Thursday, August 27, 2009

U.S. Markets Wrap: Stocks Gain on Fuel Rise; Bonds, Dollar Fall

By Elizabeth Stanton

Aug. 27 (Bloomberg) -- U.S. stocks rose, while Treasuries and the dollar slipped, after a rebound in oil and natural gas spurred investors who pushed the Standard & Poor’s 500 Index up 52 percent since March into more bets on riskier assets.

The S&P 500 erased its steepest drop in two weeks to add 0.3 percent, rising for a third day. Crude for October delivery jumped 1.5 percent, reversing a 2.2 percent loss, as speculators bought the contract after it held above $70. Natural gas surged 4 percent in less than 30 minutes, erasing most of a 7.5 percent drop as front-month futures expired.

“This whole rally since the March lows has been extraordinarily highly correlated,” said Liam Dalton, who oversees about $1.1 billion as the New York-based chief executive officer of Axiom Capital Management. “When the commodities go up, it encourages people to think the growth factor is returning globally and they invest in stocks. One feeds into the other.”

The S&P 500 added 2.86 points to 1,030.98 at 4 p.m. in New York after decreasing as much as 1.2 percent. The Dow Jones Industrial Average advanced 37.11 to 9,580.63, rallying for the eighth straight day, the longest winning streak since April 2007. Treasuries fell, driving the yield on 10-year notes up 0.3 point to 3.46 percent. The Dollar Index lost 0.8 percent.

U.S. stocks and energy prices have increasingly moved in lockstep, with the so-called correlation coefficient between the S&P 500 and crude traded in New York reaching the highest level on record this year, according to data compiled by Bloomberg.

Trading Slows

Lower-than-average trading volume in the stock market may be amplifying moves in equities. Almost 1.2 billion shares changed hands on the New York Stock Exchange, 20 percent fewer than the 2009 average, according to data compiled by Bloomberg.

American International Group Inc. soared 27 percent, leading financial stocks higher, on speculation the company may benefit from improved relations with its former chief executive officer. Citigroup Inc. jumped 9.1 percent after the New York Post reported that hedge-fund manager John Paulson is buying the shares. Boeing Co. rose 8.4 percent after saying the 787 Dreamliner will make its first flight this year.

Equities advanced after reaching the most expensive level since 2004. The S&P 500’s surge since March pushed the measure’s price to 19 times operating earnings of its companies from the past year.

The dollar dropped against the euro, yen and Swiss franc as reduced demand for safety encouraged traders to sell the U.S. currency to limit losses. Treasuries fell for the first time in four days as stocks rebounded from earlier losses, reducing the refuge appeal of government securities.

‘Problem Banks’

Stocks fell earlier as the declines in fuel prices dragged down energy shares and regulators boosted the number of “problem banks” to a 15-year high. The Federal Deposit Insurance Corp.’s list of troubled lenders grew 36 percent to 416. The regulator didn’t identify the firms, which are graded based on asset quality, liquidity and earnings. Financial shares led the S&P 500 to a 12-year low in March on concern falling real-estate values would cause widespread insolvency.

“There are good reasons to be suspicious about the strength of the recovery,” said Ralph Shive, manager of the $1.3 billion Wasatch-1st Source Income Equity Fund, which beat 96 percent of similar funds during the past five years. “We could pull back a bunch after the kind of rally we had.”

‘Hank’ Greenberg

Gross domestic product shrank at a 1 percent annual rate from April to June, less than the 1.5 percent decline projected by economists in a Bloomberg News survey, a Commerce Department report showed today in Washington. Corporate earnings rose by

AIG climbed 27 percent to $47.84 for the biggest gain in the S&P 500. Robert Benmosche, named this month as the New York- based insurer’s fifth CEO in four years, told Reuters he contacted former Chief Executive Officer Maurice “Hank” Greenberg after taking the job. Greenberg led AIG for almost four decades, building the company into the world’s largest insurer, before being forced out in 2005.

Benmosche said Greenberg “can help us with the solutions” to AIG’s problems, which led to the $182.5 billion bailout that saved the company from bankruptcy last year. AIG shares have more than tripled since Aug. 4.

Citigroup increased 9.1 percent to $5.05. Paulson has acquired about a 2 percent stake in the New York-based bank, the New York Post reported today, citing unidentified people.

