(Bloomberg) -- China’s record lending growth and weaker corporate profits will lead to credit losses for banks, according to Fitch Ratings, which is “growing increasingly wary” about the nation’s banking industry.
“At the heart of these concerns is the recent steep rise in corporate exposure amid concurrent decline in enterprise profits,” Fitch analysts led by Charlene Chu said in a report today. “This means that each CNY invested or lent is unlikely to generate the same return as before, which over time will take its toll on corporate borrowers’ ability to repay and lead to credit losses for banks.”
Corporate loans accounted for more than 90 percent of the record 5.17 trillion yuan ($758 billion) of loans Chinese banks offered in the first four months of this year, almost triple the amount granted in the same period a year earlier. The nation’s state-owned companies posted a 32 percent decline in profit in the same period.
China is battling a global recession that choked off export demand, dragging economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier.
Premier Wen Jiabao told lenders to boost loans by at least 5 trillion yuan in 2009 to support the nation’s 4 trillion yuan stimulus plan, triggering an explosion in credit, which has added to the risk of bad loans and asset bubbles. Banks face “significant” pressure on profits this year, Liu Mingkang, the head of the China Banking Regulatory Commission, said last week.
‘Excessive Risk-Taking’
Total lending may top 8 trillion yuan in 2009, Xiao Gang, chairman of Bank of China Ltd., the nation’s third-largest, said on May 15.
An emphasis on meeting loan targets and short-term profit may be contributing to “excessive risk-taking” by banks, Fitch said. The slow recognition of credit losses by lenders in China not only leads to “under-capturing” of nonperforming loans and delayed credit costs, but also inflated capital, it added.
Bad loans at Chinese banks fell by 10.7 billion yuan in the first quarter to 549.5 billion yuan, according to the country’s banking regulator. The ratio of soured debt relative to the total declined 0.38 percentage point to 2.04 percent.
The drop came at a time when at least 7.5 percent of the country’s 42 million small and medium-size enterprises had closed or suspended operations by the end of last year and about 30 million migrant workers have lost their jobs, according to official statistics.
Read more here
Wednesday, May 20, 2009
Tuesday, May 19, 2009
AT&T mulls cheaper data plans for phones
(Reuters) - AT&T Inc is considering offering cheaper data service plans with limited Web surfing for advanced cell phones including Apple Inc's iPhone.
Ralph de la Vega, the head of AT&T's mobility and consumer business, also told the Reuters Global Technology Summit in New York on Tuesday that he sees a gradual economic recovery.
The executive said it would be costly for AT&T to cut the price of its unlimited Web surfing service. The minimum plan for iPhone users is $70 a month, which includes unlimited Web surfing and a certain amount of voice calls.
Instead, AT&T could offer more limited Web surfing on cell phones for a lower fee, similar to its trial offer of 200 megabytes of data downloads for wireless netbook users for $40 a month in Atlanta and in Philadelphia.
"Right now we continue to study what is the best thing that is available, not just from an iPhone point of view, but what you can do to stimulate additional demand," said de la Vega, who is responsible for all of AT&T's consumer sales along with his role as chief executive of the mobile business.
He also announced at the summit that AT&T will expand sales of netbook computers from Dell Inc, Acer Inc and Lenovo Group Ltd to all AT&T stores this summer. It currently sells netbooks only through retail partners and in AT&T stores in Atlanta and Philadelphia.
NEW DATA FEE OPTIONS
Some analysts expect AT&T to offer an iPhone without a data plan in future but de la Vega dismissed the suggestion, saying it would not be a very good business plan for AT&T, which is very dependent on data services for future growth.
"Our business is to sell services," he said, adding that AT&T doesn't make money from the sale of devices like the iPhone, which it subsidizes heavily.
He declined to comment on negotiations with Apple for the extension of its exclusive U.S. agreement to sell the iPhone. Bigger rival Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc, has said it has also had talks with Apple about wireless devices.
"We view Apple as a strategic partner for us, a very good partner to have now and into the future," de la Vega said.
When AT&T launched the latest iPhone last year, the operator's mobile profit margins fell for a few quarters due to big subsidies it offered for the Apple phone.
De la Vega said AT&T expects wireless profit margins in the range of 40 percent to 45 percent in the next few years.
"I think that we will continue to see gradual improvement, but small improvement, over a long period of time," he said, adding that the recovery would not be a sharp return to growth, often described as a V shape recovery.
"I think it will be between the V and the L, if you ask me. I think it will be more of a gradual, slanted U," he said.
Read more here
Ralph de la Vega, the head of AT&T's mobility and consumer business, also told the Reuters Global Technology Summit in New York on Tuesday that he sees a gradual economic recovery.
The executive said it would be costly for AT&T to cut the price of its unlimited Web surfing service. The minimum plan for iPhone users is $70 a month, which includes unlimited Web surfing and a certain amount of voice calls.
Instead, AT&T could offer more limited Web surfing on cell phones for a lower fee, similar to its trial offer of 200 megabytes of data downloads for wireless netbook users for $40 a month in Atlanta and in Philadelphia.
"Right now we continue to study what is the best thing that is available, not just from an iPhone point of view, but what you can do to stimulate additional demand," said de la Vega, who is responsible for all of AT&T's consumer sales along with his role as chief executive of the mobile business.
He also announced at the summit that AT&T will expand sales of netbook computers from Dell Inc, Acer Inc and Lenovo Group Ltd to all AT&T stores this summer. It currently sells netbooks only through retail partners and in AT&T stores in Atlanta and Philadelphia.
NEW DATA FEE OPTIONS
Some analysts expect AT&T to offer an iPhone without a data plan in future but de la Vega dismissed the suggestion, saying it would not be a very good business plan for AT&T, which is very dependent on data services for future growth.
"Our business is to sell services," he said, adding that AT&T doesn't make money from the sale of devices like the iPhone, which it subsidizes heavily.
He declined to comment on negotiations with Apple for the extension of its exclusive U.S. agreement to sell the iPhone. Bigger rival Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc, has said it has also had talks with Apple about wireless devices.
"We view Apple as a strategic partner for us, a very good partner to have now and into the future," de la Vega said.
When AT&T launched the latest iPhone last year, the operator's mobile profit margins fell for a few quarters due to big subsidies it offered for the Apple phone.
De la Vega said AT&T expects wireless profit margins in the range of 40 percent to 45 percent in the next few years.
"I think that we will continue to see gradual improvement, but small improvement, over a long period of time," he said, adding that the recovery would not be a sharp return to growth, often described as a V shape recovery.
"I think it will be between the V and the L, if you ask me. I think it will be more of a gradual, slanted U," he said.
Read more here
Sunday, May 17, 2009
Temasek Sells Bank of America Stake, Looks to China
(Bloomberg) -- Temasek Holdings Pte sold its 3.8 percent stake in Bank of America Corp. at a loss that may total $4.6 billion, as the Singapore state-owned fund shifts bets from Wall Street to emerging markets.
The sale may have raised about $1.27 billion, based on the average price of Bank of America stock in the first quarter. The divestment was completed by March 31, according to a U.S. filing. Temasek declined to comment on the price.
