Feb. 23 (Bloomberg) -- Confidence among U.S. consumers fell in February to the lowest level in 10 months, a sign that concern about job prospects may hold back the spending needed to sustain the recovery.
The Conference Board’s confidence index slumped to 46, below the lowest forecast in a Bloomberg News survey of economists, from 56.5 in January, a report from the New York- based private research group showed today. A separate report showed home prices rose for a seventh month.
Stocks fell and Treasuries gained after the confidence report also showed attitudes about current conditions fell to the lowest level in 27 years and the outlook for wages dimmed. The survey reinforces expectations Federal Reserve Chairman Ben S. Bernanke will repeat the central bank’s pledge to keep interest rates low for “an extended period” in testimony to Congress tomorrow.
“Consumer spending is going to disappoint throughout most of the year,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. The economy “may not be out of the woods.”
Economists forecast the confidence index would decrease to 55 from a previously reported 55.9 January reading, according to the median of 68 projections in the Bloomberg survey. Estimates ranged from 50.9 to 59.
The Standard & Poor’s 500 Index declined 1.2 percent to 1,095.25 at 12:22 p.m. in New York. The 10-year Treasury note rose, pushing down the yield eight basis points to 3.72 percent.
Chris Low, chief economist at FTN Financial in New York, said in an e-mail to clients that the larger-than-anticipated decline may have also reflected a drop in stock values. The S&P 500 fell 8 percent to a closing low this month of 1,056.74 on Feb. 8 from a January high of 1,150.23.
Home Prices
The S&P/Case-Shiller home-price index of 20 U.S. cities increased 0.3 percent. Compared with December 2008, prices fell 3.1 percent, the smallest year-over-year decline since May 2007.
“There’s no precedent for such a sharp turnaround in the data that we have going back to 1987,” Robert Shiller, co- founder of the index, said today on a conference call with reporters. He said the eventual end to the Fed’s purchase of mortgage-backed securities and expectations for a higher federal funds rate make it difficult to forecast home prices.
The Conference Board’s measure of present conditions decreased to 19.4, the lowest since February 1983, from 25.2.
Jobs Hard to Get
The share of consumers who said jobs are plentiful fell to 3.6 percent from 4.4 percent, according to the Conference Board. The proportion of people who said jobs are hard to get increased to 47.7 percent from 46.5 percent.
“The vicissitudes of the political situation in Washington cannot be helping,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “There has been a lot of sizzle on job stimulus proposals but no meat is coming out of the sausage factory. Now the focus seems to be moving back to the health-care reform issue.”
The gauge of expectations for the next six months decreased to 63.8, the lowest since July 2009, from 77.3 the prior month.
The proportion of people who expect their incomes to increase over the next six months declined to 9.5 percent from 11 percent. The share expecting more jobs in the next six months fell to 13.4 percent from 15.8 percent.
The report also showed the Middle and South Atlantic were among regions with declines in confidence, which sustained two blizzards this month. Sentiment also waned in areas not affected, such as the Mountain and Pacific regions.
Unemployment Outlook
The unemployment rate is expected to average 9.8 percent this year, according to the median forecast of a Bloomberg survey taken early this month.
An increase in initial jobless claims so far this year signals the labor market isn’t improving, said Ricchiuto. Claims rose to 473,000 in the week ended Feb. 13, compared with 432,000 at the end of 2009, the lowest since July 2008.
Consumer spending will grow 2 percent this year, according to the median estimate of economists surveyed by Bloomberg this month. That would follow last year’s 0.6 percent decline, the worst showing since 1974.
The world’s largest economy will expand 3 percent this year after shrinking 2.4 percent in 2009, according to the median forecast of economists.
Some retailers are turning more optimistic. Lowe’s Cos., the second-largest U.S. home-improvement chain, posted fourth- quarter profit that exceeded analysts’ estimates after better- than-forecast sales signaled a recovery in the housing market.
“While the psychological impact of falling home prices and an uncertain employment picture continue to weigh” on consumers, Americans are “gaining the confidence to take on more discretionary projects.” Robert Niblock, Lowe’s chief executive officer, said in a statement Feb. 22. “The worst of the economic cycle is likely behind us.”
Wednesday, February 24, 2010
Fed Won’t Lift Target in 2010, Pimco’s Clarida Says
Feb. 23 (Bloomberg) -- The Federal Reserve won’t raise its target lending rate while unemployment is still high, according to Richard Clarida, global strategic adviser at Pacific Investment Management Co.
“The Fed’s own forecast is for unemployment at year-end to be north of 9 percent,” said Clarida in a Bloomberg Radio interview today. “I just don’t see the Fed hiking until 2011.”
Pimco used the term “new normal” last year to describe what the Newport Beach, California-based company, the world’s largest bond fund manager, forecasts as a period of slower economic growth, high unemployment and heightened government regulation. Fed policy makers said last month that while consumer spending has picked up, it’s partly “constrained by a weak labor market.”
The Fed can only let its $2.26 trillion balance shrink to its level before the September 2008 collapse of Lehman Brothers Holdings Inc. by selling the securities it purchased, something the central bank doesn’t want to do, Clarida said.
Instead, the Fed will let the securities it purchased mature and “roll off,” according to the Pimco strategist. He said the central bank will carry out “plumbing” maintenance including repurchase operations.
Policy makers unanimously agreed at their January meeting that the Fed’s balance sheet will need to decrease “substantially over time” and return the Fed’s holdings to just Treasuries, according to the minutes of the Jan. 26-27 Federal Open Market Committee meeting. Some policy makers pushed to start selling assets in the “near future.”
To Lift Economy
The Fed and U.S. agencies have lent, spent or guaranteed $9.66 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.
“The bottom line is they’re trying to do something that’s never been done before, which is to normalize policy without reducing the monetary base,” he said.
The number of Americans filing first-time claims for unemployment insurance unexpectedly increased in the week ended Feb. 13, the Labor Department reported Feb. 18.
Minneapolis Fed President Narayana Kocherlakota said in text of a speech two days earlier in St. Paul, Minnesota, that the unemployment rate is unlikely to fall below 9 percent this year and 8 percent in 2011.
“The Fed’s own forecast is for unemployment at year-end to be north of 9 percent,” said Clarida in a Bloomberg Radio interview today. “I just don’t see the Fed hiking until 2011.”
Pimco used the term “new normal” last year to describe what the Newport Beach, California-based company, the world’s largest bond fund manager, forecasts as a period of slower economic growth, high unemployment and heightened government regulation. Fed policy makers said last month that while consumer spending has picked up, it’s partly “constrained by a weak labor market.”
The Fed can only let its $2.26 trillion balance shrink to its level before the September 2008 collapse of Lehman Brothers Holdings Inc. by selling the securities it purchased, something the central bank doesn’t want to do, Clarida said.
Instead, the Fed will let the securities it purchased mature and “roll off,” according to the Pimco strategist. He said the central bank will carry out “plumbing” maintenance including repurchase operations.
Policy makers unanimously agreed at their January meeting that the Fed’s balance sheet will need to decrease “substantially over time” and return the Fed’s holdings to just Treasuries, according to the minutes of the Jan. 26-27 Federal Open Market Committee meeting. Some policy makers pushed to start selling assets in the “near future.”
To Lift Economy
The Fed and U.S. agencies have lent, spent or guaranteed $9.66 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.
“The bottom line is they’re trying to do something that’s never been done before, which is to normalize policy without reducing the monetary base,” he said.
The number of Americans filing first-time claims for unemployment insurance unexpectedly increased in the week ended Feb. 13, the Labor Department reported Feb. 18.
Minneapolis Fed President Narayana Kocherlakota said in text of a speech two days earlier in St. Paul, Minnesota, that the unemployment rate is unlikely to fall below 9 percent this year and 8 percent in 2011.
Wall Street Bonuses Rise 17%, N.Y.’s DiNapoli Says
Feb. 23 (Bloomberg) -- Wall Street bonuses rose 17 percent in 2009 from a year earlier as the securities industry rebounded from the financial crisis, New York State Comptroller Thomas DiNapoli said.
Financial firms disbursed $20.3 billion compared with $18.4 billion in 2008, DiNapoli’s office calculated, basing its estimate on personal income-tax collections. It doesn’t include stock options or other types of deferred pay. The bonus pool was the second-largest ever, DiNapoli said in his yearly report.
Cash and stock bonuses fell about a third from 2007, he said. New York State’s budget deficit is estimated to be $8.2 billion, 10 percent more than estimated in January, because Wall Street’s cash bonuses are less than forecast, Governor David Paterson said Feb. 3. Personal income tax collections in January were $1 billion below the $7.08 billion the state projected.
“It would be preferable to have predictable growth and profitability,” DiNapoli said in an interview on Bloomberg Television today. “With New York depending on the sector for budget health, we need Wall Street to be profitable.”
The average bonus for the industry was $123,000 last year, the comptroller said. Wall Street has added 3,900 jobs through December and DiNapoli said he expects that trend to continue. He said the increase in tax revenue from higher bonuses won’t solve New York’s budget problems.
Bonus Pool
The size of the bonus pool was harder to determine since many firms paid a larger percentage of bonuses in stock and deferred compensation, DiNapoli said in the statement. Wall Street accounted for 24 percent of the wages paid to New York City workers in 2008 and 5 percent of the jobs.
In the most profitable years, high levels of compensation, corporate earnings and capital gains from Wall Street-related activity accounted for as much as 20 percent of the state’s total tax revenue and 12 percent of the city’s collections, DiNapoli’s office has said.
“The bonuses are welcome news in some ways for the New York City and New York State economies,” DiNapoli said at a press conference today. “There’s a great deal of resentment against the Street for its role in the global economic meltdown.”
New York City lost 26,300 jobs in the financial industry, including securities, insurance, credit, banking and commodities in the 12 months ending in December 2009, a 5.8 percent 12-month decline, the state Labor Department reported last month. For every new job in the securities industry, three others are created for New York’s economy, DiNapoli said.
Obama Criticizes Bonuses
President Barack Obama called bank bonuses “obscene” at least twice this year, and Democratic Representative Andre Carson of Indiana said the industry’s practices are “reckless” during a House Financial Services Committee hearing on compensation.
In the fourth quarter, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank slashed their compensation. The three Wall Street firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion.
Pay at these three firms increased by 31 percent in 2009, DiNapoli’s report said. Most top executives won’t receive a cash bonus for 2009 and will take pay in types of deferred compensation.
Obama, speaking in an interview earlier this month, said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chief Executive Officer Jamie Dimon or the $9 million paid to Goldman Sachs CEO Lloyd Blankfein. The president said compensation packages over the last decade haven’t always been commensurate with performance, and reiterated his call for shareholders to have a say in CEO pay.
Financial services companies employed 430,400 at the end of 2009, DiNapoli said. New York City unemployment was 10.6 percent in December, 3.6 percentage points higher than a year earlier. Unemployed city residents totaled 424,500, an increase of 44,700 in six months, the state labor department reported in January.
Financial firms disbursed $20.3 billion compared with $18.4 billion in 2008, DiNapoli’s office calculated, basing its estimate on personal income-tax collections. It doesn’t include stock options or other types of deferred pay. The bonus pool was the second-largest ever, DiNapoli said in his yearly report.
