U.S. Backs Off as World's Top Money Cop

GOOD MORNING. Asian stocks closed higher today; U.S. futures are pointing to a higher open.

The U.S. may play the role of global policeman in matters of war and geopolitics. But in the finance arena it’s now asking the International Monetary Fund to be the world’s top cop. In prepared remarks for the IMF’s annual meeting in Istanbul, U.S. Treasury Secretary Timothy Geithner called for “rigorous surveillance” by the IMF to identify investment bubbles. He also wants the IMF to take a more proactive role in monitoring economic and foreign exchange policies to ensure they’re “consistent” with the G20’s goals for stable global growth.

Geithner’s remarks come at a precarious time for the economy. Although GDP figures around the world have been stabilizing, the recovery is still fragile. In the U.S., economists are forecasting growth of 3% in the fourth quarter. But last week’s employment figures suggest we’re still on very shaky footing. Unemployment edged up to 9.8%, the government reported, and the Household Survey showed a huge 785,000 plunge in jobs. All told, 1.3 million jobs have been lost in the last three months, and a recession has never ended with employment declining so much, according to economist David Rosenberg of the investment firm Gluskin Sheff. Many of these jobs aren’t coming back either, he wrote in a note to clients yesterday. And personal income growth is still testing new lows in this economic cycle. The bottom line: if this is a recovery it’s a “limbless” one, he says, missing an arm and a leg, and “you can’t get very far with that.”

Of course if we have a double-dip recession, or a jobless recovery worse than anticipated, then the market’s 50% rise since March could fizzle. Traders will start to see how third-quarter earnings are shaping up this week. The season kicks off with reports from Alcoa (AA), Costco (COST) and Monsanto (MON) tomorrow, followed by PepsiCo (PEP) on Thursday. Overall, analysts expect third-quarter earnings for the S&P 500 to be down around 25% from a year ago. More than 70% of S&P 500 companies beat analyst expectations for the second quarter, fueling the market’s rally. But unless corporate America can pull off a similar trick again, the bull market of 2009 could quickly unravel.

IN OTHER NEWS:

What’s a cheap meal worth? Traders will find out today when Yum! Brands (YUM) reports its third-quarter earnings after the market closes. Analysts are expecting earnings of 58 cents a share—the same as a year ago—and revenue of $2.79 billion, reflecting a 1.5% decline in sales.

Same-store sales are also expected to be super skinny. Jefferies & Company analyst Jeff Farmer believes that year-over-year, all three of the company’s core brands (KFC, Taco Bell, and Pizza Hut) will see a slide. Same-store sales in China face easier year-over-year comparisons this quarter than they did last quarter, but are still likely to be in negative territory, Farmer wrote in a report on Friday.

The worst of the bunch: Pizza Hut, which is expected to post the sharpest decline of the three core brands, Farmer wrote. The chain’s launch of a new line of pastas gave them a good year last year, but now that the hype’s died down, the pasta hasn’t been a long-term winner, says Mitchell Speiser, Senior Equity Analyst at Buckingham Research.

Yum! Brands often beats expectations because of its diversified business model and wide geographic distribution. “It’s hard to get all the ducks in a row, but they usually get most of their ducks in place to deliver on earnings,” Speiser says. For now, low food costs will likely help the company’s margins; eventually, like other consumer-focused companies, Yum! Brands will need people to start spending more freely, Speiser says.