Old and still drinking water and eating dry white toast.
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FX MATH: In Currency Wars, Balance Sheet Always Wins
The massive bouts of asset buying that central banks have undertaken since the financial crisis might look as if they have been a wash for currencies, which have ended up more or less where they were four years ago.
However, if you look inside the data and compare the ratio of change in one central bank's balance sheet to another's at different periods of time, the evidence presents a very different picture. "Quantitative easing" has been a big driver of exchange rates and likely will continue to be for some time.
The strongest example can be found in comparing changes in the balance sheets of the Federal Reserve and the European Central Bank to each other, which reveals a profound effect on the level of the euro against the dollar. Using the same comparison, we can conclude that Fed and ECB actions of the past week point toward a continuation in the euro's strength.
A longer-term look at each bank's quantitative-easing program tells the full story. As the Fed added liquidity in November 2010 and again in September 2012 via quantitative easing and expanded its balance sheet in relation to the balance sheet of the ECB, the spread between the two grew. What followed shortly after was a long protracted slide in the dollar. But as the ECB responded with its own form of QE, first in December 2011 and again in February 2012--the long-term refinancing operation program--ECB balance-sheet expansion outpaced that of the Fed's, narrowing the ratio between the two. That, in turn, led to a slide in the euro.
The 30-week correlation between the ratio of the Fed and ECB balance sheets to the euro-dollar is currently at 0.68, where 0 means there is no connection at all and 1.0 means the pair moves in lock-step. Essentially, as the ratio of the balance sheets rises--regardless of whether it is Fed or ECB policy driving the change in the ratio--the euro climbs against the dollar.
This poses something of a challenge to a view held in some quarters that QE has had no discernible effect on currency rates. In a recent article in The Wall Street Journal, some analysts were quoted as saying that the two central banks' efforts largely offset each other, limiting any major moves. The argument for no impact falls down, however, when the key measures of QE--balance-sheet accumulation--is examined over time and compared across different central banks.
The greatest proof came over the past week. With the ECB disclosing repayments of long-term refinancing loans by several of the region's banks, the change in the Fed-ECB balance-sheet ratio widened due to de-facto tightening by one of the central banks for the first time in years. Just a few days later, the Fed disclosed that it would stay on its current course, adding $85 billion to its balance sheet each month, which means the ratio will widen even further in the coming months since the ECB doesn't have plans to expand its balance sheet.
The result of the latest moves was that the euro traded as high as $1.3675 Friday, its highest level since November 2011.
Though the correlation has weakened occasionally over the past few years, those blips have been temporary in nature and the correlation has never fallen to 0. It has been surging higher in recent weeks and the latest move by the ECB and the euro's response only reinforces the connection.
The balance-sheet data suggest the euro will continue to outperform the U.S. dollar, at least until investors perceive the Fed will stop expanding its balance sheet or the ECB begins expanding its balance sheet again at a pace greater than the Fed's.
Investors are clearly putting their money on the ECB for the near term. Beyond the move in the spot market, the price of three-month risk-reversals on the euro is at their highest levels since October 2009, according to traders. The risk reversal--the cost of calls over puts--rises as investors bet that the underlying currency, in this case the euro, will trade higher.
Watching the ratio of the Fed and ECB balance sheets provides a roadmap for how the pair is likely to trade in the coming months. It is an especially helpful tool since simply looking at Fed policy has done little to guide the pair.
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CFTC: Net Long-Euro Position $4.6 Billion, Up 30%
The net amount of investor cash betting the euro would rise jumped 30% in the past week, government data showed Friday.
As of Jan. 29, investors increased their net long-euro position to $4.6 billion, up from $3.6 billion the previous week, according to the Commodity Futures Trading Commission's weekly report on the commitments of traders.
Investors have become increasingly optimistic about lending conditions in the euro zone. Last week, euro-zone banks indicated they would repay 137.16 billion euros ($183.48 billion) in European Central Bank loans two years early. The repayment amount came in at the top end of analysts' expectations.
Business conditions are also improving, particularly sharply in Germany, the euro-zone's largest economy. On Jan. 25, a closely watched index showed German business confidence jumped to a seven-month high in January. German business activity also rebounded in January.
Meanwhile, investors increased their bearish-yen bets by 8.7%. Investors held a net short-yen position--or positions that would benefit if the yen fell against the dollar--totaling $9.8 billion as of Jan. 29.
Japan's trade deficit, reported on Jan. 24, nearly tripled to a record 6.927 trillion yen in 2012, spurring expectations that the new Japanese government will continue to use monetary easing as a tool to stimulate the lackluster economy. At its monthly meeting last week, the Bank of Japan announced it would raise its inflation target to 2% and begin open-ended asset purchases in 2013, which would place additional pressure on the yen.
Overall, investors decreased their net short-dollar positions to $10.7 billion, down 30% from the previous week.
The report tracks the movements of speculators on the Chicago Mercantile Exchange. Although a small part of the global currency markets, these investors' positions are considered indicators of trading among investors like hedge funds. The CFTC's weekly report shows investors' open positions in futures contracts in major currencies held against the dollar.
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Euro Rallies to Highest Since 2011 as ECB Balance Sheet Shrinks
The euro touched the highest level against the dollar in 14 months as the European Central Bank’s balance sheet contracted while the Federal Reserve said it would continue pumping money into the U.S. economy.
The 17-nation currency gained for a second week, its first back-to-back advance this year, amid data that showed Europe’s economy may be improving. The yen fell versus the dollar for a 12th straight week, the longest since at least 1971, amid bets Prime Minister Shinzo Abe will pick a new central-bank governor who will boost monetary stimulus. South Korea’s won slid versus all of its major peers. The ECB meets Feb. 7 on interest rates.
“The move in euro has been very dramatic,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “The data in general have been coming up pretty fair in Europe. I think they’re indicating the economy in Europe right now at least is stabilizing.”
The shared currency rallied 1.3 percent to $1.3640 this week in New York. It touched $1.3711, the strongest level since Nov. 14, 2011. Against the yen, the euro climbed 3.6 percent, the most since February 2012, to 126.66 and touched 126.97, the highest since April 2010.
The dollar reached 92.97 yen, the highest since May 2010, and gained 2.1 percent on the week to 92.77 yen. It has never before risen for 12 straight weeks versus the Japanese currency, according to records compiled by Bloomberg dating to 1971.
Sixth Month
The euro appreciated in January for a sixth month against both the dollar and the yen. The advance against the greenback was the longest since May 2003, and the winning streak versus the Japanese currency was the longest since the euro began trading in 1999.
“There seems to be no reason to pick a top to the euro’s strength,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said Jan. 28 in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee.
The shared currency gained 4.8 percent over the past three months among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen tumbled 16 percent, the biggest decline, and the dollar lost 1.1 percent.
The yen tumbled this week as Abe faced a decision on who will replace BOJ Governor Masaaki Shirakawa, whose term ends in April. Abe has pushed for action to spur economic growth and fight deflation.
The South Korean won had its biggest weekly loss against the dollar since May amid concern a weak Japanese currency will hurt the nation’s exports. The won slid 2.1 percent to 1,097.38 to the greenback.
Real, Krona
Brazil’s real and Sweden’s krona were the biggest winners among the U.S. currency’s 16 most-traded counterparts.
The real gained as the central bank offered dollars to support it. The currency pared the advance yesterday after a government official said in an interview the central bank will avert excessive appreciation. The real gained 2.1 percent to 1.988 per dollar, the biggest weekly jump since Dec. 7.
The krona advanced 2.4 percent to 6.3087 per dollar and touched 6.2785, the strongest since August 2011. It added 0.4 percent to 8.6058 to the euro.
The European currency gained yesterday versus the dollar and yen as a gauge of manufacturing in the 17-nation region in January rose to the highest in almost a year. The purchasing- manager index increased to 47.9, the most since February 2012, London-based Markit Economics said. It has been below the 50 level that signals contraction for 18 months.
Balance Sheet
The ECB’s balance sheet fell to 2.93 trillion euros ($4 trillion) in the week ended Jan. 25, the lowest since February 2012. The central bank hasn’t purchased sovereign debt for 45 straight weeks.
Banks repaid 137.2 billion euros of emergency three-year loans to the ECB this week, the Frankfurt-based central bank said in a statement Jan. 31. Another 3.5 billion euros are expected to be returned next week, it said.
The ECB won’t increase its 0.75 percent benchmark interest rate at its meeting next week, a Bloomberg survey forecast.
The euro climbed yesterday as a strengthening U.S. jobs market and bets that the Federal Reserve will sustain stimulus to ensure the recovery boosted investors’ risk appetite.
Payrolls in the U.S. rose by 157,000 jobs in January, versus a Bloomberg survey’s forecast of a gain of 165,000, Labor Department figures showed. The unemployment rate unexpectedly rose to 7.9 percent, from 7.8 percent.
‘Sweet Spot’
“The jobs report hit the sweet spot of not being too strong and not being too weak,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said in a telephone interview. “It was strong enough to diminish some of the downside worries, but it wasn’t so strong that you had a situation where you’d be concerned about the Federal Reserve accelerating any shift in its monetary-policy approach.”
