Fedspeak: Roadmap for the Exit

October 28, 2009 By Richard Berner New York & David Greenlaw San Paulo The FOMC next meets on November 3-4. In anticipation, market attention is riveted on every nuance of Fed language and actions. That's hardly surprising, as the case for today's ‘sweet spot' in risky assets rests on short rates staying anchored, liquidity remaining abundant and prospects improving for growth, however modest. Fed officials won't change policy any time soon. But they know that effective communication is more critical than ever as they craft the exit strategy from an ultra-accommodative stance. Market participants want the Fed to clarify its views about the outlook and about the circumstances in which the Fed will unwind its stance. That will help to reduce uncertainty about the implications of the exit process for financial markets. By reducing uncertainty, Fed officials can actually improve the effectiveness of monetary policy. Three areas are critical: First, officials can update the baseline outlook and risks to it, and how they will react to changes. Second, they can map out their exit game plan, continuing to identify the tools they will use and the sequence for deploying them. Third, they can say what they do and do not know about the exit process, given that the Fed and market participants are in uncharted waters. Outlook risks. As noted in the minutes from the September FOMC meeting, the Fed's baseline outlook has probably improved since late June, when the central tendency for growth over the four quarters of 2010 was a range of 2.1-3.3%, and the Fed projected core inflation to run about 1.5%. The revisions will probably reflect generally improving incoming data and a further easing in financial conditions. Despite our conviction that the recovery will be sufficiently strong as well as sustainable, we'd be the first to admit that both are uncertain. Underlying vehicle and housing demand remains unclear following the expiration of ‘cash-for-clunkers' and the first-time homebuyer tax credit. With payrolls still declining and income growth weak, consumer spending strength is in doubt. And contributions to growth from capex, net exports and the government are uncertain. There is even more dispersion around the inflation outlook: Economic slack is unprecedented, while monetary stimulus, rising commodity prices and a weaker dollar might boost inflation expectations and inflation. Even the extent to which inflation has fallen is unclear: The Fed's preferred inflation gauge - the core PCE price index - rose only 1.3% in the year ended in August, but removing a sharp decline in the so-called non=market component of PCE prices yields a rate of 1.7%. Clarifying the reaction function. Given that uncertainty, clarity on how officials will react to changes in the outlook will help market participants understand the roadmap for policy. Many will expect the Fed to tighten sooner if it boosts its growth outlook. However, even if its revised outlook for growth improves to match ours, with ‘core' inflation low and declining, we think that officials will keep policy accommodative through mid-2010. An ongoing improvement in financial conditions may promote a gradual unwinding of the quantitative/credit easing that the Fed implemented to offset the credit crunch. Nonetheless, the current circumstances suggest that the existing guidance on interest rates - "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period" - is probably due for a change. A softening of the language at either the November or December FOMC meetings would be entirely consistent with our expectation that the first phase of the exit strategy (whether you call it reining in excess reserves, shrinking the balance sheet, or unwinding QE) will commence in 1H10 and that rate hikes will follow in 2H. Unlike in 2004, this language is highly conditional on economic conditions. By spelling out how much economic conditions have changed and what will be the response, the officials can help market participants understand the Fed's preferences and reactions. The "exceptionally low" language describes the stance of policy rather than its direction, so it is conceivable that it could still be applied to a 1% or even 2% funds rate target - especially with some small tweaks to the wording. Tools to use. While there appears to be some disagreement regarding the timing and the triggers for exit, all Fed officials seem to agree that the exit strategy has two basic components: 1) shrinking the volume of excess reserves and 2) raising the policy rate. Reverse repurchase agreements (RRPs) will be used to address the former. But there are several unanswered questions: How and when will the Fed use reverse RPs to drain excess reserves, given the massive size of the job? Will it need other tools such as accepting term deposits or selling assets? Will paying interest on reserves give it control over the funds rate? Here is some background. Thanks to aggressive expansion by the Fed, excess reserves - the surplus held by banks at the Fed over required reserves - currently total US$987 billion. We estimate that the excess will grow to about US$1.2 trillion by early 2010. The expected increase reflects three factors: 1) the ongoing impact of the large-scale asset purchases (LSAPs); 2) a looming slowdown in the pace of unwinding other Fed liquidity support facilities (the unwinding has provided significant offset to the LSAPs to this point but simply does not have much more room to go); and 3) the winding down of the Treasury's Supplementary Financing Program (SFP). Thus, far from exiting any time soon, the Fed will actually be adding more quantitative easing unless it takes offsetting action. This means that an important near-term issue is whether the Fed passively accepts more QE or attempts to offset the growth that should soon appear in the balance sheet and bank reserve data reports. The hawks on the FOMC would appear to have a powerful argument if they want to push the issue: "OK, we understand the rest of you don't want to exit yet, but if the recession is over, why are we doing the opposite of exiting?" The counter argument from the doves will be that draining operations might send a confusing signal to financial markets, and as long as the reserves are merely being stockpiled in cash accounts at the banks, what does it matter if more are added? Indeed, this seemed to be the prevailing sentiment at the September FOMC meeting, according to the recently released minutes. Thus, while it will be interesting to watch this debate play out in coming weeks as excess reserve balances soar to new highs, we don't sense that the Fed is about to start draining reserves. At this point, our best guess is that draining operations won't commence until early 2010. Whenever it does decide to start draining, the Fed will quickly enter uncharted territory. Although officials point out that reverse RPs are a standard component of the Fed's toolkit, the largest previous operations ever conducted with primary dealers were on the order of US$25 billion - and that was only for a relatively brief interval last autumn when the Fed was still attempting to sterilize the impact of all the new liquidity support facilities. Communications are critical here too: For example, the Fed has been conducting test reverse RPs, and to insure that investors understand the difference between policy and operational testing, the New York Fed issued a clarifying press release. Fed officials have actually outlined three approaches to draining reserves: reverse RPs, term deposit accounts and asset sales. We doubt that the Fed intends to sell assets any time soon, since such action would probably be quite disruptive to markets - this is more of a long-run option. Moreover, while offering term deposits would appear to be a useful means of draining significant volumes of reserves, this is an untested innovation that carries some legal and technical complexities. The Fed seems to be moving forward most aggressively with the reverse RP option. Initially, there was some concern that dealer capacity for large tri-party reverse RPs was quite limited due to balance sheet constraints, so the Fed signaled that it might have to conduct operations directly with large investors, such as money market funds. However, it now appears that dealers may be able to absorb a much larger volume of operations than previously believed, which would avoid the need for the Fed to deal with a new set of counterparties. Since this matter is expected to be a topic of discussion at the upcoming FOMC meeting, we are likely to get additional clarity on the technical aspects of how reverse RP operations fit into the overall exit strategy following that session. Finally, looking further ahead, the Fed has another tool - interest on excess reserves (IOER) - that, if effective, would enable officials to raise the policy rate without significant reserve draining. If the Fed hikes that rate, it raises the cost of borrowing; when banks can hold excess reserves on deposit with the Fed, they won't lend at rates below the IOER. Yet there are some institutions (in particular, the GSEs) that are not authorized to receive IOER, so there are leakages in the system. And at very low rates, IOER may not function properly. Therefore, the open market desk at the NY Fed may have to use the other tools noted above to execute the tightening as instructed by the FOMC. Uncertain impact of exit on markets. Beyond when exit will start and how it will work, there are several questions about the impact of such policies on financial markets. Will banks deploy their cash assets into securities or loans, reducing market rates and expanding credit supply? Will the interest rate on excess reserves become the policy rate, at least for a while? What will be the impact on market funding rates of conducting large reverse RP operations? The September FOMC minutes note that the Fed staff has examined the impact of very high reserve balances for bank balance sheet management and the economy. In tandem with the substantial volume of excess reserves, large banks that report weekly hold nearly US$1.2 trillion in cash assets on their balance sheets, or more than double the year-ago level. The staff believes that as banks grow more comfortable with the economic outlook, those now holding these balances for liquidity-management purposes could redeploy them into securities or loans. That shift in the asset mix would narrow spreads or increase credit availability; instead of boosting bank liabilities and the ‘money' multiplier, this would increase monetary stimulus through the asset side of banks' balance sheets. Finally, we suspect that large reverse RP operations could put upward pressure on financing rates - with general collateral RP rates possibly trading well above fed funds. We will be exploring this issue in greater detail over the course of coming days because it opens the door to the possibility that the fed funds rate might lose its status as the main barometer of monetary policy. Political constraints? Effective Fed communications will also help the FOMC navigate the current political environment. There is a deeply held concern that the Fed will be unable to execute an exit strategy due to political constraints. That's not surprising, given that criticism of the Fed is at its highest level in 70 years, according to some historians. And there will always be some politicians who criticize the Fed when it embarks on a tightening campaign. Nonetheless, we believe that such concerns are overblown. Since the days of Arthur Burns, the Fed has largely managed to run policy independently, and there is a new and very powerful argument in favor of independence. Since many place the blame for the financial and economic crisis of recent years squarely on an overly lax monetary policy coming out of the last recession, it's going to be especially difficult to criticize the Fed for exiting this time around. In addition, Chairman Bernanke's campaign to communicate directly with the public at large has strengthened the Fed's hand and probably contributed to President Obama's decision to nominate him for a second term. In the end, it's certainly conceivable that the Fed could delay exit longer than it should (just as it is possible that it moves too soon). But we are convinced that if the Fed was to wait too long, it would be because it misread the economy, not because of political influences.

