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Week In Review

Analysts Bullish on Asset Managers' Earnings, Margins for Third Quarter

Expecting strong third-quarter earnings reports from asset management firms due to the market's rally, analysts are upgrading their outlook on the companies. "This is the second quarter in a row of outsized equity and fixed income gains, likely to result in another hike in operating margins, though [changes] in compensation may temper [that] somewhat," according to a Bank of America-Merrill Lynch research report.

Indeed, Janus Capital is up 81% year to date, Waddell & Reed is up 82% and Calamos Asset Management is up 78%. Even given these tremendous gains, the Merrill report said, "Janus has further upside potential in our view, based on very strong investment performance and strong inflows as asset growth, estimated at 14%, in the third quarter."

A separate report from J.P. Morgan said, "We continue to like many of the asset managers despite the doubling of many stock prices since the March market low. We are raising numbers for all of the asset managers that we follow given the magnitude of the market movement." The J.P. Morgan analysts are especially bullish on Franklin Resources and Invesco due to their international holdings, fund performance and sales.

Fund Sales Streak at $300B

Investors continued to pour money into long-term mutual funds, with the latest week ended Sept. 23 seeing the funds take in $16.03 billion, bringing the 28-straight-week sales streak to a total of $300 billion, the Investment Company Institute said.

Stock funds, however, continued to lose assets, with $1.88 billion being withdrawn, up from $1.38 billion the week before. However, investors' outlook was split between U.S. and foreign equity funds, with domestic funds losing $2.03 billion in assets and international funds taking in $152 million.

Bond funds continued to be popular with investors, netting $12.91 billion in the latest week, steady with the $12.69 billion they reaped the previous week. Hybrid funds took in $5 billion, down slightly from $5.17 billion the previous week.

And money market funds experienced the fourth consecutive month of outflows. Investors redeemed $19.58 billion from money funds. Since peaking at $3.849 trillion in January, money funds now total $3.419 trillion.

Four Biggest-Point Drops For the Dow in Past Year

Sept. 29 marked the one-year anniversary of the biggest-point drop, 778, in the history of the Dow Jones Industrial Average, sparked by the initial failure of the House to pass the $700 billion financial rescue plan. That was followed by the Dow's second-, fourth-, and fifth-largest point drops-as well as its largest, second-largest and third-largest point gains. And between the collapse of Lehman Brothers on Sept. 15 and the end of the year, the S&P 500 moved 3% or more in one day a total of 29 times.

While the market has continued to be volatile, the S&P 500 has made those 3% daily swings only 20 times so far this year.

"The lack of volatility is a sign of good behavior. This is what you should see at the start of a bull market," Todd Campbell, president of E.B. Capital Markets told "We've moved from a period of crisis to a period of early recovery."

Alan Skrainka, chief market strategist with Edward Jones, concurred: "We don't have the extreme volatility anymore because we've reached greater stability in the financial markets. Credit markets have mostly returned to normal. Many of the problems that were keys to the panic have been addressed, and it looks like the economy is coming out of the recession."

"Move past the crisis," Barclays Wealth urges investors in its latest monthly strategy update. Position for the economic recovery since most economists are revising their growth forecasts for 2010 upwards, Barclays said.

Fed Considers Borrowing From Money Funds To Unwind Ease Stimulus

As the Federal Reserve begins to ease its extraordinary stimulus plan and works to stave off inflation, it is reportedly considering borrowing up to $500 billion from the $3.4 trillion money market fund industry rather than the 20 leading primary dealers, which aren't expected to be able to provide more than $100 billion.

However, the Fed is not expected to bring liquidity down to where it was before the crisis because it will also raise interest rates. The Fed will borrow the money through reverse repos on the mortgage-backed securities it acquired at the beginning of the financial crisis.

The Fed is reportedly considering a pilot test drive but is afraid that news of such an action will stoke fears that liquidity will be reduced significantly. The Fed recently said it would keep interest rates near zero, a signal that if the Fed is considering liquidity measures, no actions are likely to be taken in the near term.

GAO Proposes Changes to Hardship Withdrawal Rule