Monday, January 18, 2010

Dubai bail-out from Abu Dhabi less than thought


Dubai has revealed that half of its $10bn (£6.1bn) bail-out from Abu Dhabi was actually from a previous deal.

Abu Dhabi lent the money to its United Arab Emirates neighbour in December, averting a potential default that had severely rattled financial markets.

Dubai now says that the total included $5bn raised from Abu Dhabi in November.

The statement may raise further questions about the levels of transparency and disclosure from governments in the Middle East.

Without the bail-out, there were fears that debt-ridden Dubai would not be able to pay off what it owed.

That caused panic in the stock and bond markets as investors fled the government debt of other countries with large public debt - such as Greece.

'Not peaked'

A Dubai government spokeswoman said the emirate had used $1bn from the $5bn from the banks.

She declined to comment when asked if Dubai would ask for more funds.

"It is unlikely that Abu Dhabi's support has peaked just yet, and the probability of further balance sheet assistance is high," UBS economist Reinhard Cluse said.

When it was given the handout in December, Dubai used $4.1bn of the money to bail out the government-owned investment company Dubai World.

A Dubai World property subsidiary needed the money to pay investors in an Islamic bond which was due to its investors. In November, Dubai's government asked its creditors for a freeze on Dubai World's $26bn debt repayments.

Dubai's fellow emirate has helped its neighbour out in the past.

They are both are part of the seven-member UAE and their ruling families are from the same tribe.

But unlike Dubai, whose economy is largely a service sector one, Abu Dhabi has substantial oil reserves.

Friday, January 15, 2010

China Reserves Hit Record $2.4 Trillion as Loan Growth Quickens

By Bloomberg News

Jan. 16 (Bloomberg) -- China’s foreign-exchange reserves surged to a record level in December and new loans exceeded forecasts, raising the stakes in Premier Wen Jiabao’s campaign to avert asset-price bubbles.

Reserves rose 23 percent to $2.4 trillion, the world’s largest, according to a People’s Bank of China statement on its Web site yesterday. Banks extended 379.8 billion yuan ($55.6 billion) of new loans, taking the annual total to an unprecedented 9.59 trillion yuan, the PBOC reported.

“Liquidity is massive -- the government needs to do something about it,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing. Accelerating inflation may encourage the government to end the 18-month-old yuan peg to the dollar and allow a 3 percent appreciation by year-end, Meng said.

Along with a stronger yuan, policy makers will have to follow up on their decision this week to raise the share of deposits banks must set aside as reserves, Meng said. The risk: surging lending growth and an influx of speculative capital from abroad destabilize the world’s third-largest economy with bubbles from property to stock markets.

Wen’s cabinet pledged last week that regulators will step up monitoring of speculative funds after the biggest jump in property prices in 18 months in December.

Money Supply

New lending was more than the 310 billion yuan median estimate in a Bloomberg News survey and higher than in the previous two months. M2 money supply jumped 27.7 percent in December from a year earlier, after a record 29.7 percent gain in November.

For the full year 2009, foreign reserves climbed about $453 billion. The increase partly reflects China’s purchases of other currencies to prevent the yuan from appreciating. The effort, done to help exporters, has also resulted in the country becoming the largest creditor to the U.S., with $799 billion of Treasuries holdings.

“It’s a dilemma -- you can’t keep the yuan where it is forever, yet allowing it to move may stoke speculation,” Brian Jackson, a Hong Kong-based strategist on emerging markets at Royal Bank of Canada, said before the statement. “The central bank will have to monitor and stem hot-money inflows very carefully.”

The yuan will strengthen about 5 percent to 6.5 against the dollar by year-end, according to Jackson. The central bank has tightened policy this year by guiding bill yields higher and increasing banks’ required reserve ratio by half a percentage point starting Jan. 18.

Yuan Peg

Authorities have kept the yuan at 6.83 per dollar since July 2008 after allowing it to advance 21 percent over three years.

Meng said the PBOC will keep selling so-called sterilization bills to mop up cash and ratchet up banks’ reserve requirements by 2 percentage points by the end of June, to 18 percent for bigger lenders.

The currency reserves jumped by $127 billion in the fourth quarter, compared with $141 billion in the previous three months, as the trade surplus and foreign direct investment channeled in cash.

In December, direct investment from abroad more than doubled from a year earlier to $12.1 billion. The value of China’s euro and yen assets also affects the total.

