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FXE: Euro Sales Extend as Morgan Stanley Mulls EU Breakup
By Bo Nielsen and Liz Capo McCormick
April 29 (Bloomberg) -- Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as Europe’s worsening fiscal crisis threatens to splinter the 16-nation currency union.
Pension funds and banks sold euros this month at the fastest pace since the second half of 2008, when the currency tumbled more than 25 percent against the dollar between mid-July and the end of October, according to Bank of New York Mellon Corp., the world’s biggest custodian of financial assets with $23 trillion. Demand for options giving the right to sell the euro against the dollar versus those allowing for purchases rose yesterday to the highest level since November 2008.
“The assumptions that went into the makeup of the euro- zone, and hence the euro, are now being brought into question and revalued,” said Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement System, the largest U.S. public pension, with $202 billion under management. “There are differences, and screaming differences, that have now been shown between the regions of the euro-zone.”
While the euro became a rival to the dollar after the common currency’s inception in 1999, the debt crisis that began in Greece shows how it is being shaken by one country comprising 2.6 percent of the region’s economy. The euro’s 11 percent decline in the past six months made it the worst performer among its 16 most-traded peers. Standard & Poor’s cut the credit ratings on Greece, Portugal and Spain in the last two days.
Central-Bank Holdings
Credit-default swaps on the debt of Greece, Portugal and Spain climbed to record highs as the 16 nations making up the euro failed to bridge economic and political differences fast enough for traders.
The euro fell to a one-year low of $1.3115 yesterday in New York, down from 2009’s high of $1.5144 on Nov. 25, as German Chancellor Angela Merkel said in Berlin the “stability of the euro zone” was at stake if a 45 billion-euro ($59 billion) loan package for Greece orchestrated by the International Monetary Fund can’t be delivered soon.
Currency strategists are having a hard time keeping up with the decline. The median average of 32 forecasts compiled by Bloomberg is for the currency to end the year at $1.32. In February, the estimate was $1.43. The euro fell 0.1 percent to $1.3209 today.
Dumping Bonds
Bank of New York Mellon’s chief currency strategist, Simon Derrick in London, said the euro may tumble to $1.10 by the end of 2011. Morgan Stanley predicts it will trade at $1.24 by year- end. Without central bank support, the euro’s long-term fair value is $1.20, UBS AG said April 26.
Investors are on course to sell a net 50 billion euros of euro-region bonds this year, compared with purchases of 225 billion euros in 2009, according to a Nomura Holdings Inc. projection.
Central banks reduced the share of euros in their $8.1 trillion of reserves to 27.6 percent in the fourth quarter of 2009 from 28 percent in the previous three months, according to Morgan Stanley calculations based on IMF data. The figure was about 17 percent when the euro was introduced 11 years ago.
“Central bankers and institutional investors have spent 10 years pricing out the likelihood of a euro-zone break-up, and now they have to price it in again,” said Emma Lawson, a currency strategist in London at Morgan Stanley. “The euro will no longer have this additional support going forward.”
‘Shift in Attitudes’
The euro’s one-month option risk-reversal rate fell to minus 1.97 percent yesterday, the lowest level since Nov. 4, 2008, and down from minus 0.9 two weeks earlier, signaling a relative increase in demand for puts, which grant traders the right to sell the currency. It was at 1.95 percent today.
“Euro weakness is driven by a broad shift in investor attitudes, a shift which goes well beyond shorter-term foreign- exchange position changes within hedge funds,” Nomura foreign- exchange analysts Jennifer Hau in London and Jens Nordvig in New York wrote in an April 20 report to clients.
The euro, introduced on Jan. 1, 1999, at a rate of about $1.17, weakened to 82.30 U.S. cents in 2000 as the region’s economy slumped amid the bursting of the dot-com bubble. It peaked at $1.6038 in July 2008 as the global financial crisis worsened.
While the European Union shares a common monetary policy, members are responsible for their own fiscal decisions. That allowed Greece’s budget deficit to expand to almost 14 percent of its gross domestic product, exceeding the EU’s 3 percent limit without penalty. Germany’s is 3.2 percent of its GDP.
‘Vulnerable Spot’
Greece’s $357 billion economy is 2.6 percent of the euro zone’s $13.6 trillion and compares with $3.65 trillion for Germany, according to data compiled by Bloomberg.
Even though Merkel called for a quick resolution of the aid package for Greece, she has delayed German approval of loans in the face of voter opposition. Almost 60 percent of Germans don’t want to help Greece, the Die Welt newspaper reported this week, citing a survey of 1,009 people.
“The problem with Europe, and people had forgotten about this over the past decade, is that the experiment of monetary union without political union, and without any sort of federalism across the euro-zone, puts them in a very vulnerable spot,” Scott Mather, head of global portfolio management at Pacific Investment Management Co. in Munich, said in a Bloomberg radio interview on April 26.
‘Nationalistic’ Tendencies
“So when push comes to shove and you have these large imbalances that develop between countries, it is very likely that they go back to the old world of being more nationalistic,” said Mather, whose Newport Beach, California- based firm runs the $220 billion Total Return Fund, the world’s biggest bond fund.
The outlook for the euro and the dollar are both poor, according to Kenneth Rogoff, a former IMF chief economist and professor at Harvard University in Cambridge, Massachusetts. President Barack Obama has increased U.S. marketable debt to an unprecedented $7.76 trillion to fund a budget deficit the government predicts will swell to $1.6 trillion in the fiscal year ending Sept. 30.
“There’s a tremendous surge to diversify out of the dollar, and the euro is still the main alternative,” Rogoff said in a telephone interview. “Both the euro and the dollar have their longer-term vulnerabilities.”
Since 2001 the percentage of currency reserves held in dollars has fallen to 62.1 percent from 72.7 percent, according to the IMF in Washington.
‘Great Solution’
Nobel Prize-winning economist Robert Mundell said the Greek crisis is a fiscal issue, not a broader credibility peril for Europe’s common currency.
“It’s not a euro problem; the euro has been a great solution,” Mundell, a professor at Columbia University in New York, said in an interview yesterday on Bloomberg Television. “It’s a deficit and debt problem.”
Mundell said there must be conditions attached to the financing package for Greece with a year-by-year target to reduce the country’s debt and cut its deficit “well below 3 percent” of GDP.
“It could be handled if the Greeks would be able to demonstrate to Germany and the other countries that they will keep the line and do this,” Mundell said. “There has to be that transformation, otherwise the alternative is a big restructuring of the Greek debt.”
Bigger Than TARP
The euro’s weakness may also help Europe’s economy rebound as its exports become more competitive. Bundesbank President Axel Weber said April 26 that Germany’s recovery will gather steam in the second quarter. The nation’s exports rose 5.1 percent in February from the previous month, the most since June 2009, a government report showed on April 9.
To fix the region’s fiscal crisis the EU may need a plan larger than the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers, according to Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
Lower credit ratings on EU nations may force banks to boost the amount of capital they’re required to hold against bets on sovereign debt, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. While bank capital rules give a risk weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.
Soaring Yields
Yields on Greek two-year notes soared to a record 26 percent yesterday. Portugal’s jumped to 7.05 percent and Spain’s reached 2.53 percent. S&P lowered its rating on Greece by three steps to BB+, or below investment grade, from BBB+ on April 27, minutes after cutting Portugal to A- from A+. It reduced Spain’s rating one step to AA from AA+ yesterday.
“The euro is not the euro we initially bought into,” said Roddy Macpherson, investment director in Edinburgh at Scottish Widows Investment Partnership Ltd., which manages the equivalent of $216 billion of assets. “The whole confidence in the euro has taken a bit of a bashing. We’re short the euro.”
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net.
Last Updated: April 29, 2010 03:56 EDT
Profits Soar, But Chinese Banks Face Massive Capital Shortfall
Posted Apr 29, 2010 08:23am EDT by Joe Weisenthal
Related: FXI, PGL, CIND.PK, EEM, XLF, EPP, FAZ
From The Business Insider, April 29, 2010
A massive lending binge over the past couple of years has left major Chinese banks undercapitalized according to a new report from Caing, which has gone through the latest financial reports.
Sure, profits are surging, but the bottom line is that these banks are likely to need 200-300 billion yuan (up to $45 billion est.) in 2010 in fresh capital. To put that into perspective, that's half as much as all the money raised by mainland Chinese public companies last year.
Specifically:
Industrial Bank's capital adequacy ratio slipped to 10.63 percent at the end of the first quarter of this year from 10.75 percent at the end of 2009, with its core capital level dimming from 7.91 percent to 7.59 percent. The minimum capital requirement for joint-stock banks was raised to 10 percent by China Banking Regulatory Commission late last year. For six largest banks, it is 11 percent.
China Citic Bank's capital adequacy dropped to 9.34 percent at the end of March, down 0.8 percentage point from the end of last year. The Bank of Ningbao had mixed performance: its core capital level dip from 9.58 percent at the end of last year to 9.07 percent at the end of the first quarter while capital adequacy ratio climbed from 10.75 percent to 10.88 percent during the time frame.
GS - Goldman set to settle SEC fraud case soon: report
On Thursday April 29, 2010, 5:51 am EDT
LONDON (Reuters) - Goldman Sachs may soon settle its fraud case with the U.S. regulator, the New York Post reported on Thursday, opting to end a legal fight rather than endure a repeat of the public flogging it received this week.
The Post report, citing sources familiar with the matter, said Wall Street's top investment bank was mulling closing the fraud case with the U.S. Securities and Exchange Commission (SEC) to limit damage to its reputation.
"It's almost a certainty that there will be a settlement," the paper quoted a source as saying.
Goldman could not immediately be reached for comment in London.
Goldman Chief Executive Lloyd Blankfein and other executives faced a blistering cross-examination from U.S. lawmakers about the company's ethics and behavior toward its clients on Tuesday.
The SEC has filed a civil fraud suit against Goldman, charging that it hid vital information from investors about a mortgage-related security. Goldman has denied the charges.
(Reporting by Steve Slater and Douwe Miemema, Editing by Sitaraman Shankar)
BL: Citigroup's Return to Saudi Arabia May Need More Than Help From Alwaleed
By Camilla Hall
April 29 (Bloomberg) -- Citigroup Inc. is aiming to open for business in Saudi Arabia six years after selling its stake in a bank there. Returning might not be as easy as departing.
Since leaving the country in 2004, the company has said it would like to regain a foothold. Saudi officials, though, are protecting banks from new competition, according to Jean- Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies.
“They’re not as in love with U.S. banks as they used to be,” Seznec said by telephone from Riyadh, the Saudi capital. “The competitive environment is really key to this. Citibank was very successful here in the past.”
Billionaire shareholder Prince Alwaleed Bin Talal, Saudi Arabia’s richest businessman, said on April 27 in an interview with Bloomberg Television that the country “welcomes the presence of a Citibank office.” He said in an interview last month he’s helping New York-based Citigroup and its chief executive officer, Vikram Pandit, set up in Saudi Arabia.
The U.S. company, in which filings show Alwaleed held 218 million shares as of November 2008, first started a business in Saudi Arabia in 1955.
Citigroup sold its 20 percent holding in Saudi American Bank, now known as Samba Financial Group, to a state investment group in 2004, netting $760 million. The previous year, it had ended its management contract with the bank after first selling a 2.83 percent stake. A fifth of Samba’s market value today equates to about $2.9 billion, according to Bloomberg data.
Under Control
The company, then the largest financial services company in the world, said its strategy was to invest in countries where it could have majority control of the banks it ran. Citigroup currently is the fourth-largest bank in the U.S.
“The franchise that Citibank led in Saudi Arabia was very robust and prosperous for many years and they decided at that point to exit,” said John Sfakianakis, chief economist at Riyadh-based Banque Saudi Fransi. The Saudi Arabian Monetary Agency, the central bank, “has temporarily halted the issuance of new bank licenses in order to evaluate the many licenses issued so far,” he said.
The central bank, known as SAMA, did not respond to questions sent by Bloomberg News, and neither did the Capital Markets Authority, the country’s regulator. Citigroup’s Dubai- based spokesman, Karim Seifeddine, declined to comment.
William Rhodes, the Citigroup senior vice-chairman stepping down this month, said in 2006 that the bank was interested in returning to Saudi Arabia. Charles Prince, then chief executive officer, met in April that year with government officials in Riyadh at an event hosted by Alwaleed, the Saudi investor’s Kingdom Holding Company said in a statement at the time.
‘Mistake’
A year later, Mohammed al-Shroogi, the Middle East managing director, called the exit a “mistake” and said the bank was reapplying for a license to operate.
Competitors such as Tokyo-based Nomura Holdings Inc., New York’s Goldman Sachs Group Inc. and Deutsche Bank AG meanwhile have expanded in the Arab world’s largest economy.
Frankfurt-based Deutsche Bank announced April 12 the formation of Deutsche Gulf Finance, a joint Shariah-compliant home financing company owned 40 percent by the bank’s Riyadh branch and 60 percent by Saudi investors.
The government forecast the Saudi Arabian economy to grow more than 4 percent this year, after 0.2 percent last year. The world’s largest oil exporter is spending $400 billion on infrastructure to stimulate the economy.