Temasek, whose investments shrank 31 percent in the eight months through Nov. 30, raised its stake in China Construction Bank Corp. this week, and Chief Executive Officer Ho Ching said yesterday the fund would reduce exposure to developed economies. Temasek had spent about $5.9 billion since 2007 buying shares in Merrill Lynch & Co., acquired by Bank of America on Jan. 1 after the stock slid 78 percent last year.
“The belief now is that the world is not so American- centric anymore,” said Melvyn Teo, associate professor of finance at the Singapore Management University. “It’s going to be driven more and more by the Chinese economy and consumer so might as well load up more on Chinese banks than American banks.”
The value of Temasek’s assets fell to S$127 billion ($87 billion) in the eight months to Nov. 30 as the credit crisis drove down the value of stakes in Merrill Lynch, Barclays Plc and Standard Chartered Plc. The drop in the portfolio tracked a 38 percent retreat in the MSCI World Index.
Bank of America Stake
Ho, wife of Singapore Prime Minister Lee Hsien Loong, drove an expansion outside Singapore and increased financial assets to 40 percent of the company’s portfolio. Charles ‘Chip’ Goodyear, the 51-year-old former head of BHP Billiton Ltd. who oversaw a fourfold increase in the company’s stock during his almost five- year tenure as CEO, will replace Ho in October.
A Form 13F filing to the U.S. Securities and Exchange Commission yesterday from Temasek indicates that the fund no longer held shares in Bank of America or Merrill Lynch as of March 31. An earlier filing showed that the Singapore firm owned 219.7 million Merrill Lynch shares at the end of 2008.
At the average price of $6.73 for the first quarter, the stake would have been valued at $1.27 billion. The sale would have been worth $2.14 billion at yesterday’s closing price.
Since the end of March, when Temasek completed the sale, Bank of America has risen 66 percent. The stock dropped 52 percent in the first quarter.
Temasek confirmed it sold its Bank of America shares in an e-mailed response to Bloomberg News queries today. The company declined to say how much it sold the stake for or when the sale was conducted. Mark Tsang, a Hong Kong spokesman at Bank of America, declined to comment.
Raising Capital
“They probably want to turn the page on this one and move on,” said David Cohen, an economist with Action Economics in Singapore. “I suspect they’re telling themselves they should have focused on Asian investments, particularly China. You can’t fault them now. The financial crisis blind-sided a lot of investors.”
Merrill Lynch investors received 0.8595 Bank of America stock for each share held in the U.S. brokerage in the acquisition. The deal meant Temasek received about 188.8 million Bank of America shares, the equivalent of a 3.8 percent stake in the company, according to calculations by Bloomberg.
Bank of America Chief Executive Officer Kenneth Lewis has said he was pressured in December by Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson to complete the Merrill Lynch acquisition amid mounting losses at the brokerage firm.
The Charlotte, North Carolina-based bank has to raise $33.9 billion to boost capital after U.S. regulator stress tests. Its shares have tumbled 69 percent in the past year, outpacing the 37 percent decline in the Standard & Poor’s 500 Index.
Read more here
The sale may have raised about $1.27 billion, based on the average price of Bank of America stock in the first quarter. The divestment was completed by March 31, according to a U.S. filing. Temasek declined to comment on the price.
Temasek, whose investments shrank 31 percent in the eight months through Nov. 30, raised its stake in China Construction Bank Corp. this week, and Chief Executive Officer Ho Ching said yesterday the fund would reduce exposure to developed economies. Temasek had spent about $5.9 billion since 2007 buying shares in Merrill Lynch & Co., acquired by Bank of America on Jan. 1 after the stock slid 78 percent last year.
“The belief now is that the world is not so American- centric anymore,” said Melvyn Teo, associate professor of finance at the Singapore Management University. “It’s going to be driven more and more by the Chinese economy and consumer so might as well load up more on Chinese banks than American banks.”
The value of Temasek’s assets fell to S$127 billion ($87 billion) in the eight months to Nov. 30 as the credit crisis drove down the value of stakes in Merrill Lynch, Barclays Plc and Standard Chartered Plc. The drop in the portfolio tracked a 38 percent retreat in the MSCI World Index.
Bank of America Stake
Ho, wife of Singapore Prime Minister Lee Hsien Loong, drove an expansion outside Singapore and increased financial assets to 40 percent of the company’s portfolio. Charles ‘Chip’ Goodyear, the 51-year-old former head of BHP Billiton Ltd. who oversaw a fourfold increase in the company’s stock during his almost five- year tenure as CEO, will replace Ho in October.
A Form 13F filing to the U.S. Securities and Exchange Commission yesterday from Temasek indicates that the fund no longer held shares in Bank of America or Merrill Lynch as of March 31. An earlier filing showed that the Singapore firm owned 219.7 million Merrill Lynch shares at the end of 2008.
At the average price of $6.73 for the first quarter, the stake would have been valued at $1.27 billion. The sale would have been worth $2.14 billion at yesterday’s closing price.
Since the end of March, when Temasek completed the sale, Bank of America has risen 66 percent. The stock dropped 52 percent in the first quarter.
Temasek confirmed it sold its Bank of America shares in an e-mailed response to Bloomberg News queries today. The company declined to say how much it sold the stake for or when the sale was conducted. Mark Tsang, a Hong Kong spokesman at Bank of America, declined to comment.
Raising Capital
“They probably want to turn the page on this one and move on,” said David Cohen, an economist with Action Economics in Singapore. “I suspect they’re telling themselves they should have focused on Asian investments, particularly China. You can’t fault them now. The financial crisis blind-sided a lot of investors.”
Merrill Lynch investors received 0.8595 Bank of America stock for each share held in the U.S. brokerage in the acquisition. The deal meant Temasek received about 188.8 million Bank of America shares, the equivalent of a 3.8 percent stake in the company, according to calculations by Bloomberg.
Bank of America Chief Executive Officer Kenneth Lewis has said he was pressured in December by Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson to complete the Merrill Lynch acquisition amid mounting losses at the brokerage firm.
The Charlotte, North Carolina-based bank has to raise $33.9 billion to boost capital after U.S. regulator stress tests. Its shares have tumbled 69 percent in the past year, outpacing the 37 percent decline in the Standard & Poor’s 500 Index.
Read more here
Thursday, May 14, 2009
Chrysler Dealers Hunt for Answers After Shutdown News
(Bloomberg) -- A half-century of Chrysler car sales ended when Eldon Howe received a delivery from United Parcel Service Inc.
That’s how Howe learned that his Beacon Sales Inc. in Charlotte, Michigan, was among the dealers targeted to be shuttered as bankrupt Chrysler LLC prunes its retail outlets in a restructuring led by Italy’s Fiat SpA.
“We got the letter today from UPS,” said Howe, 78, who founded Beacon 55 years ago in the central Michigan city about 110 miles (177 kilometers) west of Detroit. “I’ve done this all my life,” he added. “I haven’t done anything else.”
From Virginia to California, Chrysler’s decision to cancel 789 dealership agreements forced franchisees to assess what they’ll do next, prepare to dismiss employees and ponder how to wind down decades-long relationships with their customers.
The reductions represent about 25 percent of the 3,200 Chrysler, Dodge and Jeep-brand dealers. Those who survive stand to gain business as their ranks are thinned. Those on the cut list will be gone by about June 9, Chrysler said.