Cash and stock bonuses fell about a third from 2007, he said. New York State’s budget deficit is estimated to be $8.2 billion, 10 percent more than estimated in January, because Wall Street’s cash bonuses are less than forecast, Governor David Paterson said Feb. 3. Personal income tax collections in January were $1 billion below the $7.08 billion the state projected.
“It would be preferable to have predictable growth and profitability,” DiNapoli said in an interview on Bloomberg Television today. “With New York depending on the sector for budget health, we need Wall Street to be profitable.”
The average bonus for the industry was $123,000 last year, the comptroller said. Wall Street has added 3,900 jobs through December and DiNapoli said he expects that trend to continue. He said the increase in tax revenue from higher bonuses won’t solve New York’s budget problems.
Bonus Pool
The size of the bonus pool was harder to determine since many firms paid a larger percentage of bonuses in stock and deferred compensation, DiNapoli said in the statement. Wall Street accounted for 24 percent of the wages paid to New York City workers in 2008 and 5 percent of the jobs.
In the most profitable years, high levels of compensation, corporate earnings and capital gains from Wall Street-related activity accounted for as much as 20 percent of the state’s total tax revenue and 12 percent of the city’s collections, DiNapoli’s office has said.
“The bonuses are welcome news in some ways for the New York City and New York State economies,” DiNapoli said at a press conference today. “There’s a great deal of resentment against the Street for its role in the global economic meltdown.”
New York City lost 26,300 jobs in the financial industry, including securities, insurance, credit, banking and commodities in the 12 months ending in December 2009, a 5.8 percent 12-month decline, the state Labor Department reported last month. For every new job in the securities industry, three others are created for New York’s economy, DiNapoli said.
Obama Criticizes Bonuses
President Barack Obama called bank bonuses “obscene” at least twice this year, and Democratic Representative Andre Carson of Indiana said the industry’s practices are “reckless” during a House Financial Services Committee hearing on compensation.
In the fourth quarter, Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank slashed their compensation. The three Wall Street firms set aside $39.9 billion for pay in 2009, below the 2007 record of $44.7 billion.
Pay at these three firms increased by 31 percent in 2009, DiNapoli’s report said. Most top executives won’t receive a cash bonus for 2009 and will take pay in types of deferred compensation.
Obama, speaking in an interview earlier this month, said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chief Executive Officer Jamie Dimon or the $9 million paid to Goldman Sachs CEO Lloyd Blankfein. The president said compensation packages over the last decade haven’t always been commensurate with performance, and reiterated his call for shareholders to have a say in CEO pay.
Financial services companies employed 430,400 at the end of 2009, DiNapoli said. New York City unemployment was 10.6 percent in December, 3.6 percentage points higher than a year earlier. Unemployed city residents totaled 424,500, an increase of 44,700 in six months, the state labor department reported in January.
Trump Argues Name Can’t Be Used By Icahn for Casinos
Feb. 23 (Bloomberg) -- Donald Trump opened his court battle today with billionaire Carl Icahn over three bankrupt casinos that bear Trump’s name.
In their opening statements, attorneys for Icahn and Trump disagreed about whether bankruptcy law allows the three casinos to keep using the Trump brand name.
“Icahn can’t get the benefits” of the Trump name, attorney David Friedman told U.S. Bankruptcy Judge Judith Wizmur today.
The court hearing in U.S. Bankruptcy Court in Camden, New Jersey is scheduled to last at least four days as lawyers pitch competing plans for reorganizing Trump Entertainment Resorts Inc.
Wizmur will hear from gambling consultants, economists and financial advisers for each side. Trump has changed positions and allies since the company filed bankruptcy on Feb. 17, 2009.
Trump abandoned his partnership with Trump Entertainment’s banker in favor of an alliance with his former adversaries in the case, noteholders who say that Trump personally guaranteed to repay at least $290 million of the $1.25 billion they are owed.
Icahn is working with the banker jilted by Trump, Andy Beal, a Dallas businessman who has been a high-stakes poker player. Trump Entertainment owed Beal Bank more than $480 million, debt that had a higher payment priority than the notes. Icahn bought the right to collect that bank debt for about 92 cents on the dollar, Friedman said in court today.
The case is In re TCI 2 Holdings LLC, 09-13654, U.S. Bankruptcy Court, District of New Jersey (Camden).
In their opening statements, attorneys for Icahn and Trump disagreed about whether bankruptcy law allows the three casinos to keep using the Trump brand name.
“Icahn can’t get the benefits” of the Trump name, attorney David Friedman told U.S. Bankruptcy Judge Judith Wizmur today.
The court hearing in U.S. Bankruptcy Court in Camden, New Jersey is scheduled to last at least four days as lawyers pitch competing plans for reorganizing Trump Entertainment Resorts Inc.
Wizmur will hear from gambling consultants, economists and financial advisers for each side. Trump has changed positions and allies since the company filed bankruptcy on Feb. 17, 2009.
Trump abandoned his partnership with Trump Entertainment’s banker in favor of an alliance with his former adversaries in the case, noteholders who say that Trump personally guaranteed to repay at least $290 million of the $1.25 billion they are owed.
Icahn is working with the banker jilted by Trump, Andy Beal, a Dallas businessman who has been a high-stakes poker player. Trump Entertainment owed Beal Bank more than $480 million, debt that had a higher payment priority than the notes. Icahn bought the right to collect that bank debt for about 92 cents on the dollar, Friedman said in court today.
The case is In re TCI 2 Holdings LLC, 09-13654, U.S. Bankruptcy Court, District of New Jersey (Camden).
Jobs Bill May Get U.S. Senate Vote Today After Clearing Hurdle
Feb. 23 (Bloomberg) -- The U.S. Senate may take a final vote today on a $15 billion jobs bill after a handful of Republicans, including Scott Brown of Massachusetts, broke with party leaders to help advance the Democratic measure.
Yesterday’s vote allowing the measure to proceed was 62-30, with 60 needed to overcome Republican stalling tactics. Most Republicans opposed the bill after Senate Majority Leader Harry Reid scaled back an $85 billion jobs-related measure crafted by a group of Democrats and Republicans.
Reid said today the Senate may approve the bill by the end of the day. He said he wants the Senate to consider a 30-day extension of unemployment benefits, including so-called Cobra subsidies to help the jobless buy health insurance. Those would otherwise expire at the end of this month.
Lawmakers also may consider longer-term extensions of those benefits and a group of miscellaneous tax cuts, as well as higher aid to states struggling to pay for Medicaid, Reid said.
Brown, in just his third vote since being seated earlier this month, said that while the bill was “not perfect” he “came to Washington to be an independent voice, to put politics aside and to do everything in my power to create jobs for Massachusetts families.”
Also siding with Democrats were Republican Senators Susan Collins and Olympia Snowe of Maine, Christopher Bond of Missouri and George Voinovich of Ohio. Senator Ben Nelson of Nebraska was the sole Democrat to vote against advancing the bill.
Democrats, who lost their 60-vote supermajority with Brown’s surprise win in a special election last month, needed support from at least two Republicans in yesterday’s vote because New Jersey Democrat Frank Lautenberg is being treated for stomach cancer.
Obama ‘Grateful’
President Barack Obama issued a statement saying he was “grateful to the Democratic and Republican senators who voted to support” the bill’s provisions.
“The American people want to see Washington put aside partisan differences and make progress on jobs” and with yesterday’s vote “the Senate took one important step forward in doing that,” Obama said.
House Speaker Nancy Pelosi, a California Democrat, said lawmakers there may pass the Senate plan without any changes.
The measure’s centerpiece is a $13 billion plan to fight joblessness by offering companies a one-year holiday from paying a 6.2 percent Social Security payroll tax for each worker they hire who has been jobless for at least 60 days. The plan would save or create as many as 234,000 jobs, according to the nonpartisan Congressional Budget Office.
Subsidies for Bonds
The plan would spend $2 billion to aid state governments by expanding subsidies for bonds used to finance construction projects, give small businesses more power to write off expenses and transfer $19.5 billion in tax revenue into the government’s highway trust fund.
Republican leaders had demanded a chance to restore provisions Reid dropped earlier this month, including a package of business-related tax cuts. Some of those provisions were among those Reid said today he wants the Senate to vote on later.
The provisions eliminated by Reid included an extension in unemployment benefits, a package of individual and business tax cuts worth $31 billion, and provisions preventing looming cuts in Medicare reimbursements to doctors.
The House approved a jobs bill in December costing more than $150 billion. It would spend $53 billion to extend unemployment benefits, $24 billion to help states to pay their Medicaid bills, $48 billion for infrastructure and $26 billion to shore up funding for public service jobs.
Yesterday’s vote allowing the measure to proceed was 62-30, with 60 needed to overcome Republican stalling tactics. Most Republicans opposed the bill after Senate Majority Leader Harry Reid scaled back an $85 billion jobs-related measure crafted by a group of Democrats and Republicans.
Reid said today the Senate may approve the bill by the end of the day. He said he wants the Senate to consider a 30-day extension of unemployment benefits, including so-called Cobra subsidies to help the jobless buy health insurance. Those would otherwise expire at the end of this month.
Lawmakers also may consider longer-term extensions of those benefits and a group of miscellaneous tax cuts, as well as higher aid to states struggling to pay for Medicaid, Reid said.
Brown, in just his third vote since being seated earlier this month, said that while the bill was “not perfect” he “came to Washington to be an independent voice, to put politics aside and to do everything in my power to create jobs for Massachusetts families.”
Also siding with Democrats were Republican Senators Susan Collins and Olympia Snowe of Maine, Christopher Bond of Missouri and George Voinovich of Ohio. Senator Ben Nelson of Nebraska was the sole Democrat to vote against advancing the bill.
Democrats, who lost their 60-vote supermajority with Brown’s surprise win in a special election last month, needed support from at least two Republicans in yesterday’s vote because New Jersey Democrat Frank Lautenberg is being treated for stomach cancer.
Obama ‘Grateful’
President Barack Obama issued a statement saying he was “grateful to the Democratic and Republican senators who voted to support” the bill’s provisions.
“The American people want to see Washington put aside partisan differences and make progress on jobs” and with yesterday’s vote “the Senate took one important step forward in doing that,” Obama said.
House Speaker Nancy Pelosi, a California Democrat, said lawmakers there may pass the Senate plan without any changes.
The measure’s centerpiece is a $13 billion plan to fight joblessness by offering companies a one-year holiday from paying a 6.2 percent Social Security payroll tax for each worker they hire who has been jobless for at least 60 days. The plan would save or create as many as 234,000 jobs, according to the nonpartisan Congressional Budget Office.
Subsidies for Bonds
The plan would spend $2 billion to aid state governments by expanding subsidies for bonds used to finance construction projects, give small businesses more power to write off expenses and transfer $19.5 billion in tax revenue into the government’s highway trust fund.
Republican leaders had demanded a chance to restore provisions Reid dropped earlier this month, including a package of business-related tax cuts. Some of those provisions were among those Reid said today he wants the Senate to vote on later.
The provisions eliminated by Reid included an extension in unemployment benefits, a package of individual and business tax cuts worth $31 billion, and provisions preventing looming cuts in Medicare reimbursements to doctors.
The House approved a jobs bill in December costing more than $150 billion. It would spend $53 billion to extend unemployment benefits, $24 billion to help states to pay their Medicaid bills, $48 billion for infrastructure and $26 billion to shore up funding for public service jobs.
