Published: Thursday, 8 Jul 2010 | 8:34 AM ET CNBC
New U.S. claims for unemployment insurance fell more than expected last week, government data showed on Thursday, while the number of people continuing to receive benefits in the final week of June was the lowest in seven months.
Initial claims for state unemployment benefits dropped 21,000 to a seasonally adjusted 454,000 in the week ended July 3, the lowest level since early May, the Labor Department said.
Analysts polled by Reuters had expected claims to fall to 460,000 from the previously reported 472,000, which was revised up to 475,000 in Thursday's report.
The four-week moving average of new jobless claims, seen as a better measure of underlying labor market trends, fell 1,250 to 466,000.
Stock index futures, which had been flat earlier, jumped on the jobs news, while Treasurys prices slipped and pushed the yield on the 10-year note above 3 percent.
Although a Labor Department official said there was nothing unusual in the report, the decline in claims could have been exaggerated by the fact that General Motors is limiting its annual summer plant shutdown.
General Motors announced last month that nine of its 11 domestic assembly plants would continue operating during the June 28 to July 9 shutdown to meet demand for some models.
Automakers use the summer shutdowns to complete the annual model changeover and support maintenance operations, and analysts have cautioned that this might distort claims data over the coming weeks and make it difficult to get a clear pulse of the jobs market's health.
A sluggish labor market is blunting the economy's recovery from the longest and deepest recession since the 1930s. High unemployment is putting a damper on spending, fanning fears among investors the economy could fall back into recession.
Last month, private hiring rose by 83,000 after rising only 33,000 in May, the government said on Friday. But total non-farm employment dropped 125,000 as the government laid off 225,000 temporary census workers.
Although layoffs have abated, claims for jobless benefits have not declined significantly this year, and analysts say this implies only a gradual labor market improvement.
The number of people still receiving benefits after an initial week of aid dropped 224,000 to 4.41 million in the week ended June 26, the lowest since November last year, the Labor Department said. The level was way below market expectations for 4.60 million.
The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, fell to 3.4 percent in the week ended June 26 from 3.6 percent the prior week.
Thursday, July 8, 2010
US Consumer Credit Plunges in May
Published: Thursday, 8 Jul 2010 | 3:18 PM
CNBC
U.S. consumer credit plunged in May and was revised down sharply for the prior month, suggesting Americans are still leery of taking on new debt despite rock-bottom interest rates.
The Federal Reserve said Thursday that total outstanding consumer credit to U.S consumers fell by $9.15 billion in May.
The Federal Reserve said on Thursday total outstanding credit to U.S. consumers, everything from car loans to credit cards, fell $9.15 billion, much sharper than forecasts for a $2 billion decrease. April's reading was revised to a hefty $14.86 billion drop from the originally reported rise of $1 billion.
Consumer credit peaked around $2.58 trillion in July 2008, just before a worsening of the credit crisis brought down financial giants like Lehman Brothers and American
Revolving credit, mainly credit card accounts, was down $7.32 billion, while non-revolving loans for things like cars, boats and a college education fell $1.82 billion.
CNBC
U.S. consumer credit plunged in May and was revised down sharply for the prior month, suggesting Americans are still leery of taking on new debt despite rock-bottom interest rates.
The Federal Reserve said Thursday that total outstanding consumer credit to U.S consumers fell by $9.15 billion in May.
The Federal Reserve said on Thursday total outstanding credit to U.S. consumers, everything from car loans to credit cards, fell $9.15 billion, much sharper than forecasts for a $2 billion decrease. April's reading was revised to a hefty $14.86 billion drop from the originally reported rise of $1 billion.
Consumer credit peaked around $2.58 trillion in July 2008, just before a worsening of the credit crisis brought down financial giants like Lehman Brothers and American
Revolving credit, mainly credit card accounts, was down $7.32 billion, while non-revolving loans for things like cars, boats and a college education fell $1.82 billion.
Double Dip or a Bull Market? Earnings Could Tell the Story
Published: Thursday, 8 Jul 2010 | 5:16 PM ET
CNBC
With investors wrestling over whether the market has seen merely a normal pullback or is teetering on brink of something far worse, investors again are likely to focus far more on what companies see in their future than what happened in their past.
"It's not really going to be about the numbers themselves. No one's expecting a lot of top-line growth, no one's expecting blowout earnings except in rare cases," says Michael Cohn, chief investment strategist at Global Arena Investment Management in New York. "It's all about the outlook."
Indeed, expectations from the April through June reporting season are fairly muted.
The Standard & Poor's 500 [.SPX 1070.25 9.98 (+0.94%) ] components are likely to see about a 27 percent earnings growth from the same period in 2009, according to Bank of America Merrill Lynch.
But 2009 numbers provide dubious competition: The economy then remained in the throes of the deepest downturn since the Great Depression and companies were taking essentially a kitchen-sink approach to cutting expenses rather than generating revenue.
Analysts this time around are hopeful that companies will begin to show more progress that growth isn't simply on inventory rebuilding and doing more with less, but with actual increases in production and consumption.
"This isn't a double-dip, it's just a soft spot. We get one in every recovery," says Burt White, chief investment officer at LPL Financial in Boston. "We think the top line is going to definitely move forward and probably be at a post-recession post-crisis high and we're going to be moving in a very positive direction."
Though the economy continues to confront challenges from high unemployment and sovereign debt issues in Europe, White thinks the bigger picture shows a much healthier US economy.
He specifically likes the technology and consumer discretionary sectors while being more pessimistic about energy and materials.
"The bigger issue is the fact that interest rates are zero, the Fed is on the sidelines, input costs are down and employment is moving forward but at a very slow rate, which means profit margins will be very good," he says. "You mix that all together and you end up with a pretty good temperature for companies."
Despite a generally positive mood for earnings, analysts lately have been uniformly shaving both their projections for gross domestic product and employment growth.
BofA/Merrill Lynch cut its 2010 GDP projection from 3.2 to 3.0 percent and the 2011 figure from 3.3 percent to 2.6 percent, while saying its projection for the S&P above 1300 no longer stood. Standard & Poor's itself recently pulled back its projection for the 500 from 1270 to 1190.
But neither firm said the revisions would be reflected in corporate earnings.
"We have long argued that S&P 500 has limited exposure to US consumer discretionary spending and home construction," BofAML analysts said in a research note. "Hence these revisions to US GDP estimates have little impact to our S&P 500 EPS."
Nevertheless, the convergence of conflicting signals provides a tough landscape—weighing relatively good company prospects against signs in the economy that continue to scare investors and keep nearly $3 trillion on the sidelines in money market accounts.
"[E]ven though S&P equity analysts' earnings prospects are positive, our economic forecast is neutral, while our technical outlooks is decidedly negative," Sam Stovall, S&P's chief investment strategist, said in a note.
"Specifically, deteriorating technical equity and fixed-income market indicators and unfavorable historical precedents, combined with heightened volatility...increase the range of investment outcomes, in our view, and merit a more conservative investment stance," he added.
S&P remains on the high side for its earnings projections, looking for a total gain of 42 percent in the quarter and 44 percent for the year, financials, materials and energy leading the way.
Not everyone is so optimistic.
"Earnings may surprise to the upside, causing the market to bounce one more time. But the real issue is consumption and the deflationary environment," says Mike Rubino, CEO of Rubino Financial Group in Troy, Mich. "We do expect downward revisions in the second quarter, which will lead to a cascading of the market."
A number of companies have come to what is referred as the "confessional," with preannouncements to brace the market for what is ahead.
While negative preannouncements have outnumbered the positive by a 70 to 59 margin, that's actually less than the normal 2-to-1 downward ratio.
"It's called under-promise and outperform," Global Arena's Cohn says. "It's going to be tough sledding. There is a good possibility that if the worst doesn't come to fruition by the end of the third quarter, then the market could move up nicely in the fourth quarter."
CNBC
With investors wrestling over whether the market has seen merely a normal pullback or is teetering on brink of something far worse, investors again are likely to focus far more on what companies see in their future than what happened in their past.
"It's not really going to be about the numbers themselves. No one's expecting a lot of top-line growth, no one's expecting blowout earnings except in rare cases," says Michael Cohn, chief investment strategist at Global Arena Investment Management in New York. "It's all about the outlook."
Indeed, expectations from the April through June reporting season are fairly muted.
The Standard & Poor's 500 [.SPX 1070.25 9.98 (+0.94%) ] components are likely to see about a 27 percent earnings growth from the same period in 2009, according to Bank of America Merrill Lynch.
But 2009 numbers provide dubious competition: The economy then remained in the throes of the deepest downturn since the Great Depression and companies were taking essentially a kitchen-sink approach to cutting expenses rather than generating revenue.
Analysts this time around are hopeful that companies will begin to show more progress that growth isn't simply on inventory rebuilding and doing more with less, but with actual increases in production and consumption.
"This isn't a double-dip, it's just a soft spot. We get one in every recovery," says Burt White, chief investment officer at LPL Financial in Boston. "We think the top line is going to definitely move forward and probably be at a post-recession post-crisis high and we're going to be moving in a very positive direction."
Though the economy continues to confront challenges from high unemployment and sovereign debt issues in Europe, White thinks the bigger picture shows a much healthier US economy.
He specifically likes the technology and consumer discretionary sectors while being more pessimistic about energy and materials.
"The bigger issue is the fact that interest rates are zero, the Fed is on the sidelines, input costs are down and employment is moving forward but at a very slow rate, which means profit margins will be very good," he says. "You mix that all together and you end up with a pretty good temperature for companies."
Despite a generally positive mood for earnings, analysts lately have been uniformly shaving both their projections for gross domestic product and employment growth.
BofA/Merrill Lynch cut its 2010 GDP projection from 3.2 to 3.0 percent and the 2011 figure from 3.3 percent to 2.6 percent, while saying its projection for the S&P above 1300 no longer stood. Standard & Poor's itself recently pulled back its projection for the 500 from 1270 to 1190.
But neither firm said the revisions would be reflected in corporate earnings.
"We have long argued that S&P 500 has limited exposure to US consumer discretionary spending and home construction," BofAML analysts said in a research note. "Hence these revisions to US GDP estimates have little impact to our S&P 500 EPS."
Nevertheless, the convergence of conflicting signals provides a tough landscape—weighing relatively good company prospects against signs in the economy that continue to scare investors and keep nearly $3 trillion on the sidelines in money market accounts.
"[E]ven though S&P equity analysts' earnings prospects are positive, our economic forecast is neutral, while our technical outlooks is decidedly negative," Sam Stovall, S&P's chief investment strategist, said in a note.
"Specifically, deteriorating technical equity and fixed-income market indicators and unfavorable historical precedents, combined with heightened volatility...increase the range of investment outcomes, in our view, and merit a more conservative investment stance," he added.
S&P remains on the high side for its earnings projections, looking for a total gain of 42 percent in the quarter and 44 percent for the year, financials, materials and energy leading the way.
Not everyone is so optimistic.
"Earnings may surprise to the upside, causing the market to bounce one more time. But the real issue is consumption and the deflationary environment," says Mike Rubino, CEO of Rubino Financial Group in Troy, Mich. "We do expect downward revisions in the second quarter, which will lead to a cascading of the market."
A number of companies have come to what is referred as the "confessional," with preannouncements to brace the market for what is ahead.
While negative preannouncements have outnumbered the positive by a 70 to 59 margin, that's actually less than the normal 2-to-1 downward ratio.
"It's called under-promise and outperform," Global Arena's Cohn says. "It's going to be tough sledding. There is a good possibility that if the worst doesn't come to fruition by the end of the third quarter, then the market could move up nicely in the fourth quarter."
Joblessness and housing add risks to U.S. recovery: IMF
WASHINGTON | Thu Jul 8, 2010 4:33pm EDT
WASHINGTON (Reuters) - High unemployment and a moribund housing market have increased risks to the U.S. economic recovery, while the public debt looms large and needs to be cut, the International Monetary Fund said on Thursday.
In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.
The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.
"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.
The IMF also said commercial real estate continued to deteriorate, posing risks for smaller banks. Further tipping the balance of risks to the downside, it said Europe's sovereign debt crisis could worsen financial market conditions and hurt trade.
David Robinson, the IMF's Western Hemisphere deputy director, conceded in a news briefing that recent data had come in on the weak side since the report was completed on June 21. If the weakness continued, the Fund may have to revise its forecasts downward, he said.
In a separate report on the world economy, the IMF raised its 2010 global growth forecast to 4.6 percent from the 4.2 percent it had projected in April.
DEBT BURDEN
Apart from dealing with economic risks, the IMF said the key challenge for the United States was to develop a credible strategy to put its budget on a sustainable path without jeopardizing the recovery.
The fund said U.S. federal debt as a percentage of gross domestic product would rise from 64 percent in 2010 to 72.4 percent by 2012, 96.3 percent by 2020 and 135 percent by 2030.
It welcomed commitments by the Obama administration to stabilize this at just over 70 percent of GDP by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues.
The IMF said the biggest contribution the United States could make to global growth and stability would be to increase its domestic savings -- particularly by reducing deficits.
