Experts Talk Jobless Claims, ISM, Bernanke, M&A

We check in with the pros as a mild September turns to a bumpy October start

By BusinessWeek staff

Wall Street made it through September—normally a troublesome month for the stock market—without much fuss. But the first day of October brought some stress and strife, with major U.S. indexes down sharply, including more than 2% declines in the Standard & Poor's 500-stock index and the Nasdaq composite index as of early afternoon. The culprit: Some disappointing data on the manufacturing sector and the labor market that cast some doubt on equity investors' assumptions about the strength of the U.S. economic recovery.

Also of note on Oct. 1: Federal Reserve Chairman Ben Bernanke delivered testimony on financial regulation in front of a House panel.

What did experts have to say on Oct. 1 about the disappointing data and the Fed chief's appearance? BusinessWeek compiled comments from Wall Street economists and strategists on these and other topics:

Beth Ann Bovino, Standard & Poor's

The Institute for Supply Management's manufacturing index edged down to 52.6 in September, after rising 4 points to 52.9 the month before. The reading was weaker than the 53.5 expected by markets, though yesterday's disappointing Chicago Purchasing-Management Index report likely reduced expectations ahead of [the ISM] release. The index still remains above the 50 point benchmark, indicating growth in the sector. New orders fell to 60.8 in September, after jumping almost 10 points to 64.9 the month before. Inventories jumped more than 8 points, to 42.5, though still indicating contraction. Prices paid edged down to 63.5 from 65.0. Though the weaker-than-expected report wasn't too much of a surprise, given the [Sept. 30] Chicago PMI release, it's likely to add more downside pressure to markets.

Initial Jobless Claims rose 17,000 to 551,000 in the week ended Sept. 26. This level is much higher than the 535,000 that the markets had expected. Continuing claims fell 123,000 to 6,090,000 in the week ended Sept. 19, keeping the insured unemployment rate at 4.6% for that week. Benefits have reportedly been extended by Congress and are likely to push this number higher over the next few weeks. The higher-than-expected headline reading may worry markets ahead of [the Oct. 2 release of the September U.S. employment] report.

Action Economics

Fed Chairman Bernanke discussed regulatory reform in his written testimony on the topic before the House Committee on Financial Services. As predicted in the [Oct. 1] Wall Street Journal, Bernanke proposed an "oversight council made up of the agencies involved in financial supervision and regulation should be established, with a mandate to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps, and to coordinate the agencies' responses to potential systemic risks." Other steps include legislative change for consolidated supervision of systemically important firms; a new resolution process to wind down such firms; hardening payment, clearing, and settlement systems; and ensuring consumer protections.

Bernanke linked the dollar to fiscal issues in his House testimony Q&A, saying, "The U.S. must get its fiscal house in order, otherwise this could pose risk to the dollar." He also suggested that he saw no risk in the dollar losing its status as a global reserve currency, and though an international reserve standard would inherently weaken the dollar, this is unlikely to take place. He went on to tout the Fed's policy stance, saying it can support the economy without stoking inflation with the tools and will to achieve price stability. Bernanke also advised against using monetary policy to burst asset bubbles, which could have side effects for the broader economy. Instead, a stronger regulatory system would help prevent a build-up of risk.

Steven DeSanctis, Bank of America Merrill Lynch

Looking back to 1994, we see that mergers and acquisitions inside of [the financial sector] accounted for over 30% of the overall number in both the Russell 3000 as well as the Russell 2000. Given the large discrepancy between the haves and have nots at this time, we think that we could see merger activity remain high in this group going forward. Information Technology had the next highest percentage of deals, at over 20%, and this is a sector we certainly think investors will focus on. The group has over 24% of its market cap sitting in cash, and the sector has good growth prospects, one of the key characteristics of merger candidates in the past.

Surprisingly, at least to us, deals that have taken place in the past have carried higher valuation levels than their respective index. This could be a function of companies wanting to buy "growth" or it could be the fact that Info Tech and Health Care accounted for about a third of all transactions and these groups tend to be "growthier." We also see that M&A activity peaked during the 1999-2000 period, when market valuations in general were much higher than they are today.

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