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BL: Sales of New U.S. Homes Dropped to Lowest on Record (Update2)
By Bob Willis
March 24 (Bloomberg) -- Sales of new homes in the U.S. unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.
Purchases decreased 2.2 percent to an annual pace of 308.000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.
The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6 percent this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.
“Americans remain downbeat on the housing market,” said David Semmens, an economist at Standard Chartered Bank in New York, who forecast a 300,000 sales pace. “We expect the continuation of poor sales to lead to a resumption of downward price pressure.”
Sales were projected to climb to a 315,000 annual pace, according to the median estimate in a Bloomberg survey of 78 economists. Forecasts ranged from 275,000 to 343,000. The Commerce Department revised data to show a January sales pace of 315,000, up from the previously estimated 309,000. Records go back to 1963.
Regional Breakdown
The report showed purchases dropped in three of four U.S. regions last month, those most likely to have been influenced by the winter storms. Purchases fell 20 percent in the Northeast, 18 percent in the Midwest and 4.6 percent in the South, which includes the Washington area.
Demand climbed 21 percent in the West, pushing the year- over-year increase in that region up to 35 percent, the biggest 12-month jump since March 2004.
Another Commerce Department report showed orders for long- lasting goods rose in February for a third month, while inventories and backlogs climbed by the most in more than a year, indicating the manufacturing rebound will keep propelling the recovery.
The 0.5 percent increase in bookings for durable goods was in line with the median forecast of economists surveyed by Bloomberg News and followed a 3.9 percent gain the prior month. Excluding transportation equipment, orders advanced 0.9 percent, more than anticipated.
Shares Fall
Stocks fell on growing concern government deficits will hurt the global economic recovery. The Standard & Poor’s 500 Index decreased 0.3 percent to 1,171.18 at 10:28 a.m. in New York. Treasury securities also dropped, sending the yield on the benchmark 10-year note up to 3.75 percent from 3.69 percent late yesterday.
The report on home sales showed purchases dropped in three of four U.S. regions last month, those most likely to have been influenced by the winter storms. Purchases fell 20 percent in the Northeast, 18 percent in the Midwest and 4.6 percent in the South, which includes the Washington area.
Demand climbed 21 percent in the West, pushing the year- over-year increase in that region up to 35 percent, the biggest 12-month jump since March 2004.
The median price of a new home in the U.S. increased 5.2 percent to $220,500 in February from a year earlier. The advance was the largest since September 2007.
More Supply
The supply of homes at the current sales rate increased to 9.2 months’ worth, the highest since May, from 8.9 months in January.
Housing, the industry that triggered the worst recession in seven decades as the subprime mortgage market collapsed, showed signs of recovering in 2009 as an $8,000 first-time buyer tax credit boosted sales ahead of its originally scheduled expiration in November.
Extension of the credit for contracts signed by April and its expansion to include some current homeowners has failed to boost sales in recent months.
New-home purchases are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier.
Sales of existing homes fell 0.6 percent in February to a 5.02 million rate, the lowest since June, and the inventory of unsold homes rose to its highest level in almost two years, the National Association of Realtors reported yesterday in Washington.
Prices, Foreclosures
Prices for existing home have dropped, due in part to foreclosures, which RealtyTrac Inc. forecasts will reach a record 3 million this year. Such sales draw buyers away from the market for new houses.
A lack of jobs is another hurdle to a housing recovery. Economists surveyed by Bloomberg in early March forecast the jobless rate this year will average 9.6 percent, near the 26- year high of 10.1 percent reached in October.
The end of Fed purchases of mortgage-backed securities, aimed at keeping borrowing costs low, represents another challenge for the industry. The program is scheduled to expire at the end of this month.
“Promoting and maintaining stability in the housing market is critical to achieving economic recovery and sustainable long- term growth,” Geithner said in testimony before Congress yesterday. The administration will develop a “comprehensive reform proposal” beginning later this year, he said.
To contact the report on this story: Bob Willis in Washington at bwillis@bloomberg.net
Last Updated: March 24, 2010 10:29 EDT
fyi: TBT +2.92%, $48.41, ultrashort US treasuries, fwiw
BL: Health Care Suits by States ’Unlikely to Succeed,’ Scholars Say
Health-Care Legislation Judged Able to Withstand Constitutional Challenge
By William McQuillen and Andrew Harris
March 24 (Bloomberg) -- Lawsuits by 14 states seeking to scuttle health-care legislation signed by President Barack Obama were given little chance of success in the face of the broad powers granted Congress by the U.S. Constitution, scholars said.
Thirteen states led by Florida said the law signed yesterday illegally places a fiscal burden on their cash- strapped budgets with an expansion of state-run Medicaid. Virginia filed a separate suit contending the “individual mandate” requiring people to buy health insurance exceeds Congress’s powers.
“It’s unlikely to succeed,” said Jack Balkin, a professor at Yale Law School in New Haven, Connecticut, of the effort by the states, equating the new law to Congress’s power to levy taxes. “Congress has the ability to force people to pay taxes. If it is a constitutional tax, then that is the ballgame.”
The $940 billion health care overhaul subsidizes coverage for uninsured Americans, and is financed by Medicare cuts to hospitals and fees or taxes on insurers, drugmakers, medical- device companies and Americans earning more than $200,000 a year. Many of the changes enacted by the bill, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect.
The 13 states joining in the lawsuit filed in federal court in Pensacola, Florida, claim that “the act represents an unprecedented encroachment on the liberty of individuals living in the plaintiffs’ respective states, by mandating that all citizens and legal residents of the United States have qualifying health care coverage or pay a tax penalty.”
13 States
Joining Florida in the suit are Alabama, Colorado, Idaho, Louisiana, Michigan, Nebraska, Pennsylvania, South Carolina, South Dakota, Texas, Utah and Washington. Along with a separate suit by Virginia filed in federal court in Richmond, the states asked the courts to declare the law unconstitutional and seek to bar its enforcement.
The complaints were filed moments after Obama, a Democrat, signed the legislation, which totals more than 2,400 pages.
“This is a continuation of politics by a national political faction that lost in Congress,” said Aziz Huq, a University of Chicago law professor, who predicted the lawsuits will likely fail.
Twelve of the state attorneys general participating in the Florida case are Republicans. Buddy Caldwell of Louisiana is the lone Democrat. Virginia’s lawsuit was filed by Ken Cuccinelli, a Republican.
The health-care overhaul will allow 16 million more Americans to qualify for Medicaid coverage, according to an estimate by the nonpartisan Congressional Budget Office. It will cost the states billions of dollars to administer, according to the states that sued.
‘Ruin the State’
Florida Attorney General Bill McCollum said at a press conference yesterday that the act’s legislative mandates will cost his state billions of dollars. The legislation “will ruin the state financially,” said McCollum, who predicted the lawsuits would end up before the U.S. Supreme Court.
The states claim the legislation will deprive them of sovereignty and violates the Constitution’s Tenth Amendment, which says powers not granted to the national government are reserved to the states, or the people. In its lawsuit, Virginia specifically attacked the new law’s requirement that Americans obtain health coverage, calling it unconstitutional. Charles Fried, a professor at Harvard Law School in Cambridge, Massachusetts, disagreed.
‘What Virginia Says’
“As long as the federal law is independently constitutional, it doesn’t matter what Virginia says,” said Fried, who served as solicitor general, the government’s chief lawyer before the U.S. Supreme Court, during the administration of President Ronald Reagan. “It’s like Virginia saying we don’t have to pay income tax.”
The Florida lawsuit claims the reform contains “unfunded mandates” and is too financially burdensome at a time when states already need to cut their budgets. The attorneys general also said the law imposes an illegal tax on people “for their failure or refusal to do anything other than to exist and reside in the United States.”
Balkin said throwing out the health care law may require overturning decades of court precedent leading back to the “New Deal” legislation of President Franklin Roosevelt.
Robert Kaufman, a public policy professor at Pepperdine University in Malibu, California, who calls himself a “fervent opponent” of the new health law, said chances are slim that litigation by the states will reverse it.
The Issue
“The issue is whether this is constitutional, not whether this is wise,” said Kaufman, who is also an attorney. U.S. Supreme Court decisions since Roosevelt have tended to support a broad reading of the Constitution in allowing the federal government to regulate interstate commerce, Kaufman said.
The Supreme Court in 2005 cited the Constitution’s Commerce Clause in upholding a federal ban on marijuana, showing the reach of that provision in the face of state laws allowing its use for medical reasons, said Peter Edelman, a constitutional law professor at the Georgetown University in Washington.
“Bottom line, I don’t think there is any substance to any of the arguments,” said Edelman, who was an assistant secretary at the U.S. Department of Health and Human Services during the administration of President Bill Clinton. “But you always have to put a small asterisk, given the current membership of the court.”
The cases are State of Florida v. U.S. Department of Health and Human Services, 10-cv-00091, U.S. District Court for the Northern District of Florida (Pensacola); Commonwealth of Virginia v. Sebelius, 10cv00188, U.S. District Court for the Eastern District of Virginia (Richmond).
To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net and; Andrew Harris in Chicago at aharris16@bloomberg.net.
Last Updated: March 24, 2010 00:01 EDT
CAT: Why You Need to Own Caterpillar Shares
Avondale Partners initiated coverage at Market Outperform.
TUESDAY, MARCH 23, 2010
WE ARE INITIATING COVERAGE on Caterpillar (ticker: CAT) with a Market Outperform rating and a 12-month price target of $70 (18% upside and 21% total return) with potential to $85 over the next two years as shares discount midcycle valuation on our 2012 earnings per share (about 50% total return).
We view Caterpillar as "need to own" among higher-beta [higher risk], large-cap U.S. industrials given its strong commodity leverage, emerging-markets exposure, and operating leverage. Though we see near-term potential for shares to remain range-bound by macro uncertainty, we expect Caterpillar to outperform on improved confidence over the global economic recovery (particularly sustainability of emerging-market growth) and visibility on bottom-line benefits of self-help initiatives.
While our 2010/2011E [estimated] EPS are about 5% below consensus [estimate], we note: (1) our 2010 EPS equal in line with guidance; (2) 2010/2011 estimated earnings before interest, taxes, depreciation and amortization (Ebitda) is in line with consensus; (3) 2012 estimated EPS -- what we think matters most -- is up 7%; and (4) we believe buy-side expectations are closer to ours.
Caterpillar is highly leveraged to global commodity demand growth with an estimated 40% of 2009 equipment revenues and 60%-plus of profits derived from energy, base metal, and other commodities central to the urbanization, industrialization and modernization of emerging markets (and growth of developed markets). We hold a bullish outlook for these commodities based on futures pricing, consensus economic forecasts, and our bottoms-up producer capital-spending analysis for key end markets.
Caterpillar's rising exposure to faster-growing regions should remain a key driver of strong longer-term growth. In the last 10 years, Asia/Pacific has grown from 10% of equipment revenue to 23% (14.2% compounded annualized growth rate (CAGR) versus 3.1%, excluding Asia/Pacific) while emerging markets -- China, Commonwealth of Independent States [former Soviet states], India/Asean [Southeast Asian Nations] -- grew from 8% in 2005 to 15% in 2008 (37% CAGR versus 10%, excluding emerging markets) with China and CIS growing at 53%/56%, respectively. We estimate emerging-markets exposure nearing 20% of 2009 revenue.
