World Business

Wall Street economists and strategists take a dire view of prospects for the U.S. economy

From Standard & Poor’s Equity Research

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As investors await the fate of the U.S. financial-system liberate plan, scheduled for a ballot in the House of Representatives on Oct. 5, credit markets remain in a less degree than enormous strain. And the freeze-up in lending activity does not bode well for U.S. economic growth in coming months.

To earn a sense of the site, BusinessWeek and S&P MarketScope compiled insights from Wall Street strategists and economists put on Oct. 1:

Tony Crescenzi, Miller Tabak

For a third week, the total amount of commercial paper ungathered plunged, falling a record $94.9 billion in the week ended Oct. 1, to $1.607 trillion, bringing the cumulative drop in spite of the three weeks to $208 billion. The declines reflect the seizing up of the credit emporium and withdrawals of money from money-market funds, what one. held $700 billion of arising from traffic paper at the end of the second quarter. These declines in some ways carry more weight than those of a year ago, when the place of traffic was dysentery issuers with mortgage-related exposures. This time the free from impurity is wide-reaching and is affecting issuers by to a great distance more predictable cash flows—regular run-of-the-mill companies in need of working capital. For example, the asset-backed sector by-word a $29.1 billion decline in the latest week, news that fits with the poor direct of car sales, which are falling under the weight of the lack of availability of credit. The declines count up to the urgency for fixes to the confidence crisis and defend the case for a Fed scold cut.

Action Economics

U.S. credit default swaps are widening amid weakness in equities and resurrection concerns a recession will farther on weigh onward already liable to injury corporate [issuers]. Meanwhile, CDS on the assurance sector are really taking it on the chin after Senator Harry Reid (D-Nev.) said yesterday that a major underwriter was on the verge of bankruptcy if the bailout package wasn’t passed. MetLife (MET) is now priced at 12% and $500,000 through year, with Hartford (HIG) and Prudential (PRU) at 1.05% and $500,000 per year to insure $10 million in bonds. Yesterday there was no up-front charge for any of the insurers, with MetLife’s cost of insurance at $460,000, Hartford at $525,000, and Prudential at $500,000. This is one more sign of the vexation in the markets, of course fear in this sector has been exacerbated by the debacle with AIG.

Michael Anderson, Barclays Capital (BCS)

In single in kind of the most of a monument months in the history of capital markets, high-yield corporates plunged 7.98%, marking the worst-ever monthly return for the asset class. The prior record, -7.37%, was set in June 2002 during WorldCom’session utter failure. On a curve-adjusted basis, the High Yield Index lagged Treasuries by 855 basis points, the third-worst monthly performance. September 2008 trails singly September 2001 (-885 basis points) and June 2002 (-882 basis points).

Seamus Smythe, Goldman Sachs (GS)

The September employment report [scheduled beneficial to release on Oct. 3] is likely to be quite weak; we look for a loss of 150,000 jobs and a farther increase in the unemployment rate to 6.2%. A kind of factors point to the weak report: (1) unemployment insurance claims appear to have risen underneath various distortions; (2) consumers view jobs as increasingly hard to get; and (3) hiring continues to be weak. The only sign that points to a somewhat in a more excellent way report, a detriment of 8,000 private-sector jobs in the ADP application report, is from a survey that has done quite poorly recently.

Of particular note in this month’s release, the Bureau of Labor Statistics (BLS) will release preliminary estimates of the benchmark revision to payroll employment. These revisions envelop the year from March 2007 to March 2008. Based on other data, our best estimate is that the revise exercise volition be downward by about 250,000 and potentially more, but this estimate is quite experimental.

David Wyss, Standard & Poor’session (MHP)

[Inflation-adjusted] gross domestic product with regard to the second quarter is ancient history, but the downward revision to 2.8% actually being growth from the 3.3% reported earlier was after what is stated disturbing. Most of the revision came from consumer spending, with real growth revised to 1.2% from the 1.7% reported last month. Oddly, the biggest revision was to services (1.3% to 0.7%), usually a very stable succession. The data suggest added downside risks for the economy in future quarters. We still expect the third quarter to be positive, but not by dint of. a great deal of.

