California export trade improves slightly in September

Many economists use California's export trade as a gauge of the state's rebound potential.

According to September's numbers, we still have a long way to go.

Merchandise export trade, at $10.35 billion in September, was up 3.2% from August, but still down 16.3% from the same month last year, according to an analysis of Commerce Department data released by the University of California Center  Sacramento today. 

"September's figures represent modest progress in growing California's export trade," said Jock O'Connell, international trade and economics advisor at the University of California Center.

Agricultural exports fared better than those of manufactured goods, with total ag shipments declining 8.2% from last year. Almond exports in particular are quite healthy, O'Connell said.

Exports of manufactured goods, on the other hand, were down 19.3% from September 2008, indicating that California's days as a manufacturing center are continuing to slip away, O'Connell said.

"It's a long-term process as California becomes less and less dependent on manufacturing facilities," he said.

Two bright notes in the data: Airborne exports were up 1.3% over last year at LAX. And the number of loaded containers sailing from the port of Oakland was up 12.5% from last year.

Overall, the data "suggest that Northern California may be turning the corner faster than Southern California," O'Connell said.

California exports have totaled $86.5 billion in 2009, down 22.3% from the first nine months of 2008.

-- Alana Semuels

New York governor sees risk of California bond default

Besides understanding his own state’s finances, New York Gov. David Paterson apparently has an excellent grasp of California’s fiscal situation.

So much so, in fact, that Paterson feels confident speculating publicly about the probability of California eventually defaulting on its municipal bond debt.

In a Bloomberg Radio interview on Thursday, Paterson described his plans for dealing with New York’s financial woes, and why it was important to avoid budget "gimmicks which grind up your credit rating."

New York still has an "AA" credit rating from Standard & Poor’s, compared with California’s "A" rating, which is the lowest of any state.

From there the governor, a Democrat, segued into California’s plight as he sees it:

"Now many of the legislatures don’t understand what a downgrading in a credit rating is eventually going to do. They need to go spend a few weeks in California, it might be a good investment for us to send them there because California is in a state which, I don’t know, in spite of the valiant efforts of their governor, I don’t know that California can remain in a place where they don’t inevitably go into default."

Did Paterson really mean to suggest that the largest state in the Union will stiff the investors who own tens of billions of dollars of its bonds?

A spokesman said Thursday that "Gov. Paterson was simply expressing the fact that states face a variety of financial risks in the current economic and revenue environment. He did not say California will go into default."

But what do you suppose New Yorkers’ reaction would be if Gov. Arnold Schwarzenegger were to opine publicly that "I don’t know that New York can remain in a place where they don’t inevitably go into default"?

For the record, the California Constitution mandates that state tax revenue must go first to pay education costs, and second to repay general-obligation bond debt. All other expenses are subordinate to those two.

Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer, said the treasurer would be "happy to have not just the legislature of New York but also the governor come out to California so we can show how we have a perfect record of paying investors in full and on time, and how we will maintain that spotless record."

Plus, we have many empty hotels that would love the business of some free-spending New York pols.

-- Tom Petruno

Photo: New York Gov. David Paterson. Credit: Tim Roske / Associated Press

Bad combo: Speculators fear 'double-top' in key markets

Has the "carry trade" become too tired to carry on in the short term?

Thursday’s session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular (maybe too popular) strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets worldwide -- might be getting anxious to lock in gains after markets’ powerful run since July.

"It’s prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

The percentage changes in markets Thursday weren’t huge -- the Standard & Poor’s 500 index lost 1%, to 1,087.24, while the DXY index of the dollar’s value against six other major currencies rose 0.7% -- but some traders were pointing nervously to a potential "double-top" pattern on their charts. (Think: Bactrian camel.)

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same potential double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended Thursday at $1.485.

The euro also peaked out around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored targets of the carry-traders, "You couldn’t take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and amid reports that Thailand, Russia and other countries have been buying dollars to try to slow their own currencies’ advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

-- Tom Petruno

Playboy said to be in takeover talks

Shares of Playboy Enterprises Inc. have surged today on a report that the company might sell itself.

The publisher’s Class B stock was up 79 cents, or 28%, to $3.65 about 11:15 a.m. PST, after Bloomberg News said brand-licensing firm Iconix Brand Group Inc. was in deal talks with Playboy.

Money-losing Playboy replaced longtime Chief Executive Christie Hefner with Scott Flanders in June, and has been looking for a potential buyer since then, Bloomberg said, citing an unnamed source. Read the full story here.

Playboy’s sales have crumbled since 2007, falling to $56 million in the third quarter from $83 million in the same quarter of 2007.