三季度机构投资A股大起底

随着上市公司三季报陆续披露，社保基金、公募基金以及QFII在过去3个月内对A股的投资情况被一一曝光。从中不难发现，虽然同时经历了8月份的A股大调整，但机构对于调整的反应则各有不同。社保基金转守为攻、公募基金调仓迹象明显、QFII……而从这些变化中，普通投资者也可以得到启示，四季度能不能做专业投资者就看你的了。 　　社保基金篇 　　投资思路：仓位变化不大，转守为攻。 　　投资路线：青睐中小板，加仓批发零售、机械。 　　社保基金在股票市场中的投资操作一直是外界关注焦点，素有“国家队”和“先行兵”之称。据Wind统计显示，截至10月27日，在已披露三季报的上市公司中，社保基金18个组合共进入86只股票的前十大流通股东行列，合计持股市值超过60亿元，较上期增长逾5%;合计持股数量较上期也未出现大幅变化。 　　从持仓结构上看，在800多家上市公司中，截至9月末，社保新进的股票达37只，增仓的股票20只，持仓未变的股票9只，减持的股票20只，退出的股票26只。而深交所日前公布的9月份各类投资者在22个行业上分类成交和分类持股的数据显示，社保基金三季度除了木材家具行业未有持仓外，其余行业皆有涉足。 　　参照各公司2009年半年报不难发现，今年三季度，社保基金的投资战略一直秉承“转守为攻”。钢铁、医药、化工等防御性较强的个股遭到大规模减持，而以中小板为首的成长性个股受到青睐。以包钢股份为例，在今年一季度闪电“吃进”3445.33万股后，社保基金在二季度再次增持4165.86万股，半年报显示，该股成为了社保基金持仓量第二大个股。然而这种情况到了三季度却出现了变化，包钢股份三季报显示，社保一一零和社保六零四组合经过大规模减持均已退出前十大流通股东行列。 　　此外，社保基金在二季度末还曾重仓持有时代出版、京能热电、风神股份等，但通过二级市场抛售，至三季度末均已从上述公司的前十大流通股东中“消失”。 　　相对来说，三季度，社保基金对中小板个股比较看好，成为其主攻对象。统计显示，在社保基金三季度跻身前十大流通股东的86家上市公司中，有20余家为中小板公司，巨轮股份、天润曲轴、禾盛新材等11家公司均为新建仓股票。 　　而具有一定炒作效应的新能源题材股也在三季度进入了社保基金的“法眼”，86家被社保持仓的公司中，涉及新能源题材的有7家，分别是银星能源、安泰科技、江苏国泰、丰原生化、哈空调等。从行业分布来看，机械设备、商业零售类个股最受欢迎，京山轻机、银星能源和国电南瑞、百大集团、东方市场、大连友谊等均系三季度末新进，大商股份、苏泊尔等为增持。 　　商报点评：总体来看，今年三季度，社保基金的持股仓位变化不大。从相关数据上看，持股股票数量多于被撤资、减资的家数，操作上也较为积极，在一定程度上可以说明，社保基金对今年四季度的大盘走势还是以乐观为主。 　　社保基金在持仓调整上偏向于中小板成长股，“经济复苏预期”的选股思路可见一斑。同时，值得注意的是，从社保基金目前持股比例较高的个股看，与基金等其他机构的选股思路多相悖，如大唐发电、大冶特钢等，别的机构减持，它反向增持，差别如此之大，值得投资者密切留意。 　　公募基金篇 　　投资思路：仓位略有下降、调仓迹象明显。 　　投资路线：抛弃地产、玩转银行。 　　经历了8月份A股市场的大幅调整，三季度多只基金遭遇净赎回。但是，在净赎回的压力下，基金公司并没有急于建仓，而是仍然维持在一个与二季度持平的仓位上。天相投资的统计显示，截至28日，25家公司旗下开放式股票型基金三季度末股票平均仓位为83.38%，较二季度末仅下降了2.44个百分点。 　　值得注意的是，三季报显示，王亚伟掌管的华夏大盘精选基金在大跌中选择加仓。该基金在二季度末的仓位为86.72%，时至三季度末，该基金的仓位高达92.47%，上升5.75%，逼近该基金仓位的上限95%;王亚伟掌管的另一只基金华夏策略在三季度小幅减仓，三季度末仓位为75.91%，较二季度末76.99%的仓位微降1.08%，该基金股票仓位上限为80%，而华夏基金三季度的平均股票仓位为78.24%，相比上季度减仓4.4个百分点。 　　三季度市场的大幅调整，也导致了基金在操作方向上的一反常态。从多只已发布三季报的基金公告中可以看出，基金对金融股仍在“把玩”，“去地产股”的态度异常坚决。例如大成优选二季度的前十大重仓股中有4只金融股和两只地产股，但到了三季度末，其十大重仓股中已经没有地产股身影了，而金融股依旧稳居前十。 　　另据统计，三季度末基金持股占流通股本比例最高的5家公司都不再是地产股，双汇发展和泸州老窖的基金持股占比双双超过30%，紧随其后的是苏宁电器、三安光电和中联重科。另据统计，二季度末基金持有房地产股还有1500亿元以上，至三季度末已经下降到924亿元，基金主动调整3.69个百分点。 　　就持股数额变化而言，银行股两极分化最为严重。总体来看，交通银行、招商银行、中国银行、宁波银行和建设银行是被增持较多的银行。有70只基金持有交通银行，其中三季度增持该股数量最多的是华宝兴业和中邮创业，增持额均超过1.2亿股，华夏基金也增持了1.1亿股交通银行。而易方达和博时则是减持交通银行的主力，分别减持1.1亿股和5200多万股。 　　在二季度备受基金青睐的民生银行、浦发银行都成为基金换仓对象，分别被16家和24家基金公司减持。其中华夏基金减持民生银行最多，达到3.7亿股，博时也减持了8000多万股浦发银行。值得注意的是，基金减持银行股获得的资金有些又反投到其他银行股身上。例如华夏基金用减持民生银行的钱买了北京银行，而博时减持浦发银行后增持了1.4亿多股中国银行和1.5亿多股建设银行。 　　商报点评：从三季报中可以看出，基金对于传统的银行地产股已产生厌倦，这才会出现减持、换仓的情况。除关注这些变化外，投资者还应看到，三季度基金看好且增持较多的行业集中在机械设备仪表、医药生物制品、石油化学塑胶塑料、食品饮料和信息技术业。基金增持的幅度分别达到3.39、1.71、1.66、1.34、0.99个百分点。其中，机械、医药、石化、食品等行业在三季度都出现了逆势上涨，这些趋势或将延伸至整个四季度。投资者须留意观察。商报记者 暴帆/摄 　　QFII篇 　　投资思路：增持远超过减持，长线投资。 　　投资路线：仍然布局金融地产，接盘钢铁股。 　　QFII也一直被视为A股市场中的机构主力之一。它们的投资思路在一定程度上代表了境外专业机构的态度。Wind数据显示，截至10月27日，在两市披露了三季报的800余家上市公司中，QFII出现在了82家上市公司的十大流通股股东名单中，至三季度末，QFII持股数量合计5.68亿股，较二季度的3.88亿股增加46.39%;持股市值约84.44亿元，较上期增加43.85亿元，增幅高达108.03%。 　　总体上看，QFII增持要远远超过减持。资料显示，多数QFII在震荡的三季度坚持了持股不动，一些QFII甚至还挖掘了新的个股，在QFII持有的90家公司中，有40家新进部分股票的前十大流通股东。 　　三季度市场出现大幅震荡,上证指数下跌了6%，QFII们积极地进行了调仓换股，但减持力度不大。截至10月26日的数据，QFII只退出l0只股票的前十大流通股股东。其中，以富通银行最为明显，三季度该QFII减持江淮动力达到1955万股，三季末仅持有近260万股;同时，又大举减持中航光电和恒宝股份。 　　在QFII三季度减持或大举退出的18只股票中，有10只股票当季出现下跌，如江淮动力和铁龙物流分别下跌了13.73%和12.06%。也有例外，如QFII清仓的新中基，当季涨幅就高达27%。 　　QFII在三季度投资观点上与基金、社保出现了分歧，据深交所的数据来看，9月，QFII与社保“唱反调”，减仓了机械设备股票，与8月份相比，减持幅度为1.61%;而与基金相比，34家公司的增减仓都有不同， 新中基是基金新进，而QFII完全退出。 　　房地产股票也是QFII与社保、基金出现分歧的方面。9月，QFII增仓房地产股，8月底QFII持有房地产股票占其总持股的比例为17.55%，而9月底，这一持股比例则升至18.00%，上升了0.45%。 　　除房地产外，QFII三季度对金融股也是不离不弃，更对社保抛弃的钢铁股积极增资。统计显示,英国保诚资产管理(香港)有限公司大举买入包钢股份,三季末持股791.78万股,占流通股的0.29%;而富通银行也大举买入或增持了莱钢股份,三季末持股706.47万股,占流通股的3.02%。 　　从QFII增持股票的行业分布来看，其购买或增持的主要标的集中在化工、医药生物、电子元器件等行业;而撤资的个股主要分布于建筑、交通运输等行业。在QFII三季度新进的队伍中， 中国人寿、海螺水泥、青岛海尔和苏泊尔等个股持仓量最重，均超1000万股以上，中国人寿被三家QFII同时持有，海螺水泥也被两家QFII入驻。(北京商报)

大型基金大佬减仓尤狠

　　平安重夺基金第一大重仓股，上一季度的第一大重仓股招商银行则退居次席 　　⊙记者 周宏 ○编辑 张亦文 　　基金连续3个季度的加仓纪录在2009年9月终结。 　　60家基金公司旗下502只基金今日公布完毕三季报。根据天相的统计，截至9月30日，上述60家公司旗下全部基金的平均仓位(可比数据)为80.15%，环比下降3.31个百分点。其中，封闭式基金的股票仓位环比下降了5.5个百分点，在各类基金中居首。股票基金环比仓位下降了3.26个百分点，混合型基金的仓位环比下降了3.05个百分点。基金公司整体仓位普遍下调。 　　大型基金公司降仓尤为积极 　　大型基金公司，成为基金业整体减仓的“发力点”。 　　根据天相的统计，业内最大的前五家基金管理公司华夏、博时、嘉实、易方达、南方基金中，除嘉实基金的平均股票仓位上升了2.89个百分点外，其余4家基金都有大幅减仓。 　　其中，资产规模居业内首位的华夏基金2009年3季度的平均股票仓位为78.24%(可比数据)，相比上季度减仓4.4个百分点。南方基金仓位为81.23%，相比上季度减仓1.2个百分点。易方达基金的平均仓位80.59%，相比上季度减仓9.18点，博时基金的平均仓位为68.44%，相比上季度减仓12.25个百分点。 　　易方达和博时基金还成为业内股票减仓幅度最大的8个基金管理公司之中的两家。另外六家减持股票比例较大的基金依次为摩根士丹利华鑫基金、宝盈基金、上投摩根基金、泰信基金、工银瑞信基金、景顺长城基金。 　　集中减持“金融地产” 　　行业配置中，2季度遭遇基金大手笔增持的金融地产成为了基金最新一季的重点减持对象。 　　其中，金融保险业股，基金3季度整体减持高达4.23个百分点，以市值计，基金持股缩水近1000亿元。与之相应，金融行业指数当季度跌幅达到9.62%，在各行业中名列前茅。 　　总体上看，金融保险业的减持，在大基金中尤为积极。基金规模前八大的基金，除中邮成长配置比例基本持平以外，其余都有大幅减持。减持最为积极的包括华夏红利(金融业减持13.37个百分点，近40亿市值)，博时增长(减少配置12.98个百分点，近30亿市值)等，博时新兴、汇添富均衡、易方达价值等大型基金的持股市值也都有较大幅度下降。 　　而房地产业也遭遇基金集中减持，2季度末基金持有房地产股还有1500亿元以上，至3季度末已经下降到924亿元，基金主动调整3.69个百分点。 　　此外基金减持力度较大的行业还包括采掘业、金属非金属行业和社会服务业。上述5个行业都是今年上半年基金增持力度最大的几个行业。 　　而3季度基金看好且增持较多的行业则集中在机械设备仪表、医药生物制品、石油化学塑胶塑料、食品饮料和信息技术业。基金增持的幅度分别达到3.39、1.71、1.66、1.34、0.99个百分点。其中，机械、医药、石化、食品4行业在3季度都出现了逆势上涨，尤以医药和食品两大消费品行业上涨为多。 　　追逐“业绩确定的成长股” 　　而基金重仓股的排名则再度出现大幅波动，受到再融资行为拖累的银行股纷纷遭遇减持，中国平安事隔一个季度后，再次成为基金持有的第一大重仓股。 　　根据天相的统计，基金3季度末合计持有中国平安8.63亿股，市值438亿元，占到中国平安在外流通股本的22%，有195只基金将中国平安列为重仓股。 　　而上一季度的第一大重仓股招商银行则退居次席，148只基金持有该股21.6亿股，市值319亿元(而上季度，招行的持股基金数179家、持股市值为475亿元)。 　　基金交叉重仓股的第三至第十名依次为：兴业银行、贵州茅台、浦发银行、民生银行、苏宁电器、中兴通讯、深发展Ａ、北京银行。银行股依然为主流。 　　另外，3季度基金共计新增持股50只，其中，新增持股占流通股比例最大的公司依次为片仔癀、中南建设、三安光电、扬农化工、合肥三洋、宏润建设、老白干酒、顺鑫农业、美邦服饰、湖北宜化。基金增持占流通股的比例从19.23%至7.94%不等。基金新增的重仓股行业偏重于消费品和化肥股。 　　当季度基金增持规模最多的公司则依次为中兴通讯、贵州茅台、三一重工、中联重科、北京银行、中国神华、泸州老窖、美的电器、上海汽车、潍柴动力。其中，基金增持最厉害的中兴通讯，当季度市值增加111亿元。贵州茅台、三一重工的增持力度也很大。总体看来，“确定的业绩增长”成为基金最看重的主题。 　　基金前20大重仓股 　　名称 2009年3季度 　　占流通股比例(%) 持股数(万股) 　　中国平安 21.98 86295.25 　　招商银行 13.77 215577.46 　　兴业银行 23.36 92972.77 　　贵州茅台 17.42 16441.62 　　浦发银行 15.34 121591.83 　　民生银行 14.26 268400.61 　　苏宁电器 28.29 88917.99 　　中兴通讯 23.72 34801.63 　　深发展Ａ 21.42 62635.59 　　北京银行 17.76 70235.80 　　名称 2009年3季度 　　占流通股比例(%) 持股数(万股) 　　万 科Ａ 12.3 115501.44 　　保利地产 15.38 49034.24 　　交通银行 7.94 126710.36 　　工商银行 13.99 209174.15 　　中信证券 5.85 38443.31 　　中国神华 16.57 29830.13 　　建设银行 15.86 142759.65 　　泸州老窖 36.57 26162.53 　　华侨城Ａ 31.23 41301.02 　　中国石化 5.05 64783.19

Norway Is First in Europe to Raise Rates

By ELIZABETH ADAMS LONDON -- Norway on Wednesday became the first European country to raise interest rates after the financial crisis, lifting its key borrowing rate by 0.25 percentage point to 1.5% in response to signs of renewed economic growth. The central bank also raised its interest-rate path projections in a new monetary policy report published alongside the rate decision, which signaled rates will edge up to 2.75% by the end of 2010. Norway has pulled out of recession faster than the rest of Europe, helped by the strong increase in commodity prices since the start of the year, as well as significant monetary and fiscal-policy stimulus which amounted to more than 4% of gross domestic product in 2009. "Fortunately for the Norwegian economy, oil prices have remained relatively high," the central bank said. "The measures implemented also seem to have been effective." Norges Bank's rate increase follows that of the reserve bank of Australia, which this month was the first major central bank to tighten policy after the downturn. Both countries have been helped on the road to recovery by their relatively high pre-crisis levels of economic activity compared to the average of countries in the Organization for Economic Cooperation and Development, supported by robust demand for commodities. In addition, the length and pace of both countries' economic contraction was less marked than elsewhere. Norway's move is unlikely to herald tightening elsewhere in Europe. Data released earlier this week showed private-sector loans in the euro zone declined annually for the first time on record last month, casting fresh doubts on recovery prospects and raising pressure on the European Central Bank to maintain its easy monetary stance. In contrast, the Norges Bank pinned the rate move on the quicker-than-anticipated rise in activity in Norway's economy. It said higher-than-expected inflation and considerably lower-than-forecast unemployment underpinned its decision. "The global economy is in a deep downturn but there are signs of renewed growth," the central bank said. "Developments indicate that it is appropriate to raise the key policy rate now," said governor Svein Gjedrem. Mr. Gjedrem said last month that Norway had already started to unwind unconventional measures taken in the past 12 months to prop up the economy, earlier than other countries, and he reiterated that stance Wednesday. Norges Bank said the key rate will stay between 1.25% and 2.25% between now and March 24, with gradual increases thereafter. The euro weakened to 8.3729 Norwegian kroner from 8.4080 kroner just after the decision was announced, wiping out earlier losses that followed weaker-than-anticipated unemployment data for August. But the krone quickly fell back to its earlier levels after the bank cautioned that a stronger krone would slow its expected pace of rate increases.

