World Business

While tightening credit is among the most pressing market challenges, it is only one of sundry factors currently pressuring incorporated earnings, which be in possession of been falling all year.

By Alec Young From Standard & Poor’s Equity Research

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While the S&P 500’s newly come banter off its Nov. 20 closing low of 752.44 represents a welcome reprieve in relation to months of relentless selling, we believe a retest of the lows is likely.

Although latter volatility has at least discounted significant proceeds corrosion, as well as a looming global recession, the consensus also expects the economic and profit picture to improve in the promote half of 2009. Should the current worldwide downturn be longer and deeper than expected, we think equities choose be vulnerable to further selling when markets discount a bleaker than expected outlook. Given the unprecedented free play of global de-leveraging, hedging against a “longer and deeper” scenario appears prudential.

In addition, while the S&P 500’s recent valuation of only 12.5 times 2008 estimated earnings may appear cheap by historical standards, the possibility of continued negative profit revisions means current valuations are likely higher than they appear.

The U.S. consumer, whose spending accounts for roughly 70% of economic activity, is in the state betokening pressure — the result of weakening home prices, which we believe have to a greater distance to fall because of a large inventory glut. In addition, international economic growth, whose spent strength helped boost both U.S. exports and S&P 500 fellowship sales, has weakened dramatically, by Europe, the United Kingdom, Canada, Japan, Australia, and New Zealand altogether in or flirting with recession. Overseas household weakness has boosted the U.S. dollar, farther eroding the gain of the S&P 500 companies’ approximately 45% foreign revenue exposure and exacerbating matters.

While reasonableness prices disposition undoubtedly lead an upturn in the fundamentals, we believe the global economic and income outlook needs to at in the smallest degree show tentative signs of stabilization before in any degree lasting rally will ensue. In flimsy of this unprecedented global macroeconomic uncertainty, we keep on to favor a defensive sector allocation.

Consumer Discretionary

We recommend underweighting this sector. Rising concerns surrounding the sagacity and duration of a U.S. recession are fueling ongoing erosion of the sector’s earnings estimates. S&P analysts’ fundamental outlook on the sector is negative, provident their negative outlooks for many industries, including department stores, automobile manufacturers, house appliances, and home furnishings.

Consumer Staples

We recommend overweighting the sector, reflecting our view of above-average earnings growth expectations and profit predictability. With the credit acme showing not at all signs of abating, housing prices continuing to weaken, and the job emporium remaining sluggish, we believe investors may gravitate towards defensive, low-volatility sectors.

Energy

We recommend overweighting the zeal sector, as we think low valuations will lead to a resumption of broader market outperformance. While WTI oil prices have dropped other thing than 65% since July, recent oil prices right and left $50 per barrel are still roughly in line with the beyond five-year average.

Financials

We recommend marketweighting this sector. As a result of the federal government’s efforts to stem increasing investor pessimism, we believe the worst conducive to this sector may be over. We believe that the government’s Troubled Asset Relief Program (TARP), which has involved capital infusions into financial institutions, has lifted some of the uncertainty surrounding the sector.

Health Care

We believe investors should overweight this sector. With our behold that equity mutability inclination likely remain elevated, we esteem investors will reward the sector’s defensive qualities, allowing for better relative consummation. S&P analysts have a positive fundamental outlook on the biotech industry based on an improved outlook for sales and earnings over the nearest 12 months.

Industrials

We recommend underweighting this sector, as we think poor domestic earnings perceptibility is being aggravated by dint of. slowing between nations economic growth. With the U.S. recession accelerating and recessions now under way around the world, we rely upon this increasingly global cyclical sector is vulnerable to p-e contraction as investors increasingly question its future earnings growth outlook.

Information Technology

We inform marketweighting this sector based on our view that slowing global increase and a firmer dollar make outperformance unlikely. Even though the firming U.S. dollar should not vitally hurt near-term results, in our opinion, the related unfavorable sentiment is a worry.

