Saturday, March 27, 2010
KKR Said to Plan IPO for NXP in Year’s Biggest Deal
March 27 (Bloomberg) -- NXP BV, the Dutch chipmaker bought by KKR & Co. four years ago, plans to raise at least $1 billion to cut debt in what could be this year’s largest initial public offering, two people with knowledge of the matter said.
NXP hired Morgan Stanley, Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG and Goldman Sachs Group Inc. to run the stock sale, according to the people, who asked not to be identified because the talks are private. KKR, Silver Lake, AlpInvest Partners NV, Bain Capital and Apax Partners acquired an 80.1 percent stake in the firm from Royal Philips Electronics NV in 2006, in a multistage deal valuing the company at 8.3 billion euros ($11.1 billion), including debt. KKR said in December its NXP investment was worth 30 cents on the dollar.
Kristi Huller, a KKR spokeswoman in New York, declined to comment on the potential IPO. Spokesmen for the five banks also declined to comment. NXP spokeswoman Lieke de Jong-Tops said in a text message the company declined to comment because it doesn’t react to rumor and speculation.
Buyout shops have been trying to take companies public, using the proceeds to pay down debt. The group of sponsors borrowed $4.5 billion to fund the takeover four years ago. The semiconductor company’s debt rose to $6.4 billion by the start of 2009. NXP cut that by $1.3 billion through bond exchanges, buy-backs and “privately negotiated” deals last year, the company said this month.
At $1 billion, NXP would be the biggest announced offering this year. Earlier this month, Bain Capital LLC’s Sensata Technologies Holding NV completed the largest U.S. IPO of 2010, selling $569 million of shares at the low end of its expected price range.
NXP’s owners aren’t planning to also run a prospective auction for the company, said the people with knowledge of the matter, in part because Philips intends to keep its stake of about 20 percent. That would complicate a sale to any firm competing with the Dutch lighting company.
NXP, with 29,000 employees, makes computer chips for customers such as Nokia Oyj, Continental AG and Robert Bosch GmbH, according to its Web site. The Eindhoven, Netherlands- based firm’s revenue dropped to $3.8 billion in 2009 from $5.4 billion the previous year.
Dollar Heads for Biggest Quarterly Gain Versus Euro Since 2008
March 27 (Bloomberg) -- The dollar rose, poised for the biggest quarterly gain versus the euro since 2008, as European leaders’ struggle to forge a plan to bail out Greece pushed investors toward the perceived safety of the greenback.
The yen fell against all 16 of its most-traded counterparts this week as Japanese consumer prices dropped for a 12th month, increasing the chances the nation’s central bank will lag behind its peers in raising interest rates. The U.S. economy added jobs in March, a report is forecast to show next week.
“The dollar is still the safety currency,” said Jonathan Xiong, a senior portfolio manager and director at Mellon Capital Management Corp. in San Francisco, where he helps oversee $18 billion. “The European news that is coming out is unclear, clouded and uncertain. When investors are uncertain, what happens is they buy dollars.”
The dollar appreciated 0.9 percent to $1.3410 versus the euro, from $1.3530 a week earlier. It was headed for a gain of 6.8 percent for the quarter, the largest since it advanced 11.8 percent in the three months ended in September 2008.
The yen dropped 2.1 percent, the most since Dec. 4, to 92.52 per dollar, from 90.54 yen on March 19. It was set for a decline of 3.8 percent this month, the most since December. The euro rose 1.3 percent to 124.06 yen, from 122.51 last week.
IMF on Standby
The European currency strengthened yesterday after leaders of the 16 nations that use the euro put the International Monetary Fund on standby to aid debt-stricken Greece, seeking to snuff out a threat to the currency’s stability. They endorsed a plan that calls for a mix of IMF and bilateral loans at market interest rates, while voicing confidence Greece won’t need outside help to cut its budget deficit, Europe’s largest.
European Central Bank President Jean-Claude Trichet told reporters in Brussels late on March 25 he was “extraordinarily happy that the governments of the euro area found out a workable solution.”
Earlier, the euro fell to a 10-month low versus the greenback after Trichet said an IMF role in funding a rescue for Greece would be “very, very bad.” He has expressed concern that turning to the Washington-based IMF would show Europe can’t address its problems.
The number of wagers by hedge funds and other large speculators on a decline in the euro versus the dollar compared with those on a gain -- so-called net shorts -- reached a record 74,917 contracts on March 23, according to Commodity Futures Trading Commission data last week. The amount was 46,341 on March 16.
Australia, Canada
The Australian and Canadian dollars fell versus the greenback for the first week this month amid speculation gains versus the U.S. dollar and the euro couldn’t be sustained.
Australia’s currency dropped 1.2 percent to 90.41 U.S. cents, from 91.54 cents on March 19. It fell 0.4 percent to A$1.4832 per euro, from A$1.4780 a week earlier.
“We’re seeing people get out of positions,” said Lauren Rosborough, a senior currency analyst at Westpac Banking Corp. in London. “The news from euro-zone officials has people looking to go long the euro against the Australian dollar.” A long position is a wager a currency will appreciate.
The loonie, as Canada’s currency is nicknamed, dropped 0.9 percent to C$1.0266 per U.S. dollar, while remaining near the strongest level in 20 months versus the greenback.
The U.S. currency rose against the yen before a report next week that’s expected to show the U.S. gained jobs in March, increasing the likelihood the Federal Reserve will raise interest rates before the Bank of Japan.
U.S. Employment
U.S. payrolls added 190,000 jobs in March, according to the median forecast of 62 economists surveyed by Bloomberg News before the Labor Department releases the data April 2. The economy lost 36,000 jobs in February.
Japan’s consumer prices excluding fresh food slid 1.2 percent from a year earlier, after dropping a 1.3 percent in each of the preceding two months, the nation’s statistics bureau said yesterday in Tokyo. The data intensifies pressure on the central bank to eradicate the deflation that’s hampering the economic recovery.
Mexico’s peso was the only major currency that gained against the dollar this week, as an economic recovery in the U.S. fueled demand for the Latin American nation’s exports.
The peso gained 0.7 percent to 12.4962 per U.S. dollar, from 12.5854 on March 19. It has strengthened during six of the past seven weeks against the dollar.
The Mexican currency gained 4.8 percent against the dollar this year, the best performance among the 16 major currencies tracked by Bloomberg.
Yuan forwards strengthened yesterday after a central-bank adviser said China may resume a “managed float” of the currency, bolstering optimism the government will allow appreciation.
Twelve-month non-deliverable forwards rose as much as 0.2 percent to 6.6675 per dollar, according to data compiled by Bloomberg. The contracts reflect bets the currency will gain 2.3 percent from the spot rate of 6.8270.
Greenspan Calls Treasury Yields ‘Canary in the Mine’
March 26 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates.
Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
The yield on 10-year Treasury notes was 3.85 percent at 3:08 p.m. in New York, down three basis points from late yesterday and up from 3.69 percent at the end of last week.
U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.
The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points yesterday before reaching negative 7.63 basis points.
Record Deficit
The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package.
“I don’t like American politics and what’s happening,” Greenspan said.
Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.
“I’m not convinced by any means that we can succeed in stabilizing this long-term outlook strictly from a value-added tax,” Greenspan said.
2001 Tax Cut
Greenspan in 2001 supported the first round of tax cuts under President George W. Bush. At the time, the federal government operated with a surplus, and Greenspan told Congress he didn’t think the cuts would lead to a deficit.
He told the Senate Budget Committee on Jan. 25, 2001, that “having a tax cut in place may, in fact, do noticeable good.” The next year he said it would be unwise to unwind the tax cut. As deficits returned, he became an opponent of further tax cuts, telling Congress in 2003 that “fiscal stimulus is premature.”
In today’s interview, the former Fed chairman said the U.S. economic recovery has been driven “to a very large extent” by a resurgence of stock prices. The Standard & Poor’s 500 Index has jumped 73 percent since its low on March 9, 2009. The index was little changed at 1,165.29 at 3:08 p.m. in New York.
“You can see the whole blossoming of finance,” Greenspan said. “As these stock prices have gone up, debt became far more valuable, and you can see this huge issuance, especially of junk bonds.”
A continued rally in share prices could help sustain the expansion, Greenspan said. Still, the unemployment rate could remain “not terribly far from where it is” at 9.7 percent as people re-enter the labor force to take advantage of job openings in a growing economy.
Company Earnings
The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year- over-year gain in a quarter century.
On the Chinese economy, Greenspan said there are “significant bubbles” whose consequences will be hard to predict because of a lack of data.
“There are significant bubbles in Shanghai and along the coastal provinces, but there’s some of that going back into the hinterlands as well,” Greenspan said. “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”
Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
The yield on 10-year Treasury notes was 3.85 percent at 3:08 p.m. in New York, down three basis points from late yesterday and up from 3.69 percent at the end of last week.
U.S. interest-rate swap spreads declined to the lowest levels on record this week, reflecting investor concerns about the ability of nations to finance rising fiscal deficits.
The rate to exchange floating- for fixed-interest payments for 10 years fell below the comparable-maturity Treasury yield for the first time on March 23. The swap spread reached as low as negative 10.19 basis points yesterday before reaching negative 7.63 basis points.
Record Deficit
The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package.
“I don’t like American politics and what’s happening,” Greenspan said.
Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Greenspan said in an interview last year that a consumption tax was a likely response to a widening budget deficit. That may not be sufficient when the gap is caused by a failure to cut spending, he said today.
“I’m not convinced by any means that we can succeed in stabilizing this long-term outlook strictly from a value-added tax,” Greenspan said.
2001 Tax Cut
Greenspan in 2001 supported the first round of tax cuts under President George W. Bush. At the time, the federal government operated with a surplus, and Greenspan told Congress he didn’t think the cuts would lead to a deficit.
He told the Senate Budget Committee on Jan. 25, 2001, that “having a tax cut in place may, in fact, do noticeable good.” The next year he said it would be unwise to unwind the tax cut. As deficits returned, he became an opponent of further tax cuts, telling Congress in 2003 that “fiscal stimulus is premature.”
In today’s interview, the former Fed chairman said the U.S. economic recovery has been driven “to a very large extent” by a resurgence of stock prices. The Standard & Poor’s 500 Index has jumped 73 percent since its low on March 9, 2009. The index was little changed at 1,165.29 at 3:08 p.m. in New York.
“You can see the whole blossoming of finance,” Greenspan said. “As these stock prices have gone up, debt became far more valuable, and you can see this huge issuance, especially of junk bonds.”
A continued rally in share prices could help sustain the expansion, Greenspan said. Still, the unemployment rate could remain “not terribly far from where it is” at 9.7 percent as people re-enter the labor force to take advantage of job openings in a growing economy.
Company Earnings
The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, and corporate profits climbed, figures from the Commerce Department showed today in Washington. Company earnings increased 8 percent, capping the biggest year- over-year gain in a quarter century.
On the Chinese economy, Greenspan said there are “significant bubbles” whose consequences will be hard to predict because of a lack of data.
“There are significant bubbles in Shanghai and along the coastal provinces, but there’s some of that going back into the hinterlands as well,” Greenspan said. “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”
U.S. Stocks Trim Advance, Treasuries Gain on Korea Concern
March 26 (Bloomberg) -- U.S. stocks trimmed gains and Treasuries rose as concern that tensions between North and South Korea were escalating triggered a flight from risky assets. Gold futures rallied 1 percent, the most in a week.
The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,166.59 at 4:19 p.m. in New York after gaining as much as 0.7 percent earlier. The iShares MSCI South Korea Index Fund, a U.S. exchange traded fund tracking stocks in that nation, erased a 1.4 percent gain and slid 0.6 percent as a South Korean naval vessel sank near the border of North Korea. Trading of puts, which give investors the right to sell the fund, surged to a record. Futures on South Korea’s Kospi 200 Index expiring in June lost 0.6 percent.
“This is really all about that variable we call the geopolitical; it’s about Korea,” said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. “It’s taken some of the euphoria out of the market.”
The earlier rally in U.S. equities came as analyst upgrades and takeover speculation boosted financial and retail companies and concern eased over a possible Greece default. RadioShack Corp. jumped 8.5 percent on a New York Post report that the electronics chain is considering a sale of the company. Apple Inc., Progressive Corp., Urban Outfitters Inc. and SLM Corp. advanced after analysts either raised price targets or lifted their ratings on the shares.
The Dollar Index, which tracks the currency against six major trading partners, slipped 0.6 percent to 81.602.
Korea Concern
The iShares MSCI South Korea Index Fund fell 0.6 percent to $48.74 in New York. Trading of put options that give the right to sell the ETF surged to a record of more than 55,000 contracts. The most-active contracts were April $45 puts, which jumped 40 percent to 35 cents.
The South Korean naval vessel sank off Baengnyeong island in the Yellow Sea, near the border with North Korea, an official in the office of President Lee Myung Bak said. The cause was unclear, he said. About 50 crew members were still being searched for, with 58 rescued, said the official, who declined to be identified in accord with government policy. President Lee convened a meeting of security officials to discuss the incident, said the official, giving no further details.
Greece Aid
The early rally in stocks also came as European leaders backed a proposal late yesterday for a mix of International Monetary Fund and bilateral loans for Greece, while saying the nation probably won’t need help to cut the region’s biggest budget deficit. The U.S. economy grew at a 5.6 percent annual rate last quarter, the government said, and the Reuters/University of Michigan final consumer sentiment gauge for March topped forecasts as the pace of job cuts slowed.
“The transition from an economy that’s been driven by monetary and fiscal stimulus back to more of a traditional, consumer and business-driven growth may provide some opportunities,” said Greg Woodard, portfolio strategist at Manning & Napier in Fairport, New York, which manages $28 billion. “But it’s probably to provide some more volatility as we move through 2010.”