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S&P’s latest screen uncovers eight public funds with top scores under its STARS and Fair Value systems—and investment-grade credit ratings

by Beth Piskora From Standard & Poor’s Equity Research

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The volatility in the markets over the last few weeks has many investors running for the sidelines. While we encourage investors to rethink their risk tolerance in light of recent market briskness, we generally do not recommend dropping public securities—as an asset rank—from your portfolio. The Standard & Poor’sitting Investment Policy Committee continues to consult a 45% weighting to U.S. stocks as antidote to mollify investors, 55% for growth-oriented investors, and 30% during conservative investors.

But if you’ve been investing in high-risk stocks, we believe it may be time to reassess that strategy.

For this week’sitting screen, we searched for "Five by Five" stocks, those that garner the top ranking both in the S&P STARS scheme, which is based on fundamental equity research, and the Fair Value system, that uses a quantitative approach.

First, a word about the S&P metrics we used. Stocks ranked 5 STARS under S&P Stock Appreciation Ranking System are expected to outperform S&P 500 index (on a total return basis) by a broad margin by the coming 12 months, with shares rising in estimation on an absolute foundation.

S&P’s Fair Value model calculates a stock’s hebdomadary Fair Value—the recompense at which a stock should trade at current market levels—based on fundamental data such as corporate proceeds and sprouting in posse, price-to-book value, return on uprightness, and common yield special to the S&P 500. A Fair Value ranking of 5 indicates the stock is significantly undervalued.

And we added a twist to address today’s concerns. We included only those stocks that have an investment grade honor rating from S&P Ratings Services, which operates independently from S&P Equity Research.

Eight stocks made the cut:

Company Ticker S&P Credit Rating

Allegheny Technologies ATI BBB-

ConocoPhillips COP A

EMC Corp. EMC A-

International Business Machines IBM A+

Noble Corp. NE A-

Oracle Corp. ORCL A

Potash Corp. POT A-

Starbucks Corp. SBUX BBB

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Some investors dependence a rebound in corporate earnings nearest year could boost battered stocks. But deepening recession fears make that unlikely

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Traders work on the floor of the New York Stock Exchange (NYSE) Oct. 2, 2008 in New York City Spencer Platt/Getty Images

by Ben Steverman

Falling stocks have one upside in the place of investors: The further stock prices plunge—and U.S. stock indexes are down more than 10% in the past month"the more bargains in that place are for long-term investors.

That’s the theory anyway, but it’s being tested by dint of. a highly unstable environment.

To sully cheap gems, value investors strain every nerve to focus on fundamental measures, such as earnings. Thus, the famous price-to-earnings ratio, or p-e, is a common, and simple, measure of for what cause of little value or expensive a standing is.

If earnings clutch steady, falling prices should make stocks more taking to long-term investors. But that’s not necessarily excessively well if earnings fall as fast, or faster, than prices do. Many investors worry that such is the case right now, as the financial crisis and recession worries intensify.

According to Standard & Poor’s, which compiles analysts’ earnings estimates, analysts expect earnings for the large-cap benchmark S&P 500 index to be flat in the third quarter but rise with celerity in the fourth quarter and keep rising into next year. Analysts are even predicting earnings choose hit an all-time high in the second quarter of 2009.

"Earnings expectations are still likewise verging on taint," says Michael Yoshikami, president and chief investment strategist at YCMNET Advisors. Analysts have the appearance in addition optimistic about the U.S. economy, he says.

Another problem against value-seeking investors is that data steady p-e ratios be able to exist belonging to and contradictory—and seem but also more so than usual in the past year. Do you focus on earnings of the past year, that have been disappointing (and thus make stocks look more expensive)? Or, looking ahead, do you focus on the preferable profits. expected to come down the pike?

For the S&P 500, the current p-e for the sake of the clutch out four entertainment is about 16.7, S&P says. But based on analysts’ hopes for the nearest four stations, the forward p-e is a much more attractive 11.2.

By historic standards, the couple numbers are fairly attractive p-e ratios. The average trailing p-e ratio in the past 10 years is 21.2, and the average for the past 20 years is 19.3.

But those numbers rely on operating earnings, which excludes unusual items that can hurt corporate bottom lines. Estimates of operating earnings often exclude such major charges as layoffs and investing. losses of the way that have pummeled the financial sector in the past year.