Friday, February 19, 2010
Goldman Sachs, Greece Didn’t Disclose Swap Contract
Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
German Chancellor Angela Merkel said today it’s a “scandal” if banks are found to have helped Greece conceal its budget deficit. The country “falsified statistics for years,” she said in her speech to a party rally.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about $24 million underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
Freshfields was the legal adviser to the managers of the six bond sales. Spokesman Christian Marroni didn’t have an immediate comment.
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
‘Long-Term Damage’
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
‘Wider Collusion’
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
German Chancellor Angela Merkel said today it’s a “scandal” if banks are found to have helped Greece conceal its budget deficit. The country “falsified statistics for years,” she said in her speech to a party rally.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about $24 million underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
Freshfields was the legal adviser to the managers of the six bond sales. Spokesman Christian Marroni didn’t have an immediate comment.
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
‘Long-Term Damage’
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
‘Wider Collusion’
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
Monday, February 15, 2010
U.S. Stocks Post Second Week of Gains in the Year
Published: Friday, 12 Feb 2010 | 6:18 PM ET Text Size By: Gina Francolla, Marc Briganti, Giovanny Moreano
U.S. stocks snapped four weeks of consecutive losses, led to the upside by the NASDAQ Composite, posting a gain of 1.98%. This week, the Dow Jones Industrial Average closed below the 10,000-mark, its lowest level since November 4, 2009. However, all three major equity indices recovered some of the earlier losses in the week, posting their second week of gains in 2010.
What follows is a summary of this week's statistics on the markets.
Equity Metrics
20 of the Dow 30 components finished up for the week, while 9 companies closed down, and Exxon (XOM) finished flat
332 out of the 500 (~66%) S&P components finished up for the week, ~33% increased, and 1% was unchanged
76 of the NASDAQ 100 components rose for the week
Since the Peak This Year
The Dow is off by -626.29 points, or -5.8% from its highest close of the year (a 15-month high) reached on 1/19 of 10,725.43
The S&P is off by -74.7 points, or -6.5% from its highest close of the year (a 15-month high) reached on 1/19 of 1150.23
The NASDAQ is off by -136.87 points, or -5.9% from its highest close of the year (a 16-month high) reached on 1/19 of 2320.4
Since the March Lows
Since the March lows, the NASDAQ is leading the way with a gain of 72.12%, followed by the S&P and Dow 58.97%, up % and 54.25%, respectively
S&P 500
Sector Impact: 8 out of 10 sectors closed the week in positive territory, led to the upside by basic material stocks. Utility stocks fell the most this week, down 0.87%.
Materials were helped by Cliff Natural Resources (CLF), up 10%
Utilities were hurt this week by FirstEnergy (FE), down 6%
Year-to-date, 10 out of 10 sectors continue to trade in the red, led by Telecom, down 10%.
Commodity Impact: Crude oil for March delivery snapped a four-week losing streak, closing at $74.13 per barrel on Friday, up $2.94, or 4.13% for the week.
Copper recovered some of last week's losses, gaining 7.9% this week, while milk futures dropped the most, -2.3% for the week.
Use of Temps May No Longer Signal Permanent Hiring
Published: Monday, 15 Feb 2010 | 12:42 PM ET Text Size By: AP
It's not the signal it used to be. When employers hire temporary staff after a recession, it's long been seen as a sign they'll soon hire permanent workers.
Not these days.
Companies have hired more temps for four straight months. Yet they remain reluctant to make permanent hires because of doubts about the recovery's durability.
Even companies that are boosting production seem inclined to get by with their existing workers, plus temporary staff if necessary.
"I think temporary hiring is less useful a signal than it used to be," says John Silvia, chief economist at Wells Fargo. "Companies aren't testing the waters by turning to temporary firms. They just want part-time workers."
The reasons vary. But economists and business people say the main obstacle is that employers lack confidence that the economic rebound has staying power. Many fear their sales and the overall economy will remain weak or even falter as consumers spend cautiously.
Companies also worry about higher costs related to taxes or health care measures being weighed by Congress and statehouses. That's what Chris DeCapua, owner of employment firm Dawson Careers in Columbus, Ohio, is hearing from clients.
DeCapua says corporate demand for temporary workers has surged. That's especially true for manufacturing-related jobs involving driving forklifts, assembling products, packing merchandise and loading it on trucks.
Yet that demand hasn't spilled over into a demand for permanent workers. And DeCapua doesn't see it turning around anytime soon.
"There is so much uncertainty, and when there is uncertainty people and companies hold onto their checkbooks," DeCapua says.
Companies "don't want to hire permanent workers and then have to turn around and get rid of them six months later," he says.
DoubleStar, a human resources firm based in West Chester, Penn., hired two temp workers recently to join its 60-person staff. CEO Harry Griendling says in normal times he would have hired two permanent employees.
But Griendling has doubts about the strength of the recovery. He's not ready to absorb the risk and cost of adding permanent workers.
"When I look ahead for the next three to four months, all I see is murkiness," Griendling says.
For years, economists have viewed the hiring of temp workers as a bridge between no hiring and healthy job creation. It meant that employers would soon expand their permanent payrolls to keep up with rising customer demand.
After the 1990-1991 recession, for instance, gains in temporary hiring starting in August 1991 led almost immediately to stepped-up permanent hiring. And after the 2001 recession, temporary hiring rose for three straight months in the summer of 2003. By September, employers were adding full-time jobs each month.
Now, because the recovery seems more tepid and fragile than previous rebounds, temporary hiring may have lost its predictive power, economists say.
"I think a lot of it is manufacturing," says Mark Zandi, chief economist at Moody's Economy.com. "It may be that manufacturers are relying more on temps than in the past because they are more unsure about the ongoing demand for what they produce."
Employers added 52,000 temp jobs in January — the fourth consecutive month of gains. Over that same time, total U.S. jobs shrank by 106,000. Employers have managed to squeeze more work out of their existing staffs.
For the unemployed, temporary jobs provide a paycheck at a time when the unemployment rate remains near double digits. Still, these jobs generally offer few or no benefits.
Some of the jobless see temporary work as providing a foothold at a desirable employer. Yet it seems far from certain these days that a temp job will lead to full-time work.
Allen Moore, 26, said a temporary job was all he could find last fall after more than six months of unemployment. Jobs disappeared last year around his hometown of Peoria, Ill., after manufacturer Caterpillar [CAT 56.20 0.05 (+0.09%) ] cut thousands of positions.
Moore landed a temporary job in September through a staffing agency. He preferred a permanent position. But he found none. He earns $9 an hour making pallets and boxes for FCA Manufacturing in nearby Princeville.
He said he took the job with the hope that he'd be hired as a permanent employee within about three months. The three months have come and gone.
Moore figures the company is waiting for orders to increase before it expands its long-term payroll. "They think it's going to pick up," he says. "I hope it does."
Monday, February 1, 2010
Obama Offers $3.8 Trillion Budget With Focus on Jobs
Feb. 1 (Bloomberg) -- President Barack Obama proposes a $3.8 trillion fiscal 2011 budget today that calls for $100 billion in additional stimulus spending and projects this year’s deficit will hit a record $1.6 trillion.
The plan would reduce the shortfall in part by imposing more than $800 billion in higher taxes and fees on those earning more than $250,000, banks that benefited from the financial industry bailout and the oil, gas and coal industries.
The spending blueprint being sent to Congress for the fiscal year that begins Oct. 1 reflects the administration’s struggle to boost the economy and job growth -- both top concerns of voters -- while tightening the government’s belt to reduce deficits in the years ahead.
“We’re trying to accomplish a soft landing in terms of our fiscal trajectory,” Peter Orszag, director of the White House Office of Management and Budget, said in a briefing.
The $1.6 trillion deficit forecast for the current year represents 10.6 percent of the U.S. gross domestic product, making it the biggest by that measure since World War II, according to administration figures. The deficit in 2009 was $1.4 trillion.
Deficit Projections
The White House deficit projection exceeds other forecasts. The Congressional Budget Office has forecast this year’s shortfall at $1.35 trillion. The median of 39 analysts survey by Bloomberg News is for $1.37 trillion this year and $1.10 trillion next year.
The administration’s deficit projections for 2011 and beyond are higher than the White House previously forecast because “the economic conditions were much worse” than predicted when Obama first took office, Orszag said in a Bloomberg Television interview this morning.
To address the shortfall, the administration wants to impose a three-year freeze in “discretionary” spending outside of defense and security. The freeze won’t be across-the-board. Some programs, such as education and research and development initiatives, would get as much as a 6 percent budget increase. The budget is subject to approval by Congress.
Obama’s plan also calls for creating a special debt commission to recommend steps to cut the deficit and tougher budgeting rules in Congress.
National Debt
The result would be a deficit that declines next year to $1.27 trillion and to $828 billion in 2012, according to the budget. In subsequent years, through 2020, the annual deficit would still total between $700 billion and $1 trillion. By 2020, the publicly held debt would approximately double to $18.5 trillion, according to estimates.
Orszag said the administration intends to slowly phase in its deficit-reduction plans, saying cutting too much too soon might stifle the economic recovery.
“The worst thing we could do is act too quickly and throw the economy back into recession,” Orszag said. “But we do need to be starting, and so that’s why you see this selective approach where we are beginning the process in certain components of the budget.”
Representative Paul Ryan of Wisconsin, the senior Republican on the House Budget Committee, called the budget “a plan for more of the same -- a very aggressive agenda of more government spending, more taxes, more deficits and more debt.”
Extending Stimulus
The plan calls for extending several elements of last year’s economic stimulus as part of either a new jobs package or through subsequent legislation. It proposes spending $61 billion to extend for one year the administration’s “Making Work Pay” tax credit which provided $400 to individuals and $800 to couples. It is set to expire this year.
The administration’s economic forecasts for economic growth, unemployment and inflation will be released later this morning.
Obama proposes to make permanent the Build America Bonds program, in which the federal government subsidizes infrastructure projects by picking up the tab for 35 percent of the interest costs from taxable bonds issued by local governments. It calls for reducing that subsidy to 28 percent. The budget would also spend $25 billion to provide state governments with six additional months of help paying their Medicaid bills.
Higher Taxes
The bulk of the higher taxes would come by allowing tax cuts passed under former President George W. Bush for those earning more than $250,000 to lapse at the end of this year. That would raise $678 billion, according to the administration.
A fee imposed on 50 of the biggest financial firms such as JPMorgan Chase & Co. and Bank of America Corp. would raise another $90 billion. Eliminating tax breaks for fossil-fuel industries would produce another $40 billion.
Freezing some domestic programs for three years and then holding it at the rate of inflation for the rest of the next decade would save $250 billion, the administration estimates.
That would represent an abrupt shift in priorities. Non- defense discretionary spending is projected to grow this year by 7 percent not including the costs of last year’s stimulus package, according to the CBO.
Seeking Savings
The increase totals 17 percent once the stimulus package is included, according to CBO estimates. The administration’s plan also calls for 120 program terminations, reductions and other savings it estimates would save $20 billion.
It would provide $33 billion in “emergency” funding this year to help pay for the administration’s troop buildup in Afghanistan. Next year, war costs would amount to $159.3 billion. The basic defense budget would amount to $549 billion, which represents a 1.8 increase adjusted for inflation. The Department of Homeland Security would get a 2 percent increase.
The budget has more than doubled from $1.9 trillion in 2001, according the OMB’s historical data.