Lending Slowdown
Bank lending to private companies rose 1.6 percent in February. That growth averaged 27 percent between 2004 and 2008, according to Riyadh-based Jadwa Investment Co.
Twenty banks have full banking licenses and branches operating in the kingdom, according to the central bank’s February monthly statistics bulletin. More than 100 investment companies have licenses to conduct securities business, according to the Capital Markets Authority Web site.
Previously, in the 1970s, the Saudi government forced foreign banks such as Citigroup, HSBC Holdings Plc and ABN Amro Holdings NV to sell majority stakes in their local operations to Saudi nationals. A law in 2003 opened the door for foreign banks to apply for licenses.
To contact the reporters on this story: Camilla Hall in Abu Dhabi at chall24@bloomberg.net
Last Updated: April 28, 2010 18:12 EDT
BL: Stocks, U.S. Futures Rise on Earnings; Dollar Drops as Fed Keeps Rates Low
By Gavin Serkin
April 29 (Bloomberg) -- Stocks rose as companies from Motorola Inc. to Unilever NV reported better-than-estimated earnings and European leaders moved closer to helping Greece. Higher-yielding currencies strengthened after the Federal Reserve pledged to keep interest rates at a record low.
The Stoxx Europe 600 Index climbed 1.2 percent at 8:39 a.m. in New York. The ASE Index jumped 8 percent in Athens, the most since October 2008, as French President Nicolas Sarkozy said his nation is determined to help Greece. The extra yield investors demand to hold Greek 10-year bonds instead of benchmark German bunds narrowed 91 basis points to 602 basis points. Futures on the Standard & Poor’s 500 Index advanced 0.6 percent, while South Africa’s rand rallied 1 percent against the dollar.
Investor confidence is recovering after almost three- quarters of companies in the MSCI World Index that reported earnings topped analysts’ estimates. European confidence in the economic outlook improved to the highest in more than two years and German unemployment plunged. Fed policy makers restated a pledge yesterday to keep interest rates near zero for an extended period. U.S. jobless claims fell to a one-month low.
“The Fed statement reassured people and nullified the impact of euro-area concerns,” said Brian Jackson, a senior emerging-markets strategist at RBC Capital Markets in Hong Kong. “It’s a case of the FOMC trumping Greece and Spain.”
The MSCI World Index of 23 developed nations’ stocks rose 0.5 percent. Food and beverage stocks led gains in Europe as Unilever, the world’s second-largest food and detergent company, rallied 3.6 percent in Amsterdam after saying profit rose 33 percent. Pernod Ricard SA, the maker of Absolut vodka, rallied 3.9 percent in Paris after raising its forecast for full-year earnings. Siemens, Europe’s largest engineering company, advanced 0.9 percent in Frankfurt after profit topped estimates.
First-Quarter Earnings
The gain in U.S. futures indicated the S&P 500 may extend yesterday’s 0.7 percent rally. With the first-quarter earnings season past the half-way point, S&P 500 companies have beaten analysts’ estimates by an average of 20 percent on a per-share basis, according to data compiled by Bloomberg.
Motorola, the largest U.S. mobile-phone maker, rallied 6.4 percent in pre-market trading after forecasting second-quarter earnings that topped analysts’ estimates amid growing demand for models like the Droid. Aetna Inc. and Starwood Hotels & Resorts Worldwide Inc. were also among companies that climbed after reporting better-than-estimated earnings.
Initial jobless claims fell by 11,000 to 448,000 in the week ended April 24, in line with the median forecast of economists surveyed by Bloomberg News and the lowest level in a month, Labor Department figures showed. The number of people receiving unemployment insurance and those getting extended payments decreased.
The rand appreciated for the first time in three days as investors bought currencies in countries with higher interest rates. Brighter economic prospects in Asia and widening interest-rate differentials are likely to attract more capital, while bets for exchange-rate appreciation in the region may boost so-called carry trades, the IMF said in a report today.
The euro strengthened 0.3 percent to $1.3265, after trading at $1.3115 yesterday, the lowest level in a year. Investors demanded an extra 6 percentage points in yield to buy Greece’s 10-year bonds rather than benchmark German bunds, after the difference in yield, or spread, widened to more than 8 percentage points yesterday.
Fastest Pace
German unemployment declined at the fastest pace in more than two years in April, the Nuremberg-based Federal Labor Agency said today. An index of executive and consumer sentiment in the 16 euro nations rose to 100.6 in April from a revised 97.9 in March, the European Commission in Brussels said today.
Spanish 10-year bonds rose, cutting the yield by 7 basis points to 4.04 percent. The Italian 10-year bond yield fell 1 basis point even as the nation sold 8 billion euros ($11 billion) of securities due in 2012, 2017 and 2020.
Tin for delivery in three months added 2.6 percent to $18,476 a metric ton on the London Metal Exchange, the steepest advance since February. Aluminum and nickel also gained. Gold rose 0.2 percent to $1,167.43 an ounce in London and crude oil added 1.3 percent to $84.28 a barrel in New York.
To contact the reporters for this story: Gavin Serkin at gserkin@bloomberg.net.
Last Updated: April 29, 2010 08:49 EDT
BL: Euro Plan ‘B’ Currency Would Save Greece, Hedge Manager Says
By Tom Cahill
April 29 (Bloomberg) -- An alternative to the euro is needed to let Greece and other European nations devalue their way to financial health, according to Sudeep Singh, a hedge fund manager who has traded in emerging markets for 17 years.
European nations are constrained by the euro because they can’t reduce the costs of their goods and services with a cheaper currency, part of the solution in at least five major emerging-market crises that Singh said he’s traded through. The credit ratings of Spain and Portugal were cut this week amid concern Greece’s difficulty to pay its debt will spill over to Spanish and Portuguese markets.
Europe should split the euro into two classes to provide an alternative to struggling nations, said Singh, 41. He proposes calling the new currency the “sestertii” after the Roman Empire coin once used across southern Europe.
“You have to view this crisis through an emerging-market prism, where we’ve seen this movie before,” said Singh, a veteran of hedge fund firms Caxton Associates LLC and SAC Capital Advisors LP, who this month started a new hedge fund firm in London called Redux Research Ltd. “In every other emerging-market crisis there’s been a currency devaluation, a debt restructuring and tighter new fiscal policy. Greece and the others can’t become competitive without a cheaper currency.”
Singh this month started the Matrix Redux Emerging Markets Fund in a joint venture with Matrix Group Ltd. The fund, and a separate managed account for emerging-markets foreign exchange he’s run since 2007, will use London-based Matrix’s infrastructure, operations, compliance and sales, becoming the fifth hedge fund offering from Matrix, which manages about 3 billion pounds ($4.6 billion).
Tequila Crisis
Singh started his career in 1993 in emerging-market proprietary trading for JP Morgan, experiencing the so-called Tequila crisis sparked by Mexico’s currency devaluation in 1994. He said Europe’s current credit crisis bears similarities with that one and others since in Russia, Argentina and Brazil.
Measures those nations put in place have left them on better financial footing than their developed-market peers, he said.
“Ask yourself the Rip Van Winkle question of what you would want to own before you went to sleep for 20 years,” said Singh, who ran money for Sigma Capital, the European arm of Stephen Cohen’s SAC Capital, and was formerly senior portfolio manager for emerging markets for Bruce Kovner’s Caxton in London. “Would you rather have Brazilian 20-year bonds denominated in real or Portuguese 20-year bonds denominated in euro?”
One-Year Low
The euro fell to a one-year low of $1.31 yesterday in New York, down from 2009’s high of $1.51 on Nov. 25 as German Chancellor Angela Merkel said in Berlin the “stability of the euro zone” was at stake if a 45 billion-euro ($59 billion) loan package for Greece orchestrated by the International Monetary Fund can’t be delivered soon.
Singh isn’t alone in expecting the euro be altered before the crisis ends.
Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said yesterday Greece “could eventually be forced to get out” of the 16-nation euro region. That would lead to a decline in the euro and make it “less of a liquid currency,” he said in a Bloomberg Television interview. While a smaller euro zone “makes sense,” he said, “it could be very messy.”
Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement System, the largest U.S. public pension, with $202 billion under management, said in a Bloomberg interview today the makeup of the euro zone is “being brought into question.”
‘Screaming Differences’
“There are differences, and screaming differences, that have now been shown between the regions of the euro-zone,” he said.
An expulsion of Greece from the euro area is legally impossible, Axel Weber, Bundesbank president and European Central Bank council member, said in an interview with the German Bild newspaper published today.
Replacing the European common currency that’s been in place since 1999 is getting less far-fetched, Singh said.
“There’s probably a 30 percent likelihood now, but that’s rising every minute,” said Singh, who grew up in Rochester, New York. “Europe is far closer to a tipping point than the world realizes.”
To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net
Last Updated: April 29, 2010 07:33 EDT
XOM -1.61% (68.03), down on that news....
(XOM) Exxon Profit Rises Less Than Estimated on Health Bill (Update1)
By Joe Carroll
April 29 (Bloomberg) -- Exxon Mobil Corp., the world’s largest company, posted a smaller gain in first-quarter profit than analysts estimated as health-care legislation increased costs and U.S. refineries operated at a loss.
Net income rose 38 percent to $6.3 billion, or $1.33 a share, from $4.55 billion, or 92 cents, a year earlier, Irving, Texas-based Exxon said today in a statement. Per-share profit was 8 cents below the average of 16 analyst estimates compiled by Bloomberg.
Exxon recorded a $200 million charge to reflect an increase in health-care costs driven by legislation that President Barack Obama signed into law last month. The company’s U.S. refineries lost more than $600,000 a day as gains in gasoline and diesel prices failed to keep pace with crude-oil costs.
“The costs of health-care legislation are a hit every company is going to take in one shape or another,” said Gianna Bern, president of Brookshire Advisory & Research in Flossmoor, Illinois. “In refining, they’re taking it on the chin because crude is so expensive and demand for fuel is lackluster.”
Exxon fell 84 cents to $68.35 at 8:19 a.m. New York time in trading before U.S. exchanges opened. The stock has 10 buy ratings from analysts, 10 holds and 1 sell.
Price Gains
The profit increase was Exxon’s first since the 2008 third quarter. The company benefited from a jump in oil prices and its biggest gain in first-quarter crude and natural-gas production since 2000. Revenue climbed 41 percent to $90.3 billion, Exxon said.
Oil futures in New York averaged almost $79 a barrel in the quarter, up 82 percent. Global crude demand increased enough to fill 83 supertankers after economies around the world emerged from recession. Gas futures traded 12 percent higher than in last year’s first quarter.
Chief Executive Officer Rex Tillerson plans $28 billion in capital spending this year to boost production with new wells from California to the Middle East and to upgrade refineries. Exxon also agreed in December to buy XTO Energy Inc., the largest U.S. gas producer, for more than $29 billion.
Exxon plans to close the purchase of Fort Worth, Texas- based XTO by the end of June. The acquisition, Exxon’s largest since it bought the former Mobil Corp. in 1999, will give the company access to XTO’s gas reserves and its expertise in tapping rock formations impervious to conventional drilling techniques.
BP Plc of London said April 27 that its first-quarter profit more than doubled to $6.08 billion. Chevron Corp., the second-largest U.S. energy company, is scheduled to report earnings tomorrow.
Worldwide demand for crude rose by 1.84 million barrels a day during the first quarter, almost three times the growth rate of the final three months of 2009, according to the International Energy Agency in Paris.
To contact the reporter on this story: Joe Carroll in Houston at jcarroll8@bloomberg.net.
Last Updated: April 29, 2010 08:26 EDT
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RS for CITIBANK: READ: Treasury Votes for Reverse Stock Split Citigroup (NYSE: C)
http://www.americanbankingnews.com/2010/04/26/u-s-treasury-votes-for-reverse-stock-split-citigroup-nyse-c/
The U.S. Treasury Department voted with its 7.7 billion shares that it owns in Citigroup (NYSE: C) last week at the company’s annual share holders meeting for the company to have a reverse stock split.
The Treasury Department acquired its massive pile of stock in the company when it provided emergency capital to Citigroup (NYSE: C) during the financial crisis, and noted that it was “a reluctant shareholder (that) intends to dispose of its TARP (Troubled Asset Relief Program) investments as quickly as practicable.”
The Treasury Department backed all 15 of the directors that were nominated to Citigroup’s board and voted for two proposals. One of the proposals will permit the company to issues common shares to settle $1.7 billion of “common stock equivalent” awards to employees in lieu of cash incentive pay.
The other proposal that the Treasury Department supported was to allow a reverse stock split. The Treasury Department said in a statement that “will address the fact that the company has a much larger number of shares outstanding than is necessary to ensure adequate trading liquidity.”
The Treasury said that it voted proportionally on a “say on pay” resolution that would give the shareholders the right to cast a non-binding vote on whether or not they approve Citigroup’s 2009 executive compensation.
“The Treasury strongly supports the concept that shareholders should have the ability to vote on executive compensation, and included the ’say on pay’ requirement in its regulatory reform legislative proposal,” the Treasury said in a statement.
No problem. We may need to reboot, in which case, log back in after the reboot...in meantime GLD, GDX, whooo hoo!
CHAT will be rebuilt shortly...if you seem to be alone in the room, that is a software error...bear with us
SL
Anyone having problems in chat of being the only one in there?
