Bulls Keep Snorting
Don't look now, but the current runup in U.S. stocks ranks as the greatest intrayear rally in nearly 75 years. On Nov. 24 the S&P 500 stood near a 13 1/2-month high, up a thumping 63% since its nadir on Mar. 9. Gazing out over the economic landscape, investors appear to be ignoring signs of weakness—the dismal jobless rate, shaky consumer confidence, desperately strapped states—and fixating on signs of strength. Third-quarter real GDP growth, revised down to a 2.8% annual rate from 3.5%, still squared with expectations. Profit growth at U.S. financial companies topped 36% for the quarter, pushing overall corporate earnings to a 10.6% gain—the best since 2004. The S&P/Case-Shiller U.S. National Home Price Index notched its second consecutive quarterly improvement. Housing prices could continue to stabilize as inventories shrink: In October, existing home sales were up 10% to an annual rate of 6.1 million, the fastest pace since February 2007. With the dollar languishing, gold set a new record of $1,174 an ounce on Nov. 24—but the weak dollar seems to be pushing investors to seek richer returns in stocks. The Fed, in its minutes of the Nov. 3-4 meeting, expressed mild anxiety that infinitesimal interest rates might fuel "excessive risk-taking" in the financial markets. But for now, the Wall Street party rocks on.
A New Ratings Lawsuit
The big credit-rating agencies are snarled in a thicket of lawsuits from private investors enraged that the companies gave favorable ratings to mortgage-backed bonds that subsequently tanked. Now the legal pressure has been turned up: On Nov. 20, Ohio Attorney General Richard Cordray filed suit, saying the agencies had "sold their...integrity to the highest bidder." Cordray claims the "improper" ratings from Fitch, Moody's, and Standard & Poor's (owned, like BusinessWeek until Dec. 1, by The McGraw-Hill Companies) wrecked the housing and credit markets and caused Ohio pension funds to lose more than $457 million on securities they bought. Moody's and S&P said the suit has no merit. Fitch declined to comment.
Reformers Win One
So far the Democrats are keeping their troops in formation—but how long will that last? On Nov. 21 the Senate voted to move the Finance Committee health-care reform bill to the floor for debate by a vote of 60 to 39. A lot of arm-twisting sufficed to keep all the Democrats, even those talking against the bill, on the "yes" side of the aisle, while not a single Republican broke ranks to vote in favor. Floor debate will start after Thanksgiving and likely go on for weeks, with one erstwhile supporter, Senator Joe Lieberman (I-Conn.), warning that he plans to be "stubborn" in seeking changes. Look for intense disputes over a government-run insurance plan, taxes to pay for reform, and abortion funding.
Smoke and Lawsuits
Back in 2006, the Florida Supreme Court ruled that the state's smokers couldn't sue tobacco companies as a class. However, it left 4,000 plaintiffs eligible to try their claims individually—and one of them just won a cool $300 million. On Nov. 19 a Florida jury ruled against Philip Morris USA and awarded $56 million in compensatory damages and $244 million in punitive damages for the illness of longtime smoker Lucinda Naugle. The company will appeal the verdict, which one of its lawyers termed in a statement "grossly excessive" and "the result of numerous erroneous rulings."
Shakeup in Dubai
One doesn't usually think of Persian Gulf states as struggling debtors, but Dubai, in fact, is laboring under a $90 billion mountain of borrowed money. So on Nov. 20, Sheikh Mohammed bin Rashid Al Maktoum demoted some of the energetic young officials who led the emirate's boom. He replaced Omar Bin Sulaiman, the well-liked governor of the Dubai International Finance Center, Dubai's would-be Wall Street of the Mideast, with a veteran businessman and official, Ahmed Al Tayer. Three other central figures—Mohammed Alabbar, chairman of developer Emaar Properties; Dubai World chief Sultan Bin Sulayem; and Dubai Holding boss Mohammed Al Gergawi—all recently quit the board of Investment Corp. of Dubai, which oversees the government's stakes in key operations such as Emirates Airlines. The goal appears to be to placate financial backer Abu Dhabi as well as Dubai's big merchant families.
Should Developing Nations Clamp Down on Hot Money?
They're baaaack. Brazil's recent decision to introduce a 2% tax on short-term capital inflows has rekindled a debate over the merits of capital controls, which some among developing nations used in the 1990s to guard against asset bubbles and currency appreciation. Indonesia and Taiwan have made moves in the same direction as Brazil, though with less fanfare. Officials in India and South Korea are considering following suit.