Materials

We recommend marketweighting the materials sector. We put faith in low valuations are scion by dint of. slowing global growth and a firmer dollar, which will likely temper the sector’s receipts and proceeds outlook. S&P analysts have a neutral fundamental foresight for the sector and see it being negatively impacted by slowing economic growth and raw material exact in, for example, Europe, Japan, and the United States.

Telecommunications Services

We recommend overweighting the telecom sector, due to our positive fundamental lookout, its above-average give up, and improving technical readings. S&P analysts receive a positive fundamental outlook for the sector, based on a positive outlook for the integrated telecommunication services industry, which makes up the vast greater number of the sector’session market capitalization.

Utilities

We recommend marketweighting this sector based on its defensive characteristics, its above-average dividend yield, and an improving technical outlook. S&P has a neutral fundamental outlook for the sector, based on our neutral view on several of the industries, including the electric utilities assemblage, that represents not remotely 60% of the sector.

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The Labor Dept.’s November report revealed a in a descending course jobs worm and raises concern about the effectiveness of monetary policy to brush the recession

By Michael Englund

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The injury of 533,000 nonfarm jobs in November, announced in the Labor Dept.’sitting profession report released on Dec. 5—after immense revisions to the payroll loss numbers reported for September and October—makes clear that the U.S. economy hit a brick wall in September and has been spiraling downward ever from the time of. The population’s various economic facts will prize many post-Depression records during the approach two quarters for example the "Great Recession" takes hold. Certainly we are in towards a nasty slew of economic reports through the holiday season.

The U.S. jobs report managed to undershoot market pessimism, both with the hefty send down in payrolls, which was the report’sitting headliner, the downward back-revisions, and a 0.1 hour refuse in the medium work week, to 33.5 hours. That meant a big 0.9% decline in November hours worked. Hours worked are poised for a -7% pace in the fourth specific place, following the -2.2% third-quarter figure, and we have revised down our fourth-quarter U.S. entire domestic product forecast to one annual duty of -5.0% from -4.0%. This follows a -0.5% estimate in the third quarter that looks poised for a small upward revision to -0.3%.

There was some good news, relatively speaking, in the November jobs report that diminished the headline effect from the massive payroll and workweek declines. The jobless rate "only" rose to 6.7%, as a 422,000 drop in the labor force in November mitigated some of the effect of the big 673,000 drop in civilian employment. And continually earnings rose 0.4% in November, to leave a 4.1% year-over-year gain, restraining the negative impact of the jobs decline on income.

The jobless rate is still convenient to post a massive gain in December, and we will assume a 7.0% rate by dint of. yearend. The 0.4% hourly-earnings gain offset less than half the effect of the 0.9% drop in hours worked on wage income—moreover at least these figures didn’t aggravate the effects of the big payroll declines.

It is at present clear that we are seeing the sharpest pace of decline for the U.S. economy since the particularly harsh 1980-82 or 1974 downturns, and possibly since the Great Depression. Media references to the "Great Recession" will keep panic alive, both among households and businesses, through the remainder of the holiday season or longer.

It’s unclear when the effects of the massive deleveraging process now under passage faculty of volition start to diminish, but nasty November economic reports to be released through the remainder of December and early January will likable continue to fuel open austerity in the near phrase.

When it comes to the Federal Reserve’session replication, we continue to assume policymakers will lower the 1.00% fed funds rate target at the Dec. 16 Federal Open Market Committee meeting, though the effective rate has already settled in the 0.25%-0.50% range and has little room for downward adjustment. As it did at its Oct. 28-29 meeting, yet, we reckon upon the Fed again to chase its tail with a target reduction to the 0.50% area that seems to simply come together the gap to the actual rate, though the decrement will likely further degrade the competent rate toward zero.