"The U.S. is no longer going to be the global consumer of last resort and therefore other countries, especially those with current account surpluses, will need to take up the slack," Robinson said.
"With our assessment that the dollar is now somewhat overvalued from a medium-term perspective, I emphasize medium-term, this will also need to be accompanied by greater exchange rate flexibility and appreciation elsewhere," he added.
Robinson said he believed the dollar's value would decline moderately over the next five years based on economic fundamentals. The dollar's rise in recent months was "not helpful" in sustaining global recovery but was not a "deal breaker" either, he said.
The Fund said the Federal Reserve's pledge to keep interest rates exceptionally low was appropriate to fight deflation and the drag on the economy from reduced government spending, but said the U.S. central bank must clearly communicate its plans for exiting its supportive policies.
The IMF also said that while the United States has made considerable progress in restoring financial stability, more capital will be needed in the banking system to support additional lending -- particularly if securitization markets remain impaired.
It said U.S. financial reform legislation would reduce systemic risks in the financial system, but noted that Congress missed an opportunity to consolidate bank regulators, maintaining a burden on agencies to cooperate and avoid gaps in supervision.
WASHINGTON (Reuters) - High unemployment and a moribund housing market have increased risks to the U.S. economic recovery, while the public debt looms large and needs to be cut, the International Monetary Fund said on Thursday.
In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.
The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.
"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.
The IMF also said commercial real estate continued to deteriorate, posing risks for smaller banks. Further tipping the balance of risks to the downside, it said Europe's sovereign debt crisis could worsen financial market conditions and hurt trade.
David Robinson, the IMF's Western Hemisphere deputy director, conceded in a news briefing that recent data had come in on the weak side since the report was completed on June 21. If the weakness continued, the Fund may have to revise its forecasts downward, he said.
In a separate report on the world economy, the IMF raised its 2010 global growth forecast to 4.6 percent from the 4.2 percent it had projected in April.
DEBT BURDEN
Apart from dealing with economic risks, the IMF said the key challenge for the United States was to develop a credible strategy to put its budget on a sustainable path without jeopardizing the recovery.
The fund said U.S. federal debt as a percentage of gross domestic product would rise from 64 percent in 2010 to 72.4 percent by 2012, 96.3 percent by 2020 and 135 percent by 2030.
It welcomed commitments by the Obama administration to stabilize this at just over 70 percent of GDP by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues.
The IMF said the biggest contribution the United States could make to global growth and stability would be to increase its domestic savings -- particularly by reducing deficits.
"The U.S. is no longer going to be the global consumer of last resort and therefore other countries, especially those with current account surpluses, will need to take up the slack," Robinson said.
"With our assessment that the dollar is now somewhat overvalued from a medium-term perspective, I emphasize medium-term, this will also need to be accompanied by greater exchange rate flexibility and appreciation elsewhere," he added.
Robinson said he believed the dollar's value would decline moderately over the next five years based on economic fundamentals. The dollar's rise in recent months was "not helpful" in sustaining global recovery but was not a "deal breaker" either, he said.
The Fund said the Federal Reserve's pledge to keep interest rates exceptionally low was appropriate to fight deflation and the drag on the economy from reduced government spending, but said the U.S. central bank must clearly communicate its plans for exiting its supportive policies.
The IMF also said that while the United States has made considerable progress in restoring financial stability, more capital will be needed in the banking system to support additional lending -- particularly if securitization markets remain impaired.
It said U.S. financial reform legislation would reduce systemic risks in the financial system, but noted that Congress missed an opportunity to consolidate bank regulators, maintaining a burden on agencies to cooperate and avoid gaps in supervision.
Tuesday, April 6, 2010
U.S. Stocks Advance as Fed Signals Plans to Leave Rates Low
April 6 (Bloomberg) -- U.S. stocks rose for a third day as the Federal Reserve suggested it plans to leave its benchmark interest rate at a record low to safeguard the economic recovery and banks rallied on analyst upgrades.
SunTrust Banks Inc. rose 3.6 percent as Credit Suisse Group AG said the lender may be a takeover target, while Regions Financial Corp. jumped 6.1 percent as its share-price estimate was lifted. Massey Energy Co. fell 11 percent after an explosion at a coal mine in West Virginia killed 25 workers and left four missing. Benchmark indexes climbed to their highs of the day after minutes from the last Fed policy meeting showed some policy makers warned of raising rates too soon.
“Overall, the momentum remains positive,” said Alan Gayle, a money manager at RidgeWorth Investments in Richmond, Virginia, which oversees $63 billion. “The economic data of late is surprising to the upside and April tends to be a fairly good month from a seasonal perspective.”
The Standard & Poor’s 500 Index increased 0.3 percent to 1,191.43 at 2:45 p.m. in New York after erasing a 0.4 percent slide. The Dow Jones Industrial Average rose 10.27 points, or 0.1 percent, to 10,983.82 after falling as much as 46 points earlier.
U.S. equities opened lower on concern a yearlong rally left the S&P 500 too expensive after the benchmark gauge closed at an 18-month high yesterday. The index is trading at 19 times the reported operating profits of its companies, the highest price- earnings ratio this year, according to Bloomberg data.
Stocks turned higher as the minutes from the Fed’s March meeting showed officials saw signs of a strengthening recovery while warning it could be hobbled by high unemployment and tight credit.
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Stocks rose yesterday after a report April 2 showed the biggest increase in jobs in three years. Releases on April 5 showing growth in service industries and home sales boosted optimism an economic recovery may be gathering steam.
Regional banks climbed after Credit Suisse said SunTrust may be a target for overseas financial companies. The firm also increased its price estimate for Regions Financial Corp. to $8 from $7. SunTrust climbed 3.6 percent. Regions rallied the most in the S&P 500, adding 6.1 percent to $8.69.
Financial companies gained the most in the S&P 500 among 10 groups, led by bank stocks. Eight industry groups in the benchmark index declined, while two advanced.
U.S. large-cap bank shares were raised to “market weight” from “underweight” at Wells Fargo & Co., which said “fundamentals and economy support a more positive outlook.”
El Paso Corp. rose after winning regulatory approval for its biggest expansion project, the $3 billion conduit that will carry gas from a trading hub in Opal, Wyoming, to interconnections near Malin, Oregon. Shares of the owner of the longest U.S. natural-gas pipeline network climbed as high as $11.85, the highest intraday price since October 2008.
Massey Explosion
Massey slumped 11 percent to $48.81, its biggest intraday decline since July, after the explosion.
CA Inc., the second-largest maker of software for mainframe computers, fell 1.8 percent to $23.43 after saying 2010 profit will be at the low end of its forecast range and it will cut about 1,000 jobs.
The S&P 500 has rallied 76 percent since March 2009 through yesterday as the Federal Reserve maintained record low interest rates and the economy began to recover from the worst recession since World War II. During the first quarter the gauge rallied 4.9 percent, the biggest advance to start a year since 1998.
SunTrust Banks Inc. rose 3.6 percent as Credit Suisse Group AG said the lender may be a takeover target, while Regions Financial Corp. jumped 6.1 percent as its share-price estimate was lifted. Massey Energy Co. fell 11 percent after an explosion at a coal mine in West Virginia killed 25 workers and left four missing. Benchmark indexes climbed to their highs of the day after minutes from the last Fed policy meeting showed some policy makers warned of raising rates too soon.
“Overall, the momentum remains positive,” said Alan Gayle, a money manager at RidgeWorth Investments in Richmond, Virginia, which oversees $63 billion. “The economic data of late is surprising to the upside and April tends to be a fairly good month from a seasonal perspective.”
The Standard & Poor’s 500 Index increased 0.3 percent to 1,191.43 at 2:45 p.m. in New York after erasing a 0.4 percent slide. The Dow Jones Industrial Average rose 10.27 points, or 0.1 percent, to 10,983.82 after falling as much as 46 points earlier.
U.S. equities opened lower on concern a yearlong rally left the S&P 500 too expensive after the benchmark gauge closed at an 18-month high yesterday. The index is trading at 19 times the reported operating profits of its companies, the highest price- earnings ratio this year, according to Bloomberg data.
Stocks turned higher as the minutes from the Fed’s March meeting showed officials saw signs of a strengthening recovery while warning it could be hobbled by high unemployment and tight credit.
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Stocks rose yesterday after a report April 2 showed the biggest increase in jobs in three years. Releases on April 5 showing growth in service industries and home sales boosted optimism an economic recovery may be gathering steam.
Regional banks climbed after Credit Suisse said SunTrust may be a target for overseas financial companies. The firm also increased its price estimate for Regions Financial Corp. to $8 from $7. SunTrust climbed 3.6 percent. Regions rallied the most in the S&P 500, adding 6.1 percent to $8.69.
Financial companies gained the most in the S&P 500 among 10 groups, led by bank stocks. Eight industry groups in the benchmark index declined, while two advanced.
U.S. large-cap bank shares were raised to “market weight” from “underweight” at Wells Fargo & Co., which said “fundamentals and economy support a more positive outlook.”
El Paso Corp. rose after winning regulatory approval for its biggest expansion project, the $3 billion conduit that will carry gas from a trading hub in Opal, Wyoming, to interconnections near Malin, Oregon. Shares of the owner of the longest U.S. natural-gas pipeline network climbed as high as $11.85, the highest intraday price since October 2008.
Massey Explosion
Massey slumped 11 percent to $48.81, its biggest intraday decline since July, after the explosion.
CA Inc., the second-largest maker of software for mainframe computers, fell 1.8 percent to $23.43 after saying 2010 profit will be at the low end of its forecast range and it will cut about 1,000 jobs.
The S&P 500 has rallied 76 percent since March 2009 through yesterday as the Federal Reserve maintained record low interest rates and the economy began to recover from the worst recession since World War II. During the first quarter the gauge rallied 4.9 percent, the biggest advance to start a year since 1998.
U.S. Earned $10.5 Billion on TARP Investments, Analysis Show
April 6 (Bloomberg) -- The U.S. Treasury Department has made $10.5 billion, or an 8.5 percent return, on its bailout of financial firms, a private analysis shows.
The report, which tallies money the government earned on sales of preferred stock and warrants held under the Troubled Asset Relief Program, was issued this month by financial research firm SNL Financial of Charlottesville, Virginia.
The profit came from $118.3 billion in aid that has returned to Treasury from 49 firms that “fully exited” the government’s capital purchase program.
The Treasury said April 2 that its programs aimed at stabilizing the banking system “will earn a profit thanks to dividends, interest, early repayments and the sale of warrants.” Total investments of $245 billion last year, initially projected to cost $76 billion, are expected to be profitable, the department said a statement.
The SNL report said “proceeds from both TARP warrant repurchases and auctions have largely fueled the profitability of the programs. The redemptions of the preferred shares alone generally only provide the government a 5 percent return, which comes from the dividends.”
American Express Co. and Goldman Sachs Group Inc.’s warrant repurchases in July 2009 “helped create some of the largest annualized company returns at 23.3 percent and 20.0 percent,” according to the report’s authors, Andrew Schukman and Russ Yates.
The Treasury still expects to lose a total of $117 billion on TARP, which includes financing for the auto industry and American International Group Inc., according to the Financial Times.
Treasury spokeswoman Meg Reilly said “the outlook for the U.S. financial system has improved, taxpayers are being repaid, the expected cost of resolving the financial crisis has fallen dramatically, and Treasury is winding down many programs that were put in place to address the crisis.”
The report, which tallies money the government earned on sales of preferred stock and warrants held under the Troubled Asset Relief Program, was issued this month by financial research firm SNL Financial of Charlottesville, Virginia.
The profit came from $118.3 billion in aid that has returned to Treasury from 49 firms that “fully exited” the government’s capital purchase program.
The Treasury said April 2 that its programs aimed at stabilizing the banking system “will earn a profit thanks to dividends, interest, early repayments and the sale of warrants.” Total investments of $245 billion last year, initially projected to cost $76 billion, are expected to be profitable, the department said a statement.
The SNL report said “proceeds from both TARP warrant repurchases and auctions have largely fueled the profitability of the programs. The redemptions of the preferred shares alone generally only provide the government a 5 percent return, which comes from the dividends.”
American Express Co. and Goldman Sachs Group Inc.’s warrant repurchases in July 2009 “helped create some of the largest annualized company returns at 23.3 percent and 20.0 percent,” according to the report’s authors, Andrew Schukman and Russ Yates.
The Treasury still expects to lose a total of $117 billion on TARP, which includes financing for the auto industry and American International Group Inc., according to the Financial Times.
Treasury spokeswoman Meg Reilly said “the outlook for the U.S. financial system has improved, taxpayers are being repaid, the expected cost of resolving the financial crisis has fallen dramatically, and Treasury is winding down many programs that were put in place to address the crisis.”
Fed Officials Saw Recovery Curbed by Unemployment
April 6 (Bloomberg) -- Federal Reserve officials saw signs of a strengthening recovery that could be hobbled by high unemployment and tight credit, and some warned of raising rates too soon, according to minutes of their March meeting.
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in history. Payrolls rose by 162,000 last month, the most in three years, and manufacturing grew at the fastest pace in more than five years. At the same time, sales of existing homes fell for a third month in February.
