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Daily Agenda: To Carl Icahn’s Delight, eBay Splitting from PayPal

Protests continue in Hong Kong on Chinese national day; sober manufacturing data from Europe.

Three days of celebrations of the 65th anniversary of the founding of the People’s Republic of China kick off today. Yet Beijing is instead on alert as tens of thousands of protesters take to Hong Kong’s streets in a fifth day of pro-democracy protests. For the Communist Party the situation is fraught with risk. While the Special Administrative Region demands democratic elections, the potential to inspire the general population as the pace of economic development slows threatens to upset the status quo. Also of economic concern is he possible interruption of economic activity that might result if the international community perceived any Beijing crackdown to be brutal.

PayPal to split from eBay. Yesterday online auction site eBay announced plans to spin off its online payments subsidiary PayPal by the end of next year. The move was heralded by investors including Carl Icahn, who had advocated separating the divisions into two stand-alone companies.

Ackman goes public. Pershing Square Holdings, a fund launched and managed by activist hedge fund manager William Ackman, today announced that it has raised $3.07 billion ahead of the company’s October 13 debut on the Euronext Amsterdam trading exchange. The fund is run by, but separate from, Ackman’s hedge fund firm Pershing Square Capital Management.

European manufacturing stalls. Markit purchasing managers index (PMI) data from primary European Union economies, released today, showed a grim picture. The headline German index registered a contraction at 49.9, the first negative level since Europe rose out of recession last year. Euro zone aggregate data remained positive at 50.3. France came in at a disappointing 48.8. At 51.6, the U.K. manufacturing PMI index was the lowest reading in 17 months. This adds further pressure on European Central Bank president Mario Draghi before the euro zone central bank’s monthly statement tomorrow.

U.S. auto sector data en route. U.S. September auto sales data will be released throughout the day, with most analysts anticipating a marginal pull back. August car sales hit a seasonally adjusted annualized rate of 17.5 million units, the strongest August in more than ten years.

U.S. manufacturing data expected to show slow down. September Institute for Supply Management (ISM) manufacturing index levels will be released this afternoon, U.S. Eastern time, with consensus forecasts calling for a moderation from last month’s surge to 59. Forecasts from Société Générale’s economic research group predict a further rise, however, based on increasingly upbeat reports from regional Federal Reserve Banks in recent weeks.

Portfolio Perspective: Pull back in PerspectiveChristian Wagner, Longview Capital Management

Recently many market pundits have mentioned a desire for a true correction in U.S. large caps to alleviate nerves. The thought process is simple: a 10–15 percent correction in the market would cause investors to reconsider their confidence level in long positions. An eternal facet of market psychology is that investors find it difficult to focus on why they own securities until tested by a drawdown. Generally we agree with this thesis, but with two major caveats.

First, the perception that there have been no corrections in over three years is not entirely accurate. It’s easy to be glib and assign an arbitrary definition, often 10 percent in a single trading session, as the word “correction” would suggest. The S&P 500 has pulled back by roughly 10 percent across long time frames, no multiple, in the past two years, however, without any panic. Small caps have fared even worse.

Second, many bullish pundits anticipate a market full of investors waiting to buy the dip on a sharp pull down. The reality, however, may be that the post–2009 rally created a bifurcated investment environment. Many withdrew from equities entirely, while those who remained — often on autopilot — were rewarded richly. Neither camp is likely to pile on board with fresh capital after at a mere 10 percent reduction in price/multiples.

The U.S. economy is expanding, as are corporate profits. But the Federal Reserve has clearly signaled an end to accommodative policy and valuations are historically rich. We do not fear a correction nor do we see one as a potential buying opportunity. Taking all things into consideration, a sharp pull back here would simply make equities appear fairly priced.

Christian Wagner is CEO and CIO of Longview Capital Management, a subsidiary of Doylestown, Pennsylvania–headquartered First Savings Bank.

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