The real policy questions concern the degree to which—and the aggressiveness with which—the Fed deploys various "quantitative easing" strategies, moves similar to those one time deployed by the Bank of Japan. The Fed will be under continuous emporium pressure to have being spread out its balance sheet and remove paper from the pecuniary markets in interchange for retain credit, in the hope that it will eventually be able to jump-start the lending process and force carry to the credit of one’s account back into the collapsing economy. The interest scold utensil has largely already been fully deployed, given the near-zero fed funds compute, and the massive spreads to private shortcoming instruments are a not plenteous while ago the primary barrier betwixt lower rates in the reserve market and lessen rates for nonbank borrowers.

It will be pleasing to see to the sort of degree the Fed attempts to dart in such thoughts into the policy statement it issues on Dec. 16. The committee members could seek to tell us where they want the fed funds rate to office, vs. regurgitating a "mark" they have no intention of achieving. With some of the present day verbiage, they might clarify their objectives in expanding the balance sheet, in quantitative terms. Perhaps they could engage a signal that they are volition to do what it takes when it comes to expanding the central bank’s balance sheet.

Yet the FOMC should also seek to describe the economic landscape in a way that inspires confidence rather than further panic—and this might argue against providing too much detail steady the awful state of the economy, or the hefty balance sheet expansion that might be necessary.

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The economy is in the dumps. Hard times are here. None of the speakers at the annual forecast breakfast Friday of the local chapter of the Institute for Real Estate Management attempted to deny that.

But most in like manner found some silver linings and some grounds for optimism.

Lower mortgage-interest rates and lower gas prices could back the Seattle-area real-estate industry rebound next year, said Lennox Scott, chairman and CEO of John L. Scott Real Estate.

Construction costs are starting to drop, related Tom Parsons, senior vice president of office and multifamily developer Opus Northwest.

And, for all its troubles, Seattle alembic is much better not on than most of the cease of the country, speaker after speaker maintained.

But that’sitting a little like saying Washington State’s football team, at 2-11, is better than 0-11 Washington, UW real-estate professor Jim DeLisle joked.

Seattle land-use economist Matthew Gardner predicted a tough year ahead for multifamily housing, the one and the other condos and apartments. But the market didn’t get overbuilt here as it did in California and Florida, he said: “Everyone wants to be in Seattle right now.”

Voter approval in November of new taxes to expand light-rail should spur a bound in transit-oriented development, Gardner uttered.

The local industrial real-estate market, as long as dead, also is faring better than the rest of the country, uttered Bart Brynestad, senior vice president of Panattoni Development. Tenants are hunkering the floor, he uttered, but the place of traffic isn’t overbuilt, and the vacancy rate, at 5 percent, remains mean.

“When it does turn, it’s going to rebound abundant quicker,” he said.

Kemper Freeman, chair and CEO of Kemper Development, said business at Bellevue Square and the other retail outlets in his Bellevue Collection is down just 2 percent overall from hold out year. The region’s biggest economic engines — Boeing, Microsoft, Costco — keep intoxicating, he said.

“We’re in the bright spot of the country these days,” Freeman said.

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Bloomberg’s Dina Bass has an conference with Heather Bellini, the top-rated analyst covering Microsoft, and her Magic 8 Ball says, essentially, “Outlook not so good.” (Image via Wikimedia Commons)

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The UBS analyst told Bass that it’s possible not one of Microsoft’sitting five divisions will hit meeting of friends and Wall Street revenue forecasts. Bellini furthermore believes cost cuts won’t be enough to suit profit targets.

“Enterprises have gone without ceasing a buyer’s strike just likely consumers have,” said Bellini. “You attend the unemployment numbers — I don’t suppose people are worrying about upgrading laptops and desktops.”

Microsoft reports its fiscal second divide earnings — the quarter ending Dec. 31 — on Jan. 22, 2009, at 2:30 p.m.

In October, the company lowered its forecasts for the second quarter and implemented a series of cost-saving measures.

For Q2, Microsoft’s in every one’s mouth guidance is:

• Revenue of $17.3 billion to $17.8 billion.
• Operating income of $6.1 billion to $6.4 billion.
• Diluted earnings per share of $0.51 to $0.53.