The FOMC said in its statement last month that the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” their statement said. Central bankers have used the “extended period” phrase in statements since March 2009.
Forward Guidance
The minutes showed policy makers discussed the statement language and said “such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.”
Stocks and Treasuries rose after the report. The Standard and Poor’s 500 index climbed 0.3 percent to 1,190.65 at 2:23 p.m. in New York. Yields on U.S. two-year notes fell two basis points to 1.14 percent. A basis point is 0.01 percentage point.
An extended period of low rates “might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further,” the minutes said. “A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start.”
The minutes also showed that policy makers were surprised by the rate at which inflation was decelerating.
A price gauge favored by Fed officials, the personal consumption expenditures price index, minus food and energy, rose 1.3 percent for the year ending February, slowing from a 1.5 percent rate in January.
Inflation Readings
“Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected,” the minutes said. “A number of participants observed that the moderation in price changes was widespread across many categories of spending.”
Fed officials stated a longer-run goal of 1.7 percent to 2 percent for the full PCE price index in January. Central bankers last month left the benchmark interest rate in a range of zero to 0.25 percent, where it has been since December 2008.
Officials are considering a variety of tools to tighten policy, from raising the rate they pay on reserves banks keep at the Fed to selling assets. Officials discussed allowing maturing Treasury securities to roll off the balance sheet without reinvestment. Such redemptions would lower the interest rate sensitivity of the Fed’s portfolio over time, the minutes said, and limit the need to use other draining tools.
“Nevertheless, the initiation of a redemption strategy might generate upward pressure on market rates, especially if that measure led investors to move up their expected timing of policy firming,” the minutes said. “Participants agreed that the Committee would give further consideration to these matters” while the central bank continues its current practice of reinvesting all maturing Treasury securities.
Purchase Program
U.S. central bankers last month completed their program to purchase $1.25 trillion of mortgage-backed securities, expanding the Fed’s balance sheet to $2.31 trillion on March 31, near the record $2.32 trillion the previous week.
Chairman Ben S. Bernanke told the House Financial Services Committee March 25 that he anticipates “at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet back to its pre-crisis condition” which he described as “under” $1 trillion.
Officials in January unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
Asset Bubbles
The minutes showed Fed officials are trying to identify potential asset-price bubbles and determine whether financial firms are using too much debt to boost returns.
“Members noted the importance of continued close monitoring of financial markets and institutions” in order to see “significant financial imbalances at an early stage,” the Fed said. “At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.”
“While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” minutes of the March 16 Federal Open Market Committee released today in Washington showed.
Fed officials are looking for signs of self-sustaining growth before they begin their exit from the most aggressive monetary policy in history. Payrolls rose by 162,000 last month, the most in three years, and manufacturing grew at the fastest pace in more than five years. At the same time, sales of existing homes fell for a third month in February.
The FOMC said in its statement last month that the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” their statement said. Central bankers have used the “extended period” phrase in statements since March 2009.
Forward Guidance
The minutes showed policy makers discussed the statement language and said “such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.”
Stocks and Treasuries rose after the report. The Standard and Poor’s 500 index climbed 0.3 percent to 1,190.65 at 2:23 p.m. in New York. Yields on U.S. two-year notes fell two basis points to 1.14 percent. A basis point is 0.01 percentage point.
An extended period of low rates “might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further,” the minutes said. “A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start.”
The minutes also showed that policy makers were surprised by the rate at which inflation was decelerating.
A price gauge favored by Fed officials, the personal consumption expenditures price index, minus food and energy, rose 1.3 percent for the year ending February, slowing from a 1.5 percent rate in January.
Inflation Readings
“Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected,” the minutes said. “A number of participants observed that the moderation in price changes was widespread across many categories of spending.”
Fed officials stated a longer-run goal of 1.7 percent to 2 percent for the full PCE price index in January. Central bankers last month left the benchmark interest rate in a range of zero to 0.25 percent, where it has been since December 2008.
Officials are considering a variety of tools to tighten policy, from raising the rate they pay on reserves banks keep at the Fed to selling assets. Officials discussed allowing maturing Treasury securities to roll off the balance sheet without reinvestment. Such redemptions would lower the interest rate sensitivity of the Fed’s portfolio over time, the minutes said, and limit the need to use other draining tools.
“Nevertheless, the initiation of a redemption strategy might generate upward pressure on market rates, especially if that measure led investors to move up their expected timing of policy firming,” the minutes said. “Participants agreed that the Committee would give further consideration to these matters” while the central bank continues its current practice of reinvesting all maturing Treasury securities.
Purchase Program
U.S. central bankers last month completed their program to purchase $1.25 trillion of mortgage-backed securities, expanding the Fed’s balance sheet to $2.31 trillion on March 31, near the record $2.32 trillion the previous week.
Chairman Ben S. Bernanke told the House Financial Services Committee March 25 that he anticipates “at some point we will in fact have a gradual sales process so that we can begin to move our balance sheet back to its pre-crisis condition” which he described as “under” $1 trillion.
Officials in January unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
Asset Bubbles
The minutes showed Fed officials are trying to identify potential asset-price bubbles and determine whether financial firms are using too much debt to boost returns.
“Members noted the importance of continued close monitoring of financial markets and institutions” in order to see “significant financial imbalances at an early stage,” the Fed said. “At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking.”
‘Unloved’ Junk Debt May Be Best Bond Investment: Credit Markets
April 6 (Bloomberg) -- Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offers some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 62 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The average yield rose to 4.075 percent, the highest since Feb. 24.
Leveraged Loans
Leveraged loan prices climbed 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second-largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. The Eden Prairie, Minnesota-based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell 0.02 percentage point to 4.65 percent, holding near the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
An indicator of U.S. corporate credit risk rose from a more than two-week low today.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.2 basis point to a mid-price of 84.6 basis points as of 1 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.
In London, the Markit iTraxx Europe Index on 125 investment-grade companies fell 0.69 basis point to 76.6 basis points, Markit prices show.
Junk Bond Offerings
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show.
The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Tightening Spreads
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. BB rated bonds have returned 4.9 percent this year, while bonds rated B and CCC have returned 3.8 percent and 7.1 percent, respectively.
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
‘Sweet Spot’
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.
Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.
“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”
Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offers some protection from defaults if the economic recovery flags, Gallo said.
Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 62 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg.
‘CCCs Look Rich’
“CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.”
High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 148 basis points, or 1.48 percentage point, the lowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The average yield rose to 4.075 percent, the highest since Feb. 24.
Leveraged Loans
Leveraged loan prices climbed 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index. Supervalu Inc., the second-largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. The Eden Prairie, Minnesota-based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell 0.02 percentage point to 4.65 percent, holding near the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week.
An indicator of U.S. corporate credit risk rose from a more than two-week low today.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.2 basis point to a mid-price of 84.6 basis points as of 1 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.
In London, the Markit iTraxx Europe Index on 125 investment-grade companies fell 0.69 basis point to 76.6 basis points, Markit prices show.
Junk Bond Offerings
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds yesterday.
Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show.
The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year.
Tightening Spreads
Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points.
For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. BB rated bonds have returned 4.9 percent this year, while bonds rated B and CCC have returned 3.8 percent and 7.1 percent, respectively.
The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.
‘Sweet Spot’
“BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown.
Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show.
While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said.
Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16.
Monday, April 5, 2010
Office vacancy rate hits 16-year high
(Reuters) - The U.S. office vacancy rate in the first quarter reached its highest level in 16 years, but the decline in rents eased and crept closer to stabilization, according to a report by real estate research firm Reis Inc.
U.S. | Housing Market
The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago.
"As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate," Reis director of research Victor Calanog said in a statement. "Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros."
The U.S. office vacancy rate hit a cyclical low of 12.5 percent in the third quarter 2007.
Rental rates fell an average of 0.8 percent in the first quarter, a less steep decline that seen last year. Asking rent fell 4.2 percent from a year earlier. Factoring months of free rent and landlord contributions to space improvements for each tenant, effective rent was down 7.4 percent from a year earlier.
Both asking and effective rent were off 0.8 percent from the fourth quarter 2009. The fact that effective rent is no longer falling at a greater rate than asking rent is an indication that landlords may have offered enough concessions to stimulate leasing activity.
"While we do not foresee positive rent growth resuming until next year at the earliest, office buildings at least do not seem to be experiencing as much distress relative to 12 months ago, when we were just heading into 2009 and most markets and economies around the world were still in deep turmoil," Calanog said.
LESS OF A BLOODBATH IN 2010
"We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," Calanog said. "This is bad news for loans supported by office properties that have to contend with at least six to eight more quarters of falling income."
Tight credit markets also have curbed office construction with only 3.6 million square feet of office space coming online, the lowest level of completions since Reis began publishing quarterly data in 1999.
The office vacancy rate increased in 57 of the 79 primary metropolitan areas Reis tracks. Effective rents fell in 56 out of 79 markets, down from 70 in the fourth quarter 2009.
New York, the largest office market, saw its vacancy rate rise 0.1 percentage point to 11.7 percent from 11.6 percent. Effective rent slid 2.1 percent, less than half the 5.3 percent drop seen in the fourth quarter 2009.
Washington DC has overtaken New York as Reis's tightest market, with DC sporting the nation's lowest vacancy rate of 10.4 percent. Detroit, home of the U.S. auto industry, continued to suffer the most, with a 26.2 percent vacancy rate, the highest in the nation.
Oil Jumps to Over $86 on Strong US Jobs Data
Reuters
04/05/2010
U.S. crude futures hit an 18-month high on Monday, climbing above $86 per barrel on expectations of faster-than-expected economic recovery and increasing demand for fuel.
Data on Friday showed U.S. employers created jobs in March at the fastest rate in three years. Non-farm payrolls rose 162,000, only the third increase since the U.S. economy fell into recession in late 2007 and the largest since March 2007.
U.S. manufacturing is also expanding at its fastest pace for more than five years, while Chinese manufacturing is picking up and Japanese business sentiment is also improving.
U.S. light, sweet crude oil for May delivery rose more than $1 to above $86 a barrel. The market was closed for a three-day weekend including the Good Friday holiday.
U.S. crude has risen almost 2 percent in the first five days of the quarter, versus a rise of 5.5 percent through the whole of the first three months of the year.
The strong payrolls, positive manufacturing data and signs of rising fuel demand are all likely to support oil prices and cement crude in a new, higher range, analysts say.
'Little Resistance'
Technical analysts, who follow the movement of prices on historical charts, have become more bullish and suggest the oil market could move higher in the next few weeks.
"Our take on crude oil prices in the short-term is that we likely will push higher from here," said senior commodities analyst Edward Meir at brokers MF Global. "Technically, there is very little resistance showing on the charts given the upside breakout evident."
In industry news, U.S. Tesoro [TSO 13.57 -0.82 (-5.7%) ] said on Sunday crude oil intake at its Anacortes, Washington, refinery was down to about 70 percent of its 120,000 barrel per day (bpd) capacity after a deadly explosion and fire on Friday.
Sustained demand for gas oil has triggered a surge in buying of crudes with high yields of gas oil and diesel in the Asia-Pacific market as demand led by Chinese buyers absorbed May-loading supplies.
Saturday, March 27, 2010
KKR Said to Plan IPO for NXP in Year’s Biggest Deal
March 27 (Bloomberg) -- NXP BV, the Dutch chipmaker bought by KKR & Co. four years ago, plans to raise at least $1 billion to cut debt in what could be this year’s largest initial public offering, two people with knowledge of the matter said.
NXP hired Morgan Stanley, Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs Group Inc. to run the stock sale, according to the people, who asked not to be identified because the talks are private. KKR, Silver Lake, AlpInvest Partners NV, Bain Capital and Apax Partners acquired an 80.1 percent stake in the firm from Royal Philips Electronics NV in 2006, in a multistage deal valuing the company at 8.3 billion euros ($11.1 billion), including debt. KKR said in December its NXP investment was worth 30 cents on the dollar.
Kristi Huller, a KKR spokeswoman in New York, declined to comment on the potential IPO. Spokesmen for the five banks also declined to comment. NXP spokeswoman Lieke de Jong-Tops said in a text message the company declined to comment because it doesn’t react to rumor and speculation.
Buyout shops have been trying to take companies public, using the proceeds to pay down debt. The group of sponsors borrowed $4.5 billion to fund the takeover four years ago. The semiconductor company’s debt rose to $6.4 billion by the start of 2009. NXP cut that by $1.3 billion through bond exchanges, buy-backs and “privately negotiated” deals last year, the company said this month.
At $1 billion, NXP would be the biggest announced offering this year. Earlier this month, Bain Capital LLC’s Sensata Technologies Holding NV completed the largest U.S. IPO of 2010, selling $569 million of shares at the low end of its expected price range.
NXP’s owners aren’t planning to also run a prospective auction for the company, said the people with knowledge of the matter, in part because Philips intends to keep its stake of about 20 percent. That would complicate a sale to any firm competing with the Dutch lighting company.