Caterpillar has multiple initiatives under way to improve full-cycle profitability/returns by converting cyclical cost reductions to structural savings and raise asset efficiency. While success requires improved volumes, we are optimistic given actions to-date and the track record of Caterpillar's CEO-elect, as reflected in our above historical average incremental margin expectations.
Our estimates imply 2010-2012 EPS growth of 16%/52%/49% versus consensus of 24%/49%/32%, and equate to a three-year CAGR of 38% versus 33% for the peer group and 21% for core U.S. industrials. Over the next two years, our estimates imply average growth of 33% versus 21% for Standard & Poor's 500, with midcycle EPS profitability reached in 2012. We see revision bias skewed to the upside, based primarily on potential for better cost/efficiency performance, volumes and stock buyback.
-- Ted Grace
The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Share prices at the time the report was issued and the date of the report are in parentheses.
To be considered for this feature, please send material to Research@barrons.com
Comments? E-mail us at online.editors@barrons.com
WAG: More Green in Store for Walgreen
By TERESA RIVAS | MORE ARTICLES BY AUTHOR(S)
Walgreen's second-quarter results suggest the drug chain has the right prescription for continued success.
HAS WALGREEN (ticker: WAG) hit a wall? We don't think so.
Before Tuesday's opening bell, America's largest drugstore chain reported fiscal second-quarter results that missed estimates. The company said it earned 68 cents a share on revenue of nearly $17 billion, ahead of the year-ago period, but shy of analysts' expectations of 71 cents and $17.2 billion.
Although same-store sales fell slightly, Walgreen was optimistic about future trends, saying that new store openings would rise 4.5% to 5% in 2010, and continue to grow at a 2.5% to 3% annual rate afterward.
Despite the miss, Walgreen's stock gained 1.2% to a recent $35.75. Though it's not often that a company is rewarded for missing numerous key benchmarks in a quarter, the Street has the right idea about the stock, and we think it should climb further.
The stock trades at a cheap 13.3 times forward earnings. That's slightly ahead of its main rival CVS Caremark (CVS), which Barrons.com has recommended in the past. (See Barron's Take, "Impressed by CVS," Feb. 8, 2010.)
Still, at 1.6%, Walgreen's yield is slightly higher, and its long-term-growth rate of 14.5% just edges out CVS' 14%. So the two are nearly evenly matched, but there should be room for both to grow.
As Barron's magazine wrote in February, given Walgreen's opportunities, the shares could well rally more than 40%, to as high as $50 in the next year, given its Duane Reade acquisition and positive underlying fundamentals, including expanding margins. (See Barron's, "Walgreen Finds the Right Remedy for Tough Times," Feb. 22, 2010.)
Walgreen's latest earnings only reinforce the bullish hypothesis. Of course, it would have been better for the company to deliver a better-than-expected quarter, but that's not to say that the company isn't showing strength.
Gross margin rose to 28.8% from 28.3%, a trend that should continue as capital outlays decline. William Blair analyst Mark Miller wrote in a note earlier this month that the company is already on track to save $250 million with its Power (pharmacy and prescription) program, which has shown success in Florida and will likely be expanded to other states in the near future. Given that discretionary purchases remain depressed, such continued cost-savings should not only pad margins but also enhance results when the recovery is further along.
The company's optimism about same-store-sales growth doesn't look misplaced either. Lackluster discretionary purchases are currently an industry-wide phenomenon, and the early panic over swine flu, which boosted the fiscal first quarter, largely subsided in the second quarter. Core prescriptions and prescription sales saw growth. Redesigned test stores have been showing same-store-sales improvements, and Walgreen expects to have a full 40% of its stores refurbished before 2010 ends.
The Duane Reade acquisition should also contribute to robust same-store-sales growth. As Thomas Weisel Partners analyst Steven Halper noted, "Duane Reade currently generates the highest sales per square foot of any company in the retail drugstore industry."
That's not to say that the rest of 2010 will be easy. Earnings per share are expected to dip in the coming quarters as Walgreen integrates Duane Reade and finishes its restructuring. But earnings, revenue and profit for 2010 are on trend to grow nicely year-over-year through 2012.
So Walgreen will likely continue to deliver healthy returns for some time.
Good morning!
Barrons: Traders Rue the Passage of 'Obamacare', buying PUTS against a crash
By STEVEN M. SEARS |
The Striking Price | TUESDAY, MARCH 23, 2010
Defensive options trading has jumped as some investors gird for higher taxes and more Democratic Party success.
WHEN HISTORIANS WRITE about Congress' passage of a national health-care plan, perhaps a scribe or two will quote Jerry Della Femina, a fixture in the wealthy beach town of East Hampton, N.Y., as a spokesman for Wall Street.
The legendary advertising executive declared in Tuesday's New York Post's Page Six gossip column that he is selling his oceanfront mansion "before President Obama decides to redistribute any more of my wealth."
He thinks his house is worth $40 million, and noted that he turned down a $32 million offer six years ago.
Like Della Femina, many of the financial market's most sophisticated traders are agitated by the health-care plan. This is reflected by a sudden, and surprising, increase in investors buying defensive put options in anticipation of another stock-market crash.
Such trading may seem reactionary and a bit over the top. After all, the stock market has been recovering quite nicely in recent days amid expectations of an improved economy.
But Della Femina's diatribe crystallizes the fears and frustrations of many people. "The guy with the $40 million crib," as one trader referred to him, became the everyman rich man in an ongoing conversation of how President Obama is out to get the wealthy.
"I'm not one of these $40 million-a-year guys that can hide money in Lichtenstein," the head of options trading at a major international bank barked into the phone. "All you can do is just shrug your shoulders because either things get cheaper or you ask for more money."
This trader then started reviewing state and federal taxes paid on part of his 2009 pay package. The federal government clipped him for about 35%, New York State took 11%, and Medicare grabbed another 1.5% or so.
"This check was north of a million dollars, and I gave the government over $600,000 -- that's a lot of money" he said.
Indeed, the emerging view on Wall Street seems to be that "Obamacare," as they commonly refer to it, is another federal monstrosity that is more difficult to evaluate than the plan that rescued the financial system from collapse.
And so in the absence of clarity, health-care reform seems to have increased fear among very wealthy investors as evidenced by the sudden reawakening of the options market's doomsday machine.
On any given day, trading is brisk and calm in the Standard & Poor's 500 index andStandard & Poor's Depositary Receipts (SPY). Investors of all sizes and pedigrees use these products to reduce the risk of owning stocks.
But on Monday, trading sentiment seriously darkened in ways not seen since the darkest days of the credit crisis. "Crash puts," as Jefferies & Co.'s derivatives desk characterized the activity in a note to clients, were active Monday in the S&P 500 index and Standard & Poor's Depositary Receipts, the index's exchange-traded fund options to hedge portfolios.
With SPY around 117, an investor bought 30,000 June $90 puts and 35,000 May $94 puts. Someone also bought 40,000 May 950 puts; the index was recently at 1165. Today: a broker in the S&P 500 index pit at the Chicago Board Options Exchange said trading had once more turned quiet.
Added up, the sentiment and trading activity reinforces the uneasy fact that some of the best financial minds on Wall Street have no idea what to do.
"It's a world of punters right now," says Jim Strugger, the derivatives strategist at MKM Partners, an institutional brokerage firm in Greenwich, Conn.
In the absence of clarity about the economy, or even the next sector rotation in the stock market, sophisticated investors are protecting what they have, and focusing on whatever it is they can find that is concrete. This helps to explain the motivations for the recent interest in "crash puts," and the strong focus on using options to capture dividends.
On the first day investors had to respond to the health-care plan, many people thought health-care companies would dominate trading in the stock and options market. Ironically, a cigarette stock, Philip Morris International (PM), dominated the options market.
More than 800,000 January $30 and $40 calls traded, equivalent to some 80 million shares, or roughly 11 times the stock's average daily volume over the past three months, according to a report from MEB Options, an institutional brokerage firm in Chicago.
The trading volume in Philip Morris International was massive, and supports a perception that using options to scalp dividends has dramatically increased in recent months as traders and investors struggle to post gains. Philip Morris' quarterly dividend is 58 cents, or $58 per 100 shares. (One options contract equals 100 shares.)
"Market conditions are very challenging," says Michael Schwartz, Oppenheimer & Co.'s chief options strategist. "Dividend-capture trades are an intriguing way for professional traders to make a high return with little or no risk, which is very rare in the current market."
Comments: steve.sears@barrons.com
http://twitter.com/smsearsBarrons
http://online.barrons.com/article/SB126929187122766119.html?mod=BOL_hpp_dc
BL: "Europe Failed" Greece Will Default `at Some Point,' Hurt Euro, UBS Economist Donovan Says
By James G. Neuger and Brian Parkin
March 24 (Bloomberg) -- Germany and France, paving the way for a European Union plan to aid Greece, agreed to involve the International Monetary Fund in any potential EU package for the debt-burdened nation, a German Finance Ministry official said.
The shift toward an IMF role before the start of an EU summit tomorrow came a week after finance ministers agreed to a European framework. German Chancellor Angela Merkel, who says her taxpayers shouldn’t pay for the region’s biggest budget deficit, then pushed for IMF involvement. The reversal put her at odds with French President Nicolas Sarkozy, who backed an EU solution. The euro fell to a 10-month low against the dollar.
“It seems like a U-turn but it’s a sensible solution,” said Julian Callow, chief European Economist for Barclays Capital in London. “The IMF brings credibility and transparency and anything that gives investors a degree of comfort is good. The situation has been from the outset that there is no European mechanism in place to deal with a situation like this. This is what the IMF is there for.”
Franck Louvrier, a spokesman for Sarkozy, wasn’t available to comment and didn’t respond to e-mails.
With allies dropping their resistance to IMF involvement, Merkel agreed to sign on to a statement at the Brussels summit March 25-26 to create a mechanism to aid indebted members, including Greece, Die Welt reported yesterday. A government spokesperson denied that Merkel had agreed to an EU plan.
Euro Weakens
The euro dropped to a 10-month low against the dollar and declined to a record against the Swiss franc as news of an IMF role was seen as undermining the credibility of the single currency. The euro slipped as much as 1.1 percent to $1.33354, the lowest since May 2009.
Renewed concern that Greece’s financing woes could spread also hurt the currency. Fitch Ratings cut Portugal’s credit grade today one step to AA-, calling a budget deficit that swelled to 9.3 percent of GDP last year, three times the EU limit, a “sizeable fiscal shock.”
Greek bonds declined after the Fitch announcement, paring gains on news of a possible aid agreement. The yield on the country’s benchmark 10-year note rose 1 basis point to 6.35 percent, after falling to 6.19 percent earlier.
The need to bring in the IMF was a failure for Europe, and Greece would likely eventually default even with aid, UBS Investment Bank deputy head of global economics Paul Donovan told Bloomberg Radio.
Europe ‘Failed’
“The problem that we’ve got here is Europe has failed to clear its first serious hurdle,” he said. “If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work. It’s a bad idea.”