The Fed said Jan. 30 after a two-day policy meeting that it will keep purchasing $85 billion of Treasury and mortgage securities each month to spur the economy. The purchases will continue “if the outlook for the labor market does not improve substantially,” policy makers said
The central bank left unchanged its statement that its target interest rate will stay close to zero as long as unemployment remains above 6.5 percent and projected inflation stays below 2.5 percent.
“As long as it’s not 6.5 percent, Bernanke has to continue being a dove,” Doug Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, said yesterday in a telephone interview.
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Why Dogs Are Smarter Than CaTs
With half as many neurons in their cerebral cortex as CaTs—and half the attitude, some would say—dogs are often taken to be the less intelligent domestic partner. While dogs drink out of the toilet, slavishly follow their master and need a chaperone to relieve themselves, cats hunt self-sufficiently and survey their empire with a regal gaze.
But CaTs beware. Research in recent years has finally revealed the genius of dogs.
Like other language-trained animals—dolphins, parrots, bonobos—dogs can learn to respond to hundreds of spoken signals associated with different objects. What sets dogs apart is how they learn these words.
CaTs can hold grudges and look like kings—but when it comes to memory, dogs get the pat on the head.
If you show a child a red block and a green block, and then ask for the chromium block, not the red block, most children will give you the green block, despite not knowing that the word "chromium" can refer to a shade of green. Children infer the name of the object. They know that you can't be referring to the red block.
In 2004, Juliane Kaminski from Britain's University of Portsmouth and her colleagues published the results of a similar experiment with a dog called Rico who knew the names of hundreds of objects.
Pole gets ready to play at the Duke Canine Cognition Center.
Dr. Kaminski showed Rico an object that he had never seen before, along with seven other toys that he knew by name. Then she asked Rico to fetch a toy using a word that was new to him, like "Sigfried." Just like human tots with the word "chromium," Rico was immediately able to infer that "Sigfried" referred to the new toy. Since the report on Rico, several other dogs have also been shown to make inferences this way. Dogs are the only animals that have demonstrated this humanlike ability.
Based on the ability of cats to hold a grudge, you might think that they have better memories than dogs. Not so. Several years ago, Sylvain Fiset of Canada's University of Moncton and colleagues reported experiments in which a dog or cat watched while a researcher hid a reward in one of four boxes. After a delay, they were allowed to search for the treat. Cats started guessing after only one minute. But even after four minutes, dogs hadn't forgotten where they saw the food.
Still, dog owners should not be too smug. In 2010, Krista Macpherson and William Roberts of the University of Western Ontario published a study that tested navigational memory, in which dogs had to search for food in a maze with eight arms radiating out from a central position. The researchers then looked at rats previously given the same test. They beat dogs by a wide margin.
While it may seem intuitive that most doggies know how to paddle, some need a little instruction. WSJ's Geoffrey Fowler attends a canine swimming class.
Even the dog's closest relative, the wolf, beat its cousin when food was placed on the opposite side of a fence, as shown in a 1982 study by Harry and Martha Frank of the University of Michigan. In 2001, Peter Pongrácz and colleagues from Eötvös Loránd University in Hungary published a study with an important qualification to this earlier finding: When the experimenters showed dogs a human rounding the fence first, the dogs could solve the problem immediately.
This is the secret to the genius of dogs: It's when dogs join forces with us that they become special.
Nowhere is this clearer than when dogs are reading our gestures. Every dog owner has helped her dog find a lost ball or treat by pointing in the right direction. No other animal—not even our closest relatives, bonobos and chimpanzees—can interpret our gestures as flexibly as dogs.
So are dogs smarter than CaTs? In a sense, but only if we cling to a linear scale of intelligence that places sea sponges at the bottom and humans at the top. Species are designed by nature to be good at different things.
And what might the genius of CaTs be?
Possibly, that they just can't be bothered playing our silly games or giving us the satisfaction of discovering the extent of their intelligence.
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Federal Reserve blames stalled economy on weather
The Federal Reserve is blaming the recent economic slowdown on weather and other temporary factors, and plans to keep easy-money policies in place for the foreseeable future.
"Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors," the Federal Reserve's policymaking committee said in a statement Wednesday.
The report comes just hours after the Commerce Department said the U.S. economy contracted at the end of 2012, for the first time in three years.
The Fed made no major changes to its policies, opting to keep interest rates near zero. As it did in December, the Fed said it will probably keep rates low until the unemployment rate falls to 6.5% or inflation exceeds 2.5% a year.
Economists took the Fed's language as an encouraging sign that it's not too worried about the fourth quarter slump, and stocks largely shrugged off the news.
"In December, the Committee delivered an extraordinary open-ended promise to provide as much monetary policy stimulus as it takes to get labor markets, and therefore the economy, to accelerate convincingly," said Ellen Zentner, senior economist at Nomura. "After doing so, it is likely that the next several FOMC meetings will prove to be comparatively uneventful."
The central bank will also continue buying $40 billion a month in mortgage-backed securities and $45 billion a month in Treasuries. The hope is that those additional purchases will continue to push long-term interest rates even lower.
"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Fed statement said, repeating language from December's statement.
The Fed's loudest critics argue that the Fed's easing policies are unlikely to have an impact on the unemployment rate, which currently stands at 7.8%. Many also fear that as the Fed buys an unprecedented amount of bonds, it will eventually trigger rapid inflation and struggle to unload the assets in a timely manner.
Of the Fed's 12 voting members, only one disagreed with Wednesday's decision. Esther George, president of the Federal Reserve Bank of Kansas City, said she was concerned that the Fed's policies could "increase the risks of future economic and financial imbalances."
In a speech earlier this month, she warned that the Fed's stimulative policies could risk fueling an asset bubble in bonds or farmland, among other things.
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What's behind the bull market
U.S. stocks are flirting with all-time highs, climbing to levels not seen since before the financial crisis.
But stock prices cannot go up forever, and some analysts warn that the bull market is nearing an end, just as many individual investors are returning to the market.
"The market environment is likely to get tougher in February and March as investors wrestle with the impact of fiscal tightening on the economy," said Russ Koesterich, BlackRock's global chief investment strategist.
What's behind the rally
There are a number of factors at play, including signs of improvement in Europe and sustained growth in China. But analysts say the Federal Reserve's stimulus moves have been the main driver.
The current bull market dates back to March 2009, but the rally really gained momentum after the Fed launched its second round of quantitative easing, or QE2, in 2010.
The bond-buying strategy, now in its third iteration, has coincided with a broad improvement in economic data and record profits for U.S. corporations.
But the rally is as much about what did not happen as what did.
The U.S. economy did not fall off the fiscal cliff, and lawmakers have delayed a showdown over the debt ceiling until mid-May.
The eurozone did not collapse under the weight of its crushing debt, thanks largely to aggressive moves by the European Central Bank.
And the Chinese economy appears headed for a soft landing, easing worries about demand in the world's second largest economy.
"Together, these things basically assured a risk-on rally," said Quincy Krosby, market strategist with Prudential Financial.
Related: Buy, sell or hold? What do with some of the hottest and coldest stocks
Investors were also drawn back into the market by attractive valuations, which is a fancy way of saying stocks were cheap.
Since the market bottomed in 2009, many large investors have been scooping up shares of companies that were beaten down in 2008. Many bank stocks, for example, were trading well below book value, which is the theoretical price their assets are worth minus their liabilities.
Bank of America (BAC, Fortune 500) more than doubled in price last year as investors flocked to shares of companies in the financial services sector. JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) also bounced back.
Is now the time for investors to jump in?
The good news is that stocks still seem relatively attractive. The stocks in the S&P 500 are trading at roughly 14 times expected earnings for this year, which is reasonable.
But the trends that have supported stocks up until now are changing, and investors should be prepared to play defense, said Doug Cote, chief market strategist at ING Investment Management.
Cote pointed to corporate earnings, the life blood of stock returns, which are not growing as much as they had been.
At the same time, the latest economic data have been mixed, including a disappointing report on fourth-quarter GDP released Wednesday.
In a counter-intuitive twist, the weak GDP report could end up boosting stocks in the short term, since many investors believe it will lead to more Fed stimulus, said Krosby.
Wednesday afternoon, the Fed confirmed that it will continue its bond buying program. Still, it remains to be seen how the market will fare once the central bank stops buying bonds.
Meanwhile, after shunning stocks for the past few years, individual investors have started stepping back in.
"People are panicking that they missed the bull market and they're going to get in come hell or high water," said Cote. "But this is not a good time, the party is starting to be over."
Cote said the increased participation by individual investors is "a good thing," since they had been underexposed. But he warned that the market could be headed for a pullback.
"I think this thing comes back to Earth a lot faster than it went up," he said.
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Investors still buying stocks, but enthusiasm waning
U.S. stock mutual funds raked in $3.5 billion during the week ended Jan. 23, marking the third consecutive week of inflows.
Individual investors continue dip back into U.S. stocks as the Dow and S&P 500 get closer to new record highs, but the pace has slowed.