Hugh Hefner still controls the company via his 70% stake in the Class A stock. The Class B shares don’t have voting rights.

Playboy is a classic example of a company that never should have gone public, at least from investors’ point of view. Except for a spike in the share price to $33 during the dot-com frenzy of 1999, the stock has mostly been a dud for decades -- fun for savvy short-term traders, maybe, but a bomb for long-term investors.

-- Tom Petruno

Study: Nine states risking California-style 'fiscal peril'

If misery loves company, the Pew Center on the States public policy think-tank has some comforting words for Californians: Though our fiscal problems "are in a league of their own . . . some of the same factors driving California toward the brink of insolvency also are hurting an array of other states."

Do you feel better already?

A new study from the non-partisan Pew -- "Beyond California: States in Fiscal Peril" -- looks at nine states that the organization asserts aren’t far behind the Golden State in suffering havoc from the Great Recession. The nine, alphabetically: Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

The Pew scored all 50 states based on six factors that "contributed substantially to California’s ongoing fiscal woes": high foreclosure rates; increasing joblessness; loss of state revenues; the relative size of budget gaps; legal obstacles to balanced budgets (specifically, a supermajority requirement for some or all tax increases or budget bills); and poor money-management practices.

California, of course, scored worst of all, but it was closely followed by Arizona, Rhode Island and Michigan, in that order.

Considering that Arizona and Nevada, in particular, might be expected to benefit as business refuges from California’s nightmare, here’s what the Pew study has to say about those two states:

--- Arizona: "As the economic news grew bleaker and state revenues sank during the past two years, Arizona’s lawmakers relied on one-time fixes to balance its budget instead of making long-term changes. In part, they were hamstrung by voter-imposed spending constraints, a tax structure highly reliant on a growing economy and a series of tax cuts, made in the 1990s, that has limited revenue. At this writing, policy makers still had not decided how to bridge a $1 billion gap in the current fiscal year’s budget."

--- Nevada: "Nevada’s unique gaming-based economy is in jeopardy, as its state budget relies on gambling and sales taxes to provide 60% of its revenues. Year-over-year revenue has fallen for two consecutive years, a record. But changes to the tax system are difficult to make because, unlike most states, Nevada has written some of its tax laws into the state constitution. So increasing the sales tax or adding an income tax, for example, would be nearly impossible because it requires voters to amend the constitution."

And what did Wisconsin, California’s dairy rival, do wrong to get on the Troubled-10 list?

"The recession has hit Wisconsin harder than most state governments, especially when it comes to lost tax revenues and the size of the hole in its budget," the Pew study says. "Wisconsin’s history of budget shortfalls and pattern of borrowing frequently to cover operating expenses, among other measures, made it poorly positioned to weather the most recent severe economic downturn."

At the opposite end of the spectrum, Wyoming scored best in the Pew study, followed by Iowa and Nebraska (tied for second place) and Montana, North Dakota and Texas (tied for third).

Are the Great Plains states the economic future of America?

-- Tom Petruno

Kentucky Derby track owner to buy Youbet.com

Burbank-based online horse-betting firm Youbet.com Inc. said Wednesday that it agreed to a buyout by racetrack owner Churchill Downs Inc., which also controls a rival online-betting operation.

The cash-and-stock deal is worth $127 million, though Youbet.com shareholders are getting a price well below their stock’s recent peak.

With attendance at racetracks on the decline, the merger is a bet that more people can be enticed to play the ponies online, says my colleague Nathan Olivarez-Giles, who wrote a profile of Youbet.com for The Times last week.

Together, Churchill (via its TwinSpires.com website) and Youbet.com will control about half of the online horse-betting market, Olivarez-Giles says.

Louisville, Ky.-based Churchill, which owns the racetrack that hosts the Kentucky Derby as well as other tracks in Florida, Illinois and Kentucky, agreed to pay 97 cents a share in cash for each Youbet.com share, plus 0.0598 shares of Churchill stock.

Based on Churchill’s closing stock price of $31.57 on Wednesday, that works out to a value of about $2.86 a share.

That price is a premium of 19% above Youbet.com’s closing share price of $2.41 on Wednesday, when the shares gained 19 cents, or 8.6%, for the day. The deal was announced after markets closed.

But Youbet.com shares had reached a 2 1/2-year high of $3.72 in late July, before tumbling in August.

Churchill and Youbet.com said their marriage would allow the combined firm "to pursue other online business opportunities beyond pari-mutuel wagering, should such opportunities develop."

Youbet.com earned $878,000 on sales of $27.9 million in the third quarter. Churchill lost $2.3 million on sales of $101 million, but the company makes most of its money each year in the spring quarter.