factors driving US stock market in 2003, 2009

----------------------------------- episode in June and July in 2009-------------------- S&P 500 slipped nearly 10% until earning released shored it up starting from July 13th. factors --World Bank Saw 2.9% contraction --dismal unemployment rate --disappointed Monthly same store sales --Tech spending --Falling commodity price July 7, 2009 1. S&P 500 Slumps to Lowest Level Since May 1 on Concerns Over Tech Spending U.S. stocks tumbled, sending the Standard & Poor´s 500 Index to the lowest level since May 1, on concern technology spending will slow and second-quarter earnings will fail justify a four-month rally in equities. Microsoft Corp. and Google Inc. lost more than 2.8 percent after researcher Gartner Inc. predicted spending on information technology will drop 6 percent this year. Discover Financial Services slumped 11 percent on plans to sell $500 million in shares. Valero Energy Corp., the largest U.S. refiner, slid 4.7 percent as gasoline sank to a seven-week low. "There´s a sense we´ve moved up too quickly," said Richard Sichel, who oversees $1.3 billion as chief investment officer at Philadelphia Trust Co. in Philadelphia. "Expectations are not really positive for the upcoming earnings season. There are still too many doubts on whether we´re seeing a pick-up in economic activity at any point this year." The S&P 500 slid 2 percent to 881.03 at 4:15 p.m. in New York, accelerating losses after falling below its average level over the past 200 days. The Dow Jones Industrial Average sank 161.27 points, or 1.9 percent, to 8,163.6. The Nasdaq Composite slipped 2.3 percent to 1,746.17 as Google, owner of the world´s most popular Internet search engine, traded under $400 for the first time in six weeks. July 03 2009 1. Stocks in Europe, Asia Decline as MSCI Index Has Worst Slump Since March Stocks fell in Europe and Asia, extending the MSCI World Index´s longest weekly losing streak since March, as reports on and Chrysler LLC, retail sales and the service industry added to concern the first global recession since World War II will persist. U.S. markets were closed for a holiday. Metro AG, Germany´s biggest retailer, slipped 2.5 percent as European retail sales dropped more than economists estimated. Seven & I Holdings Co., Japan´s largest retailer, sank 5 percent after saying profits sank 28 percent. Teck Resources Ltd. surged 9.1 percent in Toronto, leading Canadian stocks higher, after the company sold a stake to China´s sovereign wealth fund. The MSCI World lost 0.1 percent to 946.36 at 2:33 p.m. in New York as nine stocks fell for every five that rose. The gauge of 1,654 companies in 23 developed nations has slipped 1.8 percent this week as the U.S. lost more jobs than projected. "People realize the economy isn´t as bright as expected," said Franz Wenzel, deputy director of investment strategy at Axa Investment Managers in Paris, which oversees $678 billion. "Over the next couple of weeks or even months, the stock market will trade sideways at best." July 2nd 2009 1. U.S. Stocks, Commodities Retreat After Unemployment Data; Treasuries Gain U.S. stocks fell, sending the Standard & Poor´s 500 Index to a third straight weekly drop, as a worse-than-projected decrease in jobs added to concern that rising unemployment will prolong the recession. Treasuries rose, while oil retreated to a five-week low. Home Depot Inc., Alcoa Inc. and Travelers Cos. lost more than 3.5 percent after the Labor Department said payrolls shrank by 467,000 jobs last month, 102,000 more than the average economist estimate. Lear Corp., the second-biggest maker of automotive seats, plunged 52 percent on plans to file for bankruptcy. Europe´s Dow Jones Stoxx 600 Index slid 2.6 percent, the most in almost two weeks, following the jobs report. "It´s ugly out there," Jack Ablin, who oversees $60 billion as chief investment officer at Harris Private Bank in Chicago, told Bloomberg Television. "We were trying to gain a little bit of traction on the jobs front, to get less bad numbers on a monthly basis. Clearly this month´s report is a setback." The S&P 500 tumbled 2.8 percent to 897.29 at 4:06 p.m. in New York, extending its slump since June 12 to 5.2 percent and erasing its 2009 gain. The Dow Jones Industrial Average retreated 212.82 points, or 2.5 percent, to 8,291.24. Seventeen stocks fell for each that rose on the New York Stock Exchange, the broadest decline since April 20. About 625 million shares changed hands on the floor of the NYSE, the slowest trading day of the year. The NYSE close was delayed 15 minutes because of "connectivity problems." *Payrolls in U.S. Decline More Than Forecast; Unemployment Climbs to 9.5% June 30, 2009 1. Stocks in U.S. Decline, Trimming S&P 500 Index's Best Quarter Since 2003 U.S. stocks fell, limiting the biggest quarterly advance for the Standard & Poor´s 500 Index since 2003, after consumer June 22, 2009 1. Stocks, Commodities Fall as World Bank Sees 2.9% Contraction; Dollar Gains U.S. and European stocks tumbled, sending the Standard & Poor´s 500 Index down the most in two months, as the World Bank said the recession will be deeper than previously forecast. Treasuries rose, while oil fell below $67 a barrel and metals slumped. Freeport-McMoRan Copper & Gold Inc. and Alcoa Inc. sank at least 8.9 percent, while BP Plc and Occidental Petroleum Corp. lost more than 3.8 percent amid the biggest retreat in the Reuters/Jefferies CRB Index of 19 raw materials in almost three weeks. Bank of America Corp. dropped 9.7 percent as two board members resigned. Both the S&P 500 and Dow Jones Industrial Average erased their gains for the year. "The worries are still out there," said John Wilson, who helps oversee $120 billion as chief market technician at Morgan Keegan & Co. in Memphis, Tennessee. "Nobody is ready to get the trumpets out and herald the end of the recession." The S&P 500 slid 3.1 percent to 893.04 at 4:05 p.m. in New York following last week´s 2.6 percent slump. The Dow average sank 200.72 points, or 2.4 percent, to 8,339.01. Europe´s Dow Jones Stoxx 600 fell 2.8 percent and the MSCI World Index decreased 2.7 percent. Almost 14 stocks fell for each rising on the New York Stock Exchange, the broadest sell-off since May 13. June 16, 2009 1. Stocks in U.S. Drop, Led by Retail, Commmodity Shares; Best Buy Retreats U.S. stocks fell, sending the Standard & Poor´s 500 Index to its biggest two-day tumble since April, as Best Buy Co. posted disappointing sales and commodity producers sank on concern the economic rebound will stall. Best Buy, the world´s biggest electronics retailer, plunged 7.3 percent after profit slumped 15 percent. Freeport-McMoRan Copper & Gold Inc. and Occidental Petroleum Corp. sank at least 4.1 percent to lead commodity shares lower as oil erased a 3 percent gain and copper declined. AT&T Inc. lost 1.7 percent after the largest U.S. phone company was downgraded at Barclays Plc. Treasuries rose for a fourth day and the dollar weakened. The Standard & Poor´s 500 Index, which surged 40 percent from a 12-year low in March through last week, retreated 1.3 percent to 911.98 at 4:02 p.m. New York time. The index slid 2.4 percent yesterday, the most since May 13. The Dow Jones Industrial Average sank 107.24 points, or 1.3 percent, to 8,504.89. "The assumption that the economy was turning, that we were going to see growth again, was a little premature," said Clarence Woods Jr., chief equity trader with Baltimore-based MTB Investment Advisors, which manages $12 billion. "The rally was way too much, too fast." June 15, 2009 1. U.S. Stocks Extend Global Slide; MSCI World Index Falls Most in Two Months U.S. stocks extended a global slide, sending the MSCI World Index down the most in two months, as falling oil and metal prices weighed on commodity producers. Treasuries rose and the dollar strengthened. Alcoa Inc., Caterpillar Inc. and DuPont Co. lost at least 4.2 percent as a weaker-than-expected report on New York manufacturing also dragged stocks lower. Freeport-McMoRan Copper & Gold Inc. retreated 5.8 percent as copper sank by the daily limit in Shanghai on speculation supply may outpace demand in China, the largest consumer of the metal. Benchmark indexes for Europe and Asia sank as BP Plc and BHP Billiton Ltd. tumbled. "There´s no clear trajectory for moving us out of a recessionary environment," said Wayne Wicker, who oversees $33 billion as chief investment officer at Vantagepoint Funds in Washington. "Given the shellshock of the last year and a half, you have a lot of people who don´t think this market is sustainable." The S&P 500, which had climbed 40 percent from a 12-year low on March 9, decreased 2.4 percent to 923.72 at 4:08 p.m. New York time. The Dow Jones Industrial Average, which last week erased its 2009 loss, tumbled 187.13 points, or 2.1 percent, to 8,612.13 as 28 of its 30 companies declined. Almost 13 stocks fell for each that rose on the New York Stock Exchange. The MSCI World Index of 23 developed nations plunged 2.6 percent, the most since April 20. -------------------------------- episode in 2004 ---------------------------------------------- March 08, 2004 3. U.S. Stocks Fall, Led by Technology Shares; Intel, Texas Instruments Drop U.S. stocks fell, led by technology shares such as Intel Corp., as investors shifted out of companies that have led the market's rally during the past year. The Standard & Poor's 500 Index had its biggest drop in a month. ``There is some fear in the marketplace that the winners of the past have run their course,'' said Matthew Brown, who helps manage $26 billion at Wilmington Trust Corp. in Wilmington, Delaware. ``Earnings growth, while positive, will start to trend lower this year.''The S&P 500 fell for the first day in four, dropping 9.66, or 0.8 percent, to 1147.20. Technology shares accounted for half the drop. The Nasdaq Composite Index, which gets 40 percent ofits value from computer-related companies, sank 38.85, or 1.9 percent, to 2008.78. The Dow Jones Industrial Average sank 66.07, or 0.6 percent, to 10,529.48. About seven stocks fell for every five that rose on the New York Stock Exchange. More than 1.25 billion shares changed hands on the Big Board, down 13 percent from the daily average for the past three months. March 9, 2004 1. U.S. Stocks Decline; Nasdaq Composite Index Erases Its Gain for the Year U.S. stocks had their first back-to- back declines in two weeks amid concern that profit growth will slow more than forecast as job creation lags. The Nasdaq Composite Index erased its gain for the year. General Electric Co., the world's biggest company by market value, dropped after selling shares for the first time since 1961. Texas Instruments Inc. and TriQuint Semiconductor Inc. declined even after the chipmakers said demand will push first- quarter revenue higher than forecast. Earnings for companies in the Standard & Poor's 500 Index probably will grow 13 percent this year, based on the average analyst forecast. That's almost twice the average of the past three decades. Still, analysts may be too optimistic, given that the economy has created fewer jobs than expected. ``The robust earnings picture is something that has been largely'' factored into stock prices, said Jack Caffrey, a strategist at J.P. Morgan Private Bank, which oversees $280 billion in New York. ``The question arises: How sustainable will revenue growth be if we're not starting to create jobs.'' March 10, 2004 1. Stocks in U.S. Fall on Profit Concern; Dow Industrials Erase Gain for Year U.S. stocks dropped, sending the Standard & Poor's 500 Index and the Dow Jones Industrial Average to their biggest losses in more than four months, on concern that economic and profit growth this year will be disappointing. Shares of companies that provide raw materials, including chemical maker DuPont Co. and Alcoa Inc., the world's largest aluminum producer, led the retreat. The S&P 500 has jumped 39 percent from its 2003 low on March 11. Profit growth for the benchmark's members will slow to 13 percent this year from 18 percent, according to Thomson Financial, and could stifle the stock rally. ``We've come very far and are facing a decelerating trend in earnings in the next few months; the market is going to price that in,'' said Owen Burman, who helps manage $1.2 billion as chief investment officer at Riggs Investment Advisors in Washington, D.C. ``The market has been expensive for a while.'' March 11, 2004 1. U.S. Stocks Fall as Spain Investigates Source of Madrid Terrorist Attacks U.S. stocks declined, pushing the Standard & Poor's 500 Index and the Dow Jones Industrial Average down for a fourth straight day, after bombs killed more than 190 people in Madrid and a London newspaper said the terrorist group al-Qaeda claimed responsibility. Travel-related stocks slumped, including Continental Airlines Inc., and cruise-line operators Royal Caribbean Cruises Ltd. and Carnival Corp. The synchronized bombing of rush-hour trains gave further impetus to this week's selloff. Benchmark indexes had fallen after a report Friday showed a slower-than-expected increase in employment. The attack may mean ``al-Qaeda is still alive and active out there,'' said J. Michael Gallipo, who helps oversee $8.5 billion at BankNorth Investment Management in Latham, New York. ``Certainly, the market's position has been that if we had another major terror attack in the U.S., all bets are off.'' March 13, 2004 1. S&P 500 Index Falls on Concerns Over Economic Growth, Terrorist Threats The Standard & Poor's 500 Index had its biggest weekly drop in more than five months on concern economic growth will disappoint amid slow job creation and on anxiety about terrorism following bombing attacks in Spain that killed almost 200. Tenet Healthcare Corp., the second-biggest U.S. hospital company, led the declines, after its credit rating was cut by Standard & Poor's Ratings Services. Kroger Co., the largest U.S. grocer, fell after earnings declined amid competition from Wal- Mart Stores Inc. All 10 of the S&P 500's industry groups declined for the week, the first time since November. ``If the terrorist threat seems to be legitimate and it does affect people's tendencies to travel and spend, it's important,'' said Bruce Jon Raabe who oversees $500 million as chief investment officer at Collins & Co. in Larkspur, California. ``The market is reacting to the potential impact on a fragile economic recovery. Job growth could be affected by a slowdown in spending.'' March 19, 2004 1. Stocks in U.S. Fall; S&P 500 Index Has First Two-Week Drop Since November U.S. stocks fell, sending the Standard & Poor's 500 Index to its first back-to-back weekly decline since November. Solectron Corp., the world's second-largest maker of electronics for other companies, led the retreat after saying a measure of profitability dropped. The report sparked concern about how much earnings growth will slow. ``Profit may come in line or even exceed consensus forecasts, but that would still mean that the rate of growth is slowing,'' said Thomas Angers, who helps manage $4.3 billion at Philadelphia International Advisors. ``The market got a little bit ahead of itself on valuation parameters and needs confirmation that earnings will come through.'' The S&P 500 fell 12.58 to 1109.74. The Dow Jones Industrial Average lost 109.18 to 10,186.60. The Nasdaq Composite Index shed 21.97 to 1940.47. Each benchmark decreased 1.1 percent. March 22, 2004 1. Stocks in U.S., Europe Slide on Terrorism Concerns; Intel and AIG Decline U.S. stocks fell, sending the Standard & Poor's 500 Index to a three-month low, on concern that Israel's killing of a leader of the Palestinian group Hamas may prompt retaliatory attacks against American targets. American International Group Inc. and Intel Corp. led the drop, which pushed the S&P 500 to a 5 percent decline from its closing high for the first time in almost a year. Stocks tumbled in all 17 Western European markets after the assassination of Sheikh Ahmed Yassin. The S&P 500 slumped 14.38, or 1.3 percent, to 1095.40, with 455 of the index's 500 stocks declining. The Dow Jones Industrial Average sank 121.85, or 1.2 percent, to 10,064.75 and the Nasdaq Composite Index slid 30.56, or 1.6 percent, to 1909.91. ``Terrorism and consumer confidence are factors that will weigh on investor sentiment, and job growth is not coming through,'' said Jack Ablin, who helps manage $40 billion as chief investment officer of Harris Trust & Savings Bank in Chicago. ``If anyone was looking for bad news to latch onto, they're certainly going to find something.'' March 24, 2004 3. S&P 500 Index Falls a Fifth Day; Energy Stocks Drop as Crude Oil Declines The Standard & Poor's 500 Index fell for a fifth straight day, its longest losing streak in a month, amid concern that the potential for terrorist attacks may dent consumer confidence and spending. Energy shares such as Exxon Mobil Corp. dropped as the price of oil slipped. Technology stocks rose after Hewlett-Packard Co. won a government contract and analysts raised their ratings on Novell Inc. Red Hat Inc. gained after the software company said sales and profit will top forecasts this quarter. Investors need to see ``some stabilization of the geopolitical situation,'' said Eugene Sit, president of Sit Investment Associates, which manages $6.5 billion in Minneapolis. ``The fundamentals look pretty good, the economic outlook looks pretty good at home and abroad and the likelihood for 2005 looks good too.'' The S&P 500 lost 2.63, or 0.2 percent, to 1091.32 and the Dow Jones Industrial Average, which also fell for a fifth day, sank 15.41, or 0.2 percent to 10,048.23. Both indexes closed at the lowest in more than three months. The Nasdaq Composite Index gained 7.68, or 0.4 percent, to 1909.48. Reflection point March 25, 2004 1. Stocks in U.S. Jump, Lifting S&P 500 Index to Biggest Gain Since October U.S. stocks surged, lifting the Standard & Poor's 500 Index to its largest gain in almost six months, after companies including Avon Products Inc. and Activision Inc. boosted their earnings forecasts. Technology shares advanced for a second day, led by Intel Corp. and Microsoft Corp., as the Nasdaq Composite Index had its biggest rally since July. Stocks are attractive given the outlook for corporate profit after a five-day losing streak for the S&P 500, said Carol McMullen, who helps manage $1.5 billion as head of investments at Eastern Investment Advisors in Boston. A government report today showed the number of Americans filing for unemployment benefits held near a three-year low. ``Earnings will begin to drive the market,'' said McMullen, and the economy is expanding. ``Those positive factors will be more prominent in investors' minds.'' ----------------Another slide down -- mainly driven by concern over interest rate increase April 13, 2004 4. U.S. Stocks Decline, Led by Utility, Financial Shares as Bond Yields Rise U.S. stocks fell as a bigger-than- expected jump in retail sales sent interest rates higher in the bond market, raising concern that profit growth will slow. The Standard & Poor's 500 Index dropped for the fourth day in five. Financial shares such as Citigroup Inc., and utilities including Exelon Corp. led the decline. Johnson & Johnson, the world's largest maker of medical devices, rose after quarterly earnings beat estimates. ``Our fear is that the stock market is caught in the middle of a tug of war between a really good economy and great corporate profits, and the risk that interest rates will move up higher than people expect,'' said Chris Trompeter, who helps oversee $325 million at Tradition Capital Management in Summit, New Jersey. ``If rates move up more quickly, the market will struggle.'' Benchmark indexes had their biggest drop in almost a month. The S&P 500 lost 15.78, or 1.4 percent, to 1129.42. The Dow Jones Industrial Average shed 134.28, or 1.3 percent, to 10,381.28, erasing its gain for the year. The Nasdaq Composite Index dropped 35.40, or 1.7 percent, to 2030.08. April 28, 2004 4. Stocks in U.S. Drop on Interest-Rate Concerns; Alcoa, U.S. Steel Decline U.S. stocks fell as reports of increased fighting in Iraq and the prospect of higher interest rates overshadowed better-than-expected corporate profits. The Dow Jones Industrial Average and the Nasdaq Composite Index had their biggest declines since March. 15. ``We have had a little bit of a sloppy market because aside from the earnings picture, there are several other things going on: the interest rate picture, the international situation,'' said Michelle Clayman, who oversees $3 billion as chief investment officer at New Amsterdam Partners in New York. Shares of producers of raw materials declined, including Alcoa Inc. and U.S. Steel Corp., on concern that growth in China will slow and curb demand. The country's efforts to cool expansion in the steel, cement and other heavy industries are working, a Chinese central bank official said. The Dow dropped 135.56, or 1.3 percent, to 10,342.60. The Nasdaq Composite Index shed 42.99, or 2.1 percent, to 1989.54, for its third straight decline. -----------------Another slide in July and Augest 2004---------------------------- factors --earning concern --cut earning estimate July 1, 2004 2. U.S. Stocks Slide, Led by Technology Companies; General Motors Shares Fall U.S. stocks dropped for the first time in three days, led by technology companies, after Smith Barney said Yahoo! Inc. shares are expensive and Morgan Stanley said Intel Corp.'s revenue may fall short of forecasts. General Motors Corp. sank after the company said June vehicle sales fell 12 percent. A report showing jobless claims unexpectedly rose last week also contributed to the decline. ``Expectations are high now and it will be very hard for companies to beat forecasts,'' said Jeff Erickson, a money manager at Lowry Hill, which has $6 billion in assets in Naples, Florida. ``There won't be a lot of fuel in terms of beating earnings estimates to push the market upward.'' The Standard & Poor's 500 Index dropped 11.86, or 1 percent, to 1128.98, the steepest loss in more than six weeks. Drug wholesaler Cardinal Health Inc. led the decline. July 6, 2004 1. U.S. Stocks Drop for Third Day; Veritas, Conexant Shares Drag Nasdaq Lower U.S. stocks fell after Veritas Software Corp. and Conexant Systems Inc. reported disappointing results and Lehman Brothers Holdings Inc. cut its earnings estimate for Intel Corp. The Nasdaq Composite Index had its biggest decline in almost four months. ``It's all about profits,'' said Dave Briggs, head of equity trading at Federated Investors Inc., which oversees $25 billion in Pittsburgh. ``We're starting to see some cracks in the plaster, that they might not be as robust as we originally believed.'' The highest oil prices in a month helped push benchmark indexes lower for a third day. The Standard & Poor's 500 Index lost 9.19, or 0.8 percent, to 1116.19, with technology shares accounting for half the drop. The Nasdaq, which gets two-fifths of its value from computer stocks, fell 43.23, or 2.2 percent, to 1963.43. The Dow Jones Industrial Average shed 63.49, or 0.6 percent, to 10,219.34. July 8, 2004- disappoint sales from Yahoo July 21, 2004 - disapointing results from companies including Motorola Aug 5, 2004 - disappointing monthly retail sales growth pesist in July Aug 6, 2004 - job growth unexpected slow Aug 12, 2004 - disappointing result from HP Reflection point Aug 16, 2004 - excitin profit from Kmart and slipping oil price