Recovery Accelerates as Company Spending Rises Most Since 2006
Feb. 1 (Bloomberg) -- Evidence of a self-sustaining U.S. recovery is emerging on the factory floors of Texas Instruments Inc. The second-largest U.S. chipmaker will spend almost $1 billion this year to expand three factories and open a fourth to fill orders.
The need to rebuild industrial capacity after the largest decline on record in 2009 is boosting capital spending and may spur hiring. Beneficiaries are led by technology equipment- makers Intel Corp., Applied Materials Inc. and EMC Corp., as well as industrial product providers General Electric Co. and Rockwell Automation Inc.
Capital spending will increase the total productive capacity of the U.S. economy above its pre-recession level of December 2007, helping gross domestic product grow at a 2.7 percent annual rate in 2010, according to the median forecast of 67 economists in a Jan. 14 Bloomberg News survey. That would be the fastest rate since 2006.
“Our business is growing so we have to build out capacity,” Dave Pahl, Texas Instruments’ director of investor relations, said from Dallas. “Our customers are increasing what they’re building, so that’s increasing our revenue.”
Business executives say spending will increase further as profits rise -- third-quarter earnings increased 10.8 percent, according to Commerce Department figures, the most in more than five years -- and demand strengthens. Of U.S. companies followed by Morgan Stanley analysts in New York, 38 percent intend to raise capital spending over the next three months, up from a low of 3 percent in August.
‘Very Powerful Recovery’
“The groundwork has been laid for a very powerful recovery in capital spending,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. “It won’t take much of a spark to get companies to start spending and hiring.”
GDP rose 5.7 percent in the fourth quarter as factories revived assembly lines and consumers and companies spent more, the Commerce Department reported on Jan. 29. Purchases of equipment and software increased 13.3 percent, the most since the first quarter of 2006.
Federal Reserve officials, who left the benchmark lending rate unchanged in a range between zero and 0.25 percent on Jan. 27, noted in their policy statement that “business spending on equipment and software appears to be picking up.”
Shares in companies that make those goods are poised to extend their rally, investors say. The Russell 3000 Producer Durables index and the Standard & Poor’s 500 Semiconductor Equipment Index are each up more than 29 percent over the past 12 months, exceeding the 27 percent rise in the Standard & Poor’s 500 index.
Cash Flow
“People are buying equipment,” said Mario Gabelli, chief executive officer of Gamco Investors Inc. in Rye, New York, which owns Texas Instruments and Rockwell Automation among its $20 billion under management. “As cash flow continues to improve, as companies get more confident, they need more efficient plants,” Gabelli, 67, said in an interview in New York.
Morgan Stanley’s January business conditions index survey found that 34 percent of companies plan to increase hiring, up from 8 percent in August.
“Rising jobs will provide the gains in income and confidence needed to support consumer spending,” Richard Berner, co-head of global economics at Morgan Stanley in New York, said in a telephone interview.
Payrolls rose by 13,000 jobs in January, according to the median forecast of 62 economists surveyed by Bloomberg News ahead of the Labor Department’s Feb. 5 report. That would be the second month of job creation since the recession began in December 2007. Manufacturing payrolls are forecast to have fallen by 23,000, the least since the recession’s onset.
Davos Panel
The unemployment rate is forecast to have held at 10 percent in January, the economists’ survey showed. White House economic adviser Lawrence Summers suggested during a panel discussion at the World Economic Forum in Davos, Switzerland Jan. 29, that the jobless rate may not fall quickly as companies invest in boosting productivity rather than hiring.
Non-farm productivity rose at an 8.1 percent annual rate in the third quarter of 2009, and the median forecast of 47 economists surveyed by Bloomberg News is for output per hour to have risen at a 6 percent rate in the fourth quarter. The average quarterly growth rate of productivity over the past 20 years is 2.4 percent.
The median forecast of 54 economists in a Bloomberg News survey released Jan. 14 is that it will take until the end of 2011 for the unemployment rate to fall to 9 percent.
9 Percent?
Dean Maki, chief U.S. economist for Barclays Capital Inc. in New York, says the rise in capital spending makes that forecast too pessimistic. He predicted that the nation’s unemployment rate will fall to 9 percent by the end of 2010.
“Businesses are starting to spend on goods; that means they’ll also start spending on employment,” Maki said in an interview on Bloomberg Television after the GDP report. “The first quarter as a whole will show substantial job growth.”
Business-led job growth would be good news for President Barack Obama. A survey released Jan. 13 by Hamden, Connecticut- based Quinnipiac Polling Institute found 54 percent said they disapproved of the way Obama was handling the economy. The survey of 1,767 registered voters had a margin of error of plus or minus 2.3 percentage points.
Tax Breaks
In his Jan. 27 State of the Union address, the president proposed extending through 2010 a temporary tax incentive that encourages businesses to accelerate purchases of equipment. The 50 percent write-off may give a boost to capital expenditures if approved by Congress.
“It will help companies to make capital investments, which is what you need in a weak economy,” Monica McGuire, senior policy director of taxation for the National Association of Manufacturers in Washington, said in a telephone interview.
Slack remains in the economy. About 68.6 percent of U.S. manufacturing capacity was in use in December, compared with an average of 81 percent since records began in 1948.
Technology stocks have been rising for 10 months in anticipation of a capital expenditure rebound, and gains have slowed for many companies, said Craig Berger, a technology analyst at FBR Capital Markets in New York. Texas Instruments shares, which are up 51 percent over the past 12 months, are more expensive on a relative-value basis than 61 percent of the companies in the S&P 500.
‘So Far, So Fast’
“Investors are willing to bet we’ve got to start spending on capex after cutting back,” Berger said. “But there’s a lot of push and pull in the markets because we’ve come up so far, so fast.
Small businesses, generally those with fewer than 500 employees, and with less cash or access to financing, will limit their investments this year, according to the National Federation of Independent Business. A near-record low of 18 percent said they plan to make capital expenditures over the next three to six months, according to the industry group’s January survey.
“Capital spending is on the sidelines,” said William Dunkelberg, NFIB chief economist in Philadelphia, in a telephone interview.
By contrast, Seagate Technology, the world’s largest maker of hard-disk drives, raised its 2010 sales forecast on Jan. 21 after reporting it sold a record 49.9 million drives in the most recent quarter. While Seagate expected business buyers to resume purchasing, it didn’t predict such a quick rebound, Steve Luczo, the company’s chief executive officer, said in an interview.
Real Signals
“As we get further and further away from the implosion we all felt at the end of 2008, you have more confidence that the signals you’re seeing are real,” said Luczo, 52, whose company is based in the Cayman Islands and run from Scotts Valley, California.
Dallas-based Texas Instruments is hiring 250 workers to open a new chip-manufacturing plant in Richardson, Texas, that will eventually employ 1,000. It’s also expanding three other plants in the state. The company forecast Jan. 25 that first- quarter profit of 44 cents to 52 cents a share would beat analysts’ estimates.
Santa Clara, California-based Intel, the world’s largest chipmaker, is also raising capital spending, Chief Financial Officer Stacy Smith, 47, said in a Jan. 15 interview. Intel shares are up 45 percent over the past year, and of the 49 analysts who cover the company, 36 maintain a “buy” rating.
This “will be the first year in about five years where we are going to grow the employment in the company and make some critical R&D bets,” Smith said.
Chip Equipment
Increased capital spending bodes well for companies such as Santa Clara, California-based Applied Materials, which supplies chip-making equipment to Texas Instruments and Intel, chief executive Michael Splinter, 59, said.
“During 2008 and 2009 a lot of capacity came off line in the semiconductor industry. That has to be replaced,” he said. “In the next six to nine months I think we’re going to see increased spending on new capacity.”
EMC, the world’s biggest maker of storage computers, said on Jan. 26 that sales would be $16 billion this year, exceeding the $15.4 billion average estimate of analysts in a Bloomberg survey and a 14 percent increase from 2009.
David Goulden, chief financial officer of Hopkinton, Massachusetts-based EMC, forecasts a 3 percent to 5 percent increase in spending on information technology this year.
“We’re seeing interest in investments for growth, new opportunities and integrations, as opposed to what used to be mostly focus on cost-cutting,” he said on a Jan. 26 conference call with analysts.
Spending Plans
Surveys of corporate spending plans show increasing optimism. The Philadelphia Federal Reserve Bank’s monthly index of manufacturing capital spending plans over the next six months rose to 24.5 in January, the highest since September 2008. Similar indicators produced by the Dallas, Richmond, and New York Federal Reserve banks show the same trend. The New York capital expenditure index rose to 33.33 last month, the highest since May 2007.
American industrial capacity -- the number of plants and amount of equipment available to produce goods, mine raw materials, and generate power -- fell by 1 percent last year, the largest decline on record.
“We’re seeing a pretty good bounce back,” Jeffrey Immelt, chief executive of Fairfield, Connecticut-based General Electric, told analysts Jan. 22. “We think equipment orders should be positive for the year.” GE shares have risen 26 percent in the past year.
Purchasing Management
Smaller suppliers are also seeing the benefits. The National Association of Purchasing Management-Milwaukee reported its capital equipment index was at 60 in January, the highest since August 2008.
Milwaukee-based Rockwell Automation, which makes industrial automation and power controls, raised its 2010 forecast after reporting Jan. 27 it made a profit of 54 cents a share in the most recent quarter, topping the 36-cent average analyst estimate.
“We believe we’re at the early stage of a recovery,” CEO Keith Nosbusch said in an interview. Companies “de-stocked to the point where any need had to be filled immediately, one to one, as opposed to before where they were able to take it out of their inventory supply chain.”
Rockwell Automation shares are up 77 percent over the past 12 months. “That’s a stock we like,” Gabelli said.
LaVorgna sees capital expenditures rising 14.3 percent from the fourth quarter of 2010 to the fourth quarter of 2009, largely in the second half of the year, and 10 percent over the same period in 2011. He pointed to the level of new orders in the December ISM factory index, a leading indicator of capital spending, which rose to 64.8, the highest in five years.
“Capital spending has already improved despite low capacity use,” LaVorgna said. “You had a massive collapse in capex, and those are almost always followed by massive recoveries.”
The need to rebuild industrial capacity after the largest decline on record in 2009 is boosting capital spending and may spur hiring. Beneficiaries are led by technology equipment- makers Intel Corp., Applied Materials Inc. and EMC Corp., as well as industrial product providers General Electric Co. and Rockwell Automation Inc.
Capital spending will increase the total productive capacity of the U.S. economy above its pre-recession level of December 2007, helping gross domestic product grow at a 2.7 percent annual rate in 2010, according to the median forecast of 67 economists in a Jan. 14 Bloomberg News survey. That would be the fastest rate since 2006.
“Our business is growing so we have to build out capacity,” Dave Pahl, Texas Instruments’ director of investor relations, said from Dallas. “Our customers are increasing what they’re building, so that’s increasing our revenue.”
Business executives say spending will increase further as profits rise -- third-quarter earnings increased 10.8 percent, according to Commerce Department figures, the most in more than five years -- and demand strengthens. Of U.S. companies followed by Morgan Stanley analysts in New York, 38 percent intend to raise capital spending over the next three months, up from a low of 3 percent in August.
‘Very Powerful Recovery’
“The groundwork has been laid for a very powerful recovery in capital spending,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. “It won’t take much of a spark to get companies to start spending and hiring.”
GDP rose 5.7 percent in the fourth quarter as factories revived assembly lines and consumers and companies spent more, the Commerce Department reported on Jan. 29. Purchases of equipment and software increased 13.3 percent, the most since the first quarter of 2006.