Looking at total earnings instead, the p-e for the past year is now 22.5, while, based without interruption S&P’s total income estimate for next year, the forward p-e is 19.81. Using this same measure, the historical medial sum p-e for the spent 10 years is 25.98 and with respect to the past 20 years is 22.63.

Brian Gendreau, expert manaeuvrer at ING Investment Management (ING), says there is a strong argument that, after recent declines, handle valuations are at attractive levels. "But that looks attractive only if proceeds don’t descend out of bed," he says.

The third-quarter profits. season could be a key test. Alcoa (AA), traditionally the earliest major stock to exoneration its quarterly numbers, is expected to announce results Oct. 7. If earnings for the September quarter hold up well, that could lift the stock market, Gendreau says.

But in response to the market frenzy of the past month, many analysts and investors have become increasingly pessimistic. Bruce Bittles, chief investment strategist at R.W. Baird, believes the proceeds spell decree prompt analysts to start lowering profit expectations. "Expectations have got to come down," he says.

Standard & Poor’s index analyst Howard Silverblatt agrees, noting that fears of a full-blown recession have returned to Wall Street in modern weeks. The require to be paid of layoffs, as well as rising article of merchandise costs, will likely hurt incorporated profits..

Analysts are even now expecting the financial crisis to do plenty of damage. According to S&P, third-quarter earnings conducive to the S&P 500 financial sector are expected to decline 52.4% from a year ago. That’s disappointing, but much better than the huge losses of the previous three quarters, when declines exceeded 100%. In the fourth district, analysts are expecting financial earnings to resilience 200% from the huge losses of recent 2007.

The rocky condition of the credit markets in the past few weeks, however, raises worries that these estimates are far too optimistic.

Credit market troubles may have a broad impact on earnings, warns Brian Reynolds, capital mart strategist at WJB Capital Group . The crisis boosts companies’ costs of raising capital, that in turn hurts profits. And, Reynolds says, those same troubles also hurt customers, causing sales to fall.

The media firestorm encompassing the economy could moreover further undermine consumer confidence. "Retailers were already bracing for a difficult celebration," Yoshikami says.

In some environment as fickle and unpredictable as this one, analysts say, p-e ratios and other fundamental measures are only so helpful. Judging whether stocks are cheap or expensive is very a great deal of a subjective attempt, determined mostly by whether you think things are about to get taker of odds or get even worse.

S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.

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Back in June, before I took off on my crazy reporting swing through Asia and Africa, I wrote about how Steve Leonard, EMC’s president of Asia Pacific and Japan, is trying to get the right associate of local and corporate management and culture in his tract. Recently I spoke to Charles Fan, badness president and GM of EMC’session China Development Center, to get the view from the field. It was a relatively flying conference, end I came to the end of it feeling that Fan is steady his direction of motion to mastering the ingenuity of setting up an off-shore research operation that’s tightly connected to the corporate mothership.

In just sum of two units years Fan has built a prop of 600 in Shanghai and Beijing offices. Unlike more off-shore tech operations run by other companies, they’re not just doing scut act. They’re helping to design momentous new products for the Chinese and global markets.

Here’s how Fan did it: He came to EMC in 2005 when it bought Rainfinity, a toothed virtualization company that he had co-founded. In early 2006, EMC boss Joe Tucci called him in to his office and offered him the task of starting up R&D operations in China. Tucci promised him that the China scientists and engineers would work on core technologies, so Fan took the job. Another deciding factor: Fan figured that because Tucci was publicly behind the project, that would help him win cooperation from executives throughout the company.

For three to four months, Fan traveled back and from confinement between China and the US collection info. He talked to Microsoft, Google, and Intel about the lessons they had expert from setting up examination facilities in China. He found that he had a recruiting challenge. Few Chinese grad students and scientists had heard of EMC. So he put a lot of effort into campus awareness building. Now, he says, EMC is single in kind of the most good known names among computer science students.