Oil, Banks Drag Dow Down 1.1%

By GEOFFREY ROGOW and DONNA KARDOS YESALAVICH Stocks declined Monday on renewed concerns that some big banks may have issues repaying federal bailout funds and as a slide in oil prices weighed on both energy and materials firms. After rallying about 100 points to start off Monday's session, the Dow Jones Industrial Average ended lower by 104.22 points, or 1.1%, at 9867.96. A slide in oil prices began just before the stock market's turn into the red, with crude futures settling down $1.82 at $78.68 a barrel. Within the Dow, 27 of its 30 components fell, including energy giants Chevronand Exxon Mobil. Currencies As for financials, The Wall Street Journal reported Saturday that Bank of America's attempt to repay federal bailout funds and escape the government's grasp has been snagged by a disagreement over how much additional capital the bank must raise to satisfy regulators, according to people familiar with the situation. Bank of America slid 5.1%, the biggest decliner on the Dow. Along with the banking and oil concerns, traders cited a flood of other factors depressing stocks, including a gain for the dollar and conflicting reports on whether Congress will extend the tax credit for first-time home buyers. More broadly, traders said the market's decline on Monday reflected increasing skepticism about a seven-month rally in stocks that pushed the Dow to its highest point of the year late last week. "The action today is very impulsive and that has added a little more credence to the fear there could be a larger correction in equity markets coming," said Christian Bendixen, director of technical research for Bay Crest Partners. The Standard & Poor's 500 slid 12.65, or 1.2%, to 1066.95, weighed down by its materials and financial sectors, which each declined 2.6%. The tech-heavy Nasdaq Composite Index declined 12.62 points, or 0.6%, to 2141.85. The decline in oil and other commodities prices restarted a round of concern about global demand in the coming months, a fear that percolated last week as two railroad giants posted weak quarterly reports and transportation stocks fell precipitously. Investors had come into the week somewhat on edge with the Dow up nearly 3% for the month, especially given stocks were up even more in September before a slide in the month's final week. Moreover, any strength for the dollar has been a selling sign for stock traders. After some slight morning gains, the dollar was rallying lately against both the euro and the yen. "This gain in the dollar has been building for a couple days," said Adam Boyton, a foreign exchange strategist with Deutsche Bank. As for stocks, Mr. Boyton said "people just aren't going to get long the market into the end of the month right now." Wall Street's overnight losses triggered a sharp pullback in Asian markets Tuesday, with the fall in U.S. stocks and commodity prices weighing on markets across the region. The Nikkei 225 Average ended 1.5% lower at 10212.46 in Tokyo, China's Shanghai Composite fell 2.8% to 3021.46.