Treasuries rose for the first time in four days, sending yields down, as lower-than-average demand at this week’s record- tying $118 billion note auctions pushed yields to levels that encourage buying.
The two-year yield dropped 4 basis points, or 0.04 percentage point, to 1.05 percent. Yields on 10-year notes decreased 3 basis points to 3.86 percent after rising yesterday to 3.92 percent, the highest level since June 11.
Treasury Demand
Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.
President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the U.S, economic expansion.
Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
Euro Gains
The euro strengthened 1 percent to $1.3410 against the dollar and the Athens Stock Exchange’s ASE Index climbed 4.1 percent, the most since Feb. 9. The yield on the two-year Greek note tumbled 20 basis points to 4.46 percent.
“Investors see the agreement as a backstop, and it is helping sentiment towards the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, of the Greek accord reached in Brussels. “However, this is a rather uninspired recovery and it’s difficult to say that this is an unequivocal vote of confidence.”
The MSCI World Index of 23 developed nations’ stocks increased 0.2 percent.
European stocks fell, with the Stoxx Europe 600 Index losing 0.5 percent to trim a fourth straight weekly gain, on concern mounting government debt may derail the economic recovery even after the European Union agreed a Greek aid plan.
‘No Choice’ for Europe
Unipol Gruppo Finanziario SpA sank 7.7 percent in Milan, the most in a year, after Italy’s third-largest insurer announced a share sale and posted a full-year loss. Veolia Environnement SA, the world’s largest water company, slipped 1.1 percent in Paris after JPMorgan Chase & Co. advised selling the stock.
“Europe has no choice but to solve the Greece situation,” said Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, which manages $25 billion. “If you have confidence solving the debt crisis, the euro will rise against the dollar. However, the buyers of stocks over there will be discouraged to buy because of the weakness of their economies.”
The MSCI Asia Pacific Index increased 1 percent, its biggest advance in more than a week. The Kospi closed 0.6 percent higher before the South Korean ship sank. Japan’s Nikkei 225 Stock Average rose to the highest level since October 2008 and the Shanghai Composite Index rallied 1.3 percent.
Emerging Markets
China helped lead the MSCI Emerging Markets Index 0.4 percent higher, its first gain in three days. Brazil’s Bovespa index climbed 0.4 percent. Russia’s Micex Index increased 0.6 percent after the central bank cut its main refinancing rate for the 12th time in less than a year, lowering it a quarter point to 8.25 percent.
Nickel for delivery in three months rose 3.4 percent to $23,600 a metric ton on the London Metal Exchange to lead industrial metals higher. Copper, lead and tin also advanced.
Gold for June delivery added 1 percent to $1,105.40 an ounce on speculation demand will increase amid escalating debt concerns and the Korea incident.
Crude oil fell for a third day, retreating 0.7 percent to $80 a barrel in New York after climbing as much as 1.2 percent earlier.
The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,166.59 at 4:19 p.m. in New York after gaining as much as 0.7 percent earlier. The iShares MSCI South Korea Index Fund, a U.S. exchange traded fund tracking stocks in that nation, erased a 1.4 percent gain and slid 0.6 percent as a South Korean naval vessel sank near the border of North Korea. Trading of puts, which give investors the right to sell the fund, surged to a record. Futures on South Korea’s Kospi 200 Index expiring in June lost 0.6 percent.
“This is really all about that variable we call the geopolitical; it’s about Korea,” said Peter Kenny, a managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. “It’s taken some of the euphoria out of the market.”
The earlier rally in U.S. equities came as analyst upgrades and takeover speculation boosted financial and retail companies and concern eased over a possible Greece default. RadioShack Corp. jumped 8.5 percent on a New York Post report that the electronics chain is considering a sale of the company. Apple Inc., Progressive Corp., Urban Outfitters Inc. and SLM Corp. advanced after analysts either raised price targets or lifted their ratings on the shares.
The Dollar Index, which tracks the currency against six major trading partners, slipped 0.6 percent to 81.602.
Korea Concern
The iShares MSCI South Korea Index Fund fell 0.6 percent to $48.74 in New York. Trading of put options that give the right to sell the ETF surged to a record of more than 55,000 contracts. The most-active contracts were April $45 puts, which jumped 40 percent to 35 cents.
The South Korean naval vessel sank off Baengnyeong island in the Yellow Sea, near the border with North Korea, an official in the office of President Lee Myung Bak said. The cause was unclear, he said. About 50 crew members were still being searched for, with 58 rescued, said the official, who declined to be identified in accord with government policy. President Lee convened a meeting of security officials to discuss the incident, said the official, giving no further details.
Greece Aid
The early rally in stocks also came as European leaders backed a proposal late yesterday for a mix of International Monetary Fund and bilateral loans for Greece, while saying the nation probably won’t need help to cut the region’s biggest budget deficit. The U.S. economy grew at a 5.6 percent annual rate last quarter, the government said, and the Reuters/University of Michigan final consumer sentiment gauge for March topped forecasts as the pace of job cuts slowed.
“The transition from an economy that’s been driven by monetary and fiscal stimulus back to more of a traditional, consumer and business-driven growth may provide some opportunities,” said Greg Woodard, portfolio strategist at Manning & Napier in Fairport, New York, which manages $28 billion. “But it’s probably to provide some more volatility as we move through 2010.”
Treasuries rose for the first time in four days, sending yields down, as lower-than-average demand at this week’s record- tying $118 billion note auctions pushed yields to levels that encourage buying.
The two-year yield dropped 4 basis points, or 0.04 percentage point, to 1.05 percent. Yields on 10-year notes decreased 3 basis points to 3.86 percent after rising yesterday to 3.92 percent, the highest level since June 11.
Treasury Demand
Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months.
President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the U.S, economic expansion.
Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.”
“I’m very much concerned about the fiscal situation,” said Greenspan. An increase in long-term interest rates “will make the housing recovery very difficult to implement and put a dampening on capital investment as well.”
Euro Gains
The euro strengthened 1 percent to $1.3410 against the dollar and the Athens Stock Exchange’s ASE Index climbed 4.1 percent, the most since Feb. 9. The yield on the two-year Greek note tumbled 20 basis points to 4.46 percent.
“Investors see the agreement as a backstop, and it is helping sentiment towards the euro,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, of the Greek accord reached in Brussels. “However, this is a rather uninspired recovery and it’s difficult to say that this is an unequivocal vote of confidence.”
The MSCI World Index of 23 developed nations’ stocks increased 0.2 percent.
European stocks fell, with the Stoxx Europe 600 Index losing 0.5 percent to trim a fourth straight weekly gain, on concern mounting government debt may derail the economic recovery even after the European Union agreed a Greek aid plan.
‘No Choice’ for Europe
Unipol Gruppo Finanziario SpA sank 7.7 percent in Milan, the most in a year, after Italy’s third-largest insurer announced a share sale and posted a full-year loss. Veolia Environnement SA, the world’s largest water company, slipped 1.1 percent in Paris after JPMorgan Chase & Co. advised selling the stock.
“Europe has no choice but to solve the Greece situation,” said Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, which manages $25 billion. “If you have confidence solving the debt crisis, the euro will rise against the dollar. However, the buyers of stocks over there will be discouraged to buy because of the weakness of their economies.”
The MSCI Asia Pacific Index increased 1 percent, its biggest advance in more than a week. The Kospi closed 0.6 percent higher before the South Korean ship sank. Japan’s Nikkei 225 Stock Average rose to the highest level since October 2008 and the Shanghai Composite Index rallied 1.3 percent.
Emerging Markets
China helped lead the MSCI Emerging Markets Index 0.4 percent higher, its first gain in three days. Brazil’s Bovespa index climbed 0.4 percent. Russia’s Micex Index increased 0.6 percent after the central bank cut its main refinancing rate for the 12th time in less than a year, lowering it a quarter point to 8.25 percent.
Nickel for delivery in three months rose 3.4 percent to $23,600 a metric ton on the London Metal Exchange to lead industrial metals higher. Copper, lead and tin also advanced.
Gold for June delivery added 1 percent to $1,105.40 an ounce on speculation demand will increase amid escalating debt concerns and the Korea incident.
Crude oil fell for a third day, retreating 0.7 percent to $80 a barrel in New York after climbing as much as 1.2 percent earlier.
Tuesday, March 23, 2010
Take this job and tolerate it.....
NEW YORK (CNNMoney.com)
One of the key signs of trouble for the current labor market can be summed up by two words that are rarely spoken today: I quit.
With employers still trimming rather than adding jobs and a record number of unemployed looking for work, job holders are hanging onto their current positions, even if it means being unhappy.
The "quits rate," or frequency of people leaving jobs, is close to the lowest point since 2000, when the Labor Department began tracking the data. And workers' willingness to quit without having another job lined up is well below the historic norms going back to the 1960s, according to a separate government reading.
Recent surveys show many workers would like to find a new job once the labor market improves, but most are just too scared to make the jump yet.
An American Express survey found 54% of the general population willing to make significant concessions in the name of job security, including accepting pay cuts or even demotion.
Employment consultant Towers Watson found 86% of workers value job security and stability, topping the number of people who listed improved pay or career advancement as important to them. And while 43% of workers believe they have to leave their current employer in order to advance their career, only 12% of workers say they are looking to leave their current jobs.
"They're saying they're staying put," said Laury Sejen, a global practice leader at Towers Watson. She said she was surprised by how dug in workers have become in their current jobs.
"When you look at it from a lot of different angles, it's a mindset shift."
Stuck in a dead-end job....
One worker who feels trapped in the job is a product manager for a consortium of travel agencies, who would only talk if her name was not used in this story. She said her stomach churns every day because she dislikes her job and her boss so much. But the state of the job market and worries about job security have kept her from even looking for a new job, especially since her husband was laid off last year.
"I hear so many people are out of work, I feel lucky that I have a job with insurance," she said. "I don't want to update my résumé and send it out and have it get back to my boss."
Another unhappy worker in the accounting department with a Midwest manufacturer says he's limited by the fact that his wife also works, making it difficult to relocate in the current job market.
"The job I'm in is a lot of number crunching that I'm not interested in doing anymore, but my wife likes what she's doing," said the worker who also asked that his name not be used. "If we were to move and she stopped working, it would require us to downsize a great deal."
Both workers quoted said that in a better job market they might be more willing to try to start their own business, but they're nervous about doing so in the current environment.
Economic headwinds....
The lack of mobility from job to job is a problem for more than just those unhappy workers. Economists say it can keep wages down and hinder economic recovery.
Changing jobs is an important method workers use to improve their income, giving them more dollars that they can then pump into the economy. Even the threat of leaving a job is often enough to increase pay.
"When you have low unemployment, people are much more free to leave their jobs and search for jobs with higher wages, and employers will have to pay a premium to find or retain the best workers," said Heidi Shierholz, labor economist with the Economic Policy Institute, a liberal think tank.
It makes sense that people are nervous about changing jobs in the current labor market, said Robert Brusca of FAO Economics.
"Even if you're unhappy in a job, it's the devil you know. You don't know for sure how they'll treat you in a new job, if they'll give you a fair shake," he said.
Don't ask for a state job...
Brusca said the latest jobs bill passed by Congress won't help get job mobility moving again because it gives a tax credit only for hiring the long-term unemployed.
But the economy would benefit as much from an employer offering a job to someone already working as it does from the hiring of someone without a job, because such a hire is likely to open up another position in the economy. He said the law is an example of the difficulty that Congress has reviving the moribund labor market.
Experts say the bad housing market is another factor keeping people from switching jobs, since people won't be willing to relocate for a better position if they have to take a large loss on the sale of their home.
And the unwillingness of workers to leave an established job to try to start a new business also slows economic growth.
The Labor Department estimates that more than a million fewer jobs were created than normal during the recession because of the low rate of new business start ups. While much of that could be due to the credit crunch and the overall economic downturn, some new businesses were undoubtedly lost because current employees are unwilling to take a chance to start something new.
"Until the economy gets better, many people won't be willing to take chances. And we need them taking chances," Brusca said.
Facebook traffic tops Google for the week
NEW YORK (CNNMoney.com) -- Facebook topped Google to become the most visited U.S. Web site last week, indicating a shift in how Americans are searching for content.
Web analysis firm Experian Hitwise said Monday that the social networking site surpassed Google to take the No. 1 spot for the week ended March 13.
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"It shows content sharing has become a huge driving force online," said Matt Tatham, director of media relations at Hitwise. "People want information from friends they trust, versus the the anonymity of a search engine."
Facebook accounted for 7.07% of U.S. Web traffic that week, while Google (GOOG, Fortune 500) received 7.03%. The study compared only the domains Facebook.com and Google.com -- not, for example, Google-owned sites like Gmail.com.
Though the traffic levels were close, Facebook's year-over-year growth far outpaced Google's that week. The number of visitors to Facebook spiked 185% compared with the same period last year, while Google's traffic climbed just 9%.
"It's definitely a big moment for Facebook, even though they beat by a small margin," Tatham said. "We've seen it coming for quite a long time."
Facebook's 6th birthday
Facebook had never before beaten Google over a full weeklong period, though it has been the most visited site on recent holidays: Christmas Eve, Christmas Day and New Year's Day. Facebook was also the top site on the weekend of March 6-7.
But Tatham noted that when he added up traffic on all Google properties like Google Maps and YouTube, the company's sites comprised 11.03% of visits. Yahoo (YHOO, Fortune 500) was second with 10.98%.
Google.com had been the No. 1 site each week since Sept. 15, 2007, when ironically it passed another social networking site, MySpace.com, in order to take the crown.
Of course, the MySpace connection could be a bad omen for Facebook. MySpace enjoyed dominance on the social networking scene for years until it saw traffic plummet following Facebook's rise.
