for their seventh drop in eight days after a report that U.S. consumers cut their spending.

The Dow Jones industrial average fell 25 points, or 0.2 percent, to 12,752 in late afternoon trading Monday.

The Commerce Department said retail sales fell 0.5 percent in June from the month before as Americans spent less on autos, furniture and appliances. It was the third straight month of declining sales. The last time that happened was during the fall of 2008, at the depth of the global financial crisis.

"The summer soft patch is here, and it could be here a while," said Randy Frederick, a managing director at Charles Schwab, the stock brokerage firm. "Consumers are belt-tightening."

Companies that rely heavily on consumer spending were among the weakest on the New York Stock Exchange. Home Depot fell 61 cents to $51.48 and Lowe's Cos. lost 82 cents to $25.90.

Industrial stocks also fell sharply. General Electric lost 26 cents to $19.51 and heavy equipment maker Caterpillar lost $1.27 to $80.80, one of the biggest losses among the 30 stocks that make up the Dow average.

Also dampening spirits was news that the International Monetary Fund trimmed its estimate for global economic growth. The global lender said it expects the world economy to expand 3.5 percent this year, down from its previous estimate of 3.6 percent in April. It cut its growth estimates for next year, too.

In other trading, the Standard & Poor's 500 index fell one point to 1,356 and the Nasdaq composite index fell six points to 2,902.

Comments from Chinese Premier Wen Jiabao over the weekend were also weighing on the market. Wen said his country's economy has not yet entered a recovery and "economic difficulties may continue for some time." Some of the weakness in China comes from the debt crisis in Europe, which has crippled spending on imported goods.

In the Treasury market, the yield on the benchmark 10-year Treasury fell to 1.45 percent from 1.49 percent late Friday as investors sought the relative safety of government debt.

In Europe, borrowing rates for Italy and Spain rose again, the latest signal that bond investors are leery of the finances of those countries. Stocks fell 2 percent in Spain and 0.4 percent in Italy. Benchmark indexes in Germany and France were flat.

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The U.S. corporate earnings season resumes in earnest this week with reports from major companies that cover a wide span of the economy. On deck Tuesday are Harley-Davidson, Coca-Cola, Goldman Sachs and Johnson & Johnson. Intel and Yahoo also report this week.

Other stocks making big moves included:

— Visa rose $3.07 to $127.16 and MasterCard rose $8.04 to $437.64. The two giant payment processing companies, along with major banks, settled a seven-year old lawsuit with merchants over fees they charge when customers pay with credit cards.

— Par Pharmaceutical jumped $13.42 to $50. The generic drug maker agreed to be acquired for $1.84 billion in cash by the private investment firm TPG. The offer was a 37 percent premium to Friday's closing price.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

US STOCKS-Wall St dips on data but Citi, Visa provide support - Reuters UK

Mon Jul 16, 2012 5:26pm BST

* Retail sales unexpectedly dip in latest month

* Glaxo acquires Human Genome; private equity to buy Par Pharma

* Visa shares hit all-time high, Mastercard also rises

* Indexes down: Dow 0.25 pct, S&P 0.14 pct, Nasdaq 0.13 pct (Updates to midday, changes comment, byline)

By Rodrigo Campos

NEW YORK, July 16 (Reuters) - U.S. stocks dipped on Monday, weighed by tepid retail sales data, but gains in some financial shares and an oversold market gave Wall Street support.

Citigroup shares rose 1 percent after profit fell but came in above estimates, while Visa shares hit an all-time high and Mastercard also rose after a lawsuit settlement agreement last week.

The S&P 500 is up roughly 7 percent from a low hit early in June despite consistently worsening economic data. Historic low yields in bonds and expectations that the Federal Reserve could intervene to support the slowing economy have been cited as some of the reasons for investors to stick with equities.

Sentiment was soured Monday after data showed U.S. retail sales fell for a third straight month in June as demand slumped for everything from cars and electronics to building materials.

"Three months in a row of lower retail sales is pretty concerning. People are going to have to lower their GDP estimates. Given that, I'm surprised the market is holding so well," said Paul Zemsky, head of asset allocation at ING Investment Management in New York.

"It could be expectations that earnings could come out better than feared. The market did kind of take its expectations down quite a bit in the past weeks."

Negative to positive earnings guidance from S&P 500 companies for the second quarter is 3.3 to 1, the worst since 2008, Thomson Reuters data show.

The Dow Jones industrial average fell 32.58 points, or 0.25 percent, to 12,744.51. The S&P 500 Index dropped 1.96 points, or 0.14 percent, to 1,354.82. The Nasdaq Composite lost 3.86 points, or 0.13 percent, to 2,904.61.