Greek Prime Minister George Papandreou has been urging EU allies to give details of an aid package to shore up investor confidence and bring down borrowing costs. Greece’s 10-year bonds now yield twice comparable German debt. That financing premium led Papandreou to say on March 19 that Greece, which needs to sell about 10 billion euros ($14 billion) of bonds in coming weeks, is a step away from not being able to borrow and may need to turn to the IMF if European aid isn’t forthcoming.
Merkel set three conditions for supporting EU assistance, another German official said yesterday on condition of anonymity. Aid would be made available only if Greece couldn’t raise funds in financial markets, the IMF makes a substantial contribution and EU sanctions against deficit-limit violators are stiffened.
‘This Mess’
“The euro area’s ability to impose the rules that it already has have been inadequate,” David Mackie, chief European economist at JPMorgan Chase & Co said. “In some sense you have to bring someone in who does a better job of it. The existing rule book has failed otherwise we wouldn’t be in this mess.”
Some European officials have resisted calling in the IMF, saying it undermines the credibility of monetary union and the single currency. European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview with Germany’s Die Zeit newspaper that IMF involvement would be “detrimental to the stability” of the euro.
“The image of the euro would be that of a currency that is able to survive only with the external support of an international organization where the Europeans are not in a majority and the U.S. and the Asians are increasingly influential,” Bini Smaghi is quoted as saying.
Van Rompuy’s Role
The agreement on the IMF role came as EU President Herman Van Rompuy pushed to bridge the differences an aid to Greece and after Sarkozy called for a meeting of euro-region leaders before the Brussels gathering to take up the issue.
Van Rompuy pursued a similar strategy last month, when he delayed the start of the Feb. 11 summit to broker an accord in principle “to take determined and coordinated action” to safeguard the euro area.
Greek Finance Minister George Papaconstantinou said that he expected “positive” results from the summit and preferred a European solution for any potential aid. “We want to borrow with better rates and believe this will happen with the implementation of the deficit plan,” he said at a conference in Athens yesterday.
Greece is banking on wage cuts and tax increases to shave the deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the euro’s 11-year history. Papaconstantinou said that target is reachable even if the economy shrinks as much as 2 percent this year.
To contact the reporter on this story: James Neuger in Brussels at jneuger@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net
Last Updated: March 24, 2010 07:12 EDT
BL: Dump U.K. Stocks to Buy Emerging Asia Shares, Julius Baer's Lee Recommends
By Shiyin Chen
March 24 (Bloomberg) -- Investors should get out of the U.K. as it tackles its fiscal deficit and buy stocks in Asia’s emerging markets on expectations China will allow the eventual appreciation of the yuan, Bank Julius Baer & Co. said.
The Zurich-based bank, which oversees $142 billion of assets, this week advised investors to switch to markets including China and Indonesia, and is “tactically positive” on Thailand after its valuation lagged behind regional markets.
“If there’s one country that we’re extremely negative on, it’s the U.K. because of all the structural problems that they still have to grapple with,” said Lee Boon Keng, Singapore- based deputy chief investment officer at Julius Baer. “China is a megatrend and the recognition that China wants to play a leading role economically in the world sets the tone.”
A recovery in Asian stocks has outpaced the U.K. in the past year, with the MSCI Asia-Pacific excluding Japan Index climbing 71 percent compared with a 44 percent gain in the FTSE 100 Index. Concern that central banks worldwide will withdraw stimulus to curb inflation and widening budget deficits in Europe has capped gains this year, with the two gauges rising less than 5 percent.
The pound fell this year against all 16 of its most-traded peers tracked by Bloomberg amid concern the U.K. will struggle to narrow a budget shortfall that’s close to that of Greece.
‘Daunting Task’
The U.K.’s deficit is set to reach 12.6 percent of gross domestic product, the government said, compared with 12.7 percent for Greece. Efforts to tackle the shortfall may be complicated by an election that must be held by June, Lee said.
“One of the biggest problems the U.K. has is that it’s pretty much on its own, whereas Greece, as part of the Eurozone, has a lot of levers to pull,” he said in an interview today in Singapore. “It’s a small economy having to stand on its own, having to solve all of its problems. That is a daunting task.”
The prospects for China’s economy looks brighter given the prospects for personal income growth and with the yuan set to become the world’s reserve currency over the next two decades, Lee said. Further declines in share prices in China, India and other parts of Asia would be an opportunity to add to holdings in those markets, he said.
The Shanghai Composite Index has dropped 6.6 percent this year, the fifth worst performer among 93 indexes tracked by Bloomberg globally, after the People’s Bank of China twice ordered lenders to set aside more funds as reserves. Bombay Stock Exchange’s Sensitive Index is little changed in India, after the central bank raised borrowing costs last week for the first time in two years.
“You have to be mindful of the downward pressure that’s going to be exerted on asset prices in this part of the world as it embarks on restrictive policies,” Lee said. “But Asia is a ‘buy on dip’ proposition. If prices go down another 10 or 15 percent, you should be adding to your portfolio.”
In China, Julius Bear favors “centrally supported banks” that will benefit from growing incomes in the nation, as well as insurance stocks, Lee said. The investment company also likes renewable energy shares such as China Longyuan Power Group Corp., the nation’s biggest wind-power producer.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
Last Updated: March 24, 2010 03:49 EDT
BL: Portugal Government Debt Downgraded to AA- by Fitch With Negative Outlook
By Matthew Brown
March 24 (Bloomberg) -- Portugal’s credit grade was cut by Fitch Ratings, underscoring growing concern that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate.
The rating was lowered one step to AA- with a “negative” outlook, Fitch said in a statement today. The euro extended its decline, weakening 1.1 percent to $1.3355 as of 10:32 a.m. in London. Portuguese bonds fell, with the yield on the 10-year note rising 5 basis points to 4.33 percent. Portugal’s PSI-20 Index of stocks dropped 2 percent.
Euro-region governments in the so-called peripheral nations, including Greece, Ireland, Italy and Spain, are seeking to narrow budget deficits that have exceeded the European Union’s 3 percent limit by as much as four times. Portugal’s gross domestic product per capita and trend growth are “significantly below” what is typical for a AA country, reducing its ability to tolerate the global economic downturn, Fitch said.
“A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal’s creditworthiness,” Douglas Renwick, associate director at Fitch, wrote in the report from London. “Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.”
Deficit Plans
Portugal is planning to cut its budget deficit to 8.3 percent of gross domestic product this year from last year’s 9.3 percent. The government predicted economic growth in 2010 of 0.7 percent after a decline last year depressed tax revenue.
“Portugal’s downgrade underlines the problems in the European Union,” said Paul Robinson, a currency strategist at Barclays Capital in London. “People are worried about the fiscal situation in the southern European economies and the prospects for those economies.”
The cost of protecting against losses on Portugal sovereign debt rose to the highest in almost a month, according to CMA DataVision prices for credit-default swaps. Five-year contracts insuring $10 million of bonds increased $6,000 a year to $140,000. Swaps rise as perceptions of credit quality worsen.
Today’s downgrade for Portugal is the first by Fitch since 1998, and puts it one level below the Aa2 rating assigned to it by Moody’s Investors Service. The last time Portugal’s credit was lowered was on Jan. 21, 2009, when Standard & Poor’s cut it to A+, two steps lower than Moody’s and one step below the level Fitch gave it today.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
Last Updated: March 24, 2010 07:24 EDT
BL: Euro Weakens on Greece, Portugal Debt Concern; Commodities Drop
By Stuart Wallace
March 24 (Bloomberg) -- The euro fell to a 10-month low against the dollar after government officials said the European Union may need International Monetary Fund help to bail out Greece and Portugal’s debt was downgraded by Fitch Ratings. Crude oil and industrial metals declined.
The euro weakened against all but one of its 16 most-traded peers at 11:01 a.m. in London. Oil slid 1.5 percent, copper dropped 1.1 percent and lead tumbled 2.7 percent. The Stoxx Europe 600 Index declined 0.4 percent and futures on the Standard & Poor’s 500 Index fell 0.5 percent.
France and Germany are nearing agreement on IMF involvement in any aid package for Greece, burdened by the EU’s biggest deficit, according to a finance ministry official in Berlin. The Portugal downgrade overshadowed government and industry reports that showed European services and manufacturing grew at the fastest pace since August 2007 and German business confidence increased.
Greece “is going to default at some point,” and Europe’s failure to answer that challenge will hurt the common currency, UBS Investment Bank’s London-based deputy head of global economics, Paul Donovan, said in an interview on Bloomberg Radio. “If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work,” he said.
Swiss Franc
The euro declined as much as 1.1 percent to $1.3345, the lowest level since May 2009. The Swiss franc earlier traded near a record high versus the euro on speculation the nation’s central bank is becoming less resistant to currency gains.
Copper fell for a second day and lead posted a fifth retreat on the London Metal Exchange as the stronger dollar increased costs for investors holding other currencies. Gold dropped 0.8 percent to $1,096.50 an ounce. Raw sugar declined 1.1 percent to 16.39 cents a pound in New York trading, taking its four-day slump to 14 percent. Crude oil slid to $80.66 a barrel after a 7.5 million-barrel increase in U.S. inventories reported yesterday by the American Petroleum Institute.
While most European stock gauges declined, Greece’s ASE Index rose 0.3 percent. Portugal’s PSI-20 Index slumped 2.1 percent, the most in seven weeks. Commerzbank AG climbed 1.5 percent in Frankfurt after Chief Financial Officer Eric Strutz said in an interview that Germany’s second-largest bank expects to post a pretax profit in the first quarter.
Asian Stocks
Five stocks advanced for every four that dropped in the MSCI Asia Pacific Index, which fell 0.2 percent. Samsung Electronics Co., the world’s largest memory-chip maker, gained 1.2 percent in Seoul after chip prices jumped. Nintendo Co. surged 8.7 percent in Osaka after saying it will sell a 3-D version of its DS handheld player.
The decline in U.S. futures indicated the S&P 500 may retreat from an 18-month high. Orders for long-lasting goods probably climbed in February for a third month, advancing 0.6 percent following a 2.6 percent January increase, economists said before a Commerce Department report due at 8:30 a.m. in Washington. A separate report at 10 a.m. may show sales of new homes rose from a record low.
The MSCI Emerging Markets Index was little changed. The Budapest Stock Exchange Index gained 0.4 percent.
U.K. gilts were little changed, with the yield on the benchmark 10-year note within 2 basis points of a six-week low, on speculation the government will announce a reduction in bond sales in its budget statement today.
Treasuries were also little changed, with the five-year note yield at 2.43 percent, before the U.S. government auctions $42 billion of the securities today.
To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net
Last Updated: March 24, 2010 07:06 EDT
Who next? Tax fears drive wealthy away from London
By Daniel Thomas Property Correspondent
Published: March 23 2010 02:00 | Last updated: March 23 2010 02:00
London has been trumped by New York as the favourite city for wealthy investors and residents, with tax legislation and the attack on City bonuses contributing to its slide in the rankings, according to a survey today.
The 2010 Wealth Report, an annual study by Citi Private Bank and Knight Frank, also showed that the wealthy have not been immune to the wider economic downturn, with the value of property owned by wealthy individuals globally last year falling in three-quarters of the 56 locations tracked.