Recovery on Track, but Not Overheating (3Q 09)

China October 23, 2009 By Denise Yam, Qing Wang & Katherine Tai Hong Kong & Steven Zhang Shanghai GDP Economic growth remains robust in 3Q09: The Chinese economy grew 8.9%Y in real terms in 3Q09, recovering further from 7.9% in 2Q. On a seasonally adjusted basis, sequential quarter-on-quarter growth slowed, as expected, to 2.3% (+9.6% annualized), from the very strong 4.5% in 2Q. On the other hand, nominal GDP growth (at 6.4%Y in 3Q, implying a 2.3%Y decline in the GDP deflator) remained undermined by deflation, offsetting the gains in the terms of trade. Though a tad below our forecast (+9.5%Y, +2.9%Q), the pace is undoubtedly robust, in our view, characterizing the economic recovery as on track, but not yet overheating, calming fears of an imminent shift in policy stance towards tightening. Should we mark-to-market our full-year growth forecast to reflect the latest result, it would imply a figure that is moderately below our current projection of 9%, and we will likely revisit this in the coming weeks. Industrial Production Pick-up attributable to export recovery... Industrial value-added grew 13.9%Y (+1.3%M SA) in September (+12.3% in 3Q versus +9.1% in 2Q, +8.7% YTD), ahead of our (+13.5%) and market (+13.2%) forecasts. We believe that this is attributable to the narrowing decline in exports (-15.2%Y in September versus -23.4% in August), as delivery for exports recorded a single-digit (-9.9%Y) decline for the first time this year. ...though domestic demand is still the key growth driver: Needless to say, the manufacturing sector remains dependent on domestic demand for growth as external demand still takes time to recuperate. This is evidenced in the continued outperformance of local enterprises (shareholding companies +16.6%Y in September, collectives +13.5%, SOEs +11.8%) over foreign-invested producers (+8.9%). Trade A pleasant surprise in September... After disappointing results for several months, sticking out like a sore thumb in China's sound recovery story, trade data finally provided an upside surprise in September, adding to the good news from Korea and Taiwan in the same month. Even though we had forecast a narrowing in the year-on-year declines in shipments compared to results reported for August, the improvements were much larger than expected. In September, the year-on-year drop in exports narrowed to 15.2% (-23.4% in August), while imports slipped only 3.5%Y (-17% in August). On a seasonally adjusted month-on-month basis, exports and imports grew 6.3% and 8.3%, respectively, the strongest pace since April, picking up from 3.4% and 1%, respectively, in August. ...with manufactured imports reclaiming positive growth ahead of expectation: The strong recovery in domestic demand lifted imports of manufactures by 1.8%Y, returning to positive growth for the first time in 11 months. Overall imports of primary products are still declining year on year (-14.7% in September versus -29.1% in August), primarily due to lower international prices, but copper (+49% in value in September) and aluminum (+51%) intakes have already returned to positive growth, while ferrous metals demand is also recovering steadily (iron ore -4%, steel products -10%). We remain convinced that the worst is over for the trade sector. As year-on-year declines in shipments are likely to narrow significantly in the coming months, we believe that we remain on track to reach our full-year forecasts for exports (-16%) and imports (-13%). Retail Sales Further pick-up, in line with expectations: Retail sales growth picked up further to 15.5%Y (+1.4%M SA, +15.4% in August, +15.1% year to date), in line with forecasts, although the acceleration was partly driven by easing deflation, suggesting that sales growth in real terms likely remained broadly stable. Autos (+44.5%Y in September), furniture (+34%) and construction and decoration materials (+30.2%) remain the leaders in terms of growth in sales, consistent with the domestic investment demand-driven nature of the current economic upcycle. Fixed Asset Investment Strong, and still a key growth driver... Although external demand is showing signs of recovery, while domestic consumption has surged ahead with robust growth, fixed investment, having kick-started the rebound from the recent recession, remains a key growth driver for the economy as a whole. Nationwide FAI grew 33.2%Y in 3Q (+33.4% year to date), while urban FAI grew 35.1% in September (+32.9% in 3Q, +33.3% year to date). ...and increasingly driven by private sector initiatives: Although policy-driven investment projects, such as those in infrastructure (e.g., railways +87.5% year to date), continue to record the strongest growth, the recovery in private sector investment, especially real estate development (+37.1%Y in September, +17.7% year to date), is helping to relieve the reliance on government initiatives to power growth. Monetary Data Expansion sustained at fast pace in September, supportive of economic recovery: September turned out to be another strong month for money and loan growth, defying fears in recent months that the authorities are adopting a noticeably tighter monetary stance upon realizing a cyclical rebound in the economy since 2Q09. New loan creation picked up for the second straight month, to Rmb517 billion (+38%Y). Nevertheless, this is still consistent with our belief that monetary growth is normalizing after the strong pace in 1H09. Year to date, new loans totalled Rmb8.67 trillion, up 149%Y. Meanwhile, broad money M2 growth reached 29.3%Y in September, the highest level since the high-inflation periods of the mid-1990s. Nevertheless, we expect normalization in monetary expansion towards a more sustainable level, so the slowdown in loan creation should not constrain real economic expansion, or be interpreted as policy tightening, in our view. Foreign reserves data suggest continued mild inflows of ‘hot money' in 3Q09: China's foreign reserves reached a new record-high of US$2.27 trillion in September. The US$141 billion increase over three months ago again exceeded the trade surplus (US$39.3 billion in 3Q) and FDI (US$12.9 billion in July-August) by a wide margin. Nevertheless, part of the reserves ‘accumulation' was again attributable to the increase in valuation of investments in USD terms, due to the appreciation of the euro (+4.4% in 3Q) and yen (+7.3%). Our proxy for ‘hot money' inflows, which is the incremental change in reserves, net of the trade balance and FDI and adjusted for exchange rate movements and interest income, shows positive inflows in all three months in 3Q09, totaling US$25.6 billion, albeit less than 2Q09's US$63.9 billion. Inflation Upstream deflation easing faster than expected: Producer and raw materials purchasing price indices showed an uptick in September, narrowing year-on-year deflation more substantially than forecast. PPI fell 7%Y (-7.9% in August), while RMPPI fell 10.1% (-11.4% in August). On a month-on-month seasonally adjusted basis, both indices sustained sequential gains for the fourth straight month, by 0.8% (+0.8% in August) and 0.7% (+1% in August), respectively. The uptick was driven primarily by smaller declines in energy prices. Although the faster-than-expected ease in upstream deflation and the ongoing rapid monetary expansion are fuelling fears for high inflation next year, we are not too concerned at the current juncture, as we argue that broad money growth is currently biased upwards by a shift in household financial asset allocation, while the output gap from weak exports should help to contain inflation pressure in the next 12 months (see China Economics: Worried About Inflation? Get Money Right First, October 20, 2009). ...while deflation at the consumer level is narrowing on the lowering base effect from food: Food inflation returned to positive territory in August (+0.5%Y) and accelerated further in September to 1.5%, in line with expectations, on the back of the lowering base effect. This helped to narrow overall consumer deflation to 0.8%Y in September (-1.2% in August), the mildest level since China dipped into deflation in early 2009. On a sequential basis (non-seasonally adjusted), consumer prices bottomed in June and July, and have since then risen by 0.5% in August and 0.4% in September. Conclusion Outlook and policy implications: Although slightly below our forecast, the pace of economic growth in 3Q09 is robust, in our view, characterizing the economic recovery as being on track, but not yet overheating, and calming fears of an imminent shift in policy stance towards tightening. We continue to believe that the authorities are committed to policy stability so as to uphold private sector confidence, and expect the growth-supportive policy stance to be maintained until mid-2010. Specifically, although the State Council gave a cautiously optimistic assessment of the current economic situation and struck a less dovish policy tone at a meeting held on October 21, the policy message remains broadly unchanged, namely to carry on "proactive fiscal policy and appropriately loose monetary policy" with a view to maintaining policy continuity and stability. The notable change in language at the press statement compared to previous ones was the new reference to "managing inflation expectations" as a policy objective during the remainder of the year. In our view, the authorities are unlikely to resort to a rate hike, RRR hike or renminbi appreciation to "manage inflation expectations" as it stands, given that current inflation remains low and the economic recovery has just started to gain momentum. Rather, we suspect that the authorities may more likely resort to verbal intervention to ease the public concern about potential inflation, aided by less frequent adjustment to the prices that are still regulated by the government. In any case, the authorities are clearly preparing the market for an inevitable slowdown in new bank lending growth in the coming months and next year. These changes in policy tone are broadly in line with our expectations. Therefore, our policy call remains unchanged: the current policy stance should remain broadly unchanged toward year-end and turn neutral at the beginning of 2010 as the pace of new bank lending creation normalizes from about Rmb10 trillion in 2009 to Rmb7-8 trillion in 2010. We believe that policy tightening in the form of a base interest rate hike, RRR hike or renminbi appreciation is unlikely until 2H10.

Debtflation

October 23, 2009 By Spyros Andreopoulos London The recent downturn has called many of the old certainties into question. In the world of central banking, a prominent victim of the downturn is the - previously orthodox - view that central banks should neglect asset prices when conducting monetary policy. Yet more recently, another major tenet of central bank doctrine is being challenged - the view that monetary policy should not be used to help out governments under debt pressure. We think that the risk of independent central banks creating some amount of (controlled) inflation going forward cannot quite be dismissed out of hand. We have flagged inflation as a major long-term risk going forward: if the recovery is as tepid as we expect, central banks will be inclined to err on the side of caution when it comes to withdrawing the unprecedented conventional and unconventional monetary stimulus. But we believe that there will be a familiar additional source of inflation risk - the mounting public debt burden. There is no doubt that, last winter, with the global economy slumping, central bankers welcomed the help they got from hugely expansionary fiscal policy. However, the result has been a massive increase in developed countries' public indebtedness - the extent of the debt build-up in some countries resembles the consequences of wars. Historically, developed economies have escaped high debt by growing out of it rather than inflating it away or defaulting (with the notable exception of Germany and Japan). Growth after World War II for example was fast, not least because war-ravaged economies were rebuilding their capital stocks. This time around, however, eroding the debt through faster growth may not be an option. Instead, growth in many developed countries is likely to slow significantly going forward as labour forces shrink due to the demographic transition. Worse, population ageing will impose added pressure on public expenditure through higher pensions and healthcare costs. If outgrowing the debt is unlikely, and if governments lack the resolve to cut spending and/or raise taxes sufficiently, the remaining options are default and inflation. No policymaker in the developed world - and, by now, few in the developing world - would want to countenance default as an option. This leaves inflation. The question is familiar: could central bankers be forced to engineer inflation - ‘monetise the debt'? Almost all developing world central banks are independent from an institutional point of view. Indeed, one of the main reasons for setting up independent monetary authorities is precisely to avoid pressure from governments to inflate away the debt. So, central banks cannot be forced by their governments to generate inflation (unless governments were prepared to change the statutes of their monetary authorities; this would in most cases require going to the legislature). With governmental coercion being unfeasible, is there a possibility that independent central bankers might generate inflation out of their own volition? If nothing else, they would take a big gamble with their hard-won credibility. And history teaches us that the reason behind most, if not all, episodes of very high inflation has been monetary expansion to finance government expenditure or reduce debt (see "Could Hyperinflation Happen Again?" The Global Monetary Analyst, January 28, 2009). Still, there is a reason why a rational and forward-looking, independent central bank may want to consider generating (some) inflation. If the fiscal path is deemed unsustainable, it may be preferable to create limited inflation early on - to nip the debt problem in the bud - rather than to allow a mounting debt burden and having to inflate a lot more in the future. So, it may be best to bite the bullet and allow inflation now. But how does one avoid throwing the credibility baby out with the debt bathwater? Above all, if a central bank is to inflate, it has to do so in a controlled fashion. Former IMF Chief Economist Kenneth Rogoff's proposal of a 6% inflation target for a limited period of time could be a way of doing it. We think that for Rogoff's proposal to work, the central bank would have to communicate explicitly to the public the level of inflation targeted, the duration of the new policy, and the timeframe for a return to a lower target - the exit strategy. Another possibility would be to adopt price level targeting (PT). As we have argued before, PT could give the central bank wiggle-room to allow inflation to drift above target for some time without unanchoring inflation expectations (see "From Inflation Targeting to Price Level Targeting", The Global Monetary Analyst, July 15, 2009). If implemented correctly, the public would know that prices would ultimately return to the target path as the overshoot would eventually have to be corrected by an undershoot. Still, the risks for a central bank that follows such a strategy are substantial. Beyond putting its credibility at stake, there could be a run on assets denominated in that central bank's currency. And that's not to mention the political ramifications - inflation is known to redistribute wealth from lenders to borrowers. Yet, policymakers have shown that they are prepared to resort to unprecedented means if circumstances demand. We live in interesting times.