“I’m worried about the people in this town, they don’t want to go somewhere else to buy their cars,” Howe said. “And what about the people who have already bought cars from us? We won’t be able to take care of the service for them.”
In Seaside, California, fourth-generation dealer Donald Butts will lose the Jeep brand from his Pontiac-Cadillac-Jeep store on June 9.
‘Walking Away’
“I cannot see how this will help them recover, walking away from entire markets,” Butts said in a telephone interview. Butts, who declined to give his age, said his family began selling General Motors Corp.’s Buicks in 1907 and took on Jeep about 25 years ago.
Shrinking the number of dealers is intended to ensure profitability for the remainder, President Jim Press said on a conference call. Stronger dealers help Auburn Hills, Michigan- based Chrysler by investing their properties, selling more vehicles and satisfying buyers with well-run service departments, Press said.
Chrysler culled mostly among retailers that had annual sales of 100 or fewer vehicles; sold just one Chrysler brand; or carried Chrysler vehicles along with those of other automakers, he said.
Buying Inventory
Surviving dealers will be urged to purchase autos and supplies of replacement parts from those being closed, Press said. Dealers on the list collectively accounted for 14 percent of the company’s sales, Press said.
Job losses, which Chrysler said it didn’t estimate, will be part of the fallout.
In Michigan, Howe said he planned to tell his 14 employees today about the company’s announcement. Butts, the California dealer, said at least three service technicians would have to find work elsewhere. He owns another dealership selling Honda Motor Co.’s Acura brand and wouldn’t say how many of his 39 employees would be affected.
John Gunning, 69, was among the dealers on the shutdown list who said he saw the move coming because his Manassas Dodge in Virginia sells only one of Chrysler’s three brands.
“There are still a lot of things up in the air,” said Gunning. “Obviously I am disappointed, but I’m not amazed.”
Gunning used to be on Chrysler’s national dealer advisory board. Last month, his dealership was the top-selling Dodge outlet in Northern Virginia. He also owns a dealership for Fuji Heavy Industries Ltd.’s Subaru, which he will keep open, he said.
“I’m not convinced Chrysler is going to make it anyway,” he said. “I just want to try to save my Subaru franchise.”
Read more here
That’s how Howe learned that his Beacon Sales Inc. in Charlotte, Michigan, was among the dealers targeted to be shuttered as bankrupt Chrysler LLC prunes its retail outlets in a restructuring led by Italy’s Fiat SpA.
“We got the letter today from UPS,” said Howe, 78, who founded Beacon 55 years ago in the central Michigan city about 110 miles (177 kilometers) west of Detroit. “I’ve done this all my life,” he added. “I haven’t done anything else.”
From Virginia to California, Chrysler’s decision to cancel 789 dealership agreements forced franchisees to assess what they’ll do next, prepare to dismiss employees and ponder how to wind down decades-long relationships with their customers.
The reductions represent about 25 percent of the 3,200 Chrysler, Dodge and Jeep-brand dealers. Those who survive stand to gain business as their ranks are thinned. Those on the cut list will be gone by about June 9, Chrysler said.
“I’m worried about the people in this town, they don’t want to go somewhere else to buy their cars,” Howe said. “And what about the people who have already bought cars from us? We won’t be able to take care of the service for them.”
In Seaside, California, fourth-generation dealer Donald Butts will lose the Jeep brand from his Pontiac-Cadillac-Jeep store on June 9.
‘Walking Away’
“I cannot see how this will help them recover, walking away from entire markets,” Butts said in a telephone interview. Butts, who declined to give his age, said his family began selling General Motors Corp.’s Buicks in 1907 and took on Jeep about 25 years ago.
Shrinking the number of dealers is intended to ensure profitability for the remainder, President Jim Press said on a conference call. Stronger dealers help Auburn Hills, Michigan- based Chrysler by investing their properties, selling more vehicles and satisfying buyers with well-run service departments, Press said.
Chrysler culled mostly among retailers that had annual sales of 100 or fewer vehicles; sold just one Chrysler brand; or carried Chrysler vehicles along with those of other automakers, he said.
Buying Inventory
Surviving dealers will be urged to purchase autos and supplies of replacement parts from those being closed, Press said. Dealers on the list collectively accounted for 14 percent of the company’s sales, Press said.
Job losses, which Chrysler said it didn’t estimate, will be part of the fallout.
In Michigan, Howe said he planned to tell his 14 employees today about the company’s announcement. Butts, the California dealer, said at least three service technicians would have to find work elsewhere. He owns another dealership selling Honda Motor Co.’s Acura brand and wouldn’t say how many of his 39 employees would be affected.
John Gunning, 69, was among the dealers on the shutdown list who said he saw the move coming because his Manassas Dodge in Virginia sells only one of Chrysler’s three brands.
“There are still a lot of things up in the air,” said Gunning. “Obviously I am disappointed, but I’m not amazed.”
Gunning used to be on Chrysler’s national dealer advisory board. Last month, his dealership was the top-selling Dodge outlet in Northern Virginia. He also owns a dealership for Fuji Heavy Industries Ltd.’s Subaru, which he will keep open, he said.
“I’m not convinced Chrysler is going to make it anyway,” he said. “I just want to try to save my Subaru franchise.”
Read more here
Wednesday, May 13, 2009
Fed Views Jump in Yields as Sign of Better Outlook
(Bloomberg) -- The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.
It’s too early to judge the effectiveness of the Fed’s $300 billion plan to buy Treasuries even after 10-year yields climbed 0.65 percentage point since the initiative began in March, the officials said. They added that the goal is to stimulate private lending, rather than to target government-bond rates.
The Fed officials’ stance contradicts the view of firms including BlackRock Inc. that have predicted the rise in yields will prompt the central bank to announce an increase in the size of the program as soon as next month.
“It would be very different if the economy still appeared to be in freefall and yields were backing up, but it’s not,” said John Ryding, founder of RDQ Economics LLC in New York and a former Fed researcher. Increasing Treasury purchases would “fight against what is in my opinion a recovery signal, or a signal that the recession is drawing to a close.”
Deflation Risk
Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, is “receding” and earlier this month cited evidence the economy’s contraction is easing. The Treasuries market, along with stocks and some commodities, have reflected those shifts.
Ten-year note yields closed at 3.18 percent late yesterday, up from as low as 2.46 percent after the March 18 announcement of the plan to buy long-term government debt. The gap in yields between the notes and 10-year Treasury Inflation Protected Securities, a gauge of the inflation rate expected by investors, hit a seven-month high of 1.64 percentage points last week.
The Standard & Poor’s 500 Stock Index closed at 908.35 yesterday in New York, up 21 percent from two months before. Crude-oil futures reached $60.08 yesterday, the highest level since November.
Fed policy makers committed to buy as much as $300 billion of Treasuries over a six-month period in their March 18 Open Market Committee statement. The aim was “to help improve conditions in private credit markets,” the FOMC said.
‘Pretty Clear’
“The statement is pretty clear,” Richmond Fed President Jeffrey Lacker, who was the first FOMC member to vote for buying Treasuries this year, told reporters May 8. “It doesn’t say anything about a U.S. Treasury yield” as a target, he said after a Washington speech. “I would urge people to take it at face value.”
