MarketView for November 19

 

 

Summary 

 

Semiconductor shares rallied on Friday as higher revenue than expected from Marvell Technologies buoyed the sector. Marvell Technologies closed up 6.1 percent at $20.09. Nonetheless, the market ended flat for the week as Wall Street backed away from a strong autumn advance.

 

As a result, the major stock indexes finished little changed on Friday after China's central bank raised bank reserve requirements for the second time in two weeks, stepping up its fight to rein in prices in a move that could temper growth. The S&P 500 was just below 1,200, an important psychological level. If it fails to break above that mark convincingly, the index could trade in a tight range for the rest of the year.

 

After a nearly 13 percent run-up in September and October, the S&P 500 has slipped 2.1 percent in the last two weeks on concerns of tightening in China and debt woes in Europe. A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources said on Friday.

 

For the week, indexes were flat with the S&P inching up 0.04 percent, the Dow adding 0.1 percent, and the Nasdaq off 0.004 percent. In a potentially positive sign, the S&P managed to break above its 20-day moving average after slipping below it earlier in the week.

 

Marvell helped boost the rest of the semiconductor sector, including SanDisk, which rose 3.9 percent to $39.98. Dell closed up 1.7 percent at $13.90, after it raised its profit outlook.

 

General Motors eased 0.2 percent to $34.26 one day after its record-setting initial public offering. Meanwhile, Harrah's Entertainment terminated its own IPO, citing market conditions.

 

About 6.86 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.

 

Insider Trading Charges Could Be Imminent

 

The word is that officials are preparing insider trading charges against a host of financial players, including investment bankers and hedge fund managers, The Wall Street Journal said, citing people familiar with the matter.

 

The charges could surpass any previous investigations on Wall Street, and examine whether certain players garnered tens of millions of dollars in illegal profits, the newspaper said in its Saturday edition.

 

The investigations could expose "a culture of pervasive insider trading in U.S. financial markets", especially in ways private information is transmitted to traders through connected insiders, the newspaper said, citing federal authorities.

 

Wall Street has been abuzz for weeks about federal authorities filing another big insider trading case that might compare to last year's Galleon case.

 

Although the scope of the investigation is unclear it is said to focus on the use of so-called expert network firms, businesses that command big fees from hedge funds to match them up with experts in particular industries. There has been concern for years that some experts may be passing on confidential information about public companies to traders.

 

A year ago, the SEC sent out two dozen subpoenas to hedge funds and other traders, seeking information about their trading in a number of health-care related buyouts. The SEC's Philadelphia office is ground central for the agency's new task force that is cracking down on insider trading.

 

The Wall Street Journal report of the investigation nearing an end comes a few weeks after federal authorities charged a French doctor with passing on confidential information to a portfolio manager at FrontPoint Partners health care hedge fund. FrontPoint has not been charged.

 

Authorities are also investigating Merck's takeover of Schering-Plough and AstraZeneca's takeover of Medlmmune, according to The Wall Street Journal.

 

Bernanke Responds to Critics

 

Federal Reserve Chairman Ben Bernanke responded to critics of the Fed’s bond-buying program and issued a thinly veiled attack on China's policy of keeping its currency deceptively low. Bernanke, facing a chorus of protests about the asset-buying spree from within and outside the central bank, said a more vigorous economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar.

 

"The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Bernanke said.

 

The Fed's November 3 decision to buy a further $600 billion in U.S. government debt with new money generated outrage among policymakers in many nations, who accused the United States of seeking to weaken the dollar to gain an export edge.

 

German Finance Minister Wolfgang Schaeuble called the policy "clueless," while domestic critics have argued the policy could ignite inflation and fuel asset bubbles. Fed officials have become relatively united in their defense of the program with an unusual campaign of public remarks.

 

Bernanke went so far as to brief lawmakers on Wednesday behind closed doors. In his remarks on Friday, Bernanke faulted inflexible currencies for blocking a needed rebalancing of global growth, but admitted a need for greater domestic saving as well.

 

"Deficits and surpluses are generated by many countries' behavior not a single currency," Bernanke said during a panel discussion with IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.

 

"It will be very difficult for exchange rates by themselves to restore the balance and so I think structural adjustments on both sides are necessary," Bernanke said.