U.S. stock mutual funds raked in $3.5 billion during the week ended Jan. 23, according to data from the Investment Company Institute, making it the third consecutive week that investors added money to U.S. stocks. Altogether, investors have plowed more than $16 billion into the market during that time period, according to ICI.
The inflows represent a significant departure from the recent trend of investors fleeing the stock market, but are still just a drop in the bucket when you consider that investors yanked more than $150 billion from U.S. stocks during each of the last three years.
Plus, it seems the enthusiasm has already started to wane. During the first full week of the year, investors plowed a record $7.7 billion into U.S. stock mutual funds, nearly twice the latest weekly inflow amount.
Related: What's behind the bull market
U.S. stocks have been steadily rising since the start of the year, with the Dow and S&P 500 gaining about 5%, and both indexes are now within spitting distance of their all-time highs reached in October 2007.
As investors stepped back into the stock market, CNNMoney's Fear & Greed Index shifted deep into extreme greed. Just two months ago, it was sitting in fear. While there's definitely been a shift in sentiment, investors remain cautious. The current bull market is entering its final phase, which can last awhile but which can also cause some volatility.
Meanwhile, investors' love affair with bonds is going strong, despite growing worries of a bond bubble. During the latest week, they added more than $8 billion to bond mutual funds, ICI data showed. That brings the year's total inflow into bonds to more than $28 billion. In 2012, investors flooded bond funds with more than $300 billion.
Hybrid funds, which invest in both stocks and bonds, remain in favor among investors, gaining $1.9 billion in the latest week.
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U.S. Mutual Funds Reaping Record Deposits as Markets Rise
Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds.
Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data goes back to 1984.
Signs of improvement in the U.S. economy and a rising stock market that pushed the Dow Jones Industrial Average above 14,000 today for the first time since 2007 have prompted Americans to step up their investments. Equity mutual funds gathered $29.9 billion in January’s first three weeks, more than for any full month since 2006.
“When we got beyond the fiscal cliff it unlocked a lot of money,” David Kelly, chief global strategist for New York-based JPMorgan Funds, said in a telephone interview. “That was a big risk that was removed.”
The unit of JPMorgan Chase & Co. manages $367 billion. The U.S. Congress at the start of the year reached a compromise to avoid more than $600 billion in scheduled tax increases and spending cuts that could have damaged the economy.
Hiring climbed in January after accelerating more than previously estimated at the end of 2012, evidence the U.S. labor market was making progress. Payrolls rose 157,000 after a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed today in Washington.
Economic Improvement
Manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to perk up, data from the Institute for Supply Management showed today.
“As economic life across America slowly improves, stock funds will increase too,” Avi Nachmany, director of research at New York-based research firm Strategic Insight, wrote this week in a report. Mutual-fund deposits may exceed $90 billion in January when final data are available, according to estimates by Strategic Insight.
The Standard & Poor’s 500 Index, a benchmark for large U.S. stocks, gained 6.1 percent this year as of 2:44 p.m. in New York after advancing 13 percent in 2012. The 20-member S&P index of custody banks and asset managers is up 11 percent in 2013.
Asset-management firms have noticed the change in investor behavior.
“In January people have moved back into equities,” James Kennedy, chief executive officer of Baltimore-based T. Rowe Price Group Inc. (TROW), said in a Jan. 29 interview. “It is true for the industry and it is true for us.”
Reversing December
The firm’s mutual funds suffered redemptions in December as customers waited for U.S. political leaders to strike a budget deal, Kennedy said. T. Rowe Price oversaw $577 billion as of Dec. 31.
At Invesco Ltd. (IVZ), the owner of Invesco, Van Kampen and PowerShares funds, sales of equity products in January were running 50 percent higher than in the fourth quarter, Chief Financial Officer Loren Starr said yesterday in an interview.
“January has been an extraordinary month in terms of flows coming back into a whole range of products,” Starr said. Atlanta-based Invesco has $688 billion under management.
Franklin Resources Inc. (BEN), manager of the Franklin and Templeton mutual funds, reported today that investors pulled $6.4 billion from its stock funds in the fourth quarter.
“As U.S. equity flows come back we would expect to see, like many, a stronger number this quarter,” CEO Gregory Johnson said on a conference call. San Mateo, California-based Franklin manages assets of $782 billion.
Domestic, International
Money flowed into both international and domestic stock funds in the first three weeks of last month, according to the ICI, whose data for the fourth week will be released Feb. 6. Domestic equity funds suffered redemptions for the past six years as clients piled into fixed income, ICI data show.
Stock funds last attracted more money in March 2006, when they drew $33.1 billion. In February 2000, just ahead of the collapse of technology stocks, equity funds won a record $56.3 billion, according to ICI data.
Clients contributed $28.1 billion to bond funds in the first three weeks of January, according to the ICI, even as money managers such as Dan Fuss of Loomis Sayles & Co. warned that rising interest rates could hurt bond performance.
“For heaven’s sakes, don’t go out and borrow money to buy bonds right now,” Fuss said this week in an interview. Fuss, who oversees $66 billion, called the fixed-income market more “overbought” than at any time in his 55-year career.
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BofA Declares: The Great Rotation Is Here
The big theme of 2013 – according to investment strategists at shops across Wall Street – will be the "Great Rotation," a massive move out of bonds and into stocks.
Economic growth in the U.S. is expected to accelerate, facilitating the shift.
Hedge fund manager Ray Dalio agrees – in an interview with CNBC this morning, he characterized 2013 as a transition year in which large amounts of cash that have been tied up in bank accounts or hidden under mattresses will move into equities and other risk assets.
Sure enough, we've seen historic fund flows into equity funds already in 2013 – but surprisingly, bond funds haven't seen big outflows.
For a while now, BofA Merrill Lynch Chief Investment Strategist Michael Hartnett has been out in front of the rest touting the "Great Rotation" theme for 2013 – and he says it's already begun.
Even though the public data don't show investors shifting out of bonds and into stocks yet, Hartnett says BofA's data on client position does show exactly that.
In a new note, Hartnett writes (emphasis added):
The past seven years have seen a Great Divergence in terms of fund flows. Investors have poured $800bn into bond funds and redeemed $600bn from long- only equity funds. But recent data show the first genuine signs of equity-belief in years. The past 13 days have seen $35 billion come back into equity funds ($19 billion of which is via long-only).
And while the industry flow data does not show “rotation” out of bonds, our private client data does. The structural long position in fixed income is simply threatened by low expected returns thanks to low rates and the mathematical reality that a small rise in rates can cause total return losses in portfolios. Table 1 shows that negative returns would occur if the 30-year Treasury yield rose from 3.03% to above 3.26% anytime in the next 12 months (and note the same yield was 4.53% just 3-years ago).
However, there are still two big risks to an "orderly" rotation out of bonds and into stocks this year, in Hartnett's view.
He says the possibilities of either a "1994 scenario" or a "1987 scenario" jeopardize a smooth transition:
1994
The current level of US jobless claims (335K) is the lowest since Jan 2008, when the unemployment rate was just 5.0%. If the global economy and corporate animal spirits revive sufficiently to cause an upward surprise to US payroll numbers in coming months, say numbers in excess of 300K, then a repeat of the 1994 “bond shock” is likely. In recent months we’ve drawn a number of comparisons to market returns in 2012 and 1993, the last year banks assumed major global leadership. In 1994 the combination of stronger-than-expected payroll, a tighter Fed, a 200bps back-up in yields led to a big pause in the nascent equity bull market and a savage reversal of fortune in leveraged areas of the fixed income markets (e.g. Orange County & Mexico). Investors banking on economic recovery should therefore be reducing longs positions in High Yield and EM debt.
1987
In contrast, in 1987, rising risk appetites caused equity prices to drag bond yields higher. At the same time, policy tensions over currency valuations between Germany and the US also put upward pressure on bond yields, as well as gold prices. Ultimately the combination of policy risks, rising gold and bond yields helped precipitate the October crash in equity markets. A repeat of 1987 is a low probability event in 2013. But it is also clear that risk appetite is on the rise, many countries are trying to devalue their way to growth, risking a currency war, and should gold start to respond favorably to this backdrop, we would certainly worry that a major risk correction is imminent.
So, what does this mean for investors? Hartnett writes that given the recent surge in investor sentiment (click here for eight indicators that illustrate this pretty clearly), a correction in the stock market in the next month or so would be a good thing.
However, if we don't get a correction in the next month or so. Here's why, according to Hartnett:
Retail inflows into equity markets have started to pick up (more inflows are expected to be reported in the weekly numbers) and individual investors are still lightly positioned in equities relative to history.
Further, both the EPS and GDP “bars” are low in early 2013. The three-month suspension of the US debt ceiling renders DC uneventful in the near term. And it is too early to argue the policy is not working to stimulate growth. Q2 is crucial in this respect.
If all of these factors come together to prevent a pullback in stocks this winter, Hartnett worries that "a combo of excess risk positioning and liquidity withdrawal could lead to a bigger correction in Spring."
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DAVID BIANCO: 'Significant Sequestration Is Good For Stocks'
One of the big unresolved issues of the fiscal cliff is the sequester, or the massive spending programs that were supposed to expire automatically at the end of the 2012.