NYT: More American Expatriates Give Up Citizenship
By BRIAN KNOWLTON
Published: April 25, 2010
WASHINGTON — Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.
“What we have seen is a substantial change in mentality among the overseas community in the past two years,” said Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva. “Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”
The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.
Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.
Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.
American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.
One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps.
Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said.
“I loved my time in the Marines, and the U.S. is still a great country,” she said. “But having lived here 20 years and having to pay and file while seeing other countries’ nationals not having to do that, I just think it’s grossly unfair.”
“It’s taxation without representation,” she added.
Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.
Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.
“It seems the new anti-terrorist rules are having unintended effects,” Daniel Flynn, who lives in Belgium, wrote in a letter quoted by the Americans Abroad Caucus in the U.S. Congress in correspondence with the Treasury Department.
“I was born in San Francisco in 1939, served my country as an army officer from 1961 to 1963, have been paying U.S. income taxes for 57 years, since 1952, have continually maintained federal voting residence, and hold a valid American passport.”
Mr. Flynn had held an account with a U.S. bank for 44 years. Still, he wrote, “they said that the new anti-terrorism rules required them to close our account because of our address outside the U.S.”
Kathleen Rittenhouse, who lives in Canada, wrote that until she encountered a similar problem, “I did not know that the Patriot Act placed me in the same category as terrorists, arms dealers and money launderers.”
Andy Sundberg, another director of American Citizens Abroad, said, “These banks are closing our accounts as acts of prudent self-defense.” But the result, he said, is that expats have become “toxic citizens.”
The Americans Abroad Caucus, headed by Representative Carolyn B. Maloney, Democrat of New York, and Representative Joe Wilson, Republican of South Carolina, has made repeated entreaties to the Treasury Department.
In response, Treasury Secretary Timothy F. Geithner wrote Ms. Maloney on Feb. 24 that “nothing in U.S. financial law and regulation should make it impossible for Americans living abroad to access financial services here in the United States.”
But banks, Treasury officials note, are free to ignore that advice.
“That Americans living overseas are being denied banking services in U.S. banks, and increasingly in foreign banks, is unacceptable,” Ms. Maloney said in a letter Friday to leaders of the House Financial Services Committee, requesting a hearing on the question.
Mr. Wilson, joining her request, said that pleas from expats for relief “continue to come in at a startling rate.”
Relinquishing citizenship is relatively simple. The person must appear before a U.S. consular or diplomatic official in a foreign country and sign a renunciation oath. This does not allow a person to escape old tax bills or military obligations.
Now, expats’ representatives fear renunciations will become more common.
“It is a sad outcome,” Ms. Bugnion said, “but I personally feel that we are now seeing only the tip of the iceberg.”
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BL: Ivory Tower Gives Wall Street Its Worst Ideas: Brendan Moynihan
Commentary by Brendan Moynihan
April 26 (Bloomberg) -- People, pundits and politicians looking for financial-crisis culprits should turn their sights to the professors who bear so much responsibility for it.
To borrow a phrase from professor Burton Malkiel, a random walk down Wall Street reveals that some of its biggest disasters have come from ideas hatched in the ivory tower. The next one may come from Lord John Maynard Keynes, now in fashion as the U.S. government goes on a spending binge.
“Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back,” said Professor Keynes, who died in 1946. “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
I’ll wager that his ideas will in time be blamed for the brewing disaster that’s sure to follow the explosion in federal deficit spending during and after the financial meltdown. But that’s for a future column.
Let’s start with Edward Altman, a professor at New York University’s Stern School of Business. He published a paper in 1985 showing that the default rate for bonds rated below the investment grade of BBB- (high-yield or junk bonds) was comparable to that of investment-grade issues. Michael Milken, the junk-bond king at Drexel Burnham Lambert, latched on to the same idea and began arranging bond issues to finance the corporate buyout boom of the 1980s.
S&L Crisis
Both men held the view that investors could boost their returns without increasing risk. This view played itself out in the savings-and-loan industry collapse in the late 1980s, fueled partly by their investments in high-yield bonds. Among the most notable was Lincoln Savings & Loan Association, headed by Charles Keating, who invested heavily in Milken junk bonds that played a major role in the lender’s failure. The Lincoln debacle also entangled five U.S. senators, the so-called Keating Five, in a political influence-peddling scandal.
Another 1980s disaster with roots in academia was portfolio insurance, which used a computer model to dynamically hedge equity portfolios, selling stock-index futures contracts as prices fell. The firm Leland O’Brien Rubinstein Associates Inc., headed by three academics, pioneered the strategy, which was blamed for contributing to the Oct. 19, 1987, stock-market crash.
Though other forces played a part in that crash, the New York Stock Exchange invoked portfolio insurance when it adopted so-called circuit breakers, which halted trading if the indexes fell by a specified amount.
Forget Hong Kong
In the financial-market history books, the 1990s probably won’t be remembered for the U.K.’s return of Hong Kong to China on July 1, 1997, when almost everyone thought the province’s currency would collapse in value on world foreign-exchange markets. It will be marked by the Thai baht’s plunge the following day, triggering a round of competitive currency devaluations that reached Russia in August 1998, when the country defaulted on its debt.
One casualty was hedge fund Long-Term Capital Management LP, which mixed traders with mathematicians and college professors, including the two Nobel Prize laureates among its founders: Myron Scholes and Robert Merton. The fund arranged trades that took advantage of differences between interest rates and currencies in bond markets around the world, including emerging markets. It used the pricing model for which the two had won the prestigious award to mine for opportunities in options.
Grand Theories
Grand as the models’ theories were, it wasn’t enough to prevent a $2.5 billion loss and a 22 percent decline in the Standard & Poor’s 500 Index. The Federal Reserve Bank of New York had to organize a rescue in September 1998 by the fund’s bank creditors. The Fed itself was forced to cut its benchmark lending rate three times in a six-week span, including an unusual intermeeting reduction, delivering a dose of preventive medicine to the U.S. economy.
Academic economists have long had an inferiority complex, their social science being void of the certitude found in, say, chemistry. They have compensated with formulas to make their work seem more like a hard science.
There is a flaw in their approach. In the natural sciences, a postulated theory is dismissed with a single instance contradicting it. Not so in economics where a defunct theory is put on a shelf and brought out, dusted off, and used when it’s back in fashion.
Seeing Patterns
Academia’s efficient-market hypothesis holds that prices on Wall Street’s financial markets are a random walk and that past prices can’t provide insight into the future. Yet, the professors are willing to use past data to calculate volatility and correlation for their models. For example, remember the mantra: House prices have never fallen, therefore they won’t.
In the past decade, some scientists, certain of the infallibility of their constructs, attempted to model human behavior in the financial markets with their math formulas -- to disastrous effect.
In March 2000, as stock-market indexes were peaking, professor David X. Li brought us his Gaussian copula formula, which used correlations to price collateralized-debt obligations, securities once deemed too complex to value -- and helping to set off the subprime credit bubble.
Next up, Keynes -- but as I said, that’s a whole column in and of itself.
(Brendan Moynihan, co-author of “What I Learned Losing a Million Dollars,” is an editor-at-large at Bloomberg News. The opinions expressed are his own.)
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To contact the writer of this column: Brendan Moynihan at bmoynihan@bloomberg.net
Last Updated: April 25, 2010 21:00 EDT
BL: Obama to turn Goldman into Protected Monopoly:
Goldman Sachs Money for Obama Wins at Monopoly: Kevin Hassett
Commentary by Kevin Hassett
April 26 (Bloomberg) -- The financial overhaul bill creeping toward law is more than a thousand pages, but it has a simple story line. President Barack Obama and the Democrats have decided to turn Goldman Sachs Group Inc. and a few other financial giants into organizations that resemble ATT Corp. in the 1950s.
Government rules will establish quasi-monopolies, and discourage competition. In exchange, the affected firms will be exposed to constant bureaucratic meddling, but will have the ability to manage this by influencing political appointments.
Obama and his team have made a show of threatening the big firms, and this might have given the impression that the financial revisions will hurt their value. But for old-time ATT shareholders, the deal was a net positive for many years. The same will be true today for the big financial companies.
It is clear that many investors understand this. While Obama has been bashing the big financial institutions, markets have noticed that the proposed legislation probably is good for their bottom lines.
On Nov. 21, 2008, Goldman Sachs shares closed at a little more than $53. The bailouts and the pending bill have been very good for the company. Last week, the shares closed at almost $160.
Even looking at recent events, the Goldman share price has done nothing to suggest that the government action will harm the firm. On Dec. 11, 2009, the House passed its version of the financial overhaul bill, and the share price of Goldman closed at $166. On April 14th, with the Dodd bill steamrolling toward the finish line, the share price peaked at about $185.
SEC Suit
The recent price drop wasn’t occasioned by news of the Dodd bill, but rather by the announcement that the Securities and Exchange Commission had filed a lawsuit accusing the firm of fraud regarding a specific mortgage securities instrument.
The shares of JPMorgan Chase & Co. and the other big financials have shown similar movements.
Why might the Dodd bill be good for the bottom line? Former Federal Reserve economist Larry Lindsey observed in a memo to House Minority Leader John Boehner of Ohio that, “Needless to say, the large Wall Street firms are not complaining; they will permanently benefit from having lower borrowing costs.” Lowering borrowing costs will, of course, increase profits. That’s why the big financials have performed so solidly during the period that the financial reform went from possible to almost certain.
An April 20 letter that seconded the Lindsey analysis by Charles Plosser, the president of the Philadelphia Federal Reserve Bank, explained how it will work.
Government Guarantee
The Dodd bill will establish a set of companies that will be implicitly established as too big to fail, or TBTF. These firms will, according to Plosser, have an advantage: “when stock and bondholders of TBTF firms win, they profit, but when they lose, they become eligible for a government bailout.”
This will lower the cost of capital for the firms so designated, since lenders will understand that the U.S. government will be there should calamity ensue. If you lend to a little guy, you lose if he runs into trouble. If you lend to a big guy, you get your money back from taxpayers.
Over time, the big banks will get bigger and bigger, as they capture business from smaller firms that don’t have the benefit of the implicit government guarantee.
For Goldman Sachs, that is the good news. The bad news is that there is a cost associated with becoming one of the government’s favored financials. The Fed will be granted almost unlimited power to micromanage systemically important institutions. If the Fed believes that a firm’s actions increase the risk of a financial meltdown, then it can order a halt. But even this eventually will be a net positive for the bottom line.
Picking Winners
Think about it, if the big firms are all investing in the same things and have imitative strategies, then the systemic risk is heightened because their positions are highly correlated. To manage systemic risk, it will be essential to require firms to focus in unique areas. The Fed will inevitably allow some firms to do this, while others do that. Each institution will dwell in its own unique space, with everyone making monopoly profits.
There is one precedent for such an intrusive arrangement. The Federal Communications Commission is the government body that regulates telecommunications and media companies. For many years, the FCC micromanaged the activities of telephone, cable and broadcast companies, with near-monopolies in their regions and markets. While the modern FCC has done a fine job of guiding those sectors toward increased competition, for many years, it acted to prohibit competition. The regulator was the monopolist’s best friend until the 1960s, when MCI Inc. was first allowed to compete in the long-distance telephone business.
Managing Politicians
The Dodd bill will turn Goldman Sachs into the equivalent of ATT, JPMorgan into a cable-TV company, and the Fed into the FCC. That will be a bad deal for the big guys only if they do a poor job of managing the politicians. That seems unlikely because the Fed will look at monopoly profits as a source of financial industry capital and stability, and will be unlikely to take FCC-like action to limit them.
A number of news reports covering the financial overhaul bill have mentioned that Goldman Sachs employees were, according to the Web site Opensecrets.org, the second-biggest contributor to Obama’s presidential election campaign in 2008, and yet they find themselves in the crosshairs of reform.
If you think through the economics of this plan, though, those contributions look like a savvy investment.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)
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To contact the writer of this column: Kevin Hassett at khassett@bloomberg.net
Last Updated: April 25, 2010 21:00 EDT
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Andy Xie: I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie
Commentary by Andy Xie
April 26 (Bloomberg) -- “My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”
It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.
There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.
Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.
“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”
How could anyone resist an offer like that?
The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.
China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China’s real-estate market a “bubble” isn’t denying China’s development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time. When it is about to burst, I’ll let you know.
Free Lunch
Expectations of a Chinese currency revaluation are, perhaps, the most important force inflating the bubble. First, it plays to the latent human desire for a free lunch. You just need to exchange your money for Chinese yuan. According to all the experts on Wall Street, you can only gain. The money has been gushing into China.
Second, the revaluation story has kept Chinese money inside the country. The dollar has always been the safe-haven asset for Chinese. This is why Chinese banks had a large dollar deposit base. Of course, anybody who was somebody had dollars offshore. Now all that money is back. More importantly, any income, legal or otherwise, now stays in China.
Flats Beat Cash
Why would corrupt officials keep apartments rather than cash? Well, according to Wall Street, the yuan is going to appreciate. So holding dollars is out of the question. And why hold Chinese cash when property prices are always going up? The corruption money can be turbocharged in the real-estate market. Only when they are caught do they understand the downside of holding fixed assets.