The Fed has bought $101.7 billion under the initiative so far, part of its campaign to cut borrowing costs by purchasing assets with the benchmark interest rate near zero. Policy makers in March also decided to boost purchases of mortgage securities this year to $1.25 trillion from $500 billion and buy $200 billion, double the previous amount, of federal agency debt.
Stuart Spodek, BlackRock’s co-head of U.S. bonds in New York, said in an interview last week the Fed “needs to consider increasing its purchases of Treasuries” to “stabilize” long- term yields. He told Bloomberg Television May 11 officials may announce an increase as soon as the June 23-24 meeting. Spokeswoman Melissa Garville declined to comment further.
American Century
Another fund manager, James Platz of Mountain View, California-based American Century Investments, expects the Fed to announce further purchases “at some point.”
Should the rise in yields cause mortgage rates to surge, that may prove to be a trigger for a stronger Fed response, said Richard Clarida, a strategic adviser at Pacific Investment Management Co., the world’s biggest bond-fund manager. “That’s going to really, really, really hurt the economy,” Clarida said in a Bloomberg Television interview this week.
Last week, fixed mortgage rates rose for the first time in four weeks, with the average cost of a 30-year home loan climbing to 4.84 percent from 4.78 percent, which was the lowest level in Freddie Mac data going back to 1970.
The increase in Treasury yields, coupled with a drop in consumer prices, is increasing real interest rates for companies. Real investment-grade corporate borrowing costs climbed to 8.34 percent in March, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co.
Read more here
It’s too early to judge the effectiveness of the Fed’s $300 billion plan to buy Treasuries even after 10-year yields climbed 0.65 percentage point since the initiative began in March, the officials said. They added that the goal is to stimulate private lending, rather than to target government-bond rates.
The Fed officials’ stance contradicts the view of firms including BlackRock Inc. that have predicted the rise in yields will prompt the central bank to announce an increase in the size of the program as soon as next month.
“It would be very different if the economy still appeared to be in freefall and yields were backing up, but it’s not,” said John Ryding, founder of RDQ Economics LLC in New York and a former Fed researcher. Increasing Treasury purchases would “fight against what is in my opinion a recovery signal, or a signal that the recession is drawing to a close.”
Deflation Risk
Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, is “receding” and earlier this month cited evidence the economy’s contraction is easing. The Treasuries market, along with stocks and some commodities, have reflected those shifts.
Ten-year note yields closed at 3.18 percent late yesterday, up from as low as 2.46 percent after the March 18 announcement of the plan to buy long-term government debt. The gap in yields between the notes and 10-year Treasury Inflation Protected Securities, a gauge of the inflation rate expected by investors, hit a seven-month high of 1.64 percentage points last week.
The Standard & Poor’s 500 Stock Index closed at 908.35 yesterday in New York, up 21 percent from two months before. Crude-oil futures reached $60.08 yesterday, the highest level since November.
Fed policy makers committed to buy as much as $300 billion of Treasuries over a six-month period in their March 18 Open Market Committee statement. The aim was “to help improve conditions in private credit markets,” the FOMC said.
‘Pretty Clear’
“The statement is pretty clear,” Richmond Fed President Jeffrey Lacker, who was the first FOMC member to vote for buying Treasuries this year, told reporters May 8. “It doesn’t say anything about a U.S. Treasury yield” as a target, he said after a Washington speech. “I would urge people to take it at face value.”
The Fed has bought $101.7 billion under the initiative so far, part of its campaign to cut borrowing costs by purchasing assets with the benchmark interest rate near zero. Policy makers in March also decided to boost purchases of mortgage securities this year to $1.25 trillion from $500 billion and buy $200 billion, double the previous amount, of federal agency debt.
Stuart Spodek, BlackRock’s co-head of U.S. bonds in New York, said in an interview last week the Fed “needs to consider increasing its purchases of Treasuries” to “stabilize” long- term yields. He told Bloomberg Television May 11 officials may announce an increase as soon as the June 23-24 meeting. Spokeswoman Melissa Garville declined to comment further.
American Century
Another fund manager, James Platz of Mountain View, California-based American Century Investments, expects the Fed to announce further purchases “at some point.”
Should the rise in yields cause mortgage rates to surge, that may prove to be a trigger for a stronger Fed response, said Richard Clarida, a strategic adviser at Pacific Investment Management Co., the world’s biggest bond-fund manager. “That’s going to really, really, really hurt the economy,” Clarida said in a Bloomberg Television interview this week.
Last week, fixed mortgage rates rose for the first time in four weeks, with the average cost of a 30-year home loan climbing to 4.84 percent from 4.78 percent, which was the lowest level in Freddie Mac data going back to 1970.
The increase in Treasury yields, coupled with a drop in consumer prices, is increasing real interest rates for companies. Real investment-grade corporate borrowing costs climbed to 8.34 percent in March, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co.
Read more here
Tuesday, May 12, 2009
Toyota to Cut 2009 Output to Lowest in Seven Years
(Bloomberg) -- Toyota Motor Corp., the world’s biggest automaker, will slash global vehicle production by 28 percent in 2009 to the lowest in seven years as worldwide vehicle demand plummets.
Global output will fall to 6.68 million vehicles from 9.24 million in 2008, Hideaki Homma, a company spokesman, said today by phone. Sales will drop 18 percent to 7.34 million vehicles, he said. The figures include the carmaker’s Daihatsu Motor Co. and Hino Motors Ltd. subsidiaries.
Toyota, which has enough capacity to build 10 million vehicles a year, has slashed production as rising unemployment and falling wages sap demand in the U.S. and Japan, its two biggest markets. Auto sales in the U.S. have dropped to the lowest volumes in about 30 years.
“The U.S. market slump is having a huge impact on Toyota,” said Hitoshi Yamamoto, chief executive officer of Tokyo-based Fortis Asset Management Japan Co., which manages $5.5 billion in Japanese equities. “Toyota’s forecast looks pessimistic.”
The carmaker fell 3.2 percent to 3,620 yen, at the 11 a.m. trading break on the Tokyo stock exchange. It has risen 27 percent this year.
Read more here
Global output will fall to 6.68 million vehicles from 9.24 million in 2008, Hideaki Homma, a company spokesman, said today by phone. Sales will drop 18 percent to 7.34 million vehicles, he said. The figures include the carmaker’s Daihatsu Motor Co. and Hino Motors Ltd. subsidiaries.
Toyota, which has enough capacity to build 10 million vehicles a year, has slashed production as rising unemployment and falling wages sap demand in the U.S. and Japan, its two biggest markets. Auto sales in the U.S. have dropped to the lowest volumes in about 30 years.
“The U.S. market slump is having a huge impact on Toyota,” said Hitoshi Yamamoto, chief executive officer of Tokyo-based Fortis Asset Management Japan Co., which manages $5.5 billion in Japanese equities. “Toyota’s forecast looks pessimistic.”
The carmaker fell 3.2 percent to 3,620 yen, at the 11 a.m. trading break on the Tokyo stock exchange. It has risen 27 percent this year.
Read more here
Monday, May 11, 2009
Ford to sell 300 million common shares
(Reuters) - Ford Motor Co said on Monday that it would sell 300 million common shares and use part of the proceeds to pay off its healthcare obligations to the United Auto Workers under the terms of a recently concluded deal with the union.