NXP, with 29,000 employees, makes computer chips for customers such as Nokia Oyj, Continental AG and Robert Bosch GmbH, according to its Web site. The Eindhoven, Netherlands- based firm’s revenue dropped to $3.8 billion in 2009 from $5.4 billion the previous year.
Dollar Heads for Biggest Quarterly Gain Versus Euro Since 2008
March 27 (Bloomberg) -- The dollar rose, poised for the biggest quarterly gain versus the euro since 2008, as European leaders’ struggle to forge a plan to bail out Greece pushed investors toward the perceived safety of the greenback.
The yen fell against all 16 of its most-traded counterparts this week as Japanese consumer prices dropped for a 12th month, increasing the chances the nation’s central bank will lag behind its peers in raising interest rates. The U.S. economy added jobs in March, a report is forecast to show next week.
“The dollar is still the safety currency,” said Jonathan Xiong, a senior portfolio manager and director at Mellon Capital Management Corp. in San Francisco, where he helps oversee $18 billion. “The European news that is coming out is unclear, clouded and uncertain. When investors are uncertain, what happens is they buy dollars.”
The dollar appreciated 0.9 percent to $1.3410 versus the euro, from $1.3530 a week earlier. It was headed for a gain of 6.8 percent for the quarter, the largest since it advanced 11.8 percent in the three months ended in September 2008.
The yen dropped 2.1 percent, the most since Dec. 4, to 92.52 per dollar, from 90.54 yen on March 19. It was set for a decline of 3.8 percent this month, the most since December. The euro rose 1.3 percent to 124.06 yen, from 122.51 last week.
IMF on Standby
The European currency strengthened yesterday after leaders of the 16 nations that use the euro put the International Monetary Fund on standby to aid debt-stricken Greece, seeking to snuff out a threat to the currency’s stability. They endorsed a plan that calls for a mix of IMF and bilateral loans at market interest rates, while voicing confidence Greece won’t need outside help to cut its budget deficit, Europe’s largest.
European Central Bank President Jean-Claude Trichet told reporters in Brussels late on March 25 he was “extraordinarily happy that the governments of the euro area found out a workable solution.”
Earlier, the euro fell to a 10-month low versus the greenback after Trichet said an IMF role in funding a rescue for Greece would be “very, very bad.” He has expressed concern that turning to the Washington-based IMF would show Europe can’t address its problems.
The number of wagers by hedge funds and other large speculators on a decline in the euro versus the dollar compared with those on a gain -- so-called net shorts -- reached a record 74,917 contracts on March 23, according to Commodity Futures Trading Commission data last week. The amount was 46,341 on March 16.
Australia, Canada
The Australian and Canadian dollars fell versus the greenback for the first week this month amid speculation gains versus the U.S. dollar and the euro couldn’t be sustained.
Australia’s currency dropped 1.2 percent to 90.41 U.S. cents, from 91.54 cents on March 19. It fell 0.4 percent to A$1.4832 per euro, from A$1.4780 a week earlier.
“We’re seeing people get out of positions,” said Lauren Rosborough, a senior currency analyst at Westpac Banking Corp. in London. “The news from euro-zone officials has people looking to go long the euro against the Australian dollar.” A long position is a wager a currency will appreciate.
The loonie, as Canada’s currency is nicknamed, dropped 0.9 percent to C$1.0266 per U.S. dollar, while remaining near the strongest level in 20 months versus the greenback.
The U.S. currency rose against the yen before a report next week that’s expected to show the U.S. gained jobs in March, increasing the likelihood the Federal Reserve will raise interest rates before the Bank of Japan.
U.S. Employment
U.S. payrolls added 190,000 jobs in March, according to the median forecast of 62 economists surveyed by Bloomberg News before the Labor Department releases the data April 2. The economy lost 36,000 jobs in February.
Japan’s consumer prices excluding fresh food slid 1.2 percent from a year earlier, after dropping a 1.3 percent in each of the preceding two months, the nation’s statistics bureau said yesterday in Tokyo. The data intensifies pressure on the central bank to eradicate the deflation that’s hampering the economic recovery.
Mexico’s peso was the only major currency that gained against the dollar this week, as an economic recovery in the U.S. fueled demand for the Latin American nation’s exports.
The peso gained 0.7 percent to 12.4962 per U.S. dollar, from 12.5854 on March 19. It has strengthened during six of the past seven weeks against the dollar.
The Mexican currency gained 4.8 percent against the dollar this year, the best performance among the 16 major currencies tracked by Bloomberg.
Yuan forwards strengthened yesterday after a central-bank adviser said China may resume a “managed float” of the currency, bolstering optimism the government will allow appreciation.
Twelve-month non-deliverable forwards rose as much as 0.2 percent to 6.6675 per dollar, according to data compiled by Bloomberg. The contracts reflect bets the currency will gain 2.3 percent from the spot rate of 6.8270.
Greenspan Calls Treasury Yields ‘Canary in the Mine’
March 26 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.
Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
The yield on 10-year Treasury notes was 3.85 percent at 3:08 p.m. in New York, down three basis points from late yesterday and up from 3.69 percent at the end of last week.
U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.
The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points yesterday before reaching negative 7.63 basis points.
Record Deficit
The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package.
“I don’t like American politics and what’s happening,” Greenspan said.
Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.
“I’m not convinced by any means that we can succeed in stabilizing this long-term outlook strictly from a value-added tax,” Greenspan said.
2001 Tax Cut
Greenspan in 2001 supported the first round of tax cuts under President George W. Bush. At the time, the federal government operated with a surplus, and Greenspan told Congress he didn’t think the cuts would lead to a deficit.
He told the Senate Budget Committee on Jan. 25, 2001, that “having a tax cut in place may, in fact, do noticeable good.” The next year he said it would be unwise to unwind the tax cut. As deficits returned, he became an opponent of further tax cuts, telling Congress in 2003 that “fiscal stimulus is premature.”
In today’s interview, the former Fed chairman said the U.S. economic recovery has been driven “to a very large extent” by a resurgence of stock prices. The Standard & Poor’s 500 Index has jumped 73 percent since its low on March 9, 2009. The index was little changed at 1,165.29 at 3:08 p.m. in New York.
“You can see the whole blossoming of finance,” Greenspan said. “As these stock prices have gone up, debt became far more valuable, and you can see this huge issuance, especially of junk bonds.”
A continued rally in share prices could help sustain the expansion, Greenspan said. Still, the unemployment rate could remain “not terribly far from where it is” at 9.7 percent as people re-enter the labor force to take advantage of job openings in a growing economy.
Company Earnings
The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year- over-year gain in a quarter century.
On the Chinese economy, Greenspan said there are “significant bubbles” whose consequences will be hard to predict because of a lack of data.
“There are significant bubbles in Shanghai and along the coastal provinces, but there’s some of that going back into the hinterlands as well,” Greenspan said. “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”
Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
The yield on 10-year Treasury notes was 3.85 percent at 3:08 p.m. in New York, down three basis points from late yesterday and up from 3.69 percent at the end of last week.
U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.
The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points yesterday before reaching negative 7.63 basis points.
Record Deficit
The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package.
“I don’t like American politics and what’s happening,” Greenspan said.
Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.
“I’m not convinced by any means that we can succeed in stabilizing this long-term outlook strictly from a value-added tax,” Greenspan said.
2001 Tax Cut
Greenspan in 2001 supported the first round of tax cuts under President George W. Bush. At the time, the federal government operated with a surplus, and Greenspan told Congress he didn’t think the cuts would lead to a deficit.
He told the Senate Budget Committee on Jan. 25, 2001, that “having a tax cut in place may, in fact, do noticeable good.” The next year he said it would be unwise to unwind the tax cut. As deficits returned, he became an opponent of further tax cuts, telling Congress in 2003 that “fiscal stimulus is premature.”
In today’s interview, the former Fed chairman said the U.S. economic recovery has been driven “to a very large extent” by a resurgence of stock prices. The Standard & Poor’s 500 Index has jumped 73 percent since its low on March 9, 2009. The index was little changed at 1,165.29 at 3:08 p.m. in New York.
“You can see the whole blossoming of finance,” Greenspan said. “As these stock prices have gone up, debt became far more valuable, and you can see this huge issuance, especially of junk bonds.”
A continued rally in share prices could help sustain the expansion, Greenspan said. Still, the unemployment rate could remain “not terribly far from where it is” at 9.7 percent as people re-enter the labor force to take advantage of job openings in a growing economy.
Company Earnings
The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year- over-year gain in a quarter century.
On the Chinese economy, Greenspan said there are “significant bubbles” whose consequences will be hard to predict because of a lack of data.
“There are significant bubbles in Shanghai and along the coastal provinces, but there’s some of that going back into the hinterlands as well,” Greenspan said. “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”
U.S. Stocks Trim Advance, Treasuries Gain on Korea Concern
March 26 (Bloomberg) -- U.S. stocks trimmed gains and Treasuries rose as concern that tensions between North and South Korea were escalating triggered a flight from risky assets. Gold futures rallied 1 percent, the most in a week.
The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,166.59 at 4:19 p.m. in New York after gaining as much as 0.7 percent earlier. The iShares MSCI South Korea Index Fund, a U.S. exchange traded fund tracking stocks in that nation, erased a 1.4 percent gain and slid 0.6 percent as a South Korean naval vessel sank near the border of North Korea. Trading of puts, which give investors the right to sell the fund, surged to a record. Futures on South Korea’s Kospi 200 Index expiring in June lost 0.6 percent.
“This is really all about that variable we call the geopolitical; it’s about Korea,” said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. “It’s taken some of the euphoria out of the market.”
The earlier rally in U.S. equities came as analyst upgrades and takeover speculation boosted financial and retail companies and concern eased over a possible Greece default. RadioShack Corp. jumped 8.5 percent on a New York Post report that the electronics chain is considering a sale of the company. Apple Inc., Progressive Corp., Urban Outfitters Inc. and SLM Corp. advanced after analysts either raised price targets or lifted their ratings on the shares.
The Dollar Index, which tracks the currency against six major trading partners, slipped 0.6 percent to 81.602.
Korea Concern
The iShares MSCI South Korea Index Fund fell 0.6 percent to $48.74 in New York. Trading of put options that give the right to sell the ETF surged to a record of more than 55,000 contracts. The most-active contracts were April $45 puts, which jumped 40 percent to 35 cents.
The South Korean naval vessel sank off Baengnyeong island in the Yellow Sea, near the border with North Korea, an official in the office of President Lee Myung Bak said. The cause was unclear, he said. About 50 crew members were still being searched for, with 58 rescued, said the official, who declined to be identified in accord with government policy. President Lee convened a meeting of security officials to discuss the incident, said the official, giving no further details.
Greece Aid
The early rally in stocks also came as European leaders backed a proposal late yesterday for a mix of International Monetary Fund and bilateral loans for Greece, while saying the nation probably won’t need help to cut the region’s biggest budget deficit. The U.S. economy grew at a 5.6 percent annual rate last quarter, the government said, and the Reuters/University of Michigan final consumer sentiment gauge for March topped forecasts as the pace of job cuts slowed.
“The transition from an economy that’s been driven by monetary and fiscal stimulus back to more of a traditional, consumer and business-driven growth may provide some opportunities,” said Greg Woodard, portfolio strategist at Manning & Napier in Fairport, New York, which manages $28 billion. “But it’s probably to provide some more volatility as we move through 2010.”
Treasuries rose for the first time in four days, sending yields down, as lower-than-average demand at this week’s record- tying $118 billion note auctions pushed yields to levels that encourage buying.
The two-year yield dropped 4 basis points, or 0.04 percentage point, to 1.05 percent. Yields on 10-year notes decreased 3 basis points to 3.86 percent after rising yesterday to 3.92 percent, the highest level since June 11.
Treasury Demand
Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.
President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the U.S, economic expansion.
Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
Euro Gains
The euro strengthened 1 percent to $1.3410 against the dollar and the Athens Stock Exchange’s ASE Index climbed 4.1 percent, the most since Feb. 9. The yield on the two-year Greek note tumbled 20 basis points to 4.46 percent.
“Investors see the agreement as a backstop, and it is helping sentiment towards the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, of the Greek accord reached in Brussels. “However, this is a rather uninspired recovery and it’s difficult to say that this is an unequivocal vote of confidence.”
The MSCI World Index of 23 developed nations’ stocks increased 0.2 percent.
European stocks fell, with the Stoxx Europe 600 Index losing 0.5 percent to trim a fourth straight weekly gain, on concern mounting government debt may derail the economic recovery even after the European Union agreed a Greek aid plan.
‘No Choice’ for Europe
Unipol Gruppo Finanziario SpA sank 7.7 percent in Milan, the most in a year, after Italy’s third-largest insurer announced a share sale and posted a full-year loss. Veolia Environnement SA, the world’s largest water company, slipped 1.1 percent in Paris after JPMorgan Chase & Co. advised selling the stock.
“Europe has no choice but to solve the Greece situation,” said Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, which manages $25 billion. “If you have confidence solving the debt crisis, the euro will rise against the dollar. However, the buyers of stocks over there will be discouraged to buy because of the weakness of their economies.”