The massive liquidity waves have prompted Chinese banks to lend as much as possible. One Wall Street tradition adopted quickly in China was bonus recipients signing company checks to themselves. All you need is to report eye-popping quarterly earnings. It is an easier game than on Wall Street: The Chinese government keeps the lending spread wide by fixing both the deposit and lending rates. You just have to lend. The earnings will follow. Might the loans turn bad in three years? Well, I’m not going to give back my bonuses, right?
For a bubble to last you need a force to hold it together when it stumbles. Wall Street kept pumping out new natural or synthetic products to turn debt into demand for assets. Local governments play this role in China.
Future Profits Now
When it comes to interested parties, Chinese governments are knee-deep in the bubble. They get all the money from land sales. Land values have risen to half of the development cost. In hot spots, land costs more than the development -- the governments want to collect the future price gain immediately.
When properties are sold, transaction and profit taxes kick in. Developers pay more levies to the governments than they earn. When developers finally book their earnings, they must put it to work, as good Wall Street analysts would recommend, so they buy land. As land prices are much higher, their measly earnings aren’t enough, so they have to borrow. The governments get all their earnings and debt repayments. Can you blame them for boosting the market whenever it slips?
Land obsession is another force at work. China was a rural economy not so long ago. The most important asset was always land. “Be a government official and become rich” is a millennium-old Chinese saying. It didn’t explain where the money went. It always went into agricultural land. In cities, you only see buildings, not paddy fields. But the buildings sit on land.
Now housemaids are in the market. Who else? Never underestimate 1.3 billion people. In China, they say you should take the shoeshine boy’s advice. Many would listen to him.
Welcome to China, the land of getting rich quick.
(Andy Xie is an independent economist based in Shanghai and was formerly Morgan Stanley’s chief economist for the Asia- Pacific region. The opinions expressed are his own.)
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To contact the writer of this column: Andy Xie at andyxie88@yahoo.com.hk
Last Updated: April 25, 2010 15:00 EDT
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LVS: Sands to Open Big Bet on Asian Gambling
APRIL 25, 2010
By JONATHAN CHENG in Singapore and ALEXANDRA BERZON in Los Angeles
With a floating garden that overlooks Singapore's glitzy waterfront from about 200 meters in the air, the Marina Bay Sands is an architectural showstopper. It is also a massive US$5.7 billion bet on the future of Asian gambling.
Developer Las Vegas Sands Corp. and its chairman, Sheldon Adelson, have created ambitious casino-resorts in the past, but none quite like Marina Bay, which industry observers—and Mr. Adelson himself—are comparing with iconic regional landmarks such as the Sydney Opera House and Kuala Lumpur's Petronas Towers. Analysts say Marina Bay, which opens Tuesday, could become the world's most lucrative casino.
That optimism underscores the growing prominence of Asia for a casino industry with limited prospects in Las Vegas, Atlantic City and other U.S. markets. With Marina Bay set to open Tuesday and rival Steve Wynn's Encore at Wynn Macau opening last week, two of the gambling industry's biggest competitors now rely on Asia for the majority of their revenues. A third, MGM Mirage, decided last month to sell its stake in an Atlantic City, N.J., property in order to maintain a foothold in Macau, where it has the smallest market share but is keen to expand.
After a series of delays, Sands will only open some parts of Marina Bay on Tuesday, with a bigger official opening in June.
Still, Tuesday's opening marks a return of optimism for the battered global gambling industry after two years of pain. A celebration in December of MGM Mirage's new $8.5 billion CityCenter project in Las Vegas was tempered with concern it would take business from other casinos. After Sands narrowly avoided filing for bankruptcy-court protection in 2008 and 2009, financing troubles forced the company to halt progress on many of its other projects to focus on Singapore.
While Las Vegas remains weak, prospects are now bright in Macau—the world's largest casino market by revenue. In 2009, gambling revenue in Macau was about $14.9 billion, up 9.6% from $13.6 billion in 2008. Las Vegas Strip gambling revenue in 2009 was $5.6 billion, off 9.4% from $6.1 billion in 2008.
Macau recorded its two biggest months to date in terms of gambling revenue in January and March, and industry watchers and insiders are salivating at the prospect of a new golden age of gambling in Asian markets.
"The Asian market is going to be overpowering and we're just getting started," said Bill Lerner, a casino consultant for Union Gaming Group, which is based in Las Vegas.
Mr. Adelson, who had earlier predicted Marina Bay could generate $1 billion in cash a year, last week set expectations even higher. "Not only are our hopes justified, we think we're liable to exceed our own expectations," Mr. Adelson said.
To succeed, Marina Bay will have to attract wealthy gamblers to Singapore from neighboring India, Malaysia and Indonesia without siphoning off too much business from Macau, a four-hour plane ride away.
Success in Singapore isn't certain. The government banned casinos for decades and is only allowing them in cautiously—imposing a hefty surcharge on its citizens and introducing a system that allows Singaporeans to put their family members, or even themselves, on a blacklist. "Singapore's revenue potential is still a large question mark for investors," said Dennis Farrell, a bond analyst for Wells Fargo Securities. "It's an untested market."
Under a government-mandated duopoly, Sands will share the Singapore market with Malaysia's Genting Group, which beat Marina Bay to opening day with its family-oriented Resorts World project on Feb. 14.
Working in its favor, Marina Bay has a plum location on Singapore's central waterfront and an arresting engineering marvel: a 7,000-ton cantilevered floating garden called a SkyPark that perches atop the project's three 55-story hotel towers. Sands says the public observation deck will be longer horizontally than the Eiffel Tower is tall.
No official numbers have been released from Resorts World's 10 weeks in operation. But on a recent Sunday morning, all the blackjack, baccarat and roulette tables on Resorts World's large casino floor were ringed with hordes of gamblers and onlookers, making it difficult to get a seat at any table. Slot machines were also hard to come by, and the two large video roulette theaters were overflowing with gamblers.
Another indicator of market appetite: calls to Singapore's National Council on Problem Gambling, which nearly tripled between January and March. So far, 567 Singaporeans have registered with the government body to have themselves blocked from entering the casinos.
Credit Suisse analyst Foong Wai Loke projects that the two Singapore casinos will together generate annual revenues of about US$2.6 billion—about 40% of the Las Vegas Strip's US$6.1 billion in 2008.
Other industry observers have estimated a market of US$3 billion to US$3.5 billion a year.
Mr. Adelson predicts "an almost inexhaustible supply" of gamblers from Malaysia, Indonesia, Thailand, India, China, Vietnam and Australia.
Marina Bay will need time to ramp up. When the company announced the opening date in February, it still didn't know what would be ready for the soft opening in April. Now, company spokesman Ron Reese said the company expects to open the casino floor, about one-third of the project's 2,500 hotel rooms, 10% of its shops and half its restaurants.
—Sam Holmes in Singapore contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Alexandra Berzon at alexandra.berzon@wsj.com
http://online.wsj.com/article/SB10001424052748703441404575205901790694036.html?mod=WSJ_article_MoreIn
WSJ: China Ponders Imposing New Property Taxes
In Effort to Tamp Down Overheated Housing Market, Government Considers U.S.-Style Annual Tax Based on Home Values
APRIL 25, 2010
By ESTHER FUNG
SHANGHAI—China is considering introducing new or higher taxes on real estate, possibly even a U.S.-style property tax, which would mark a significant escalation of its struggle to cool down a booming property market now widely being described as a bubble.
How authorities handle any kind of property tax—the prospect of which is fiercely opposed by some property developers—will have significant implications for China's economy, and will ripple through global markets. The construction boom is the main driver of the current recovery in China, and is one of the few parts of the world economy growing strongly right now. Construction also underpins China's demand for raw materials, which has helped support global prices for commodities, such as copper and iron ore.
In recent months, many prominent local economists have urged authorities in Beijing to make more use of the powerful tool of taxation to curb property speculation and rein in runaway prices. China now levies several types of taxes on property sales, but authorities are said to be considering higher transaction taxes that target luxury properties, or possibly a tax on property values similar to the kind levied by local governments in the U.S.
The reasoning is that higher taxes will make it less attractive to invest in real estate. And giving local governments more revenue from property taxes could reduce their incentive to keep prices high to profit from sales of land-use rights.
Opponents fear new taxes would shatter confidence in the real-estate market, leading to a bust that would damage the entire economy.
In a notice last week announcing a package of policies to contain rapidly rising housing prices, China's State Council told tax authorities to speed up the drafting of tax policies that will "guide appropriate purchases of housing and regulate personal gains from property." The government has given few details publicly, and local media have in recent days been filled with conflicting reports about the different types of taxes that could be introduced in various areas.
"The details of the tax are very sketchy right now, but there is a sense of urgency from the government to ease prices, not just for economic reasons, but also for social reasons. The rich-poor disparity is troubling," said Wu Jianxiong, an analyst from Central China Securities.
Average urban-property prices in China rose an average of 11.7% in March, the fastest pace since the Chinese government began releasing the data in July 2005. Prices in major cities such as Shanghai and Beijing are increasingly making property unaffordable for large portions of the population, and have become a focus of public discontent.
China's government has promoted widespread home-ownership and has repeatedly said it will continue to support first-time home buyers even as it rolls out restrictive policies aimed at investors and speculators. So analysts expect any new tax policies to be imposed on high-end residences, or target individuals who have bought multiple properties.
Currently, China levies several forms of one-off taxes related to a property transaction, such as a stamp duty, an income tax and a transaction tax. Though many options are being discussed, many analysts and market observers think the government could impose what is being labeled as a "property consumption" tax on luxury property in select cities—a term that could be interpreted as a tax on anything beyond a primary residence.
A more radical change would be to start levying an annual tax based on the value of people's homes—the kind of property tax that a homeowner in the average U.S. suburb would be familiar with. This has been advocated by Chinese economists who say local governments need a more secure revenue source.
"The main purpose of such a tax would be to dampen speculative demand and to increase the costs of holding property for wealthy people," said Hingyin Lee, director of research and advisory from Colliers International.
Chinese media have reported that such a tax may be implemented in Chongqing, a vast city in southwestern China that has been a focal point of experiments in urban governance. In an interview with a newspaper backed by the official Xinhua news agency, Chongqing's mayor, Huang Qifan, said the city had proposed to the national government a plan for a Western-style property tax for high-end properties.
Chongqing has proposed an annual tax equivalent to 1% of the value of any home over 200 square meters that has sold for three times the average market price, Mr. Huang said in the interview. The tax would rise to 1.5% if a home sells for four times the average price, and would continue rising on a progressive scale up to 5% of the full house price. The interview didn't specify how the average price would be estimated.
A Chongqing city spokesman, Wen Tianping, confirmed the details of the plan and said it had been submitted to the State Council for approval.
In a potential sign of the sensitivity of the planned tax, on Friday the interview was no longer available on the newspaper's Web site. The Chongqing city spokesman said he didn't know why the the report had been taken down.
China now collects 1.2% annual tax on 70% to 90% of the value of commercial property, and analysts say another possibility would be to extend the commercial-property tax to third and subsequent homes by classifying such properties as income-generating.
Analysts said it is hard to predict how much further sales volumes and prices would fall under any new property-tax policy, given the lack of details over the tax policies, and that adjustments may have to be made to current transaction costs to avoid duplication.
"Sales of high-end residential homes will definitely be hit," said Johnson Hu, an analyst from UOB Kayhian. "Transaction volumes have already dipped this week as home-buyers take a wait-and-see approach."
—Aaron Back and Gao Sen contributed to this article.
http://online.wsj.com/article/SB10001424052748704388304575202072057277514.html?mod=WSJ_article_MoreIn
WSJ: Standoff Over Ship Escalates in Koreas
By EVAN RAMSTAD
http://online.wsj.com/article/SB10001424052748704446704575205400833858626.html?mod=WSJ_hp_mostpop_read
SEOUL—South Korea's top military official said Sunday that a torpedo likely exploded under the South Korean patrol boat that sank a month ago near the maritime border with North Korea, bringing Seoul closer to declaring it was attacked by the North and hastening a delicate decision about what to do next.
The finding puts South Korea and its ally the U.S. in a bind in confronting the nuclear-armed totalitarian state. Seoul faces several constraints in penalizing Pyongyang, starting with the prospect that a military response could escalate into a war that very few here want.
The response could include seeking economic sanctions through the United Nations, a senior official in Seoul said, but the timing may be shaped by an approaching South Korean election and the process of rallying world support for penalties.
Defense Minister Kim Tae-young stopped just short of blaming North Korea for the March 26 sinking of the Cheonan, which killed 46 sailors, but said "a heavy torpedo is the most likely cause."
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Associated Press
South Korean Prime Minister Chung Un-chan, center, comforts a family member of victims as Defense Minister Kim Tae-young, left, looks on during a memorial service for the deceased sailors from the sunken South Korean naval ship Cheonan.
The Cheonan sinking's lead investigator said his team had concluded that ship was torn apart by a "non-contact" explosion from a device that didn't touch the vessel itself. A salvage crew on Saturday recovered the ship's severed bow after raising the stern on April 15.
The statements marked a turning point in an investigation that has received saturation media coverage here. Government officials had already said privately that they strongly suspect the North is behind the sinking.