"By nature, the Web is ever-changing," Tatham said. "The Internet can be a fickle crowd."
Web analysis firm Experian Hitwise said Monday that the social networking site surpassed Google to take the No. 1 spot for the week ended March 13.
Facebook Digg Twitter Buzz Up! Email Print Comment on this story
"It shows content sharing has become a huge driving force online," said Matt Tatham, director of media relations at Hitwise. "People want information from friends they trust, versus the the anonymity of a search engine."
Facebook accounted for 7.07% of U.S. Web traffic that week, while Google (GOOG, Fortune 500) received 7.03%. The study compared only the domains Facebook.com and Google.com -- not, for example, Google-owned sites like Gmail.com.
Though the traffic levels were close, Facebook's year-over-year growth far outpaced Google's that week. The number of visitors to Facebook spiked 185% compared with the same period last year, while Google's traffic climbed just 9%.
"It's definitely a big moment for Facebook, even though they beat by a small margin," Tatham said. "We've seen it coming for quite a long time."
Facebook's 6th birthday
Facebook had never before beaten Google over a full weeklong period, though it has been the most visited site on recent holidays: Christmas Eve, Christmas Day and New Year's Day. Facebook was also the top site on the weekend of March 6-7.
But Tatham noted that when he added up traffic on all Google properties like Google Maps and YouTube, the company's sites comprised 11.03% of visits. Yahoo (YHOO, Fortune 500) was second with 10.98%.
Google.com had been the No. 1 site each week since Sept. 15, 2007, when ironically it passed another social networking site, MySpace.com, in order to take the crown.
Of course, the MySpace connection could be a bad omen for Facebook. MySpace enjoyed dominance on the social networking scene for years until it saw traffic plummet following Facebook's rise.
"By nature, the Web is ever-changing," Tatham said. "The Internet can be a fickle crowd."
Existing home sales slip in February
March 23, 2010: 11:37 AM ET
NEW YORK (CNNMoney.com) -- Sales of existing homes fell slightly in February, according to an industry report released Tuesday, a sign that the housing market's recovery remains fragile.
The National Association of Realtors reported that home resales fell 0.6% last month to a seasonally adjusted annual rate of 5.02 million units. That's down from a rate of 5.05 million in January. Still, sales are 7% higher than in February 2009, when homes were going into contract at an annual rate of 4.69 million units.
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Last month's figures came in slightly above analyst expectations. Consensus estimates had forecast an annual rate of 5 million units, according to Briefing.com.
"Some closings were simply postponed by winter storms, says Lawrence Yun, NAR's chief economist, "but buyers couldn't get out to look at homes in some areas and that should negatively impact near term contract activity."
Yun added that sales have been higher on a year-over-year basis for eight straight months.
Analysts are hoping sales will pick up as the April 30 deadline for the new homebuyer tax credit closes in.
In November, Congress extended and expanded an $8,000 tax credit for first-time homebuyers, which also allows some repeat buyers to qualify for a $6,500 credit.
"We saw [an increase] in home buying figures in November" when consumers thought the credit was going away, said Carl Riccadonna, senior U.S. economist for Deutsche Bank.
But this time around, Riccadonna doesn't necessarily expect a "rush to the realtors."
0:00 /3:10Homeowners walking away
A separate NAR survey found that first-time homebuyers purchased 42% of homes in February, compared to 40% in January. Investors made up 19% of transactions, compared to 17% in January. Overall buyer traffic improved by 12% in February, NAR said.
Sales of distressed properties, including foreclosures and short sales, made up 35% of sales last month, compared to 38% in January.
Prices and inventory: NAR's report showed that the median price of homes sold in February was $165,100, down 1.8% from February 2009.
Total existing homes on the market jumped 9.5% in February to 3.59 million units, representing an 8.6-month supply of homes unsold, up from a 7.8 month supply in January. NAR's Yun attributed some of the increase in inventory to the number of distressed homes coming to market.
Sales by property type: Sales of single-family homes dipped 1.4% to a seasonally-adjusted annual rate of 4.37 million units in February, compared to 4.43 million units in January.
Existing condos and co-op sales fared better, rising 4.8% to a seasonally adjusted annual rate of 650,000 in February, from 620,000 in January. Sales for existing condos and co-ops are up 30.3% from February 2009.
Sales by region: The Midwest fared the best of all, according to NAR. The region saw existing home sales jump 2.8% in February to an annual rate of 1.11 million units, which was 8.8% higher than last year.
The Northeast also saw slight improvement in existing homes sales, which rose 2.4% to an annual pace of 840,000 for the month. Sales are up 12% from last year.
The Western region of the country fared the worst, with existing home sales falling 4.7% to an annual rate of 1.22 million units in February. Still, sales are up 3.4% from last year.
Existing home sales in the South dipped 1.1% to an annual rate of 1.85 million units in February, but were up 6.9% from a year ago.
Outlook: The housing market this year will struggle to balance a gradual recovery of demand with glut of inventory, according to Deutsche Bank's Carl Riccadonna.
While February's declines are worrisome, he stressed that this time of year is a trickle for homebuying, since the true judge of the health of the market will come during peak homebuying season this spring.
But even then, all eyes will be on jobs, the most definitive sign of economic recovery. "The best housing recovery plan is a strong labor market," said Riccadonna. "That's the rising tide that lifts all boats."
NEW YORK (CNNMoney.com) -- Sales of existing homes fell slightly in February, according to an industry report released Tuesday, a sign that the housing market's recovery remains fragile.
The National Association of Realtors reported that home resales fell 0.6% last month to a seasonally adjusted annual rate of 5.02 million units. That's down from a rate of 5.05 million in January. Still, sales are 7% higher than in February 2009, when homes were going into contract at an annual rate of 4.69 million units.
Facebook Digg Twitter Buzz Up! Email Print Comment on this story
Last month's figures came in slightly above analyst expectations. Consensus estimates had forecast an annual rate of 5 million units, according to Briefing.com.
"Some closings were simply postponed by winter storms, says Lawrence Yun, NAR's chief economist, "but buyers couldn't get out to look at homes in some areas and that should negatively impact near term contract activity."
Yun added that sales have been higher on a year-over-year basis for eight straight months.
Analysts are hoping sales will pick up as the April 30 deadline for the new homebuyer tax credit closes in.
In November, Congress extended and expanded an $8,000 tax credit for first-time homebuyers, which also allows some repeat buyers to qualify for a $6,500 credit.
"We saw [an increase] in home buying figures in November" when consumers thought the credit was going away, said Carl Riccadonna, senior U.S. economist for Deutsche Bank.
But this time around, Riccadonna doesn't necessarily expect a "rush to the realtors."
0:00 /3:10Homeowners walking away
A separate NAR survey found that first-time homebuyers purchased 42% of homes in February, compared to 40% in January. Investors made up 19% of transactions, compared to 17% in January. Overall buyer traffic improved by 12% in February, NAR said.
Sales of distressed properties, including foreclosures and short sales, made up 35% of sales last month, compared to 38% in January.
Prices and inventory: NAR's report showed that the median price of homes sold in February was $165,100, down 1.8% from February 2009.
Total existing homes on the market jumped 9.5% in February to 3.59 million units, representing an 8.6-month supply of homes unsold, up from a 7.8 month supply in January. NAR's Yun attributed some of the increase in inventory to the number of distressed homes coming to market.
Sales by property type: Sales of single-family homes dipped 1.4% to a seasonally-adjusted annual rate of 4.37 million units in February, compared to 4.43 million units in January.
Existing condos and co-op sales fared better, rising 4.8% to a seasonally adjusted annual rate of 650,000 in February, from 620,000 in January. Sales for existing condos and co-ops are up 30.3% from February 2009.
Sales by region: The Midwest fared the best of all, according to NAR. The region saw existing home sales jump 2.8% in February to an annual rate of 1.11 million units, which was 8.8% higher than last year.
The Northeast also saw slight improvement in existing homes sales, which rose 2.4% to an annual pace of 840,000 for the month. Sales are up 12% from last year.
The Western region of the country fared the worst, with existing home sales falling 4.7% to an annual rate of 1.22 million units in February. Still, sales are up 3.4% from last year.
Existing home sales in the South dipped 1.1% to an annual rate of 1.85 million units in February, but were up 6.9% from a year ago.
Outlook: The housing market this year will struggle to balance a gradual recovery of demand with glut of inventory, according to Deutsche Bank's Carl Riccadonna.
While February's declines are worrisome, he stressed that this time of year is a trickle for homebuying, since the true judge of the health of the market will come during peak homebuying season this spring.
But even then, all eyes will be on jobs, the most definitive sign of economic recovery. "The best housing recovery plan is a strong labor market," said Riccadonna. "That's the rising tide that lifts all boats."
Monday, March 22, 2010
Obama Pays More Than Buffett as U.S. Risks AAA Rating
March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
Moody’s Warning
While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
Unprecedented Spending
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.
Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard & Poor’s said the default rate will drop to 5 percent by year-end from 10.4 percent in February.
Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009.
Berkshire Hathaway
Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody’s and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt.
P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P, makes everything from Tide detergent to Swiffer dusters.
New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest health products company is rated AAA by S&P and Moody’s.
Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada have also been below Treasuries, Trace data show.
‘Avalanche’
“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.
Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s.
While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and 1.58 percent in January, Bank of America Merrill Lynch indexes show.
Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey. Two-year yields will rise to 1.77 percent, from 0.99 percent.
Relative Yields
Investors demand 0.59 percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries.
President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the nonpartisan Congressional Budget Office said this month. Publicly held debt will zoom to $20.3 trillion, or 90 percent of gross domestic product, by 2020, the CBO forecast.
There’s “a lack of a long-term plan to deal with the federal budget deficit,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “At some point in time the market may lose its patience.”
Balance Sheets
Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated companies make them more attractive than Treasuries.
Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three months, Bloomberg data show. That represents 28 percent of assets, the least in at least a decade.
Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of America Merrill Lynch indexes show. That’s down from the peak of 515 basis points in November 2008, and approaching the record low of 36 in 1997.
Adding to Corporates
New York Life Investment Management is adding to bets the difference in yields will continue to shrink.
“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money manager who helps invest $115 billion at the New York-based insurer. “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”
For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. The U.S. has the biggest, most liquid securities markets, said Cheah.
Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are about half their average since 1980.
Losing its Status
The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the first time in almost three decades. The amount of Treasuries outstanding dropped 8 percent to $3.4 trillion in 2000, the biggest annual decline since 1946.
Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in 2007 from 2000 as the U.S. borrowed to finance tax cuts intended to revive a slumping economy. The amount has since risen 64 percent to $7.4 trillion.
More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.
At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth quarter, Bloomberg data show.
Growing Supply
High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those maturities will make government debt a bigger proportion of indexes that fund managers measure their performance against, he said. Managers betting Treasury yields will rise may diversify into corporate debt, Pollack said.
“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group Inc. in Baltimore. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22 billion. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
Moody’s Warning
While Treasuries backed by the full faith and credit of the government typically yield less than corporate debt, the relationship has flipped as Moody’s Investors Service predicts the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7 percent of taxes for debt payments in 2010 and almost 11 percent in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.
“Those economies have been caught in a crisis while they are highly leveraged,” said Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London. “They have to make the required adjustment to stabilize markets without choking off growth.”
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
Unprecedented Spending
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said.
Obama’s unprecedented spending and the Federal Reserve’s emergency measures to fix the financial system are boosting the economy and cutting the risk of corporate failures. Standard & Poor’s said the default rate will drop to 5 percent by year-end from 10.4 percent in February.
Bonds sold by companies have returned 3.24 percent this year, including reinvested interest, compared with a 1.55 percent gain for Treasuries, Bank of America Merrill Lynch index data show. Returns exceeded government debt by a record 23 percentage points in 2009.
Berkshire Hathaway
Berkshire Hathaway’s 1.4 percent notes due February 2012 yielded 0.89 percent on March 18, 3.5 basis points, or 0.035 percentage point, less than Treasuries, composite prices compiled by Bloomberg show. The Omaha, Nebraska-based company, which is rated Aa2 by Moody’s and AA+ by S&P, has about $157 billion of cash and equivalents and about $52 billion of debt.
P&G, the world’s largest consumer-products maker, saw the yield on its 1.375 percent notes due August 2012 fall to 1.12 percent on March 18, 6 basis points below government debt. The Cincinnati-based company, rated Aa3 by Moody’s and AA- by S&P, makes everything from Tide detergent to Swiffer dusters.
New Brunswick, New Jersey-based Johnson & Johnson’s 5.15 percent securities due August 2012 yielded 1.11 percent on Feb. 17, 3 basis points less than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest health products company is rated AAA by S&P and Moody’s.
Yields on bonds of home-improvement retailer Lowe’s in Mooresville, North Carolina, drugmaker Abbott Laboratories of Abbott Park, Illinois, and Toronto-based Royal Bank of Canada have also been below Treasuries, Trace data show.
‘Avalanche’
“It’s a manifestation of this avalanche, this growth in U.S. Treasury supply which is under way and continues for the foreseeable future, and the comparative scarcity of high-quality credit,” particularly in shorter-maturity debt, said Malvey, whose Lehman team was ranked No. 1 in fixed-income strategy by Institutional Investor magazine from 1998 through 2007.
Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show. Malvey said the last time he can recall that a corporate bond yield traded below Treasuries was when he was head of company debt research at Kidder Peabody & Co. in the mid-1980s.
While Treasuries are poised to make money for investors this quarter, they are losing momentum. The securities are down 0.43 percent in March after gaining 0.4 percent last month and 1.58 percent in January, Bank of America Merrill Lynch indexes show.
Benchmark 10-year Treasury yields will reach 4.20 percent by year-end, up from 3.69 percent last week, according to the median forecast of 48 economists in a Bloomberg News survey. Two-year yields will rise to 1.77 percent, from 0.99 percent.