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Chinese Americans at Microsoft and in the community cheered the appointment of Qi Lu as president of the company’s Online Services Group, noting the meaning of his reaching one’s destination at the highest ranks of the company.

“When people look at their own career in posse in a company, they always look at if in that place is someone like them in the senior leadership team,” said Weina Wang, chairwoman of Chinese Microsoft Employees (CHIME), the largest company-sponsored diversity cluster, with 2,500 members. “And I suppose Lu’s joining Microsoft is definitely a huge encouragement, from a career-development perspective, for totality the Chinese and Asian employees.”

Lu, who reports directly to CEO Steve Ballmer, will be the highest-ranking Chinese American in the relation of the 95,000-employee company when he begins Jan. 5. He will presumably unite the company’s 18-person higher leadership team, 17 of whom are unblemished.

Nelson Dong, partner at law firm Dorsey & Whitney in Seattle, said Lu’s appointment is significant for several reasons.

“More and more Chinese Americans are moving from one side the historic ‘glass ceiling’ that held them to purely technical positions in the past,” said Dong, who focuses on technology and Asian law, in an e-mail.

“Like Dr. Lu, they are persuading up in more corporations today to take major direction roles over all districts of companies, using and relying on their technical skills but no longer being limited to purely technical roles. Dr. Lu is assuming a position of major strategic and business importance to Microsoft.”

As president of the Online Services Group, Lu will head Microsoft’sitting Internet search and advertising efforts — the critical fronts in the company’s battle with Google. He led search and advertising engineering at Yahoo until August.

Dong, who is on the board of the Washington State China Relations Council in Seattle and the National Committee on U.S.-China Relations in New York, reported Lu’s selection has broader implications in opposition to corporations seeking talented engineers and executives.

“[T]op companies of the nature must have being prepared to have diverse care if they truly aspire to have a global impact,” Dong uttered. “China is a natural talent pool today, producing some 300,000 new engineers annually, and so it is fitting that Microsoft will now be the subject of of the like kind a senior leader who is fully representative of that enormous reservoir of technical abilities.”

Wang said members of CHIME were buzzing Thursday after an in good time report named Lu for the job. Ballmer confirmed the news internally later that day.

“Personally I was very excited when I saw Steve’s e-mail, and I put faith in a piece of land of Chinese and Asian employees here in the body share the identical excitement,” she said.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

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Mary Jo Foley has a profit dig out today on a distribution deal between Microsoft and Dell for Live Search. Currently, Google’s search toolbar is preloaded on Dell PCs. Officials aren’t commenting, moreover Foley cites unnamed sources familiar with the manner of making saying the sum of two units tech giants “have signed a deal by way of which Dell determination be shipping starting anew PCs with the Live Search toolbar preinstalled.”

“My sources say that Microsoft has offered Dell sweet enough articles of agreement to entice the PC composer to take the place of its search-preload deal with Google with a comparable offering from Microsoft,” Foley reports.

Meanwhile, Qi Lu, Microsoft’session new Online Services Group president, told The Wall Street Journal that Microsoft’s ability to invest in Internet search was a key enticement. “In my interaction with Steve [Ballmer] the person thing that impressed and won me over is the make horizontal of commitment they are investing,” reported Lu, who left Yahoo, in what place he was charged with execution vice president in charge of search and advertising, in August.

Lu cited Microsoft’s investments in distribution deals specifically:

“They’re investing resources, they’re investing in our ability to distribute a product, investing in things that we can do to ensure we have at the highest quality of user actual trial, and that’s very, very important,” Lu said.

Microsoft has inked several significant distribution deals for Live Search with PC makers, in a invite to grow its place of traffic share.

In October, Google had 63.1 percent of the U.S. search market. Yahoo had 20.5 percent and Microsoft had 8.5 percent, according to comScore.

In March 2007, Microsoft cut a global deal with Lenovo to preinstall Live services, including search, on new PCs.

In June, Microsoft landed a North American distribution deal with Hewlett-Packard, set to begin in 2009.

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