Hardcore free marketers frown on controls on principle, arguing that capital should be free to move across borders. Even the International Monetary Fund, which under the leadership of Dominique Strauss-Khan has sought to portray itself as less doctrinaire on such issues, has inveighed against controls—mostly on the grounds that they usually don't work. Yet in a November column on the Project Syndicate Web site, Harvard University's Dani Rodrik argues the time has come to launch a new dialogue, free of "ingrained financial fetishism," on how developing countries can best protect themselves against speculative capital. And Arvind Subramanian, of the Peterson Institute for International Economics, floated in a Nov. 25 column in India's Business Standard the idea that developing countries should band together, under the umbrella of the Group of 20, and institute capital controls in concert. Such an approach, says Subramanian, would take care of the stigma problem and make controls more effective. (Dani Rodrik: "The IMF Needs Fresh Thinking on Capital Controls") (Arvind Subramanian: "Coordinate Capital Controls")
Cadbury Food Fight
Like kids grabbing for a candy bar, the world's largest makers of edible goodies may soon be battling for British chocolatier Cadbury. On Nov. 18, Hershey's and Italy's Ferrero confirmed that they were mulling bids, which could put pressure on Kraft in the wake of its $16.4 billion hostile offer for Cadbury a week earlier. Then rumors proliferated on Nov. 22 that Swiss behemoth Nestlé could belly up to the table as well, teaming with Hershey in a joint effort to soothe European antitrust concerns.
See Why the Cadbury Deal Matters
Reliance's Big Bid
Dow Chemical. Germany's BASF. And now, Reliance Industries may add its name to the list of the world's top petrochemical giants. On Nov. 21 it offered around $12 billion for bankrupt LyondellBasell Industries, a once-American, now Dutch plastics manufacturer. Cash-rich Reliance could pay off the hefty price tag in less than two years, say analysts. While Indian companies have had a checkered history buying troubled overseas assets—see Tata Motors and Jaguar Land Rover—Reliance chief Mukesh Ambani, India's richest man, is a disciplined and ruthless negotiator. Bankers expect his all-cash offer will trump cash-and-stock bids from unnamed rivals.
Boffo at Every Bite
What is it that teen girls see in vampires? Seduced, perhaps, by the fantasy of the ultimate bad-boy romance, teens swarmed movie theaters on Nov. 20 to see The Twilight Saga: New Moon. The $72 million gross broke The Dark Knight's one-day record, and the film, produced for $50 million by independent studio Summit Entertainment, garnered an eye-popping $142 million by the end of the weekend. That kind of appeal will almost certainly put New Moon, already ranked 15th for the year, among the top 10.
The Last Saab Story?
As with the Opel saga, this one is becoming a cliffhanger, but it could have an unhappy ending. On Nov. 24, Swedish sports car maker Koenigsegg Group pulled its bid to buy Saab from General Motors. GM would like to ditch the brand at the same time it is disposing of Saturn and Pontiac. Koenigsegg didn't explain its U-turn, but Saab has long lost money, and its sales are projected to skid from 91,000 last year to 41,000 in 2009.
Two Against Google?
Rupert Murdoch wants to loosen Google's iron grip on the news—and Microsoft wants to help. Murdoch's News Corp. has held early-stage talks with the Redmond (Wash.) software giant to forge a deal that would strip Wall Street Journal content from Google's search engine, says a person familiar with the talks. Microsoft would pay an undisclosed fee in exchange for the anticipated bump in visitors to its Bing search engine, according to the Financial Times, which first reported the discussions on Nov. 22. But the arrangement could leave Microsoft and News Corp. vulnerable to allegations of anticompetitive behavior while cutting Murdoch's properties off from one of their main sources of readers: 26% of the Journal's online traffic arrives via the Web giant.
HP's Strong Quarter
Hardware? Fuhgettaboutit. The black ink for Hewlett-Packard these days continues to flow from services. Despite major revenue declines in four of its core businesses, including PCs and printers, profits jumped 14%, to $2.4 billion, in the fiscal fourth quarter, ended Oct. 31. HP slashed computer prices to maintain its standing as the world's No. 1 PC maker, but the company has gotten a big boost from its $13.9 billion purchase last year of Electronic Data Systems, now HP Enterprise Services. And CEO Mark Hurd's cost-cutting is expected to brighten HP's bottom line when the recovery strengthens.
The BusinessWeek/YouGov Optimism Meter: Impending Gloom
The Optimism Meter, a proprietary measure of sentiment and expectations, economic statistics, and market forecasts, dropped by a point the week of Nov. 24, to 45, as consumers grew gloomier about jobs and less confident that stocks will keep rising. Developed to track shifts in outlook among individuals, professional investors, and economists, the meter gauges optimism about jobs, markets, and growth.
* Calculated using consumer polling, economic forecasts, and financial markets data; 0=lowest and 100=highest
Data: YouGov, Bloomberg, BusinessWeek