Relative Yields
Investors demand 0.59 percentage point more in yield to own 10-year Treasuries than German bunds of similar maturity, Bloomberg data show. A year ago, debt of Germany, whose deficit is 4.2 percent of its economy, yielded about half a percentage point more than Treasuries.
President Obama’s budget proposal would create bigger deficits every year of the next decade, with the gaps totaling $1.2 trillion more than his administration projects, the nonpartisan Congressional Budget Office said this month. Publicly held debt will zoom to $20.3 trillion, or 90 percent of gross domestic product, by 2020, the CBO forecast.
There’s “a lack of a long-term plan to deal with the federal budget deficit,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “At some point in time the market may lose its patience.”
Balance Sheets
Deutsche Bank and Barclays Plc, two of the 18 primary dealers of U.S. government securities that are obligated to bid at the Treasury’s auctions, say balance sheets of high-rated companies make them more attractive than Treasuries.
Corporate borrowers are reducing debt at a record pace. Companies in the S&P 500 cut their liabilities by $282 billion to $7.1 trillion in the fourth quarter from the prior three months, Bloomberg data show. That represents 28 percent of assets, the least in at least a decade.
Investors are accepting smaller premiums to lend to companies, with yields on bonds rated at least AA falling to within 107 basis points of Treasuries on average, Bank of America Merrill Lynch indexes show. That’s down from the peak of 515 basis points in November 2008, and approaching the record low of 36 in 1997.
Adding to Corporates
New York Life Investment Management is adding to bets the difference in yields will continue to shrink.
“As the balance sheet of corporate America continues to improve and the balance sheet of the government deteriorates, that spread should narrow,” said Thomas Girard, a senior money manager who helps invest $115 billion at the New York-based insurer. “There is some sort of breaking point. The federal government can’t keep expanding its borrowing without having to incur some costs.”
For all the concern about U.S. finances, Treasuries are unlikely to lose their role as the world’s borrowing benchmark, said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. The U.S. has the biggest, most liquid securities markets, said Cheah.
Speculating that Treasuries may lose their privileged position is “not a bet I want to put on,” said Cheah, who worked at Singapore’s central bank. Yields on 10-year notes are about half their average since 1980.
Losing its Status
The last time there was talk of the U.S. losing its status as the world’s benchmark for bonds was in the late 1990s, when the government began amassing budget surpluses in 1998 for the first time in almost three decades. The amount of Treasuries outstanding dropped 8 percent to $3.4 trillion in 2000, the biggest annual decline since 1946.
Treasury supply resumed growing in 2001 after two rounds of tax cuts proposed by President George W. Bush led to deficits. Outstanding Treasury supply rose 53 percent to $4.5 trillion in 2007 from 2000 as the U.S. borrowed to finance tax cuts intended to revive a slumping economy. The amount has since risen 64 percent to $7.4 trillion.
More is on the way. The U.S. will sell a record $2.43 trillion of debt in 2010, according to the average forecast of 10 of the 18 primary dealers in a Bloomberg survey.
At the same time Treasury sales are rising, the cash position of the largest corporations is swelling. Companies in the S&P 500 held a record $2.3 trillion as of the fourth quarter, Bloomberg data show.
Growing Supply
High-rated corporate bonds due in three to five years are most likely to yield less than Treasuries, according to Deutsche Bank’s Pollack. The growing supply of Treasuries with those maturities will make government debt a bigger proportion of indexes that fund managers measure their performance against, he said. Managers betting Treasury yields will rise may diversify into corporate debt, Pollack said.
“There’s no natural law that says a Treasury has to yield less than a corporate,” said Daniel Shackelford, who is part of a group that manages $18 billion in bonds at T. Rowe Price Group Inc. in Baltimore. “It wouldn’t be the first time that I would scratch my head and say ‘this doesn’t make sense, the market’s behaving irrationally.’ And it can go on for much longer than you may think.”
House Approves Landmark U.S. Health-Care Legislation
March 22 (Bloomberg) -- The U.S. House passed the most sweeping health-care legislation in four decades, rewriting the rules governing medical industries and ensuring that tens of millions of uninsured Americans will get medical coverage.
President Barack Obama will sign the health-care package into law at the White House tomorrow, said an administration official who spoke on condition of anonymity because it hasn’t been publicly announced.
Yesterday’s 219-212 vote marks a victory for Obama. Only Democrats voted for the legislation, underscoring a partisan divide that promises to make health care the defining issue in November’s congressional elections.
Lawmakers hailed the action as a historic follow-up to the 1965 creation of the Medicare program for the elderly and a way to mitigate soaring health costs that make up a sixth of the U.S. economy. It came after a last-minute deal with anti- abortion Democrats and a lobbying trip by Obama to the Capitol.
“It’s a victory for the American people,” Obama told reporters at the White House just before midnight. “This legislation will not fix everything that ails our health-care system but it moves us decisively in the right direction. This is what change looks like.”
House Speaker Nancy Pelosi described the passage as “history for our country and progress for the American people.”
Two Bills
To finish their work on health care, House Democrats approved a Senate bill passed in December and then voted 220-211 to pass a measure that would amend the Senate legislation to fix provisions they don’t like. The Senate must also pass this second bill under a budget process called reconciliation that requires a simple majority vote.
While Senate Democrats plan to act this week on the second bill, they face a host of challenges from Republicans that may hold up their work or force a new vote in the House.
The two bills together will cost $940 billion over 10 years and cover 32 million uninsured Americans, the Congressional Budget Office estimated. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Companies such as health insurer WellPoint Inc. of Indianapolis, medical-device maker Medtronic Inc. of Minneapolis and drugmaker Pfizer Inc. of New York will get millions of new customers with the extension of coverage. Their industries will also face billions of dollars in new fees.
WellPoint Reacts
As part of the overhaul, drugmakers agreed to help the elderly more easily afford medicines. Insurers, which opposed the legislation, will have to take all customers, regardless of pre-existing conditions, and face limits on how much revenue can be spent beyond covering medical expenses.
“WellPoint is disappointed that after more than a year of debate, Congress has approved health-care legislation that does little to reduce cost and improve quality,” company spokeswoman Kristin Binns said in an e-mail to reporters.
Under the bill, Americans will have to buy insurance or pay a penalty, with the possibility of tapping new purchasing exchanges and government aid for lower-income Americans.
Republicans said the costs will balloon, criticized the increases in government programs and held out the possibility that private insurance and medical care would be hurt.
“We are looking at a health-care bill that nobody in this body believes is satisfactory,” House Minority Leader John Boehner said prior to the vote. “We have failed to reflect the will of our constituents.”
Business Groups
Business groups, including the U.S. Chamber of Commerce, also lobbied against the legislation, and Peoria, Illinois-based Caterpillar Inc. sent a letter to leaders saying the bills would raise its costs by $100 million in the first year alone.
The House’s two-step process became necessary after Democrats lost the 60th vote in the Senate generally needed to push through major legislation.
Just weeks after the Senate’s party-line 60-39 vote, Democrats were almost finished drafting a House-Senate compromise bill when Massachusetts Republican Scott Brown won a Jan. 19 special election to fill the seat left vacant by the death of Democrat Edward M. Kennedy.
The use of the budget-reconciliation tool opens the door for the Senate to pass the second bill with 51 votes, as long as it can withstand Republican challenges and the rulings of a parliamentarian, who will take out any provision he decides have only an incidental impact on the federal budget.
‘Massive’ Amendments
New Hampshire Senator Judd Gregg, who will help coordinate the Republicans’ efforts, said his party can put forth “massive amounts” of amendments on unrelated issues from gun control to immigration. They can also challenge provisions such as the scaling back of a tax on high-end, or so-called Cadillac, insurance plans because it would affect money flowing into Social Security, he said.
Any changes in the Senate would force a new House vote on the reconciliation bill, further complicating the effort. House Democrats particularly wanted to change the Cadillac tax because they say it would affect too many workers.
“If those people think they’re only going to vote on this once, they’re nuts,” Senator Orrin Hatch, a Utah Republican, said in a Bloomberg Television interview last week.
Illinois Senator Richard Durbin, a member of the Democratic leadership, said yesterday his party is prepared for challenges and any amendments Republicans might file.
‘Ready to Tackle’
“We’re ready to tackle that if that’s what they want to do,” Durbin said on CBS’s “Face the Nation” program. “We’re ready to deal with honest amendments. There will come a time when the American people say enough, this is about politics.”
Obama, who faced criticism for largely leaving the drafting of the legislation to Congress, swung into high gear in recent weeks. He hosted a Feb. 25 bipartisan summit at the White House, proposed detailed final compromises and lobbied dozens of undecided Democrats. He postponed a trip to Asia to remain in Washington for yesterday’s vote.
Obama benefited in part from the votes of Democrats who are leaving Congress and who were willing to switch sides after voting “no” on a House version in November.
He also won support from Democrats, including Representative Dennis Kucinich of Ohio, who had threatened to oppose the final measure because it didn’t include a new government program, or public option, to compete against private insurers.
Expanding Medicaid
The legislation will expand the Medicaid government program for the poor to cover those making up to 133 percent of the federal poverty level, and offer subsidies for millions of other Americans to buy insurance through an online exchange offering policies at more-affordable group rates.
Many employers with more than 50 workers that don’t offer coverage will be subject to a penalty. The reconciliation bill will change the penalty to $2,000 per worker, from $750 in the Senate bill, and subtract out the first 30 employees.
The overhaul is financed in large part through new taxes. The reconciliation bill would add a 3.8 percent Medicare tax on investment income imposed on individuals who earn more than $200,000 a year and joint tax filers who have more than $250,000 in earnings. That adds to a higher Medicare payroll tax already in the Senate bill.
President Barack Obama will sign the health-care package into law at the White House tomorrow, said an administration official who spoke on condition of anonymity because it hasn’t been publicly announced.
Yesterday’s 219-212 vote marks a victory for Obama. Only Democrats voted for the legislation, underscoring a partisan divide that promises to make health care the defining issue in November’s congressional elections.
Lawmakers hailed the action as a historic follow-up to the 1965 creation of the Medicare program for the elderly and a way to mitigate soaring health costs that make up a sixth of the U.S. economy. It came after a last-minute deal with anti- abortion Democrats and a lobbying trip by Obama to the Capitol.
“It’s a victory for the American people,” Obama told reporters at the White House just before midnight. “This legislation will not fix everything that ails our health-care system but it moves us decisively in the right direction. This is what change looks like.”
House Speaker Nancy Pelosi described the passage as “history for our country and progress for the American people.”
Two Bills
To finish their work on health care, House Democrats approved a Senate bill passed in December and then voted 220-211 to pass a measure that would amend the Senate legislation to fix provisions they don’t like. The Senate must also pass this second bill under a budget process called reconciliation that requires a simple majority vote.
While Senate Democrats plan to act this week on the second bill, they face a host of challenges from Republicans that may hold up their work or force a new vote in the House.
The two bills together will cost $940 billion over 10 years and cover 32 million uninsured Americans, the Congressional Budget Office estimated. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Companies such as health insurer WellPoint Inc. of Indianapolis, medical-device maker Medtronic Inc. of Minneapolis and drugmaker Pfizer Inc. of New York will get millions of new customers with the extension of coverage. Their industries will also face billions of dollars in new fees.
WellPoint Reacts
As part of the overhaul, drugmakers agreed to help the elderly more easily afford medicines. Insurers, which opposed the legislation, will have to take all customers, regardless of pre-existing conditions, and face limits on how much revenue can be spent beyond covering medical expenses.
“WellPoint is disappointed that after more than a year of debate, Congress has approved health-care legislation that does little to reduce cost and improve quality,” company spokeswoman Kristin Binns said in an e-mail to reporters.
Under the bill, Americans will have to buy insurance or pay a penalty, with the possibility of tapping new purchasing exchanges and government aid for lower-income Americans.
Republicans said the costs will balloon, criticized the increases in government programs and held out the possibility that private insurance and medical care would be hurt.
“We are looking at a health-care bill that nobody in this body believes is satisfactory,” House Minority Leader John Boehner said prior to the vote. “We have failed to reflect the will of our constituents.”
Business Groups
Business groups, including the U.S. Chamber of Commerce, also lobbied against the legislation, and Peoria, Illinois-based Caterpillar Inc. sent a letter to leaders saying the bills would raise its costs by $100 million in the first year alone.
The House’s two-step process became necessary after Democrats lost the 60th vote in the Senate generally needed to push through major legislation.
Just weeks after the Senate’s party-line 60-39 vote, Democrats were almost finished drafting a House-Senate compromise bill when Massachusetts Republican Scott Brown won a Jan. 19 special election to fill the seat left vacant by the death of Democrat Edward M. Kennedy.
The use of the budget-reconciliation tool opens the door for the Senate to pass the second bill with 51 votes, as long as it can withstand Republican challenges and the rulings of a parliamentarian, who will take out any provision he decides have only an incidental impact on the federal budget.
‘Massive’ Amendments
New Hampshire Senator Judd Gregg, who will help coordinate the Republicans’ efforts, said his party can put forth “massive amounts” of amendments on unrelated issues from gun control to immigration. They can also challenge provisions such as the scaling back of a tax on high-end, or so-called Cadillac, insurance plans because it would affect money flowing into Social Security, he said.
Any changes in the Senate would force a new House vote on the reconciliation bill, further complicating the effort. House Democrats particularly wanted to change the Cadillac tax because they say it would affect too many workers.
“If those people think they’re only going to vote on this once, they’re nuts,” Senator Orrin Hatch, a Utah Republican, said in a Bloomberg Television interview last week.
Illinois Senator Richard Durbin, a member of the Democratic leadership, said yesterday his party is prepared for challenges and any amendments Republicans might file.