Liam Bailey, head of research at Knight Frank, said: "The UK's capital has suffered more than many financial centres and there is growing concern among the footloose international elite over threats to the previously stable tax environment."
New York took the top slot in the report's rankings, with London second, followed by Paris and Tokyo .
The report says that the global recession has had a "huge impact on prime property markets".
Property performed strongly in emerging markets at the expense of established locations, with prices in cities such as Shanghai and Hong Kong rising by more than 40 per cent last year as they grew in popularity as places of influence and financial importance.
In contrast, London property prices rose by a comparatively modest 6.1 per cent last year.
However, the report also highlights returning confidence in the prime markets of London and other capital cities as wealthy investors continue to seek real estate as a defensive asset class.
David Poole, head of Citi Private Bank in the UK, said that wealthy property owners were again looking for investments. "Buying becomes opportunistic in a downturn, particularly as people turn to hard assets such as property when other assets experience dislocation."
Monaco remains the most expensive property market, having topped second-placed London last year, followed by Paris and Hong Kong.
Property accounts for one-third of investment portfolios, according to the report, although there has been a sharp decline in the number of wealthy people in each location with investable assets of more than $1m (£666,000, €739,000).
Their numbers in the UK fell by a fifth to 439,000, in the US by 19 per cent to 2.5m, in Russia by 23 per cent to 101,000 and in Hong Kong by 23 per cent to 72,000.
Most of those polled do not expect their wealth to increase significantly in 2010, but only 4 per cent expect it to decline.
Even so, more than 70 per cent of respondents believe this will be a good year to invest in property.
The markets of emerging economic regions recovered earlier, such as in Asia Pacific, where property prices rose 17.1 per cent last year, and South America, which was up 7.8 per cent.
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Stocks worth 9% less today than yesterday: How changes in capital gains taxes will affect YOUR portfolio
What Healthcare Bill Could Mean To The Market
By: iStockAnalyst Monday, March 22, 2010 1:28 PM
With Health Care Reform passing, investors can throw charts, trends, earnings... out the window. Nobody on the left or right has any idea how this new entitlement is going to play out and what its short and long-term impact will be on stocks or the economy.
iStock has read many of the same stories as our readers. One side says the reform will cut the debt by more than a trillion dollars in 20 years. The other side says bankruptcy is on the way; in all likelihood, the needle will come to rest somewhere in the middle.
iStock can say with certainty, once the American public cedes more of its money to the government, you can rest assured that this will be just the first bite out of the money apple.
In the two previous Social Welfare programs, Social Security and Medicare/Medicaid, the costs to the public rose dramatically in the years after passage. There is no doubt the initial sticker price will not be anywhere near the final price tag for Health Care reform. Nothing ever works to form; there are always unforeseen costs and unintended consequences.
But what will be the consequences for stocks and the economy; those are the questions you want answered.
To get a feel of what investors can expect, iStock looked back at the stock market's performance following the passage of Social Security and Medicare/Medicaid.
* A year after SS was signed into law; the Dow was up more than 29%.
* Investors weren't as fortunate following Medicare/Medicaid as the Dow was down 5% twelve months later.
If we had to pick a side, iStock would put it at 70% that the markets close 2010 lower than they are today and that the economy starts to sputter by next spring and a recession follows fairly quickly. Similar actions transpired when the two previous Social welfare laws were signed.
We feel this way because the Health Care bill will increase the tax rates on capital gains and unearned income i.e. dividends, rental income, CDs...
Cap gains are slated to move to 24% from 15% and unearned income for folks making more than $200k ($250,000 for a couple) will get an additional 3.9% tacked on.
What does that mean?
Let's say you have a $10,000 gain in IBM. At a 15% tax rate, you owe $1,500 in cap gains taxes. At 24%, the tax bill is $2,400, a $900 increase. Put another way, you owe 60% more in taxes. Instantaneously your investment has lost 9% of its value ($900/$10000.)
Wall Street will take this into account in valuing stock prices. Based on the new law, the markets are worth 9% less today than they were yesterday.
In addition, we anticipate, with all kinds of taxes headed higher in 2011 as the Bush tax cuts sunset, investors across the board will start their year-end tax selling earlier than usual.
This only makes sense. As Newton said regarding his Laws of Motion, "every action has a reaction equal in magnitude and opposite in direction."
As for corporations and their profits, if Caterpillar's (CAT : 62.41, 2.46) letter to Speaker Pelosi is any indication, profits and unemployment could join the opposite direction list.
According to Gregory Folley, vice president and chief human resources officer of Caterpillar, the bill "would increase CAT's insurance costs by at least 20 percent, or more than $100 million, just in the first year of the health-care overhaul program."
(We searched diligently and Caterpillar was the only major publicly traded company we found making such claims. We couldn't find any that said it would save money and increase profits.)
If Mr. Folley and CAT's calculations are correct, that $100 million a year will have to come from somewhere. It will come out of profits and from cutting costs, which probably means fewer employees and lower earnings per share for Caterpillar.
In the event CAT's situation is not an isolated incident, many large companies could be facing the same challenges with their bottom lines. Earnings are the mother's milk of higher stock prices. Anything that lowers profits will eventually lead to lower stock prices.
Again, it's foolhardy to say what this wealth-transfer will do to stocks or the economy with any certainty. The taxes don't kick in until 2011, so stocks could easily have a last hurrah before money mangers factor in the new cost of capital landscape. By then, we can only hope the economy recovers enough to absorb the new taxes, leaving room for stocks to head higher.
Businesses, on the other hand, are already busy with 3rd and 4th quarter planning. They will probably react more quickly than stocks. That could be why, despite better economic news, the White House has warned unemployment will remain stubbornly high. Until companies fully understand what the final health care product is, it‘s reasonable to believe they will hold back and only add new personnel if it's 100% necessary; part-time employees should probably be nervous or cross their fingers that they get a full-time offer.
In the end, we believe this is the most likely scenario: The cost for Health Care will be more than advertised, it will add to our nation's debt, the additional costs and taxes will slow the economy, perhaps into another recession in 2011, and stock prices probably rise a bit before investors feel the impact of higher capital taxes.
As an investor and American citizens, we hope our scenario proves to be incorrect and the critics are wrong. Here's to the proponents being correct and that health care costs go down and as a result, money is freed up for business and people to invest in economic growth, and the deficit shrinks.
Admittedly, we have our doubts and believe that "the best laid schemes o' mice an' men" will yet again prove to be true regarding Health Care reform.
http://www.istockanalyst.com/article/viewarticlepaged/articleid/3966092/pageid/1
FP: U.S. faces possible US$52B tax hike, Cost of doing business in US set to rise
Jonathan Ratner, Financial Post
Not only is the cost of doing business in the United States set to rise with the passing of Barack Obama's health-care reform bill, but the expense for taxpayers may also be higher than anticipated. With an additional 32 million Americans expected to eventually receive health insurance coverage, much of the price tag will be paid by businesses.
The U.S. Chamber of Commerce, which criticized the bill for saddling an already burdened corporate America with additional costs, noted that it will lead to US$52-billion in new taxes on companies as a result of the requirement that more employees be covered by insurance. At the same time, the organization said the legislation creates 16,500 new jobs in the Internal Revenue Service.
"The House made a wrong and unfortunate decision that ignores the will of the American people," said Thomas Donohue, the Chamber's chief executive. "It will drive up health-care costs and make coverage less affordable for businesses and families.... It will further expand entitlements and explode the deficit, and raises taxes by a half a trillion dollars at the worst possible time."
Average health-care costs for U.S. employers increased 7.3% in 2009, bringing average net payments for active employees to US$3,341. The spike in health-care spending exceeded the rate of inflation, which fell 0.4% last year. It also topped overall U.S. health-care costs, which rose 4.8%, according to data from Thomson Reuters.
This comes at a difficult time for U.S. companies, which are struggling to cope with the worst economic downturn in decades. Construction equipment giant Caterpillar Inc., for example, estimates its insurance costs will rise by US$100-million, or 20%, in the first year alone.
"We can ill-afford cost increases that place us at a disadvantage versus our global competitors," Gregory Folley, the company's vice-president and chief human resources officer, said in a recent letter to House leaders. "We are disappointed that efforts at reform have not addressed the cost concerns we've raised throughout the year."
One of those global competitors could be Canada, which has long had lower health-care costs than the United States.
"From a pure cost perspective, it is an extra tax for the United States that does not get levied on Canada," said Eric Lascelles, chief economics and rates strategist with TD Securities. However, he has a mixed view on the competitive impact of the healthcare reforms given that they will take years to be implemented.
"There are certain advantages the United States will accrue as a consequence of this," Mr. Lascelles added, noting that both labour mobility and overall health outcomes should improve. "One of the huge distortions in the U.S. labour market is that people who have someone with a serious illness in their household often are unable to change jobs because they would be unable to get insurance at the new company."
As a result, one possible scenario could see very little near-term impact, followed by an advantage for Canadian businesses in the subsequent three to 10 years as their U.S. counterparts get hit with additional taxes. Longer term, the playing field would more likely be evened out due to the existence of a more universal form of health care in the United States.
Most key provisions of the healthcare reform bill do not take effect until 2014. Meantime, the regulations that govern these changes will need to be drafted. There will also be two election cycles before then, which could affect what is ultimately implemented.
Business will not be alone paying, so will taxpayers.
The Congressional Budget Office (CBO) estimates that the legislation will cost US$940-billion over ten years and reduce the federal deficit by US$138-billion during the same period. However, the Senate must now pass a budget-reconciliation bill that makes some significant "fixes" to the original Senate bill passed in December.
"They passed this bill, but it's not done yet," said Andrew Busch, global currency strategist at BMO Capital Markets in Chicago. "There is still quite a bit to change."
The reconciliation bill's price tag is lower at US$875-billion over 10 years, but it includes heftier subsidies to lower-income groups at the expense of higher taxes. The potential changes by Senate parliamentarians will depend on what they feel directly affects the budget. If the Senate makes any changes to this "side-car" bill, the House would need to vote on it again before it is sent to the President for signing.
Calling the CBO's US$138-billion estimate "false advertising" and the reform terminology a "misnomer," Citigroup Inc. health-care analyst Charles Boorady said the bill will result in an additional US$1-trillion in U.S. health-care spending over the next 10 years.
One the biggest assumptions included in the bill is more than US$400-billion in Medicare savings over the next decade.
"I don't think Congress has any kind of history with reducing Medicare spending-- ever," Mr. Busch said. "I can't envision that they'll be able to cut spending for Medicare and send it over to another portion of the bill. It just doesn't seem to make any sense." He thinks the CBO has been unable to score the reconciliation bill because it simply is not yet complete.
One issue of contention is the so-called "doc fix," a critical element of the cost of health care. These reimbursements to doctors that take part in Medicare are estimated to total US$20-billion to US$25-billion per year. However, since they were left out of the CBO scoring, doc fixes serve as just one example why a final tally is difficult to determine.
jratner@nationalpost.com
Housing Data In Focus As Markets Remain Overbought - RTTNews Daily Market Analysis
Posted on: Tue, 23 Mar 2010 09:11:00 EDT
(RTTNews) - The major U.S. index futures are pointing to an almost flat opening on Tuesday, with the Dow futures and the Nasdaq 100 futures trading with a positive bias, while the S&P 500 futures are slightly lower. Notwithstanding a mixed close in the Asian markets, sentiment was bordering on the positive, as traders overlooked recent fiscal and monetary concerns. The major European markets are firmly in positive territory.