America's defense contractors are expected to get hit the worst by sequestration. And the indirect impacts are expected to ripple unfavorably through much of the economy.
But in a note to clients today, Deutsche Bank's David Bianco writes that "some sequestration is good for stocks."
From his note:
We expect S&P to continue to rally during 4Q reporting. After that investors will turn their attention to the US debt ceiling and sequestration. We believe debt ceiling will be raised. As we argue in our note, contrary to most views, we believe significant sequestration is good for stocks and see the main threat to the rally as being the failure to put through any spending cuts in 2013.
Basically, Bianco thinks that the right kind of cuts would be favorable to U.S. debt metrics and in turn instill some confidence. Here's more on Bianco's thoughts from a note he published on Thursday
Fine-tuning sequestration is the best case scenario: Likely S&P 500 target 1600
We see the upcoming deadlines as an opportunity to improve the deficit. Slowing longer-term spending is key to stabilizing debt/GDP, but material 2013 cuts are needed for credibility. Thus, we think the best negotiated outcome trims the $70b sequestration for 2013 to ~$50b but maintains $1.2t in cuts over 9 years. Adding timing flexibility and opening more of the budget to cuts would cushion GDP impact, but cuts to entitlements and defense must occur under any credible plan. Thus, we favor modified sequestration.
Sequestration without modification: Likely S&P 500 target 1575
At this time, unmodified sequestration appears to be a very possible outcome. However, near-term support should still be strong at 1400 for the S&P in this scenario and we reiterate our 1575 year-end target. This outcome would pressure defense and many health care stocks; however, we think this risk is largely priced into those industries and the broader market would rally on a healthier fiscal outlook. GDP must demonstrate its ability to absorb the shock and still expand in 2013, but we think this is likely and 1575 should be reached by year-end likely with a late 2H rally after a range-bound summer.
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S&P 500 target raised to 1,600 at Deutsche Bank
The S&P 500 SPX +0.12% has had a strong run so far this year and Deutsche Bank analysts expect it to go even higher, leaving its old record in the dust.
The analysts raised on Friday their 12-month target for the index to 1,600 from 1,575.
“We are encouraged by recent legislation to sever the issue of spending cuts from the debt ceiling,” they wrote in a note to clients, referring to developments in Washington. “A higher debt ceiling sidelines the tail risk of default on debt or entitlement payments and puts the focus on a new spending cut agreement or following through with sequestration.”
The S&P 500 has gained around 5% so far this year. The benchmark rose briefly above 1,500 on Thursday for the first time since 2007. It’s still shy of its record closing high of 1,565.15, hit in October 2007. Read more on U.S. stock trading.
“Sentiment has become more positive than the typical new normal gloom, but we maintain our view that the next 5%+ S&P 500 price move is likely up to about 1,575,” the Deutsche Bank analysts said. They don’t expect the index to hit 1,600 in the first half of the year.
“Our best advice is to participate in the likely grind higher over the next few months with overweights in tech and industrials,” the analysts noted. “We remain overweight in financials on another expected leg up later in 2013.”
Obama Uses Blazing Saddles Strategy to Negotiate Debt Ceiling
Only Mel Brooks had the comic genius to pull off an iconic movie scene that has become a staple of hardball negotiating strategies. And only the president and could be dysfunctional enough to demonstrate that life really does imitate art, leaving the nation agog at the debt ceiling theatrics playing out on the Washington stage. You should be laughing if you're not already crying.
As President Obama steps up to the inaugural podium to once again take an oath to protect and defend a Constitution that has long become nothing but a minor irritant to those seeking to expand federal power, his words paint a picture of a government on autopilot. Out of control, running low on fuel, leaderless and off course, rival politicians are engaged in a desperate battle not to solve our fiscal problems but to affix blame for a disaster caused by both parties.
"There is no Plan B," says the president. The problem is that his Plan A is to push the country ever Forward toward an unprecedented explosion in government spending, borrowing, taxing, and money printing -- long-term consequences be damned.
Obama's Senate allies are doing their part, refusing to pass a budget since 2009. They even rejected Obama's last-submitted budget proposal -- unanimously. Required by law to submit another budget proposal by February 4, the administration has already indicated that it has no plans to do so, promising to deliver something "as soon as possible." Apparently, the fiscal cliff ate their homework.
And so the president strikes a defiant pose -- the Blazing Saddles Sheriff of Rock Ridge come to life -- mouthing words belied by his actions. Referring to demands that concrete spending reductions be put in place before the federal government can borrow trillions more, he declaims, "What I will not do is to have that negotiation with a gun at the head of the American people." Yet it is he, the Chief Executive, who is holding the gun. In business, this would lead to a company's rapid implosion.
I have worked with many CEOs facing imminent cash flameout. The good ones are a marvel to behold. They halt all unnecessary spending, immediately. They prioritize payables, paying the most essential bills first and on time, as less essential creditors are persuaded to wait. They put long term projects in mothballs, sell off non-strategic assets, renegotiate contracts, and aggressively pursue receivables. They announce furloughs and layoffs impacting all employees not absolutely essential to keeping the business afloat and impose pay cuts for all remaining personnel, starting with the CEO.
Most of all, an embattled CEO will do everything possible to reassure customers, suppliers, and partners. He will not run around telling the world how screwed up his company is and how close it is to falling off a cliff.
As everyone not living in a cave knows, the federal government is four to six weeks away from a serious cash crunch. So how many prudent CEO-like moves are taking place in Washington, D.C., these days? None. Instead, our Chief Executive stands in front of the news cameras with a metaphorical gun to the nation's head, daring Congress not to give him everything he wants so he can proceed with business as usual. Until the next crisis.
To make matters worse, the Republican Congressional leadership is in shambles, torn between the old bulls who have been part of the spending problem for decades and restive new members sent to Washington to slam the brakes on. As befuddled as the citizens of Rock Ridge, they have no idea what to make of this bizarre standoff. Their latest lame response? Kick the can. But no matter how many interim concessions they make, this is not going to end well. So what to do?
Let me offer a modest proposal.
Freezing the debt ceiling and issuing IOUs is a strategy that has a great deal of merit, as it is certainly better than caving in to more borrowing borrowing every time the same doomsday threats are repeated. The IOUs could circulate as a second-tier currency, like a Class A and a Class B stock or secured and unsecured credit instruments. Both traditional dollars and the new Obamabucks would circulate in parallel, just like Abraham Lincoln's Demand Notes (greenbacks) and bona fide Silver Certificates once did. If Lincoln could conjure up a novel fiat currency to finance the Civil War, what's to stop Obama from doing the same to finance Food Stamp Nation?
Whatever bills the federal government couldn't pay in dollars it would pay in Obamabucks, promising to redeem them later. The market would determine the exchange rate between the two, initially set at parity but allowed to float as a barometer of how well the president and Congress are doing in getting the country's fiscal house in order.
If the primary goal is to protect the credit rating of the United States so as to avoid the consequences of soaring interest rates on federal debt--as politicians from both parties claim--then anyone redeeming a federal security should get paid in dollars. Whenever the Treasury Department runs short of dollars, everyone else gets paid in Obamabucks, in essence making them creditors to the government. This includes all federal employees, Social Security and unemployment benefit recipients, anyone on the dole, defense contractors, members of Congress, and Big Bird.
The IRS would be required to accept Obamabucks at par as payment for taxes, creating an acceptor of last resort, but no private company or individual would be forced to accept anything besides dollars unless they choose to. And if any private parties decide to accept Obamabucks, they can discount them as the market will bear. Politicians would naturally accept Obamabucks as campaign donations, assuring that their constituents don't lose precious "access." Finally, businesses that want an escape hatch from the coming inflationary spiral can always bring back the gold clause.
Imagine the educational impact this would have on those who are mystified by the workings of a fiat currency. Picture even our densest citizens shaking off their innumeracy as they begin to ponder: "Hey, the Treasury has always printed as many dollars as it wants. Now it is printing as many Obamabucks as it wants. What's the real difference?"
The frightening answer is: None.
Scoff at the IOU gambit if you want. But if no one calls the sheriff's bluff, our blazing Chief Executive goes on to "win" battle after battle to blow past each debt ceiling, and the Fed proceeds with QE infinity as Ben Bernanke has promised, this is essentially the course the country will be following anyway.
Regardless of how the current debt ceiling circus act plays out, don't be surprised to see what happens to Uncle Sam's credit rating as potential lenders to a government living well beyond its means start figuring all of this out.
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not much time to post, glad your still around. have a merry christmas
Greek Economy To Shrink At Least 5% In 2012, Says Think Tank
ATHENS (Dow Jones)--Greece may be bracing for a recession far worse than the official forecast, a Greek think tank said Monday, with the contraction expected at 5% or more in 2012.
The Foundation for Economic and Industrial Research, also known as IOBE, appeared more pessimistic than the country's international creditors, while presenting its quarterly review. The International Monetary Fund expects a gross domestic product contraction of 4.8% this year.