The MSCI Asia Pacific Index increased 1 percent, its biggest advance in more than a week. The Kospi closed 0.6 percent higher before the South Korean ship sank. Japan’s Nikkei 225 Stock Average rose to the highest level since October 2008 and the Shanghai Composite Index rallied 1.3 percent.
Emerging Markets
China helped lead the MSCI Emerging Markets Index 0.4 percent higher, its first gain in three days. Brazil’s Bovespa index climbed 0.4 percent. Russia’s Micex Index increased 0.6 percent after the central bank cut its main refinancing rate for the 12th time in less than a year, lowering it a quarter point to 8.25 percent.
Nickel for delivery in three months rose 3.4 percent to $23,600 a metric ton on the London Metal Exchange to lead industrial metals higher. Copper, lead and tin also advanced.
Gold for June delivery added 1 percent to $1,105.40 an ounce on speculation demand will increase amid escalating debt concerns and the Korea incident.
Crude oil fell for a third day, retreating 0.7 percent to $80 a barrel in New York after climbing as much as 1.2 percent earlier.
The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,166.59 at 4:19 p.m. in New York after gaining as much as 0.7 percent earlier. The iShares MSCI South Korea Index Fund, a U.S. exchange traded fund tracking stocks in that nation, erased a 1.4 percent gain and slid 0.6 percent as a South Korean naval vessel sank near the border of North Korea. Trading of puts, which give investors the right to sell the fund, surged to a record. Futures on South Korea’s Kospi 200 Index expiring in June lost 0.6 percent.
“This is really all about that variable we call the geopolitical; it’s about Korea,” said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. “It’s taken some of the euphoria out of the market.”
The earlier rally in U.S. equities came as analyst upgrades and takeover speculation boosted financial and retail companies and concern eased over a possible Greece default. RadioShack Corp. jumped 8.5 percent on a New York Post report that the electronics chain is considering a sale of the company. Apple Inc., Progressive Corp., Urban Outfitters Inc. and SLM Corp. advanced after analysts either raised price targets or lifted their ratings on the shares.
The Dollar Index, which tracks the currency against six major trading partners, slipped 0.6 percent to 81.602.
Korea Concern
The iShares MSCI South Korea Index Fund fell 0.6 percent to $48.74 in New York. Trading of put options that give the right to sell the ETF surged to a record of more than 55,000 contracts. The most-active contracts were April $45 puts, which jumped 40 percent to 35 cents.
The South Korean naval vessel sank off Baengnyeong island in the Yellow Sea, near the border with North Korea, an official in the office of President Lee Myung Bak said. The cause was unclear, he said. About 50 crew members were still being searched for, with 58 rescued, said the official, who declined to be identified in accord with government policy. President Lee convened a meeting of security officials to discuss the incident, said the official, giving no further details.
Greece Aid
The early rally in stocks also came as European leaders backed a proposal late yesterday for a mix of International Monetary Fund and bilateral loans for Greece, while saying the nation probably won’t need help to cut the region’s biggest budget deficit. The U.S. economy grew at a 5.6 percent annual rate last quarter, the government said, and the Reuters/University of Michigan final consumer sentiment gauge for March topped forecasts as the pace of job cuts slowed.
“The transition from an economy that’s been driven by monetary and fiscal stimulus back to more of a traditional, consumer and business-driven growth may provide some opportunities,” said Greg Woodard, portfolio strategist at Manning & Napier in Fairport, New York, which manages $28 billion. “But it’s probably to provide some more volatility as we move through 2010.”
Treasuries rose for the first time in four days, sending yields down, as lower-than-average demand at this week’s record- tying $118 billion note auctions pushed yields to levels that encourage buying.
The two-year yield dropped 4 basis points, or 0.04 percentage point, to 1.05 percent. Yields on 10-year notes decreased 3 basis points to 3.86 percent after rising yesterday to 3.92 percent, the highest level since June 11.
Treasury Demand
Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.
President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the U.S, economic expansion.
Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
Euro Gains
The euro strengthened 1 percent to $1.3410 against the dollar and the Athens Stock Exchange’s ASE Index climbed 4.1 percent, the most since Feb. 9. The yield on the two-year Greek note tumbled 20 basis points to 4.46 percent.
“Investors see the agreement as a backstop, and it is helping sentiment towards the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, of the Greek accord reached in Brussels. “However, this is a rather uninspired recovery and it’s difficult to say that this is an unequivocal vote of confidence.”
The MSCI World Index of 23 developed nations’ stocks increased 0.2 percent.
European stocks fell, with the Stoxx Europe 600 Index losing 0.5 percent to trim a fourth straight weekly gain, on concern mounting government debt may derail the economic recovery even after the European Union agreed a Greek aid plan.
‘No Choice’ for Europe
Unipol Gruppo Finanziario SpA sank 7.7 percent in Milan, the most in a year, after Italy’s third-largest insurer announced a share sale and posted a full-year loss. Veolia Environnement SA, the world’s largest water company, slipped 1.1 percent in Paris after JPMorgan Chase & Co. advised selling the stock.
“Europe has no choice but to solve the Greece situation,” said Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, which manages $25 billion. “If you have confidence solving the debt crisis, the euro will rise against the dollar. However, the buyers of stocks over there will be discouraged to buy because of the weakness of their economies.”
The MSCI Asia Pacific Index increased 1 percent, its biggest advance in more than a week. The Kospi closed 0.6 percent higher before the South Korean ship sank. Japan’s Nikkei 225 Stock Average rose to the highest level since October 2008 and the Shanghai Composite Index rallied 1.3 percent.
Emerging Markets
China helped lead the MSCI Emerging Markets Index 0.4 percent higher, its first gain in three days. Brazil’s Bovespa index climbed 0.4 percent. Russia’s Micex Index increased 0.6 percent after the central bank cut its main refinancing rate for the 12th time in less than a year, lowering it a quarter point to 8.25 percent.
Nickel for delivery in three months rose 3.4 percent to $23,600 a metric ton on the London Metal Exchange to lead industrial metals higher. Copper, lead and tin also advanced.
Gold for June delivery added 1 percent to $1,105.40 an ounce on speculation demand will increase amid escalating debt concerns and the Korea incident.
Crude oil fell for a third day, retreating 0.7 percent to $80 a barrel in New York after climbing as much as 1.2 percent earlier.
Tuesday, March 23, 2010
Take this job and tolerate it.....
NEW YORK (CNNMoney.com)
One of the key signs of trouble for the current labor market can be summed up by two words that are rarely spoken today: I quit.
With employers still trimming rather than adding jobs and a record number of unemployed looking for work, job holders are hanging onto their current positions, even if it means being unhappy.
The "quits rate," or frequency of people leaving jobs, is close to the lowest point since 2000, when the Labor Department began tracking the data. And workers' willingness to quit without having another job lined up is well below the historic norms going back to the 1960s, according to a separate government reading.
Recent surveys show many workers would like to find a new job once the labor market improves, but most are just too scared to make the jump yet.
An American Express survey found 54% of the general population willing to make significant concessions in the name of job security, including accepting pay cuts or even demotion.
Employment consultant Towers Watson found 86% of workers value job security and stability, topping the number of people who listed improved pay or career advancement as important to them. And while 43% of workers believe they have to leave their current employer in order to advance their career, only 12% of workers say they are looking to leave their current jobs.
"They're saying they're staying put," said Laury Sejen, a global practice leader at Towers Watson. She said she was surprised by how dug in workers have become in their current jobs.
"When you look at it from a lot of different angles, it's a mindset shift."
Stuck in a dead-end job....
One worker who feels trapped in the job is a product manager for a consortium of travel agencies, who would only talk if her name was not used in this story. She said her stomach churns every day because she dislikes her job and her boss so much. But the state of the job market and worries about job security have kept her from even looking for a new job, especially since her husband was laid off last year.
"I hear so many people are out of work, I feel lucky that I have a job with insurance," she said. "I don't want to update my résumé and send it out and have it get back to my boss."
Another unhappy worker in the accounting department with a Midwest manufacturer says he's limited by the fact that his wife also works, making it difficult to relocate in the current job market.
"The job I'm in is a lot of number crunching that I'm not interested in doing anymore, but my wife likes what she's doing," said the worker who also asked that his name not be used. "If we were to move and she stopped working, it would require us to downsize a great deal."
Both workers quoted said that in a better job market they might be more willing to try to start their own business, but they're nervous about doing so in the current environment.
Economic headwinds....
The lack of mobility from job to job is a problem for more than just those unhappy workers. Economists say it can keep wages down and hinder economic recovery.
Changing jobs is an important method workers use to improve their income, giving them more dollars that they can then pump into the economy. Even the threat of leaving a job is often enough to increase pay.
"When you have low unemployment, people are much more free to leave their jobs and search for jobs with higher wages, and employers will have to pay a premium to find or retain the best workers," said Heidi Shierholz, labor economist with the Economic Policy Institute, a liberal think tank.
It makes sense that people are nervous about changing jobs in the current labor market, said Robert Brusca of FAO Economics.
"Even if you're unhappy in a job, it's the devil you know. You don't know for sure how they'll treat you in a new job, if they'll give you a fair shake," he said.
Don't ask for a state job...
Brusca said the latest jobs bill passed by Congress won't help get job mobility moving again because it gives a tax credit only for hiring the long-term unemployed.
But the economy would benefit as much from an employer offering a job to someone already working as it does from the hiring of someone without a job, because such a hire is likely to open up another position in the economy. He said the law is an example of the difficulty that Congress has reviving the moribund labor market.
Experts say the bad housing market is another factor keeping people from switching jobs, since people won't be willing to relocate for a better position if they have to take a large loss on the sale of their home.
And the unwillingness of workers to leave an established job to try to start a new business also slows economic growth.
The Labor Department estimates that more than a million fewer jobs were created than normal during the recession because of the low rate of new business start ups. While much of that could be due to the credit crunch and the overall economic downturn, some new businesses were undoubtedly lost because current employees are unwilling to take a chance to start something new.
"Until the economy gets better, many people won't be willing to take chances. And we need them taking chances," Brusca said.
Facebook traffic tops Google for the week
NEW YORK (CNNMoney.com) -- Facebook topped Google to become the most visited U.S. Web site last week, indicating a shift in how Americans are searching for content.
Web analysis firm Experian Hitwise said Monday that the social networking site surpassed Google to take the No. 1 spot for the week ended March 13.
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"It shows content sharing has become a huge driving force online," said Matt Tatham, director of media relations at Hitwise. "People want information from friends they trust, versus the the anonymity of a search engine."
Facebook accounted for 7.07% of U.S. Web traffic that week, while Google (GOOG, Fortune 500) received 7.03%. The study compared only the domains Facebook.com and Google.com -- not, for example, Google-owned sites like Gmail.com.
Though the traffic levels were close, Facebook's year-over-year growth far outpaced Google's that week. The number of visitors to Facebook spiked 185% compared with the same period last year, while Google's traffic climbed just 9%.
"It's definitely a big moment for Facebook, even though they beat by a small margin," Tatham said. "We've seen it coming for quite a long time."
Facebook's 6th birthday
Facebook had never before beaten Google over a full weeklong period, though it has been the most visited site on recent holidays: Christmas Eve, Christmas Day and New Year's Day. Facebook was also the top site on the weekend of March 6-7.
But Tatham noted that when he added up traffic on all Google properties like Google Maps and YouTube, the company's sites comprised 11.03% of visits. Yahoo (YHOO, Fortune 500) was second with 10.98%.
Google.com had been the No. 1 site each week since Sept. 15, 2007, when ironically it passed another social networking site, MySpace.com, in order to take the crown.
Of course, the MySpace connection could be a bad omen for Facebook. MySpace enjoyed dominance on the social networking scene for years until it saw traffic plummet following Facebook's rise.
"By nature, the Web is ever-changing," Tatham said. "The Internet can be a fickle crowd."
Web analysis firm Experian Hitwise said Monday that the social networking site surpassed Google to take the No. 1 spot for the week ended March 13.
Facebook Digg Twitter Buzz Up! Email Print Comment on this story
"It shows content sharing has become a huge driving force online," said Matt Tatham, director of media relations at Hitwise. "People want information from friends they trust, versus the the anonymity of a search engine."
Facebook accounted for 7.07% of U.S. Web traffic that week, while Google (GOOG, Fortune 500) received 7.03%. The study compared only the domains Facebook.com and Google.com -- not, for example, Google-owned sites like Gmail.com.
Though the traffic levels were close, Facebook's year-over-year growth far outpaced Google's that week. The number of visitors to Facebook spiked 185% compared with the same period last year, while Google's traffic climbed just 9%.
"It's definitely a big moment for Facebook, even though they beat by a small margin," Tatham said. "We've seen it coming for quite a long time."
Facebook's 6th birthday
Facebook had never before beaten Google over a full weeklong period, though it has been the most visited site on recent holidays: Christmas Eve, Christmas Day and New Year's Day. Facebook was also the top site on the weekend of March 6-7.
But Tatham noted that when he added up traffic on all Google properties like Google Maps and YouTube, the company's sites comprised 11.03% of visits. Yahoo (YHOO, Fortune 500) was second with 10.98%.