Seoul has largely insisted on waiting to make a final statement until the ship was recovered and analyzed, a process hampered by difficult weather and sea conditions. In the meantime, officials privately say, they are looking for concrete evidence to build a case to penalize Pyongyang.
South Korea has raised the last part of a naval ship that sank last month. The country's top military officials said a torpedo likely exploded under the ship.
A military response looks unlikely at this point. South Korea has stopped short of matching previous acts of aggression, from the 1987 explosion of a Korean Air jet near Myanmar to the July 2008 killing of a South Korean tourist at a North Korean resort by a North Korean soldier.
Though the public favors punishing the North, there is little appetite for warlike action that would disrupt the South Korean economy or destabilize the North enough to require the South to take it over.
President Lee Myung-bak said last week he has no intention of invading the North. U.S. Secretary of State Hillary Clinton on Friday called for calm.
A U.S. defense official said that while the Pentagon is involved in analyzing the wreckage, it was awaiting a formal South Korean determination of the sinking's cause before discussing any possible courses of action with Seoul. "We aren't running any hypotheticals here," said the U.S. official. "This is the South Korean government's decision."
Privately, U.S. officials acknowledged the findings will have major ramifications for U.S. policy in Asia. They worry that further escalations by the North could complicate an American foreign policy agenda dominated by the war in Afghanistan and international efforts to contain Iran's nuclear program.
North Korea has been angry with South Korea since the 2007 election of Mr. Lee, who ended 10 years of providing money to the North.
More broadly, North Korea has pushed forward the development of nuclear weapons and advanced missiles against the wishes of the South and the Obama administration.
It has chafed under stricter penalties imposed by the U.N. Security Council after a nuclear test last May, which have resulted in the seizure of weapons shipments that are a main source of cash for dictator Kim Jong Il's regime.
Many in South Korea speculate that the March 26 sinking may have been retaliation for a fire fight last November when South Korea's navy severely damaged a North Korean vessel and perhaps killed some of its sailors.
That skirmish occurred in the boundary area not far from where the Cheonan sunk. The North's dictator Mr. Kim visited the navy base of the damaged ship in February.
In another line of speculation, some analysts say Mr. Kim may have ordered the attack to show strength inside the country to help the potential succession of his son, Kim Jong Un.
Acts of Aggression
Some of North Korea's attempts against South Korea
Jan. 21, 1968: North Korean commandos reach presidential Blue House in Seoul and attempt to kill President Park Chung-hee. They fail, but kill two South Korean police and five civilians; 28 of the commandos are killed.
Oct. 9, 1983: North Korean agents bomb a meeting attended by President Chun Doo-hwan in Rangoon, Burma, killing three members of his cabinet and 14 others in his entourage.
Nov. 29, 1987: Two North Korean spies place a time bomb on a Korean Air flight from Baghdad to Bangkok; it explodes over the Andaman Sea near Burma, killing 115.
June 16, 1999: North Korean warships accompany fishing boats across the maritime border in the Yellow Sea, leading to a 10-minute gunbattle that resulted in the sinking of a North Korean ship.
June 29, 2002: North Korean warships venture three miles south of the maritime border in the Yellow Sea and skirmish with two South Korean ships; six South Korean sailors are killed.
Nov. 10, 2009: A North Korean warship strays one mile south of the maritime border in the Yellow Sea, leading to a brief gunbattle with two South Korean ships.
WSJ Research
There's less evidence of this possibility, but when Mr. Kim was rising in power in the 1970s and 1980s, North Korean media attributed several military actions to him. His father, North Korean founder Kim Il Sung, was a war hero and resister of Japan's colonization of the Korean peninsula, which ended after World War II in 1945.
If North Korea is ultimately blamed, South Korean officials don't expect difficulty building public support to penalize it. North Korea's military has blamed South Korea for the Cheonan's sinking, though the North hasn't explicitly denied being involved.
Should the North be responsible, Seoul would likely ask the U.N. Security Council to create additional economic sanctions that would be binding on all nations, according to a high-ranking South Korean official.
Meanwhile, South Korea would likely end its own remaining economic activities with North Korea. The South Korean official noted that since Mr. Lee took office, Seoul has sharply reduced trade and investment with Pyongyang by tying such activities to a reduction of nuclear-weapons development in the North.
"We can cut the rest off," the official said, including closing a joint industrial park near the inter-Korean border where South Korean firms employ 40,000 North Koreans.
The government discussion is also influenced by the coming June 2 biennial election of South Korea's National Assembly.
Opposition lawmakers have focused on the military's shortcomings in handling the sinking, particularly a slowness early on to provide information.
Members of the ruling conservative party have emphasized the prospect of North Korean involvement and raised questions about the military's preparedness for surprise attacks.
A finding of Northern aggression might help politicians in the ruling party because it has long taken a harder line with Pyongyang than other parties. Uncertainty will allow politicians in opposition parties to continue criticizing the efficiency of the military and incumbent government.
Lawmakers suspended campaigning until after a Thursday funeral for the sailors, which will cap five days of national mourning that began Sunday. But they plan their own investigation of the sinking afterward with an eye toward finishing before the election.
The main probe is being conducted by 43 civilian and military experts, including some from the U.S., Australia and Sweden. The investigation's chief, Yoon Duk-yong, said Sunday said the damage to the 1,200-ton ship's hull makes it "highly likely that a noncontact explosion was the cause."
Metal fatigue was ruled out because the ship didn't break cleanly. Mr. Yoon promised further analysis.
There remains a chance the explosion was caused by a mine that South Korea or the U.S. planted along the countries' shared maritime border 40 years ago, when a nearby island was used as a radar station. Defense officials believe such mines were cleared long ago.
"People in the government are rather cautious until we come up with the decisive material that can verify what was the cause," says Park Chan-bong, a former negotiator with North Korea for the South Korean government who is now an adviser to the ruling Grand National Party. "Until then, I think it is rather rational to wait."
—Jay Solomon and Peter Spiegel in Washington contributed to this article.
Write to Evan Ramstad at evan.ramstad@wsj.com
WSJ: Hong Kong Seeks Ban on Robertson's Tiger Asia Fund
By ELLEN SHENG
HONG KONG—The Hong Kong Securities and Futures Commission said Monday it is seeking to ban Tiger Asia Management LLC, a New York-based hedge fund, from trading in all listed securities and derivatives in Hong Kong.
The move, which marks the first time the Hong Kong regulator has sought to ban any entity from trading in the city, comes as the SFC is seeking to freeze 8.6 million Hong Kong dollars (US$1.1 million) of Tiger Asia's assets in connection with alleged insider dealing in shares of Bank of China Ltd.
The SFC alleges Tiger Asia traded in Bank of China shares after receiving confidential details of two placements of the bank's shares by UBS AG and Royal Bank of Scotland Group PLC. The firm allegedly received advance notice of the placements and had agreed not to deal in Bank of China shares after receiving the information, but then proceeded to sell short 104 million Bank of China shares before UBS's placement, and to sell 256 million shares before RBS's placement.
The HK$8.6 million the SFC is seeking to freeze is equal to the notional profit Tiger Asia allegedly made from its Bank of China trades.
This would be in addition to the HK$29.9 million the SFC sought to freeze when it first started proceedings against Tiger Asia in August in connection with alleged insider dealings in shares of China Construction Bank Corp.
That case is still pending in Hong Kong court proceedings. The SFC is amending its proceedings against Tiger Asia and three of its senior officers, Bill Sung Kook Hwang, Raymond Park and William Tomita, to include the new allegations.
The SFC said no date has been set for a court to hear the allegations.
The SFC is also seeking orders to unwind both the Bank of China and China Construction Bank transactions and to restore affected counterparties to their pretransaction positions.
Tiger Asia is a so-called "tiger cub"—one of several funds that got their start with support from Tiger Management LLC, which nurtured and seeded many funds after founder Julian Robertson closed Tiger Management in 2000.
Executives at Tiger Asia, which has no physical presence in Hong Kong, couldn't immediately be reached for comment.
Write to Ellen Sheng at ellen.sheng@dowjones.com
Now that is a very thoughtful, and worthy hypothesis...I've been wondering myself about the extent of the current recovery, and what might be the next possible Krakatoa which could derail the locomotive.
thank you
TheAge: Australia Tightens Foreign Property Ownership Rules
TIM COLEBATCH
April 24, 2010
THE Federal government will scrap its controversial new rules on foreign investment in real estate, and instead tighten both the rules and their enforcement to head off a damaging political storm.
In a stunning about-face, Assistant Treasurer Nick Sherry has announced that temporary residents will now have to seek approval from the Foreign Investment Review Board (FIRB) to buy any real estate in Australia.
Temporary residents will also be required to sell their Australian property when they leave Australia. And for the first time, the FIRB will be given the means to ensure that the laws are enforced.
In a surprising move, the crackdown will also target vendors and real estate agents. Senator Sherry said they would face civil penalties if they were involved in transactions that breached the Foreign Acquisitions and Takeovers Act. His spokesman could not explain how vendors and real estate agents are expected to know the immigration status of buyers.
The move comes barely three weeks after Senator Sherry denied that foreign investors were a factor in the Australian real estate market.
Since then, the opposition has been demanding action and there has been a growing crescendo of complaints and reports of massive buying by Chinese investors. Bloomberg newsagency reports that Chinese government companies and sovereign wealth funds have expressed interest in investing in Australian real estate, after Beijing ordered them to sell Chinese properties to bring down housing prices.
Senator Sherry now says he has consulted the community and the real estate industry, and concluded that the foreign investment regime needs to be strengthened, ''particularly in relation to the arrangements for temporary residents''.
''International investment that boosts the numbers of houses available for people to rent is a good thing, and temporary residents living here should, within very strict rules, have the opportunity to buy a home. ''But the rules have to be tough enough to ensure that the system works in that way, and that's what we're delivering.''
http://www.theage.com.au/national/foreign-home-buyers-backflip-20100423-tjb3.html
Hmmm: China starts regular patrols of South China Sea
English.news.cn 2010-04-26 01:09:40
HAIKOU, April 25 (Xinhua) -- China's fishery administration said on Sunday it had started regular patrols of the South China Sea, sending two vessels to take over from two others currently escorting Chinese fishing boats in the area.
"China Yuzheng 301 and 302 take over from China Yuzheng 311 and 202, which have been patrolling the sea area of Nansha Islands since April 1," said Wu Zhuang, director of Administration of Fishery and Fishing Harbor Supervision for South China Sea under the Ministry of Agriculture.
He said the patrol ships were sent to escort Chinese fishing boats in the South China Sea and reinforce China's fishing rights of the waters around Nansha Islands.
The two ships set sail from Sanya, a coastal city in China's Southernmost Island Province of Hainan, on Sunday.
China's patrol vessels escort the country's fishing boats and help treat fishermen who fall ill, Wu said.
Editor: Mu Xuequan
BL: Carnivores’ Dilemma Widens as Pork Signals Record Meat Prices
By Whitney McFerron
April 26 (Bloomberg) -- U.S. meat prices may rise to records this summer after farmers reduced hog and cattle herds to the smallest sizes in decades, the result of surging feed costs linked to demands for more ethanol.
Wholesale pork jumped as much as 25 percent this month to 90.68 cents a pound last week, the highest since August 2008, U.S. Department of Agriculture data show. Beef climbed 22 percent this year to $1.6896 a pound on April 23, the most expensive since July 2008. Chicken’s gain in March was the most in 20 months.
Demand for pork chops, steaks and chicken breasts is rising as the economy improves, backyard barbecues resume and China and Russia allow more U.S. imports. Domestic supplies may drop to a 13-year low because of culls to stem losses caused by corn prices that doubled after former President George W. Bush set targets to increase ethanol use.
“Ethanol-induced prices in meat are just now getting to the marketplace,” said Steve Meyer, the president of Paragon Economics, a meat industry consultant in Des Moines, Iowa. “Consumers are going to see the highest prices they’ve ever paid in meat and poultry because of the decisions made to make corn into ethanol.”
Hog futures have almost doubled from a low in August to 85.175 cents a pound on the Chicago Mercantile Exchange on April 23. The price may reach $1 by June, said Tom Cawthorne, director of hog marketing at broker R.J. O’Brien & Associates in Chicago. CME cattle jumped 14 percent in the past year.
Meat-Price Outlook
Retail prices may hit records in the next 90 days as U.S. demand peaks during summer grilling season, said John Nalivka, a former USDA economist and the president of meat consultant Sterling Marketing Inc. in Vale, Oregon. The previous records were in 2008 for pork at $3.026 a pound in September, based on monthly averages tracked by the USDA since 1970, and for beef at $4.526 a pound in August. Chicken’s peak was $1.857 a pound in May 2009.
More expensive pork and beef may revive food inflation that dropped last year for the first time since 1961. Meat prices tracked by the United Nations Food and Agriculture Organization are up 5 percent this year, even as food costs fell 5.8 percent.
The rally also means a boost for livestock producers including Smithfield Foods Inc., the world’s largest pork processor. The Smithfield, Virginia-based company said April 21 that its hog-rearing unit will be profitable in the fiscal year that begins in May, its first period without a loss since 2007.
