WHAT WILL THE RECOVERY LOOK LIKE? From Bob Doll, vice chairman and global chief investment officer of equities, BlackRock

Economic indicators have been increasingly suggesting that a bottom in the economy has formed or is forming, and investors are now focusing on what the recovery will look like. We continue to believe that the coming rebound will be constrained by wealth losses and tighter credit conditions, but even with these drags, we should see a noticeable improvement in categories such as consumer durables, residential investment and business investment, which should be enough to allow GDP to grow at around the 2% to 3% level over the next 12 months.

From an equity markets perspective, we believe a number of risks remain, but several positive factors are also playing an influence. Monetary conditions remain very market-friendly, valuations are still reasonable, profits continue to expand to the upside and corporations are being shareholder-friendly in terms of their cash expenditures. On the downside, we would point to a still-constrained consumer, an expanding budget deficit, rising tax levels and the possibility of increased regulation.

On balance, we believe that the current rally may have gotten ahead of itself, but the intermediate term remains constructive. Additionally, we would also note that stock price movements have begun to return to more normal levels, and have recently been less driven by macro factors and more by security-specific factors. As volatility levels have come down, we have seen increased performance differentiation among individual stocks, which is good news for traditional stock pickers.


WASHINGTON WATCH, From Bruce Thompson, managing director, head of global public policy at Clearbrook Investment Consulting
 
SEC INVESTOR COMMITTEE: The new SEC Investor Advisory Committee, formed to give investors a greater voice in the Commission’s work, met for the first time last week and agreed that the question of fiduciary duty should be a top agenda item. The committee will discuss whether all financial intermediaries who provide investment advice be subjected to the same fiduciary duties, and how those duties should be defined. The President’s financial regulatory reform would give the SEC the authority to establish a fiduciary duty for any broker or investment adviser offering investment advice. SEC Chairman Schapiro has said she supports harmonizing the regulation of broker-dealer and investment advisers. Other discussion topics for the committee will be enhanced disclosure requirements, technology, financial literacy, valuation, majority voting, proxy voting and director-investor communications.  
 
SHORT SALES: The SEC made permanent a temporary rule put in place last fall to curb naked short selling and proposed new transparency measures to make more short sale information available to the public. The Commission also announced it would hold a public roundtable on September 30 to discuss additional steps. U.S. Senator Ted Kaufman (D-Del.) said the actions were “some progress, but not enough.” Kaufman, who leads a bipartisan group of Senators who have been urging the SEC to act, said the SEC should act to restore the substance of the uptick rule. He also wants the SEC to implement tougher rules to stop naked short selling through an enforceable system.

BERNANKE RE-APPOINTMENT: One key decision facing the President this fall will be whether to re-appoint Fed Chairman Ben Bernanke to a second term. Bernanke’s term expires January 31, 2010, but a decision will need to be made this fall to allow time for confirmation hearings and a Senate vote. Bernanke seems to be campaigning for a second term, appearing at an NPR town hall, sitting for a “60 Minutes” interview, and giving a series of speeches defending his actions as necessary to save the financial system and the economy from a depression. President Obama has voiced his support for Bernanke a number of times, and most political observers believe he will re-appoint him. However, some speculate that the President may want his own person at the Fed, which would be given expanded authority over the financial system under the President’s regulatory reform plan. Three possible candidates are Lawrence Summers, director of the National Economic Council, Janet Yellen, president of the San Francisco Fed and former CEA chair under President Clinton, and Alan Blinder, who was a former vice-chairman of the Fed under Clinton.
 

Report Calendar

Monday, August 3
July ISM Manufacturing Index
July Motor Vehicle Sales
June Construction Spending

Tuesday, August 4
June Pending Home Sales Index
June Personal Income and Outlays

Wednesday, August 5
June Factory Orders
July ADP Employment Report
July Challenger Job-Cut Report
July ISM Non-Manufacturing Index

Thursday, August 6
Initial Jobless Claims
Fed Balance Sheet

Friday, August 7
July Employment
June Outstanding Consumer Credit