REPORTS

Tuesday

• March retail sales
• March Producer Price Index
• February business inventories
• Earnings: CSX, Goldman Sachs, Intel, Johnson & Johnson, Philips Electronics

Wednesday: Tax Day!

• Federal Reserve Beige Book
• March Consumer Price Indes
• March industrial production and capacity utilization
• Earnings: Abbot labs, AMR

Thursday

• April Philadelphia Fed manufacturing index
• Jobless claims
• March existing home sales
• March housing starts
• Money supply
• Earnings: Biogen Idex, Gannett, Google, Harley-Davidson, JPMorgan Chase, Nokia, Sourthwest Airlines

Friday

• Reuters/University of Michigan consumer sentiment index

FORECASTS

From Daniel Bernstein, JD, director of professional services, MarketCounsel:

Over the past twelve months or so, there has been a tremendous amount of discussion about new regulation. Yet, despite the Congressional hearings, SEC roundtables and expert discussions, there has been a dearth of actual changes or even proposals. Other than the new short sales proposals released on April 9, 2009 everything else has been just talk. That being said, some of the talk stands out as being more worrisome than other.

In a recent speech, SEC Division of Investment Management Director Andrew “Buddy” Donohue said that the SEC is considering requiring third party compliance reviews of investment advisers. The scope and frequency of these reviews has not been discussed, but it would most likely be an annual review of the firm’s compliance program and its effectiveness. It is also unknown what the qualifications would be for providers that perform these reviews.

This self-policing requirement would be quite burdensome for smaller investment advisers. Not only would it be time consuming, but it could be quite expensive. Assuming that there will be some qualification required of the providers, an independent review would most likely cost thousands of dollars. This will make it economically difficult for small advisers to survive. Even mid-size and larger firms will be taking on additional expenses that will make it more difficult for them to survive.

The tremendous time and economic burden would be justifiable if there was a significant risk that the independent review was helping to control. Traditionally, however, there has not been such a risk. In fact:

• Outside of investment advisers that have some type of self-custody or commingling practices, there has not been an extraordinary amount of fraud in the independent investment adviser industry. Typically, third parties maintain custody of client assets and perform valuations, and clients get statements directly from those custodians.
  

• The SEC has examined or had the opportunity to examine many of the firms that have committed fraud, including Bernard Madoff’s firm. The examiners are supposed to be highly trained and qualified. Why should we expect that an independent review would be superior to an SEC examination?

• Finally, many of the firms that have committed fraud are unregistered or otherwise would not be subjecting themselves to an independent review. Many of the Ponzi schemes that have recently come to light were committed by hedge fund managers that were exempt from investment adviser registration.

While we do not think that a requirement for an independent review is necessary, it would be better than one of the other alternatives being discussed. There has been talk, and fear, for years, about investment advisers having to be regulated by a self-regulatory organization such as FINRA. Richard Ketchum, the new chairman and chief executive officer of FINRA, recently claimed that it is investment advisers that need more examination oversight and FINRA is “uniquely positioned … to build an oversight program for investment advisers quickly and efficiently.”

FINRA oversight of investment advisers would be a terrible strain on the industry. Without going into tremendous detail about the cons with such membership, one only has to look at how many small broker-dealers exist today, especially in consideration of how many existed in the past. It’s just not economically practical and small broker-dealers have not been able to survive. Whether or not FINRA would have such an impact on investment advisers is unknown, but it would have to be assumed that the entrepreneurial independence of the industry would be in jeopardy.

From Peter Hayes, managing director, BlackRock:

After suffering their worst calendar-year decline on record in 2008, munis have embarked on a notable turnaround—and are still boasting very attractive yields Given the likelihood of higher tax rates in the future, tax-exempt income is an appealing option for more and more investors.

Clearly, fundamental trends among the US states have been negative. Tax receipts have declined, led by drops insals tax revenue, property taxes, capital gains taxes and personal and corporate income taxes. 46 states face budget shortfalls. The good news is: Washington is paying attention and has responded with a massive stimulus package that includes provisions aimed at aiding state and local governments, as well as the municipal market in general. Much of the risk is already priced into the market. All of this gives us reason for optimism.

There had been fears that demand would be overwhelmed by fierce supply as states and municipalities, driven by the need to balance their budgets, flood the market with new bond issues. The government aid is addressing the problem in two ways: First the federal dollars have reduced states’ need to issue debt to close their budget gaps, effectively reducing new-issue supply in the market. Second, certain elements of the federal plan are geared toward increasing demand. This includes a tax incentive to banks that is encouraging them to buy bonds from smaller municipal issuers, and the repeal of certain taxes for a period of time. For example, the interest on private activity bonds will be exempt from AMT for bonds issued or refinanced in 2009 or 2010.