Ford also said it expects to grant to the underwriters -- Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley -- a 30-day option to buy up to 45 million shares of common stock.
Ford shares fell 4.6 percent to $5.80 in after-market trade following the stock offering. At that price, the new shares would raise about $1.7 billion for Ford.
Ford is the only U.S. automaker that has not sought government aid.
Ford's stock offering comes on the heels of a successful debt exchange. Ford shares have had a four-fold rise in price since hitting a low of $1.50 on February 20.
Ford said net proceeds from the stock offering would also be used for general corporate purposes.
Read more here
Ford also said it expects to grant to the underwriters -- Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley -- a 30-day option to buy up to 45 million shares of common stock.
Ford shares fell 4.6 percent to $5.80 in after-market trade following the stock offering. At that price, the new shares would raise about $1.7 billion for Ford.
Ford is the only U.S. automaker that has not sought government aid.
Ford's stock offering comes on the heels of a successful debt exchange. Ford shares have had a four-fold rise in price since hitting a low of $1.50 on February 20.
Ford said net proceeds from the stock offering would also be used for general corporate purposes.
Read more here
Thursday, May 7, 2009
Satyam Fake Profits May Have Earned Chairman Raju $600 Million
(Bloomberg) -- B. Ramalinga Raju, accused of committing India’s biggest corporate fraud, and associates may have made as much as 30 billion rupees ($605 million) from transactions in shares of Satyam Computer Services Ltd. as the price soared on fake profits, an official at the Ministry of Corporate Affairs said.
Raju, 54, and the others slashed their combined holding in the software company, once India’s fourth-largest, to 1.5 percent last year from 25 percent in 2001, according to the official, who has seen the 14,000-page report on Satyam by the government’s Serious Fraud Investigation Office. The person declined to be identified because the report isn’t yet public.
If prosecutors can prove he forged documents and profited from increased share prices fueled by fraudulent accounting, Raju may face life in prison, the official said. The former Satyam chairman was arrested in January after saying he falsified accounts that went undetected for years. His revelation led to lawsuits from investors in the U.S. and new disclosure rules by Indian regulators.
“Where has the money gone? We need to know the real beneficiaries,” said Prakash Shah, secretary of the Mumbai- based Investor Education and Welfare Association, a not-for- profit organization set up in the wake of a 1992 securities scandal. “The small investors, the innocent persons, have been duped.”
Raju and associates may have gained from stock sales and pledging some equity holdings as collateral, the ministry official said.
Board Dismissed
Satyam shares more than doubled in the 7 1/2 years to Sept. 30, according to data compiled by Bloomberg. They have plunged 75 percent since Raju’s Jan. 7 statement, filed with the Bombay Stock Exchange, that he reported more than $1 billion of cash and assets in Satyam’s accounts that didn’t exist.
Raju is being held in a Hyderabad jail following his arrest on Jan. 9.
After Raju’s disclosures, India’s government dismissed Satyam’s board and appointed new directors to find a buyer for the software exporter, whose clients include Cisco Systems Inc. and Nestle SA. Tech Mahindra Ltd., the Pune, India-based software company partly owned by BT Group Plc, bought a 31 percent stake in Satyam last month.
Other charges Raju faces carry a maximum penalty of seven years in jail under the Indian Penal Code.
Raju hasn’t been given a copy of the SFIO’s findings, S. Bharat Kumar, his lawyer, said in a telephone interview on May 4 from Hyderabad, where Satyam is based and Raju lives.
‘Out of Context’
“They are selectively leaking the information to the press,” he said. “The matter is being quoted out of context, and it’s defamatory.”
Archana Muthappa, a spokeswoman for Satyam, declined to comment on the investigations. K.K. Pant, spokesman for the Ministry of Corporate Affairs, wouldn’t comment on the SFIO report.
The SFIO submitted its findings to the ministry last month. It is one of the government agencies inquiring into Satyam, along with the Central Bureau of Investigation and the Securities and Exchange Board of India, the market regulator. The CBI filed eight charges in a Hyderabad court on April 7 against Raju and eight other people, including his younger brother Rama Raju, 50, and former Chief Financial Officer Srinivas Vadlamani.
R.S. Rahul, the lawyer for Vadlamani, said he couldn’t comment without seeing the SFIO report. K. Ravindra Reddy, the lawyer for Rama Raju, declined to comment.
U.S. Lawsuits
A hearing will be held tomorrow on a CBI petition seeking permission to conduct lie detector tests on Raju and the others who were accused, Kumar said. Lawyers in the U.S. are following the investigations into Satyam, which faces at least a dozen lawsuits from investors who bought American depositary receipts issued by the company on the New York Stock Exchange.
“These investigations are giving everybody a road map as to what avenues to pursue,” said Robert Harwood, a partner at Harwood Feffer LLP in New York, a law firm that filed one of the suits on behalf of Hossein Momenzadeh, who bought Satyam ADRs in July 2007. “It funnels in quite significantly.”
The U.S. lawsuits have been consolidated with U.S. District Judge Barbara Jones in New York, who has scheduled a hearing today on who should lead the litigation, according to a court docket.
Satyam was set up in June 1987 as a closely held company to write software code and run electronic data processing centers. It held an initial public offering in 1992.
Read more here
Raju, 54, and the others slashed their combined holding in the software company, once India’s fourth-largest, to 1.5 percent last year from 25 percent in 2001, according to the official, who has seen the 14,000-page report on Satyam by the government’s Serious Fraud Investigation Office. The person declined to be identified because the report isn’t yet public.
If prosecutors can prove he forged documents and profited from increased share prices fueled by fraudulent accounting, Raju may face life in prison, the official said. The former Satyam chairman was arrested in January after saying he falsified accounts that went undetected for years. His revelation led to lawsuits from investors in the U.S. and new disclosure rules by Indian regulators.
“Where has the money gone? We need to know the real beneficiaries,” said Prakash Shah, secretary of the Mumbai- based Investor Education and Welfare Association, a not-for- profit organization set up in the wake of a 1992 securities scandal. “The small investors, the innocent persons, have been duped.”
Raju and associates may have gained from stock sales and pledging some equity holdings as collateral, the ministry official said.
Board Dismissed
Satyam shares more than doubled in the 7 1/2 years to Sept. 30, according to data compiled by Bloomberg. They have plunged 75 percent since Raju’s Jan. 7 statement, filed with the Bombay Stock Exchange, that he reported more than $1 billion of cash and assets in Satyam’s accounts that didn’t exist.
Raju is being held in a Hyderabad jail following his arrest on Jan. 9.
After Raju’s disclosures, India’s government dismissed Satyam’s board and appointed new directors to find a buyer for the software exporter, whose clients include Cisco Systems Inc. and Nestle SA. Tech Mahindra Ltd., the Pune, India-based software company partly owned by BT Group Plc, bought a 31 percent stake in Satyam last month.
Other charges Raju faces carry a maximum penalty of seven years in jail under the Indian Penal Code.
Raju hasn’t been given a copy of the SFIO’s findings, S. Bharat Kumar, his lawyer, said in a telephone interview on May 4 from Hyderabad, where Satyam is based and Raju lives.
‘Out of Context’
“They are selectively leaking the information to the press,” he said. “The matter is being quoted out of context, and it’s defamatory.”