"A conservative estimate is that there will be a 5% contraction during 2012," said Aggelos Tsakanikas, head of research at IOBE.
The report also saw unemployment rising further, to 20% this year, up from a 17.3% percent in 2011. Inflation is expected to ease to levels below 1% from 3.1% last year as demand continues to weaken.
"Recession is going to be quite intense this year as well," said IOBE head Yannis Stournaras, adding that the country should pick up the pace of its long-awaited privatization program.
In March, Greece completed much of a planned EUR206 billion debt restructuring plan, which was part of a new EUR130 billion bailout agreed to by the country's European partners and the IMF in March.
Greece's caretaker government aims to pass the final pieces of legislation--that are a precondition for the new bailout--by mid April and pave the way for national elections thereafter.
But the new government will have to announce some EUR11 billion in further austerity measures by June, to cover expected budget gaps in 2013 and 2014.
Growing stevia responsibly
Cargill’s Truvia® natural sweetener takes a forward-thinking approach to stevia production
Learn how Cargill connects its expertise in developing responsible supply chains and partnering with cooperatives in taking a forward-thinking approach to stevia production in Argentina.
With a multi-year vision in mind, the Truvia® team and grower cooperative, Cooperativa Tabacalera Misiones (CTM) are taking a proactive approach to building a sustainable stevia supply chain with small-scale stevia growers and their communities.
Growing stevia in Misiones, Argentina
Stevia is native to the Misiones, Argentina region. Thanks to the region’s abundant annual rainfall and warm climate, the stevia plants thrive. However, growing stevia in an area of abundant rainfall is challenging due to heavy rains which make the area susceptible to soil erosion and compaction.
Soil erosion occurs when rainfall exceeds the soil’s ability to absorb water. Rainfall also causes soil compaction, resulting in standing water and the formation of crevices. Over time, the fertility of the land is reduced resulting in decreased crop yields and contributing to water pollution.
Maintaining healthy soil with the use of stepped soil terraces
To ensure that small-scale farmers who grow stevia for Cargill will be able to do so for generations, the Truvia® team is taking a forward-thinking approach to natural resource preservation.
With the yield and quality of stevia plant production directly dependent on the health of the soil in which it grows, the Truvia® team and farmers called upon a well-known agricultural technique: soil terraces. Soil terraces help prevent soil erosion, creating more arable land on the sloped land.
In the stevia fields of Misiones, stepped soil terraces create channels for excess rainwater to collect and drain away slowly and safely.
“Healthy soil means robust stevia production that’s sustainable over the long term,” explains Deborah Ross, sustainability manager of the Truvia® business. “We’re helping small-scale farmers to be successful, while also being responsible stewards of the environment in Misiones.”
Ensuring a sustainable stevia supply chain now and into the future
Cargill and CTM are building soil terraces to improve soil conditions on 5 percent of land used for stevia production. With more investment and aid to follow, the Truvia® team has committed to a set of goals to ensure a sustainable stevia enterprise now and into the future.
“We have a responsibility to our growers and their communities as well as our customers and consumers,” says Ross. “Environmental stewardship like soil terracing enables us to deliver on those promises.”
Cargill’s Truvia® natural sweetener
Stocks rally on Bernanke comments, dollar off
(Reuters) - Global stocks rallied on Monday while the dollar retreated after Federal Reserve Chairman Ben Bernanke said that in order to reduce unemployment, easy monetary policy should stay in place.
The benchmark S&P 500 index closed at its highest level since May 2008.
Bernanke, speaking to the National Association for Business Economics, said accommodative monetary policy would support demand and, over time, drive down long-term unemployment.
His comments supported views that easy monetary policy would remain in place for some time and fanned expectations for more Fed asset purchases. Previous rounds of quantitative easing have weakened the dollar and boosted U.S. and global stocks.
"We are clearly addicted to this highly liquid market, and Bernanke has reassured that it (will) stay up this way," said Kent Engelke, chief economic strategist at Capitol Securities Management.
"The risk trade is definitely on and money is moving out of Treasuries and into risky assets."
Gains in U.S. equities pushed the S&P 500 to a more than 12 percent gain so far this year, setting it on track for its best quarter since 2009. The advance has been fuelled by months of better-than-expected U.S. economic data as investors' focus shifts away from the euro zone debt crisis.
The Dow Jones industrial average .DJI gained 160.90 points, or 1.23 percent, to end at 13,241.63. The Standard & Poor's 500 Index .SPX was up 19.40 points, or 1.39 percent, at 1,416.51. The Nasdaq Composite Index .IXIC was up 54.65 points, or 1.78 percent, at 3,122.57.
The S&P 500 is on track to close its fourth straight month of gains.
Global equities as measured by MSCI .MIWD00000PUS rose 1 percent, the largest jump in the index in two weeks.
The pan-European FTSEurofirst 300 index .FTEU3 ended up 0.89 percent. U.S. dollar denominated Nikkei futures gained 1.1 percent.
Germany could allow two euro zone rescue funds to operate together in an effort to strengthen the region's tools against its debt crisis, a move that further helped revive investor appetite for growth-oriented assets.
U.S. government debt prices snapped a four-day winning streak as fewer worries about Europe reduced bids for lower-risk Treasuries. <US/>
The benchmark 10-year U.S. Treasury note was down 5/32, the yield at 2.2515 percent.
EURO RALLIES BUT CAUTION PERSISTS
The euro hit its highest level against the greenback in more than three weeks. The U.S. currency slid to a more than three-week low against the Swiss franc.
The euro rose as high as $1.3367, its highest level since February 29, according to Reuters data. Against the Swiss franc, the dollar dipped as low as 0.9018, its lowest since March 1.
Disappointing U.S. home sales data reinforced bets on an extended easing stance from the Fed. Contracts to purchase previously owned homes unexpectedly fell in February.
"All this left the market with the nagging thought that the Fed is not quite done with economic stimulus," said Boris Schlossberg, director of FX Research at GFT in Jersey City, New Jersey. "I think they have not in any way, shape or form eliminated that possibility."
Monday's rally notwithstanding, sentiment toward the euro remained cautious as investors worried about the euro zone's troubled economy.
Gold futures prices rose 1.8 percent as the dollar weakened on Bernanke's comments and as the Fed chairman's dovish stance reminded investors about the threat of inflation.
Also supporting risk assets, German business sentiment rose unexpectedly for the fifth month in a row in March, signaling that Europe's largest economy is more resilient than others tied to the euro zone debt crisis.
Bernanke's words drive Wall Street up 1 percent
(Reuters) - The S&P 500 rebounded from its worst week so far this year to retake a four-year high on Monday after Federal Reserve Chairman Ben Bernanke signaled supportive monetary policy will remain even though the job picture has begun to improve.
The three major U.S. stock indexes climbed 1 percent or more and all 10 S&P 500 sectors advanced. Gains were led by S&P technology shares, with that sector's index .GSPT up 1.7 percent, and the S&P health care sector index .GSPA also up 1.7 percent. Shares of International Business Machines (IBM.N), up 1.1 percent at $207.77, gave the Dow its biggest boost.
Bernanke's comments came as investors try to gauge how much longer a nearly six-month rally in stocks will last and reinforced the view that further quantitative easing, or QE3, from the Fed may be possible.
The S&P 500 is up 25 percent since the end of September, mostly on optimism about the pace of economic growth. With stimulus from the Fed and an improving economy, the climate for stocks is even friendlier.
"There is still a lot of cash on the sidelines looking for a pullback, and I suspect some people over the weekend said, 'Yeah, maybe I'll put some money in,' and then you get Ben Bernanke's comments and that stoked the fire," said Bob Doll, BlackRock's vice chairman and global chief investment officer in New York.
The Dow Jones industrial average .DJI shot up 160.90 points, or 1.23 percent, to 13,241.63 at the close. The Standard & Poor's 500 Index .SPX gained 19.40 points, or 1.39 percent, to 1,416.51. The Nasdaq Composite Index .IXIC climbed 54.65 points, or 1.78 percent, to 3,122.57.
As the quarter draws to a close, hedge funds that have been underinvested in stocks could be doing some last-minute shopping for winners in the big rally, strategists said. Financials have led the rally, though almost all S&P 500 sectors are expected to post gains for the quarter.
The S&P financial index .GSPF is up 23 percent, with just four days to go until the end of the quarter.
In his talk, Bernanke said the U.S. economy needed to grow more quickly if it is to produce enough jobs to continue to bring down the unemployment rate.
"Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies," Bernanke told a gathering of the National Association for Business Economics.
The S&P index fell 0.5 percent last week, a relatively minor decline that was still the biggest weekly slide since the final week of December.
Data on Monday showed pending home sales slipped 0.5 percent in February, according to the National Association of Realtors, confounding expectations for a rise of 1 percent.
The Dow Jones U.S. home builders index .DJUSHB still managed a gain of 0.5 percent.
Lions Gate Entertainment Corp (LGF.N) rallied 4.5 percent to $15.18 after the strong opening of its film "The Hunger Games," which made $214 million over the weekend globally.