The S&P 500 has fallen seven of the last eight days.

Retail sales unexpectedly fell 0.5 percent in June, and a separate report showed manufacturing in New York state rose in July by a bit more than forecast.

The WTO ruled in favor of the United States in a case challenging a virtual monopoly on China's electronic payments market, in a decision that may boost foreign suppliers like Visa , Mastercard and American Express.

The decision comes after last Friday's agreement by Visa, Mastercard and major banks to pay a $7.25 billion settlement with U.S. retailers, roughly in line with what the credit card companies had reported setting aside.

Citigroup reported adjusted second-quarter earnings that beat expectations, sending shares up 0.9 percent to $26.89. The results follow JPMorgan Chase & Co's on Friday, which contributed to gains of 1 percent on major indexes.

GlaxoSmithKline is to acquire its long-time partner Human Genome Sciences Inc for $3 billion, ending a three-month hostile pursuit of the U.S. biotech company on friendly terms after sweetening its offer. Shares of Human Genome rose 4.6 percent to $14.20.

In another healthcare deal, private equity firm TPG said it would buy U.S.-based Par Pharmaceutical for $1.9 billion, sending Par shares up 37 percent to $50.02. (Reporting by Rodrigo Campos, editing by Dave Zimmerman)

London 2012 Olympics: business embassy's £1bn goal - Daily Telegraph

More than 2,000 UK businesses and 1,000 international groups have registered to attend. As well as hosting summits, Lancaster House is being designed as a location where business leaders can negotiate deals, strike new partnerships, and promote their products. It is these discussions that Uden believes will generate £1bn of new trade and investment.

The 19th century property been largely stripped out and refurbished ready for the start of the Olympics. Specialist event group Innovision, who also worked on the Diamond Jubille, has been appointed by UKTI to transform Lancaster House.

"We have been working on this for months," says Sue Bateman, the creative director. "Every piece of furniture will be British."

Businesses and artists have donated their products and works to Lancaster House, meaning the refurbishment will not cost taxpayers. Items on show will include artwork by Damien Hirst in the state dining room, Jason Bruges Studio's 'Mirror Mirror' structure in the garden, and a McLaren Formula One car.

However, there is competition for the attention of the business world across London during the Olympics. Other countries have also booked landmark locations to promote themselves as destinations for investment. For example, Somerset House will become Casa Brazil, Russia will take over parts of Kensington Gardens, and Alexandra Palace will become Holland Heinejen House.

"We want to show them what London is about now," said Mr Uden. "We live in challenging times and it is important that the opportunities we have to bolster the economy are grabbed with both hands.

MONEY MARKETS-ECB rate cut unlikely to send cash to US-JPMorgan - Reuters

Mon Jul 16, 2012 3:08pm EDT

By Chris Reese and Ana Nicolaci da Costa

NEW YORK/LONDON, July 16 (Reuters) - The European Central Bank's decision to cut the rate it pays banks for depositing money overnight is unlikely to spur much of a flow of cash into U.S. money market funds, according to a strategist at JPMorgan Securities.

The ECB cut its main interest rate on July 5 to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to breathe life into the flagging euro zone economy.

However, banks will likely continue to deposit funds in Europe despite the lack of a return, said Alex Roever, short-term fixed income strategist at JPMorgan Securities in New York.

"We expect only a limited amount of this money to work its way into U.S.-dollar based assets in search of a yield advantage," Roever said.

"Most of the money invested in Euro-based funds isn't there because of relative value versus other currencies, rather it is there because the shareholders have a need for liquid assets denominated in the euro," he said.

"We think cash that may leave a euro money market fund is more likely to wind up on deposit at a core European bank than it is to be invested in a U.S. money market fund," he said.

Euro zone bank-to-bank lending rates hit new all-time lows on Monday in the wake of the ECB move, and could ease further before stabilizing at a premium over overnight rates.

Short-term Euribor rates that banks publish for lending to each other have been driven to an all-time low, which in turn should encourage consumers and companies to borrow more at the lower rates.

But that fall for the moment looks academic given that nervousness over economic and systemic threats are still prompting banks in reality to keep vast quantities of their cash parked at the ECB.

The unprecedented cut in deposit rates to zero means institutions get no return on that cash but not that that has made a difference to the amount of money parked at the ECB - much of it has just been shifted to a current account facility which also offers no interest.

That suggests that, at least initially, no-one in the sector has enough faith in public finances in the euro zone, its banking sector or the health of a reeling economy to risk lending more. Most analysts are skeptical that will change.