-- Tom Petruno

Michael Hiltzik: California and the history of Fender guitars

One can while away the hours debating what is California's best-known export. The avocado? The microprocessor? The Real Housewives of Orange County?

As my column for Thursday suggests, the Fender electric guitar deserves pride of place in this roster for its enduring position in the market for musical instruments. Leo Fender built the first model in the mid-1940s in his Fullerton workshop, precursor to the company's current facility in Corona.

Since then the company had had its ups and downs, including a 20-year stretch under the ownership of CBS Inc., but its executives today say they're in California to stay. Fender isn't immune to the travails that other California manufacturers complain about, including high costs and expansive regulations, but its executives say the state has compensating virtues for the firm -- a link to its history, a cachet all its own, and trained, loyal workers.

The column begins below.

The sound of California business success came to my ears the moment I stepped through the door of Fender Musical Instruments Corp.’s 3-acre manufacturing plant in Corona.

It reached me as riffs and scales on electric guitar, audible over the thud of metal stamping and the grind of band saws that one might customarily hear on a factory floor.

But this is no ordinary plant. The last step in Fender’s quality-control process requires an experienced musician to play every note on a finished guitar, listening for a stray vibration or tuning flaw to be corrected before any model, including the American Standard Stratocaster that is the plant’s bread and butter, reaches a dealer.

Fender’s Corona shop is a testament to how U.S. manufacturing -- California manufacturing, especially -- can survive in a world where even complex products such as microprocessors can be turned out by the millions by unskilled laborers overseas.

The secret is to marry assembly-line efficiency and hand-tooled precision. Much of Fender’s manufacturing process, including the rough cutting of the guitar body and the stamping of the metal parts (some still based on dies cut personally by Leo Fender, the company’s founder), is at least partially automated. But there’s no substitute for the hand-finishing, polishing and tuning of the hundreds of American Standard Stratocasters and Telecasters, along with other high-end guitars, produced each day by a workforce of 600 in Corona.

Read the whole column.

-- Michael Hiltzik

AIG chief says he's 'committed' to staying despite battle with U.S. over pay

American International Group Inc. Chief Exeuctive Robert Benmosche today sought to play down published reports that’s he’s ready to jump ship because of frustration with his federal masters over executive pay issues.

After a Wall Street Journal story said that Benmosche was threatening to leave AIG -- just three months after taking the helm -- the CEO sent a letter to employees insisting that he was "totally committed to leading AIG through its challenges."

AIG shares, which fell as low as $36.02 today, rebounded to $37.99 after the letter was reported but have since drifted lower again.

Benmosche, who was named to the CEO job in August, hasn’t been afraid to take on the government despite its 80% ownership of the company since last year’s federal bailout.

From Benmosche’s letter, which the Journal posted on its website:

I’m sure many of you were concerned to see this morning’s news accounts speculating about my frustration with the time and effort it is taking to ensure that our top 100 executives are compensated fairly. To be certain, I and the Board are indeed frustrated and we are in ongoing discussions with Treasury and the Special Master to resolve the uncertainty surrounding this issue. However, as I have said before, the vast majority of AIG employees are unaffected by this issue.

Let me be clear: I and the Board remain totally committed to leading AIG through its challenges and to continuing to fight on your behalf. We are all working aggressively to overcome this compensation barrier that stands in the way of restoring AIG’s value and allowing us to live up to our obligations to all stakeholders: our customers, who have remained loyal; our nearly 100,000 employees, including 46,000 here in the U.S.; our shareholders and creditors.

The U.S. took a majority stake in AIG in return for keeping the company afloat amid the financial system meltdown. The government’s stake means the administration’s pay czar, Kenneth Feinberg, has the right to reject executive-compensation arrangements that he believes are unwarranted.

The Journal story said Benmosche believed he was in an "impossible situation" trying to balance government pay restrictions against the need to retain top AIG staff.

-- Tom Petruno

Yes, Geithner's just kidding about a 'strong dollar'

Despite Treasury Secretary Timothy Geithner’s latest emphatic statement about the need to "maintain a strong dollar," financial markets know he’s not serious.

The Obama administration, like the Bush administration before it, pays lip service to the idea of keeping the greenback strong even as the currency continues to lose value against its major and minor foreign rivals.

This is theater, but it’s still important in the scheme of things, says Dan Katzive, currency strategist at Credit Suisse in New York.

Although global markets fully expect the dollar to stay weak because of rock-bottom U.S. short-term interest rates and soaring federal borrowing (among other reasons), Katzive notes that it’s in everyone’s interest for any further decline in the buck to remain orderly -- which pretty much describes the drop since 2001.