Google.com had been the No. 1 site each week since Sept. 15, 2007, when ironically it passed another social networking site, MySpace.com, in order to take the crown.
Of course, the MySpace connection could be a bad omen for Facebook. MySpace enjoyed dominance on the social networking scene for years until it saw traffic plummet following Facebook's rise.
"By nature, the Web is ever-changing," Tatham said. "The Internet can be a fickle crowd."
Existing home sales slip in February
March 23, 2010: 11:37 AM ET
NEW YORK (CNNMoney.com) -- Sales of existing homes fell slightly in February, according to an industry report released Tuesday, a sign that the housing market's recovery remains fragile.
The National Association of Realtors reported that home resales fell 0.6% last month to a seasonally adjusted annual rate of 5.02 million units. That's down from a rate of 5.05 million in January. Still, sales are 7% higher than in February 2009, when homes were going into contract at an annual rate of 4.69 million units.
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Last month's figures came in slightly above analyst expectations. Consensus estimates had forecast an annual rate of 5 million units, according to Briefing.com.
"Some closings were simply postponed by winter storms, says Lawrence Yun, NAR's chief economist, "but buyers couldn't get out to look at homes in some areas and that should negatively impact near term contract activity."
Yun added that sales have been higher on a year-over-year basis for eight straight months.
Analysts are hoping sales will pick up as the April 30 deadline for the new homebuyer tax credit closes in.
In November, Congress extended and expanded an $8,000 tax credit for first-time homebuyers, which also allows some repeat buyers to qualify for a $6,500 credit.
"We saw [an increase] in home buying figures in November" when consumers thought the credit was going away, said Carl Riccadonna, senior U.S. economist for Deutsche Bank.
But this time around, Riccadonna doesn't necessarily expect a "rush to the realtors."
0:00 /3:10Homeowners walking away
A separate NAR survey found that first-time homebuyers purchased 42% of homes in February, compared to 40% in January. Investors made up 19% of transactions, compared to 17% in January. Overall buyer traffic improved by 12% in February, NAR said.
Sales of distressed properties, including foreclosures and short sales, made up 35% of sales last month, compared to 38% in January.
Prices and inventory: NAR's report showed that the median price of homes sold in February was $165,100, down 1.8% from February 2009.
Total existing homes on the market jumped 9.5% in February to 3.59 million units, representing an 8.6-month supply of homes unsold, up from a 7.8 month supply in January. NAR's Yun attributed some of the increase in inventory to the number of distressed homes coming to market.
Sales by property type: Sales of single-family homes dipped 1.4% to a seasonally-adjusted annual rate of 4.37 million units in February, compared to 4.43 million units in January.
Existing condos and co-op sales fared better, rising 4.8% to a seasonally adjusted annual rate of 650,000 in February, from 620,000 in January. Sales for existing condos and co-ops are up 30.3% from February 2009.
Sales by region: The Midwest fared the best of all, according to NAR. The region saw existing home sales jump 2.8% in February to an annual rate of 1.11 million units, which was 8.8% higher than last year.
The Northeast also saw slight improvement in existing homes sales, which rose 2.4% to an annual pace of 840,000 for the month. Sales are up 12% from last year.
The Western region of the country fared the worst, with existing home sales falling 4.7% to an annual rate of 1.22 million units in February. Still, sales are up 3.4% from last year.
Existing home sales in the South dipped 1.1% to an annual rate of 1.85 million units in February, but were up 6.9% from a year ago.
Outlook: The housing market this year will struggle to balance a gradual recovery of demand with glut of inventory, according to Deutsche Bank's Carl Riccadonna.
While February's declines are worrisome, he stressed that this time of year is a trickle for homebuying, since the true judge of the health of the market will come during peak homebuying season this spring.
But even then, all eyes will be on jobs, the most definitive sign of economic recovery. "The best housing recovery plan is a strong labor market," said Riccadonna. "That's the rising tide that lifts all boats."
NEW YORK (CNNMoney.com) -- Sales of existing homes fell slightly in February, according to an industry report released Tuesday, a sign that the housing market's recovery remains fragile.
The National Association of Realtors reported that home resales fell 0.6% last month to a seasonally adjusted annual rate of 5.02 million units. That's down from a rate of 5.05 million in January. Still, sales are 7% higher than in February 2009, when homes were going into contract at an annual rate of 4.69 million units.
Facebook Digg Twitter Buzz Up! Email Print Comment on this story
Last month's figures came in slightly above analyst expectations. Consensus estimates had forecast an annual rate of 5 million units, according to Briefing.com.
"Some closings were simply postponed by winter storms, says Lawrence Yun, NAR's chief economist, "but buyers couldn't get out to look at homes in some areas and that should negatively impact near term contract activity."
Yun added that sales have been higher on a year-over-year basis for eight straight months.
Analysts are hoping sales will pick up as the April 30 deadline for the new homebuyer tax credit closes in.
In November, Congress extended and expanded an $8,000 tax credit for first-time homebuyers, which also allows some repeat buyers to qualify for a $6,500 credit.
"We saw [an increase] in home buying figures in November" when consumers thought the credit was going away, said Carl Riccadonna, senior U.S. economist for Deutsche Bank.
But this time around, Riccadonna doesn't necessarily expect a "rush to the realtors."
0:00 /3:10Homeowners walking away
A separate NAR survey found that first-time homebuyers purchased 42% of homes in February, compared to 40% in January. Investors made up 19% of transactions, compared to 17% in January. Overall buyer traffic improved by 12% in February, NAR said.
Sales of distressed properties, including foreclosures and short sales, made up 35% of sales last month, compared to 38% in January.
Prices and inventory: NAR's report showed that the median price of homes sold in February was $165,100, down 1.8% from February 2009.
Total existing homes on the market jumped 9.5% in February to 3.59 million units, representing an 8.6-month supply of homes unsold, up from a 7.8 month supply in January. NAR's Yun attributed some of the increase in inventory to the number of distressed homes coming to market.
Sales by property type: Sales of single-family homes dipped 1.4% to a seasonally-adjusted annual rate of 4.37 million units in February, compared to 4.43 million units in January.
Existing condos and co-op sales fared better, rising 4.8% to a seasonally adjusted annual rate of 650,000 in February, from 620,000 in January. Sales for existing condos and co-ops are up 30.3% from February 2009.
Sales by region: The Midwest fared the best of all, according to NAR. The region saw existing home sales jump 2.8% in February to an annual rate of 1.11 million units, which was 8.8% higher than last year.
The Northeast also saw slight improvement in existing homes sales, which rose 2.4% to an annual pace of 840,000 for the month. Sales are up 12% from last year.
The Western region of the country fared the worst, with existing home sales falling 4.7% to an annual rate of 1.22 million units in February. Still, sales are up 3.4% from last year.
Existing home sales in the South dipped 1.1% to an annual rate of 1.85 million units in February, but were up 6.9% from a year ago.
Outlook: The housing market this year will struggle to balance a gradual recovery of demand with glut of inventory, according to Deutsche Bank's Carl Riccadonna.
While February's declines are worrisome, he stressed that this time of year is a trickle for homebuying, since the true judge of the health of the market will come during peak homebuying season this spring.
But even then, all eyes will be on jobs, the most definitive sign of economic recovery. "The best housing recovery plan is a strong labor market," said Riccadonna. "That's the rising tide that lifts all boats."
Monday, March 22, 2010
Obama Pays More Than Buffett as U.S. Risks AAA Rating
March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
Moody’s Warning
While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
Unprecedented Spending
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.
Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard & Poor’s said the default rate will drop to 5 percent by year-end from 10.4 percent in February.
Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009.
Berkshire Hathaway
Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody’s and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt.
P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P, makes everything from Tide detergent to Swiffer dusters.
New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest health products company is rated AAA by S&P and Moody’s.
Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada have also been below Treasuries, Trace data show.
‘Avalanche’
“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.
Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s.
While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and 1.58 percent in January, Bank of America Merrill Lynch indexes show.
Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey. Two-year yields will rise to 1.77 percent, from 0.99 percent.
Relative Yields
Investors demand 0.59 percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries.
President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the nonpartisan Congressional Budget Office said this month. Publicly held debt will zoom to $20.3 trillion, or 90 percent of gross domestic product, by 2020, the CBO forecast.
There’s “a lack of a long-term plan to deal with the federal budget deficit,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “At some point in time the market may lose its patience.”
Balance Sheets
Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated companies make them more attractive than Treasuries.
Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three months, Bloomberg data show. That represents 28 percent of assets, the least in at least a decade.
Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of America Merrill Lynch indexes show. That’s down from the peak of 515 basis points in November 2008, and approaching the record low of 36 in 1997.
Adding to Corporates
New York Life Investment Management is adding to bets the difference in yields will continue to shrink.
“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money manager who helps invest $115 billion at the New York-based insurer. “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”
For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. The U.S. has the biggest, most liquid securities markets, said Cheah.
Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are about half their average since 1980.
Losing its Status
The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the first time in almost three decades. The amount of Treasuries outstanding dropped 8 percent to $3.4 trillion in 2000, the biggest annual decline since 1946.
Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in 2007 from 2000 as the U.S. borrowed to finance tax cuts intended to revive a slumping economy. The amount has since risen 64 percent to $7.4 trillion.
More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.
At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth quarter, Bloomberg data show.
Growing Supply
High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those maturities will make government debt a bigger proportion of indexes that fund managers measure their performance against, he said. Managers betting Treasury yields will rise may diversify into corporate debt, Pollack said.
“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group Inc. in Baltimore. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
Moody’s Warning
While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
Unprecedented Spending
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.
Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard & Poor’s said the default rate will drop to 5 percent by year-end from 10.4 percent in February.
Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009.
Berkshire Hathaway
Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody’s and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt.
P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P, makes everything from Tide detergent to Swiffer dusters.
New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest health products company is rated AAA by S&P and Moody’s.
Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada have also been below Treasuries, Trace data show.
‘Avalanche’
“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.
Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s.
While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and 1.58 percent in January, Bank of America Merrill Lynch indexes show.
Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey. Two-year yields will rise to 1.77 percent, from 0.99 percent.
Relative Yields
Investors demand 0.59 percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries.
President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the nonpartisan Congressional Budget Office said this month. Publicly held debt will zoom to $20.3 trillion, or 90 percent of gross domestic product, by 2020, the CBO forecast.
There’s “a lack of a long-term plan to deal with the federal budget deficit,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “At some point in time the market may lose its patience.”
Balance Sheets
Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated companies make them more attractive than Treasuries.
Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three months, Bloomberg data show. That represents 28 percent of assets, the least in at least a decade.
Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of America Merrill Lynch indexes show. That’s down from the peak of 515 basis points in November 2008, and approaching the record low of 36 in 1997.
Adding to Corporates
New York Life Investment Management is adding to bets the difference in yields will continue to shrink.
“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money manager who helps invest $115 billion at the New York-based insurer. “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”
For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. The U.S. has the biggest, most liquid securities markets, said Cheah.
Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are about half their average since 1980.
Losing its Status
The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the first time in almost three decades. The amount of Treasuries outstanding dropped 8 percent to $3.4 trillion in 2000, the biggest annual decline since 1946.
Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in 2007 from 2000 as the U.S. borrowed to finance tax cuts intended to revive a slumping economy. The amount has since risen 64 percent to $7.4 trillion.
More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.
At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth quarter, Bloomberg data show.
Growing Supply
High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those maturities will make government debt a bigger proportion of indexes that fund managers measure their performance against, he said. Managers betting Treasury yields will rise may diversify into corporate debt, Pollack said.
“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group Inc. in Baltimore. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”
House Approves Landmark U.S. Health-Care Legislation
March 22 (Bloomberg) -- The U.S. House passed the most sweeping health-care legislation in four decades, rewriting the rules governing medical industries and ensuring that tens of millions of uninsured Americans will get medical coverage.
President Barack Obama will sign the health-care package into law at the White House tomorrow, said an administration official who spoke on condition of anonymity because it hasn’t been publicly announced.
Yesterday’s 219-212 vote marks a victory for Obama. Only Democrats voted for the legislation, underscoring a partisan divide that promises to make health care the defining issue in November’s congressional elections.
Lawmakers hailed the action as a historic follow-up to the 1965 creation of the Medicare program for the elderly and a way to mitigate soaring health costs that make up a sixth of the U.S. economy. It came after a last-minute deal with anti- abortion Democrats and a lobbying trip by Obama to the Capitol.
“It’s a victory for the American people,” Obama told reporters at the White House just before midnight. “This legislation will not fix everything that ails our health-care system but it moves us decisively in the right direction. This is what change looks like.”
House Speaker Nancy Pelosi described the passage as “history for our country and progress for the American people.”
Two Bills
To finish their work on health care, House Democrats approved a Senate bill passed in December and then voted 220-211 to pass a measure that would amend the Senate legislation to fix provisions they don’t like. The Senate must also pass this second bill under a budget process called reconciliation that requires a simple majority vote.
While Senate Democrats plan to act this week on the second bill, they face a host of challenges from Republicans that may hold up their work or force a new vote in the House.
