Analysts Bullish on Asset Managers' Earnings, Margins for Third Quarter

Expecting strong third-quarter earnings reports from asset management firms due to the market's rally, analysts are upgrading their outlook on the companies. "This is the second quarter in a row of outsized equity and fixed income gains, likely to result in another hike in operating margins, though [changes] in compensation may temper [that] somewhat," according to a Bank of America-Merrill Lynch research report.

Indeed, Janus Capital is up 81% year to date, Waddell & Reed is up 82% and Calamos Asset Management is up 78%. Even given these tremendous gains, the Merrill report said, "Janus has further upside potential in our view, based on very strong investment performance and strong inflows as asset growth, estimated at 14%, in the third quarter."

A separate report from J.P. Morgan said, "We continue to like many of the asset managers despite the doubling of many stock prices since the March market low. We are raising numbers for all of the asset managers that we follow given the magnitude of the market movement." The J.P. Morgan analysts are especially bullish on Franklin Resources and Invesco due to their international holdings, fund performance and sales.

Fund Sales Streak at $300B

Investors continued to pour money into long-term mutual funds, with the latest week ended Sept. 23 seeing the funds take in $16.03 billion, bringing the 28-straight-week sales streak to a total of $300 billion, the Investment Company Institute said.

Stock funds, however, continued to lose assets, with $1.88 billion being withdrawn, up from $1.38 billion the week before. However, investors' outlook was split between U.S. and foreign equity funds, with domestic funds losing $2.03 billion in assets and international funds taking in $152 million.

Bond funds continued to be popular with investors, netting $12.91 billion in the latest week, steady with the $12.69 billion they reaped the previous week. Hybrid funds took in $5 billion, down slightly from $5.17 billion the previous week.

And money market funds experienced the fourth consecutive month of outflows. Investors redeemed $19.58 billion from money funds. Since peaking at $3.849 trillion in January, money funds now total $3.419 trillion.

Four Biggest-Point Drops For the Dow in Past Year

Sept. 29 marked the one-year anniversary of the biggest-point drop, 778, in the history of the Dow Jones Industrial Average, sparked by the initial failure of the House to pass the $700 billion financial rescue plan. That was followed by the Dow's second-, fourth-, and fifth-largest point drops-as well as its largest, second-largest and third-largest point gains. And between the collapse of Lehman Brothers on Sept. 15 and the end of the year, the S&P 500 moved 3% or more in one day a total of 29 times.

While the market has continued to be volatile, the S&P 500 has made those 3% daily swings only 20 times so far this year.

"The lack of volatility is a sign of good behavior. This is what you should see at the start of a bull market," Todd Campbell, president of E.B. Capital Markets told CNNMoney.com. "We've moved from a period of crisis to a period of early recovery."

Alan Skrainka, chief market strategist with Edward Jones, concurred: "We don't have the extreme volatility anymore because we've reached greater stability in the financial markets. Credit markets have mostly returned to normal. Many of the problems that were keys to the panic have been addressed, and it looks like the economy is coming out of the recession."

"Move past the crisis," Barclays Wealth urges investors in its latest monthly strategy update. Position for the economic recovery since most economists are revising their growth forecasts for 2010 upwards, Barclays said.

Fed Considers Borrowing From Money Funds To Unwind Ease Stimulus

As the Federal Reserve begins to ease its extraordinary stimulus plan and works to stave off inflation, it is reportedly considering borrowing up to $500 billion from the $3.4 trillion money market fund industry rather than the 20 leading primary dealers, which aren't expected to be able to provide more than $100 billion.

However, the Fed is not expected to bring liquidity down to where it was before the crisis because it will also raise interest rates. The Fed will borrow the money through reverse repos on the mortgage-backed securities it acquired at the beginning of the financial crisis.

The Fed is reportedly considering a pilot test drive but is afraid that news of such an action will stoke fears that liquidity will be reduced significantly. The Fed recently said it would keep interest rates near zero, a signal that if the Fed is considering liquidity measures, no actions are likely to be taken in the near term.

GAO Proposes Changes to Hardship Withdrawal Rule

Noting that 15% of 401(k) participants have engaged in some form of "leakage," that is, hardship withdrawals from their plans or failure to roll the money over when changing jobs, between 1998 and 2006, the Government Accountability Office is recommending that Congress eliminate the ban on additional contributions for six months by those who make hardship withdrawals.