BATS Global Markets Inc (BATS.Z) on Sunday apologized for a system failure that caused shares in its own initial public offering to erroneously trade for less than a penny on Friday and resulted in Apple Inc's (AAPL.O) shares being temporarily halted.
About 6.2 billion shares changed hands on the New York Stock Exchange, the Nasdaq and Amex, compared with the daily average for 2012 of about 6.86 billion shares.
Advancers outpaced decliners on NYSE by a ratio of slightly more than 3 to 1 and on the Nasdaq by about 10 to 3.
Greek Restructuring Delay Helps Banks as Risks Shift
Delaying Greece’s debt restructuring by more than a year reduced banks’ potential losses as firms trimmed their holdings and most of the risk shifted to European taxpayers.
When Greece was first rescued by the European Union and the International Monetary Fund in May 2010, lenders in other EU nations held $68 billion of its sovereign debt, according to the Bank for International Settlements. If Greece had defaulted, banks would have lost $51 billion at a 25 percent recovery rate.
Banks’ holdings of Greek bonds fell by more than half to about $31 billion over the next 15 months, according to BIS, cutting creditors’ losses at last week’s swap by at least 45 percent. Lenders are protected against further losses thanks to sweeteners from the EU to encourage the exchange. Meanwhile, Greece’s debt remains almost unchanged and the risk of future default is now mostly borne by the public. The same playbook is being used with Portugal and Ireland.
“This is a horrible deal for the EU taxpayer,” said Raoul Ruparel, chief economist at Open Europe, a London-based research group. “The longer we wait for these restructurings, the worse the deal gets for the public. There’s an ongoing risk transfer from the banks to the taxpayers.”
New Borrowing
On the face of it, the swap chopped 137 billion euros ($179 billion) from Greece’s 368 billion-euro debt burden. The actual reduction is less than half of that because the country has to borrow from the EU and the IMF to provide new debt to private creditors and to recapitalize banks and pension funds that can’t handle losses from the swap.
The new borrowing -- in effect, replacing private with public debt -- will amount to 78 billion euros, according to the EU, leaving the actual relief from the swap at 59 billion euros. Greece also will need to draw money from a second, 130 billion- euro EU and IMF rescue fund to repay other private debt and finance the government’s budget deficit.
That will leave Greece’s debt at 161 percent of gross domestic product at the end of the year, 4 percentage points less than the current level, according to a March 11 report by the European Commission. The ratio probably will return to 165 percent in 2013, the commission said.
When all IMF and EU loans promised to Greece are disbursed, 66 percent to 75 percent of the country’s debt will be held by the public. In 2010, before the first bailout and before the European Central Bank started buying its bonds, Greece had about 310 billion euros of debt, all held by the private sector.
Taxpayers on Hook
If Greece has to restructure again, or defaults, taxpayers will be on the hook.
“The swap doesn’t achieve debt sustainability for Greece,” said Nicola Mai, an economist at JPMorgan Chase & Co. in London. “Debt relief going forward will have to come from the public sector.”
Banks reduced holdings of Greek bonds as they matured. Greece used loans from the IMF and the EU to make those payments. The European Central Bank also has bought about 66 billion euros of Greek sovereign bonds from financial institutions since May 2010, JPMorgan has estimated.
Commerzbank AG (CBK), Germany’s second-largest bank, reduced its holdings of Greek, Irish and Portuguese sovereign bonds by 70 percent to 1.6 billion euros in the past two years, including a 2.3 billion writedown, according to investor presentations by the firm. BNP Paribas SA (BNP), France’s largest lender, reduced its long-term exposure to the three countries’ debt by 61 percent to 2.6 billion euros in 2011, including a 3.2 billion-euro writedown, according to company statements.
‘Zombie Banks’
“Relative to where banks were a year ago, they’re at a much better point,” said Roger Lister, a New York-based analyst who covers European lenders for credit-ratings firm DBRS Inc. “They may still face future losses, but those will be at a much smaller scale because their exposure is reduced greatly after all the actions by the EU.”
The EU’s moves have favored banks, especially the weakest lenders that couldn’t bear losses from a Greek default, according to Peter Tchir, founder of New York-based hedge fund TF Market Advisors.
“Every policy seems to be designed to help the zombie banks survive,” said Tchir, whose company focuses on European credit markets.
It’s not only European banks that have been spared greater losses from exposure to Greece. If the country had defaulted in 2010, losses for all bondholders, including insurance companies and asset managers, would have been 232 billion euros, based on a 25 percent recovery. During last week’s swap, they ended up losing 107 billion euros.
Portugal, Ireland
A similar shift of risk to taxpayers is happening with Portugal and Ireland. The ECB has bought 20 billion euros of each nation’s debt, according to Open Europe estimates, while the EU and the IMF provided 78 billion euros and 85 billion euros, respectively, in new loans to replace private financing for the two countries.
In Ireland, most of the public money has been used to pay the debt of failed Irish banks. The ECB and the Irish central bank have taken over financing of the lenders, providing about 140 billion euros of funding and transferring risk to taxpayers.
Since the November 2010 bailout of Ireland, European lenders have reduced their exposure to that country’s banking system by more than half to 61 billion euros. While current and past Irish governments have tried to stop paying banks’ debts with public funds, the EU has rejected the requests.
Collateral Needs
Ireland has been in talks with the EU, IMF and the ECB to extend payments on 30 billion euros of debt linked to the bailout of Anglo Irish Bank Corp. The notes, a form of IOU that must be repaid over more than a decade, are used as collateral for funding from the country’s central bank. The ECB is seeking stronger collateral, Finance Minister Michael Noonan said today. The changes that the ECB is “requesting will have to align with our interests,” he said.
Portugal’s borrowing costs rose this month on concern the country might follow Greece into a debt restructuring. Portugal may get a second bailout package from the EU and the IMF this year, according to JPMorgan’s Mai. Unlike Greece, a second rescue won’t include a debt swap, he said.
“As long as they continue to push for reforms, there won’t be a political motivation to get the private sector involved and take losses on Ireland or Portugal,” Mai said.
Even if the political will materializes for a restructuring that involves private bondholders, it might be too late. Most of Portugal’s debt has shifted to the public, said Open Europe’s Ruparel.
“They’d like us to believe Greece was a special case and won’t be repeated in other cases,” Ruparel said. “Greece is the worst case, but not a special case.”
Greek Banks Seek 2011 Earnings Release Delay, Kathimerini Says
Greek banks asked for the deadline on releasing full-year earnings to be extended, as they figure out how to account for losses from a debt swap and additional provisions following a Blackrock review of loan portfolios, Kathimerini said.
The lenders asked regulators to extend the March 30 deadline in order to get the best tax treatment to offset losses against expected future profit over a 30-year period, the Athens-based newspaper said, without citing anyone.
If the extension is granted it’s likely the banking system recapitalization deadline will also be extended, Kathimerini said.
Johnson & Johnson Zytiga Study Sets Up Challenge to Dendreon’s Provenge
Johnson & Johnson (JNJ)’s prostate-cancer pill Zytiga became positioned to mount a challenge to Dendreon Corp. (DNDN)’s Provenge after independent monitors said J&J’s medicine was so effective it should be given to all patients in a study.
The findings by monitors of a study of Zytiga in men with advanced prostate cancer who hadn’t begun chemotherapy will enable J&J to go against Provenge, a $93,000 infusion therapy. While some analysts and Dendreon officials say the drugs may be used together, a survey by Christopher Raymond, an analyst at Robert W. Baird & Co. in Chicago, found that most oncologists would prescribe Zytiga. That drug is currently approved for treatment after chemotherapy.
Zytiga safely slowed progression of the disease and reduced the risk of death, New Brunswick, New Jersey-based J&J said today in a statement disclosing it had halted the study so that men currently getting a placebo could receive the drug.
The news is “another positive for Johnson & Johnson’s pharmaceutical franchise, further strengthening the profile of Zytiga, an important growth driver over the next several years,” said Larry Biegelsen, an analyst at Wells Fargo Securities in New York, in a note to clients.
Sales Forecast
“There are roughly twice as many pre-chemotherapy prostate-cancer patients as there are post-chemo patients,” said Biegelsen, who is reviewing his $914 million sales forecast for Zytiga for 2013. He rates J&J shares outperform.
J&J rose less than 1 percent to $64.85 at the close of New York trading, while Seattle-based Dendreon fell 7 percent to $10.12. Medivation Inc. (MDVN), a San Francisco-based biotechnology company developing a drug called MDV3100 that works in a similar manner as Zytiga, rose 14 percent to $72.91.
Fifteen percent of the 218,000 American men a year who are diagnosed with prostate cancer have it spread beyond the walnut- sized gland that lies between the bladder and urethra, according to the National Cancer Institute. Treatments are designed to stop the production of male hormones that fuel the tumor’s growth.
Johnson & Johnson plans to file for regulatory approval of Zytiga in the U.S. and worldwide in the second half of 2012 for use, before chemotherapy, in men with prostate cancer that doesn’t respond to conventional therapies to quell hormone production. Dendreon’s Provenge is also sold to treat those men.