‘Ready to Tackle’
“We’re ready to tackle that if that’s what they want to do,” Durbin said on CBS’s “Face the Nation” program. “We’re ready to deal with honest amendments. There will come a time when the American people say enough, this is about politics.”
Obama, who faced criticism for largely leaving the drafting of the legislation to Congress, swung into high gear in recent weeks. He hosted a Feb. 25 bipartisan summit at the White House, proposed detailed final compromises and lobbied dozens of undecided Democrats. He postponed a trip to Asia to remain in Washington for yesterday’s vote.
Obama benefited in part from the votes of Democrats who are leaving Congress and who were willing to switch sides after voting “no” on a House version in November.
He also won support from Democrats, including Representative Dennis Kucinich of Ohio, who had threatened to oppose the final measure because it didn’t include a new government program, or public option, to compete against private insurers.
Expanding Medicaid
The legislation will expand the Medicaid government program for the poor to cover those making up to 133 percent of the federal poverty level, and offer subsidies for millions of other Americans to buy insurance through an online exchange offering policies at more-affordable group rates.
Many employers with more than 50 workers that don’t offer coverage will be subject to a penalty. The reconciliation bill will change the penalty to $2,000 per worker, from $750 in the Senate bill, and subtract out the first 30 employees.
The overhaul is financed in large part through new taxes. The reconciliation bill would add a 3.8 percent Medicare tax on investment income imposed on individuals who earn more than $200,000 a year and joint tax filers who have more than $250,000 in earnings. That adds to a higher Medicare payroll tax already in the Senate bill.
Stocks Show Economy Revving as Cyclical Shares Win
March 22 (Bloomberg) -- Retailers erased their stock market losses since the collapse of Lehman Brothers Holdings Inc. and transportation companies doubled in a year, signs the advance in U.S. equities is just getting started.
Amazon.com Inc. and Gap Inc. have wiped out declines of as much as 63 percent since the bear market began in October 2007 amid forecasts retailers’ profits will increase 63 percent through 2012. The Dow Jones Transportation Average, where earnings are projected to almost triple in two years, is beating the Standard & Poor’s 500 Index by 32 percentage points since March 2009, the widest gap for a rally since 1990.
Investors seeking signals equities will keep rising are finding them in industries most tied to the economy, the basis for a century-old forecasting technique known as Dow Theory. While bears say the gains aren’t justified by earnings and that shares are climbing too fast, Stephen Lieber of Alpine Woods Capital Investors LLC and David Darst of Morgan Stanley are buying on speculation the expansion will revive profit growth.
“This is not a junk stock rally,” said Lieber, who helps manage more than $7 billion in Purchase, New York. “This is a restoration-of-confidence rally. This is a business confidence rally.”
Lieber owns Intel Corp., the Santa Clara, California-based semiconductor maker that climbed to an 18-month high of $22.24 last week amid optimism sales to business customers are growing.
Winning Streak
The S&P 500 increased 0.9 percent and the MSCI World Index of stocks in 23 developed nations climbed 0.3 percent as both measures advanced for a third week. Government reports showing higher consumer spending and lower-than-expected inflation have pushed the Dow Jones Industrial Average up 3 percent in 2010, according to data compiled by Bloomberg. The S&P 500 slipped 0.1 percent to 1,158.79 at 9:55 a.m. in New York today.
An exchange-traded fund that matches the performance of the U.S. benchmark index, the SPDR S&P 500 ETF Trust, rose 14 straight days through March 17, the longest streak in its 17- year history. The 11-day winning streak by the Dow transports that ended last week was the best since 1992, data compiled by Bloomberg show.
Companies whose profits are most tied to changes in U.S. gross domestic product are beating those with the smallest connection to the economy by the widest margin on record.
The Morgan Stanley Cyclical Index, a measure of 30 stocks from Dearborn, Michigan-based Ford Motor Co. to U.S. Steel Corp. in Pittsburgh, has surged 209 percent since March 6, 2009. It topped the Morgan Stanley Consumer Index, a gauge of companies such as Pfizer Inc. and ConAgra Foods Inc. that do relatively well during a contraction, by 147 percentage points.
Twice the Gain
The cyclical index has also provided almost double the return since Feb. 8, when the S&P 500 began rebounding from a three-week drop that erased 8.1 percent, according to data compiled by Bloomberg.
Manufacturing and industrial stocks in the S&P 500 are up 11 percent in 2010, beating nine other groups in the index by at least 2 percentage points, data compiled by Bloomberg show. This is the first time since 1985 that the measure, which includes Chicago-based Boeing Co., the world’s second-largest commercial plane-maker, and General Electric Co. in Fairfield, Connecticut, the biggest supplier of power turbines, has led this far into a year, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi.
“We are still bullish on risk assets,” said Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, which oversees $1.6 trillion. “We see a multiyear cyclical bull market.”
High Velocity
The speed of the rebound in stocks since Feb. 8 is reason to doubt its sustainability, says Andrew Lapthorne, global head of quantitative strategy at Paris-based Societe Generale. The relative strength index using 14 days of data for the SPDR S&P 500 ETF rose to 76.76 on March 17, the highest level since October 2006. Surges in the RSI mean a security may have climbed too far, too fast.
Rallying stocks have pushed the S&P 500’s price relative to earnings in the last 12 months to 18.6 times. The average multiple over the last 56 years is 16.6, according to data compiled by Bloomberg.
“The long-term valuation expectations are way, way too high,” said Lapthorne. “I don’t think there is much value in the markets. It has the potential to drive violently downwards.”
Amazon, Old Navy
Investors should bet that companies with the best earnings prospects will outperform, Robert Buckland, an equity strategist at Citigroup Inc. in London, wrote in a March 17 report. Stocks that fell the most in the 2007 to 2009 bear market helped propel the S&P 500 during the past 12 months and cyclical stocks will help lead the market in the next two years, Buckland said.
Amazon, the Seattle-based owner of the world’s biggest Internet retailer, has doubled since the stock market bottomed in 2009 and gained 12 percent over the last six weeks. San Francisco-based Gap, which runs namesake clothing stores and Old Navy, is up 22 percent in the past six weeks.
Both stocks helped send the S&P 500 Consumer Discretionary Index, a measure of companies reliant on Americans’ spending, past its level on Sept. 12, 2008, just before Lehman’s bankruptcy froze credit markets and $1.7 trillion in bank losses spurred the worst recession in seven decades.
Buffett’s Indicator
The average analyst estimate for Amazon’s 2011 earnings has increased 14 percent to $4.78 a share this year. Gap’s has risen 4.8 percent to $1.73. Profit for companies in the consumer discretionary index are forecast to surge an average of 57 percent to $21.66 a share through the end of 2012, according to data compiled by Bloomberg.
Warren Buffett said on Nov. 3 that he made an “all-in wager” on the strength of the U.S. economy when he bought Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. for $27 billion, the biggest purchase of his career.
Buffett, 79, the billionaire chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, told ABC News last year that U.S. rail- freight traffic is among the most important measures of economic health. Trains hauled 287,837 carloads for the week ended March 13, near the highest level in a year, data from the Washington- based Association of American Railroads show.
‘Coming Back’
The rebound in shipping has helped push the Dow Jones Transportation Average up 104 percent since the market low, compared with the S&P 500’s 71 percent jump. Companies in the gauge are projected to report a 173 percent increase in profits in the next two years, led by a sixfold gain at Honolulu-based Alexander & Baldwin Inc., which operates barges, data on operating profits compiled by Bloomberg show. By comparison, earnings among S&P 500 companies may grow 52 percent during that time, the data show.
“The cyclical stocks are coming back because the economy is coming back,” said Jeffrey Saut, the chief investment strategist at Raymond James & Associates, which manages $230 billion in St. Petersburg, Florida. “I’m still bullish into the summer.”
Dow Theory, developed by Wall Street Journal co-founder Charles Dow in the 1800s, suggests the rally in U.S. equities may continue. Dow’s transportation and industrial averages both reached the highest levels since October 2008 last week.
Stocks that fell the most during the bear market plunge have been the biggest winners in the rebound, according to data compiled by Bloomberg. Financial shares in the S&P 500 have risen 152 percent in the past year. Investors from Paulson & Co. to Fairholme Capital Management are loading up on the group. Regulatory filings show banks, brokerages and insurers make up 19 percent of hedge fund equity holdings, the biggest allocation compared with other industries.
“I’m bullish,” said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees more than $220 billion. “The economy is improving, corporate earnings look good and there’s still great value in the market.”
Amazon.com Inc. and Gap Inc. have wiped out declines of as much as 63 percent since the bear market began in October 2007 amid forecasts retailers’ profits will increase 63 percent through 2012. The Dow Jones Transportation Average, where earnings are projected to almost triple in two years, is beating the Standard & Poor’s 500 Index by 32 percentage points since March 2009, the widest gap for a rally since 1990.
Investors seeking signals equities will keep rising are finding them in industries most tied to the economy, the basis for a century-old forecasting technique known as Dow Theory. While bears say the gains aren’t justified by earnings and that shares are climbing too fast, Stephen Lieber of Alpine Woods Capital Investors LLC and David Darst of Morgan Stanley are buying on speculation the expansion will revive profit growth.
“This is not a junk stock rally,” said Lieber, who helps manage more than $7 billion in Purchase, New York. “This is a restoration-of-confidence rally. This is a business confidence rally.”
Lieber owns Intel Corp., the Santa Clara, California-based semiconductor maker that climbed to an 18-month high of $22.24 last week amid optimism sales to business customers are growing.
Winning Streak
The S&P 500 increased 0.9 percent and the MSCI World Index of stocks in 23 developed nations climbed 0.3 percent as both measures advanced for a third week. Government reports showing higher consumer spending and lower-than-expected inflation have pushed the Dow Jones Industrial Average up 3 percent in 2010, according to data compiled by Bloomberg. The S&P 500 slipped 0.1 percent to 1,158.79 at 9:55 a.m. in New York today.
An exchange-traded fund that matches the performance of the U.S. benchmark index, the SPDR S&P 500 ETF Trust, rose 14 straight days through March 17, the longest streak in its 17- year history. The 11-day winning streak by the Dow transports that ended last week was the best since 1992, data compiled by Bloomberg show.
Companies whose profits are most tied to changes in U.S. gross domestic product are beating those with the smallest connection to the economy by the widest margin on record.
The Morgan Stanley Cyclical Index, a measure of 30 stocks from Dearborn, Michigan-based Ford Motor Co. to U.S. Steel Corp. in Pittsburgh, has surged 209 percent since March 6, 2009. It topped the Morgan Stanley Consumer Index, a gauge of companies such as Pfizer Inc. and ConAgra Foods Inc. that do relatively well during a contraction, by 147 percentage points.
Twice the Gain
The cyclical index has also provided almost double the return since Feb. 8, when the S&P 500 began rebounding from a three-week drop that erased 8.1 percent, according to data compiled by Bloomberg.
Manufacturing and industrial stocks in the S&P 500 are up 11 percent in 2010, beating nine other groups in the index by at least 2 percentage points, data compiled by Bloomberg show. This is the first time since 1985 that the measure, which includes Chicago-based Boeing Co., the world’s second-largest commercial plane-maker, and General Electric Co. in Fairfield, Connecticut, the biggest supplier of power turbines, has led this far into a year, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi.
“We are still bullish on risk assets,” said Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, which oversees $1.6 trillion. “We see a multiyear cyclical bull market.”
High Velocity
The speed of the rebound in stocks since Feb. 8 is reason to doubt its sustainability, says Andrew Lapthorne, global head of quantitative strategy at Paris-based Societe Generale. The relative strength index using 14 days of data for the SPDR S&P 500 ETF rose to 76.76 on March 17, the highest level since October 2006. Surges in the RSI mean a security may have climbed too far, too fast.
Rallying stocks have pushed the S&P 500’s price relative to earnings in the last 12 months to 18.6 times. The average multiple over the last 56 years is 16.6, according to data compiled by Bloomberg.
“The long-term valuation expectations are way, way too high,” said Lapthorne. “I don’t think there is much value in the markets. It has the potential to drive violently downwards.”
Amazon, Old Navy
Investors should bet that companies with the best earnings prospects will outperform, Robert Buckland, an equity strategist at Citigroup Inc. in London, wrote in a March 17 report. Stocks that fell the most in the 2007 to 2009 bear market helped propel the S&P 500 during the past 12 months and cyclical stocks will help lead the market in the next two years, Buckland said.
Amazon, the Seattle-based owner of the world’s biggest Internet retailer, has doubled since the stock market bottomed in 2009 and gained 12 percent over the last six weeks. San Francisco-based Gap, which runs namesake clothing stores and Old Navy, is up 22 percent in the past six weeks.
Both stocks helped send the S&P 500 Consumer Discretionary Index, a measure of companies reliant on Americans’ spending, past its level on Sept. 12, 2008, just before Lehman’s bankruptcy froze credit markets and $1.7 trillion in bank losses spurred the worst recession in seven decades.
Buffett’s Indicator
The average analyst estimate for Amazon’s 2011 earnings has increased 14 percent to $4.78 a share this year. Gap’s has risen 4.8 percent to $1.73. Profit for companies in the consumer discretionary index are forecast to surge an average of 57 percent to $21.66 a share through the end of 2012, according to data compiled by Bloomberg.
Warren Buffett said on Nov. 3 that he made an “all-in wager” on the strength of the U.S. economy when he bought Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. for $27 billion, the biggest purchase of his career.
Buffett, 79, the billionaire chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, told ABC News last year that U.S. rail- freight traffic is among the most important measures of economic health. Trains hauled 287,837 carloads for the week ended March 13, near the highest level in a year, data from the Washington- based Association of American Railroads show.