Dell Beats Estimates

Boeing, the second-biggest maker of commercial aircraft, surged 8.4 percent to $51.82. Customers will receive planes in the fourth quarter of 2010, and the project will be profitable following a $2.5 billion third-quarter charge, Boeing said. The new delivery target is about 2 1/2 years behind schedule.

Dell Inc. rose 6.7 percent to $15.65. The second-largest maker of personal computers reported second-quarter sales and profit that exceeded the average analyst estimates. Dell earned 28 cents a share excluding some items on revenue of $12.8 billion. The average estimates were 22 cents a share on revenue of $12.6 billion.

The S&P 500 has risen 0.5 percent this week following reports showing consumer confidence and new home sales exceeded economists’ estimates. Government data today showed fewer Americans filed new claims for jobless benefits last week.

“Everybody is in agreement we’re in an economic recovery,” said John Massey, a money manager at SunAmerica Asset Management Corp. in Jersey City, New Jersey. “What’s disputed is how much is already built into prices currently.”

Bearishness on stocks may foreshadow more gains because pessimistic investors may already have sold shares. A weekly poll of clients by the American Association of Individual Investors found 49 percent were bearish, the third-highest proportion since the record 70 percent in March.

“If investors were unusually bullish I would worry more about stocks,” said David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which manages $120 billion. “While valuations are not as dirt-cheap as in March, they’re still reasonably compelling.”

Wednesday, August 19, 2009

Buffett Says U.S. Federal Debt Poses Risks to Economy, Dollar

By Shamim Adam

Aug. 19 (Bloomberg) -- The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary yesterday. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system. The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30.

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, said. “For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”

The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, Buffett said.

Record Deficit

The U.S. budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July. The excess of expenditure over revenue for July climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history, the Treasury said Aug. 12.

Officials must still do “whatever it takes” to get the U.S. economy back on its growth momentum, Buffett wrote.

“Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources,” Buffett said. “With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”

Pacific Investment Management Co., which runs the world’s biggest bond fund, said in an Emerging Markets Watch report that the dollar will weaken as the swelling U.S. deficit erodes its status as a reserve currency. The Dollar Index, which tracks the greenback against a basket of currencies, has fallen 12 percent from this year’s high in March.

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt,” Buffett said. “The dollar’s destiny lies with Congress.”

Buffett is the chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. Buffett built Berkshire into a $155 billion enterprise over four decades with dozens of acquisitions, buying companies that sell ice cream, lease private jets and operate power plants.

Stocks Fall as China Slumps; Commodities Drop, Yen, Bonds Rise

By Daniel Hauck

Aug. 19 (Bloomberg) -- China’s stocks dropped, briefly dragging the benchmark index into a so-called bear market and triggering declines in equities and commodities worldwide. The yen and Treasuries rose as investors sought less risky assets.

The MSCI World Index of 23 developed nations sank 0.5 percent at 10:10 a.m. in London and futures on the Standard & Poor’s 500 Index slid 1 percent. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. Copper fell 1.9 percent on the London Metal Exchange. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg. The 10-year Treasury yield dropped to its lowest level since July 14.

The U.S. and Chinese governments pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg. Earnings for Chinese companies that reported since July 8 have trailed analysts’ estimates by 12 percent on average, Bloomberg data show.

“The focus of global markets is what’s happening in China,” said Bartosz Pawlowski, a London-based emerging-markets strategist at BNP Paribas SA. “China will have to remove liquidity from the market, and it’s likely that commodities will suffer and it means worse sentiment towards risk in general.”

Declining Loans

The Shanghai Composite lost 4.3 percent today as Maanshan Iron & Steel Co. tumbled 7.5 percent. The company posted a half- year loss for the second consecutive period as the global recession curbed demand from homebuilders and automakers.

The Shanghai gauge stands at less than half its record level on Oct. 16, 2007. Stocks have slumped this month as new loans in July declined to less than a quarter of June’s level and companies including Yunnan Copper Industry Co. reported losses. The gauge is 53 percent higher for the full year.

The Dow Jones Stoxx 600 Index of European shares retreated 1.2 percent. A 42 percent rebound since March 9 has left the regional measure valued at 40.2 times the profits of its companies, near the most expensive level since 2003, weekly data compiled by Bloomberg show.