The study, dubbed COU-AA-302, covered 1,088 men with mild or no symptoms from prostate cancer that had spread to other parts of the body and didn’t respond to conventional therapy to stop hormone production. They were given Zytiga once daily plus the steroid prednisone twice daily, or else prednisone plus a placebo.
Unanimous Finding
The independent data-monitoring committee unanimously recommended stopping the study because men given Zytiga had a clinical benefit, with less progression of the cancer, signs of improved survival and a favorable safety profile, the company said. The committee also said patients originally assigned to get the placebo should start receiving Zytiga.
The drug was initially approved in the U.S. in April 2011 for men with advanced prostate cancer that didn’t respond to previous treatment, including chemotherapy.
Each year in the U.S., about 30,000 men are diagnosed with metastatic, treatment-resistant prostate cancer, said Bryan Huang, an analyst at Citi Investment Research in New York. Assuming that Zytiga costs $5,000 a month and that the Medivation drug will reach the market at about the same price, the pre-chemotherapy U.S. market is about $2.4 billion a year, he said in a note.
Fewer than half of patients with advanced disease get chemotherapy, and they would receive treatment for a shorter period of time, Huang wrote. He estimates a post-chemotherapy market of $800 million a year.
“We believe Zytiga and MDV3100 will further squeeze Provenge market due to ease of administration, tangible clinical benefits beyond overall survival and cheaper pricing,” he wrote.
Apple to Play ‘Fall Guy’ for Massive Market Sell-Off, Say Elliott Wave Folks
Fans of “Elliott Wave” theory take note: The Elliott Wave International group has been warning ominously in the last week or so that “government bureaucrats” might find a way to take away the bunch bowl from the amazing run-up in Apple (AAPL) shares, which are up 35% this year, and 55% in the last 12 months.
Over the transom this morning comes a missive from Elliott Wave researcher Mark Galasiewski, who writes that a warning by the U.S. Department of Justice to Apple earlier this week that it plans to sue Apple and five U.S. publishers has echoes of former anti-trust deals that cut short the growth of former high-flying stocks.
Writes Galasiewski, the action “signals that the rising trend in the stock market is near its end and a major bear market waits just around the corner. This time, Apple Inc. will play the fall guy.”
Galasiewski sees a parallel to the DoJ suit against Microsoft (MSFT) on anti-trust grounds in 2000. And he cites the work of Elliott Wave guru Robert Prechter:
The government’s antitrust suits against U.S. corporations, particularly the landmarks suits that make the history books, consistently come near stock market peaks, usually slightly afterward.
Stock markets declined afterward for two and a half years, Galasiewski observes.
Similar precedents, the group believes, are the suit against Standard Oil in 1907, “ahead of the panic” of that year; the suit against RCA that precipitated the Great Depression; and the suit against IBM (IBM) “one month after the 1969 top in the Dow Jones Industrial Average.”
“If past precedent holds, a court decision against Apple and its partners should signal the start of a major bear market in global equities,” writes Galasiewski.
But not today: Apple shares today are up $3.56, or 0.7%, at $545.55.
Fitch downgrades Greece to restricted default
ATHENS, Greece (AP) — The Fitch ratings agency has downgraded Greece to "restricted default" after the country secured a strong majority of private creditors to participate in a bond swap deal that will wipe off about euro105 billion from its national debt.
Friday's move was expected, with ratings agencies having said they considered the bond swap deal to be a default. The two other major ratings agencies, Moody's and Standard & Poor's, have already downgraded Greece to default level.
Following weeks of intense discussions, the Greek government said Friday that 83.5 percent of private investors holding its government bonds were participating in a bond swap. Of the investors holding the euro177 billion ($234 billion) in bonds governed by Greek law, 85.8 percent joined.
ATHENS, Greece (AP) — Greece has cleared a major hurdle in its race to avoid bankruptcy by persuading the vast majority of its private creditors to sign up to the biggest national debt writedown in history, paving the way for a second massive bailout.
Following weeks of intense discussions, the Greek government said Friday that 83.5 percent of private investors holding its government bonds were participating in a bond swap. Of the investors holding the euro177 billion ($234 billion) in bonds governed by Greek law, 85.8 percent joined.
"We have achieved an exceptional success ... and I believe everyone will soon realize that this is the only way to keep the country on its feet and give it a second historic chance that it needs," Finance Minister Evangelos Venizelos told Parliament.
He said he would recommend the activation of legislation known as "collective action clauses" to force bondholders who refused to sign up into the swap. The issue was to be discussed at a Cabinet meeting Friday afternoon.
"A window of opportunity is opening" with the success of the deal to reduce the country's euro368 billion debt by euro105 billion, or about 50 percentage points of gross domestic product, he said.
The bond swap is a radical attempt to pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing debt, the country can gradually return to growth and eventually repay the remaining money it owes.
The investors will exchange their bonds with new ones worth 53.5 percent less in face value and easier repayment terms for Greece. A total of euro206 billion ($273 billion) of Greece's debt is in private hands. The swap will effectively shift the bulk of the remaining debt into public hands — mainly eurozone countries contributing to Greece's bailouts.
If the exchange had failed, Greece would have risked defaulting on its debts in two weeks, when it faced a large bond redemption. A successful bond swap is also a key condition for Greece to receive a euro130 billion ($172 billion) package of rescue loans from other eurozone countries and the International Monetary Fund.
Eurozone finance ministers said after a conference call on Friday that Greece has fulfilled the conditions to soon get approval for the bailout.
"There is no doubt that we will be able to decide on the release of the second Greece package next week," German Finance Minister Wolfgang Schaeuble said. The IMF has set a tentative date of March 15 to discuss the size of its participation in the bailout.
The ministers also released up to euro35.5 billion ($47 billion) in bailout money to fund the debt swap. Investors exchanging bonds will receive up to euro30 billion — or 15 percent of the remaining money they are owed — as a sweetener for the deal and euro5.5 billion for outstanding interest payments.
"The debt exchange represents the largest ever sovereign debt restructuring," said Charles Dallara, the managing director of the Institute of International Finance, the body that negotiated the deal with the Greek government on behalf or large investors.
Markets, which had rallied on Thursday on expectations of a successful deal, were muted on Friday. The Stoxx 50 of leading European shares was up 0.1 percent, but the main stock index in Athens was down 0.32 percent in midday trading. The euro retreated 0.4 percent from recent highs to $1.3215.
"After quite a rollercoaster ride, it looks like Greece has finally done it ... allowing Europe to avoid what could have been a disorderly default in which the costs do not bear thinking about," said Simon Furlong, a trader at Spreadex.
The International Swaps and Derivatives Association was meeting to determine whether the bond swap would be deemed a so-called "credit event" — a technical default — which would trigger the payment of credit default swaps, which is essentially insurance against a default.
When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilize big financial institutions that sold them.
However, since then a CDS payout has started to look less threatening. The ISDA, a private organization that rules on credit events, said that if triggered, overall payouts on CDS linked to Greece will be below $3.2 billion. That amount is spread over many financial firms and likely too small to significantly hurt any one of them.
Under Greece's bond swap, holders of euro172 billion ($228 billion) in Greek- and foreign-law bonds agreed to sign up to the deal. By triggering the collective action clauses to force holdouts to join, Greece will secure a participation level of 95.7 percent, or euro197 billion ($261 billion). The country also extended the deadline for holders of foreign law bonds, of whom 69 percent have so far signed up, until March 23.
EU economic affairs commissioner Olli Rehn said he was "very satisfied" by the high turnout, and urged Athens to press ahead with its austerity program, implemented over the past two years amid deep popular resentment.
"That contribution by the private sector is an indispensable element to ensure future sustainability of the Greek public debt and, thus, a decisive contribution to financial stability in the euro area as a whole," he said.
"I now expect the Greek authorities to maintain their strong commitment to the economic adjustment program and to rigorously and timely implement the policy package."
IMF head Christine Lagarde also welcomed the debt writedown agreement. "This is an important step that will dramatically reduce Greece's medium-term financing needs and contribute to debt sustainability," she said.
On the streets of Athens, however, many remained skeptical about the deal and pessimistic about the future. Panayiotis Theodoropoulos said the writedown was good "for them."
"For us? Nothing. Everyone looks out for themselves. In a while the people will be living on the streets," he said.
The debt crisis, sparked by years of overspending and waste, has left Greece relying on funds from international bailout loans since May 2010. Austerity measures including repeated salary and pension cuts and tax hikes imposed in return have led to record unemployment with more than 1 million people out of work, a fifth of the labor force.
The national statistical authority said Friday that the recession in the last quarter of 2011 was deeper than initially forecast, reaching 7.5 percent instead of 7 percent. The economy is expected to shrink for a fifth straight year in 2012, stagnate in 2013 and modestly expand in 2014.