‘Coming Back’
The rebound in shipping has helped push the Dow Jones Transportation Average up 104 percent since the market low, compared with the S&P 500’s 71 percent jump. Companies in the gauge are projected to report a 173 percent increase in profits in the next two years, led by a sixfold gain at Honolulu-based Alexander & Baldwin Inc., which operates barges, data on operating profits compiled by Bloomberg show. By comparison, earnings among S&P 500 companies may grow 52 percent during that time, the data show.
“The cyclical stocks are coming back because the economy is coming back,” said Jeffrey Saut, the chief investment strategist at Raymond James & Associates, which manages $230 billion in St. Petersburg, Florida. “I’m still bullish into the summer.”
Dow Theory, developed by Wall Street Journal co-founder Charles Dow in the 1800s, suggests the rally in U.S. equities may continue. Dow’s transportation and industrial averages both reached the highest levels since October 2008 last week.
Stocks that fell the most during the bear market plunge have been the biggest winners in the rebound, according to data compiled by Bloomberg. Financial shares in the S&P 500 have risen 152 percent in the past year. Investors from Paulson & Co. to Fairholme Capital Management are loading up on the group. Regulatory filings show banks, brokerages and insurers make up 19 percent of hedge fund equity holdings, the biggest allocation compared with other industries.
“I’m bullish,” said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees more than $220 billion. “The economy is improving, corporate earnings look good and there’s still great value in the market.”
U.S. Stocks Rise as Drug Shares Rally After House OKs Overhaul
March 22 (Bloomberg) -- U.S. stocks gained, erasing an early decline, as health-care shares rallied after the House of Representatives passed an overhaul of the industry.
Merck & Co. and Pfizer Inc. climbed more than 1.5 percent to help lead health-care companies to the biggest gain among 10 groups in the Standard & Poor’s 500 Index after the House approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage.
“The health-care legislation approval removes the uncertainty,” said Richard Sichel, chief investment officer at the Philadelphia Trust Co., which manages $1.4 billion. “On top of that, the shares had been beaten down, so you can find reasonably valued companies.”
The S&P 500 increased 0.3 percent to 1,162.8 at 10:37 a.m. in New York. The Dow Jones Industrial Average climbed 35 points, or 0.3 percent, to 10,776.98.
U.S. stocks retreated at the start of trading amid concern growing government debt and rising interest rates will derail the global economy.
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing.
The Reserve Bank of India raised its benchmark rates after local financial markets closed on March 19, a month earlier than the next scheduled review, to tame the fastest inflation in more than a year.
Policy makers in Australia and Malaysia have also increased rates since the end of February, while China has ordered lenders to set aside more funds as reserves twice this year.
“There’s a lot of structural headwinds around at the moment,” said Markus Steinbeis, head of equity portfolio management at the German unit of Pioneer Investments, which oversees about $221 billion globally. “Sentiment is neutral to negative and we could see a couple of days of consolidation before trading higher.”
Merck & Co. and Pfizer Inc. climbed more than 1.5 percent to help lead health-care companies to the biggest gain among 10 groups in the Standard & Poor’s 500 Index after the House approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage.
“The health-care legislation approval removes the uncertainty,” said Richard Sichel, chief investment officer at the Philadelphia Trust Co., which manages $1.4 billion. “On top of that, the shares had been beaten down, so you can find reasonably valued companies.”
The S&P 500 increased 0.3 percent to 1,162.8 at 10:37 a.m. in New York. The Dow Jones Industrial Average climbed 35 points, or 0.3 percent, to 10,776.98.
U.S. stocks retreated at the start of trading amid concern growing government debt and rising interest rates will derail the global economy.
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing.
The Reserve Bank of India raised its benchmark rates after local financial markets closed on March 19, a month earlier than the next scheduled review, to tame the fastest inflation in more than a year.
Policy makers in Australia and Malaysia have also increased rates since the end of February, while China has ordered lenders to set aside more funds as reserves twice this year.
“There’s a lot of structural headwinds around at the moment,” said Markus Steinbeis, head of equity portfolio management at the German unit of Pioneer Investments, which oversees about $221 billion globally. “Sentiment is neutral to negative and we could see a couple of days of consolidation before trading higher.”
Stocks Fall on Interest-Rate, Debt Concerns; Dollar Strengthens
March 22 (Bloomberg) -- Stocks declined for a third day and the dollar rallied on concern rising interest rates and widening government deficits will hamper the economic recovery. Greek bonds and shares fell.
The MSCI World Index dropped 0.7 percent at 9:15 a.m. in New York, marking its longest losing streak in six weeks. Futures on the Standard & Poor’s 500 Index retreated 0.7 percent. The dollar strengthened against 15 of its 16 most- traded counterparts. Greece’s ASE Index sank 2.9 percent and the premium investors demand to hold the nation’s 10-year notes instead of benchmark German bunds widened 18 basis points.
India’s central bank raised interest rates for the first time in almost two years late on March 19, saying that controlling prices was imperative after inflation accelerated to a 16-month high. German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on a package to help Greece tackle the region’s biggest deficit.
“There has been an uptick in sovereign-default concerns and there is uncertainty over support for Greece,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “Investors are likely to be disappointed again from the EU summit this week and that’s going to continue to weigh on the euro to the benefit of the dollar.”
Health-care stocks in the MSCI World Index slipped 0.3 percent for the second-best performance among 10 groups. The U.S. House passed the most sweeping health-care legislation in four decades, rewriting the rules governing medical industries and ensuring that tens of millions of uninsured will get medical coverage. The approval will remove a significant “overhang” from the industry and be viewed positively, Credit Suisse Group AG analyst Ralph Giacobbe wrote in a note today.
Europe, Asia
The Stoxx Europe 600 Index declined 1.1 percent while the MSCI Asia Pacific Index dropped 0.9 percent. Vedanta Resources Plc, the largest copper producer in India, led basic resources shares lower, falling 2.3 percent in London.
Royal Dutch Shell Plc slipped 0.9 percent after agreeing with PetroChina Co. to buy Arrow Energy Ltd. for A$3.5 billion ($3.2 billion). PetroChina Co., the nation’s biggest energy producer, declined 2.7 percent in Hong Kong.
U.S. Futures
The decline in U.S. futures indicated the S&P 500 may trim gains from three straight weekly advances. The Dow Jones Industrial Average snapped an eight-day winning streak on March 19 after India’s unexpected rate increase.
The Dollar Index, which tracks the currency against those of six U.S. trading partners, climbed for a third day, adding 0.3 percent. Government bonds gained, with the yield on the German bund falling 2 basis points to 3.08 percent. The yield on the 10-year Treasury note slipped 1 basis point to at 3.68 percent.
Maintaining government debt at post-crisis levels may reduce growth in advanced economies by as much as half a percentage point a year from the pace before the first global recession since World War II, John Lipsky, first deputy managing director of the International Monetary Fund, said in Beijing yesterday.
“Risk aversion has come up after developments in India and Greece,” said Henrik Gullberg, a fixed-income strategist at Deutsche Bank AG in London. “Any exiting of the current accommodative policy stance is bad for risk appetite and good for the dollar.”
Greek bonds tumbled for a third day, with the yield on the two-year note jumping as much as 38 basis points to 5.5 percent. National Bank of Greece SA, the nation’s biggest lender, led stock declines in Athens, sinking as much as 6 percent. The cost of insuring against a default on Greek government bonds rose, with credit-default swaps climbing 26 basis points to 356, according to CMA DataVision.
Default Swaps
Credit-default swaps on the Markit iTraxx Crossover Index of high-yield European corporates climbed 14 basis points to 467, according to JPMorgan Chase & Co. Credit-swap gauges in Europe rolled into their 13th series today. New series of the benchmarks are created every six months when companies are added or dropped depending on their ratings, cost of protection and ease of trading.
The MSCI Emerging Markets Index dropped 1.2 percent for a third day of declines. South Korea’s Kospi Index and Taiwan’s Taiex Index fell 0.8 percent, and India’s Sensitive Index slid 1 percent. Russia’s Micex Index lost 1.3 percent and the ruble depreciated against the central bank’s target basket for the first time in a week, slipping 0.5 percent. The rand weakened 0.9 percent against the dollar in limited trading during a public holiday today.
Copper for delivery in three months fell 1.7 percent to $7,310 a metric ton on the London Metal Exchange, retreating for a third day. Crude oil for April delivery dropped 2.4 percent to $78.76 a barrel in New York trading, falling for a third day. The April contract expires today.
The MSCI World Index dropped 0.7 percent at 9:15 a.m. in New York, marking its longest losing streak in six weeks. Futures on the Standard & Poor’s 500 Index retreated 0.7 percent. The dollar strengthened against 15 of its 16 most- traded counterparts. Greece’s ASE Index sank 2.9 percent and the premium investors demand to hold the nation’s 10-year notes instead of benchmark German bunds widened 18 basis points.
India’s central bank raised interest rates for the first time in almost two years late on March 19, saying that controlling prices was imperative after inflation accelerated to a 16-month high. German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on a package to help Greece tackle the region’s biggest deficit.
“There has been an uptick in sovereign-default concerns and there is uncertainty over support for Greece,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London. “Investors are likely to be disappointed again from the EU summit this week and that’s going to continue to weigh on the euro to the benefit of the dollar.”
Health-care stocks in the MSCI World Index slipped 0.3 percent for the second-best performance among 10 groups. The U.S. House passed the most sweeping health-care legislation in four decades, rewriting the rules governing medical industries and ensuring that tens of millions of uninsured will get medical coverage. The approval will remove a significant “overhang” from the industry and be viewed positively, Credit Suisse Group AG analyst Ralph Giacobbe wrote in a note today.
Europe, Asia
The Stoxx Europe 600 Index declined 1.1 percent while the MSCI Asia Pacific Index dropped 0.9 percent. Vedanta Resources Plc, the largest copper producer in India, led basic resources shares lower, falling 2.3 percent in London.
Royal Dutch Shell Plc slipped 0.9 percent after agreeing with PetroChina Co. to buy Arrow Energy Ltd. for A$3.5 billion ($3.2 billion). PetroChina Co., the nation’s biggest energy producer, declined 2.7 percent in Hong Kong.
U.S. Futures
The decline in U.S. futures indicated the S&P 500 may trim gains from three straight weekly advances. The Dow Jones Industrial Average snapped an eight-day winning streak on March 19 after India’s unexpected rate increase.
The Dollar Index, which tracks the currency against those of six U.S. trading partners, climbed for a third day, adding 0.3 percent. Government bonds gained, with the yield on the German bund falling 2 basis points to 3.08 percent. The yield on the 10-year Treasury note slipped 1 basis point to at 3.68 percent.
Maintaining government debt at post-crisis levels may reduce growth in advanced economies by as much as half a percentage point a year from the pace before the first global recession since World War II, John Lipsky, first deputy managing director of the International Monetary Fund, said in Beijing yesterday.
“Risk aversion has come up after developments in India and Greece,” said Henrik Gullberg, a fixed-income strategist at Deutsche Bank AG in London. “Any exiting of the current accommodative policy stance is bad for risk appetite and good for the dollar.”
Greek bonds tumbled for a third day, with the yield on the two-year note jumping as much as 38 basis points to 5.5 percent. National Bank of Greece SA, the nation’s biggest lender, led stock declines in Athens, sinking as much as 6 percent. The cost of insuring against a default on Greek government bonds rose, with credit-default swaps climbing 26 basis points to 356, according to CMA DataVision.
Default Swaps
Credit-default swaps on the Markit iTraxx Crossover Index of high-yield European corporates climbed 14 basis points to 467, according to JPMorgan Chase & Co. Credit-swap gauges in Europe rolled into their 13th series today. New series of the benchmarks are created every six months when companies are added or dropped depending on their ratings, cost of protection and ease of trading.
The MSCI Emerging Markets Index dropped 1.2 percent for a third day of declines. South Korea’s Kospi Index and Taiwan’s Taiex Index fell 0.8 percent, and India’s Sensitive Index slid 1 percent. Russia’s Micex Index lost 1.3 percent and the ruble depreciated against the central bank’s target basket for the first time in a week, slipping 0.5 percent. The rand weakened 0.9 percent against the dollar in limited trading during a public holiday today.
Copper for delivery in three months fell 1.7 percent to $7,310 a metric ton on the London Metal Exchange, retreating for a third day. Crude oil for April delivery dropped 2.4 percent to $78.76 a barrel in New York trading, falling for a third day. The April contract expires today.
Lipsky Says ‘Acute’ Debt Challenges Face Advanced Economies
March 22 (Bloomberg) -- Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging-market nations has also reached a “worrisome level,” he said.
“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.
Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.
Budget Deficit
The U.S. budget deficit widened to a record in February as the government spent more to help revive the economy. The gap grew to $221 billion after a shortfall of $194 billion in February 2009, the Treasury Department said on March 10. The figures indicate the deficit this year will probably surpass the record $1.4 trillion in the fiscal year that ended in September.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Lipsky said. The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, he said.
‘Bulging Fiscal Deficits’
“When we look at the picture right now, recovery has been encouraging in both developed and emerging economies, and inflation has remained fairly contained,” said David Cohen, a Singapore-based economist at Action Economics. “The biggest cloud over the outlook would be bulging fiscal deficits. The concern is that the situation in Greece is a dress-rehearsal for problems in bigger economies.”
Greece is racing to cut its borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. In the U.S., President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse.
Inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion, Lipsky said. Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously.
Pension, Tax Reforms
The bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures, Lipsky said.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, the IMF official said. Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.
Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability.
All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech yesterday at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging-market nations has also reached a “worrisome level,” he said.
“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.
Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.
Budget Deficit
The U.S. budget deficit widened to a record in February as the government spent more to help revive the economy. The gap grew to $221 billion after a shortfall of $194 billion in February 2009, the Treasury Department said on March 10. The figures indicate the deficit this year will probably surpass the record $1.4 trillion in the fiscal year that ended in September.