Consumers May Balk
Prices may be peaking, if futures markets are a guide. Hogs for settlement in May through August are trading between 85 cents and 87.4 cents a pound, a narrow range that may signal prices are near their top, said Ron Plain, a livestock economist at the University of Missouri in Columbia.
Consumers may choose cheaper food with the unemployment rate in March at 9.7 percent, near a 26-year high.
“The key question is if the U.S. economy is strong enough to sustain higher grocery store prices for meat,” Plain said. “We had been expecting a late summer peak, but I’m afraid we may end up with a late spring peak.”
Supermarkets have been “holding the line” on consumer costs, Paragon’s Meyer said. In March, retail beef on average was little changed from a year earlier, 4.8 percent below its record high, USDA data show. Pork was 1 percent lower than the same month in 2009 and 3.7 percent from its peak, while chicken was 9.6 percent below the record high set last year.
‘Cycle Has Turned’
Producers are optimistic for the first time in more than two years because output is falling as demand accelerates.
“The cycle in hog production has turned,” Smithfield Chief Executive Officer C. Larry Pope said on a March 26 conference call with analysts. “We have been through a long period of prolonged losses in the live-production side of the business. We’ve been talking about that for a long, long time. We are seeing a period in which our costs are going down and our hog prices are moving up.”
Smithfield cut its hog-breeding herd by 13 percent since early 2008. As of March 1, the total U.S. sow herd shrank by 7.1 percent in two years to 5.76 million animals, the fewest in at least 47 years, USDA data show. Cattle farmers slashed herds in January to the smallest in 51 years, and the government estimates that supplies may not rebound until 2013.
Elaine Johnson, an analyst at CattleHedging.com LLC in Westminster, Colorado, estimates that U.S. per-capita supplies of beef, pork and poultry will be the smallest since 1997. It takes 10 or 11 months to raise a hog to slaughter weight and about three years for cattle.
‘Mighty Good’ Price
“Pork prices will continue to gradually creep up,” said Zack McCullen III, the vice president of swine production at Prestage Farms Inc., the fifth-largest U.S. hog farm. “If you look at futures this week, they look mighty good. I think they’ll definitely hold up for a while.”
Clinton, North Carolina-based Prestage, which produces about 650 million pounds of pork annually, cut its sows 10 percent last year, McCullen said. “Ethanol was the main driver in corn prices going up to historical levels,” he said. “Ethanol was the pork producers’ biggest problem.”
The hog industry lost about $6.2 billion from October 2007 until last month on rising feed costs and lower export demand caused by swine flu, Missouri’s Plain said. Profits returned as corn futures on the Chicago Board of Trade dropped from a record $7.9925 a bushel in June 2008 to $3.61 on April 22.
Ethanol refiners are using more of the U.S. harvest than ever. An estimated 4.3 billion bushels, or 33 percent, of last year’s crop will be used for fuel, compared with 3.049 billion bushels, or 23 percent, in 2008, USDA data show.
Ethanol Mandate
Bush signed the Energy Independence and Security Act in 2007, increasing the ethanol mandate to 15 billion gallons a year by 2015 from about 10.5 billion in 2009, in a bid to cut dependence on foreign fuel and curb emissions.
The USDA estimates farmers harvested a record 13.131 billion bushels of corn last year. Chris Thorne, a spokesman for Growth Energy, a Washington-based ethanol trade group, there will be more than enough of the grain to meet demand for making food, livestock feed and fuel.
Speculators including hedge funds and commodity index funds have increased their bets that the meat rally will continue, holding record positions in cattle on April 20, while reducing net-long positions in hogs by 0.6 percent from a record on April 13. In September, speculators had a record bet against hogs, after prices reached a six-year low in August.
Even after the drop in feed costs, hog farmers may not expand herds for another two years, in part because banks tightened lending requirements during the recession, said Neil Strother, whose farm in Wilson, North Carolina, owns about 5,000 sows. Strother said he liquidated 15 percent of his herd last year.
No Expansion Seen
“From the largest producer to the smallest producer, none of us want to see production ramp up right now,” he said.
Rising overseas demand may erode inventories for pork that in March were the lowest for that month since 2007, the government said on April 22. Beef stockpiles in March were the lowest for any month since July 2005, and the USDA forecasts exports will jump 9.7 percent this year.
Brett Stuart, managing partner at Global AgriTrends, a consulting company in Denver, expects pork exports to China, including Hong Kong, to climb 22 percent this year from 2009. The government predicts total U.S. pork exports will increase 5.7 percent this year. In March, China lifted a ban on U.S. pork put in place after the swine-flu outbreak last year.
“We’ve been living a little on borrowed time as consumers,” said Bill Lapp, a former chief economist for ConAgra Foods Inc. who is the president of consultant Advanced Economic Solutions in Omaha, Nebraska. “The confluence of reduced production and improving export markets are supporting wholesale prices and eventually that’s going to turn into higher consumer prices.”
To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net.
Last Updated: April 25, 2010 19:00 EDT
BL: Rogoff Says Greece Won't Be Last IMF Rescue as Ireland, Spain `Vulnerable'
By Simon Kennedy
April 26 (Bloomberg) -- Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff.
“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate. Greece on April 23 triggered a 45 billion-euro ($60 billion) rescue package from the IMF and the euro region after its soaring deficit sent borrowing costs surging and sparked concern about a default.
At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent.
The likelihood is “better than 50-50” that others in the 16-nation euro area will end up requiring help from the Washington-based lender, said Rogoff, 56. He expects the IMF will eventually dispatch more loans to Greece than the as-much- as 15 billion euro it’s currently offering.
High Stakes
“The stakes are very high for Europe as it wants to avoid contagion,” said Rogoff, who in 2008 predicted the failure of some large U.S. banks prior to the collapse of Lehman Brothers Holdings Inc.
Any Spanish bailout would dwarf that for Greece as its economy is four times bigger. Although Spanish debt as a share of GDP is 53.2 percent compared with Greece’s 115.1 percent, it’s still worth 560 billion euros, more than double Greece’s burden. Ireland has debt of 105 billion euros, or 64 percent of GDP, and Portugal has 126 billion euros, equivalent to 76.8 percent of GDP.
Investors are expressing their concern by charging countries with large deficits increasingly more to borrow for 10 years than they do Germany, the euro-area’s largest economy and issuer of its benchmark debt.
The gap between German and Greek bonds widened 76 basis points to 635 basis points as of 10:41 a.m. in London today. That’s the highest since at least March 1998, when Bloomberg began compiling the generic prices.
Portugal was charged 213 basis points more to borrow than Germany, and Spain was 99 points. The spread for Ireland widened to 182 points, the most since the country’s 2010 budget was published on Dec. 9.
‘Political Will’
“I wouldn’t say they have to have an IMF program, but it’s possible,” said Rogoff of Spain, Portugal and Ireland. “It’s hard to say, as so much depends on political will and the numbers.”
He spoke before Greek officials led by Finance Minister George Papaconstantinou spent the weekend negotiating with IMF and European officials in Washington. Investors betting against Greece now will “lose their shirts,” Papaconstantinou said yesterday. IMF Managing Director Dominique Strauss-Kahn said the talks will be completed in time to meet the nation’s needs. Greece has 8.5 billion euros of bonds maturing on May 19.
Contagion Risk
Canadian Finance Minister Jim Flaherty, also in Washington for the spring meetings of the IMF and World Bank, said Group of 20 nations, including some in Europe, are worried the aid plan is “not enough” and want to ensure any rescue is a “one-time event.”
“The IMF has the capacity to lend more and we’ll eventually see the IMF give more,” Rogoff said.
IMF and European officials played down the risk that euro- area nations other than Greece will require outside aid. Strauss-Kahn said April 22 he doesn’t “see a need these days to focus on any other countries but Greece.”
European Central Bank Governing Council member Ewald Nowotny said in an April 24 interview that Spain and Portugal’s “numbers” are “not to be compared with those of Greece.” French counterpart Christian Noyer dismissed such speculation as “sport in the markets.”
‘Bogeyman’
Rogoff said the “basic game plan” of European policy makers is to hope their economic recoveries strengthen enough to enable governments to cut their debt. The IMF last week predicted the euro-area economy will expand 1 percent this year compared with 3.1 percent growth in the U.S.
“Recovery will mitigate the debt problems,” Rogoff said. “It’s very hard for Europe to get a sustained recovery.”
Governments call in the IMF when they need a “bogeyman” to act as a focus for voters’ anger when budget cuts are unavoidable, Rogoff said. Greek unions and opposition parties have already slammed Prime Minister George Papandreou’s appeal to the lender because it will likely result in tougher austerity measures.
Strauss-Kahn said April 24 that Greeks ‘shouldn’t fear the IMF” and that “we are there to try and help them.”
“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame,” Rogoff said.
To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net
Last Updated: April 26, 2010 05:50 EDT
Business ExchangeTw
BL: Oil Contango Soars as Oklahoma Brims With Crude: Energy Markets
By Grant Smith
April 26 (Bloomberg) -- Oil storage costs are soaring to the highest level in four months as tanks in Oklahoma brim with near-record crude inventories.
Oil for delivery in June cost $1.95 a barrel less than the July contract as of April 21, the biggest gap since Dec. 15 on the New York Mercantile Exchange. The premium for further-out delivery, or contango, mirrors the expense of stockpiling. It emerged after inventories jumped 5.8 percent in the week ended April 16 to 34.1 million barrels in Cushing, Oklahoma, where traders make deliveries for futures, government data show.
Inventories are near the record 35.7 million barrels on Jan. 1 as Canadian imports rise refineries shut for maintenance. Supplies are so plentiful that West Texas Intermediate, or WTI, oil costs less than Brent crude in Europe, a lower quality crude. Brent cost more than WTI three times in the past year.
“The problem is you cannot get a lot of crude out of the region, it’s landlocked,” said Lawrence Eagles, head of commodities research at JPMorgan Chase & Co. in New York. “It points to being a very local issue.”
New York crude oil for June delivery rose 22 cents to $85.34 a barrel today, $1.87 less than July. The June contract has traded in a range between $72 and $88 so far this year on the New York Mercantile Exchange.
While the oversupply weighs on the front-month contract for WTI, European benchmark Brent crude traded today near the highest price since Oct. 7, 2008 on London’s ICE Futures Europe exchange. Brent for June delivery increased as much as 0.6 percent to $87.75, and the contango against the July contract was at 72 cents.
About 16 million barrels of unused storage capacity remains around Cushing, Barclays Capital estimates. Should that site reach capacity, producers will need to halt operations because there will be no place to put it. A wider contango means traders can potentially earn more from storing crude, and in turn means tank terminal owners can charge them more for the service.
Gulf Coast Connection
Cushing was used to connect Gulf Coast companies with refiners in Chicago and the Midwest. Declining onshore production means the hub is now also being used to store additional barrels from Alberta, Canada, according to the Energy Department.
In other energy markets, gasoline prices last week reached their highest since October 2008 as refinery maintenance curbs production. Nymex gasoline dropped 0.1 percent to $2.352 a gallon today.
Refineries are running at 85.9 percent of capacity, below the 10-year average of about 88 percent for this time of year, according to the Energy Department.
The refinery restrictions are making existing operations more profitable. The gasoline crack spread, or the difference between fuel and crude oil based on June contracts, widened about 11 cents to $14.08 a barrel today. The June gasoline crack spread is up 26 percent in three months.
Handling Canadian Crude
Refiners in the Midwest have added equipment such as coking units to handle more Canadian crude, which is heavier and cheaper than WTI, according to BNP Paribas SA.
“In periods of weak refining activity, either due to maintenance or weak oil demand, you have greater chance for the more expensive, lighter crudes to back up in storage at Cushing,” said Harry Tchilinguirian, head of commodity derivatives research at BNP Paribas in London.
Total U.S. fuel demand, averaged over four weeks, fell 1.1 percent to 18.9 million barrels, the biggest decline since the week ended Jan. 8, the government reported April 21.
Storing at Sea
Vitol Group of Cos. is among companies that can profit from holding oil when the difference between near-term and future delivery exceeds the cost of storage. A record contango last year coupled with low freight rates made it possible for traders from Royal Dutch Shell Plc to BP Plc to store as many as 150 million barrels on ships anchored at sea.
Ed Morse, the head of commodities research at Credit Suisse Group AG, called WTI a poor indicator of global oil prices last year because of its link to stockpile levels in Oklahoma, rather than world supply and demand. In October, Saudi Arabia’s state oil company dropped WTI as its U.S. pricing benchmark in favor of another grade that is priced at the Gulf Coast.
The contango may unwind as U.S. refineries whittle down inventories at Cushing when they bolster operating rates to make gasoline in time for the peak summer driving season, David Greely, a New York-based commodity analyst at Goldman Sachs Group Inc., said in an April 20 report.
The bank, Wall Street’s biggest commodity broker, said growth in Cushing inventories is “likely temporary,” and recommended buying WTI and selling Brent contracts to profit when the difference between the two narrows.
To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net
Last Updated: April 26, 2010 07:16 EDT
BL: Bond Traders Declare Inflation Dead After Yields Fall
By Daniel Kruger
April 26 (Bloomberg) -- The bond vigilantes who punished governments for profligate spending in past years have gone into hiding.
Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data. The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren’t troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 percent in February from a year earlier in the 30 countries that form the Organization for Economic Cooperation and Development, the smallest gain on record.