Monthly Increases

The data indicated that foreign-exchange reserves grew by about $55.7 billion in October, $60.5 billion in November and $10.4 billion in December. Gains in the dollar in December against the euro and yen pared the value of China’s holdings in those currencies, Royal Bank of Scotland Group Plc said.

“Inflows are likely to pick up in the first quarter,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

The central bank has set a target of a “moderate” loan expansion in 2010 to support economic growth while stabilizing prices and managing inflation expectations.

Property prices across 70 major cities climbed 7.8 percent in December from a year earlier, a government report showed Jan. 14. A government report due next week will show gross domestic product increased 10.5 percent in the fourth quarter from a year before, the most since April-to-June 2008, according to the median of 41 estimates in a Bloomberg News survey.

Banks may already have extended 1 trillion yuan of new loans this year, adding to inflation risks, Goldman Sachs Group Inc. said in a note to clients yesterday, citing checks with financial institutions.

The China Banking Regulatory Commission’s recommended range for lending this year is between 7 trillion yuan and 8 trillion yuan, a person familiar with the matter said last month, as the nation also seeks to limit the risk from inflation. Premier Wen said on Dec. 27 that it would have been better if lending in 2009 hadn’t been on such a large scale.

U.S. Economy: Industrial Production, Confidence Climb (Update1)

By Courtney Schlisserman and Timothy R. Homan

Jan. 15 (Bloomberg) -- Production in the U.S. rose for a sixth consecutive month, consumers gained confidence and price increases slowed, indicating the economic recovery is being sustained into 2010 without generating inflation.

Output climbed 0.6 percent in December for a second month, according to figures from the Federal Reserve issued today in Washington. The cost of living increased 0.1 percent last month, less than the median forecast of economists surveyed by Bloomberg News, and sentiment reached a four-month high in January, other reports showed.

Manufacturers may ramp up production in coming months to rebuild stockpiles and meet rising global demand that’s lifting profits at companies including Intel Corp. The rebound so far has soaked up a quarter of the excess capacity created by the worst recession since the 1930s, giving the Fed scope to keep interest rates close to zero through the first half of the year.

“The economy is on a pretty good track on the recovery side and inflation is not a problem,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, who correctly forecast the increase in consumer prices. “The Fed can be pretty relaxed, at least for the moment, and focus on making sure this recovery is sustainable.”

Stocks Drop

The Standard & Poor’s 500 Index dropped the most in a month after JPMorgan Chase & Co. reported a loss in its retail banking division and a stronger dollar pulled down commodity prices. The S&P 500 fell 1.1 percent to 1,136.03 at 4:05 p.m. in New York, the biggest decline since Dec. 17.

The increase in production matched the median forecast of 76 economists surveyed by Bloomberg. Estimates ranged from no change to a gain of 1.1 percent. The stretch of increases at the end of 2009 was the longest in a decade.

Production was propelled by a jump in utility use as temperatures turned colder. Utility demand climbed 5.9 percent, the biggest jump in two decades. December was colder than average, according to the National Oceanic and Atmospheric Administration, prompting Americans to turn up the heat.

Manufacturing dropped 0.1 percent as losses in auto and mineral production offset a 0.9 percent gain in business equipment. Demand for computers, communications gear and semiconductors improved, signaling investment may be picking up.

Another report today showed manufacturing accelerated in the New York Fed region this month. The Fed Bank of New York’s general economic index rose to 15.9 from 4.5 in December. Readings above zero in the so-called Empire State Index signal manufacturing expansion in the state and parts of New Jersey and Connecticut.

‘Solid’ Quarter

“We’re turning up,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Inventories are the spark of the recovery,” he said, and growth “looks pretty solid for the fourth quarter.”

Intel, the world’s largest chipmaker, yesterday projected bigger first-quarter sales than analysts had estimated, a sign the computer industry has shaken off the effects of the recession. The Santa Clara, California-based company, which supplies chips to more than 80 percent of the world’s computers, expects its profit margin to hit a 10-year high this year as consumers snap up laptops and businesses loosen the purse strings on technology budgets.

“My expectation for 2010 is that we’re going to see robust unit growth,” Chief Financial Officer Stacy Smith said in an interview. “The consumer segments of the market will stay pretty strong, and I do believe we are going to see a resurgence in PC client sales.”