Market movement in today's session largely hinges on the existing home sales report and the house price index of the Federal Housing Finance Agency to be released after the markets open. Existing home sales are likely to decline from the month-ago levels and a worse than expected drop is likely to stir recovery concerns. Crude oil and gold futures are showing weakness, with the euro sliding further due to the uncertainty surrounding the Greek debt crisis.
U.S. stocks opened Monday's session lower, weighed down by fiscal and monetary policy concerns, but buying interest picked up in morning trading, as traders bid up healthcare stocks following the passage of the healthcare bill by the House. After a steady advance throughout the morning, the major averages moved sideways for the rest of the session to close with moderate gains.
The Dow Industrials ended up 43.91 points or 0.41% at a fresh 17-1/2 month high of 10,786 and the S&P 500 Index advanced 5.91 points or 0.51% to 1,166, while the Nasdaq Composite Index gained 20.99 points or 0.88% over the course of the session to end at 2,395.
Twenty-two of the thirty Dow components ended the session higher, with Pfizer (PFE), Intel (INTC), Home Depot (HD), Disney (DD), DuPont (DD), Caterpillar (CAT), Boeing (BA) and American Express (AXP) advancing strongly in the session.
Among the sector indexes, the NYSE Arca Airline Index rose 1.84% and the KBW Bank Index climbed 1.13%. The S&P Retail Index gained 1.24% compared to a 1.57% advance by the Philadelphia Housing Sector Index and a nearly 1% upward move by the NYSE Arca Biotechnology Index. In the technology space, the Philadelphia Semiconductor Index moved up 2.41%, the NYSE Arca Disk Drive Index rallied 2.67%, the NYSE Arca Networking Index rose 1.16% and the NYSE Arca Computer Hardware Index firmed up by 1.74%.
Currency, Commodity Markets
In their first trading session as the front month contract, crude oil futures for May delivery are trading down $0.12 to $81.48 a barrel. On Monday, the April futures expired at $81.25, up $0.57 a barrel, after the dollar retreated on an increase in risk appetite.
Gold futures are declining $2.50 to $1,097 an ounce after receding $8.10 to $1,099.50 an ounce in the previous session.
Among currencies, the U.S. dollar is trading at 90.35 yen compared to the 90.145 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.3498.
Asia
The major Asian markets had a mixed session on Tuesday, with the Japanese market, which opened after Monday's public holiday, declining along with the Taiwanese and the Chinese markets, while the rest of the markets rebounded, taking cues from Wall Street's positive performance overnight.
Japan's Nikkei 225 average opened lower and declined steadily throughout the session to close down 50.57 points or 0.47% at 10,774.
A majority of stocks declined, with All Nippon Airways leading the slide with a decline of 6%. Last week, the airline forecast that its loss for the full year may be double what it had estimated earlier. Auto, financial, construction, real estate, utility, heavy equipment and most technology stocks also came under selling pressure.
On the other hand, electronics makers showed some strength. Auto parts retailer Clarion climbed 6.25%, Mitsubishi Heavy rallied 3.10%, Olympus gained 3.33%, Sony moved up 3.55%, Toshiba advanced 3.56% and Fuji Electric Holding rose 3.17%. Toshiba received support from a Nikkei newspaper report that said the company is in discussions with a Bill Gates company to develop nuclear reactors.
Meanwhile, Australia's All Ordinaries rose sharply in early trading and consolidated its gains thereafter before ending up 40.40 points or 0.83% at 4,888, slightly off its 2-month highs reached last Friday.
Most sectors, barring telecommunications, IT, healthcare and real estate stocks advanced in the session. The major miners, with the exception of gold mining stocks Lihir Gold and Newcrest Mining, firmed up in the session. Energy and bank stocks also closed higher. On the other hand, Qantas, building contractor Leighton and CSL came under selling pressure.
Hong Kong's Hang Seng Index opened higher and moved sideways till the afternoon. Thereafter, the index pared some of its gains to close up 54.53 points or 0.26% at 20,998. Twenty of the forty-two index components closed the session higher. Retailer Esprit Holdings and Li & Fung rallied 3.06% and 4.73%, respectively. Property stocks also showed modest buying interest.
Europe
The major European markets opened Tuesday's session modestly higher. The French CAC 40 Index and the German DAX Index are rising 0.59% and 0.18%, respectively, while the U.K.'s FTSE 100 Index is moving up 0.45%.
In corporate news, oil company Cairn Energy reported that its full year 2009 net profit fell to $24.7 million from $348.8 million in the previous year, with the decline mainly due to lower one-time gains and a one-time impairment charge. However, excluding one-time items, profits rose to $53 million from $11 million last year.
Meanwhile, U.K. insurer Legal & General reported a full year profit of 863 million pounds compared to a loss of 1.07 billion pounds in the year-ago period. The company also announced a 33% increase in its dividend.
Imperial Tobacco said its first-half performance is tracking to expectations. However, the company said cigarette volumes were down around 4%.
On the economic front, French statistical office INSEE released the results of its business climate survey, which showed that the industrial economic situation in France improved. The business climate indicator rose by 4 points to 94 in March, although it remained below its long-term average. The index measuring personal production expectations improved to 3 from -4, while the index of general production expectations remained unchanged at -5.
The U.K. consumer price inflation report released by the U.K. Office for National Statistics showed that the U.K.'s annual inflation rate came in at 3% in February from 3.5% in the previous month. Economists had expected a more modest decline in the inflation rate to 3.1%. Nevertheless, the rate remains above the Bank of England's 2% target. On a monthly basis, consumer prices rose 0.4%, slower than the 0.5% increase expected by economists.
U.S. Economic Reports
The National Association of Realtors is scheduled to release its report on existing home sales for February at 10 AM ET. Economists estimate existing home sales of 5 million for the month.
Existing home sales showed a decline to 5.05 million units in January compared to 5.44 million in December. Single-family home sales as well as condominium/co-ops sales fell. Inventories measured by months supply rose to 7.8 from 7.2 in the previous month, while in absolute terms, the number of existing homes available for sales fell to 3.265 million units, the lowest since March 2006. The median selling price was flat year-over-year at $164,700.
The Federal House Finance Agency set to release its house price index for January at 10 AM ET. The index is a weighted, repeat-sales index that measures average price changes of single-family houses in repeat sales or refinancings on the same properties. The house price index fell 1.6% month-over-month in December compared to expectations for a 0.4% increase.
San Francisco Federal Reserve Bank President Janet Yellen is due to speak on the economic outlook and central bank independence to Town Hall Los Angeles at 3 PM ET.
Earnings
Walgreen (WAG) said its second quarter sales rose 3.1% to $17 billion and net earnings rose 4.6% to 68 cents per share. The second quarter's results included a charge of 2 cents per share. Analysts estimated earnings of 71 cents per share on revenues of $17.17 billion.
KB Home (KBH) reported revenues of $264 million, down 14% year-over-year. The company reported a net loss of 71 cents per share, narrower than the 75 cents per share loss in the year-ago period.
Stocks in Focus
Phillips-Van Heusen (PVH) rose in Monday's after hours session after it reported fourth quarter non-GAAP earnings of 61 cents per share, a two-fold increase from 30 cents per share in the year-ago period. Revenues rose 9% to $614.6 million. Analysts estimated earnings of 59 cents per share on revenues of $609.33 billion. Excluding the impact of its Tommy Hilfiger agreement, the company expects 2010 non-GAAP earnings of $3.20-$3.28 per share and revenues of $2.47 billion to $2.50 billion. Phillips-Van Heusen expects the Tommy Hilfiger deal to be immediately accretive to earnings on a non-GAAP basis, with the firm predicting a 20-25 cents per share earnings boost in 2010 and a 75 cents to $1 per share earnings accretion in 2011.
Delta Airlines (DAL) and US Airways (LCC) could be in focus after the companies announced an agreement to transfer 12% of the takeoff and landing slots involved in a previously announced transaction between the carriers at New York's LaGuardia and Washington's Reagan's National airports to four airlines, AirTran Airways (AAI), Spirit Airlines, WestJet (WJA.TO) and JetBlue Airways (JBLU).
RLI Corp. (RLI) may see some activity after rating agency Fitch announced that it has upgraded the company's senior debt rating to 'BBB-' from 'BBB' and raised its insurer financial strength rating for its operating subsidies to 'A+' from 'A'.
ViaSat (VSAT) could see some weakness after it announced that it has commenced an underwritten public offering of 5.5 million shares, consisting of 2.5 million shares offered by ViaSat and 3 million shares offered by certain selling shareholders.
Glacier Bancorp. (GBCI) may also be in focus after it said it has completed its previously announced public offering of 10.29 million shares at a price of $14.75 per share, a discount to its previous session's closing price of $15.94. The company expects net proceeds of $145.6 million from the offering and intends to use it for supporting growth of its banks and for general corporate purposes.
Massey Energy (MEE) may also see weakness after it announced a public offering of 8.5 million shares in a registered underwritten public offering. Abbott Labs (ABT) could also see some activity after it announced the completion of its acquisition of laboratory information management system company STARLIMS Technologies.
Coca-Cola Enterprises (CCE) is likely to move in reaction to its announcement that its subsidiary Bottling Holdings has entered into an agreement with Coca-Cola (KO) to acquire the latter's bottling operations in Norway and Sweden for $822 million.
For comments and feedback: contact editorial@rttnews.com
Existing U.S. Home Sales Fall for Third Month (Update1)
By Shobhana Chandra
March 23 (Bloomberg) -- Sales of existing U.S. homes fell in February for a third month, indicating a lack of jobs is hindering government efforts to revive demand.
Purchases dropped 0.6 percent to a 5.02 million annual rate, the lowest level in eight months and in line with the median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. The median price decreased 1.8 percent from February 2009.
The extension and expansion of a federal tax credit that helped stabilize housing in 2009 has yet to spark sales this year as hiring hasn’t materialized. Home Depot Inc. is among companies cutting prices to stimulate demand as the world’s largest economy recovers from the worst recession since the 1930s.
“It’s going to be a very slow recovery for housing,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “People don’t want to commit to a home purchase if they’re worried about their job.”
Stocks climbed after the report and Treasury securities dropped. The Standard & Poor’s 500 Index rose 0.2 percent to 1,167.65 at 10:10 a.m. in New York.
Economists’ Forecasts
Existing home sales were forecast to fall to a 5 million annual rate, according to the median estimate of 74 economists in a Bloomberg News survey. Projections ranged from 4.75 million to 5.2 million, after an initially reported 5.05 million rate in January.
Purchases of existing homes climbed 7.9 percent compared with a year earlier prior to adjusting for seasonal patterns. The median price decreased to $165,100 from $168,200 a year ago.
The number of previously-owned homes on the market jumped 9.5 percent to 3.59 million. At the current sales pace, it would take 8.6 months to sell those houses compared with 7.8 months at the end of the prior month.