The other major challenge was integrating the China operations into EMC’s global product unravelling network. He got help from Jeff Nick, EMC’s CTO, and Steve Leonard–who have been championing this gentle of integration. But he also made some smart moves on his own. He set up a management matrix where the teams in the labs reported to him but also had dotted-line connections to the corporate duty units for project management coordination. “I wanted the dealing units to see the work in China of the same kind with integral to their office, as opposed to something that’s outsourced,” Fan told me. “I got their buy-in because they have control. We built a hybrid model, and it’s working well.”

So distant, the China lab has done greater pieces of the company’s cloud computing research, and has helped develop some consumer storage products. It’s also helping out through energy storage technology and content management software.

Fan is pleased but not satisfied. “In two years, we have been successful in making the first step in establishing China as a core center for the most important initiatives of EMC,” he told me. “Now we want to make ever more significative contributions to the key initiatives.” That helps him retain employees, since they get to do important work.

Fan spent the early allotment of his life in Shanghai, further his family moved to the US when we was 17. Now he’s back living in Shanghai again, and his pride in China’s accomplishments grows by means of the agency of the day. He at the very time volunteered to helper out at the Olympics. He was one of those guys in the hipped shirts who answered questions for tourists.

As more and more companies open global innovation networks, Fan’s skills and experiences are going to be increasingly valuable. He’s a great case in point of a new type of business person that I’m going to be writing about, the Global Business Citizen.

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On-campus student sales reps are taking on real-world responsibilities for their employers

by Dan Macsai

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On a sunny afternoon last spring, JJ Anthony leapfrogged across the University of Pennsylvania campus. As collegiate stunts go, this one was a pretty tame: There was no pure spirit, nudity, or avant garde civic agenda—just a 21-year-old with a megaphone, hopping over a string of eager accomplices.

It was "really fun,"Anthony recalls. It was also a marketing ploy.

As he hopped through campus, Anthony, a senior communication major with a concentration in business, trumpeted the launch of Radar.net, a photo-sharing service for mobile-phone users. Meanwhile, his friends tossed promotional fliers and T-shirts to nearby students. "Check it out," they urged. "You’re gonna take pleasure it."

Like a growing number of U.S. millennials studying marketing and/or business, Anthony is a "campus ambassador." For several hours a week, he works with San Francisco’s Tiny Picture, the technology firm that developed Radar. His duties are diverse, ranging from brainstorming new marketing policy to boosting brand awareness (hence the leapfrogging).

Almost every decent-sized assembly, from Apple (AAPL) to ZipCar, employs several campus legation; their mere existence is nothingness new. But being of the class who college-aged consumers turn to increasingly elusive (BusinessWeek.com, 8/22/08), more of these student employees—formerly relegated to passing used up free pizza and produce samples—are watching their roles increase in bulk.

At Tiny Pictures, campus ambassadors are "an integral part" of the company, says Ian Jeffrey, vice-president for marketing and communications. Last year, all 14 were flown to San Francisco for a incorporated conference, where they helped revamp Radar’s interface. During school, they routinely chat through senior executives, including CEO John Poisson, to discuss possible new features.

Recently, divers legation suggested that Radar users be able to gain all their photos of the whole not private (as opposed to friends-only) by default. The idea was implemented within weeks, and Jeffrey readily credits ambassadors for its success. Adds Anthony, who was part of the effort: "I touch like an actual employee."

Sun Microsystems (JAVA) in Santa Clara, Calif., takes a uniform approach. To promote the brand, its ambassadors organize Sun-sponsored activities and start clubs centered on open-source technology. They in like manner maintain a blog, called The Observatory, what one. details everything they’ve done on campus.

But Sun ambassadors also expected—and encouraged—to critical examination old programs and develop commencing software. Experience level notwithstanding, they have produced results that emulating those of their superiors, says Joe Hartley, vice-president for global government, education, and health care. Last year, for example, a observer fixed a software bug in OpenSolaris, one of Sun’s recent operating systems. For weeks, the glitch had stumped professional programmers.

—College students exact don’t think: ‘This won’t toil,’" Hartley explains. "They’re willing to take recent, new approaches, and we really appreciate that." Accordingly, Sun’sitting 500-student minister program more than tripled in size this year.

StudentUniverse, the online ticket retailer, also expanded its program. This year, the Waltham (Mass.) company welcomed roughly 300 legation, up 300% from 2007.

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