The last thing the world needs is a sudden dollar collapse that could trigger market pandemonium.

The DXY index of the dollar’s value against six major rivals, including the euro and the yen, is down 37% since mid-2001, including this year’s slide of 7.6%.

With traders already inclined to keep selling the U.S. currency, imagine the market's reaction if Geithner were to say, "You know, we’ve thought about it, and we’d really like to see the dollar fall a lot more."

Even if the administration believes that -- given that a weakening buck is a boon to U.S. exporters -- no one in a position of power is going to say so, for fear of waving a red flag at markets.

Instead, by reiterating the stock phrase about dollar strength, "They’re assuring the markets that the U.S. isn’t going to talk the dollar down," Katzive says.

Besides, the administration has to be figuring there’s no reason to mess with success.

Consider: One long-term concern about a falling dollar is that it could undercut U.S. financial markets by scaring away foreign investors, whose dollar-denominated assets lose value as the greenback falls.

But the Treasury bond market isn’t suffering from a lack of investor demand even as the administration borrows record sums. And the U.S. stock market, too, remains robust, as investors see dollar weakness as good news for American multinational firms. The Dow Jones industrials are at a new one-year high today.

"It’s the best of everything right now," says Win Thin, a currency strategist at Brown Bros. Harriman in New York.

-- Tom Petruno

Photo: Treasury Secretary Timothy Geithner. Credit: Chris Ratcliffe / Bloomberg News

California debt binge shakes up muni bond market

The municipal bond market’s message to California: Enough with the borrowing already!

Over the last seven weeks the state has sold more than $21 billion of short- and long-term debt for budget-related reasons and to finance voter-approved infrastructure projects.

That flood -- in a period when muni bond yields nationwide already were rebounding after diving in summer -- has helped to boost yields more than they might otherwise have risen, some analysts assert.

"Yields are higher because California has so much paper in the market," said Matt Fabian, who tracks muni bond trends at Municipal Market Advisors in Westport, Conn.

The state has been its own worst enemy: Its borrowing costs have risen with each bond deal, which means taxpayers will bear a bigger hit to service the debt over time.

Rising market yields also have the effect of devaluing older fixed-rate muni bonds. If you own a California muni-bond mutual fund, chances are its share price has been sliding since the end of September as the  market has suffered indigestion from the supply of new bonds.

In California’s latest offering -- a sale Tuesday of nearly $1.9 billion of bonds maturing in June 2013 -- the state had to pony up for a 4% annualized tax-free yield to lure investors to the deal.

Less than two weeks ago the state paid a yield of 2.48% on a bond with a similar maturity.

Investors’ ability to squeeze 4% out of the state in this week’s deal "is an expression of saturation of the market" by California, said George Strickland, a muni bond fund manager at Thornburg Investment Management in Santa Fe, N.M.

Demand for the bonds sold Tuesday also may have suffered because the deal stemmed from one of the gimmicks concocted by the Legislature and Gov. Arnold Schwarzenegger in July to close the state’s huge budget deficit: The proceeds will repay local governments for the $2 billion in property tax revenue that the state is borrowing from them to plug the budget gap.

The bonds become part of the state’s overall debt burden, but they’re a step below so-called general obligation issues, which have an iron-clad repayment guarantee in the state Constitution.

Treasurer Bill Lockyer obviously knows that he has dumped a lot of debt on the market this autumn. He didn’t have much choice, given the budget fixes ordered by the Legislature, and given the backlog of infrastructure bonds California has to sell.

The state’s borrowing plans had been put on hold for much of this year because of the deepening budget crisis. "We had a lot of work to do to get our financing program back on track" this fall, said Tom Dresslar, Lockyer’s spokesman.

Of course, for investors with money to put to work, rising muni yields are welcome.

Ken Naehu, who manages bond investments at Bel Air Investment Advisors in L.A., believes the state’s budget woes are far from over, which Schwarzenegger acknowledged Tuesday. Still, a 4% tax-free yield on a bond maturing in less than four years was too good an opportunity to pass up, he said.

"We gave them a large order," Naehu said.

-- Tom Petruno

Small-business optimism rises, but job machine 'still in reverse'

An index of small-business optimism reached a 13-month high in October, but has a long way to go to return to some semblance of normalcy, according to a report Tuesday from the National Federation of Independent Business.

The group said its members overall continued to report weak sales and more plans to cut jobs, raising doubts about the strength of the economic recovery.

The NFIB asks members monthly about their sales, earnings, hiring and other issues. From those results the group calculates its optimism index.

The October survey of 2,059 small firms nationwide put the index at 89.1, up from 88.8 in September and the third straight increase. It’s also up sharply from the recession low of 81 reached in March.