Federal Reserve officials, who left the benchmark lending rate unchanged in a range between zero and 0.25 percent on Jan. 27, noted in their policy statement that “business spending on equipment and software appears to be picking up.”
Shares in companies that make those goods are poised to extend their rally, investors say. The Russell 3000 Producer Durables index and the Standard & Poor’s 500 Semiconductor Equipment Index are each up more than 29 percent over the past 12 months, exceeding the 27 percent rise in the Standard & Poor’s 500 index.
Cash Flow
“People are buying equipment,” said Mario Gabelli, chief executive officer of Gamco Investors Inc. in Rye, New York, which owns Texas Instruments and Rockwell Automation among its $20 billion under management. “As cash flow continues to improve, as companies get more confident, they need more efficient plants,” Gabelli, 67, said in an interview in New York.
Morgan Stanley’s January business conditions index survey found that 34 percent of companies plan to increase hiring, up from 8 percent in August.
“Rising jobs will provide the gains in income and confidence needed to support consumer spending,” Richard Berner, co-head of global economics at Morgan Stanley in New York, said in a telephone interview.
Payrolls rose by 13,000 jobs in January, according to the median forecast of 62 economists surveyed by Bloomberg News ahead of the Labor Department’s Feb. 5 report. That would be the second month of job creation since the recession began in December 2007. Manufacturing payrolls are forecast to have fallen by 23,000, the least since the recession’s onset.
Davos Panel
The unemployment rate is forecast to have held at 10 percent in January, the economists’ survey showed. White House economic adviser Lawrence Summers suggested during a panel discussion at the World Economic Forum in Davos, Switzerland Jan. 29, that the jobless rate may not fall quickly as companies invest in boosting productivity rather than hiring.
Non-farm productivity rose at an 8.1 percent annual rate in the third quarter of 2009, and the median forecast of 47 economists surveyed by Bloomberg News is for output per hour to have risen at a 6 percent rate in the fourth quarter. The average quarterly growth rate of productivity over the past 20 years is 2.4 percent.
The median forecast of 54 economists in a Bloomberg News survey released Jan. 14 is that it will take until the end of 2011 for the unemployment rate to fall to 9 percent.
9 Percent?
Dean Maki, chief U.S. economist for Barclays Capital Inc. in New York, says the rise in capital spending makes that forecast too pessimistic. He predicted that the nation’s unemployment rate will fall to 9 percent by the end of 2010.
“Businesses are starting to spend on goods; that means they’ll also start spending on employment,” Maki said in an interview on Bloomberg Television after the GDP report. “The first quarter as a whole will show substantial job growth.”
Business-led job growth would be good news for President Barack Obama. A survey released Jan. 13 by Hamden, Connecticut- based Quinnipiac Polling Institute found 54 percent said they disapproved of the way Obama was handling the economy. The survey of 1,767 registered voters had a margin of error of plus or minus 2.3 percentage points.
Tax Breaks
In his Jan. 27 State of the Union address, the president proposed extending through 2010 a temporary tax incentive that encourages businesses to accelerate purchases of equipment. The 50 percent write-off may give a boost to capital expenditures if approved by Congress.
“It will help companies to make capital investments, which is what you need in a weak economy,” Monica McGuire, senior policy director of taxation for the National Association of Manufacturers in Washington, said in a telephone interview.
Slack remains in the economy. About 68.6 percent of U.S. manufacturing capacity was in use in December, compared with an average of 81 percent since records began in 1948.
Technology stocks have been rising for 10 months in anticipation of a capital expenditure rebound, and gains have slowed for many companies, said Craig Berger, a technology analyst at FBR Capital Markets in New York. Texas Instruments shares, which are up 51 percent over the past 12 months, are more expensive on a relative-value basis than 61 percent of the companies in the S&P 500.
‘So Far, So Fast’
“Investors are willing to bet we’ve got to start spending on capex after cutting back,” Berger said. “But there’s a lot of push and pull in the markets because we’ve come up so far, so fast.
Small businesses, generally those with fewer than 500 employees, and with less cash or access to financing, will limit their investments this year, according to the National Federation of Independent Business. A near-record low of 18 percent said they plan to make capital expenditures over the next three to six months, according to the industry group’s January survey.
“Capital spending is on the sidelines,” said William Dunkelberg, NFIB chief economist in Philadelphia, in a telephone interview.
By contrast, Seagate Technology, the world’s largest maker of hard-disk drives, raised its 2010 sales forecast on Jan. 21 after reporting it sold a record 49.9 million drives in the most recent quarter. While Seagate expected business buyers to resume purchasing, it didn’t predict such a quick rebound, Steve Luczo, the company’s chief executive officer, said in an interview.
Real Signals
“As we get further and further away from the implosion we all felt at the end of 2008, you have more confidence that the signals you’re seeing are real,” said Luczo, 52, whose company is based in the Cayman Islands and run from Scotts Valley, California.
Dallas-based Texas Instruments is hiring 250 workers to open a new chip-manufacturing plant in Richardson, Texas, that will eventually employ 1,000. It’s also expanding three other plants in the state. The company forecast Jan. 25 that first- quarter profit of 44 cents to 52 cents a share would beat analysts’ estimates.
Santa Clara, California-based Intel, the world’s largest chipmaker, is also raising capital spending, Chief Financial Officer Stacy Smith, 47, said in a Jan. 15 interview. Intel shares are up 45 percent over the past year, and of the 49 analysts who cover the company, 36 maintain a “buy” rating.
This “will be the first year in about five years where we are going to grow the employment in the company and make some critical R&D bets,” Smith said.
Chip Equipment
Increased capital spending bodes well for companies such as Santa Clara, California-based Applied Materials, which supplies chip-making equipment to Texas Instruments and Intel, chief executive Michael Splinter, 59, said.
“During 2008 and 2009 a lot of capacity came off line in the semiconductor industry. That has to be replaced,” he said. “In the next six to nine months I think we’re going to see increased spending on new capacity.”
EMC, the world’s biggest maker of storage computers, said on Jan. 26 that sales would be $16 billion this year, exceeding the $15.4 billion average estimate of analysts in a Bloomberg survey and a 14 percent increase from 2009.
David Goulden, chief financial officer of Hopkinton, Massachusetts-based EMC, forecasts a 3 percent to 5 percent increase in spending on information technology this year.
“We’re seeing interest in investments for growth, new opportunities and integrations, as opposed to what used to be mostly focus on cost-cutting,” he said on a Jan. 26 conference call with analysts.
Spending Plans
Surveys of corporate spending plans show increasing optimism. The Philadelphia Federal Reserve Bank’s monthly index of manufacturing capital spending plans over the next six months rose to 24.5 in January, the highest since September 2008. Similar indicators produced by the Dallas, Richmond, and New York Federal Reserve banks show the same trend. The New York capital expenditure index rose to 33.33 last month, the highest since May 2007.
American industrial capacity -- the number of plants and amount of equipment available to produce goods, mine raw materials, and generate power -- fell by 1 percent last year, the largest decline on record.
“We’re seeing a pretty good bounce back,” Jeffrey Immelt, chief executive of Fairfield, Connecticut-based General Electric, told analysts Jan. 22. “We think equipment orders should be positive for the year.” GE shares have risen 26 percent in the past year.
Purchasing Management
Smaller suppliers are also seeing the benefits. The National Association of Purchasing Management-Milwaukee reported its capital equipment index was at 60 in January, the highest since August 2008.
Milwaukee-based Rockwell Automation, which makes industrial automation and power controls, raised its 2010 forecast after reporting Jan. 27 it made a profit of 54 cents a share in the most recent quarter, topping the 36-cent average analyst estimate.
“We believe we’re at the early stage of a recovery,” CEO Keith Nosbusch said in an interview. Companies “de-stocked to the point where any need had to be filled immediately, one to one, as opposed to before where they were able to take it out of their inventory supply chain.”
Rockwell Automation shares are up 77 percent over the past 12 months. “That’s a stock we like,” Gabelli said.
LaVorgna sees capital expenditures rising 14.3 percent from the fourth quarter of 2010 to the fourth quarter of 2009, largely in the second half of the year, and 10 percent over the same period in 2011. He pointed to the level of new orders in the December ISM factory index, a leading indicator of capital spending, which rose to 64.8, the highest in five years.
“Capital spending has already improved despite low capacity use,” LaVorgna said. “You had a massive collapse in capex, and those are almost always followed by massive recoveries.”
Consumer Spending in U.S. Increases for Third Month
Feb. 1 (Bloomberg) -- Spending by U.S. consumers increased in December for a third consecutive month, signaling the biggest part of the economy will contribute more to growth in coming months.
The 0.2 percent increase in purchases was less than anticipated and followed a 0.7 percent gain in November that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.4 percent, exceeding expectations.
Retailers such as Amazon.com Inc. are posting profits on increased sales as Americans spent more this past holiday season than the year before. Employment is key to propelling bigger gains in spending, one reason the Obama administration is proposing a fiscal 2011 budget today that calls for $100 billion in additional stimulus focusing on jobs.
“Consumers have the wherewithal to support good spending, however they are going to be reticent until they see a few good months of job gains,” said Craig Thomas, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the gain in spending. “2010 is lined up to be a moderately good year.”
Stock-index futures held earlier gains following the report. The contract on the Standard & Poor’s 500 Index rose 0.6 percent to 1,076.5 at 9:10 a.m. in New York. Treasury securities fell.
The median estimate of 65 economists surveyed called for a 0.3 percent increase in spending, after an originally reported gain of 0.5 percent the prior month. Projections ranged from no change to 0.7 percent.
Income Gains
The gain in incomes followed a 0.5 percent increase in November and exceeded the 0.3 percent median estimate in the Bloomberg survey. Wages and salaries climbed 0.1 percent in December after increasing 0.4 percent the prior month.
Today’s report showed prices were stabilizing. The inflation gauge tied to spending patterns rose 2.1 percent from December 2008, less than the survey median forecast.
The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent in December from the previous month and was up 1.5 percent from a year earlier.
Adjusted for inflation, spending climbed 0.1 percent following a 0.4 percent rise the prior month.
Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 4.8 percent from 4.5 percent the prior month.
Disposable income, or the money left over after taxes, increased 0.4 percent.
Better Sales
Amazon, the world’s largest Internet retailer, posted profit and sales that beat analysts’ estimates and said revenue growth may accelerate this quarter as consumers start spending more following the recession. Sales may rise as much as 43 percent to $7 billion in the first quarter, more than last year’s 18 percent growth, the Seattle-based company said last week in a statement. Analysts surveyed by Bloomberg had estimated sales of $6.42 billion.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, climbed 0.2 percent in December after rising 2.3 percent the prior month.
Purchases of non-durable goods decreased 0.8 percent, and spending on services, which account for almost 60 percent of all outlays, increased 0.4 percent.
The economy grew at a 5.7 percent annual rate in the fourth quarter, exceeding the median forecast of economists surveyed, figures from the Commerce Department showed last week. Consumer spending, which accounts for 70 percent of the economy, climbed at a 2 percent pace, also exceeding expectations.
The 0.2 percent increase in purchases was less than anticipated and followed a 0.7 percent gain in November that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.4 percent, exceeding expectations.