Dendreon Announces Executive Appointments
- Joe DePinto Named Executive Vice President, Global Commercial Operations -
- Robert S. Poulton Named Executive Vice President, Technical Operations -
- Christine Mikail Named Executive Vice President, Corporate Development, General Counsel, Secretary -
February 28, 2012--Dendreon Corporation (Nasdaq:DNDN) today announced three new appointments to the Company's executive team. Joe DePinto is joining Dendreon as executive vice president, global commercial operations; Robert S. Poulton, currently global head of quality, has been appointed executive vice president, technical operations; and Christine Mikail is joining Dendreon as executive vice president, corporate development, general counsel, and secretary. Mr. DePinto, Mr. Poulton and Ms. Mikail will report to John H. Johnson, president and chief executive officer. All three appointments are effective immediately.
"We are pleased to welcome Joe and Christine to Dendreon, and Bob to his new position," said John H. Johnson, president and chief executive officer of Dendreon. "Having previously worked with Joe and Christine and given Bob's extensive experience and leadership, I know that they will bring not only their expertise to their respective business areas, but also a genuine passion for Dendreon and our mission of helping patients with cancer. By restructuring the team and flattening the organization, I believe we will be able to increase the focus on our key priorities for this year and accelerate decision making."
Mr. DePinto will be responsible for all sales, marketing, and market access teams in the U.S. and globally. He has spent the last two decades commercializing and developing oncology products. Mr. DePinto's experience includes sales, marketing, strategic accounts, market access, and product development on the R&D side. Mr. DePinto's commercial expertise will help build upon Dendreon's solid foundation for successfully selling PROVENGE® (sipuleucel-T) in the U.S. Mr. DePinto most recently was vice president and product champion for ImClone Systems, a wholly-owned subsidiary of Eli Lilly and Company and previously served as vice president, U.S. sales and marketing at Abraxis Bioscience. Prior to that, Mr. DePinto served as vice president, commercial operations at ImClone Systems; global Marketing Leader, Oncology Therapeutics for Johnson & Johnson Pharmaceutical Services Inc.; and vice president, oncology sales at Ortho Biotech Products. Mr. DePinto earned his Bachelor of Science in Marketing and MBA in Pharmaceutical Chemical Studies from Fairleigh Dickinson University.
Mr. Poulton brings more than two decades of manufacturing and operational experience to the executive team, having previously served Dendreon as its global head of quality. In this new role, Mr. Poulton will oversee Dendreon's global manufacturing, operations, logistics and quality functions. Prior to joining Dendreon in 2010, Mr. Poulton served in a number of senior positions at Wyeth, including senior vice president, CMC, Compliance and Conformance, group vice president of global strategy, technical operations; group vice president of international operations and technology, and senior vice president of international operations and supply chain. While there, he was responsible for transforming the Wyeth Global Supply Chain. Before that, Mr. Poulton spent more than 19 years at SmithKline Beecham overseeing quality functions around the world. Following the merger of SmithKline Beecham and GlaxoWellcome, Mr. Poulton was appointed vice president of worldwide regulatory compliance, responsible for all R&D regulated facilities and processes. Born in the United Kingdom, Mr. Poulton graduated with a First Class Honours degree in Applied Chemistry from Brighton Polytechnic.
Ms. Mikail will be responsible for legal, corporate development, and government affairs at Dendreon. She has experience in high-growth business development, complex transaction structuring and negotiation, intellectual property and patent portfolio management, regulatory and clinical strategy, as well as public company representation. Ms. Mikail most recently served as senior vice president, corporate development at Savient Pharmaceuticals. Prior to that, Ms. Mikail served as vice president, general counsel and secretary for ImClone Systems, a wholly-owned subsidiary of Eli Lilly and Company, as well as a member of Eli Lilly's Transactions Center of Expertise. Previously, Ms. Mikail worked at the law firms of Reed Smith LLP, Lowenstein Sandler PC and Wilmer Hale. Ms. Mikail earned her Bachelor of Arts from Rutgers University and J.D. from Fordham University School of Law.
Ms. Mikail succeeds John E. Osborn, who will remain with Dendreon to assist in the transition and provide advice to Mr. Johnson on selected matters. Mr. Osborn also will be teaching at the University of Washington and serving as a member of the healthcare innovation policy group for the Romney presidential campaign. "We're grateful to John for his contributions. John joined the company in a critical transitional period following our launch of PROVENGE, and he provided valuable strategic advice and counsel to me and the Board of Directors, while working to strengthen our legal, compliance and policy functions," said Mitchell H. Gold, executive chairman of the Board of Directors.
Link - New Source
No profit yet, waiting for a year-end retirement match from my former company before rolling the funds to another retirement account.
did i miss something
"We had 10 years ago Steve Jobs, Bob Hope and Johnny Cash.
Now We Have No jobs, no hope and no cash
RIP: Greek Leaders Agree on New Government
ATHENS — After crisis talks on Sunday night, Prime Minister George Papandreou and his main rival agreed to create a new unity government in Greece that will not be led by Mr. Papandreou, according to a statement released Sunday night by the Greek president, who mediated the talks.
Mr. Papandreou and the opposition leader Antonis Samaras agreed to meet again on Monday to hammer out the details. The name of the new prime minister is not expected until then.
The new government is intended to govern for several months to put in place a debt agreement with the European Union, a step European leaders consider crucial to shoring up the euro. Then it is to hold a general election and dissolve.
Mr. Papandreou has faced mounting pressure to resign, including from within his own party, the Socialists.
Before the meeting with the president, Mr. Samaras said he would enter talks on a unity government only if Mr. Papandreou resigned. Mr. Papandreou himself had repeatedly said that he would be willing to step aside for the deal to go through.
But after meeting with his cabinet in the afternoon, Mr. Papandreou said Mr. Samaras would first have to agree to a seven-point plan of priorities that would essentially commit the new government to the terms of the debt deal. The priorities include securing the release of European rescue funds, meeting fiscal targets imposed by foreign creditors, and passing the 2012 budget by the end of the year.
Mr. Samaras’s conservative New Democracy party has in the past voted against many of the unpopular austerity measures Europe has demanded in exchange for its help, leaving the Socialist government to shoulder the political burden alone.
Mr. Papandreou also insisted that the two sides agree on the composition of a unity government before he steps down.
“It’s clear this government is prepared to hand over the baton, but it can’t hand it over into a vacuum,” he said, according to a transcript of the cabinet meeting that was released to the news media. “It will hand over to the next government, if we agree and decide on it.”
It was not clear on Sunday night whether the opposition had agreed to the sevenpoints during the meeting with President Karolos Papoulias; nor was it clear when Mr. Papandreou would step down. Discussion of the composition of the unity government was left for Monday.
In one scenario discussed in the Greek media on Sunday, Mr. Papandreou might cede power to a unity govermnet including politicians from the Socialist and New Democracy parties but led by a nonpolitical figure. One name being mentioned as a possible leader for such a government is Lukas Papademos, a former vice president of the European Central Bank.
That scenario could set the stage for a power battle between Mr. Papademos and the current finance minister, Evangelos Venizelos, who has reportedly been trying to rally support for a government that he could lead.
Mr. Papandreou survived a crucial confidence vote in Parliament in the early hours of Saturday, a vote seen as an endorsement for the debt agreement with the European Union, but which was predicated on the expectation that he would immediately resign.
His failure to do so appeared to leave Greek politically deadlocked, with the opposition calling for early elections and the government insisting that holding elections now would be too destabilizing.
European leaders want the Greek Parliament to pass the new debt deal worked out in Brussels on Oct. 26. They have urged Greek leaders to forge a broader consensus, since the governing Socialist party did not seem to be able to unify and pass the law on its own.
The deal calls for banks that hold some Greek debt to write down 50 percent of its face value, to help reduce the country’s public indebtedness to 120 percent of its gross domestic product by 2020. But the deal also requires the Greek government to adopt a series of deeply unpopular austerity measures, and it imposes a permanent foreign monitoring presence, a development that many Greeks see as a loss of sovereignty.
In an effort to allow Greeks to have their say, and to strongarm Mr. Samaras into backing the debt deal, Mr. Papandreou proposed a popular referendum on the agreement last week. After the referendum idea drew the ire of European leaders and threw international markets into turmoil, Mr. Papandreou withdrew it.
Though the about-face may have appeared to be a defeat for Mr. Papandreou, he won support for the debt deal from the opposition.
Opinion polls published in Greek newspapers on Sunday drew different conclusions about whether Greeks preferred a national unity government or immediate elections.
A poll for the centrist weekly Proto Thema found that 52 percent of Greeks favored a unity government that would rule for several months and be chosen by Mr. Papandreou, while 36 percent preferred immediate elections to choose a new government, as proposed by the New Democracy party.
Another poll, for the center-left Ethnos newspaper, found less difference in support for the two scenarios, with 45 percent supporting a unity government and 42 percent backing snap elections.
A third survey, for the center-right Kathimerini, found that 66 percent of Greeks supported early elections, but in that poll the alternative choice offered was not a unity government, it was a referendum, which only 14 percent of respondents supported.
Growing to fast and not being able to off-load the Company before the Day of Reckoning...
TWKGQ should have taken a lesson from the Greeks
All of the above...the glass is half full, I'm only down 50 percent.
I'm holding about $60K dollars on the shit holes of Genworth, Citi Bank, Bank of America, and NBG.
Me no worry, I'm in the game for the LONG side of the trade and I never look at my short term trade losses.