Archana Muthappa, a spokeswoman for Satyam, declined to comment on the investigations. K.K. Pant, spokesman for the Ministry of Corporate Affairs, wouldn’t comment on the SFIO report.
The SFIO submitted its findings to the ministry last month. It is one of the government agencies inquiring into Satyam, along with the Central Bureau of Investigation and the Securities and Exchange Board of India, the market regulator. The CBI filed eight charges in a Hyderabad court on April 7 against Raju and eight other people, including his younger brother Rama Raju, 50, and former Chief Financial Officer Srinivas Vadlamani.
R.S. Rahul, the lawyer for Vadlamani, said he couldn’t comment without seeing the SFIO report. K. Ravindra Reddy, the lawyer for Rama Raju, declined to comment.
U.S. Lawsuits
A hearing will be held tomorrow on a CBI petition seeking permission to conduct lie detector tests on Raju and the others who were accused, Kumar said. Lawyers in the U.S. are following the investigations into Satyam, which faces at least a dozen lawsuits from investors who bought American depositary receipts issued by the company on the New York Stock Exchange.
“These investigations are giving everybody a road map as to what avenues to pursue,” said Robert Harwood, a partner at Harwood Feffer LLP in New York, a law firm that filed one of the suits on behalf of Hossein Momenzadeh, who bought Satyam ADRs in July 2007. “It funnels in quite significantly.”
The U.S. lawsuits have been consolidated with U.S. District Judge Barbara Jones in New York, who has scheduled a hearing today on who should lead the litigation, according to a court docket.
Satyam was set up in June 1987 as a closely held company to write software code and run electronic data processing centers. It held an initial public offering in 1992.
Read more here
Wednesday, May 6, 2009
Noe’s Pinton Is Forced Into Receivership by Creditors
(Bloomberg) -- Pinton Estates Plc, a U.K. property company controlled by Leo Noe, was forced into receivership by its creditors after failing to collect enough rent to make bond payments.
Deloitte LLP was appointed as the company’s joint receiver and manager by at least 20 percent of Pinton’s bondholders, the required minimum, Nigel Letheren, a spokesman for the bond’s trustee Prudential Assurance Co. Ltd., said by telephone yesterday. “Discussions are continuing and we are hoping to be able to resolve this matter quickly,” Shimon Cohen, a spokesman for Noe, said in an e-mail.
Estates & General Plc and Ashpol Plc, two other companies controlled by Noe’s family investment company, also have breached bond terms, according to Regulatory News Service statements. Noe, 55, used debt and equity to acquire real estate companies and individual properties worth more than 3 billion pounds ($4.5 billion) over the last decade. Some of the assets were linked to debentures, bonds that allow properties to be removed from the secured asset pool and sold as values rise.
“We’re seeing commercial property stressed to the point where some of these debentures are starting to default,” said Richard Smith, a credit strategist at Royal Bank of Scotland Group Plc in London. “They made it through the last downturn largely unscathed. Obviously, you could argue we’re in the kind of market that’s unprecedented.”
Boom and Bust
U.K. commercial property values almost doubled in the five years through mid-2007. Those gains have since been wiped out.
Pinton Estates, which has a 70 million pound debenture, couldn’t pay the whole of its half-year coupon in March because it failed to collect rent from some tenants, according to a May 1 statement.
Estates & General, which Noe bought in 2004 for 71 million pounds, is trying to refinance a 3 million pound debenture that expired on 31 December, according to a Regulatory News Service statement on Jan. 16.
Ashpol breached the terms of its 75 million pound debenture after the properties it was secured against fell in value, according to a Jan. 23 statement. The debenture’s trustee, Law Debenture Trustees Ltd, asked Ashpol to provide more equity to meet the terms of its agreement.
Noe is chairman and part owner of F&C Reit Asset Management Ltd., a London-based company that owns real estate worth 8.5 billion pounds, according to its Web site.
Family Owners
Trafalgar Overseas Ltd, a company registered in Gibraltar, is the parent of Pinton, Estates & General and Ashpol, according to Companies House, where U.K. private companies are required to file their accounts. Trafalgar is controlled by Leo Noe’s family, according to F&C’s Web Site. The debentures pay interest of 10.75 percent to 12.4 percent.
Pinton reported a 6.1 million-pound loss and Ashpol an 11.3 million-pound loss for the year ended March 31, 2008, according to accounts filed at Companies House. A director of both companies withdrew 1.5 million pounds from each one for charitable donations that period, according to the accounts.
Noe was a director of all three companies until he resigned from their boards in the last quarter of 2008, according to Companies House accounts. Noe is a philanthropist and founder of the Rachel Charitable Trust.
Read more here
Deloitte LLP was appointed as the company’s joint receiver and manager by at least 20 percent of Pinton’s bondholders, the required minimum, Nigel Letheren, a spokesman for the bond’s trustee Prudential Assurance Co. Ltd., said by telephone yesterday. “Discussions are continuing and we are hoping to be able to resolve this matter quickly,” Shimon Cohen, a spokesman for Noe, said in an e-mail.
Estates & General Plc and Ashpol Plc, two other companies controlled by Noe’s family investment company, also have breached bond terms, according to Regulatory News Service statements. Noe, 55, used debt and equity to acquire real estate companies and individual properties worth more than 3 billion pounds ($4.5 billion) over the last decade. Some of the assets were linked to debentures, bonds that allow properties to be removed from the secured asset pool and sold as values rise.
“We’re seeing commercial property stressed to the point where some of these debentures are starting to default,” said Richard Smith, a credit strategist at Royal Bank of Scotland Group Plc in London. “They made it through the last downturn largely unscathed. Obviously, you could argue we’re in the kind of market that’s unprecedented.”
Boom and Bust
U.K. commercial property values almost doubled in the five years through mid-2007. Those gains have since been wiped out.
Pinton Estates, which has a 70 million pound debenture, couldn’t pay the whole of its half-year coupon in March because it failed to collect rent from some tenants, according to a May 1 statement.
Estates & General, which Noe bought in 2004 for 71 million pounds, is trying to refinance a 3 million pound debenture that expired on 31 December, according to a Regulatory News Service statement on Jan. 16.
Ashpol breached the terms of its 75 million pound debenture after the properties it was secured against fell in value, according to a Jan. 23 statement. The debenture’s trustee, Law Debenture Trustees Ltd, asked Ashpol to provide more equity to meet the terms of its agreement.
Noe is chairman and part owner of F&C Reit Asset Management Ltd., a London-based company that owns real estate worth 8.5 billion pounds, according to its Web site.
Family Owners
Trafalgar Overseas Ltd, a company registered in Gibraltar, is the parent of Pinton, Estates & General and Ashpol, according to Companies House, where U.K. private companies are required to file their accounts. Trafalgar is controlled by Leo Noe’s family, according to F&C’s Web Site. The debentures pay interest of 10.75 percent to 12.4 percent.
Pinton reported a 6.1 million-pound loss and Ashpol an 11.3 million-pound loss for the year ended March 31, 2008, according to accounts filed at Companies House. A director of both companies withdrew 1.5 million pounds from each one for charitable donations that period, according to the accounts.
Noe was a director of all three companies until he resigned from their boards in the last quarter of 2008, according to Companies House accounts. Noe is a philanthropist and founder of the Rachel Charitable Trust.