But the index has dived from the 100 level three years ago.

And as the NFIB notes, in the terrible economy of 1980-82 (which saw back-to-back recessions) the index was below 90 in just one quarter. "In this recession, the index has been below 90 for six quarters, indicative of the severity of this downturn," the group said.

Some highlights from the October survey results:

--- A net 11% of small companies expect business conditions to improve over the next six months, up 3 points from September but historically low. "Consumer spending is weak, recent reports on consumer sentiment are discouraging, and there is nothing on the table in Washington to make owners more optimistic about the future, a recipe for depressed expectations and spending plans," the NFIB said.

--- Widespread price cutting continued to contribute to reports of lower sales.

--- Over the next three months 16% of firms plan to reduce employment, the same percentage as in September, and 9% plan to create new jobs (up 2 points). "The job-generating machine is still in reverse."

--- For firms attempting to borrow, "Getting a loan continues to be difficult, with a net 14% reporting loans harder to get than in their last attempt. With very weak plans to make capital expenditures, add to inventory and expand operations, it would appear that many of those trying to borrow are having cash flow difficulties due to very weak sales (most frequently reported as the top business problem)."

--- The good news, such as it is: "Neither labor costs nor materials costs are seriously pressuring owners."

-- Tom Petruno

California forced to boost yield on bond sale to lure buyers

California has stumbled badly in its latest foray into the municipal bond market -- a sign that investors are overloaded with the state’s debt.

Borrowing $1.9 billion Tuesday via bonds that mature in June 2013, the state was forced to pay a 4% annualized tax-free yield to lure investors to the deal.

Just last Friday the brokerages underwriting the deal, led by Goldman Sachs, had estimated that the bonds could be sold at a yield of 3%.

Individual investors put in orders for $621 million of the securities, or about 33% of the total. But that wasn’t enough to give the state much leverage with the institutional investors whose demands determined the final yield on the debt.

The bonds were issued by the California Statewide Communities Development Authority, but it’s the state itself that’s on the hook. The proceeds will repay cities and counties for the $2 billion in property tax revenue that the state is borrowing from them -- some would say, stealing from them -- under terms of the budget deal the Legislature and Gov. Arnold Schwarzenegger reached in July.

California has borrowed heavily in recent months for budget-related reasons and to fund long-term infrastructure projects, and Treasurer Bill Lockyer has been selling into a market that has demanded ever-higher yields on Golden State debt.

That’s good for investors, but taxpayers will pay the price.

-- Tom Petruno

Hurt us and you hurt the planet, Goldman Sachs CEO says

The best defense is a good offense, or so the old line goes.

That seems to be the playbook at the moment for Goldman Sachs Group CEO Lloyd Blankfein.

To many Americans, Goldman has become the preeminent symbol of Wall Street arrogance and greed -- the great vampire squid, as Rolling Stone’s Matt Taibbi famously labeled the firm.

Some in Congress, along with heavyweights such as former Federal Reserve Chairman Paul Volcker, want to break up the biggest financial institutions -- and restore the division between commercial banking and Wall Street -- to lessen the risk of another systemic meltdown.

But twice now this week Blankfein has insisted that the country badly misunderstands his company and its contributions to the well-being of humanity.

"Most of the activities we do, and you can be confused if you read the pop press, serve a real purpose," Blankfein said at a conference today in New York, according to Bloomberg News. "It wouldn’t be better for the world or the financial system" to change Goldman’s activities, he said.

Over the weekend the Times of London published a long feature on Goldman that included an interview with Blankfein. He was self-deprecating but wholly unrepentant about the firm’s power and massive profitability.

From the Times:

"I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

That doesn’t wash with Simon Johnson, a finance professor at the Massachusetts Institute of Technology and former economist at the International Monetary Fund.

In a radio interview with Bloomberg News today, Johnson said that Goldman’s assets had nearly quadrupled over the last decade. "What have we gained from a societal perspective from Goldman Sachs becoming four times bigger? Nothing," Johnson said. "Break Goldman Sachs up into four pieces, let them choose how they break up."

-- Tom Petruno

Photo: Goldman Sachs CEO Lloyd Blankfein. Credit: Spencer Platt / Getty Images

Why the new love for the old Dow

For Wall Street’s bulls, bigger now is a better idea.

Shares of the largest, best-known U.S. companies are spearheading the market’s latest advance -- a switch from the first seven months of the rally, when small-company stocks mostly led the charge.

Some investors may just be figuring that, if they’re going to get aboard the bull market at this point, it’s safer to stick with the most familiar and most liquid issues.