“The fact that inflation is very well behaved, that provides the cover for central banks to remain on the sidelines and continue to pursue accommodative policies to help the economy,” said Thomas Girard, a senior money manager who helps oversee $115 billion in fixed-income assets with New York Life Investment Management in New York.
Ending Bearish Bets
Girard is no longer bearish on Treasuries, even though some of the world’s biggest investors, including Bill Gross, manager of the world’s biggest bond fund, say the best is over for bonds. Girard extended the duration of the U.S. Treasuries he oversees this month to match that of benchmark indexes from a so-called underweight position.
Steady yields are helping U.S. President Barack Obama, German Chancellor Angela Merkel, U.K. Prime Minister Gordon Brown and Japan Prime Minister Yukio Hatoyama finance deficits and spur their economies.
The U.S. paid $383.4 billion in interest on its debt in fiscal 2009 ended Sept. 30, down from $451.2 billion in the previous year, according to the Treasury Department. That represented 3.2 percent of gross domestic product, down from 4.6 percent a decade earlier, when Bill Clinton was president and the U.S. had a budget surplus.
Auction Demand
Demand for U.S. government bonds is increasing. On average, the Treasury received $3.21 in bids for each dollar sold at 10- year auctions this year, compared with $2.63 in 2009 and $2.41 from 2004 through 2008, according to data compiled by Bloomberg.
“Part of what’s frustrated bond vigilantes has been that economic data has ratified the notion of modest growth and continued declining inflation,” said Wan-Chong Kung, a money manager who helps oversee $89 billion at FAF Advisors in Minneapolis, the asset-management arm of U.S. Bancorp.
The term bond vigilantes was coined by economist Edward Yardeni in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds.
Economists at the securities unit of London-based Barclays Plc, Britain’s second-largest bank, forecast in an April 23 research report that inflation in developed nations will hold steady at an annual rate of 1.5 percent through the end of the year before slowing to 1.4 percent in mid-2011.
Bernanke’s ‘Moderation’
Federal Reserve Bank of Atlanta President Dennis Lockhart said in an April 15 speech that he is paying “serious attention” to disinflationary pressures. The “moderation in inflation has been broadly based,” Fed Chairman Ben S. Bernanke said a day earlier in testimony to Congress.
Consumer prices rose 1.4 percent in the 16-member euro region in March from a year earlier instead of a previously reported 1.5 percent, the European Union’s statistics office in Luxembourg said April 16. The report came a week after the Frankfurt-based European Central Bank kept its benchmark rate at a record low of 1 percent and President Jean-Claude Trichet forecast inflation will remain “moderate” through 2010.
Japan may say this week consumer prices excluding fresh food dropped for the 13th consecutive month in March, based on the median estimate of 20 economists surveyed by Bloomberg News. Traders see prices falling an average 0.9 percent annually for the next five years, yields on inflation-linked bonds show.
Expectations that yields will stay low for an extended period run counter to the outlook of Pacific Investment Management Co.’s Gross. The manager of the $219.7 billion Total Return Fund said a month ago that the bond market may have seen its best days.
‘Bear Element’
“Real interest rates are moving higher,” Gross said in a March 25 Bloomberg Radio interview from Pimco’s headquarters in Newport Beach, California. “That’s the main bear element in the bond market.”
Real yields, which take into account inflation or deflation, have increased to 1.46 percent on 10-year Treasuries from 1.03 percent at the end of last year. The mean over the past 20 years is 2.73 percent, Bloomberg data show.
The challenge facing policy makers is debt near postwar records, after governments spent trillions of dollars to revive their economies following the first global recession since World War II, the International Monetary Fund said April 21. The richest nations face growing pressure to draft plans to reduce budget deficits, while emerging economies try to fuel domestic demand and avoid asset bubbles, the Washington-based IMF said.
‘Downside Risks’
“Activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as fiscal fragilities have come to the fore,” the IMF said in the report.
Bond investors are focusing on those “fragilities.” Government debt as measured by Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index has returned 1.35 percent on average this year, compared with 0.9 percent in all of 2009.
“There’s a philosophical battle between those -- and I’m in this camp -- who feel the deflationary forces are very powerful, versus those who say ‘hey, you’re printing tons of money, you’ve got to have inflation,’” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $72 billion in fixed-income assets. “And they’re right, too. The big question is timing.”
Besides taxpayers, the biggest beneficiaries of low borrowing cost are companies. The average corporate bond yields 3.93 percent, down from 6.68 percent a year earlier, according to Bank of America Merrill Lynch Indexes. The drop represents annual interest savings of $27.5 million for every $1 billion borrowed by companies from Fairfield, Connecticut-based General Electric Co. to Roche Holding AG in Basel, Switzerland.
Diminished Supply
Sovereign bonds are also benefitting from diminished supply following the seizure in credit markets. While U.S. government debt outstanding has risen $1.444 trillion since 2008 to $7.68 trillion, private sector debt fell $1.86 trillion to $40.186 trillion, according to UBS Securities.
“There will be a limit to how much pure supply can push yields higher,” said David Rolley, who helps oversee $106 billion as co-head of global fixed-income in Boston at Loomis Sayles & Co. “There appear to be levels at which people are prepared to buy. For example, for the U.S. 10-year as we approach 4 percent buyers emerge.”
The benchmark 3.625 percent Treasury note February 2020 closed last week at 98 14/32 to yield 3.82 percent, down from 4.01 percent on April 5, according to BGCantor Market Data. The yield was 3.80 percent as of 6:10 a.m. in New York.
Bank Demand
Yields on Treasuries average 2.41 percent, down from last year’s high of 2.75 percent in June, Bank of America Merrill Lynch indexes show. Ten-year yields will fall to 3 percent by year-end, said Sungjin Park, head of fixed income at Samsung Investment Trust Management in Seoul, South Korea’s largest private investor, with $60 billion in debt assets.
“Currently, the main mission of the Fed is not about inflation,” Park said. “It’s the recovery of the U.S. economy. Low yields help the Fed spur growth.”
German bunds yield 2.13 percent, down from last year’s high of 2.89 percent amid Greece’s worsening debt crisis.
Japan’s bonds yield 0.81 percent on average, compared with last year’s peak of 1.05 percent. Bank of Japan Deputy Governor Kiyohiko Nishimura said April 21 that the country’s recovery is beginning to stem deflation and the central bank should persist with its accommodative monetary policy.
“Some beams of light are starting to break through a thick cloud of deflation,” Nishimura said in a speech in Sendai, northern Japan. “The effects of the pickup in the economy since the spring of 2009 can be considered to spread over to prices only from now on.”
U.K. Gilts
Yields on U.K. gilts average 3.53 percent. While up from 3.21 percent a year ago, it’s down from 3.66 percent in July. The Office for National Statistics in London said last week that Britain had a budget deficit of 152.8 billion pounds ($234 billion) in the fiscal year ended March 31, an increase of 76 percent.
The Bank of England’s Monetary Policy Committee voted 9-0 to keep rates at a record low 0.5 percent because data in the previous month hadn’t changed enough to “substantially alter” its view of the economy, minutes of the April 8 meeting released April 21 in London showed.
“The size of the output gap in the U.K. is pretty substantial,” said Robin Marshall, who helps oversee $20 billion as director of fixed income at Smith & Williamson Asset Management in London. “There is a still huge amount of unused capacity bearing down on inflation here, and indeed elsewhere in most major markets.”
To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.
Last Updated: April 26, 2010 06:14 EDT
BL: U.S. Stocks Cheapest Since 1990 on Analyst Estimates
By Lynn Thomasson, Whitney Kisling and Rita Nazareth
April 26 (Bloomberg) -- Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.
Earnings estimates for Standard & Poor’s 500 Index companies from Apple Inc. to Intel Corp. and CSX Corp. climbed 9.1 percent on average in April, twice the gain in their prices and the largest monthly increase since at least 2006, data compiled by Bloomberg show. The benchmark gauge for American equities is trading at 14.2 times forecasts for its companies’ profits, lower than any time since 1990, except for the six months after Lehman Brothers Holdings Inc. collapsed.
Income is beating analysts’ estimates by 22 percent in the first quarter, making investors even more bullish that the rally will continue after the index climbed 80 percent since March 2009. While bears say the economy’s recovery is too weak for earnings to keep up the momentum, Fisher Investments and BlackRock Inc. are snapping up companies whose results are most tied to economic expansion.
“The stock market is incredibly inexpensive,” said Kevin Rendino, who manages $11 billion in Plainsboro, New Jersey, for BlackRock, the world’s largest asset manager. “I don’t know how the bears can argue against how well corporations are doing.”
S&P 500 companies may earn $85.96 a share in the next year, according to data from equity analysts compiled by Bloomberg. That compares with the index’s record combined profits of $89.93 a share from the prior 12 months in September 2007, when the S&P 500 was 19 percent higher than today.
Record Pace
The earnings upgrades come as income beats Wall Street estimates at the fastest rate ever for the third time in four quarters. More than 80 percent of the 173 companies in the S&P 500 that reported results have topped estimates, compared with 79.5 percent in the third quarter and 72.3 percent in the three- month period before that, Bloomberg data show.
Futures on the S&P 500 rose 0.1 percent to 1,214 as of 5:22 a.m. in New York. The gauge increased 2.1 percent last week to 1,217.28 as new-home sales surged the most since 1963, recovering from the April 16 rout when the Securities and Exchange Commission said it was suing New York-based Goldman Sachs Group Inc. for fraud. The index is up 9.2 percent for 2010, the largest gain in the world’s 15 biggest equity markets, Bloomberg data show.
While analysts are raising estimates, they’re not boosting investment ratings. Companies ranked “buy” make up 30 percent of all U.S. equities, the data show. That compares with 45 percent in September 2007, a month before the S&P 500 reached its record high of 1,565.15 and began a 17-month plunge that erased $11 trillion from the value U.S. shares.
Easier to Adjust
“It’s been easier for analysts to adjust their earnings estimates than to aggressively put forth strong ‘buy’ recommendations,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. “It may be a reflection of concern about the resilience of earnings in 2011 and beyond.”
Companies are losing the benefit of a weaker dollar after the currency appreciated 9.5 percent since November against a basket of six trading partners, according to the Dollar Index from Atlanta-based IntercontinentalExchange Inc. A rising currency cuts demand for American exports and reduces overseas revenue when converted back to dollars.
Abercrombie & Fitch Co., the New Albany, Ohio-based teen retailer, warned the rally may weaken its profitability, according to a March 10 conference call. Westport, Connecticut- based Terex Corp., the world’s third-biggest maker of construction equipment, said in an April 21 earnings release that currency swings may reduce revenue. Terex got 75 percent of 2009 sales outside the U.S., Bloomberg data show.
Alternate Valuation
David Rosenberg, chief economist of Gluskin Sheff & Associates Inc., says U.S. stocks are poised for losses because they’ve become too expensive. The S&P 500 is valued at 22.1 times annual earnings from the past 10 years, according to inflation-adjusted data since 1871 tracked by Yale University Professor Robert Shiller.
Economic growth will slow and stocks retreat as governments around the world reduce spending after supporting their economies through the worst recession since the 1930s, said Komal Sri-Kumar, who helps manage more than $100 billion as chief global strategist at TCW Group Inc. The U.S. budget shortfall may reach $1.6 trillion in the fiscal year ending Sept. 30, according to figures from the Washington-based Treasury Department.
“The correction is going to come,” Sri-Kumar said in an interview with Bloomberg Television in New York on April 21. “You now have a debt bubble growing in the sovereign side, and we’re slow to recognize how negative that could be.”
Deficit Spending
The European Union deficit tripled to 6.3 percent of gross domestic product last year, from 2 percent in 2008, the EU’s Luxembourg-based statistics office said on April 22. Moody’s Investors Service cut Greece’s credit rating the same day on concern its debt load will be higher and more costly than previously estimated, spurring a drop of 1.1 percent in the Stoxx Europe 600 Index.
The S&P 500 posted a 0.2 percent gain that day after initially falling 1.3 percent, helped by an advance in PNC Financial Services Group Inc. The fifth-largest U.S. bank by deposits said profit rose 28 percent on higher net interest income and less reserves for bad loans.
PNC, based in Pittsburgh, is one of 38 financial services companies in the S&P 500 reporting an average first-quarter earnings increase of 175 percent after banks and brokerages racked up $1.78 trillion of losses and writedowns linked to the collapse of the U.S. subprime mortgage market.
Mobile Devices
Intel, the world’s biggest semiconductor maker, spurred the S&P 500’s biggest rally in a month after reporting earnings on April 13 that topped Wall Street estimates and predicted data centers and the shift to mobile devices will drive growth. The results prompted at least 20 of the 31 firms covering the Santa Clara, California-based company to raise their 2010 forecasts.
Analysts lifted the average 2010 prediction by 10 percent to $1.88 a share, Bloomberg data show. Intel trades at 12.8 times projected annual income, about half the average using trailing profits since 1991. The shares are up 18 percent in 2010, the Dow Jones Industrial Average’s eighth-biggest gain.