The two bills together will cost $940 billion over 10 years and cover 32 million uninsured Americans, the Congressional Budget Office estimated. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Companies such as health insurer WellPoint Inc. of Indianapolis, medical-device maker Medtronic Inc. of Minneapolis and drugmaker Pfizer Inc. of New York will get millions of new customers with the extension of coverage. Their industries will also face billions of dollars in new fees.
WellPoint Reacts
As part of the overhaul, drugmakers agreed to help the elderly more easily afford medicines. Insurers, which opposed the legislation, will have to take all customers, regardless of pre-existing conditions, and face limits on how much revenue can be spent beyond covering medical expenses.
“WellPoint is disappointed that after more than a year of debate, Congress has approved health-care legislation that does little to reduce cost and improve quality,” company spokeswoman Kristin Binns said in an e-mail to reporters.
Under the bill, Americans will have to buy insurance or pay a penalty, with the possibility of tapping new purchasing exchanges and government aid for lower-income Americans.
Republicans said the costs will balloon, criticized the increases in government programs and held out the possibility that private insurance and medical care would be hurt.
“We are looking at a health-care bill that nobody in this body believes is satisfactory,” House Minority Leader John Boehner said prior to the vote. “We have failed to reflect the will of our constituents.”
Business Groups
Business groups, including the U.S. Chamber of Commerce, also lobbied against the legislation, and Peoria, Illinois-based Caterpillar Inc. sent a letter to leaders saying the bills would raise its costs by $100 million in the first year alone.
The House’s two-step process became necessary after Democrats lost the 60th vote in the Senate generally needed to push through major legislation.
Just weeks after the Senate’s party-line 60-39 vote, Democrats were almost finished drafting a House-Senate compromise bill when Massachusetts Republican Scott Brown won a Jan. 19 special election to fill the seat left vacant by the death of Democrat Edward M. Kennedy.
The use of the budget-reconciliation tool opens the door for the Senate to pass the second bill with 51 votes, as long as it can withstand Republican challenges and the rulings of a parliamentarian, who will take out any provision he decides have only an incidental impact on the federal budget.
‘Massive’ Amendments
New Hampshire Senator Judd Gregg, who will help coordinate the Republicans’ efforts, said his party can put forth “massive amounts” of amendments on unrelated issues from gun control to immigration. They can also challenge provisions such as the scaling back of a tax on high-end, or so-called Cadillac, insurance plans because it would affect money flowing into Social Security, he said.
Any changes in the Senate would force a new House vote on the reconciliation bill, further complicating the effort. House Democrats particularly wanted to change the Cadillac tax because they say it would affect too many workers.
“If those people think they’re only going to vote on this once, they’re nuts,” Senator Orrin Hatch, a Utah Republican, said in a Bloomberg Television interview last week.
Illinois Senator Richard Durbin, a member of the Democratic leadership, said yesterday his party is prepared for challenges and any amendments Republicans might file.
‘Ready to Tackle’
“We’re ready to tackle that if that’s what they want to do,” Durbin said on CBS’s “Face the Nation” program. “We’re ready to deal with honest amendments. There will come a time when the American people say enough, this is about politics.”
Obama, who faced criticism for largely leaving the drafting of the legislation to Congress, swung into high gear in recent weeks. He hosted a Feb. 25 bipartisan summit at the White House, proposed detailed final compromises and lobbied dozens of undecided Democrats. He postponed a trip to Asia to remain in Washington for yesterday’s vote.
Obama benefited in part from the votes of Democrats who are leaving Congress and who were willing to switch sides after voting “no” on a House version in November.
He also won support from Democrats, including Representative Dennis Kucinich of Ohio, who had threatened to oppose the final measure because it didn’t include a new government program, or public option, to compete against private insurers.
Expanding Medicaid
The legislation will expand the Medicaid government program for the poor to cover those making up to 133 percent of the federal poverty level, and offer subsidies for millions of other Americans to buy insurance through an online exchange offering policies at more-affordable group rates.
Many employers with more than 50 workers that don’t offer coverage will be subject to a penalty. The reconciliation bill will change the penalty to $2,000 per worker, from $750 in the Senate bill, and subtract out the first 30 employees.
The overhaul is financed in large part through new taxes. The reconciliation bill would add a 3.8 percent Medicare tax on investment income imposed on individuals who earn more than $200,000 a year and joint tax filers who have more than $250,000 in earnings. That adds to a higher Medicare payroll tax already in the Senate bill.
President Barack Obama will sign the health-care package into law at the White House tomorrow, said an administration official who spoke on condition of anonymity because it hasn’t been publicly announced.
Yesterday’s 219-212 vote marks a victory for Obama. Only Democrats voted for the legislation, underscoring a partisan divide that promises to make health care the defining issue in November’s congressional elections.
Lawmakers hailed the action as a historic follow-up to the 1965 creation of the Medicare program for the elderly and a way to mitigate soaring health costs that make up a sixth of the U.S. economy. It came after a last-minute deal with anti- abortion Democrats and a lobbying trip by Obama to the Capitol.
“It’s a victory for the American people,” Obama told reporters at the White House just before midnight. “This legislation will not fix everything that ails our health-care system but it moves us decisively in the right direction. This is what change looks like.”
House Speaker Nancy Pelosi described the passage as “history for our country and progress for the American people.”
Two Bills
To finish their work on health care, House Democrats approved a Senate bill passed in December and then voted 220-211 to pass a measure that would amend the Senate legislation to fix provisions they don’t like. The Senate must also pass this second bill under a budget process called reconciliation that requires a simple majority vote.
While Senate Democrats plan to act this week on the second bill, they face a host of challenges from Republicans that may hold up their work or force a new vote in the House.
The two bills together will cost $940 billion over 10 years and cover 32 million uninsured Americans, the Congressional Budget Office estimated. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Companies such as health insurer WellPoint Inc. of Indianapolis, medical-device maker Medtronic Inc. of Minneapolis and drugmaker Pfizer Inc. of New York will get millions of new customers with the extension of coverage. Their industries will also face billions of dollars in new fees.
WellPoint Reacts
As part of the overhaul, drugmakers agreed to help the elderly more easily afford medicines. Insurers, which opposed the legislation, will have to take all customers, regardless of pre-existing conditions, and face limits on how much revenue can be spent beyond covering medical expenses.
“WellPoint is disappointed that after more than a year of debate, Congress has approved health-care legislation that does little to reduce cost and improve quality,” company spokeswoman Kristin Binns said in an e-mail to reporters.
Under the bill, Americans will have to buy insurance or pay a penalty, with the possibility of tapping new purchasing exchanges and government aid for lower-income Americans.
Republicans said the costs will balloon, criticized the increases in government programs and held out the possibility that private insurance and medical care would be hurt.
“We are looking at a health-care bill that nobody in this body believes is satisfactory,” House Minority Leader John Boehner said prior to the vote. “We have failed to reflect the will of our constituents.”
Business Groups
Business groups, including the U.S. Chamber of Commerce, also lobbied against the legislation, and Peoria, Illinois-based Caterpillar Inc. sent a letter to leaders saying the bills would raise its costs by $100 million in the first year alone.
The House’s two-step process became necessary after Democrats lost the 60th vote in the Senate generally needed to push through major legislation.
Just weeks after the Senate’s party-line 60-39 vote, Democrats were almost finished drafting a House-Senate compromise bill when Massachusetts Republican Scott Brown won a Jan. 19 special election to fill the seat left vacant by the death of Democrat Edward M. Kennedy.
The use of the budget-reconciliation tool opens the door for the Senate to pass the second bill with 51 votes, as long as it can withstand Republican challenges and the rulings of a parliamentarian, who will take out any provision he decides have only an incidental impact on the federal budget.
‘Massive’ Amendments
New Hampshire Senator Judd Gregg, who will help coordinate the Republicans’ efforts, said his party can put forth “massive amounts” of amendments on unrelated issues from gun control to immigration. They can also challenge provisions such as the scaling back of a tax on high-end, or so-called Cadillac, insurance plans because it would affect money flowing into Social Security, he said.
Any changes in the Senate would force a new House vote on the reconciliation bill, further complicating the effort. House Democrats particularly wanted to change the Cadillac tax because they say it would affect too many workers.
“If those people think they’re only going to vote on this once, they’re nuts,” Senator Orrin Hatch, a Utah Republican, said in a Bloomberg Television interview last week.
Illinois Senator Richard Durbin, a member of the Democratic leadership, said yesterday his party is prepared for challenges and any amendments Republicans might file.
‘Ready to Tackle’
“We’re ready to tackle that if that’s what they want to do,” Durbin said on CBS’s “Face the Nation” program. “We’re ready to deal with honest amendments. There will come a time when the American people say enough, this is about politics.”
Obama, who faced criticism for largely leaving the drafting of the legislation to Congress, swung into high gear in recent weeks. He hosted a Feb. 25 bipartisan summit at the White House, proposed detailed final compromises and lobbied dozens of undecided Democrats. He postponed a trip to Asia to remain in Washington for yesterday’s vote.
Obama benefited in part from the votes of Democrats who are leaving Congress and who were willing to switch sides after voting “no” on a House version in November.
He also won support from Democrats, including Representative Dennis Kucinich of Ohio, who had threatened to oppose the final measure because it didn’t include a new government program, or public option, to compete against private insurers.
Expanding Medicaid
The legislation will expand the Medicaid government program for the poor to cover those making up to 133 percent of the federal poverty level, and offer subsidies for millions of other Americans to buy insurance through an online exchange offering policies at more-affordable group rates.
Many employers with more than 50 workers that don’t offer coverage will be subject to a penalty. The reconciliation bill will change the penalty to $2,000 per worker, from $750 in the Senate bill, and subtract out the first 30 employees.
The overhaul is financed in large part through new taxes. The reconciliation bill would add a 3.8 percent Medicare tax on investment income imposed on individuals who earn more than $200,000 a year and joint tax filers who have more than $250,000 in earnings. That adds to a higher Medicare payroll tax already in the Senate bill.
Stocks Show Economy Revving as Cyclical Shares Win
March 22 (Bloomberg) -- Retailers erased their stock market losses since the collapse of Lehman Brothers Holdings Inc. and transportation companies doubled in a year, signs the advance in U.S. equities is just getting started.
Amazon.com Inc. and Gap Inc. have wiped out declines of as much as 63 percent since the bear market began in October 2007 amid forecasts retailers’ profits will increase 63 percent through 2012. The Dow Jones Transportation Average, where earnings are projected to almost triple in two years, is beating the Standard & Poor’s 500 Index by 32 percentage points since March 2009, the widest gap for a rally since 1990.
Investors seeking signals equities will keep rising are finding them in industries most tied to the economy, the basis for a century-old forecasting technique known as Dow Theory. While bears say the gains aren’t justified by earnings and that shares are climbing too fast, Stephen Lieber of Alpine Woods Capital Investors LLC and David Darst of Morgan Stanley are buying on speculation the expansion will revive profit growth.
“This is not a junk stock rally,” said Lieber, who helps manage more than $7 billion in Purchase, New York. “This is a restoration-of-confidence rally. This is a business confidence rally.”
Lieber owns Intel Corp., the Santa Clara, California-based semiconductor maker that climbed to an 18-month high of $22.24 last week amid optimism sales to business customers are growing.
Winning Streak
The S&P 500 increased 0.9 percent and the MSCI World Index of stocks in 23 developed nations climbed 0.3 percent as both measures advanced for a third week. Government reports showing higher consumer spending and lower-than-expected inflation have pushed the Dow Jones Industrial Average up 3 percent in 2010, according to data compiled by Bloomberg. The S&P 500 slipped 0.1 percent to 1,158.79 at 9:55 a.m. in New York today.
An exchange-traded fund that matches the performance of the U.S. benchmark index, the SPDR S&P 500 ETF Trust, rose 14 straight days through March 17, the longest streak in its 17- year history. The 11-day winning streak by the Dow transports that ended last week was the best since 1992, data compiled by Bloomberg show.
Companies whose profits are most tied to changes in U.S. gross domestic product are beating those with the smallest connection to the economy by the widest margin on record.
The Morgan Stanley Cyclical Index, a measure of 30 stocks from Dearborn, Michigan-based Ford Motor Co. to U.S. Steel Corp. in Pittsburgh, has surged 209 percent since March 6, 2009. It topped the Morgan Stanley Consumer Index, a gauge of companies such as Pfizer Inc. and ConAgra Foods Inc. that do relatively well during a contraction, by 147 percentage points.
Twice the Gain
The cyclical index has also provided almost double the return since Feb. 8, when the S&P 500 began rebounding from a three-week drop that erased 8.1 percent, according to data compiled by Bloomberg.
Manufacturing and industrial stocks in the S&P 500 are up 11 percent in 2010, beating nine other groups in the index by at least 2 percentage points, data compiled by Bloomberg show. This is the first time since 1985 that the measure, which includes Chicago-based Boeing Co., the world’s second-largest commercial plane-maker, and General Electric Co. in Fairfield, Connecticut, the biggest supplier of power turbines, has led this far into a year, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi.
“We are still bullish on risk assets,” said Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, which oversees $1.6 trillion. “We see a multiyear cyclical bull market.”