The 30-stock Dow Jones industrial average closed at a new one-year high Monday, rising 203.52 points, or 2%, to 10,226.94. American Express Co., Caterpillar Inc. and United Technologies Corp. were among Dow members reaching their highest levels in at least a year.

By contrast, though most broader market indexes also advanced they remained below their recent highs. The Russell 2,000 small-stock index, for example, gained 11.96 points, or 2.1%, to 592.31. That left it 5% below its one-year closing high of 623.94 reached Oct. 14.

When the market surge began in early March, buyers did what they usually do at major turning points, which is to favor the most beaten-down stocks, betting that they’ll snap back the fastest. And as usual in bear markets, small-company stocks had suffered much greater losses than blue chips from September 2008 to March.

The snap-back bet on small stocks worked beautifully: The Russell 2,000 index soared 76% from March 9 to Sept. 30, far exceeding the 48% gain in the Dow index in that period.

But since Sept. 30 the Dow has pulled ahead, rising 5.3% while the Russell index has lost 2%.

Sam Stovall, chief investment strategist at Standard & Poor’s in New York, says it’s typical for big-name stocks to take the lead in the second year of bull markets. Given the magnitude of the market’s gains since March, some investors may already be moving out of smaller issues and into blue chips with four months yet to go before the bull reaches its one-year anniversary, he said.

The mega-companies’ stocks have three other things working in their favor. One is the continuing slide in the dollar, which can be a boon to U.S. exporters by making their products cheaper for foreign buyers, of course.

Second, given nagging doubts about the U.S. economy’s growth prospects, many investors are looking to multinational firms for their overseas growth potential. McDonald’s Corp. shares rose 1.5% to $62.64 Monday, the highest since January, after the company said that same-store sales were up 3.3% in October from a year earlier -- with all of that improvement coming from foreign stores.

Third, investors who are jumping into stocks now may want to be sure they also can jump out quickly, should some out-of-the-blue bolt of bad news trigger a serious plunge. That’s an argument for owning the most liquid, easy-to-sell shares, and those are the names in the Dow.

-- Tom Petruno

Photo: The Wall Street bull statue in lower Manhattan. Credit: Robert Caplin / Bloomberg News

East West shares soar after deal to buy failed rival

Wall Street thinks Pasadena-based East West Bancorp made a sweet deal to buy rival United Commercial Bank in a takeover brokered Friday by the Federal Deposit Insurance Corp.

Shares of East West -- which now becomes by far the largest U.S. bank focused on the Chinese American market -- have rocketed more than 50% today. The stock was up $4.81 to $13.46 at about 12:20 p.m. PST.

The FDIC seized loss-ridden United Commercial on Friday and agreed to sell the San Francisco-based lender to East West. The deal will boost East West’s assets to about $19 billion, from $12.5 billion. The FDIC agreed to cover most of the expected additional losses on United Commercial's loan portfolio.

As my colleague E. Scott Reckard detailed over the weekend:

The takeover will greatly expand the reach of East West, which has concentrated on Southern California and the San Francisco Bay Area. In addition to 69 California offices, East West has full-service branches in Houston and Hong Kong.

United Commercial not only has dozens of branches in California but also has locations in key Chinese American areas, including New York, Boston, Seattle, Atlanta and Houston.

What's more, because of its 2007 acquisition of a Shanghai bank, United Commercial also has a banking license in China -- a "rare and hard-to-come-by" asset that makes it easier to operate and expand in that country, said RBC Capital Markets analyst Joe Morford. It has full-service offices in Shanghai, Hong Kong and Shantou, China.

Even though East West, too, is in the red this year as loan losses mount, Wall Street clearly now sees the bank as a survivor. Still, the stock remains far below its record high of $43.30 in 2004.

Several brokerage analysts rushed to boost their ratings on East West today. Michael Diana of Noble Financial Group in New York raised his rating to "buy" from "hold," citing the potential for "massive" cost savings in the merger from what he figures will be consolidation of overlapping East West and United Commercial branches in California.

East West CEO Dominic Ng, however, told The Times that he expected to see only a "few" branch closings as a result of the deal.

Morgan Stanley analyst Ken Zerbe boosted his East West rating to "overweight" from "equal weight," and Sandler O’Neill analyst Aaron Deer removed his "sell" rating, raising the stock to "hold."

-- Tom Petruno

Photo: East West CEO Dominic Ng. Credit: Mark Boster / Los Angeles Times

Dow at new one-year high as stocks jump worldwide

The bears are being routed worldwide today as investors find plenty of reasons to buy stocks and not many reasons to sell.

The Dow Jones industrial average was trading at a new one-year high at about 11 a.m. PST, up 176.84 points, or 1.8%, to 10,200.26. That tops the recent closing high of 10,092.19 on Oct. 19.