Retailers such as Amazon.com Inc. are posting profits on increased sales as Americans spent more this past holiday season than the year before. Employment is key to propelling bigger gains in spending, one reason the Obama administration is proposing a fiscal 2011 budget today that calls for $100 billion in additional stimulus focusing on jobs.
“Consumers have the wherewithal to support good spending, however they are going to be reticent until they see a few good months of job gains,” said Craig Thomas, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the gain in spending. “2010 is lined up to be a moderately good year.”
Stock-index futures held earlier gains following the report. The contract on the Standard & Poor’s 500 Index rose 0.6 percent to 1,076.5 at 9:10 a.m. in New York. Treasury securities fell.
The median estimate of 65 economists surveyed called for a 0.3 percent increase in spending, after an originally reported gain of 0.5 percent the prior month. Projections ranged from no change to 0.7 percent.
Income Gains
The gain in incomes followed a 0.5 percent increase in November and exceeded the 0.3 percent median estimate in the Bloomberg survey. Wages and salaries climbed 0.1 percent in December after increasing 0.4 percent the prior month.
Today’s report showed prices were stabilizing. The inflation gauge tied to spending patterns rose 2.1 percent from December 2008, less than the survey median forecast.
The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent in December from the previous month and was up 1.5 percent from a year earlier.
Adjusted for inflation, spending climbed 0.1 percent following a 0.4 percent rise the prior month.
Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 4.8 percent from 4.5 percent the prior month.
Disposable income, or the money left over after taxes, increased 0.4 percent.
Better Sales
Amazon, the world’s largest Internet retailer, posted profit and sales that beat analysts’ estimates and said revenue growth may accelerate this quarter as consumers start spending more following the recession. Sales may rise as much as 43 percent to $7 billion in the first quarter, more than last year’s 18 percent growth, the Seattle-based company said last week in a statement. Analysts surveyed by Bloomberg had estimated sales of $6.42 billion.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, climbed 0.2 percent in December after rising 2.3 percent the prior month.
Purchases of non-durable goods decreased 0.8 percent, and spending on services, which account for almost 60 percent of all outlays, increased 0.4 percent.
The economy grew at a 5.7 percent annual rate in the fourth quarter, exceeding the median forecast of economists surveyed, figures from the Commerce Department showed last week. Consumer spending, which accounts for 70 percent of the economy, climbed at a 2 percent pace, also exceeding expectations.
U.S. Stock Futures Rise, Treasuries Fall on Economy; Euro Gains
Feb. 1 (Bloomberg) -- U.S. stock futures rose, Treasuries fell and the euro snapped a four-day decline versus the dollar on speculation manufacturing is recovering around the world.
Standard & Poor’s 500 Index futures expiring in March rose 0.5 percent at 9:02 a.m. in New York as Exxon Mobil Corp. advanced. The euro strengthened 0.5 percent against the dollar and 0.4 percent versus the yen. The zloty climbed as much as 1.5 percent to its highest in a year against the euro and the rand gained 0.7 percent against the dollar as factory production rose in Poland and South Africa.
U.S. manufacturing probably expanded in January for a sixth month, the Institute for Supply Management may say today, adding to evidence the recovery in the world’s biggest economy is gaining momentum. Indexes of manufacturing in the euro region and the U.K. rose more than economists forecast.
“We look for a further leg up in equities, which could be driven by positive economic and earnings news,” JPMorgan Asset Management strategists David Shairp and Rekha Sharma wrote in a report today. The prospect of central banks withdrawing stimulus may mean that “markets will be periodically challenged and volatility will be on the rise,” they wrote.
The MSCI World Index of 23 developed nations’ stocks slipped less than 0.1 percent as Asian stocks dropped on concern China will take more steps to prevent its economy from overheating. Toshiba Corp. declined 6 percent in Tokyo after cutting its revenue forecast. Honda Motor Co. slid 2.5 after saying it’s recalling some cars in North America and the U.K.
European Movers
Europe’s Dow Jones Stoxx 600 Index fell 0.2 percent, paring earlier losses of as much as 0.8 percent. Vivendi SA, the owner of the world’s largest music company, slid 3.3 percent in Paris after a U.S. jury ruled it misled investors. Ryanair Holdings Plc advanced 5.7 percent in Dublin after Europe’s biggest discount airline raised its profit forecast.
Northumbrian Water Group Plc led shares of utility companies higher, jumping as much as 13 percent in London, after the Sunday Times reported that Ontario Teachers’ Pension Plan may bid 1.7 billion pounds ($2.7 billion) for the company.
The gain in U.S. futures indicated the S&P 500 may rebound from a three-month low. The U.S. Institute for Supply Management’s factory index, due at 10 a.m. in New York, rose to 55.5 last month from 54.9 in December, according to the median forecast of 62 economists surveyed by Bloomberg News. Readings greater than 50 signal expansion. Commerce Department data showed Americans’ income rose more than estimated in December.
Earnings Rebound
A record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the final three months of 2009 with a 76 percent increase in profits. Almost 80 percent of the results released since Jan. 11 topped the average forecasts of Wall Street estimates, data compiled by Bloomberg show.
Exxon added 1.8 percent after posting a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline.
The Dubai Financial Market General Index climbed 2.2 percent after Aabar Investments PJSC, the Abu Dhabi fund that’s the biggest shareholder in Daimler AG, said full-year profit more than doubled. The MSCI Emerging Markets Index fell 0.6 percent, extending its drop since Jan. 11 to as much as 10 percent.
Lower Home Prices
The euro advanced against 12 of its 16 most-traded counterparts, rising most versus the South Korean won with a 1 percent gain. The pound fell after reports showing a decline in U.K. house prices and a drop in mortgage approvals. The U.K. currency lost 0.4 percent against the dollar and 0.8 percent versus the euro.
The Dollar Index, which tracks the U.S. currency against those of six major trading partners, ended a four-day advance, dropping 0.2 percent. Treasuries fell for the first time in three days, with the yield on the 10-year note rising 4 basis points to 3.63 percent.
Copper for delivery in three months fell as much as 2.2 percent to $6,600 a metric ton in London, the lowest compared with intraday prices since Nov. 16. Tin retreated 5.5 percent to $16,250 a ton. Gold for immediate delivery added 0.5 percent to $1,086.32 an ounce in London and crude oil added 0.6 percent to $73.34 a barrel in New York.
Standard & Poor’s 500 Index futures expiring in March rose 0.5 percent at 9:02 a.m. in New York as Exxon Mobil Corp. advanced. The euro strengthened 0.5 percent against the dollar and 0.4 percent versus the yen. The zloty climbed as much as 1.5 percent to its highest in a year against the euro and the rand gained 0.7 percent against the dollar as factory production rose in Poland and South Africa.
U.S. manufacturing probably expanded in January for a sixth month, the Institute for Supply Management may say today, adding to evidence the recovery in the world’s biggest economy is gaining momentum. Indexes of manufacturing in the euro region and the U.K. rose more than economists forecast.
“We look for a further leg up in equities, which could be driven by positive economic and earnings news,” JPMorgan Asset Management strategists David Shairp and Rekha Sharma wrote in a report today. The prospect of central banks withdrawing stimulus may mean that “markets will be periodically challenged and volatility will be on the rise,” they wrote.
The MSCI World Index of 23 developed nations’ stocks slipped less than 0.1 percent as Asian stocks dropped on concern China will take more steps to prevent its economy from overheating. Toshiba Corp. declined 6 percent in Tokyo after cutting its revenue forecast. Honda Motor Co. slid 2.5 after saying it’s recalling some cars in North America and the U.K.
European Movers
Europe’s Dow Jones Stoxx 600 Index fell 0.2 percent, paring earlier losses of as much as 0.8 percent. Vivendi SA, the owner of the world’s largest music company, slid 3.3 percent in Paris after a U.S. jury ruled it misled investors. Ryanair Holdings Plc advanced 5.7 percent in Dublin after Europe’s biggest discount airline raised its profit forecast.
Northumbrian Water Group Plc led shares of utility companies higher, jumping as much as 13 percent in London, after the Sunday Times reported that Ontario Teachers’ Pension Plan may bid 1.7 billion pounds ($2.7 billion) for the company.
The gain in U.S. futures indicated the S&P 500 may rebound from a three-month low. The U.S. Institute for Supply Management’s factory index, due at 10 a.m. in New York, rose to 55.5 last month from 54.9 in December, according to the median forecast of 62 economists surveyed by Bloomberg News. Readings greater than 50 signal expansion. Commerce Department data showed Americans’ income rose more than estimated in December.
Earnings Rebound
A record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the final three months of 2009 with a 76 percent increase in profits. Almost 80 percent of the results released since Jan. 11 topped the average forecasts of Wall Street estimates, data compiled by Bloomberg show.
Exxon added 1.8 percent after posting a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline.
The Dubai Financial Market General Index climbed 2.2 percent after Aabar Investments PJSC, the Abu Dhabi fund that’s the biggest shareholder in Daimler AG, said full-year profit more than doubled. The MSCI Emerging Markets Index fell 0.6 percent, extending its drop since Jan. 11 to as much as 10 percent.
Lower Home Prices
The euro advanced against 12 of its 16 most-traded counterparts, rising most versus the South Korean won with a 1 percent gain. The pound fell after reports showing a decline in U.K. house prices and a drop in mortgage approvals. The U.K. currency lost 0.4 percent against the dollar and 0.8 percent versus the euro.
The Dollar Index, which tracks the U.S. currency against those of six major trading partners, ended a four-day advance, dropping 0.2 percent. Treasuries fell for the first time in three days, with the yield on the 10-year note rising 4 basis points to 3.63 percent.
Copper for delivery in three months fell as much as 2.2 percent to $6,600 a metric ton in London, the lowest compared with intraday prices since Nov. 16. Tin retreated 5.5 percent to $16,250 a ton. Gold for immediate delivery added 0.5 percent to $1,086.32 an ounce in London and crude oil added 0.6 percent to $73.34 a barrel in New York.
Obama Budget Said to Forecast $1.6 Trillion Deficit for 2010
Feb. 1 (Bloomberg) -- The budget plan President Barack Obama is set to release today forecasts the deficit will hit a record $1.6 trillion this year before beginning to decline in 2011, a congressional aide said.
Obama will send Congress a $3.8 trillion spending blueprint that includes a mix of tax cuts and spending to boost the economy as well as aid to states. It also takes steps to rein in the deficit, which has widened as the recession cut tax revenue and the government took measures to stimulate the economy.
The administration forecasts the shortfall will decline from $1.6 trillion in the fiscal year ending Sept. 30 to $1.3 trillion in fiscal 2011, said the aide, who spoke on condition of anonymity because the figures haven’t been officially released.
Obama is putting emphasis on boosting the U.S. economy, which hasn’t recovered the more than 7 million jobs lost since the recession began in December 2007. Following up the stimulus legislation enacted last year, the president is seeking more spending on infrastructure projects and $33 billion in tax breaks and incentives to encourage small businesses to hire more workers and raise wages.
The measures to add jobs will be “probably somewhere in the $100 billion range,” spokesman Robert Gibbs said yesterday on CNN’s “State of the Union” program. Last year’s stimulus amounted to $862 billion, the Congressional Budget Office says. The House in December passed job legislation of more that $150 billion.
Economy and Deficit
The budget reflects the administration’s struggle to confront voter anxiety about a 10 percent jobless rate and the national debt surging toward $13 trillion. The result is a plan that tries to step up spending in some areas for an economic boost while slowing it over a longer period.