Read more here
Tuesday, May 5, 2009
U.S. Banks Must Raise Debt Without FDIC to Repay TARP
(Bloomberg) -- Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.
The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.
The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.
Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.
“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.
Bank of New York
Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.
The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.
Read more here
The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.
The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.
Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.
“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.
Bank of New York
Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.
The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.
Read more here
Monday, May 4, 2009
Bonds Show Lehman Fades in History as Spreads Narrow
(Bloomberg) -- From Frankfurt to London to New York to Tokyo, bond traders say the Lehman Brothers Holdings Inc. bankruptcy is fading into history as the cost of credit retreats throughout the Group of Seven industrialized nations.
The shock to financial markets from Lehman’s collapse in September sent the Standard & Poor’s 500 Index to its biggest annual decline since 1938, froze credit markets, drove Goldman Sachs Group Inc. to seek $5 billion from Warren Buffett and sparked a run on Treasuries that caused bill rates to fall below zero for the first time.
Now, the record pace of corporate bond sales, declining money market rates and a drop in mortgage costs all suggest the global economy is on the mend. In the government debt market, yields on 10-year notes exceed those of two-year securities by at least 1 percentage point in all the G-7 nations for the first time since before 1991, according to data compiled by Bloomberg. The so-called yield curve typically steepens when traders anticipate a recovery.
The gap “is likely to get steeper still,” said Paul McCulley, a managing director at Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s biggest bond fund. “When policy stimulation gets traction in the real economy,” investors will begin to anticipate higher yields, he wrote in a May 1 e-mail.
Keeping Rates Low
Central banks show no inclination of raising interest rates until the housing market recovers, restraining short-term bond yields. Federal Reserve policy makers said March 18 that they are prepared to keep benchmark rates “exceptionally low” for “an extended period.” Bank of Canada Governor Mark Carney said he intends to leave the central bank’s main rate at a record low 0.25 percent until the end of June 2010.
At the same time, the flood of money being pumped into the economy by policy makers, including $12.8 trillion in the U.S., will ward off deflation and cause longer-term yields to increase, traders say.
“Inflation threats are increasing the longer you pump cash into the system,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. Subsequent steepening “will be more of a sell-off from the longer-end of the curve,” he said.
The U.S. Treasury yield curve has widened to 2.22 percentage points from 1.25 percentage points in December. It averaged less than zero in 2006 as traders correctly anticipated that the economy would enter a recession, causing inflation, which erodes the value of fixed-rate securities, to slow.
Steepest Curves
Curves in the U.K. and Italy are near the steepest levels in about 17 years, at 2.47 and 2.40 percentage points, respectively. Canada’s curve is 2.07 points, near the most since 2002.
The shift accelerated as Japan, U.K. and U.S. central bankers cut short-term interest rates to near zero and embraced so-called quantitative easing policies by buying debt assets to keep rates down after exhausting other tools.
Merrill Lynch & Co. indexes show sovereign debt issued by the G-7 has lost 1.07 percent this year, including reinvested interest, amid a surge in government borrowing to finance the rise in spending needed to prop up contracting economies. That compares with a return of 14 percent in 2008 for Treasuries, the best annual performance since gaining 18 percent in 1995, the indexes show.
Deflation Concern
Government coupon securities issued by the G-7 and maturing in five years or less gained 0.52 percent this year, compared with losses of 0.74 percent for securities maturing in five years or more, according to Merrill. Among the 26 largest sovereign debt markets, the U.S., U.K. and Canada lost the most in April, Bloomberg data shows.
Deflation was the concern last year as U.S. bond yields fell to historic lows, the Reuters/Jefferies CRB Index of commodities tumbled 36 percent and U.S. home prices plunged 19 percent, according to the S&P/Case-Shiller index. The consumer price index fell to minus 0.4 percent in March from a year before, the first annualized decline since 1955, the Labor Department said April 15.
The Fed’s preferred measure of inflation, which tracks consumer spending and excludes food and fuel costs, rose at a 1.5 percent annual pace last quarter, the Commerce Department said April 29, approaching the lower end of central bankers’ longer-term forecasts.
‘Not Enough’
The difference between yields on Treasury Inflation Protected Securities, or TIPS, due in 10 years and notes that aren’t indexed to inflation was 1.43 percentage points. The so- called breakeven rate, which reflects traders’ outlook for consumer prices over the life of the debt, was negative 0.08 percent Nov. 20. Among the G-7, U.K. 10-year gilts have the highest breakeven rate at 2.20 percentage points.
President Barack Obama signed a $787 billion, two-year economic stimulus plan in February. Prime Minister Taro Aso of Japan unveiled a 25,400 yen ($255 billion) plan to stimulate growth. Germany, France and Italy have pledged a combined 107 billion euros ($142 billion) and the U.K. has promised 25 billion pounds ($37 billion).
Even with those measures, the global economy will contract 1.3 percent this year, according to the International Monetary Fund. While the Federal Reserve’s Open Market Committee said April 29 that the contraction has slowed and the outlook “improved modestly,” the economy may suffer as job losses and restricted credit inhibit consumer spending.
“The stimulus is not enough,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “It’s more about absorbing cyclical damage and bailing out the banking sector rather than starting a path toward economic growth.”
Lending Again
Banks curtailed lending to each other in August 2007, when losses from subprime mortgages left the world’s largest financial institutions with securities and financial contracts they couldn’t value. Markets froze in the wake of New York-based Lehman’s bankruptcy on Sept. 15, as traders speculated that if the 158-year-old firm could fail, so could any company.
Now, lending has resumed. The London interbank offered rate for three-month dollar loans fell to 1.01 percent, the lowest since June 2003.
The TED spread measuring the difference between Libor and Treasury bill rates, which rose as high as 4.64 percentage points on Oct. 10, narrowed to 0.83 percentage point today. The Libor-OIS premium that indicates banks’ reluctance to lend to each other fell to 0.79 percentage point, the lowest level since before Lehman’s collapse, from 3.64 percent on Oct. 10.
Bond Sales
Companies have sold about $477 billion of bonds this year in the U.S., compared with $354 billion during the same period of 2008, according to data compiled by Bloomberg. The extra yield investors demand to buy U.S. corporate debt instead of Treasuries narrowed to 6.4 percentage points on May 1 from 8.96 percentage points on Dec. 15, according to Merrill Lynch’s U.S. Corporate & High Yield Master Index.
Rates on 30-year fixed mortgages averaged 1.76 percentage points more than 10-year Treasuries last week, down from 3.07 points on Dec. 19, the highest level since 1986, according to Bloomberg data.
“There will be a recovery and our view is we want to be ready to play that recovery,” said Michael Atkin, who helps oversee $12 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston.
Read more here
The shock to financial markets from Lehman’s collapse in September sent the Standard & Poor’s 500 Index to its biggest annual decline since 1938, froze credit markets, drove Goldman Sachs Group Inc. to seek $5 billion from Warren Buffett and sparked a run on Treasuries that caused bill rates to fall below zero for the first time.
Now, the record pace of corporate bond sales, declining money market rates and a drop in mortgage costs all suggest the global economy is on the mend. In the government debt market, yields on 10-year notes exceed those of two-year securities by at least 1 percentage point in all the G-7 nations for the first time since before 1991, according to data compiled by Bloomberg. The so-called yield curve typically steepens when traders anticipate a recovery.