Other major U.S. indexes also are up sharply, though still below their recent peaks. The Nasdaq composite, up 34.30 points, or 1.6%, to 2,146.74, is within 1.4% of its closing high of 2,176.32 on Oct. 19.

Today’s rally is rooted in faith that the global economy won’t go back into the soup. That sentiment got a boost after finance ministers and central bank chiefs of the G-20 nations met over the weekend in Scotland and pledged not to rush to remove fiscal and monetary support programs.

"We agreed to maintain support for the recovery until it is assured," the group said in a statement.

That helped stoke investors’ appetite for risk-taking as markets opened today. Emerging-market stocks are among the day’s biggest gainers. The Indian market jumped 2.1%, Russian stocks surged 5% and the Brazilian market is up 2.4% so far.

Commodity prices also are broadly higher, led by oil, corn, cotton and gold, with the yellow metal at a new all-time high of $1,102.20 an ounce, up from $1,095.10 on Friday.

With risk takers on a roll, the dollar is the day’s loser -- but it’s clearly not hurting the mood on Wall Street. The DXY index of the dollar’s value against six other major currencies is down about 1%.

As for concerns that the U.S. House’s passage of the $1.1-trillion healthcare reform bill would hammer medical-related stocks -- well, not today. Most major drug stocks are trading higher (Merck is up 65 cents to $33.24) and an index of 11 big HMO stocks, including Wellpoint Inc. and UnitedHealth Group Inc., is up 1.5% to a new 52-week high.

Even the bond market is cooperating with stock bulls today: Despite the dollar’s slide Treasury bond yields are flat compared with Friday.

-- Tom Petruno

Photo: Richard Drew / Associated Press

Gold bulls bet the real crowd has yet to arrive

The gold-bull bandwagon is a popular ride, and getting more so every day. The latest big-name investment newsletter writer to wax glowingly about gold’s prospects is Fred Hickey, editor of the High-Tech Strategist letter in Nashua, N.H.

What does gold have to do with tech, or vice-versa? Exactly the point: The metal -- which hit another record high on Friday, up $6.40 to $1,095.10 an ounce -- is finding fans among investment pros far afield from the corps of the eternal gold bugs.

Hickey actually has been bullish on gold since at least the start of this year (which means he benefits if he can talk up the price further), but in his latest letter he suggests that the groundswell of interest in the metal is just gaining steam. He believes that interest is being driven by "a loss of confidence in the U.S. dollar and U.S. government policies around the world."

ZeroHedge blog excerpts some of Hickey’s comments from his letter:

"The psychological barrier of $1,000 gold has been broken. That $1,000 number might as well be $100. There is no longer a limit to the upside. . . . I doubt that what we're seeing is the final blow off. I have no idea when it may come. It could be months or years from now. I just know that it hasn't yet occurred. In the meantime, prepare yourself for a lot more company (besides the smartest of the hedge fund managers) and more head-fakes. In the end, the public will come in en masse. They'll also be buying gold stocks with abandon. That is clearly not the case today.

"Gold is no longer being driven by jewelry demand, as in the recent past. It is investment demand that's wagging the yellow dog's tail. It's a loss of confidence in the U.S. dollar and U.S. government policies around the world that's driving gold to record levels. As it has been for thousands of years, gold is the safest store of wealth, not so much something to be fashioned into a necklace."

Because gold pays no dividends or interest, for many investors a bet on the metal is simply a momentum trade -- a bet that many other people will be willing to pay higher prices to own it.

That bet has worked for nine straight years, since gold traded at $274 at the end of 2000. Hickey and other bulls believe that, before this run is over, the ranks of gold investors worldwide will expand dramatically. It may not be early in this game, the bulls say, but they're also sure it's not too late.

-- Tom Petruno

The last analyst says goodbye to FirstFed

Paul Miller, the last analyst covering FirstFed Financial Corp., gave up today, saying in a note that “it is unlikely that any value remains for shareholders” of the Los Angeles savings and loan company.

The FBR Research analyst had last published comments on the parent of First Federal Bank of California in February, when he advised investors to sell the stock. Back then, Miller valued FirstFed shares at 60 cents; the stock was unchanged at 32 cents today in the over-the-counter market.

For FirstFed, which stumbled with its pay-option adjustable mortgages, the issue is no longer existing investors as much as whether new shareholders can be found. As Miller pointed out, regulators have ordered the company to liquidate itself, merge with another financial institution or find new investors to provide a shot of fresh capital.

FirstFed is hoping to sell new shares to private investors in a deal that would all but wipe out existing shareholders.