The MSCI Emerging Markets Index dropped 0.7 percent and headed for its lowest closing level since July 22. India’s Bombay Stock Exchange Sensitive Index lost 1 percent, while Indonesia’s Jakarta Composite index fell 2.3 percent. Hungary’s forint led declines in east European currencies against the euro as the tumble in Chinese shares prompted investors to sell emerging-market assets.

Copper, Oil

Copper for delivery in three months fell 1.9 percent to $5,963 a metric ton on the LME. Crude oil retreated 0.8 percent to $68.65 a barrel in New York. China is the world’s second- largest oil user.

Investors are concerned that governments and their central banks will struggle to withdraw stimulus packages that have eased the global economic recession. “Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” billionaire Warren Buffett said. Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

Treasuries advanced as investors sought the relative safety of U.S. bonds, driving the yield on the 10-year note 6 basis points lower to 3.44 percent.

Yen, Pound

The yen strengthened most against the pound after minutes of the Bank of England’s Aug. 6 meeting showed Governor Mervyn King wanted a larger increase in the central bank’s asset- purchase program. The dollar rose versus all 16 major currencies tracked by Bloomberg except the yen.

Confidence in the world economy surged to a 22-month high in August on signs the first global recession since World War II is approaching an end, a Bloomberg survey of users on six continents showed last week.

The U.S. unemployment rate dropped in July for the first time since April 2008, data from the Labor Department showed this month, while the German and French economies unexpectedly grew last quarter, government figures indicated last week.

The cost of protecting corporate bonds from default jumped to the highest in a month, according to JPMorgan Chase & Co. prices for credit-default swaps. Contracts on the Markit iTraxx Europe index rose 3.25 basis points to 103.25, and the risk gauge has now climbed 23 percent since Aug. 10.

Thursday, August 13, 2009

Retail Sales in U.S. Unexpectedly Declined in July (Update2)

By Timothy R. Homan

Aug. 13 (Bloomberg) -- Sales at U.S. retailers unexpectedly fell in July as a boost from the cash-for-clunkers automobile incentive program failed to overcome cuts in other spending.

The 0.1 percent decrease in sales, the first drop in three months, followed a revised 0.8 percent gain in June that was larger than previously estimated, Commerce Department figures showed today in Washington. Purchases excluding automobiles fell 0.6 percent, also more than anticipated.

Today’s report underscores the threat to spending from the continued deterioration in the job market; a separate government report today showed more Americans than forecast filed claims for unemployment insurance last week. Retailers such as Wal-Mart Stores Inc. and Macy’s Inc. are cutting costs and inventories to bolster profits as households cut back on non-essential items.

“Until we start seeing job growth, consumers are still going to be very cautious,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, which accurately forecast the drop in purchases excluding automobiles. “It’s premature to talk about the sustainability of a recovery,” he said, until there’s “follow-through on the demand side.”

The Labor Department said today that 558,000 people filed first-time claims for jobless benefits last week, up from 554,000 the week before.

Stocks, Treasuries

Stocks pared gains and two-year Treasuries erased their losses after today’s reports. The Standard & Poor’s 500 Stock Index rose 0.2 percent to 1,007.75 as of 9:41 a.m. in New York after futures climbed as much as 1.3 percent earlier. Two-year yields were at 1.14 percent after reaching 1.19 percent before the figures were released.

Retail sales were projected to rise 0.8 percent after an initially reported 0.6 percent gain in June, according to the median estimate of 76 economists in a Bloomberg News survey. Forecasts ranged from a decline of 0.9 percent to a gain of 2 percent.

Excluding automobiles, the drop in sales was the biggest since March. They were forecast to increase 0.1 percent, according to the survey median.

Americans cut back on furniture, electronics, building materials, groceries and sporting goods in July, according to the report. The drop in sales at department stores, at 1.6 percent, was the biggest this year.

Price Impact

A drop in prices probably also contributed to a decline in revenue at service stations. Filling station sales decreased 2.1 percent. Regular unleaded gasoline averaged $2.53 a gallon at the pump in July, down 11 cents from the prior month, according to AAA.

Excluding gasoline, retail sales rose 0.1 percent following a 0.3 percent gain.