The gap “is likely to get steeper still,” said Paul McCulley, a managing director at Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s biggest bond fund. “When policy stimulation gets traction in the real economy,” investors will begin to anticipate higher yields, he wrote in a May 1 e-mail.
Keeping Rates Low
Central banks show no inclination of raising interest rates until the housing market recovers, restraining short-term bond yields. Federal Reserve policy makers said March 18 that they are prepared to keep benchmark rates “exceptionally low” for “an extended period.” Bank of Canada Governor Mark Carney said he intends to leave the central bank’s main rate at a record low 0.25 percent until the end of June 2010.
At the same time, the flood of money being pumped into the economy by policy makers, including $12.8 trillion in the U.S., will ward off deflation and cause longer-term yields to increase, traders say.
“Inflation threats are increasing the longer you pump cash into the system,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. Subsequent steepening “will be more of a sell-off from the longer-end of the curve,” he said.
The U.S. Treasury yield curve has widened to 2.22 percentage points from 1.25 percentage points in December. It averaged less than zero in 2006 as traders correctly anticipated that the economy would enter a recession, causing inflation, which erodes the value of fixed-rate securities, to slow.
Steepest Curves
Curves in the U.K. and Italy are near the steepest levels in about 17 years, at 2.47 and 2.40 percentage points, respectively. Canada’s curve is 2.07 points, near the most since 2002.
The shift accelerated as Japan, U.K. and U.S. central bankers cut short-term interest rates to near zero and embraced so-called quantitative easing policies by buying debt assets to keep rates down after exhausting other tools.
Merrill Lynch & Co. indexes show sovereign debt issued by the G-7 has lost 1.07 percent this year, including reinvested interest, amid a surge in government borrowing to finance the rise in spending needed to prop up contracting economies. That compares with a return of 14 percent in 2008 for Treasuries, the best annual performance since gaining 18 percent in 1995, the indexes show.
Deflation Concern
Government coupon securities issued by the G-7 and maturing in five years or less gained 0.52 percent this year, compared with losses of 0.74 percent for securities maturing in five years or more, according to Merrill. Among the 26 largest sovereign debt markets, the U.S., U.K. and Canada lost the most in April, Bloomberg data shows.
Deflation was the concern last year as U.S. bond yields fell to historic lows, the Reuters/Jefferies CRB Index of commodities tumbled 36 percent and U.S. home prices plunged 19 percent, according to the S&P/Case-Shiller index. The consumer price index fell to minus 0.4 percent in March from a year before, the first annualized decline since 1955, the Labor Department said April 15.
The Fed’s preferred measure of inflation, which tracks consumer spending and excludes food and fuel costs, rose at a 1.5 percent annual pace last quarter, the Commerce Department said April 29, approaching the lower end of central bankers’ longer-term forecasts.
‘Not Enough’
The difference between yields on Treasury Inflation Protected Securities, or TIPS, due in 10 years and notes that aren’t indexed to inflation was 1.43 percentage points. The so- called breakeven rate, which reflects traders’ outlook for consumer prices over the life of the debt, was negative 0.08 percent Nov. 20. Among the G-7, U.K. 10-year gilts have the highest breakeven rate at 2.20 percentage points.
President Barack Obama signed a $787 billion, two-year economic stimulus plan in February. Prime Minister Taro Aso of Japan unveiled a 25,400 yen ($255 billion) plan to stimulate growth. Germany, France and Italy have pledged a combined 107 billion euros ($142 billion) and the U.K. has promised 25 billion pounds ($37 billion).
Even with those measures, the global economy will contract 1.3 percent this year, according to the International Monetary Fund. While the Federal Reserve’s Open Market Committee said April 29 that the contraction has slowed and the outlook “improved modestly,” the economy may suffer as job losses and restricted credit inhibit consumer spending.
“The stimulus is not enough,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “It’s more about absorbing cyclical damage and bailing out the banking sector rather than starting a path toward economic growth.”
Lending Again
Banks curtailed lending to each other in August 2007, when losses from subprime mortgages left the world’s largest financial institutions with securities and financial contracts they couldn’t value. Markets froze in the wake of New York-based Lehman’s bankruptcy on Sept. 15, as traders speculated that if the 158-year-old firm could fail, so could any company.
Now, lending has resumed. The London interbank offered rate for three-month dollar loans fell to 1.01 percent, the lowest since June 2003.
The TED spread measuring the difference between Libor and Treasury bill rates, which rose as high as 4.64 percentage points on Oct. 10, narrowed to 0.83 percentage point today. The Libor-OIS premium that indicates banks’ reluctance to lend to each other fell to 0.79 percentage point, the lowest level since before Lehman’s collapse, from 3.64 percent on Oct. 10.
Bond Sales
Companies have sold about $477 billion of bonds this year in the U.S., compared with $354 billion during the same period of 2008, according to data compiled by Bloomberg. The extra yield investors demand to buy U.S. corporate debt instead of Treasuries narrowed to 6.4 percentage points on May 1 from 8.96 percentage points on Dec. 15, according to Merrill Lynch’s U.S. Corporate & High Yield Master Index.
Rates on 30-year fixed mortgages averaged 1.76 percentage points more than 10-year Treasuries last week, down from 3.07 points on Dec. 19, the highest level since 1986, according to Bloomberg data.
“There will be a recovery and our view is we want to be ready to play that recovery,” said Michael Atkin, who helps oversee $12 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston.
Read more here
Sunday, May 3, 2009
Berkshire expects first-quarter profit
(Fortune) -- Berkshire Hathaway expects to report a first-quarter operating profit next week, CEO Warren Buffett said Saturday. However, he added that the firm's net worth continues to decline under the weight of losses from investments and derivatives bets.
At Berkshire's annual meeting Saturday, Buffett said that the firm expects to post an operating profit - excluding investment gains and losses - of $1.7 billion for the quarter, down from $1.9 billion a year ago.
The quarter featured solid gains in Berkshire's utilities and insurance operations and less favorable performances from its more economically sensitive businesses, such as furniture and jewelry stores, he explained.
In recent years Berkshire has typically filed its first-quarter report on the eve of the annual meeting. But Berkshire said this past week that it wouldn't have numbers ready this weekend. Instead, it expects to announce the results the afternoon of Fri., May 8.
The delay gave rise to some speculation about what the first-quarter report would show. Buffett said Saturday that the decision was driven largely by a quirk of the calendar - not by any change in policy.
Read more here
At Berkshire's annual meeting Saturday, Buffett said that the firm expects to post an operating profit - excluding investment gains and losses - of $1.7 billion for the quarter, down from $1.9 billion a year ago.
The quarter featured solid gains in Berkshire's utilities and insurance operations and less favorable performances from its more economically sensitive businesses, such as furniture and jewelry stores, he explained.
In recent years Berkshire has typically filed its first-quarter report on the eve of the annual meeting. But Berkshire said this past week that it wouldn't have numbers ready this weekend. Instead, it expects to announce the results the afternoon of Fri., May 8.
The delay gave rise to some speculation about what the first-quarter report would show. Buffett said Saturday that the decision was driven largely by a quirk of the calendar - not by any change in policy.
Read more here
Subscribe to:
Comments (Atom)