“To many people, they think it’s double-talk but it’s perfectly logical and consistent with economic theory,” said James Horney, a former Senate Budget Committee analyst now at the Center on Budget Policy and Priorities, a research organization in Washington.
The White House deficit projection exceeds other forecasts. The CBO has forecast this year’s shortfall at $1.35 trillion. The median of 39 analysts survey by Bloomberg News is for $1.37 trillion this year and $1.10 trillion next year.
Obama has promised to cut the deficit in half from $1.3 trillion by the end of his first term and “the president is committed to keeping that goal,” Gibbs said.
Increased Outlays
Defense and education are set to get increased funding in Obama’s 2011 budget plan while spending on some domestic programs will be frozen over three years, according to congressional and administration officials and previous announcements from the White House. The budget is subject to approval -- and modification -- by Congress.
On taxes, Obama said in his State of the Union address last week that some of the tax cuts passed under former President George W. Bush in 2001 and 2003 would be extended. “We will not continue tax cuts for oil companies, investment fund managers and for those making over $250,000 a year,” he said.
The White House wants lawmakers to give small businesses tax credits of up to $5,000 for each new worker hired as part of a $33 billion package of incentives. This would be folded into a stimulus program that would “add infrastructure spending,” Gibbs said.
In an extension of last year’s stimulus, the administration proposes making permanent the Build America Bonds program. The federal government would pick up the tab for 28 percent of the interest costs from taxable bonds issued by state and local governments, according to a Treasury Department official.
Aid to States
The budget also will call for spending $25 billion to provide states with an additional six months worth of funding to help pay for the government’s Medicaid health insurance program for the poor.
On energy, the administration supports expanding nuclear power by tripling loan guarantees for new reactors to more than $54 billion, an administration official said. The 2011 budget will add $36 billion to the $18.5 billion already approved for nuclear-power plant loan guarantees.
Obama will propose a defense budget of about $708 billion that includes $159 billion for the wars in Iraq and Afghanistan, four officials said on Jan. 22. The administration has said it plans to spend $161 billion on the wars this year.
While spending would rise in many areas of the federal catalog, the administration has announced it would seek a three- year freeze on most spending for domestic programs that Congress enacts each year, for a savings of as much as $15 billion in the first year and an estimated $250 billion over 10 years.
Non-defense discretionary spending, about 17 percent of the budget last year, is projected to grow this year by 7 percent, excluding the costs of last year’s stimulus package, according to the CBO.
In 2009, those expenditures grew by 5 percent, according to the agency. The increases are much higher if the stimulus package is included, with this year’s hike totaling 17 percent and last year’s increase, 11 percent.
Obama will send Congress a $3.8 trillion spending blueprint that includes a mix of tax cuts and spending to boost the economy as well as aid to states. It also takes steps to rein in the deficit, which has widened as the recession cut tax revenue and the government took measures to stimulate the economy.
The administration forecasts the shortfall will decline from $1.6 trillion in the fiscal year ending Sept. 30 to $1.3 trillion in fiscal 2011, said the aide, who spoke on condition of anonymity because the figures haven’t been officially released.
Obama is putting emphasis on boosting the U.S. economy, which hasn’t recovered the more than 7 million jobs lost since the recession began in December 2007. Following up the stimulus legislation enacted last year, the president is seeking more spending on infrastructure projects and $33 billion in tax breaks and incentives to encourage small businesses to hire more workers and raise wages.
The measures to add jobs will be “probably somewhere in the $100 billion range,” spokesman Robert Gibbs said yesterday on CNN’s “State of the Union” program. Last year’s stimulus amounted to $862 billion, the Congressional Budget Office says. The House in December passed job legislation of more that $150 billion.
Economy and Deficit
The budget reflects the administration’s struggle to confront voter anxiety about a 10 percent jobless rate and the national debt surging toward $13 trillion. The result is a plan that tries to step up spending in some areas for an economic boost while slowing it over a longer period.
“To many people, they think it’s double-talk but it’s perfectly logical and consistent with economic theory,” said James Horney, a former Senate Budget Committee analyst now at the Center on Budget Policy and Priorities, a research organization in Washington.
The White House deficit projection exceeds other forecasts. The CBO has forecast this year’s shortfall at $1.35 trillion. The median of 39 analysts survey by Bloomberg News is for $1.37 trillion this year and $1.10 trillion next year.
Obama has promised to cut the deficit in half from $1.3 trillion by the end of his first term and “the president is committed to keeping that goal,” Gibbs said.
Increased Outlays
Defense and education are set to get increased funding in Obama’s 2011 budget plan while spending on some domestic programs will be frozen over three years, according to congressional and administration officials and previous announcements from the White House. The budget is subject to approval -- and modification -- by Congress.
On taxes, Obama said in his State of the Union address last week that some of the tax cuts passed under former President George W. Bush in 2001 and 2003 would be extended. “We will not continue tax cuts for oil companies, investment fund managers and for those making over $250,000 a year,” he said.
The White House wants lawmakers to give small businesses tax credits of up to $5,000 for each new worker hired as part of a $33 billion package of incentives. This would be folded into a stimulus program that would “add infrastructure spending,” Gibbs said.
In an extension of last year’s stimulus, the administration proposes making permanent the Build America Bonds program. The federal government would pick up the tab for 28 percent of the interest costs from taxable bonds issued by state and local governments, according to a Treasury Department official.
Aid to States
The budget also will call for spending $25 billion to provide states with an additional six months worth of funding to help pay for the government’s Medicaid health insurance program for the poor.
On energy, the administration supports expanding nuclear power by tripling loan guarantees for new reactors to more than $54 billion, an administration official said. The 2011 budget will add $36 billion to the $18.5 billion already approved for nuclear-power plant loan guarantees.
Obama will propose a defense budget of about $708 billion that includes $159 billion for the wars in Iraq and Afghanistan, four officials said on Jan. 22. The administration has said it plans to spend $161 billion on the wars this year.
While spending would rise in many areas of the federal catalog, the administration has announced it would seek a three- year freeze on most spending for domestic programs that Congress enacts each year, for a savings of as much as $15 billion in the first year and an estimated $250 billion over 10 years.
Non-defense discretionary spending, about 17 percent of the budget last year, is projected to grow this year by 7 percent, excluding the costs of last year’s stimulus package, according to the CBO.
In 2009, those expenditures grew by 5 percent, according to the agency. The increases are much higher if the stimulus package is included, with this year’s hike totaling 17 percent and last year’s increase, 11 percent.
U.S. Stocks Advance, Treasuries Decline on Economy; Euro Gains
Feb. 1 (Bloomberg) -- U.S. stocks rose, Treasuries fell and the euro snapped a four-day decline versus the dollar on speculation manufacturing is recovering around the world.
The Standard & Poor’s 500 Index added 0.7 percent at 9:33 a.m. in New York as Exxon Mobil Corp. advanced. The euro strengthened 0.5 percent against the dollar and the yen. The zloty climbed as much as 1.5 percent to its highest in a year against the euro and the rand gained 0.7 percent against the dollar as factory production rose in Poland and South Africa.
U.S. manufacturing probably expanded in January for a sixth month, the Institute for Supply Management may say today, adding to evidence the recovery in the world’s biggest economy is gaining momentum. Indexes of manufacturing in the euro region and the U.K. rose more than economists forecast.
“We look for a further leg up in equities, which could be driven by positive economic and earnings news,” JPMorgan Asset Management strategists David Shairp and Rekha Sharma wrote in a report today. The prospect of central banks withdrawing stimulus may mean that “markets will be periodically challenged and volatility will be on the rise,” they wrote.
The MSCI World Index of 23 developed nations’ stocks added 0.5 percent, erasing an earlier slide of as much as 0.4 percent. Asian stocks dropped on concern China will take more steps to prevent its economy from overheating. Toshiba Corp. declined 6 percent in Tokyo after cutting its revenue forecast. Honda Motor Co. slid 2.5 after saying it’s recalling some cars in North America and the U.K.
European Movers
Europe’s Dow Jones Stoxx 600 Index added 0.1 percent, reversing earlier losses of as much as 0.8 percent. Vivendi SA, the owner of the world’s largest music company, slid 2.4 percent in Paris after a U.S. jury ruled it misled investors. Ryanair Holdings Plc advanced 5.7 percent in Dublin after Europe’s biggest discount airline raised its profit forecast.
Northumbrian Water Group Plc led shares of utility companies higher, jumping as much as 13 percent in London, after the Sunday Times reported that Ontario Teachers’ Pension Plan may bid 1.7 billion pounds ($2.7 billion) for the company.
The U.S. Institute for Supply Management’s factory index, due at 10 a.m. in New York, rose to 55.5 last month from 54.9 in December, according to the median forecast of 62 economists surveyed by Bloomberg News. Readings greater than 50 signal expansion. Commerce Department data showed Americans’ income rose more than estimated in December.
Earnings Rebound
A record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the final three months of 2009 with a 76 percent increase in profits. Almost 80 percent of the results released since Jan. 11 topped the average forecasts of Wall Street estimates, data compiled by Bloomberg show.
Exxon added 1.6 percent to $65.45 after posting a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline.
The Dubai Financial Market General Index climbed 2.2 percent after Aabar Investments PJSC, the Abu Dhabi fund that’s the biggest shareholder in Daimler AG, said full-year profit more than doubled. The MSCI Emerging Markets Index fell 0.4 percent, extending its drop since Jan. 11 to as much as 10 percent.
The Dollar Index, which tracks the U.S. currency against those of six major trading partners, ended a four-day advance, dropping 0.3 percent. Treasuries fell for the first time in three days, with the yield on the 10-year note rising 4 basis points to 3.63 percent.
Copper for delivery in three months fell as much as 2.2 percent to $6,600 a metric ton in London, the lowest compared with intraday prices since Nov. 16. Tin retreated 5.8 percent to $16,200 a ton. Gold for immediate delivery added 0.5 percent to $1,086.32 an ounce in London and crude oil added 0.4 percent to $73.18 a barrel in New York.
The Standard & Poor’s 500 Index added 0.7 percent at 9:33 a.m. in New York as Exxon Mobil Corp. advanced. The euro strengthened 0.5 percent against the dollar and the yen. The zloty climbed as much as 1.5 percent to its highest in a year against the euro and the rand gained 0.7 percent against the dollar as factory production rose in Poland and South Africa.
U.S. manufacturing probably expanded in January for a sixth month, the Institute for Supply Management may say today, adding to evidence the recovery in the world’s biggest economy is gaining momentum. Indexes of manufacturing in the euro region and the U.K. rose more than economists forecast.
“We look for a further leg up in equities, which could be driven by positive economic and earnings news,” JPMorgan Asset Management strategists David Shairp and Rekha Sharma wrote in a report today. The prospect of central banks withdrawing stimulus may mean that “markets will be periodically challenged and volatility will be on the rise,” they wrote.
The MSCI World Index of 23 developed nations’ stocks added 0.5 percent, erasing an earlier slide of as much as 0.4 percent. Asian stocks dropped on concern China will take more steps to prevent its economy from overheating. Toshiba Corp. declined 6 percent in Tokyo after cutting its revenue forecast. Honda Motor Co. slid 2.5 after saying it’s recalling some cars in North America and the U.K.