The government’s cash-for-clunkers plan did boost auto sales, confirming industry data released earlier this month. Purchases at dealerships and parts stores climbed 2.4 percent last month, the biggest gain since January.

Industry data showed sales of cars and light trucks rose to an 11.2 million annual unit pace in July, the highest since September, after the government offered credits of up to $4,500 to trade in gas-guzzlers for more fuel-efficient vehicles.

Auto Incentives

President Barack Obama last week signed into law an emergency measure giving an additional $2 billion to the cash- for-clunkers program after the original $1 billion ran out three months earlier than projected. The infusion of funds was intended to extend the program through August.

Excluding autos, gasoline and building materials -- the retail group the government uses to calculate gross domestic product figures for consumer spending -- sales dropped 0.2 percent after no change in June. The government uses data from other sources to calculate the contribution from the three categories excluded.

Wal-Mart, the world’s largest retailer, today reported profit that exceeded some analysts’ estimates after managing inventory to lower costs. Comparable-store sales trailed the company’s forecast.

Macy’s, the second-biggest U.S. department store chain, said yesterday it cut inventories 7.5 percent in the second quarter from a year ago as sales dropped.

Karen Hoguet, chief financial officer at the Cincinnati- based company, said on a conference call yesterday that Macy’s is “cautiously optimistic” its sales trends will improve.

Job Losses

The economy has lost about 6.7 million jobs since the recession started in December 2007, the worst of any downturn since World War II. GDP contracted at a 1 percent annual rate in the second quarter, the fourth consecutive drop.

Consumer spending, which accounts for 70 percent of the economy, is projected to grow at an average 1.6 percent pace through the first half of 2010, ending its worst slump since 1980, according to the median estimate of economists surveyed this month by Bloomberg News. Purchases rose at an average 3.5 percent pace in the decade before the current recession began in December 2007.

Fed policy makers yesterday said they will hold the benchmark interest rate “exceptionally low” for an “extended period” to help sustain a recovery. They also added “sluggish income growth” to the list of reasons why household spending is likely to be slow to rebound. Headwinds previously mentioned included job losses, tight credit and falling home values.

Monday, August 10, 2009

Bank of Japan May Focus on Risks to Recovery, Keep Rate at 0.1%

By Mayumi Otsuma

Aug. 11 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa may today focus on the risk that recent economic improvements will fail to translate into a sustainable recovery and price declines will keep falling.

The policy board will hold the key overnight lending rate at 0.1 percent at a meeting in Tokyo, according to all 22 economists surveyed by Bloomberg News. The board will refrain from unveiling any new policy measures a month after extending credit-easing programs by three months to Dec. 31, they said.

The Nikkei 225 Stock Average has risen 49 percent from a 26-year low in March on expectations Japan is overcoming its worst postwar recession. Economists say any recovery is likely to be weak because shrinking profits will force companies to cut spending and shed workers.

“The Bank of Japan will remain cautious about the outlook, even though expectations for a global recovery are surging in financial markets,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “Board members will probably retain the phrase ‘significant uncertainty’ in their statement” to be published after the meeting, Kato said.

The key rate will stay unchanged at least through 2010, according to 12 of 16 economists surveyed by Bloomberg News. The policy meeting will probably end early this afternoon in Tokyo, and Shirakawa will speak to the press at 3:30 p.m.

Improvements in exports and production helped the world’s second-largest economy expand 3.9 percent in the three months ended June 30 after contracting for four quarters, analysts predict a report will show next week. The revival has yet to spur business investment and consumption, which together account for more than two-thirds of the economy.

Machine Orders

Machinery orders, an indicator of capital spending in the next three to six months, will fall 8.6 percent in the current quarter, the Cabinet Office said yesterday.

“The economy appears to have regained momentum temporarily, but few people are convinced that we’re seeing the beginning of a lasting recovery,” said Teizo Taya, a former central bank board member and now an adviser to the Daiwa Institute of Research in Tokyo. “As the job market will keep deteriorating and wages will suffer, there is no prospect for a rebound in consumption.”

Prime Minister Taro Aso is struggling to steer the economy toward a recovery as his ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Falling Prices

Shirakawa may indicate that deflation is likely to become more entrenched as domestic demand weakens. Policy makers will probably forecast price declines will extend into the year ending March 2012 even as the economy recovers, according to two people familiar with the matter. Consumer prices excluding fresh food slid a record 1.7 percent in June from a year before.