High Velocity
The speed of the rebound in stocks since Feb. 8 is reason to doubt its sustainability, says Andrew Lapthorne, global head of quantitative strategy at Paris-based Societe Generale. The relative strength index using 14 days of data for the SPDR S&P 500 ETF rose to 76.76 on March 17, the highest level since October 2006. Surges in the RSI mean a security may have climbed too far, too fast.
Rallying stocks have pushed the S&P 500’s price relative to earnings in the last 12 months to 18.6 times. The average multiple over the last 56 years is 16.6, according to data compiled by Bloomberg.
“The long-term valuation expectations are way, way too high,” said Lapthorne. “I don’t think there is much value in the markets. It has the potential to drive violently downwards.”
Amazon, Old Navy
Investors should bet that companies with the best earnings prospects will outperform, Robert Buckland, an equity strategist at Citigroup Inc. in London, wrote in a March 17 report. Stocks that fell the most in the 2007 to 2009 bear market helped propel the S&P 500 during the past 12 months and cyclical stocks will help lead the market in the next two years, Buckland said.
Amazon, the Seattle-based owner of the world’s biggest Internet retailer, has doubled since the stock market bottomed in 2009 and gained 12 percent over the last six weeks. San Francisco-based Gap, which runs namesake clothing stores and Old Navy, is up 22 percent in the past six weeks.
Both stocks helped send the S&P 500 Consumer Discretionary Index, a measure of companies reliant on Americans’ spending, past its level on Sept. 12, 2008, just before Lehman’s bankruptcy froze credit markets and $1.7 trillion in bank losses spurred the worst recession in seven decades.
Buffett’s Indicator
The average analyst estimate for Amazon’s 2011 earnings has increased 14 percent to $4.78 a share this year. Gap’s has risen 4.8 percent to $1.73. Profit for companies in the consumer discretionary index are forecast to surge an average of 57 percent to $21.66 a share through the end of 2012, according to data compiled by Bloomberg.
Warren Buffett said on Nov. 3 that he made an “all-in wager” on the strength of the U.S. economy when he bought Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. for $27 billion, the biggest purchase of his career.
Buffett, 79, the billionaire chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, told ABC News last year that U.S. rail- freight traffic is among the most important measures of economic health. Trains hauled 287,837 carloads for the week ended March 13, near the highest level in a year, data from the Washington- based Association of American Railroads show.
‘Coming Back’
The rebound in shipping has helped push the Dow Jones Transportation Average up 104 percent since the market low, compared with the S&P 500’s 71 percent jump. Companies in the gauge are projected to report a 173 percent increase in profits in the next two years, led by a sixfold gain at Honolulu-based Alexander & Baldwin Inc., which operates barges, data on operating profits compiled by Bloomberg show. By comparison, earnings among S&P 500 companies may grow 52 percent during that time, the data show.
“The cyclical stocks are coming back because the economy is coming back,” said Jeffrey Saut, the chief investment strategist at Raymond James & Associates, which manages $230 billion in St. Petersburg, Florida. “I’m still bullish into the summer.”
Dow Theory, developed by Wall Street Journal co-founder Charles Dow in the 1800s, suggests the rally in U.S. equities may continue. Dow’s transportation and industrial averages both reached the highest levels since October 2008 last week.
Stocks that fell the most during the bear market plunge have been the biggest winners in the rebound, according to data compiled by Bloomberg. Financial shares in the S&P 500 have risen 152 percent in the past year. Investors from Paulson & Co. to Fairholme Capital Management are loading up on the group. Regulatory filings show banks, brokerages and insurers make up 19 percent of hedge fund equity holdings, the biggest allocation compared with other industries.
“I’m bullish,” said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees more than $220 billion. “The economy is improving, corporate earnings look good and there’s still great value in the market.”
Amazon.com Inc. and Gap Inc. have wiped out declines of as much as 63 percent since the bear market began in October 2007 amid forecasts retailers’ profits will increase 63 percent through 2012. The Dow Jones Transportation Average, where earnings are projected to almost triple in two years, is beating the Standard & Poor’s 500 Index by 32 percentage points since March 2009, the widest gap for a rally since 1990.
Investors seeking signals equities will keep rising are finding them in industries most tied to the economy, the basis for a century-old forecasting technique known as Dow Theory. While bears say the gains aren’t justified by earnings and that shares are climbing too fast, Stephen Lieber of Alpine Woods Capital Investors LLC and David Darst of Morgan Stanley are buying on speculation the expansion will revive profit growth.
“This is not a junk stock rally,” said Lieber, who helps manage more than $7 billion in Purchase, New York. “This is a restoration-of-confidence rally. This is a business confidence rally.”
Lieber owns Intel Corp., the Santa Clara, California-based semiconductor maker that climbed to an 18-month high of $22.24 last week amid optimism sales to business customers are growing.
Winning Streak
The S&P 500 increased 0.9 percent and the MSCI World Index of stocks in 23 developed nations climbed 0.3 percent as both measures advanced for a third week. Government reports showing higher consumer spending and lower-than-expected inflation have pushed the Dow Jones Industrial Average up 3 percent in 2010, according to data compiled by Bloomberg. The S&P 500 slipped 0.1 percent to 1,158.79 at 9:55 a.m. in New York today.
An exchange-traded fund that matches the performance of the U.S. benchmark index, the SPDR S&P 500 ETF Trust, rose 14 straight days through March 17, the longest streak in its 17- year history. The 11-day winning streak by the Dow transports that ended last week was the best since 1992, data compiled by Bloomberg show.
Companies whose profits are most tied to changes in U.S. gross domestic product are beating those with the smallest connection to the economy by the widest margin on record.
The Morgan Stanley Cyclical Index, a measure of 30 stocks from Dearborn, Michigan-based Ford Motor Co. to U.S. Steel Corp. in Pittsburgh, has surged 209 percent since March 6, 2009. It topped the Morgan Stanley Consumer Index, a gauge of companies such as Pfizer Inc. and ConAgra Foods Inc. that do relatively well during a contraction, by 147 percentage points.
Twice the Gain
The cyclical index has also provided almost double the return since Feb. 8, when the S&P 500 began rebounding from a three-week drop that erased 8.1 percent, according to data compiled by Bloomberg.
Manufacturing and industrial stocks in the S&P 500 are up 11 percent in 2010, beating nine other groups in the index by at least 2 percentage points, data compiled by Bloomberg show. This is the first time since 1985 that the measure, which includes Chicago-based Boeing Co., the world’s second-largest commercial plane-maker, and General Electric Co. in Fairfield, Connecticut, the biggest supplier of power turbines, has led this far into a year, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi.
“We are still bullish on risk assets,” said Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, which oversees $1.6 trillion. “We see a multiyear cyclical bull market.”
High Velocity
The speed of the rebound in stocks since Feb. 8 is reason to doubt its sustainability, says Andrew Lapthorne, global head of quantitative strategy at Paris-based Societe Generale. The relative strength index using 14 days of data for the SPDR S&P 500 ETF rose to 76.76 on March 17, the highest level since October 2006. Surges in the RSI mean a security may have climbed too far, too fast.
Rallying stocks have pushed the S&P 500’s price relative to earnings in the last 12 months to 18.6 times. The average multiple over the last 56 years is 16.6, according to data compiled by Bloomberg.
“The long-term valuation expectations are way, way too high,” said Lapthorne. “I don’t think there is much value in the markets. It has the potential to drive violently downwards.”
Amazon, Old Navy
Investors should bet that companies with the best earnings prospects will outperform, Robert Buckland, an equity strategist at Citigroup Inc. in London, wrote in a March 17 report. Stocks that fell the most in the 2007 to 2009 bear market helped propel the S&P 500 during the past 12 months and cyclical stocks will help lead the market in the next two years, Buckland said.
Amazon, the Seattle-based owner of the world’s biggest Internet retailer, has doubled since the stock market bottomed in 2009 and gained 12 percent over the last six weeks. San Francisco-based Gap, which runs namesake clothing stores and Old Navy, is up 22 percent in the past six weeks.
Both stocks helped send the S&P 500 Consumer Discretionary Index, a measure of companies reliant on Americans’ spending, past its level on Sept. 12, 2008, just before Lehman’s bankruptcy froze credit markets and $1.7 trillion in bank losses spurred the worst recession in seven decades.
Buffett’s Indicator
The average analyst estimate for Amazon’s 2011 earnings has increased 14 percent to $4.78 a share this year. Gap’s has risen 4.8 percent to $1.73. Profit for companies in the consumer discretionary index are forecast to surge an average of 57 percent to $21.66 a share through the end of 2012, according to data compiled by Bloomberg.
Warren Buffett said on Nov. 3 that he made an “all-in wager” on the strength of the U.S. economy when he bought Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. for $27 billion, the biggest purchase of his career.
Buffett, 79, the billionaire chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, told ABC News last year that U.S. rail- freight traffic is among the most important measures of economic health. Trains hauled 287,837 carloads for the week ended March 13, near the highest level in a year, data from the Washington- based Association of American Railroads show.
‘Coming Back’
The rebound in shipping has helped push the Dow Jones Transportation Average up 104 percent since the market low, compared with the S&P 500’s 71 percent jump. Companies in the gauge are projected to report a 173 percent increase in profits in the next two years, led by a sixfold gain at Honolulu-based Alexander & Baldwin Inc., which operates barges, data on operating profits compiled by Bloomberg show. By comparison, earnings among S&P 500 companies may grow 52 percent during that time, the data show.
“The cyclical stocks are coming back because the economy is coming back,” said Jeffrey Saut, the chief investment strategist at Raymond James & Associates, which manages $230 billion in St. Petersburg, Florida. “I’m still bullish into the summer.”
Dow Theory, developed by Wall Street Journal co-founder Charles Dow in the 1800s, suggests the rally in U.S. equities may continue. Dow’s transportation and industrial averages both reached the highest levels since October 2008 last week.
Stocks that fell the most during the bear market plunge have been the biggest winners in the rebound, according to data compiled by Bloomberg. Financial shares in the S&P 500 have risen 152 percent in the past year. Investors from Paulson & Co. to Fairholme Capital Management are loading up on the group. Regulatory filings show banks, brokerages and insurers make up 19 percent of hedge fund equity holdings, the biggest allocation compared with other industries.
“I’m bullish,” said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees more than $220 billion. “The economy is improving, corporate earnings look good and there’s still great value in the market.”
U.S. Stocks Rise as Drug Shares Rally After House OKs Overhaul
March 22 (Bloomberg) -- U.S. stocks gained, erasing an early decline, as health-care shares rallied after the House of Representatives passed an overhaul of the industry.
Merck & Co. and Pfizer Inc. climbed more than 1.5 percent to help lead health-care companies to the biggest gain among 10 groups in the Standard & Poor’s 500 Index after the House approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage.
“The health-care legislation approval removes the uncertainty,” said Richard Sichel, chief investment officer at the Philadelphia Trust Co., which manages $1.4 billion. “On top of that, the shares had been beaten down, so you can find reasonably valued companies.”
The S&P 500 increased 0.3 percent to 1,162.8 at 10:37 a.m. in New York. The Dow Jones Industrial Average climbed 35 points, or 0.3 percent, to 10,776.98.
U.S. stocks retreated at the start of trading amid concern growing government debt and rising interest rates will derail the global economy.
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing.
The Reserve Bank of India raised its benchmark rates after local financial markets closed on March 19, a month earlier than the next scheduled review, to tame the fastest inflation in more than a year.
Policy makers in Australia and Malaysia have also increased rates since the end of February, while China has ordered lenders to set aside more funds as reserves twice this year.
“There’s a lot of structural headwinds around at the moment,” said Markus Steinbeis, head of equity portfolio management at the German unit of Pioneer Investments, which oversees about $221 billion globally. “Sentiment is neutral to negative and we could see a couple of days of consolidation before trading higher.”
Merck & Co. and Pfizer Inc. climbed more than 1.5 percent to help lead health-care companies to the biggest gain among 10 groups in the Standard & Poor’s 500 Index after the House approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage.
“The health-care legislation approval removes the uncertainty,” said Richard Sichel, chief investment officer at the Philadelphia Trust Co., which manages $1.4 billion. “On top of that, the shares had been beaten down, so you can find reasonably valued companies.”
The S&P 500 increased 0.3 percent to 1,162.8 at 10:37 a.m. in New York. The Dow Jones Industrial Average climbed 35 points, or 0.3 percent, to 10,776.98.
U.S. stocks retreated at the start of trading amid concern growing government debt and rising interest rates will derail the global economy.
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing.
The Reserve Bank of India raised its benchmark rates after local financial markets closed on March 19, a month earlier than the next scheduled review, to tame the fastest inflation in more than a year.
Policy makers in Australia and Malaysia have also increased rates since the end of February, while China has ordered lenders to set aside more funds as reserves twice this year.
“There’s a lot of structural headwinds around at the moment,” said Markus Steinbeis, head of equity portfolio management at the German unit of Pioneer Investments, which oversees about $221 billion globally. “Sentiment is neutral to negative and we could see a couple of days of consolidation before trading higher.”
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