European Movers
Europe’s Dow Jones Stoxx 600 Index added 0.1 percent, reversing earlier losses of as much as 0.8 percent. Vivendi SA, the owner of the world’s largest music company, slid 2.4 percent in Paris after a U.S. jury ruled it misled investors. Ryanair Holdings Plc advanced 5.7 percent in Dublin after Europe’s biggest discount airline raised its profit forecast.
Northumbrian Water Group Plc led shares of utility companies higher, jumping as much as 13 percent in London, after the Sunday Times reported that Ontario Teachers’ Pension Plan may bid 1.7 billion pounds ($2.7 billion) for the company.
The U.S. Institute for Supply Management’s factory index, due at 10 a.m. in New York, rose to 55.5 last month from 54.9 in December, according to the median forecast of 62 economists surveyed by Bloomberg News. Readings greater than 50 signal expansion. Commerce Department data showed Americans’ income rose more than estimated in December.
Earnings Rebound
A record nine-quarter earnings slump for S&P 500 companies is projected to have ended in the final three months of 2009 with a 76 percent increase in profits. Almost 80 percent of the results released since Jan. 11 topped the average forecasts of Wall Street estimates, data compiled by Bloomberg show.
Exxon added 1.6 percent to $65.45 after posting a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline.
The Dubai Financial Market General Index climbed 2.2 percent after Aabar Investments PJSC, the Abu Dhabi fund that’s the biggest shareholder in Daimler AG, said full-year profit more than doubled. The MSCI Emerging Markets Index fell 0.4 percent, extending its drop since Jan. 11 to as much as 10 percent.
The Dollar Index, which tracks the U.S. currency against those of six major trading partners, ended a four-day advance, dropping 0.3 percent. Treasuries fell for the first time in three days, with the yield on the 10-year note rising 4 basis points to 3.63 percent.
Copper for delivery in three months fell as much as 2.2 percent to $6,600 a metric ton in London, the lowest compared with intraday prices since Nov. 16. Tin retreated 5.8 percent to $16,200 a ton. Gold for immediate delivery added 0.5 percent to $1,086.32 an ounce in London and crude oil added 0.4 percent to $73.18 a barrel in New York.
Citigroup Said to Plan Sale of $10 Billion Private-Equity Unit
Feb. 1 (Bloomberg) -- Citigroup Inc. plans to sell or split off its $10 billion Citi Private Equity unit, expanding the list of money-management businesses the U.S. bank is disposing of to reduce debt, people familiar with the matter said.
Citi Private Equity, which takes minority stakes in companies and invests in other buyout funds, oversees about $2 billion of Citigroup’s money, said the people, who declined to be identified because the sale talks are private. The rest is from outside investors. Managers of the decade-old unit, led by Todd Benson and Darren Friedman, have discussed buying it for themselves alongside new partners or with other financing, one person said.
Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink. Chief Executive Officer Vikram Pandit plans to keep a smaller buyout unit the bank bought in late 2007, a few months after he joined, the people said.
“Citi has been going in and out of these different investing vehicles, both private equity and hedge funds,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “It’s been a game of musical chairs.”
Benson and Friedman stepped in as co-heads of Citi Private Equity after the January 2009 departure of John Barber, who had led the unit for nine years. Neither of the co-heads returned calls for comment, and Citigroup spokeswoman Shannon Bell declined to comment.
Metalmark to Stay
Other money-management units marked for sale or closure include the Citi Property Investors real-estate unit, which oversees $12.5 billion; and the Hedge Fund Management Group, which allocates money to hedge funds on behalf of its own investors, the people said.
Citigroup plans to keep Metalmark Capital LLC, a buyout firm the bank agreed to buy for an undisclosed sum in December 2007. Headed by former Morgan Stanley executive Howard Hoffen, Metalmark oversees almost $3.8 billion in several funds, one person said. It invests in energy, health care, financial and industrial companies, according to Metalmark’s Web site.
Pandit, 53, decided to keep Metalmark because he preferred its management and strategy to those of Citi Private Equity, three people said. Both Pandit and John Havens, who heads Citigroup’s trading- and investment-banking division, worked with Hoffen at Morgan Stanley from the late 1980s through the early 2000s.
Dorfman, O’Brien
The bank also is keeping another fund, Citi Venture Capital International, which focuses on China, India, Central and Eastern Europe and Latin America.
Citigroup’s hedge-fund and buyout division, Citi Capital Advisors, is run by Jonathan Dorfman and James O’Brien, another pair of former Morgan Stanley executives who joined Citigroup when it bought their hedge fund in October 2007. Four of Citigroup’s most senior executives previously took turns leading the division, including Pandit, Havens and Vice Chairmen Lewis Kaden and Edward “Ned” Kelly.
Citi Capital Advisors has about $14 billion under management, a figure that excludes the funds earmarked for disposal, people familiar with the matter said. At the end of 2007, the division oversaw $73 billion. More than a dozen funds were shuttered or frozen, including Pandit’s Old Lane Partners fund, which Citigroup bought in 2007 for $800 million. The bank stopped reporting the alternative-investing division’s results after the first quarter of 2008, when it had a net loss of $509 million.
Decision in 2009
The decision to sell Citi Private Equity was made last year, before President Barack Obama on Jan. 21 proposed banks be forced to divest their private-equity firms and hedge funds, the people familiar with the matter said. Ownership of such businesses can expose taxpayers to the risk of further bank bailouts, according to the White House.
A person close to Citigroup said its private-equity business doesn’t conflict with the proposal, since most investing is done on behalf of customers and little of the bank’s own capital is put at risk. Citigroup counts its remaining buyout and hedge funds among “core” operations that also include banking, trading, securities underwriting and credit cards.
Depending on how the new laws or regulations are written, Citigroup may have to overhaul its private-equity business again, said Calyon Securities USA analyst Michael Mayo, who rates Citigroup shares “underperform.”
Dollar General, GMAC
“None of this is set in stone,” Mayo said in an interview.
Citi Private Equity was formed in 2000. Early in the decade, the unit was used partly to consolidate investments inherited from the 1998 merger of Citicorp and Travelers Group Inc., people familiar with the matter said. In February 2007, Citi Private Equity raised about $3.3 billion of new funding.
Citigroup doesn’t publicly disclose the performance of Citi Private Equity. Managers of such funds typically charge fees for overseeing investors’ money and take a fixed cut of any capital gains.
The unit was a secondary investor on New York-based buyout firm KKR & Co.’s $7.3 billion takeover of discount retailer Dollar General Corp. in July 2007. Goodlettsville, Tennessee- based Dollar General went public through an initial stock offering last November, and now has a market value of about $8 billion.
Not as profitable was a supporting equity investment in New York-based Cerberus Capital Management LP’s takeover of auto- finance company GMAC LLC, people familiar with the matter say. Like Citigroup, GMAC had to get a series of infusions from the U.S. government as surging unemployment drove up consumer-loan defaults. In November, Michael Carpenter, who ran Citigroup’s hedge fund and buyout unit before he quit in 2006, was tapped as GMAC’s new CEO.
Citi Private Equity, which takes minority stakes in companies and invests in other buyout funds, oversees about $2 billion of Citigroup’s money, said the people, who declined to be identified because the sale talks are private. The rest is from outside investors. Managers of the decade-old unit, led by Todd Benson and Darren Friedman, have discussed buying it for themselves alongside new partners or with other financing, one person said.
Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink. Chief Executive Officer Vikram Pandit plans to keep a smaller buyout unit the bank bought in late 2007, a few months after he joined, the people said.
“Citi has been going in and out of these different investing vehicles, both private equity and hedge funds,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “It’s been a game of musical chairs.”
Benson and Friedman stepped in as co-heads of Citi Private Equity after the January 2009 departure of John Barber, who had led the unit for nine years. Neither of the co-heads returned calls for comment, and Citigroup spokeswoman Shannon Bell declined to comment.
Metalmark to Stay
Other money-management units marked for sale or closure include the Citi Property Investors real-estate unit, which oversees $12.5 billion; and the Hedge Fund Management Group, which allocates money to hedge funds on behalf of its own investors, the people said.
Citigroup plans to keep Metalmark Capital LLC, a buyout firm the bank agreed to buy for an undisclosed sum in December 2007. Headed by former Morgan Stanley executive Howard Hoffen, Metalmark oversees almost $3.8 billion in several funds, one person said. It invests in energy, health care, financial and industrial companies, according to Metalmark’s Web site.
Pandit, 53, decided to keep Metalmark because he preferred its management and strategy to those of Citi Private Equity, three people said. Both Pandit and John Havens, who heads Citigroup’s trading- and investment-banking division, worked with Hoffen at Morgan Stanley from the late 1980s through the early 2000s.
Dorfman, O’Brien
The bank also is keeping another fund, Citi Venture Capital International, which focuses on China, India, Central and Eastern Europe and Latin America.
Citigroup’s hedge-fund and buyout division, Citi Capital Advisors, is run by Jonathan Dorfman and James O’Brien, another pair of former Morgan Stanley executives who joined Citigroup when it bought their hedge fund in October 2007. Four of Citigroup’s most senior executives previously took turns leading the division, including Pandit, Havens and Vice Chairmen Lewis Kaden and Edward “Ned” Kelly.
Citi Capital Advisors has about $14 billion under management, a figure that excludes the funds earmarked for disposal, people familiar with the matter said. At the end of 2007, the division oversaw $73 billion. More than a dozen funds were shuttered or frozen, including Pandit’s Old Lane Partners fund, which Citigroup bought in 2007 for $800 million. The bank stopped reporting the alternative-investing division’s results after the first quarter of 2008, when it had a net loss of $509 million.
Decision in 2009
The decision to sell Citi Private Equity was made last year, before President Barack Obama on Jan. 21 proposed banks be forced to divest their private-equity firms and hedge funds, the people familiar with the matter said. Ownership of such businesses can expose taxpayers to the risk of further bank bailouts, according to the White House.
A person close to Citigroup said its private-equity business doesn’t conflict with the proposal, since most investing is done on behalf of customers and little of the bank’s own capital is put at risk. Citigroup counts its remaining buyout and hedge funds among “core” operations that also include banking, trading, securities underwriting and credit cards.
Depending on how the new laws or regulations are written, Citigroup may have to overhaul its private-equity business again, said Calyon Securities USA analyst Michael Mayo, who rates Citigroup shares “underperform.”
Dollar General, GMAC
“None of this is set in stone,” Mayo said in an interview.
Citi Private Equity was formed in 2000. Early in the decade, the unit was used partly to consolidate investments inherited from the 1998 merger of Citicorp and Travelers Group Inc., people familiar with the matter said. In February 2007, Citi Private Equity raised about $3.3 billion of new funding.
Citigroup doesn’t publicly disclose the performance of Citi Private Equity. Managers of such funds typically charge fees for overseeing investors’ money and take a fixed cut of any capital gains.
The unit was a secondary investor on New York-based buyout firm KKR & Co.’s $7.3 billion takeover of discount retailer Dollar General Corp. in July 2007. Goodlettsville, Tennessee- based Dollar General went public through an initial stock offering last November, and now has a market value of about $8 billion.
Not as profitable was a supporting equity investment in New York-based Cerberus Capital Management LP’s takeover of auto- finance company GMAC LLC, people familiar with the matter say. Like Citigroup, GMAC had to get a series of infusions from the U.S. government as surging unemployment drove up consumer-loan defaults. In November, Michael Carpenter, who ran Citigroup’s hedge fund and buyout unit before he quit in 2006, was tapped as GMAC’s new CEO.
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