Federal Reserve policy makers may decide tomorrow to let their $300 billion program of purchasing long-term Treasuries expire in September, former governors Lyle Gramley and Laurence Meyer said this month. In contrast with the Bank of Japan, the Fed and other central banks face the threat that inflation will accelerate should they fail to remove excess cash from their economies fast enough.

“Given that the problem of inflation matters the least in Japan among major economies, the Bank of Japan will have plenty of time to observe how other central banks unwind extraordinary measures” before it ends its own, said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Credit Programs

The Bank of Japan lowered the key rate to 0.1 percent in December and has since begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. Some economists say the bank may set prerequisites for raising the rate to signal to investors that it’s not in a hurry.

“A rate increase is still far off, and BOJ policy makers will probably discuss presenting the preconditions for ending their policy commitment to avoid misleading market expectations,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. The central bank may outline any requirements for raising the key rate around the time it ends the emergency credit-easing programs, she said.

Japan’s central bank set conditions for ending a policy of keeping interest rates near zero in 1999, saying it wouldn’t raise them until concerns about deflation were dispelled.

Saturday, August 1, 2009

China Manufacturing Expands a Fifth Month, PMI Shows (Update3)

By Bloomberg News

Aug. 1 (Bloomberg) -- China’s manufacturing expanded for a fifth month as record lending and a 4 trillion yuan ($586 billion) stimulus plan drove a recovery in the world’s fastest- growing major economy.

The official Purchasing Managers’ Index rose to a seasonally adjusted 53.3 in July from 53.2 in June, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. A reading above 50 indicates an expansion.

China’s stimulus spending and subsidies for consumer purchases have countered a collapse in exports and helped companies from chipmaker Semiconductor Manufacturing International Corp. to automaker General Motors Co. The nation’s policy makers will take their cue from the U.S. on when to end economic rescue efforts, central bank Governor Zhou Xiaochuan said July 28 in Washington.

“The recovery is very strong,” said Wang Tao, an economist with UBS AG in Beijing. “But it’s not yet stable, because it’s all stimulus driven.”

An export-order index rose to 52.1 in July from 51.4 in June, the PMI showed. The output index increased to 57.3 from 57.1. A measure of new orders was unchanged at 55.5.

China’s economic growth accelerated in the second quarter, gaining 7.9 percent from a year earlier. The manufacturing index has climbed from a record low of 38.8 in November.

Bad Loans, Asset Bubbles

The economy “will keep rebounding as domestic demand accelerates,” Zhang Liqun, an economist at the State Council Development and Research Center, said in today’s statement.

Banks extended $1 trillion of new loans in the first half, triple the amount a year earlier, stoking concern that the recovery may come at a cost of bad loans, bubbles in stocks and property and resurgent inflation.

The CSI 300 Index of stocks, up 87 percent this year, plunged the most in eight months on July 29 on investors’ concern that the central bank will tighten monetary policy.

Stimulus measures helped an estimated increase of more than 70 percent in General Motors’ vehicle sales in China in July from a year earlier. The factories of Semiconductor Manufacturing, China’s biggest chipmaker, will be more fully used this quarter than in the previous three months as demand improves, the company said July 29.

‘Blind Investment’

“While the recovery in manufacturing attests to the overall effectiveness of China’s stimulus, some uncertainties remain,” said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan Chase & Co. She cited a government warning last month that “blind investment” is adding to overcapacity in some industries.

In November, Premier Wen Jiabao rolled out the spending package spanning earthquake reconstruction work, the construction of power grids, railways and low-cost homes, and subsidies for farmers’ purchases of televisions and minivans.

The nation that’s the world’s second-biggest exporter reported its slowest economic growth in almost a decade in the first quarter after global trade collapsed. China’s exports started to slide in November and shrank 21.8 percent by value in the first half of 2009 from a year earlier.

In Guangdong, a manufacturing hub on the nation’s east coast, exports are recovering, the official Xinhua News Agency said July 20, citing the provincial trade bureau. They may return to growth in the fourth quarter, the bureau said.

Wang, the economist from UBS, said she expects the same for the exports of the nation as a whole as global demand recovers. South Korea reported today that its exports fell for a ninth month in July from a year earlier.