Maintaining public debt at its post-crisis levels could cut potential growth in advanced economies by as much as half a percentage point annually, compared with pre-crisis performance, Lipsky said. The Washington-based IMF, which rescued countries including Pakistan and Iceland during the recession, expects global growth of about 4 percent this year, and a somewhat faster pace in 2011, reflecting expansionary fiscal and monetary policies, he said.
‘Bulging Fiscal Deficits’
“When we look at the picture right now, recovery has been encouraging in both developed and emerging economies, and inflation has remained fairly contained,” said David Cohen, a Singapore-based economist at Action Economics. “The biggest cloud over the outlook would be bulging fiscal deficits. The concern is that the situation in Greece is a dress-rehearsal for problems in bigger economies.”
Greece is racing to cut its borrowing costs as 20 billion euros ($27 billion) of debt comes due in the next two months. In the U.S., President Barack Obama on Feb. 12 signed a bill into law that raised the federal debt limit by $1.9 trillion to $14.3 trillion and placed new curbs on spending in an attempt to prevent this year’s record deficit from becoming worse.
Inflation is “clearly not the answer” as a moderate increase in inflation would have a limited effect, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion, Lipsky said. Instead, growth-enhancing reforms such as liberalization of goods and labor markets, as well as the removal of tax distortions should be pursued vigorously.
Pension, Tax Reforms
The bulk of the needed debt reduction should be focused on reforms of pension and health entitlements, containment of other primary spending and increased tax revenues and improving both tax policy and tax administration measures, Lipsky said.
For most advanced economies, maintaining fiscal stimulus in 2010 remains appropriate, the IMF official said. Still, fiscal consolidation should begin in 2011 if the recovery occurs at the projected pace. Some actions should be undertaken now by all countries that will need fiscal adjustment, he said.
Lipsky said it was “fully appropriate” for China to maintain its fiscal stimulus through this year, while seeking to rein in its rapid loan growth. He said fiscal consolidation would be appropriate in the U.S., where a higher public savings rate will be required to ensure long-term fiscal sustainability.
Wednesday, March 10, 2010
Dollar Bond Sales Surge in Asia as Borrowers Tap New Investors
March 10 (Bloomberg) -- The lowest relative borrowing costs in more than two years and demand from international investors is driving Asian companies to sell record amounts of dollar- denominated bonds.
BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent in the aftermath of the seizure in credit markets.
“It’s one of the cheapest times to borrow in U.S. dollars, and at the same time, there’s a lot of cash floating around,” said Rajeev de Mello, head of Asian investment for Western Asset Management Co., which oversees $506 billion. U.S. and European pension funds “want a slice of the action,” De Mello, who is based in Singapore, said in a phone interview.
The extra yield demanded for dollar debt from investment- grade companies in Asia instead of Treasuries has fallen to 2.44 percentage points from 7.62 percentage points in December 2008, according to JPMorgan Chase & Co. Spreads fell close to a two- year low because growth in the region is helping lead the world out of the worst financial crisis since the Great Depression.
Korea Development
Korea Development Bank, the South Korean state-run lender known as KDB, boosted the size of its 4.375 percent bond sale last month to $750 million from $500 million, the most in U.S. dollars that the company has borrowed for so long at so cheap a rate, Bloomberg data show. The debt, due in 5.5 years, yielded 203 basis points more than Treasuries and the spread has narrowed to 166 basis points, Bloomberg data show.
KDB’s $1 billion of five-year 5.3 percent bonds, yielded 218 basis points, or 2.18 percentage points, more than similar- maturity Treasury yields when sold in January 2008.
BOC Hong Kong sold $1.6 billion of 5.55 percent bonds maturing 2020 on Feb. 4. Evergrande Real Estate issued $750 million of five-year notes on Jan. 22, the largest Chinese real estate high-yield offering ever, according to Bank of America Merrill Lynch, which helped manage the sale. High-yield bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
The difference between the average cost of borrowing in dollars and in local currencies in Asia has narrowed to 94 basis points from 426 basis points a year ago, when U.S. stock markets bottomed, according to HSBC Holdings Plc indexes.
Asian companies are “switching funding to international markets” as they borrow more and for longer periods and as the cost of borrowing in dollars becomes more competitive, Morgan Stanley credit strategist Viktor Hjort said in a phone interview from Hong Kong.
Borrowing Costs
Money-market rates have fallen in the period. The three- month London interbank offered rate for dollars was last at 0.25425 percent, compared with 1.33125 percent a year ago, Bloomberg data show. Libor is the interest rate at which banks borrow funds from one another and is a financing benchmark.
“The rally in the bond market has meant U.S. dollar funding costs are at least as competitive again,” said Sean Henderson, head of debt syndication at HSBC in Hong Kong. Local- currency sales in Asia still exceed dollar debt as “many Asian companies’ funding needs are too small to justify issuing offshore debt,” he added.
Local Currencies
Local-currency bonds by Asian companies total $112.2 billion this year, compared with $121.4 billion in the same period of 2009, Bloomberg data show.
“We were surprised to see new investors in our latest three global bond offerings, including some big U.S. asset managers who aren’t traditional buyers of our notes,” Yoon Hee Sung, the director of international finance at Export-Import Bank of Korea, the state-run lender known as Kexim, said in an interview in Seoul.
Kexim sold $1 billion of 4.125 percent, 5.5-year notes on March 2, priced to yield 195 basis points more than Treasuries.
U.S. Federal Reserve Chairman Ben S. Bernanke has said the “nascent” U.S. recovery means rates of zero to 0.25 percent will be needed for an “extended period.” That contrasts with growth in Asian nations.
International Monetary Fund projections show developing Asia’s economy will expand 8.4 percent this year, compared with 2.7 percent in the U.S. and 1 percent in the euro area. Analysts boosted 2010 Asian corporate earnings estimates 4 percent, Credit Suisse Group said in a note to clients March 8.
U.S. Investors
“There is significantly more interest from U.S. and European investors as evidenced by new order allocations,” said Richard Chun, a Hong Kong-based money manager for New York hedge fund Claren Road Asset Management LLC, which manages about $3 billion globally. Now, 60 to 75 percent of recent deals are being allocated to U.S. and European investors versus 20 to 30 percent several years ago, he said.
Bank of Baroda and Bank of India have canceled dollar bond sales this year citing market volatility from Europe’s sovereign debt crisis. Total issuance won’t be affected, Morgan Stanley’s Hjort said.
Morgan Stanley predicts new Asian dollar bond sales of at least $17 billion in the coming three months. The New York-based bank also forecasts bond redemptions of $27 billion -- almost half 2009’s total new issuance -- globally this year.
“While there are some risk factors facing credit markets, supply is unlikely to be what spoils the party this time,” Hjort said.
Bucyrus, Citigroup, Medtronic, Navistar: U.S. Equity Preview
March 10 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses. Prices are as of 8 a.m. in New York.
AeroVironment Inc. (AVAV:US) declined 5.4 percent to $22.51. The maker of U.S. military spyplanes reported third- quarter profit excluding some items of 30 cents a share, missing the average analyst estimate in a Bloomberg survey by 7.4 percent. The company also lowered its 2010 sales forecast to between $240 million and $250 million. On average, the analysts surveyed by Bloomberg estimated revenue of $288.7 million.
Allergan Inc. (AGN:US) rose 2.3 percent to $62.75. The health-care company’s Botox for reducing facial wrinkles was approved by U.S. regulators to treat muscle spasms in the elbow, wrist and fingers, the Food and Drug Administration said.
American Eagle Outfitters Inc. (AEO:US) surged 5.5 percent to $18.10. The U.S. clothing retailer said it plans to close its Martin+Osa concept, including all 28 stores and the online business. It also estimated first-quarter earnings per share excluding some items of 15 cents to 17 cents. Analysts in a Bloomberg survey had estimated it at 15 cents.
Bucyrus International Inc. (BUCY:US) advanced 3.2 percent to $67.74. The maker of mining equipment was added to Goldman Sachs Group Inc.’s “conviction buy” list.
Chevron Corp. (CVX:US): Bank of America Corp. (BAC:US) cut its price target on shares of the second-largest U.S. energy company to $90, from $95.
Citigroup Inc. (C:US) rose 2.1 percent to $3.90. The bank seeking capital after repaying bailout funds to the Treasury is selling trust preferred securities as rising investor demand drives borrowing costs to near the lowest in almost five years.
Collective Brands Inc. (PSS:US) dropped 1.8 percent to $23.55. The Kansas-based owner of footwear chains reported a fourth-quarter loss excluding some items of 18 cents a share.
Facet Biotech Corp. (FACT:US) soared 67 percent to $27.13. Abbott Laboratories (ABT:US), maker of the arthritis drug Humira, agreed to buy the biotechnology company for $27 a share, for a net transaction value of about $450 million, adding experimental medicines in cancer and immunology.
Abbott retreated 1.1 percent to $54.21.
InterMune Inc. (ITMN:US) soared 70 percent to $39.63. The maker of a treatment for a deadly lung disease that afflicts about 100,000 Americans won a U.S. panel’s backing to introduce the medicine. The Food and Drug Administration usually follows the recommendations of its advisory panels.
Medtronic Inc. (MDT:US) dropped 1.2 percent to $44.20. A Food and Drug Administration review posted on the agency’s Web site said the device maker’s deep brain stimulation therapy was tied to suicides, depression and worsening seizures in a study of epilepsy patients.
Micromet Inc. (MITI:US) sank 3.6 percent to $7.80. The drugmaker offered to sell 10 million shares of common stock.
Navistar International Corp. (NAV:US) lost 9.2 percent to $40.20. The maker of International-brand trucks reported first- quarter sales that missed estimates in a Bloomberg survey of analysts.
Fed’s ‘Extended Period’ Rate Pledge Criticized by Some on FOMC
March 10 (Bloomberg) -- The Federal Reserve’s pledge to keep interest rates close to zero for an “extended period” has come under criticism from policy makers who say it’s restricting their room to maneuver as the economy recovers.
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
The Fed presidents have said the phrase, repeated every meeting since March 2009, might reduce the central bank’s flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind. Their doubts increase the chances the language will be tweaked when policy makers next meet on March 16, said New York University economist Mark Gertler.
“Some on the committee may be concerned that the ‘extended period’ language creates the perception that the Fed will refrain from raising interest rates well beyond the time that economic conditions begin to justify an increase,” said Gertler, who co-wrote research with Fed Chairman Ben S. Bernanke.
Officials may be “getting ready to take the scissors out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Evans’ Speech
Chicago Fed President Charles Evans omitted the phrase from a speech yesterday in Arlington, Virginia, instead saying rates would stay low for “some time.” He told reporters afterward that the change didn’t signal doubts about the “extended period” phrase.
Evans said that to him, the “extended period” phrase means three to four FOMC meetings. The FOMC schedules eight meetings a year.
Robert Eisenbeis, former Atlanta Fed research director, said the Fed presidents may not convince the rest of the rate- setting Federal Open Market Committee to alter the wording.
Bernanke has signaled the phrase will be retained in next week’s statement by repeating the pledge Feb. 24-25 in semiannual testimony to Congress, Eisenbeis said.
“The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” said the 56- year-old Fed chief, a Republican who won Senate approval in January for a second four-year term.
‘Exceptionally Low’
The Fed adopted the wording three months after cutting its benchmark interest rate to a record in December 2008, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
In November, the FOMC added that its commitment depends on when the labor market, inflation and price expectations pick up.
The job market has since shown signs of stabilizing. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October.
The U.S. may add as many as 300,000 jobs this month, the most in four years, David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in an interview yesterday.
The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Most indicators suggest that inflation likely will be subdued for some time,” Bernanke said last month.
Market Rates
Two-year Treasury notes yielded 0.87 percent yesterday, compared with 4.67 percent three years ago. The yield on 10-year Treasuries was 3.7 percent, down from 4.59 percent in March 2007.
Bullard, 49, told reporters last week he was “a little less patient” with repeating “extended period,” though he didn’t plan to dissent. He said the phrase may appear to lock in a time frame for action, whereas the FOMC plans to react to economic conditions as they develop.
“I would hope we would get the committee to think about some different language that would convey the state-contingency that I would like to convey, and I think most people on the committee would like to convey,” he said March 4 in St. Cloud, Minnesota.
Plosser, 61, said Feb. 17 that he had “some sympathy” for Hoenig’s dissent. “That forward guidance has gotten us in a box,” he told reporters in Philadelphia.
Fisher, 60, said Feb. 10 in Dallas that “I have never been comfortable with that language.”
Voting Members
Hoenig and Bullard vote on FOMC decisions this year. The other presidents with a 2010 vote are Cleveland’s Sandra Pianalto and Boston’s Eric Rosengren. New York Fed President William Dudley has a permanent vote, as do the Fed’s Washington- based governors.
The debate echoes discussions in 2003 and 2004, when officials cut the benchmark federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.”
An informal tally by then-Chairman Alan Greenspan at the August 2003 meeting showed seven of 18 policy makers objected to the phrase. It was jettisoned the following January, when the FOMC said it “can be patient in removing its policy accommodation.”
The Fed will provide transcripts of the 2004 meetings in coming months, based on historical release dates.
“The longer you use the phrase, the more it hardens and the more drama is associated with changing” it, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who helped write the FOMC statements as the Fed’s monetary-affairs director from 2001 to 2007.
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
The Fed presidents have said the phrase, repeated every meeting since March 2009, might reduce the central bank’s flexibility to raise interest rates or mislead investors into believing the Fed has a specific date in mind. Their doubts increase the chances the language will be tweaked when policy makers next meet on March 16, said New York University economist Mark Gertler.