The increase is supply last month was “unusual,” Lawrence Yun, the Realtors’ chief economist, said in a news conference today. The jump may be caused by more distressed properties coming on the market and by trade-up buyers who are now putting their houses up for sale in advance of other purchases, he said.
The share of homes sold to first-time buyers increased to 42 percent, from 40 percent in January, said Yun.
Sales Breakdown
The report showed sales of existing single-family homes decreased 1.4 percent to an annual rate of 4.37 million. Sales of condos and co-ops increased 4.8 percent to a 650,000 rate.
Purchases dropped in two of four regions, led by a 4.7 percent decline in the West. A lack of inventory in the California market is restraining purchases in the West, Yun said. Sales fell 1.1 percent in the South, rose 2.4 percent in the Northeast and climbed 2.8 percent in the Midwest.
Existing home sales, which account for more than 90 percent of the market, are compiled from contract closings and may reflect purchases agreed upon weeks or months earlier. Many economists consider new home sales, recorded when a contract is signed, a more timely barometer of the market.
The Commerce Department may report tomorrow that new home sales rose last month after slumping in January to the lowest level since records began in 1963.
Credit Extended
The Obama administration in November extended a tax credit for first-time buyers due to expire at the end of that month and expanded it to include to some current owners. The extension covers closings through June as long as contracts are signed by the end of April.
Executives at Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, said they are “keeping a close eye” on demand to gauge if it holds up after the incentive fades.
“We too are interested to see if the positive momentum that we established can be sustained,” Chief Executive Officer Ara K. Hovnanian said on a conference call with investors on March 3.
Other measures aimed at stabilizing housing will end even sooner. The Federal Reserve last week said its program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt, which was intended to lower borrowing costs, would conclude as planned at the end of this month.
Mortgage Rates
The evidence so far suggests the imminent dissolution of the program, which was credited with helping drive mortgage rates to record lows, isn’t influencing the market. The rate on a 30-year fixed loan was 4.96 percent in the week ended March 18, not far from the 4.71 percent reached on Dec. 3 that marked the lowest in Freddie Mac data going back to 1972.
While borrowing costs are low and prices are down, sustained job gains remain the missing ingredient in promoting a rebound in housing. The unemployment rate, which reached a 26- year high of 10.1 percent in October, is projected to end the year at 9.5 percent, according to the median estimate of economists surveyed by Bloomberg this month.
Home Depot, the largest U.S. home-improvement retailer, plans to cut prices on some plants and patio furniture in March and April to help meet its goal of increasing annual sales for the first time in five years. Executives said unemployment, housing foreclosures and credit restrictions are crimping sales.
“We are looking to continue to drive our traffic in the stores,” Craig Menear, executive vice president of merchandising, said in a telephone interview last week from Atlanta, where Home Depot is based. “Things are still difficult out there for customers.”
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net
Last Updated: March 23, 2010 10:13 EDT
BL: European Stocks Advance; Legal & General, Cairn Energy Surge
By Sarah Jones
March 23 (Bloomberg) -- European stocks rose for the first time in four days as Bank of China Ltd. reported earnings that beat analysts’ estimates. Most Asian shares gained and U.S. index futures were little changed.
Legal & General Group Plc surged 5.1 percent after the insurer posted a full-year profit and boosted its dividend. Cairn Energy Plc rallied 9.3 percent after the operator of India’s biggest onshore oil field announced the start of drilling in Greenland and raised output forecasts in Rajasthan. Volkswagen AG limited gains in European stocks after the region’s largest carmaker announced a sale of preferred shares.
The Stoxx Europe 600 Index rose 0.4 percent to 261.11 at 12:38 p.m. in London. The gauge extended its advance after Bank of China, the nation’s third-largest lender by market value, posted a more than fourfold increase in fourth-quarter net income to 18.9 billion yuan ($2.8 billion).
“The market just wants to continue to move higher,” said Mike Lenhoff, who helps oversee about $35.5 billion as chief strategist at Brewin Dolphin Securities Ltd. in London. “We have a very fertile backdrop for equity markets at the moment. We are getting decent corporate news flow with numbers that, in many cases, are better than expected.”
Three Straight Weeks
The Stoxx 600 has advanced for three straight weeks amid optimism the European Union will help Greece rein in Europe’s biggest budget deficit and as the Federal Reserve pledged to maintain record-low borrowing costs for an extended period. The benchmark gauge for European equities has surged 66 percent since March last year.
Futures on the Standard & Poor’s 500 Index slipped less than 0.1 percent today before a report on home sales. The MSCI Asia Pacific Index rose 0.1 percent as Australia & New Zealand Banking Group Ltd. unveiled expansion plans.
Legal & General climbed 5.1 percent to 85.45 pence after posting 2009 net income of 863 million pounds ($1.3 billion) as investment returns increased. That beat the 461 million-pound median estimate in a Bloomberg survey. The U.K.’s fourth-biggest insurer also increased its dividend by 33 percent to 2.73 pence a share.
Cairn Energy jumped 9.3 percent to 413.9 pence, the highest level since at least 1989. The company said two drilling rigs will begin a four-well offshore exploration program in the summer of 2010. Cairn is targeting about 1.6 billion barrels of risked oil-in-place reserves and 385 million barrels of risked resources.
VW Declines
Volkswagen preferred stock dropped 5 percent to 69.34 euros after the automaker said it will sell as many as 65 million new shares to help finance the takeover of Porsche SE’s auto-making unit. The offer price, subscription ratio and the final offer volume will be decided by March 26.
VT Group Plc jumped 5.1 percent to 725 pence, the highest level since at least 1991, after the government-services company agreed to be bought by Babcock International Group Plc for 1.3 billion pounds. Babcock rallied 5.3 percent to 560.5 pence.
“Strategically and financially the acquisition is in our view a great deal for the shareholders of both entities,” said Howard Wheeldon, a London-based strategist at BGC Partners. The acquisition “will produce growth and potentially excellent future bottom line results.”
GKN, Magna
GKN Plc climbed 4.7 percent to 137.1 pence on speculation Magna International Inc. may bid for the U.K. maker of aircraft components. The London-based Times said speculation involving the two companies was “reheated.”
“Maybe there’s some money going into the shares on the back of that story,” said John Buckland, an analyst at MF Global UK Ltd. in London. He has a “buy” recommendation on the stock.
Opap SA rallied 8.2 percent to 16.40 euros, leading a measure of travel and leisure shares to the second-biggest gain among 19 industry groups in the Stoxx 600. Europe’s largest publicly traded gambling company reported fourth-quarter net income of 92.1 million ($124 million), beating analysts’ estimates.
British Airways Plc rose 2.9 percent to 247.9 pence. Europe’s third-biggest airline said its profit outlook is “broadly” unchanged after the industrial action of the past three days. The carrier said the strike over pay and staffing levels cost about 7 million pounds a day.
Saipem SpA, Europe’s largest oil-services provider, gained 3.1 percent to 28.54 euros and Technip SA, the second-biggest, climbed 5.9 percent to 61.34 euros after Morgan Stanley upgraded both companies to “overweight” from “equal weight.”
Tecnicas Reunidas SA surged 4.4 percent to 46.35 euros after Morgan Stanley rated the engineering and construction- services company “overweight” in new coverage.
Sales of existing U.S. homes probably fell in February by 1.1 percent to a 5 million annual rate, the lowest level in eight months, according to a Bloomberg survey of economists. December and January showed the two biggest declines on record. The National Association of Realtors’ report is due at 10 a.m. in Washington.
To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.
Last Updated: March 23, 2010 08:39 EDT
BL: Most Asian Stocks Fall on Greece Speculation; Banks Advance
By Shani Raja and Jonathan Burgos
March 23 (Bloomberg) -- Most Asian stocks fell amid speculation European Union leaders will fail to agree on an aid package for Greece at a summit this week. Banks advanced.
Poly Real Estate Group Co. fell 1.9 percent in Shanghai on concern local governments in China are stepping up measures to curb land supply. Mitsui Fudosan Co. led Japanese developers lower for a third day as a government report last week showed land prices dropped the most in at least 36 years. Australia & New Zealand Banking Group Ltd. rose 3 percent in Sydney after saying it will add branches in Taiwan.
Eight stocks declined for every seven that rose in the MSCI Asia Pacific Index, which gained 0.1 percent to 124.33 as of 9:18 p.m. in Tokyo. The gauge lost 0.5 percent yesterday after India raised interest rates on March 19 to curb inflation, fueling concern a withdrawal of stimulus policies will stifle the global recovery. European Central Bank President Jean-Claude Trichet yesterday spoke out against offering the low-interest loans for which the Greek government has pressed.
“Concerns about policy tightening and continuing worries that Greece won’t get aid from the EU are affecting equity markets,” said Pearlyn Wong, Singapore-based investment analyst at Bank Julius Baer Co., which manages about $350 billion. “We still see some upside for Asia but investors have to be selective.”
In Hong Kong, the Hang Seng Index increased 0.3 percent, with Bank of China Ltd. rising 1.8 percent before an earnings announcement. China Telecom Corp. jumped 5.1 percent on brokerage upgrades. Australia’s S&P/ASX 200 Index advanced 0.9 percent and South Korea’s Kospi Index gained 0.6 percent.
Healthcare Legislation
The Nikkei 225 Stock Average lost 0.5 percent in Japan, where markets were closed yesterday for a national holiday. China’s Shanghai Composite Index slumped 0.7 percent.
Futures on the Standard & Poor’s 500 Index rose 0.2 percent. The gauge climbed 0.5 percent yesterday, with drugmakers advancing after the House of Representatives approved legislation that will ensure tens of millions of uninsured Americans will get medical coverage.
In Shanghai, Chinese real-estate companies declined after the Oriental Morning Post said Shanghai may require faster payments from developers for land purchases. Poly Real Estate fell 1.9 percent to 20.20 yuan, while Gemdale Corp. lost 2.4 percent to 13.60 yuan.
Mitsui Fudosan, Japan’s top property developer, sank 3.3 percent to 1,532 yen, while its closest rival, Mitsubishi Estate Co., retreated 1.5 percent to 1,425 yen.
Lack of Growth
An index of developers on the Topix index slumped 5.8 percent in the past three days. Japanese commercial land prices fell 6.1 percent in 2009 to the lowest level since comparable data was first collected in 1974, according to a government report on March 18.
“I’m not inclined to be overweight on Japanese real-estate stocks because of their lack of growth prospects,” said Hideo Arimura, a senior fund manager at Mizuho Asset Management Co., which oversees the equivalent of $36 billion in Tokyo.
ANZ Banking rose 3 percent to A$25.45 after the head of its Asia-Pacific operations said the lender plans to add as many as nine branches in Taiwan over the next two years.
The bank has 21 branches in the country after acquiring Royal Bank of Scotland Group Plc’s retail, commercial and institutional businesses there, Alex Thursby, ANZ’s Asia Pacific, Europe and Americas chief executive officer, told reporters in a briefing in Hong Kong yesterday.
Banks Advance
Rival National Australia Bank Ltd. gained 2.4 percent to A$27.36. Commonwealth Bank of Australia, the nation’s largest lender by market value, increased 1.7 percent to A$56.70.