Information-technology spending will climb 1.7 percent in 2010, after dropping 3.1 percent last year, according to Morgan Stanley. Personal-computer shipments rose 27 percent last quarter, according to Gartner Inc. The PC market bounced back from a year earlier, when the recession dragged down shipments almost 7 percent -- the worst performance since 2001, according to market research firm IDC.
Concerns Are Past
“We’re in a time period where the concerns we had in 2007 and 2008 have been taken care of or are past,” Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California, said in a April 20 Bloomberg Television interview. “If you’re waiting for a market pullback or individual stock pullbacks, you could be waiting a long time.”
CSX, the third-largest U.S. railroad, rallied the most in two months on April 14 after saying it hauled more goods and charged more for each carload. Analysts say the Jacksonville, Florida-based company will earn $3.48 a share in 2010, a 6.2 percent increase since the firm released quarterly results.
Profit estimates for energy producers and industrial companies have climbed more than 10 percent in the past month, the most among the 10 largest groups in the S&P 500, data compiled by Bloomberg show. Gross domestic product in the U.S. is forecast to increase 3 percent this year and 2.95 percent in 2011 after contracting 2.4 percent last year, according to the median estimates of 64 economists surveyed by Bloomberg.
Apple Earnings
Apple’s profit almost doubled last quarter as consumers snapped up iPhones and Macintosh personal computers, the Cupertino, California-based company said on April 20. The results sent its stock up 9.5 percent to an all-time high of $270.83 last week and boosted projections for annual income by 7.7 percent to $13 a share.
Apple, the third-biggest company in the U.S., with a market value of $246.4 billion, is 30 percent cheaper than the average of the past five years with a multiple of 20.8 times estimated 2010 profit, Bloomberg data show.
U.S. retail sales increased 1.6 percent in March, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department issued April 14 in Washington. Consumer spending and manufacturing helped the economy expand across most of the U.S. in March, according to the Federal Reserve’s Beige Book of regional economic activity issued April 14.
The S&P 500 rallied 92 percent in the five years after reaching a valuation in November 1990 of 14.1 times profit, about the multiple indicated by earnings forecasts for next year, according to Bloomberg data. The index last traded that cheaply in June 2009, near the start of the biggest rally in seven decades and nine months after New York-based Lehman filed the world’s biggest bankruptcy.
“The earnings story is very supportive of the market even after the rally over the last year,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion in client assets from San Francisco. “The recovery is real, it’s V-shaped and it’s got legs.”
To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
Last Updated: April 26, 2010 05:27 EDT
BL: Dollar Strength Grows as Carry Trade Profits Evaporate Without High Rates
By Liz Capo McCormick
April 26 (Bloomberg) -- Foreign-exchange profits from carry trades are disappearing as differences in central bank interest rates fail to increase fast enough to compensate for swings in currency rates.
Royal Bank of Scotland Plc’s index tracking the strategy of tapping cash where borrowing costs are low and investing where rates are higher, rose 0.57 percent in the first quarter, the smallest amount in a year, and down from 9.8 percent in all of 2009. Morgan Stanley strategists said in an April 15 research report that the only “functionally attractive” currency to target in carry trades is Australia’s dollar.
Falling demand for carry trades may help the dollar -- a favorite for funding the trades because of record low U.S. rates -- extend a rally that drove it 11 percent higher versus the euro the past six months. Gains of almost 30 percent in Brazil’s real, New Zealand’s dollar and South Africa’s rand the past 12 months suggest they already reflect the prospect of higher rates as central bankers begin to shift monetary policy.
“There is no easy money left in the carry trade,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $45 billion in currency assets.
“Most of the high-yielding currencies are overvalued and the low-yielders are undervalued,” he said. “The gains you can make on the interest-rate differentials are not going to make you 20 percent a year, it’s probably only going to make you about 2 or 3 percent.”
Central Bank Rates
The dollar rose to the highest in almost three weeks versus the yen today after reports last week showed orders for U.S. durable goods excluding transportation items surged 2.8 percent in March and sales of new homes jumped 26.9 percent, the most in five decades. The greenback strengthened 0.2 percent to 94.24 yen and gained 0.1 percent to $1.3370 per euro.
Measured by Bloomberg Correlation-Weighted Currency indexes, the dollar has gained 1.7 percent this year.
A stronger currency is important to the U.S. because it entices foreign investors to Treasury debt that finances the nation’s record budget deficit. The downside is that it may restrain profit growth at companies with international sales by making U.S. exports more expensive.
Euro Predictions
United Technologies Corp., the Hartford-based maker of Pratt & Whitney jet engines and Black Hawk helicopters, and Providence, Rhode Island-based Textron Inc., which produces Cessna planes, predicted the euro would trade at $1.41 or higher this year.
“The global convergence in yields has basically sidelined the demand for carry,” said Mike Moran, a New York-based senior currency strategist at Standard Chartered Plc. “What has happened over the last 18 months has really leveled the playing field in carry trades. It has driven a convergence in the two most important factors in the carry trade, yields and volatility.”
Carry trades, which flourish most when interest-rate spreads are wide and swings in exchange rates muted, lost 31.5 percent in 2008 as the global financial crisis led to a compression of central bank borrowing costs, before rebounding last year, RBS index data shows.
Coordinated Effort
The Federal Reserve, European Central Bank and four other central banks lowered rates in October 2008 in an unprecedented coordinated effort to ease the effects of the worst financial crisis since the Great Depression.
Central bankers are now preparing rate increases as the global economy recovers. The Reserve Bank of Australia boosted its overnight cash rate to 4.25 percent this month from 3 percent in October. New Zealand’s benchmark rate is 2.5 percent, compared with 0.1 percent in Japan and a range of zero to 0.25 percent in the U.S.
In January 2007, rates were 0.25 percent in Japan, 5.25 percent in the U.S., 6.25 percent in Australia and 7.25 percent in New Zealand.
Investors who took advantage of global rate differentials averaged annual returns of 16 percent from 2000 to 2005, according to the RBS index. The best gains of the decade were in 2002, when the strategy returned 29.3 percent.
At 10.1 percent, three-month implied option volatility for emerging economies is about one percentage point less than for currencies of major industrialized nations, a JPMorgan Chase & Co. index show. In October 2008, emerging volatility was 13 percentage points more.
‘Not Very Attractive’
Higher volatility reduces the allure of carry trades by increasing the probability that swings in exchange rates will erode gains. The JPMorgan option index measuring swings in industrialized nation currencies averaged 7.7 percent in the two years before the subprime-mortgage market collapsed in August 2007.
“The carry trade is not very attractive now, broadly speaking,” said Ronald Leven, a senior currency strategist at Morgan Stanley in New York. “There also is some shifting away from the dollar as a funding currency.”
Leven forecasts the dollar will appreciate to 109 yen and $1.24 per euro by December. Federal fund futures traded on CME Group Inc.’s Chicago Mercantile Exchange show traders place a 56 percent chance the U.S. central bank will lift its target for overnight loans between banks by November.
Greece, Portugal
The dollar has benefitted at the expense of the euro, which has been plagued by concern about the ability of Greece and other European countries such as Portugal and Spain to meet their debt obligations.
Greece asked the European Union and International Monetary Fund on April 23 to activate a lifeline of as much as 45 billion euros ($60.2 billion) in an unprecedented test of the euro’s stability and European political cohesion.
“The alleviating of financing stress in Europe should reduce the risk aversion bid for the dollar that emerged last December and lead markets to return to dollar funding of carry and risk trades,” strategists at Zurich-based Credit Suisse Group AG wrote in an April 13 report.
The company forecast the dollar will weaken to $1.43 per euro and to 92 yen in three months.
The Aussie gained 28 percent against the U.S. dollar and 24 percent versus the Japanese yen in the past 12 months as the RBA began raising rates in October.
Bank of Canada
The Bank of Canada signaled last week it may be the first Group of Seven nation to boost borrowing costs. India raised rates for the second time in a month last week and Sweden’s Riksbank reiterated a forecast to boost its seven-day repurchase rate by the end of the third quarter.
“Regardless of when exactly the Fed raises rates, there is already a waterfall going on in movements of U.S. rates above those in other nations,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. Investors “have been paid for being short the U.S. dollar, but that incentive structure is changing,” he said.
The cost of borrowing in yen for three months between banks fell below the dollar rate on March 4 for the first time since August, lessening the appeal of the greenback as a funding currency.
The London interbank offered rate, or Libor, for three- month yen loans was 8.375 basis points less than the dollar rate last week, the most since July. The dollar rate moved below its yen counterpart last year for the first time.
“Ten years ago it was basically the carry trade as a free lunch,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with $131.6 billion in assets. “If we are in an environment where risk appetite remains subdued, and questions remain about what will happen with economies and central banks going forward, and if the fiscal crisis we are now seeing will broaden, then this is not the ideal environment for carry.”
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.
Last Updated: April 26, 2010 00:35 EDT
GM! Commodities, Stocks Gain as Profits Improve; Euro Weakens on Greek Concern
By David Merritt
April 26 (Bloomberg) -- Stocks rallied and commodities rose as corporate earnings improved, while the euro fell and yields on the bonds of Europe’s most indebted nations climbed. Greek bonds’ premium to German debt soared to a record.
The MSCI World Index of 23 developed nations’ stocks advanced 0.4 percent at 10:32 a.m. in London as the MSCI Emerging Markets Index added 1.1 percent. Futures on the Standard & Poor’s 500 Index increased 0.1 percent. Copper jumped as much as 1.5 percent and palladium rallied to its highest since March 2008. The euro slid against its 16 most-traded counterparts. The yield premium investors demand to hold Portuguese bonds climbed 13 basis points to a record. Greece’s rose 76 basis points.
Even after the biggest rally since the 1930s, the S&P 500 is trading at 14.2 times forecasts for corporate profits, lower than any time since 1990, excluding the six months after Lehman Brothers Holdings Inc. collapsed, data compiled by Bloomberg show. Greece, with 8.5 billion euros ($11.3 billion) of bonds maturing May 16, neared an emergency aid package as investors said any delay may trigger another sell-off in its assets.
“It’s a back-and-forth between the strong economic recovery and concerns that could derail it, but the positive forces are stronger,” said Rudolf Buxtorf, who helps manage about $500 million at RBS Coutts Bank in Zurich. “There are no alternatives to equities. We have strong cyclical forces and liquidity is still there.”
European Stocks
The Stoxx Europe 600 Index rallied 1.1 percent as shares of raw-materials producers and banks advanced. BHP Billiton Ltd., the world’s largest mining company, rose 1.1 percent in London. Julius Baer Group Ltd., the 120-year-old Swiss private bank, climbed 3.3 percent in Zurich after Deutsche Bank AG advised buying the shares. TomTom NV soared 7 percent in Amsterdam after Europe’s biggest maker of portable navigation devices reported an unexpected profit.
The MSCI Asia Pacific Index climbed 1.6 percent, its biggest gain in more than five weeks. Toyota, the world’s largest carmaker, jumped 3.4 percent in Tokyo after the Nikkei newspaper said the company had an annual operating profit instead of the loss the company forecast. Taiwan Semiconductor Manufacturing Co. climbed 2.9 percent in Taipei.
The gain in U.S. futures indicated the S&P 500 may extend its 0.7 percent rally on April 23, when it closed at the highest level since September 2008 and erased losses spurred by the government’s fraud lawsuit against Goldman Sachs Group Inc. on April 16.
Corporate Earnings
Earnings estimates for S&P 500 companies climbed 9.1 percent on average in April, twice the gain in their prices and the largest monthly increase since at least 2006, data compiled by Bloomberg show. About 84 percent of companies on the benchmark gauge that have reported first-quarter earnings have topped estimates.
Polish stocks led gains in emerging markets as the benchmark WIG 20 Index jumped 2 percent, the most in three weeks, while the Budapest Stock Exchange Index rallied 1.9 percent after Hungarian voters returned Fidesz leader Viktor Orban to power with 263 seats in the 386-strong parliament. Russia’s RTS Index advanced 1.5 percent as Credit Suisse Group AG raised the country’s equities to 5 percent “overweight” from 5 percent “underweight,” citing a potential 10 percent appreciation to the RTS Index by year-end.
Greek Stocks
Greek stocks and bonds tumbled on concern a euro-region bailout for the country may not be enough to prevent a default and might even be replicated in other indebted nations. The ASE Index dropped 1.7 percent and the yield on Greece’s benchmark two-year note jumped more than 100 basis points to 12.06 percent. Credit-default swaps on Greek government debt rose 4.5 basis points to 619, according to CMA DataVision prices. That means it costs $619,000 annually to insure against default on $10 million of bonds for five years. The contracts are down from a peak closing price of 639 basis points April 22.
The euro slipped 1 percent compared with the pound, 0.4 percent versus the dollar, 0.3 percent against the yen. The pound advanced against 15 of its 16 biggest peers as a report showed U.K. house prices rose for a ninth month.
Copper for three-month delivery on the London Metal Exchange advanced as much as 1.5 percent to $7,865 a metric ton, the highest level since April 16. Palladium, used in autocatalysts and jewelry, rose as high as $572.70 an ounce in London intraday trading. Oil was little changed near $85 a barrel in New York.
To contact the reporter on this story: David Merritt in London on dmerritt1@bloomberg.net
Last Updated: April 26, 2010 05:40 EDT