“Some on the committee may be concerned that the ‘extended period’ language creates the perception that the Fed will refrain from raising interest rates well beyond the time that economic conditions begin to justify an increase,” said Gertler, who co-wrote research with Fed Chairman Ben S. Bernanke.
Officials may be “getting ready to take the scissors out,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
Evans’ Speech
Chicago Fed President Charles Evans omitted the phrase from a speech yesterday in Arlington, Virginia, instead saying rates would stay low for “some time.” He told reporters afterward that the change didn’t signal doubts about the “extended period” phrase.
Evans said that to him, the “extended period” phrase means three to four FOMC meetings. The FOMC schedules eight meetings a year.
Robert Eisenbeis, former Atlanta Fed research director, said the Fed presidents may not convince the rest of the rate- setting Federal Open Market Committee to alter the wording.
Bernanke has signaled the phrase will be retained in next week’s statement by repeating the pledge Feb. 24-25 in semiannual testimony to Congress, Eisenbeis said.
“The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” said the 56- year-old Fed chief, a Republican who won Senate approval in January for a second four-year term.
‘Exceptionally Low’
The Fed adopted the wording three months after cutting its benchmark interest rate to a record in December 2008, saying “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
In November, the FOMC added that its commitment depends on when the labor market, inflation and price expectations pick up.
The job market has since shown signs of stabilizing. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October.
The U.S. may add as many as 300,000 jobs this month, the most in four years, David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, said in an interview yesterday.
The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Most indicators suggest that inflation likely will be subdued for some time,” Bernanke said last month.
Market Rates
Two-year Treasury notes yielded 0.87 percent yesterday, compared with 4.67 percent three years ago. The yield on 10-year Treasuries was 3.7 percent, down from 4.59 percent in March 2007.
Bullard, 49, told reporters last week he was “a little less patient” with repeating “extended period,” though he didn’t plan to dissent. He said the phrase may appear to lock in a time frame for action, whereas the FOMC plans to react to economic conditions as they develop.
“I would hope we would get the committee to think about some different language that would convey the state-contingency that I would like to convey, and I think most people on the committee would like to convey,” he said March 4 in St. Cloud, Minnesota.
Plosser, 61, said Feb. 17 that he had “some sympathy” for Hoenig’s dissent. “That forward guidance has gotten us in a box,” he told reporters in Philadelphia.
Fisher, 60, said Feb. 10 in Dallas that “I have never been comfortable with that language.”
Voting Members
Hoenig and Bullard vote on FOMC decisions this year. The other presidents with a 2010 vote are Cleveland’s Sandra Pianalto and Boston’s Eric Rosengren. New York Fed President William Dudley has a permanent vote, as do the Fed’s Washington- based governors.
The debate echoes discussions in 2003 and 2004, when officials cut the benchmark federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.”
An informal tally by then-Chairman Alan Greenspan at the August 2003 meeting showed seven of 18 policy makers objected to the phrase. It was jettisoned the following January, when the FOMC said it “can be patient in removing its policy accommodation.”
The Fed will provide transcripts of the 2004 meetings in coming months, based on historical release dates.
“The longer you use the phrase, the more it hardens and the more drama is associated with changing” it, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who helped write the FOMC statements as the Fed’s monetary-affairs director from 2001 to 2007.
Citigroup Selling TruPS After Repaying Bailout: Credit Markets
March 10 (Bloomberg) -- Citigroup Inc., seeking capital after repaying bailout funds to the Treasury, is selling trust preferred securities as rising investor demand drives borrowing costs to near the lowest in almost five years.
The bank plans to issue as much as $2 billion of the securities, known as TruPS, as soon as today, according to a person familiar with the offering who declined to be identified because terms aren’t set. The 30-year fixed-to-floating rate securities may initially yield about 8.875 percent, another person said.
Citigroup, 27 percent owned by the U.S. government, is issuing the debt after borrowers sold $13.9 billion of U.S. corporate bonds yesterday, the busiest day in more than a month. The New York-based bank’s offering shows that liquidity is improving, which will help the economy, said Daniel Fuss, vice chairman at Loomis Sayles & Co. in Boston.
“It’s wonderful news for Citigroup and also shows markets are functioning very well,” said Fuss, whose Loomis Sayles Bond Fund is in the 97th percentile among peers this year, according to data compiled by Bloomberg.
Citigroup is selling the TruPS following a $7.6 billion loss in the fourth quarter after it repaid $20 billion of the securities issued under the Treasury’s Troubled Asset Relief Program, set up in late 2008 to support financial firms and markets.
“It’s a capital structure need,” said David Hendler, the head of U.S. financial services research at CreditSights Inc. in New York. “It’s not as dilutive like common equity issuance and they’ve already done a ton of that.”
Novartis, MGM Mirage
Yields on corporate bonds are near five-year lows, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. They fell to 4.015 percent on Feb. 26, the lowest since May 31, 2005, and were 4.023 percent as of March 9. Average spreads over Treasuries fell to 1.6 percentage points, matching the lowest this year.
Elsewhere in credit markets, Novartis AG, Switzerland’s second-biggest drugmaker, and MGM Mirage, the largest casino owner on the Las Vegas strip, led the busiest day for U.S. corporate bond sales since Feb. 4, Bloomberg data show. Novartis sold $5 billion of 3-, 5- and 10-year senior notes for its acquisition of Alcon Inc., the world’s largest eye-care company. MGM Mirage issued $845 million of 10-year bonds to repay loans.
American International Group Inc.bondholders reaped at least $3.2 billion after agreeing to sell its two largest non- U.S. life insurance divisions for $51 billion, Bloomberg data show.
Sales in Europe
In Europe yesterday, Goldman Sachs Group Inc. led 10 sales totaling 7 billion euros ($9.5 billion), the most this year, Bloomberg data show. New York-based Goldman Sachs, the most profitable securities firm in Wall Street history, priced 1.25 billion euros of seven-year debt in its first benchmark deal in the currency in five months.
Asian companies are selling record amounts of dollar- denominated bonds amid the lowest relative borrowing costs in more than two years and demand from international investors.
BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent after the seizure in credit markets.
Nakheel PJSC bonds, part of Dubai World’s planned $26 billion debt restructuring, climbed the most in two months yesterday after JPMorgan Chase & Co. said creditors may get paid face value. The developer’s $750 million sukuk, or Islamic bond, added 5 cents, the most since Jan. 6, to 56.25 cents on the dollar, prices compiled by Bloomberg show.
Low Interest Rates
Federal Reserve Bank of Chicago President Charles Evans said low U.S. interest rates are likely to be needed “for some time” as high unemployment lingers and inflation stays below his target.
“With the unemployment rate at 9.7 percent and inflation significantly under my benchmark for price stability, there is no conflict between our policy goals,” Evans said in the text of a speech in Arlington, Virginia. Weakness in the job market, including long-term unemployment, means that “this accommodation will likely be appropriate for some time,” he said.
In the loan market, Anheuser-Busch InBev NV, the biggest beer maker, will cut at least $90 million from annual interest costs by refinancing $17.2 billion of debt it took when the company was formed in 2008.
Maker of Budweiser
Lenders to the maker of Budweiser set interest at 117.5 basis points over benchmark rates on three-year term loans, and 97.5 basis points on a five-year revolving credit line, according to two people with direct knowledge of the deal. That compares with a margin of 175 basis points the company is paying on its existing debt.
The cost of insuring against default on European and Asian corporate bonds fell today. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell 5 basis points to 407 basis points, according to JPMorgan Chase & Co. The Markit iTraxx Japan index dropped 2 basis points to 121 basis points in Tokyo, according to BNP Paribas SA prices.
The cost of protecting against U.S. corporate defaults rose yesterday. The Markit CDX North America Investment-Grade Index, linked to credit-default swaps on 125 companies, increased 1.2 basis point to 83.7 basis points, according to CMA DataVision. The Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings was little changed at 74 basis points.
‘Screaming Bargain’
Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.
AIG said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion. A week later, MetLife Inc. agreed to buy American Life Insurance Co. for $15.5 billion.
AIG’s $78 billion of bonds surged to 18-month highs since Feb. 26, according to Bloomberg data. The bailed out New York- based firm’s debt is the best performer this month through yesterday on Bank of America Merrill Lynch indexes.
Citigroup is the sole bookrunner on its sale of TruPS, the company said in a prospectus filed with the U.S. Securities and Exchange Commission. The filing didn’t specify the amount of the sale.
Citigroup shares rose 26 cents, or 7.3 percent, to $3.82 in New York Stock Exchange composite trading yesterday, the biggest rise since August, Bloomberg data show.
“People are looking at Citi more as a stable to hopefully gradually growing entity,” Hendler said. The stock is a “screaming bargain,” CreditSights analysts wrote in a March 8 report.
The bank raised more than $80 billion of new capital last year, increasing the number of shares outstanding during the last three years sixfold to almost 30 billion. Its book value per share -- its net worth, divided by total shares outstanding -- tumbled to $5.35 as of Dec. 31 from $24.18 at the end of 2006.
Citigroup’s $2.35 billion of 8.3 percent fixed-to-floating bonds due in 2057 rose 1.4 cent to 96.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The hybrid debt has more than tripled in price in the last year from 30.5 cents, Trace data show.
U.S. Treasury prices Washington Federal warrants
WASHINGTON, March 10 (Reuters) - The U.S. Treasury Department said on Wednesday it has priced a secondary public offering of 1.71 million government warrants to purchase common stock of Washington Federal (WFSL.O) at $9.15 per warrant.
It estimated aggregate net proceeds from the offering at about $15.4 million.
"These proceeds provide an additional return to the American taxpayer from Treasury's investment in the company beyond the dividend payments it received on the related preferred stock," the department said.
(Reporting by Doug Palmer; Editing by James Dalgleish)
It estimated aggregate net proceeds from the offering at about $15.4 million.
"These proceeds provide an additional return to the American taxpayer from Treasury's investment in the company beyond the dividend payments it received on the related preferred stock," the department said.
(Reporting by Doug Palmer; Editing by James Dalgleish)
GDP seen slowing, tying Fed hands on rates
March 10, 2010
(Reuters) - After a growth spurt at the end of 2009, the U.S. economy will slow in the months ahead, keeping the Federal Reserve from raising borrowing costs until the final three months of the year, a Reuters poll showed.
The survey of over 70 economists suggests U.S. gross domestic product will grow at a 2.6 percent annualized rate between January and March, less than half the pace of the fourth quarter of 2009, when it expanded at a 5.9 percent rate.
For all of 2009, the world's biggest economy contracted by 2.4 percent, but the poll predicts it will grow by 2.9 percent in 2010 on an annual basis.
With steady but subdued growth, economists expected the core consumer price index, which strips out volatile food and energy costs, to grow 1.4 percent in the first quarter of the year and to average 1.3 percent over the course of 2010 before edging up to 1.6 percent in 2011.
That suggests the Federal Reserve won't need to raise its benchmark federal funds rate, its main monetary policy tool, until the final three months of the year, a quarter later than predicted in last month's poll.
The Fed funds rate is currently set in a range of zero to 0.25 percent, and the median forecast from respondents see a rise to 0.75 percent between October and December.
"Low inflation is the key to the outlook," said Ethan Harris, head of North America economics at Bank of America Securities-Merrill Lynch. "It allows the Fed to focus exclusively on growth and keep both feet planted firmly on the accelerator."
The Fed has started to unwind some of the emergency measures it adopted during the worst days of the financial crisis. Last month, it raised the discount rate at which banks can access emergency loans.
But officials have said that broader borrowing costs would remain low for an extended period.
After hitting 0.75 percent by year end, economists expect rates to rise relatively slowly, reaching 1.5 percent by mid-2011.
Headline inflation, including food and energy costs, is likely to rise at a 2.5 percent rate in the first quarter and a 2.1 percent rate for the whole of 2010, the survey showed.
(Polling by Bangalore Polling Unit; Editing by Ruth Pitchford)
(Reuters) - After a growth spurt at the end of 2009, the U.S. economy will slow in the months ahead, keeping the Federal Reserve from raising borrowing costs until the final three months of the year, a Reuters poll showed.
The survey of over 70 economists suggests U.S. gross domestic product will grow at a 2.6 percent annualized rate between January and March, less than half the pace of the fourth quarter of 2009, when it expanded at a 5.9 percent rate.
For all of 2009, the world's biggest economy contracted by 2.4 percent, but the poll predicts it will grow by 2.9 percent in 2010 on an annual basis.
With steady but subdued growth, economists expected the core consumer price index, which strips out volatile food and energy costs, to grow 1.4 percent in the first quarter of the year and to average 1.3 percent over the course of 2010 before edging up to 1.6 percent in 2011.
That suggests the Federal Reserve won't need to raise its benchmark federal funds rate, its main monetary policy tool, until the final three months of the year, a quarter later than predicted in last month's poll.
The Fed funds rate is currently set in a range of zero to 0.25 percent, and the median forecast from respondents see a rise to 0.75 percent between October and December.
"Low inflation is the key to the outlook," said Ethan Harris, head of North America economics at Bank of America Securities-Merrill Lynch. "It allows the Fed to focus exclusively on growth and keep both feet planted firmly on the accelerator."
The Fed has started to unwind some of the emergency measures it adopted during the worst days of the financial crisis. Last month, it raised the discount rate at which banks can access emergency loans.
But officials have said that broader borrowing costs would remain low for an extended period.
After hitting 0.75 percent by year end, economists expect rates to rise relatively slowly, reaching 1.5 percent by mid-2011.
Headline inflation, including food and energy costs, is likely to rise at a 2.5 percent rate in the first quarter and a 2.1 percent rate for the whole of 2010, the survey showed.
(Polling by Bangalore Polling Unit; Editing by Ruth Pitchford)
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