Banks also rose after Richard X. Bove at Rochdale Securities LLC advised buying Citigroup Inc. shares, which jumped 3.6 percent in New York trading. In Tokyo, Fukuoka Financial Group Inc. climbed 2.2 percent to 369 yen after the Japanese lender was raised to “buy” from “neutral” at Nomura Holdings Inc.
Bank of China, the country’s third-largest lender by market value, advanced 1.8 percent to HK$4.04. The bank reported 2009 net income of 81.1 billion yuan after Hong Kong’s stock market closed. That beat the 78.7 billion yuan average estimate of 15 analysts compiled by Bloomberg.
China Telecom, the country’s biggest fixed-line carrier, jumped 5.1 percent to HK$3.74. HSBC Holdings Plc upgraded the stock to “neutral” from “underweight” and Kim Eng Securities raised it to “buy” from “hold.” China Telecom said yesterday earnings will rebound in 2010, even as it reported a 34 percent decline in full-year profit.
‘Bullish Sentiment’
“Bullish investor sentiment is reflecting a further improvement in the global economy and growth in corporate earnings” in 2010, said Fumiyuki Nakanishi, a strategist at Tokyo-based SMBC Friend Securities Co.
The MSCI Asia Pacific Index rose 1.4 percent last week after the U.S. Federal Reserve pledged to keep borrowing costs near zero for an “extended period” and as the Bank of Japan expanded a bank-loan program. Stocks in the gauge trade at 18.9 times estimated earnings, compared with 15.1 times for the MSCI World Index of 23 developed nations.
In Sydney, BHP Billiton Ltd., the world’s largest mining company, increased 1.1 percent to A$43.06. Rio Tinto Group, the world’s third-biggest mining company, gained 0.9 percent to A$75.72.
Crude oil and copper prices gained for the first time in three sessions in New York yesterday, with oil for May delivery rising 0.8 percent and copper futures advancing 0.2 percent.
Cnooc Ltd., China’s largest offshore oil producer, gained 0.5 percent to HK$12.38 in Hong Kong. Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, advanced 1.5 percent to A$47.20.
In Tokyo, Toshiba Corp. surged 3.6 percent to 466 yen. The company and Bill Gates’s TerraPower will collaborate on developing a nuclear reactor capable of operating for decades without being refueled, the Nikkei reported today, without disclosing a source for the information.
To contact the reporters for this story: Shani Raja in Sydney at sraja4@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net.
Last Updated: March 23, 2010 06:14 EDT
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CSM: Attorneys general in 12 states poised to challenge healthcare bill
As soon as President Obama signs the healthcare bill into law, the attorneys general say they will challenge its constitutionality. The mandate to buy insurance is at the center of the controversy.
By Warren Richey, Staff writer / March 22, 2010
Attorneys general from at least 12 states say they will challenge the constitutionality of the healthcare reform bill passed by the House of Representatives Sunday night.
The threatened action suggests the controversial measure is about to move from the legislative realm into what could become a protracted and messy fight in the courts. The attorneys general say they will sue once President Obama signs the bill into law. They are pledging to take their battle all the way to the US Supreme Court.
“The health care legislation Congress passed tonight is an assault against the Constitution,” said South Carolina Attorney General Henry McMaster. “A legal challenge by the states appears to be the only hope of protecting the American people from this unprecedented attack on our system of government,” he said in a statement.
Florida Attorney General Bill McCollum issued a similar statement late Sunday. “If the president signs this bill into law, we will file a lawsuit to protect the rights and interests of American citizens,” he said.
Which states are moving to block healthcare law?
The comments came after a Sunday night conference call in which attorneys general from 11 states expressed support for legal action to block the law. In addition to Florida and South Carolina, the participating attorneys general were from Alabama, Nebraska, Texas, Oklahoma, Pennsylvania, Washington, Utah, North Dakota, and South Dakota.
In addition, Virginia Attorney General Ken Cuccinelli announced that he will file a lawsuit on behalf of his state challenging what he called the “unconstitutional overreach” of the healthcare law.
“Virginia is in a unique situation that allows it the standing to file such a suit since Virginia is the only state so far to pass a law protecting its citizens from a government-imposed mandate to buy health insurance,” he said. “The health care reform bill, with its insurance mandate, creates a conflict of laws between the federal government and Virginia,” Attorney General Cuccinelli said.
“Normally, such conflicts are decided in favor of the federal government, but because we believe the federal law is unconstitutional, Virginia’s law should prevail.”
Attorneys general and other opponents of the bill had threatened legal challenges for months. Most recently, they objected to the proposed “deem and pass” legislative maneuver that had been the suggested route to passage of the bill. But congressional leaders jettisoned the maneuver on Saturday and relied instead on traditional up or down votes on Sunday. That decision eliminated potential grounds for a lawsuit.
Has Congress overstepped its authority?
At the center of the controversy is the bill's inclusion of a federal mandate requiring all Americans to purchase health insurance or face penalties. Opponents say this measure stretches Congress’s constitutional power to “regulate commerce … among the several states” beyond any meaningful limits on federal authority. They say Congress is authorized to regulate behavior to protect public safety or welfare, but federal lawmakers overstep the constitutional limits of their power when they begin ordering Americans to purchase certain products.
“With this law, the federal government will force citizens to buy health insurance, claiming it has the authority to do so because of its power to regulate interstate commerce,” Cuccinelli said. “We contend that if a person decides not to buy health insurance, that person – by definition – is not engaging in commerce, and therefore, is not subject to a federal mandate.”
The Virginia attorney general added: “Just being alive is not interstate commerce. If it were, there would be no limit to the US Constitution’s commerce clause and to Congress’s authority to regulate everything we do.”
In addition to challenging the individual mandate to buy health insurance, opponents had threatened to sue to block favorable concessions to the states of Nebraska and Louisiana that were designed to entice senators from those states to vote in favor of the healthcare bill.
Virginia to sue government over healthcare reform
(2010-03-22)
(REUTERS) -
NEW YORK (Reuters) - Virginia's attorney general said he plans to sue the federal government over the healthcare reform legislation, saying Congress lacks authority to force people to buy health insurance.
Attorney General Kenneth Cuccinelli, a Republican, said on Monday that Congress lacks authority under its constitutional power to regulate interstate commerce to force people to buy insurance. He said the bill also conflicts with a state law that says Virginians cannot be required to buy insurance.
"If a person decides not to buy health insurance, that person by definition is not engaging in commerce," Cuccinelli said in recorded comments. "If you are not engaging in commerce, how can the federal government regulate you?"
Cuccinelli said he plans to file his lawsuit in federal court in Richmond, Virginia, after President Barack Obama signs the bill into law, which he is expected to do.
The bill requires most Americans to have health coverage, and provides subsidies to help lower-income workers afford it.
No Republican voted for the bill, which passed the House on Sunday night by a 219-212 vote.
(Reporting by Jonathan Stempel; editing by John Wallace)
BL: Obama "Spreads The Wealth" With New Taxes for Health Care
By Ryan J. Donmoyer
March 22 (Bloomberg) -- President Barack Obama said on the campaign trail in October 2008 that he wanted to “spread the wealth around.” With Obama on the verge of signing sweeping health-care overhaul legislation, he’s about to do just that.
High-income investors would pay higher Medicare taxes, tax breaks for out-of-pocket medical deductions would be curtailed, and it would cost insurance companies more to pay executives millions of dollars. Those levies will help fund expansion of Medicaid services for the poor and subsidize health insurance to cover millions who don’t currently have benefits.
“It’s very clear that taxes are levied on the wealthy and the benefits will spread across the entire income distribution, with a lot going to expanded Medicaid distribution and expanding health insurance,” said Roberton Williams, an economist at the Tax Policy Center, a Washington research institute backed by the Urban Institute and Brookings Institution. “One couldn’t claim he didn’t keep that promise” to “spread the wealth around.”
In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency. The bill also imposes about $69 billion more in penalties for individuals and businesses who don’t meet mandates to buy insurance, according to the Congressional Budget Office, another nonpartisan agency.
Higher Medicare Taxes
Most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000.
The legislation would for the first time apply Medicare taxes to investment income received by these households beginning in 2013. The 3.8 percent rate would apply to unearned income such as realized capital gains, dividends, interest, rents, and royalties. It wouldn’t apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn.
Obama’s budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted.
The bill also increases the individual’s share of Medicare tax currently imposed on salaries starting at $200,000 for individuals and $250,000 for couples to 2.35 percent, from 1.45 percent currently.
Cost to Couples
The combination of the new Medicare taxes and Obama’s budget proposals, if they were in place this year, would cost a married couple with a household income of $5 million an extra $287,100 in taxes, according to analysis by the consulting firm Deloitte Tax in Washington.
The Medicare taxes superseded an earlier Senate proposal to tax high-value employer-provided insurance coverage, dubbed “Cadillac plans.” That 40 percent excise tax was delayed until 2018, when it would begin to apply to benefits over $10,200 for individuals and $27,500 for couples.
Those thresholds would be indexed to inflation, which grows at a slower pace than the cost of health care, meaning more employers would likely face the levy over time.
Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.
Savings Accounts
The bill in 2011 places new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including health savings accounts. Improper withdrawals from the accounts also would be hit with a new 20 percent tax.
And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses.
Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings, according to WageWorks Inc., a San Mateo, California, company that administers 1.5 million accounts.
Tanning Salons
Consumers who frequent tanning salons would pay a 10 percent excise tax, and those who buy devices such as wheelchairs would pay a 2.9 percent excise tax. Drugmakers may pass on a $3 billion annual fee. Insurers would be denied deductions for executive pay over $500,000.
Under the reconciliation bill, individuals who don’t purchase insurance would be subject to a fine of $325 in 2015 and $695 in 2016. Individuals may be subject to a charge equal to as much as 2.5 percent of their income in 2016, if the total is greater than the flat payment.
Employers with 50 or more workers would pay $2,000 per worker if they don’t offer health insurance. The legislation offers a small business tax credit to help pay for employer- provided premiums.
To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net;
Last Updated: March 22, 2010 00:01 EDT
ETFC: E*Trade Appoints Steven Freiberg CEO, Plans 1-for-10 Reverse Stock Split
By Nick Baker
March 22 (Bloomberg) -- E*Trade Financial Corp., the online brokerage that hasn’t posted a quarterly profit since 2007, named Steven Freiberg chief executive officer two weeks after saying its preferred candidate was no longer a possibility. The company’s board also approved a 1-for-10 reverse stock split.
Freiberg, 53, joins New York-based E*Trade from Citigroup Inc., where he’d worked for three decades, according to today’s statement. He was reassigned from his job overseeing credit cards at New York-based Citigroup in January 2009, when the company shifted businesses it wants to exit into a new division called Citi Holdings Inc.
He replaces Robert Druskin, who remains chairman. Druskin was named interim CEO in December after E*Trade failed to find a permanent replacement for Donald Layton, who helped save the online brokerage from collapse.