Tomorrow's burden

--Inflation is not a concern because both economic growth and labor market are weak --No other currency will replace dollar in the near future a.SDR is limited to government use b.Euro is new c.China currency is not convertible and China legal system is not internationally friendly --ex Oct 22nd 2009 WASHINGTON, DC From The Economist print edition America’s debt crisis will be chronic, not acute Illustration by Belle Mellor AS AMERICA’S financial crisis recedes, the rumblings of its next crisis can be heard. The federal government has wrapped its guarantees around banks and the housing market. It has borrowed hundreds of billions of dollars to stimulate the enfeebled economy, while tax revenues crumble. And in the years to come the cost of retirees’ benefits will explode. “There is every reason to worry that the banking crisis has simply morphed into a long-term government-debt crisis,” says Kenneth Rogoff of Harvard University. But what kind would it be: acute or chronic? If it were an emerging market, America would probably have hit trouble already: foreigners would have recoiled from financing its gaping budget deficits; default or a bail-out would have followed. The past two years have shown that rich countries are not immune to acute crises. Iceland’s case has been the most severe: the IMF had to save the country from collapse. Others have displayed milder symptoms: credit markets have discounted meaningful odds that Greece, Ireland or Italy would default. But although an acute crisis cannot be ruled out, America’s is far more likely to be chronic. Its expansion is likely to be sluggish and deflationary, which make it economically and politically hard to reduce debt. Of course, America could still give investors a scare. Within two months the Treasury will probably have reached the statutory limit on the amount of debt it can issue. In a peculiarly American ritual, Congress often grandstands before agreeing to raise it. In 1996 its Republican leaders unsettled markets by pooh-poohing the consequences of default before eventually granting Bill Clinton’s request. The Treasury’s ravenous borrowing needs also leave lots of opportunities for something to go wrong. In the past two years the portion of its debt maturing in less than a year has jumped from 30% to over 40%, the most since the early 1980s (see chart 1). In the fiscal year that ended on September 30th the Treasury held an auction on average more than once a day to finance nearly $7 trillion of new and maturing debt. A failure to raise as much money at an auction as planned—as occurred in Britain earlier this year—could send a shudder through global financial markets. “Other countries can afford a failed auction; we can’t,” says Lou Crandall, chief economist at Wrightson ICAP, a financial-research firm. “What do you do when there is a confidence shock to your flight-to-safety asset?” But it is difficult to identify any such concerns today. If anything, the underlying demand for Treasury bonds is rising. Mr Crandall notes that in the past year the share of Treasury debt bought at auctions by big investors and foreign central banks (as opposed to dealers) has roughly doubled to around 60%. Yields on ten-year Treasuries, at 3.3%, are lower than they were in August 2008, before bail-outs and recession sent projected deficits into the stratosphere. It may be that other, temporary forces, such as the lack of private borrowing or the Fed’s easy monetary policy, are offsetting any worries about deficits. Yet Tom Gallagher, an analyst at ISI Group, a broker-dealer, estimates that investors’ expectations of yields in five years’ time, when such temporary factors will have faded, are no higher than they were last summer. The reason, he says, is not that bond investors do not care about deficits, but that they assume—perhaps wrongly—that politicians simply will not allow those deficits to materialise. America may be the world’s strongest borrower, thanks to its size, wealth, legal and political stability, and two centuries of timely debt repayment (the one exception being its abrogation in 1933 of a promise to repay some bondholders in gold). Such demonstrated willingness to pay means a lot to lenders, because they cannot push countries into bankruptcy court. America also borrows in the currency other countries most want to hold in their own foreign-exchange reserves. In May Standard & Poor’s said Britain could lose its AAA rating. America has been spared the same fate in part, S&P says, because of the “unique external flexibility” granted by the dollar’s reserve currency status. Recently China and other countries have questioned that status, advocating greater use of other currencies or a currency basket like the IMF’s Special Drawing Right (SDR). Yet the dollar’s share of global foreign-exchange reserves has remained high. It fell to 63% in mid-2009 from 72% in 2001 because of the decline in its value, not reduced demand. The share was 59% in 1995. The data show central banks buy more dollars when it falls and less when it rises, says Stephen Jen of BlueGold Capital, a hedge fund. The view of Kazakhstan’s central-bank governor, Grigory Marchenko, is typical. His country will eventually reduce the dollar’s share of its reserves, he said last month, but not for a long time: “There’s no alternative yet.” SDRs’ potential is limited by the fact that only governments use them. The euro is still young and the euro zone’s borders are not yet fixed. China’s economy may one day rival America’s. But Dino Kos, a former chief of markets at the Federal Reserve Bank of New York who now works for Portales Partners, a research firm, notes that the yuan does not meet one of the most basic requirements of a reserve currency: other countries cannot use it to intervene in foreign-exchange markets because it is not freely convertible. Moreover, central banks loathe uncertainty; the arrest of four Rio Tinto employees this year on charges of stealing state secrets (downgraded to obtaining commercial secrets) shows that China’s legal system remains capricious. Eventually, the dollar’s dominance will fade; but as with sterling in the last century, this will take decades. Of course, American policies could hurry it up, in particular by trying to reduce the debt burden through inflation. In March the Federal Reserve began buying $300 billion in Treasury bonds to push down long-term interest rates. Such purchases amount to printing money, and aroused fears that the Fed was subordinating inflation-control to helping the government finance its deficits. “I must have been asked about that a hundred times in China,” Richard Fisher, president of the Federal Reserve Bank of Dallas, told the Wall Street Journal in May. But inflation is harder to create than you think. It would require the economy to grow so rapidly that unemployment plummeted and businesses returned to full capacity. Even the most optimistic forecasts say that is years away. Inflation could rise more quickly if the public came to expect higher inflation. But Donald Kohn, vice-chairman of the Fed, recently predicted that both inflation and inflation expectations were more likely to drop than to rise. Trouble in slow motion In short, the likeliest triggers of an acute crisis—a lenders’ strike, a crash in the dollar or inflation—seem remote. Not so the damage of a chronic, slow-motion crisis. Publicly held debt, just 37% of GDP two years ago, has already jumped to 56%. How much further it rises depends crucially on how fast the economy grows: higher growth leads to narrower deficits and a larger GDP to support the debt. The White House sees deficits stuck at around 4% of GDP and the debt ratio reaching 77% by 2019. The IMF, which forecasts lower growth, sees the deficit rising to around 7% of GDP and the debt ratio to 100%. The Congressional Budget Office (CBO) is in between (see chart 2). Debts of that magnitude elevate interest rates, crowd out private investment and damp growth. In 2004 William Gale of the Brookings Institution and Peter Orszag, now Barack Obama’s budget director, estimated that an increase of 1% of GDP in future deficits would raise long-term interest rates by 0.4-0.7 percentage points. They reckoned that continuing deficits of 3.5% of GDP would reduce national income by 1-2%. Rising debts also force the government to divert tax revenue from public services to interest payments. The CBO estimates that by 2019 interest on the national debt will consume 3.8% of GDP, more than twice its share earlier this decade. Bigger deficits raise interest rates not just by competing for savings, but by raising doubts about America’s ability to repay the money. Moody’s Investors Service notes that, including what states owe, America’s government debt will hit 100% of GDP in 2010, higher than other AAA-rated nations (see chart 3). “If it looks like, after the crisis is over, the trajectory of the debt is going to be continuously upward, I’d say the rating could be in jeopardy,” says Steven Hess, an analyst at Moody’s. Canada lost its AAA credit rating in the early 1990s as its combined federal and provincial debt ratio neared 100%. (It won it back in 2002.) Japan was marked down in 1998 when its ratio hit 115%. Ireland lost its AAA grade this year when the banking crisis exposed the government to huge risk. Mr Hess remarks that banking crises often trigger downgrades, as in Ireland earlier this year and Sweden in the early 1990s, because the government ends up backing a lot of private-sector liabilities. America has implicitly backed the biggest banks and much of the residential-mortgage market. The extra exposure, Mr Hess notes, is far smaller than Ireland’s. Still, if growth proves weak, the public will be on the hook for more bad private debts. A rating downgrade would not be cataclysmic; AA-rated countries borrow without problems. But interest rates would rise for the Treasury as well as anyone else who borrows in dollars, including corporations and state governments. Higher interest payments would mean further pressure on the deficit and debt. Stabilising debt as a share of GDP requires some combination of faster economic growth, higher taxes, or lower spending. It can be done. The ratio topped 100% during the second world war. It later fell rapidly as defence spending shrank, the economy bounded forward and policymakers made some difficult choices: Harry Truman paid for the Korean war with higher taxes. In recent decades several heavily indebted rich countries have clawed their way back to health without resort to default or inflation, notably Canada, Denmark and Sweden. These episodes provide little comfort to America now. Its defence budget is too small, as a proportion of GDP, to make a meaningful contribution to deficit reduction. Both Canada and Sweden started with large public sectors and shrank them; Mr Rogoff notes that America’s public sector is expanding. More important, devalued currencies and strong exports boosted growth while they wrestled down their deficits. In contrast, American exports are much smaller relative to GDP and the rest of the world remains sickly. Falling interest rates provided a tailwind to deficit reduction in all countries through the 1980s and 1990s as inflation phobias accumulated over prior decades seeped away. America is more likely to experience the opposite since its interest rates are already so low. Japan’s example may be more relevant. Beginning in the early 1990s, a prolonged banking crisis, sluggish growth, deflation and numerous stimulus plans drove its debt ratio up dramatically; it is still rising. Its interest rates remain low, largely because Japan borrows almost entirely from its own citizens whereas half of America’s debt is owed to foreigners. Japan tried to corral its debt by raising taxes in 1997; it promptly snuffed out a recovery. Japan’s experience illustrates the excruciating dilemma facing American policymakers. The White House acknowledges the deficits it projects are too high. But slashing spending or raising taxes too soon could snuff out recovery and leave America with even bigger deficits. Asked on October 15th when the administration would tackle the deficit, Tim Geithner, the treasury secretary, said: “First, growth.”

Earnings Cheer Pushes Up DJIA

By DONNA KARDOS YESALAVICH and GEOFFREY ROGOW Stocks bounced Thursday as optimism about earnings season continued to escalate. The Dow Jones Industrial Average gained 131.95 points, or 1.3%, to 10081.31 one day after a late-session selloff pushed the benchmark back beneath 10000. Travelersled the benchmark's gains, jumping 7.7% after it said its third-quarter profit more than quadrupled on sharply lower catastrophic losses and improved investment returns. Strong earnings reports from other bellwethers including 3Mand McDonald'salso aided the Dow's climb. Earnings reports from technology companies dominate the market action, as AT&T and EMC both post results before the opening bell. Plus, Microsoft makes a big launch. MarketWatch's Rex Crum reports. Traders said sentiment toward the latest round of earnings reports improved as the session progressed. Several noted that corporate conference calls in the late morning were especially helpful for investor confidence. Third-quarter earnings have come in above Wall Street estimates. While market participants are still critical of the reports as they look to justify the S&P 500's 60% jump over the past seven months, any weakness in stocks lately has been met with a wave of buying. "Certainly the market's trickier here, as more people have been dragged reluctantly into it," said Steve Auth, chief investment officer at Federated Investors, noting stocks' recent fragility. Still, he added, "clearly there's a lot of buying interest in the market that keeps coming in and buying these sell-offs." An improved forecast of economic activity from the Conference Board also provided a lift, allowing investors to largely brush aside a disappointing weekly jobs report. The Standard & Poor's 500 advanced 11.51 points, or 1.1%, to 1092.91, helped by a 3% rise in its financial sector. Basic-materials and consumer-discretionary stocks also jumped, with those sectors gaining more than 1% each. PNC Financial Servicessoared 13% after posting a third-quarter profit of $559 million and saying it could re-pay its $7.6 billion in government support within the next 15 months. ProLogis gained 9.1% after the real-estate investment trust swung to a third-quarter loss but its chief executive said the industrial-property market was "firming up." The Nasdaq Composite Index rose 14.56 points, or 0.7%, to 2165.29, trailing other indexes after online auctioneer eBayreported a 29% earnings decline and issued disappointing fourth-quarter guidance. Its shares fell 4.2%. After trading lower for much of the session, oil pared some of its decline late to close down just 18 cents at $81.19 a barrel, helping energy stocks turn positive. The dollar turned positive against the yen but was lower against the euro. The two-year note edged up 1/32 to yield 0.951%, while the 10-year Treasury note fell 5/32 to yield 3.411%. Write to Donna Kardos Yesalavich at donna.yesalavich@dowjones.com and Geoffrey Rogow at geoffrey.rogow@dowjones.com

Why ETFs Deserve a Prize

By EDWIN A. FINN JR. Our special issue on ETFs is a primer for newcomers and state-of-the-industry report for pros. EXCHANGE-TRADED FUNDS probably rank as the most successful financial product of the past two decades. They have cut costs, minimized risks and allowed investors to know at any point in time exactly what they own. Many of our readers, be they financial advisors or individuals, use ETFs already. But many do not. That's why we decided to ask the staff of Barron's to prepare this special issue, which serves as a primer for newcomers but also a state-of-the-industry report for experienced hands. ETFs are not for everyone. Many investors will always want to beat the market by picking their own stocks and bonds. Others want to accomplish the same thing by picking expert portfolio managers to do the job. Still, whether you choose to use ETFs or not, it's important to know how they work and how other investors are using them. When ETFs were introduced in the early 1990s, they seemed a gimmick. Much was made of the fact that, unlike mutual funds, ETFs allowed investors to buy and sell at current market prices during the day. That was important to some professionals. But most individuals don't have much need to jump in and out of the market hourly. As it turned out, the attributes that contributed the most to the explosive growth of ETFs among individuals were not ease of trading but tax efficiency and low cost. While mutual-fund managers must sell stocks when clients redeem shares, ETFs do not, thus limiting owners' tax bills. As for the cost savings, they come about largely because ETFs don't have fund managers. A substantial part of the investing public has voted with its feet. ETFs now hold about $700 billion in assets, which amounts to nearly 15% of the $4.5 trillion held in traditional equity mutual funds. As Mike Santoli points out in his story, "Growing to the Sky," ETF assets are expected to grow by more than 20% a year for the next five years, while mutual funds grow at a much slower pace. A good part of the growth will come from high-net-worth individuals, who, as Lawrence Strauss notes in "Why the Rich Like These Bare-Bones Products," are getting more comfortable with the funds. Leslie Norton reports in "Do Emerging-Markets Funds Have More Upside?" that ETFs have proven one of the best ways to play emerging markets because they spread risk among many stocks and, again, rein in costs. The same goes for investing in small and medium-sized companies, as explained by Dimitra DeFotis in "Small Stocks, Big Gains." The latest growth area is fixed-income, where an ETF can buy bonds to mimic a certain bond index. See Tom Sullivan's story, "Putting Bonds in Your Portfolio Mix." If you're interested in owning gold through an ETF, see Dow Jones Newswires' reporter Allen Sykora's story, "Insuring Against Economic Calamity." Sector ETFs can be used to carry out straightforward underweighting and overweighting strategies as well as more complex maneuvers. Depending on how they're used, these sector funds can play either defensive or aggressive roles in an investor's portfolio. See "What You Need to Know About Sector ETFs" by Barrons.com's Bob O'Brien. Please feel free to send us any questions about ETFs or about ETF investing strategies. We can be reached at editors@barrons.com or at Barron's, 1211 Avenue of the Americas, New York, N.Y. 10036.