"Most plans that GAO contacted used plan documents, call centers and websites to inform participants of the short-term costs associated with the various forms of leakage, such as the tax and associated penalties. However, few plans provided them with information on the long-term negative implications that leakage can have on their retirement savings, such as the loss of compounded interest and earnings on the withdrawn amount over the course of a participant's career," GAO said.

Thus, the GAO is asking the Labor Department to encourage plan sponsors to publish information on their 401(k) websites about the long-term negative impact of making such withdrawals.

"Despite the financial hardships many are facing, people need to resist raiding their 401(k), because it can be a really bad deal for them over the long run," said Sen. Herb Kohl (D-Wis.), chairman of the Senate Special Committee on Aging, who requested the GAO report.

Funds Give Analysts More Investment Sway

Rather than simply generate reports for portfolio managers to use, fund analysts at leading companies including Fidelity, Putnam and MFS are getting more say in which stocks a fund selects in offerings they are labeling "sector" or "research" funds.

Mutual fund analysts at Lipper say given the volatility of the market, which has become one of stock pickers, the hands-on approach makes sense and creates another layer of risk management and accountability.

"The old standard was that you had a couple of star portfolio mangers running everything, but now we are seeing a shift, and I think it's working out better for investors," said Tom Roseen, senior fund analyst with Lipper.

Barclays Predicts Strong Economic Recovery

During the second and third quarters, American households should recover as much as $6 trillion of the $14 trillion in wealth that they lost since the onset of the financial downturn last year, according to Barclays Capital analysts. Even so, consumers probably won't be ready to start spending freely again any time soon, Barclays said.

Ongoing economic policies and strong cyclical growth will drive a stronger economic recovery than the markets expect, especially in the United States. "We have a lot of policy left to go," said Larry Kantor, head of research at Barclays Capital. He expects that about half of the federal stimulus money devoted to infrastructure will be spent in 2010. "Economic data will be better than expected, particularly in the U.S.," Kantor said. "The recovery is not fragile. It has a lot more to run."

Barclays recommends that investors favor equities over corporate credit, with a focus on cyclical sectors such as industrials and technology. Current profit margins in the industrial sector suggest that they are likely to hit bottom at nearly 120 basis points above the lows of the prior business cycle. Also, margins will bottom out sooner than they typically have at this point in the economic cycle, owing to substantial inventory liquidation. In the technology sector, several semiconductor companies have increased their quarterly guidance in the middle of their quarters. Furthermore, analyst opinion continues to improve about the sector. In addition, electronics was one of the strongest categories in August retail sales reports.

Aided by stronger industrial output and a more robust technology sector, Barclays expects U.S. GDP growth to reach almost 5% for the next six months, with growth averaging 4.5% in the second half of 2009. That will precipitate a strong recovery and stronger employment numbers. Kantor pointed out that even though the general market believes that unemployment will increase to 10% and stay there for a while, Barclays Capital projects unemployment to fall to 9.1% and 8.8% by the third and fourth quarters of 2010, respectively.

IRA Contributions to Charities Might Continue

A provision by the Internal Revenue Service that permits people age 70-1/2 or older to contribute up to $100,000 of their IRA money to a charity each year without tax consequences is slated to expire at the end of the year.

However, with so many charities lobbying for its continuation, and with President Obama earlier this year proposing a one-year extension in his budget, it is possible it could be continued, at least for the short term.

"The current expectation is that an 'extenders' bill will be taken up late this year," said Timothy Hanford, a tax consultant with ADC Strategies. "The betting is that all of the provisions expiring in 2009 will get extended."

However, with so much on Congress's plate, healthcare reform notwithstanding, it is possible that the measure may not be taken up until next year, and then enforced retroactively, Hanford said.

Morningstar Buys Stake in Private Equity Data Source

Morningstar has acquired a minority equity stake in PitchBook Data, a provider of data on private equity transactions, investors, companies, limited partners and service providers. Liz Kirscher, president of the data service business at Morningstar, will join the company's board of directors. Financial terms were not disclosed.

"Private equity investments represent a significant asset pool and have been attracting increasing investor interest because of their low correlation with the stock market," Kirscher said. "PitchBook's unique research and data collection techniques allow the company to provide private equity information that is difficult to find anywhere else.

Big Comeback Expected For Wall Street Bonuses

Wall Street bonuses have been slipping since reaching a peak of $34 billion in 2006, but with asset management firms expected to announce stellar earnings for the third quarter, those bonuses could come back big time, CNNMoney.com reports. Last year, financial executives got only $18 billion in bonuses, a figure almost certain that this year's bonus pool will beat. With 16,000 fewer people working on Wall Street, checks should be bigger.

 

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