E*Trade, the fourth-largest online brokerage by client assets, has lost $3.58 billion since the third quarter of 2007 because of customer defaults on home loans. While Layton failed to return the company to profitability, he reduced costs by swapping $1.7 billion of debt into zero-coupon convertible bonds. He was asked to serve as CEO through December 2009 in March 2008, three months after E*Trade received a $2.5 billion cash infusion from hedge-fund manager Citadel Investment Group LLC, now its largest shareholder.
E*Trade shares have fallen 11 percent to $1.57 this year, compared with the 2.7 percent advance by the NYSE Arca Securities Broker/Dealer Index.
To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net.
Last Updated: March 22, 2010 08:32 EDT
FUQI falling to new highs...seems impossible to go even lower
FXI: Asian Stocks Fall the Most in a Month on Concern Over Stimulus
By Shani Raja
March 22 (Bloomberg) -- Asian stocks fell the most in a month on concern the region’s central banks will boost efforts to curb inflation, and after an International Monetary Fund official said economies will struggle to tackle public debt.
BHP Billiton Ltd., the world’s largest mining company, lost 1.4 percent in Sydney as commodity prices slumped after India’s central bank unexpectedly raised interest rates last week. PetroChina Co., the nation’s biggest energy producer, dropped 2.7 percent in Hong Kong after agreeing to take over Australia’s Arrow Energy Ltd. Posco, Asia’s biggest maker of stainless steel, sank 3.3 percent in Seoul on speculation global demand will slow.
“Investors are increasingly jittery about the inflationary outlook and high levels of sovereign debt,” said Tim Schroeders, who helps manage about $1.1 billion at Pengana Capital Ltd. in Melbourne. “The IMF’s comments switch the spotlight to a medium-term limitation of the global economy.”
The MSCI Asia Pacific ex Japan Index fell 1.5 percent to 415.27 as of 7:24 p.m. in Tokyo, its biggest drop since Feb. 19. About four times as many stocks declined as advanced. The gauge gained 1.3 percent last week after the U.S. Federal Reserve pledged to keep borrowing costs near zero for an “extended period” and as the Bank of Japan expanded a bank-loan program.
Hong Kong’s Hang Seng Index fell 2.1 percent, the biggest decline among Asia-Pacific equity benchmarks, as developers dropped after Beijing suspended some land sales. South Korea’s Kospi Index lost 0.8 percent, Australia’s S&P/ASX 200 Index fell 0.9 percent, and China’s Shanghai Composite Index gained 0.2 percent. Japan’s markets were closed today for a holiday.
Rate Surprise
Futures on the Standard & Poor’s 500 Index fell 0.8 percent. The gauge declined 0.5 percent on March 19 as India’s surprise rate decision that day spurred speculation that withdrawal of economic stimulus policies will curtail global growth. India’s central bank raised interest rates for the first time in almost two years, saying that controlling price-gains was imperative after inflation accelerated to a 16-month high.
“India raising rates is seen as a precursor to other big- spending economies tightening fiscal measures, and we know how traders will react to that,” said Chris Weston, a Melbourne- based research analyst at IG Markets. “The narrative from the IMF shows it’s going to be a bumpy ride for 2010, but the potential pullback should also entice some fresh investment opportunities.”
‘Acute’ Challenges
Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing.
Materials-related companies fell the most among the 10 industry groups in the MSCI Asia Pacific ex Japan Index after crude oil retreated the most in three weeks in New York on March 19, slumping 1.9 percent to settle at $80.68 a barrel and copper futures dropped 0.7 percent to $3.3725 a pound.
BHP Billiton dropped 1.4 percent to A$42.59, and Rio Tinto Group, the world’s third-biggest mining company, lost 1.5 percent to A$75.03. Jiangxi Copper Co., China’s biggest producer of the metal, slipped 1.9 percent to HK$16.52 in Hong Kong.
Cnooc Ltd., the country’s biggest offshore oil explorer, sank 2.7 percent to HK$12.32, while in Sydney, Santos Ltd., Australia’s No. 3 oil and gas producer, dipped 1.2 percent to A$14.08. PT Bumi Resources, Asia’s largest exporter of power- station coal, fell 9.7 percent to 2,325 rupiah in Jakarta.
Commodities, Valuations
PetroChina slumped 2.7 percent to HK$8.97. The company and Royal Dutch Shell Plc agreed to buy Australian coal-seam gas producer Arrow Energy after raising their offer to A$3.5 billion ($3.2 billion). Arrow fell 3.6 percent to A$5.10 in Sydney.
Shipping lines dropped after the Baltic Dry Index, a measure of freight rates for commodities, had its first weekly decline in five weeks. Orient Overseas (International) Ltd., Hong Kong’s biggest container line, retreated 6 percent to HK$54.50. Hanjin Shipping Co., South Korea’s largest container- box carrier, lost 4 percent to 30,000 won.
Today’s drop in the MSCI Asia Pacific ex Japan Index wiped out its increase this year. Concern that governments will withdraw policies that have fueled economic growth, and that Greece will struggle to curb its deficit, has offset optimism from reports showing improving U.S. manufacturing and employment.
Shares in the Asian gauge trade at 14.4 times estimated earnings, compared with 15.1 times for the MSCI World Index. The world index has risen 1.5 percent this year.
‘Cause for Optimism’
“There is still cause for optimism,” said Pengana’s Schroeders. “Valuations overall remain attractive, bolstered by increasing levels of merger-and-acquisition activity as consolidation amongst companies in certain sectors continues.”
Posco sank 3.3 percent to 529,000 won in Seoul, while in Hong Kong, Aluminum Corp. of China Ltd. lost 4.1 percent to HK$8.06. Baoshan Iron & Steel Co., China’s largest publicly traded steelmaker, declined 1.1 percent to 8.19 yuan in Shanghai. BlueScope Steel Ltd., Australia’s biggest steelmaker, retreated 2.5 percent to A$2.75 in Sydney.
China Overseas Land & Investment Ltd., a developer controlled by China’s construction ministry, sank 3.8 percent to HK$16.32 in Hong Kong. Hang Lung Properties Ltd., which gets about 40 percent of sales from China, retreated 4.6 percent to HK$30.35 and was the biggest drop in the Hang Seng Index.
Beijing halted a land transaction in the city’s central business district as regulators decided to suspend some purchases to stabilize the property market, the Beijing News reported today, citing the Beijing Land Coordination and Reservation Center.
China’s property prices rose at the fastest pace in almost two years in February, fueling concern record lending and inflows of capital from abroad are creating asset bubbles in the world’s third-biggest economy.
“Record property prices in cities like Beijing and Shanghai are prompting the government to do something,” said Pauline Dan, Hong Kong-based chief investment officer at Samsung Investment Trust, which oversees about $77 billion in assets. “China is relying primarily on administrative measures to cool the property market and is delaying raising interest rates.”
To contact the reporter for this story: Shani Raja in Sydney at sraja4@bloomberg.net.
Last Updated: March 22, 2010 06:26 EDT
BL: Obama May Pay Price for Pushing `Political Chips' on Health-Care Overhaul
By Edwin Chen and Julianna Goldman
March 22 (Bloomberg) -- Barack Obama achieved what every Democratic president since Harry Truman has attempted when the U.S. House passed a health-care overhaul. Now he’ll find out what price he and his party may pay for the victory.
The bill’s passage, which affects 17 percent of the nation’s economy, came without a single Republican vote, a measure of the partisan divide over the issue that has fueled distrust of Congress and damaged Obama’s approval ratings.
“There’s no doubt that he’s pushed a lot of his political chips in the middle of the table,” David Axelrod, a senior White House adviser, said in an interview. “If we had not been successful, I think there would have been a lot of crepe hanging in this town, and most of the crepe would have been hung on this building. And he knew that.”
“What was on trial here was not just whether we could solve the health-care problem, but whether we could solve any problem,” Axelrod said.
Republicans complain about both the substance of the $940 billion bill and the process by which it was passed. Democrats considered how to defend their vote for it during this year’s congressional election campaigns.
“This obviously is hugely important to the president, but you have to realize that there are some people who took a vote that will probably cost them their election,” said New York Representative Anthony Weiner, a Democrat. “I hope that the administration sees this as not only a triumphant moment, but also a little bit of a humbling one.”
Scale Back
Obama will likely be forced to scale back energy and climate-change legislation, several House members said.
In remarks last night after the House acted, Obama thanked Democrats for rising “above the weight of our politics.”
“This wasn’t an easy vote for a lot of people, but it was the right vote,” he said at the White House.
At one point in January, when his prospects looked bleak, the president said he’d be willing to serve just one term if that was the cost of delivering on health care, which he has made the center of his domestic agenda.
He persisted as one obstacle followed another: Deadlines came and went, and finally his party lost a Massachusetts Senate seat held by the late Edward Kennedy since 1962, after Republican Scott Brown campaigned against Obama’s plan.
After Brown’s victory deprived Democrats of the 60 Senate votes they needed to stop Republican delaying tactics, some top aides urged Obama to seek a less-sweeping health-care overhaul while Republicans stepped up their calls to start over.
Obama rejected that advice. The legislation he’s about to sign will provide coverage for tens of millions of Americans, impose “the toughest insurance reforms in history,” as he put it on March 20, and set the U.S. on course toward universal medical insurance.
‘Opportunity Cost’
Still, Obama’s victory leaves him depleted. “There has been a large ‘opportunity cost’ that the president and the Democratic Party have paid for going down this road,” said William Galston, a onetime domestic policy adviser to President Bill Clinton.
Obama is unlikely to find either Democratic or Republican willingness to work on issues of mutual concern.
“The president just has a limited ability to ask Democrats to cast any more tough votes going forward,” said Vin Weber, a Republican strategist and former congressman from Minnesota.
Said Representative Baron Hill, an Indiana Democrat, “I feel like I am walking the plank.”
“In the short term, it’s going to cost me,” Hill said. “It remains to be seen whether or not people will see the benefits that are in the bill 10 years out.”
‘Huge Price’
Obama and Democratic allies have already begun selling those benefits, convinced that many consumer-protection features will become evident later this year -- and be appreciated before Election Day.
To be sure, not all Republicans say the president’s victory presages gains for their party in the November midterm elections.
“I believe the Democrats should pay a huge price for this,” said Darrell Issa, a California Republican, “but I am not going to predict that they will.”
Within his own party, Obama used the soft power of persuasion more than the arm-twisting associated with Lyndon Johnson, aides and advisers said.
The vote brought him closer than any president to putting the U.S. on a path to universal health coverage. In November 1945, seven months into his presidency, Truman proposed a national health-care program.
‘Unpopular Votes’
White House spokesman Robert Gibbs said the health-care debate wouldn’t cause Obama to think small, arguing that the administration’s successes are cumulative.
Some analysts disagree with that calculation.
The president, starting with the economic-stimulus bill, “pushed Democrats into casting a lot of unpopular votes,” said George Edwards, a presidential historian at Texas A&M University in College Station, Texas. “And now people will be saying: ‘Don’t ask me to cast more that are going to end my career.’”
Edwards said the divisions created by the health-care fight create some possibilities. Obama may “emphasize things that have more support, that are less divisive, that are more positive -- jobs and the economy,” he said.
To contact the reporters on this story: Edwin Chen in Washington at EChen32@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net
Last Updated: March 22, 2010 00:48 EDT