 

Strauss-Kahn said he too recognized the difficulties involved but said global imbalances could not be tackled without "important changes in the relative values in the currencies. We need to move in that direction," he said.

 

Addressing international criticism of the Fed's action, Bernanke said much of the recent weakness of the dollar reflected an unwinding of the increases that were notched as investors fled to the safety of the greenback during the European sovereign debt crisis in the spring.

 

Many emerging economies are worried that volatile investment inflows sparked by the dollar's decline could be destabilizing -- either fueling inflation or asset bubbles. Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse.

 

"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals" he said.

 

While Bernanke did not explicitly point to China, U.S. officials have long argued that an undervalued Chinese yuan gives the Asian export powerhouse an unfair advantage.

 

Bernanke said inflexible currencies were preventing a needed rebalancing of global growth and could end up destabilizing the world economy.

 

"For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.

 

Bernanke said sluggish growth, falling inflation and an unemployment rate that has hovered near 10 percent for months convinced Fed policymakers they needed to pump in more stimulus.

 

"On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," he said. "As a society, we should find that unacceptable."

 

Bernanke said a fiscal program that combined near-term measures to enhance growth and steps to address long-range deficits would be an important complement to Fed policies.

 

Regulatory Reform Beginning to Take Hold

 

Regulators are bringing bring more transparency to the derivatives market, hedge funds and private equity. Proposed rules issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission showed regulators working to implement hundreds of new regulations mandated in July by Congress.

 

Shining a brighter light on derivatives was one of the key goals of the landmark Dodd-Frank reforms, pushed through by Democrats and President Barack Obama over the resistance of most Republicans and a host of Wall Street lobbyists.

 

The CFTC's and SEC's proposed rules target a range of derivatives including credit default swaps, which were implicated in the downfall of troubled giants Lehman Brothers and AIG during the 2007-2009 credit crises.

 

Swaps in interest rates, currencies, credit risk or other underlying values, are a big chunk of the $583-trillion global market for derivative contracts traded over-the-counter (OTC), or among private firms, rather than on exchanges. Until now, the market has been virtually unregulated, despite its tremendous size. Its opacity has made it a lucrative business for the largest OTC derivatives dealers: Bank of America, Goldman Sachs, Citigroup, JPMorgan Chase and Morgan Stanley.

 

The CFTC and SEC, following through on Dodd-Frank, have proposed new standards for OTC swap reporting and record-keeping. The CFTC's proposal on the timing of swaps reporting met some skepticism.

 

In its proposal on Friday, the CFTC did not set specific time limits for reporting most swap trades. It said only that they be submitted "as soon as technologically practicable." It proposed that data on standardized block trades and large notional swaps be held for 15 minutes before being released.

 

Much of the world's derivatives trading is done in New York and London. The leaders of the Group of 20 (G20) leading economies agreed in 2009 that derivatives must become less risky and more transparent. A report on the issue is expected from G20 regulators in January.

 

Dodd-Frank called for requiring market participants to report swap trades in "real-time" and left it up to regulators to define what that means -- one of many Dodd-Frank details still to be fleshed out in the implementation phase.

 

The agencies will evaluate comments from the public on their proposals over the next two months, with changes possibly resulting. Under Dodd-Frank, the deadline for final implementation of most new derivatives rules is April 2011.

 

The CFTC's preliminary recommendation came on the same day the SEC proposed rules for security-based swaps. Taken together, the agencies' proposals gave an early outline of not only when, but where and how swap data will be disclosed.

 

Dodd-Frank opens a business opportunity to play a data handling and warehousing role for Depository Trade & Clearing Corp and major exchanges, such as CME Group and Intercontinental Exchange. ICE this week applied to make its ICE Trust unit a registered clearer under the CFTC.

 

The SEC on Friday also proposed, under another Dodd-Frank mandate, requiring hedge funds and private equity firms with more than $150 million in assets under management to register with the investor protection agency. This rule is designed to help the SEC root out fraud and abuse in the $1.65-trillion hedge fund business.

 

Recently, the hedge fund sector, which includes giants such as Bridgewater Associates and Paulson & Co, has not posted the immense profits that some years ago made it famous.

 

The European Parliament on November 11 approved new rules to regulate managers of hedge funds and private equity beginning in 2013. EU member-states had already approved the package. The implementation deadline for the SEC rule on hedge fund and private equity firm registration is April 2011.