Capital Markets Lab Weekly Market Wrap Up, September 6 – September 10, 2010

US Economic Data

Initial and Continuing claims

Initial claims came in better than expected for last week. The estimate was that 470 thousand jobs would be lost and instead only 451 thousand jobs were lost. Continuing Claims came in worse than expected. The expectation was of continuing insurance benefits for 4,450,000 unemployed Americans and instead 4,478,000 unemployed Americans sought continued insurance compensation. America has now officially been in recession for about three years. The unemployment numbers are an improvement when looked over on a week to week basis. However, initial claims have been hovering around the same 400k-500k range since the middle of 2009. There are a variety of structural issues, inherent in the system, which are haulting a recovery in the labor market.

  1. America, in recent years, has implemented more reforms targeted at creating a larger social safety net. As a result, there is less incentive to work again.
  2. Growth in the job numbers have predominantly come from the public sector rather than the private sector. The public sector cannot create sustainable and useful jobs.
  3. Tax laws have been all but certain. Businessmen may know that taxes will rise in the future yet there is still a great deal of uncertainty in how much. This makes capital budgeting for projects and for reporting purposes difficult. It makes it difficult, on the margin, for a business to hire another employee.
  4. Over-unionization has made it difficult for American manufacturers to compete. Pensions and health care benefits reduce profitability substantially. Reduced profits results in reduced employment.

Americans also need productive jobs. Milton Friedman said in a debate once:

“If all we want are jobs, we can create any number–for example, have people dig holes and then fill them up again, or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.”

The point is particularly poignant today. With public payrolls outstripping private payrolls and the public sector growing while the private sector contracts we should evaluate how to better foster American entrepreneurial spirit.

– Robert Belsky

U.S. Mortgage Index Falls

For the first time in six weeks, the number of U.S. mortgage applications has declined due to the fact that the number of people refinancing reduced dramatically by 3.1%. By the week ending September 3rd, the MBA’s (Mortgage Bankers Association) index reduced around 1.5% even though the purchasing applications increased to 6.3%. This decline in refinancing is due to the fact that mortgage rates rose from a record low in the past six weeks.

Since 1990, the lowest average rate was 4.43% for a 30- year fixed mortgage, which was prevalent until last week and then went up to 4.50%. Moreover, for a 15- year fixed loan, the average rate increased from 3.88% to 4.0% and for a 1- year adjustable loan the rate increased from 6.95% to 7.0%. However, of all the loans last week, 82% of it accounted for refinancing rather than purchases showing that even though the volume of refinances dropped, it still remains near the recent highs due to the low mortgage rates than what were available years back. Hence, even though the employment numbers in August and the pending home sales in July crossed expectations, it looks as if the housing market is yet to catch up without any major shifts in the recent trend being foreseen in the near future.

– Rowena Zacharia

US Market News

Goldman Sachs – To Close Proprietary Trading Business

In reaction to the recently passed Dodd-Frank Wall Street Reform Act, it has become known that Goldman Sachs Group Inc. is eliminating its proprietary trading business arm. This business, which was known as Goldman Sachs Principle Strategies, engaged in trading with the firm’s capital, an action now prohibited under the recently passed reform bill. The reason is that the bill enforces the “Volker Rule”, which does not allow banks to have proprietary trading units, or to be invested in hedge funds. For Goldman Sachs, this is not great news. Their proprietary trading unit was extremely successful, accounting for about 10% of the firm’s revenue, and at one point did not have a single daily loss for the entire first quarter of 2010. The trading group staffed about 70 members, who are reportedly being offered positions in other areas of the firm, or branching out to the buy-side and starting up their own funds.

Although the Dodd-Frank Act gives banks at least four years to disband their respective trading groups Goldman Sachs and other banks, decide now is better than later. As legal analyst Gary Townsend said to Bloomberg Television, “What’s motivating people is that they need to know where they are going, and no one wants to be the last group out the door…it’s really the personnel decisions that are driving this to happen sooner rather than later”. It has been reported that a number of firms are targeting the Goldman Sachs trading unit, among them are Kohlberg Kravis Roberts (KKR), Perella Weinberg Partners, Pimco, The Carlyle Group and BlackRock (BLK).

– Alex Tarhini

Bristol-Myers Purchases ZymoGenetrics for $885 Million

Bristol-Myers Squibb Company announced its intention to purchase ZymoGenetrics, Inc. at a price $9.75 paid in cash. According to the press release, the total cost of the deal is valued at $885 million, an 84% premium to Tuesday’s trading price. Bristol Myers currently holds an extensive portfolio of cancer, cardiovascular, HIV, Hepatitis, and psychiatric drugs. The purchase of the company allows Bristol-Myers to strengthen its portfolio of drugs to treat patients with Hepatitis C. Prior to buyout, Bristol-Myers held approximately 37% of the outstanding shares in the company and they have already engaged in a deal with ZymoGenetics to tender their shares over the next several weeks.

According to the US Center for Disease Control, there “exists safe and effective vaccines” available for Hepatitis B and A, but no such vaccine exists for Hepatitis C. As of 2007, the most recent survey year, Hepatitis C has infected approximately 17,000 people in the US, or a rate of 0.3 cases per 100,000. Since there is no cure for Hepatitis C, the acquisition of ZymoGenetics, through the ownership of the patent, allows Bristol-Myers to retain a competitive position for years to come. Once again as we have mention over the previous weeks, firms are entering a variety of deals in order to eliminate competitors and searching for useful ways to put their cash to good use. With an economy that has decelerated slightly, acquisitions seem like the only way for firms to improve their earnings and competitive position.

– Michael Alfaro

Article submitted by: Michael Alfaro, Robert Belsky, Alex Tarhini and Rowena Zacharia of the Capital Markets Lab. To learn more about the Capital Markets Lab please visit their web site View all articles by Capital Markets Lab

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