关注通胀投资主题

关注通胀投资主题 　　随着股指再度转强，市场个股表现活跃，面对未来的行情，选择什么样的投资思路来参与市场呢？综合市场人士观点，对通货膨胀预期上升带来的投资主题正越来越成为大家关注的焦点。 　　东海证券研究所认为，在中国，通胀周期与增长周期具有明显的先后波动次序。目前经济上行与通胀下行并存(2009年二季度-2009年四季度)，处于经济复苏初期"增长复苏+低通胀"，以可选消费为代表的先导行业率先复苏，行业景气轮动规律开始发挥作用，这往往是经济增长和股票投资的黄金时期。预计未来周期演进到：经济与通胀双双上行阶段(2010年一季度)，经济全面复苏与通胀起来，政策转型，黄金时期结束。 　　按照经验，潜在通胀受益行业主要包括金融、地产、能源、大宗商品等。 　　综合来看，目前正处于经济复苏和通胀上升前夜的黄金投资时期。业内人士认为，股市因此保持较好表现的概率较大，建议投资者适度乐观，同时重点关注通胀受益投资主题。 　　近日A股通过稳步攀升的走势，一扫周一回调带来的阴霾。钢铁、电力和煤炭石油等大市值板块推动股指重新走强。业内人士认为，股指再次形成上升趋势的迹象比较明显，市场机会也相应增多，投资者不妨积极参与。 通胀下买股票首选三大类 　　通胀预期在近期的股票牛市行情中也成了炒作题材。不少投资人跟风进场,进一步推高了资产价格。不过,很少有投资者注意到板块与通胀之间的内在关联,而这一点对资产配置的作用却是举足轻重的。 　　不同类型的上市企业,在通胀中受到的损益也是截然不同的。举例来说,食品生产企业由于受到上游农产品 （000061 股吧,行情,资讯,主力买卖）价格上涨的影响,削减了利润空间,间接影响了股价,所以,通胀对这类企业是不利因素。以此反推,资源类、金融类和地产类企业却是最先受益于通胀的板块。 　　资源类企业包括石油、煤炭、有色、金属、黄金等,由于处于产业链顶端,这一行业也将是通胀环境下受益最大的群体。因此,无论是看好经济的乐观派,还是看淡经济的悲观派,都会不约而同地增加对资源类资产的配置性需求。 　　金融类企业作为早周期行业,一旦通胀来临,央行必然要通过加息抑制通胀,届时银行的利息收入就会相应增加,所以以银行为首的金融股也将成为通胀的受益群体,适当配置银行股具备一定的防通胀作用。 　　地产类企业方面,上半年房地产市场的火爆趋势不言而喻,而且由于通胀预期、宽松的信贷环境和低利率借贷成本等多项因素,将释放出更多的投资性需求,从而对冲刚性需求的下降,共同维持地产板块的强势表现,因此该板块中长期对抗通胀的优势毋庸置疑,尤其地产储备量大的个股品种将是其中的优选。 商业：通胀预期下的时机把握 荐3股 　　超市:通胀预期下的时机把握。1、CPI 进入上升通道,特别是食品价格的上涨将带动超市同店增速的上升,从而影响超市业绩变化;2、辅以上半年信贷的高增长,CPI上行将引发投资者对于通胀的担忧,其避险情绪的上升将使资金转向具有防御性的板块,而超市即是能够抵挡通胀风险的可选板块之一;3、百货业的高弹性尽管在下半年仍将延续,但其全年业绩已为投资者充分预期,股价也已达到合理水平。在不存在新的刺激性因素的情况下,百货股的继续上涨缺乏动力。 　　成长性分析着眼点:本文考察上市公司的最终落脚点是成长性,而成长性又可分为以下几个方面:1、产业格局。产业格局为公司成长性提供约束条件。通过地区间比较,湖北及福建的市场开发程度及竞争程度均强于湖南;通过产业链比较,武汉中百具有最强的谈判地位;2、经营效率。虽然武汉中百的物流建设最为完善,但最高效的经营者却是新华都。从物流中心分布的角度来看,由于新华都的物流中心最接近市场,这成为其提高经营效率的有效方式;3、人才培养。3家超市均建立了对于高层的激励机制;而对于普通员工的培养上,步步高的员工培训费比例最高,这意味着步步高的人才培养略胜一筹。 　　投资建议:从基本面的分析,在综合考察了上市公司的产业格局、经营效率及人才培养等方面之后,我们认为步步高的成长性最强,评级由“中性”上调为“增持”;武汉中百成长性适中,2009年26倍的动态PE最具安全边际,维持“增持”评级;新华都虽然有着不错的经营效率,但因福建市场激烈的竞争状况,以及偏高的估值,仍旧维持“中性”评级。 　　风险提示:投资者需关注:1)宏观经济波动的风险;2)甲型流感等突发公共事件对于零售业影响。 农林牧渔：通胀预期强化 投资机会逐隐现 荐6股 　　猪肉价格走势对于通胀的影响往往被夸大。实际上，肉(包括猪牛羊和禽类)主要作为终端消费品，传导面小，再加上在CPI中所占权重仅7%左右，因此通胀还不至于被肉价所操纵。但由于食品和衣着在CPI中所占权重合计达到42.6%，包括猪肉在内的农产品价格整体走势对于通胀的影响还是显著的。 　　我们对农产品价格走势逐一作了判断，概述为以下3类：基本能够实现自给，国内价格更多体现政府意志，如小麦、稻谷、玉米等；基本能够实现自给，政府价格管制能力有限，国内价格有较为固定的运行周期，如食糖、猪肉、水产品等；对国际市场依赖程度高，国内价格跟随国际价格而动，如大豆、棉花等。总体来说，农产品价格上涨趋势已经确立，但4季度以震荡向上为主。 　　4季度通胀应该不会出现，但CPI转正已成必然。农业板块相对于大盘的估值水平和CPI的走势较为一致，因此农产品价格上涨会拉动农业板块估值水平的提高。 　　之前，我们认为农产品价格上涨对于农业板块来说仅是一个趋势性投资机会，对于提升业绩的作用有限。实际上，由于农业上市公司盈利模式差异较大，这个结论过于笼统，有些行业从农产品价格上涨中获益很大，如制糖业和海水养殖业。另外，随着政府对农资产品市场的规范化，粮价平稳上涨也将促使种植等行业盈利能力的稳步提升。 　　基于业绩和估值水平的提升，上调行业投资评级为“谨慎推荐”。个股方面，建议关注成长可期、估值较低的开创国际，受益于农产品价格上涨的北大荒、顺鑫农业、好当家、獐子岛、东方海洋和农产品，具有优势玉米种子品种的登海种业和敦煌种业。对于南宁糖业、新农开发和新赛股份，建议适度关注。 群益证券：通胀将重临 房地产受益 　　自今年八月至今，内房股股价普遍经历调整，主要反映市场忧虑中国政府为房地产市场降温以及今年下半年起新增贷款持续下降等因素。优质内房股估值已回落至吸引水平。事实上，随内地经济复苏以及城市化的高速发展过程，内地二、三线城市对住房需求庞大。此外，市场开始预期中国今年年底通胀重临，尽避流动资金迈向正常化，但在内地欠缺投资出路下，资金仍会在经济持续增长及政府温和政策下流入一线城市住房市场。 　　市场普遍预估美国存在长线上通胀恶化的风险，而市场亦开始预期中国今年年底通胀将重临，因此，两地反映通胀的数据将继续成焦点，而对投资者在资产配置生成一定程度的支配作用。假如将于十月中下旬公布的通胀数据进一步加深市场对中国通胀年底重临的预期，而市场认为美国未来长线通胀恶化的预期进一步加强的话，预计将进一步促使资金投向传统抗通胀产品，预料内地和香港房地产市场将进一步受益。 　资源品再度受宠 通胀预期升温 　　张志斌 　　在第二批创业板公司网上发行的情况下，昨日股指的缩量上涨出乎了很多市场人士的预料，而煤炭石油、有色金属甚至电力、钢铁、地产等板块的强势上行更是使得股指K线呈现阳包阴的强势上攻形态。市场人士认为，随着经济复苏态势的日益明确，市场的通胀预期也在日渐升温，而那些有望受益于通胀的行业正逐渐成为主力资金流入的目标。 　　大智慧Topview数据显示，中国石油(13.45,0.14,1.05%)(601857.SH)、中国神华(34.49,0.60,1.77%)(601088.SH)、中国石化(11.98,0.00,0.00%)(600028.SH)等能源类权重股昨日再度占据上证指数涨幅贡献榜的前列，分别高居第一、第三和第五位，而周一时它们还是股指回调压力的主要来源。以煤炭石油为代表的资源股早盘的强势上涨正是昨日股指顽强上行的主要动力来源，郑州煤电(12.26,0.17,1.41%)(600121.SH)早盘的强势涨停则成为了该板块飙升的导火索。随着能源板块的上涨，有色金属、地产等资源类板块也纷纷出现大幅上涨，从而推动了股指的攀升。 　　天相投顾认为，长假期间外围股市及大宗商品价格的上涨刺激了A股市场的补涨热情，开门红之后，10月市场能否延续这种强势表现，历史是一面镜子，可以折射未来。从历史走势来看，国庆节前若出现一波大幅回落，并在节前止跌企稳，但大趋势仍向上，节后首日大多以红盘报收，且未来仍将有一波上升行情。按照此历史规律，市场前期的持续调整格局有望在节后有所改观。 　　天相投顾表示，从近期全球股市、金价以及油价的联袂上扬来看，以黄金为代表的大宗商品价格的上涨对于股票市场特别是资源类行业具备明显的传导效应。而决定黄金价格未来走势的主要因素，依然是黄金的货币属性。美元走弱、通胀预期、供应约束、投资需求、货币体系重建，这些因素将决定黄金价格继续保持强势。在此背景之下，A股市场中的资源类行业特别是贵金属行业同样值得持续关注。 　　与此同时，在目前通胀压力与产能过剩并存的背景下，很多市场人士看好我国供应偏紧或未来供应增长缓慢的行业，包括资源类的石油、煤炭、有色金属；农产品(10.89,-0.17,-1.54%)类的玉米、猪肉；投资品类的房地产；奢侈品类的大型高档百货、高档白酒、名贵中成药等行业。这其中通胀预期成为了决定行业配置的重要因素之一。 　　国泰君安证券认为，随着经济的进一步复苏，通胀将再次回归，尤其是在2009年如此大的货币投放基础上，M1增速超过30%，而M1增速一般领先CPI大概6个月，明年上半年最起码有温和通胀，而通胀波动的幅度取决于当时的经济复苏程度——产出缺口和流动性投放程度。目前过剩产能现象仍较严重，而需求也只是从低谷复苏，远达不到过热，国泰君安不认为明年上半年产出缺口能达到2007～2008年年初的水平，但单月CPI达到3%～4%不成问题，因此通胀是目前确定性较高的投资主题。在通胀主题下，与消费相关的批发零售、农业和食品饮料业绩上升的确定性更高，因为其受过剩产能和美元波动的影响更小。 　　一位基金业人士也对CBN记者表示，从目前经济运行的态势来看，中国经济出现二次探底的可能性较小，即将公布的三季报宏观数据应该会如市场预期的那样继续出现好转，因此股指目前下行的空间相对较小，相反一旦经济复苏的态势确立，将有效打开股指的上行空间，而上市公司不断改善的业绩也将成为市场底部的强力支撑，A股后市的走势值得看好。 石油化工：原油振荡上行 全行业温和通胀好时机 　　核心观点: 　　原油、成品油：稳步振荡上行，带来全行业温和通胀好时机。目前美国等发达国家石油消费增长现了由负变正的明显好转，中国等发展中国家更是出现了10%以上石油消费增长。这种石油消费的增长主要来自三个方面：一是全球经济恢复使得民间消费信心增长，带动了石油下游消费增长，比如染料和助剂消费和汽车目前就增长很快。二是中国、美国、印度等石油消费大国近期加大了石油战略储备。三是随着北半球冬季取暖季的到来，全球各大石油商取暖油储量必然增加。随着全球经济的好转，目前除馏分油以外的石油库存已经明显下降，我们预计随着北半球冬季取暖油储季的到来，石油库存将全面下降，世界石油需求重现复苏曙光，国际油价将突破横盘整理，稳步振荡上行，带动石化、化工产品价格上行，使全行业出现温和通胀的好时机。 　　石化中间体：将出现明显分化石化中间体价格与国际油价相关性较强，10月份以来，国际原油价格出现了明显的上涨。我们预计，由于石化中间体下游差异性较大，随着医药需求增长、化纤消费回暖，且芳烃类跟随国际油价波动较紧，芳烃将在10月上行的概率较大。烯烃类下游随着房地产复苏而有所增长，但反应略慢一些，预计10月下旬价格将有所上升。醇类因生产过剩，供应充足价格反弹后还将下跌；酮类则因供不应求价格还将继续反弹，但醋酸因纺织需求减少而新增产能较多未来价格很难看好。 　　估值及重点公司中国石油、中国石化两大集团绝对估值显示目前A股价格偏低(H股更具投资价值)，A股相对估值虽然与国际金融危机中的公司相比仍然偏高，但12.9倍PE不能就说一定偏高。我们认为中国正处于重化工业发展阶段，石油消费具备较强的刚性，石化行业利润受金融危机拖累有限，09年国际油价年均值65美元正好进入中国石油、中国石化的最佳盈利区间附近，我们认为应更多地考虑绝对估值的结果，给予石化行业推荐的投资评级。 　　驱动因素、关键假设及主要预测： 　　目前全球石油消费随着经济复苏已经再现明显好转，美国等发达国家石油消费增长现了由负变正的明显好转，中国等发展中国家更是出现了10%以上石油消费增长。这种石油消费的增长主要来自三个方面：一是全球经济恢复使得民间消费信心增长，带动了石油下游消费增长，比如染料和助剂消费和汽车目前就增长很快，特别是发达国家消费的增长已经使我国染料出口环比猛增，染料和助剂的消费从产业链远端带动了石油消费的增长。二是中国、美国、印度等石油消费大国近期加大了石油战略储备，随着中国四大战略储备库的建成，国内石油战略储备日见增长，美国的战略储备近期也出现了较快的增长。三是随着北半球冬季取暖季的到来，全球各大石油商取暖油储量必然增加，尽管有人预测今年暖冬现象比较明显，但石油商油储不会因为天气预测这种不确定因素而改变。随着全球经济的好转，目前除馏分油以外的石油库存已经明显下降，我们预计随着北半球冬季取暖油储季的到来，石油库存将全面下降，世界石油需求重现复苏曙光，国际油价将突破横盘整理，稳步振荡上行，带动石化、化工产品价格上行，使全行业出现温和通胀的好时机。 　　我们与市场不同的观点： 　　市场没有考虑到北半球冬季取暧油在10月份用量的增长，我们是业内第一个提出10月份多数石化产品价格将上行的预测。另外，我们还指出随着国际油价的上升，石化中间体价格将明显分化，芳烃、烯烃涨价而醇类跌价。行业估值与投资建议：受西方金融危机影响，国际石化行业估值仍然处于历史较低水平，以2010年预测业绩计算平均市盈率为9.21倍，平均市净率1.87倍。与国际市场相比，我国以2010年预测业绩计算的行业平均市盈率为12.9倍，平均市净率2.88倍。可见从行业整体估值水平上看，中国石化行业不具备优势，行业REP比较及行业PB与ROE国际比较显示国内石化行业估值略偏高一些。但12.9倍PE不能就说一定偏高。我们认为中国正处于重化工业发展阶段，石油消费具备较强的刚性，石化行业利润受金融危机拖累有限，09年国际油价年均值65美元正好进入中国石油、中国石化的最佳盈利区间附近，我们认为应更多地考虑绝对估值的结果，给予石化行业推荐的投资评级。 　　行业表现的催化剂： 　　2009年受节能减排、环保政策影响，石化小企业将面临较大的成本压力，一些没有竞争优势的小企业(如缺少资源的小炼厂)难逃“关停并转”厄运，面临被大企业集团的整合，因此09年石化行业并购整合与重组将明显加剧，是良好催化剂。另外，国内成品油价格上调及欧3、欧4环保汽油标准的推行都是公司股票表现的催化剂。主要风险因素：石化行业与国际油价相关性极强，国际油价变动幅度较大，向上或向下远超出我们预测的波动区间，国际油价的大幅波动传导到企业利润上致使公司业绩波动超出我们的预期。 　　产业政策比我们预测的还要不利，资源税收政策可能进一步趋严。 　　李国洪 银河证券 有色金属：9月份的进口增加+受益通胀 荐5股 　　10月14日,中国海关总署公布未锻造铜及铜材、未锻造铝及铝材进口数据。 　　点评:10月14日,中国海关总署公布未锻造铜及铜材、未锻造铝及铝材进口数据。具体数据见表,在经历8月份进口环比减少之后,9月份的进口出现增加,表明中国经济复苏强劲,对金属需求形成有力支撑。 　　经济转暖是一个大的趋势,具体转暖的路径当会有曲折而趋势不会改变。我们认为金属行业的景气度会因经济转暖而得到提升。我们维持有色金属行业“增持”的投资评级,在基本金属子行业中,我们认为铜子行业的基本面最佳。影响金价的三大因素使金价长期看好,黄金业业绩的稳定增长预期在有色行业内最为确定,我们长期看好黄金子行业。在二级市场中,黄金、铜两子行业的估值也低于行业平均水平。我们认为该两行业具备趋势性的投资机会。我们重点的关注的个股为山东黄金、中金黄金、江西铜业、云南铜业。关注短期内铅锌业的投资机会,重点关注中金岭南。 　　投资风险:宏观经济尤其是美国经济不能如期转暖;中国经济复苏程度低于预期;板块估值压力。(大通证券)