"It doesn't matter what rate it is, the banks aren't going to lend," one trader said. "Balance sheets haven't been restored and what's going on regarding Libor, more banks are going to get fined, that's a hit on their balance sheet as well."

Barclays Plc, the bank at the center of a scandal over the attempted manipulation of London's Libor system of setting interbank rates, was fined a record $450 million last month by U.S. and British authorities.

It is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting Libor, but more than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan.

Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, hit a new all-time low of 0.477 percent on Monday, down from 0.486 percent on Friday.

The trader expected Euribor rates to stabilize around 0.30-0.35 percent, offering a premium over Eonia overnight rates which have also fallen steadily since the ECB rate cut.

Eonia rates were last at 0.12 percent, having fallen sharply after the deposit facility rate -- which serves as a floor for bank-to-bank overnight rates -- was cut to zero. Forward contracts suggest those rates will only stabilize at around nine basis points.

"Expectations of low Eonia rates have become deeply entrenched. Eonia is now expected to rise above 75 basis points (0.75 percent) only after three years," Deutsche Bank said in a research note.

Richard McGuire, strategist at Rabobank, also does not expect the reduction in the deposit facility rate to spur bank lending in the current scenario.

"We are still flirting with recession in Europe and in the developed world and hence banks are reticent to lend against such a backdrop," McGuire said.

Philippine business community 2nd most optimistic in the world - report -
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Economy worries keep stocks in check - Financial Times

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Your Money: Will credit card settlement mean higher swipe fees? - Reuters

NEW YORK | Mon Jul 16, 2012 1:58pm EDT

NEW YORK (Reuters) - Cash or credit?

That is a familiar choice at the gas pump, with a cheaper price for cash payments and a higher one for credit card purchases. But will this fly at a grocery store, hotel or other retail outpost?

Visa Inc and MasterCard Inc's proposed $7.25 billion settlement with retailers over swipe fees, which credit card companies charge to process payments [ID:nL2E8IDJVK], could lead to a two-tiered payment system for a host of transactions, analysts say.

The agreement allows retailers to collectively bargain on future swipe fees, which are also known as interchange rates. It also opens up the possibility that more retailers can add surcharges for credit card transactions, although they would have to explain them to consumers in clear, concise language.

The settlement is not a completely done deal since one of the plaintiffs, the National Association of Convenience Stores, is rejecting it. Even so, here are the answers to four questions consumers should be asking now:

1. Will it end up costing me money or saving me money?

The answer is not easy since it is unclear how retailers will react.

One choice is for retailers to add a surcharge for credit card transactions at the cash register.

"Merchants have to be really careful about that one," says Greg McBride, senior financial analyst for "If they charge more, there are a lot of customers who aren't going to pull out their wallets and get cash instead. They're going to turn around and walk out the door."

Ed Mierzwinski, consumer program director of advocacy group U.S. PIRG, says transparency is good for shoppers. "If it's done right, consumers have more information about prices, and they can make their decisions about payment methods based on what the price may be," he says.

The costs of credit card transactions are written into the price of everything at a store. So people who pay with cash are already paying extra.

"If (retailers) go to surcharging, the theory is that the extra cost of accepting credit cards will be captured by the surcharge, and everyone else will pay less," Mierzwinski says.

2. What will it actually cost to use credit if there are surcharges?

That equation will be based on a charge fee that does not repel consumers, since banks want to keep their customers. "So the threat of surcharging by retailers may cause the banks to renegotiate the interchange rates," Mierzwinski says.

Most of the swipe fee is profit that banks use to fund credit card rewards programs. So rewards may decline as banks try to keep their swipe fees low, Mierzwinski says.

Then stores will have to decide whether to pass along surcharges to their customers. "There are plenty of people who are sloppy with their finances, but savvy consumers are not going to pay 6 percent more to get a 1 percent rebate on their credit cards," McBride says.

3. What information will I get about the charges?

Presumably, consumers will find out about the cost of their payment options at the cash register, which may end up upsetting them and causing longer lines.

The settlement outlines rules about what can be charged and in what way. Retailers will "have to make it very clear," says Mierzwinski.

Also, 10 states, including Texas, New York and California, prohibit surcharges. So the settlement is a moot point for residents of these states.

4. Should I just start paying in cash?

Cash is always a good budgeting option, but McBride says he does not expect stores to start encouraging people to use paper money.

"It doesn't reduce their costs if people use cash," he says. "You have to make bank runs every day. What if you run out of quarters? There's risk of theft and manpower."

So if not cash, then what? "It will be interesting to see what, if anything, changes," says McBride. "A lot of this has been bluster by merchants."

(Follow us @ReutersMoney or here. Editing by Lauren Young)

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