Part of the money raised would pay off holders of $150 million in FirstFed bonds at 20 cents on the dollar, and part would be used to bolster the thrift’s capital cushion against losses.

The thrift got some good news today as President Obama was expected to sign legislation allowing companies to use losses from 2008 and 2009 to offset taxable profits going back five years, rather than just two years. FirstFed has reported $547 million in losses since the beginning of 2008 -- losses that could be used to apply for greater tax refunds.

FirstFed’s executives weren’t talking today, saying they were in a “quiet period” because of the coming attempt to sell new shares. The Securities and Exchange Commission has yet to clear the offering so FirstFed can issue a prospectus describing the proposed stock sale.

In an SEC filing this week, FirstFed provided fresh evidence of how its operating focus is shifting from modifying loans for troubled borrowers to dealing with foreclosures for those who can’t be helped.

Single-family home loans that were 60 to 89 days delinquent -- the most serious threats to go into default -- totaled $7.5 million, down from $12.6 million a month earlier and $97 million on Sept. 30, 2008.

So the pipeline of sludge is drying up at the entry point. But there was still plenty to deal with at the other end.

Even after selling 356 foreclosed properties in the third quarter, the bank owned 665 foreclosures valued at $176 million at the end of September, up from 413 worth an estimated $98 million at the end of June.

-- E. Scott Reckard

'I'm sorry' Citigroup was ever born, co-founder says

John Reed, the co-founder of Citigroup, now wants to apologize for creating that monster -- which has become one of the biggest taxpayer-supported casualties of the financial-system crash.

In an interview with Bloomberg News, the 70-year-old Reed says he’s "sorry" for his role in forming Citi in 1998, when Reed’s Citicorp merged with Sanford Weill’s brokerage and insurance titan Travelers Group.

Reed, who has been publicly expressing regret about the merger since at least April 2008 (when he told the Financial Times that the deal was a "mistake"), also has joined former Federal Reserve Chairman Paul Volcker in calling for the restoration of the Glass-Steagall Act, which until its repeal in 1999 had restricted commercial banks’ forays into high-risk Wall Street businesses.

From Bloomberg:

"I would compartmentalize the [banking] industry for the same reason you compartmentalize ships," Reed said. "If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity."

Lawmakers were wrong to repeal the Depression-era Glass-Steagall Act in 1999, Reed said. At the time he supported the overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

"We learn from our mistakes," said Reed. "When you’re running a company, you do what you think is right for the stockholders. Right now I’m looking at this as a citizen."

-- Tom Petruno

Productivity soars, and workers wonder: Where's our share?

The government’s report today on worker productivity growth in the third quarter shows, yet again, the benefit businesses are reaping from slashing millions of jobs in the Great Recession.

Productivity -- output per hour worked -- rocketed at a 9.5% annualized rate in the latest quarter, well above the 6.5% growth Wall Street had expected.

Michael Darda, chief economist at investment firm MKM Partners in Greenwich, Conn., put the report in perspective in a research note today:

"Productivity growth has exploded upward at an 8.2% average annualized pace during the last two quarters, the fastest two-quarter surge off a recession trough since 1961. Unit labor costs, typically the flip side of the productivity numbers, collapsed at nearly a 6% annualized rate during the last two quarters -- the largest two-quarter decline off a recession trough on record. Since corporate profits are directly related to productivity growth and inversely related to unit cost growth, this data is good news for earnings.

"However, the recent productivity gains are not sustainable. At some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules. As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger fraction of their income in savings."

Darda is an unabashed bull on the idea that the economic recovery can and will become self-sustaining -- and that job growth will follow.

Although a turn in the labor market may not be apparent in Friday’s report on October employment, Darda said, "We continue to believe that net job losses will end in the next three months and that net job growth will restart within the next six months."

But Steven Ricchiuto, chief economist at Mizuho Securities in New York, says the danger is that companies have fallen into a trap of "excessive cost cutting."

From a research note Ricchiuto wrote today:

"Specifically, the corporate sector’s single-minded focus on driving up next quarter’s earnings is resulting in an unsustainable shift in the share of national income accruing to the corporate sector at the expense of households. The more companies strive to cut cost, the more workers they fire and the lower the future demand for their product.

"The more household income is squeezed the more consumers will have to save in order to complete their required balance sheet adjustment. This in turn limits top-line revenue growth at companies and makes the turn back to cost cutting to boost earnings [create] a negative feedback loop that sets the stage for a double-dip scenario."

It’s understandable that companies remain fearful of spending money, but Ricchiuto’s concern is valid: Squeezing your remaining labor force to death isn’t a recipe for long-term business success.

Who wants to go first to expand their payroll?

-- Tom Petruno