Five Technologies That Could Change Everything

By MICHAEL TOTTY It's a tall order: Over the next few decades, the world will need to wean itself from dependence on fossil fuels and drastically reduce greenhouse gases. Current technology will take us only so far; major breakthroughs are required. What might those breakthroughs be? Here's a look at five technologies that, if successful, could radically change the world energy picture. They present enormous opportunities. The ability to tap power from space, for instance, could jump-start whole new industries. Technology that can trap and store carbon dioxide from coal-fired plants would rejuvenate older ones. Success isn't assured, of course. The technologies present difficult engineering challenges, and some require big scientific leaps in lab-created materials or genetically modified plants. And innovations have to be delivered at a cost that doesn't make energy much more expensive. If all of that can be done, any one of these technologies could be a game-changer. SPACE-BASED SOLAR POWER For more than three decades, visionaries have imagined tapping solar power where the sun always shines—in space. If we could place giant solar panels in orbit around the Earth, and beam even a fraction of the available energy back to Earth, they could deliver nonstop electricity to any place on the planet. Source: New Scientist Sunlight is reflected off giant orbiting mirrors to an array of photovoltaic cells; the light is converted to electricity and then changed into microwaves, which are beamed to earth. Ground-based antennas capture the microwave energy and convert it back to electricity, which is sent to the grid. The technology may sound like science fiction, but it's simple: Solar panels in orbit about 22,000 miles up beam energy in the form of microwaves to earth, where it's turned into electricity and plugged into the grid. (The low-powered beams are considered safe.) A ground receiving station a mile in diameter could deliver about 1,000 megawatts—enough to power on average about 1,000 U.S. homes. The cost of sending solar collectors into space is the biggest obstacle, so it's necessary to design a system lightweight enough to require only a few launches. A handful of countries and companies aim to deliver space-based power as early as a decade from now. ADVANCED CAR BATTERIES Electrifying vehicles could slash petroleum use and help clean the air (if electric power shifts to low-carbon fuels like wind or nuclear). But it's going to take better batteries. Source: EDSRC In a lithium-air battery, oxygen flows through a porous carbon cathode and combines with lithium ions from a lithium-metal anode in the presence of an electrolyte, producing an electric charge. The reaction is aided by a catalyst, such as manganese oxide, to improve capacity. Lithium-ion batteries, common in laptops, are favored for next-generation plug-in hybrids and electric vehicles. They're more powerful than other auto batteries, but they're expensive and still don't go far on a charge; the Chevy Volt, a plug-in hybrid coming next year, can run about 40 miles on batteries alone. Ideally, electric cars will get closer to 400 miles on a charge. While improvements are possible, lithium-ion's potential is limited. One alternative, lithium-air, promises 10 times the performance of lithium-ion batteries and could deliver about the same amount of energy, pound for pound, as gasoline. A lithium-air battery pulls oxygen from the air for its charge, so the device can be smaller and more lightweight. A handful of labs are working on the technology, but scientists think that without a breakthrough they could be a decade away from commercialization. UTILITY STORAGE Everybody's rooting for wind and solar power. How could you not? But wind and solar are use-it-or-lose-it resources. To make any kind of difference, they need better storage. Source: AEP Battery packs located close to customers can store electricity from renewable wind or solar sources and supply power when the sun isn't shining or the wind isn't blowing. Energy is collected in the storage units and can be sent as needed directly to homes or businesses or out to the grid. Scientists are attacking the problem from a host of angles—all of which are still problematic. One, for instance, uses power produced when the wind is blowing to compress air in underground chambers; the air is fed into gas-fired turbines to make them run more efficiently. One of the obstacles: finding big, usable, underground caverns. Similarly, giant batteries can absorb wind energy for later use, but some existing technologies are expensive, and others aren't very efficient. While researchers are looking at new materials to improve performance, giant technical leaps aren't likely. Lithium-ion technology may hold the greatest promise for grid storage, where it doesn't have as many limitations as for autos. As performance improves and prices come down, utilities could distribute small, powerful lithium-ion batteries around the edge of the grid, closer to customers. There, they could store excess power from renewables and help smooth small fluctuations in power, making the grid more efficient and reducing the need for backup fossil-fuel plants. And utilities can piggy-back on research efforts for vehicle batteries. CARBON CAPTURE AND STORAGE Keeping coal as an abundant source of power means slashing the amount of carbon dioxide it produces. That could mean new, more efficient power plants. But trapping C02 from existing plants—about two billion tons a year—would be the real game-changer. Source: Vattenfall Carbon dioxide is removed from smokestack gases and compressed. It's then pumped deep underground and stored in porous rock formations. Techniques for modest-scale CO2 capture exist, but applying them to big power plants would reduce the plants' output by a third and double the cost of producing power. So scientists are looking into experimental technologies that could cut emissions by 90% while limiting cost increases. Nearly all are in the early stages, and it's too early to tell which method will win out. One promising technique burns coal and purified oxygen in the form of a metal oxide, rather than air; this produces an easier-to-capture concentrated stream of CO2 with little loss of plant efficiency. The technology has been demonstrated in small-scale pilots, and will be tried in a one-megawatt test plant next year. But it might not be ready for commercial use until 2020. NEXT-GENERATION BIOFUELS One way to wean ourselves from oil is to come up with renewable sources of transportation fuel. That means a new generation of biofuels made from nonfood crops. Researchers are devising ways to turn lumber and crop wastes, garbage and inedible perennials like switchgrass into competitively priced fuels. But the most promising next-generation biofuel comes from algae. Algae grow by taking in CO2, solar energy and other nutrients. They produce an oil that can be extracted and added into existing refining plants to make diesel, gasoline substitutes and other products. Algae grow fast, consume carbon dioxide and can generate more than 5,000 gallons a year per acre of biofuel, compared with 350 gallons a year for corn-based ethanol. Algae-based fuel can be added directly into existing refining and distribution systems; in theory, the U.S. could produce enough of it to meet all of the nation's transportation needs. But it's early. Dozens of companies have begun pilot projects and small-scale production. But producing algae biofuels in quantity means finding reliable sources of inexpensive nutrients and water, managing pathogens that could reduce yield, and developing and cultivating the most productive algae strains. — Mr. Totty is a news editor for The Journal Report in San Francisco. He can be reached at michael.totty@wsj.com.