Spare Capacity

Capacity utilization, which measures the proportion of plants in use, increased to 72 percent in December, the highest level in a year, from 71.5 the prior month, the Fed’s production report also showed. It was forecast to rise to 71.8 percent, according to the survey median.

The plant-use rate averaged 80 percent over the past two decades and reached a record low 68.3 percent in June. Excess capacity is one reason economists project inflation will remain low.

The increase in the consumer-price index last month followed a 0.4 percent gain in November, the Labor Department reported. The median forecast of economists surveyed projected a 0.2 percent advance.

Excluding food and energy costs, the so-called core index also increased 0.1 percent. Companies may have little success raising prices with unemployment projected to average 10 percent this year, the highest annual rate in seven decades.

“Consumer pricing pressures remain very subdued,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who accurately forecast the rise in the core rate. “It gives the Fed further leeway to continue keeping rates where they are well through 2010.”

The Reuters/University of Michigan preliminary index of consumer sentiment for January increased to 72.8, less than anticipated, from 72.5 in December. The gauge averaged 66.3 last year after reaching a record 28-year low of 55.3 in November 2008. .”

Sunday, January 10, 2010

Trichet May Signal Risk Concern as Central Bankers Gather

By Simon Kennedy and Christian Vits

Jan. 11 (Bloomberg) -- European Central Bank President Jean-Claude Trichet, who warned investors against taking on too much risk two years before the financial crisis started, may be about to sound the alert again.

Trichet and fellow central bankers met financial executives in Basel, Switzerland, yesterday after officials signaled concern banks are rebuffing tougher regulation and embracing risk as the turmoil ebbs.

Risk is back in the spotlight as China witnesses a record increase in credit, Goldman Sachs Group Inc. posts record earnings and the MSCI World index of stocks logs a 74 percent gain since March. Federal Reserve Chairman Ben S. Bernanke and Chinese central bank governor Zhou Xiaochuan will attend talks in Basel today of the Group of 10 central banks, which Trichet chairs.

“As liquidity is still abundant there’s certainly a danger that an excessive risk taking behavior returns,” said Carsten Brzeski, an economist at ING Group in Brussels. “However, central banks face a dilemma as they can hardly do more than calling on the banks at the moment.”

Trichet, who warned in November 2005 about “an underestimation of risks by financial markets,” is scheduled to brief reporters around 1 p.m. local time today.

He may join the chorus of officials voicing concern about excessive risk taking, which led to the credit bust of 2007. Financial Stability Board Chairman Mario Draghi told reporters on Jan. 9 that markets may be overly optimistic about the recovery. Fed Bank of Kansas City President Thomas Hoenig said Jan. 7 that the Fed should move “sooner rather than later” to reduce stimulus.


“The markets are becoming risky again, bankers are becoming risk-takers again,” Draghi, who is also governor of the Bank of Italy, said in Basel. “At the same time, bankers should be aware of the fragilities in the system.”

The Bank for International Settlements, which is hosting today’s gathering, last month warned that low rates often spur banks to take on too much risk. In the U.S., regulators told banks on Jan. 7 to guard against possible losses from an eventual end to low interest rates.

“It is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases” in borrowing costs, the Federal Financial Institutions Examination Council, which includes the Fed, said in a statement.

Central Bank Action

Markets are rediscovering their appetite for risk after central bankers truncated the recession with record low interest rates and governments around the world bailed out the banking system. The Fed has cut its benchmark rate to almost zero and taken on more than $1 trillion of assets on its balance sheet to combat the credit freeze, while its Japanese counterpart’s benchmark is also near zero. The ECB’s main rate is at a record- low 1 percent.

“The massive amount of financing and cheap funding that continues to be available to banks is a fertile ground for heavier risk taking,” Karsten Schroeder, chief executive officer of Amplitude Capital LLP, a Swiss money manager, told Bloomberg Television.

Goldman Sachs and JPMorgan Chase & Co. are among the banks taking advantage of low rates, a stock-market rally and the demise of competitors like Lehman Brothers Holdings Inc. to bolster profits. Banks have also increased lobbying against reforms aimed at restricting how much risk they can take.

Commercial bankers, who traditionally attend the January meeting in Basel, met with policy makers to discuss risk taking and regulation yesterday. Deutsche Bank AG Chief Executive Officer Josef Ackermann was among those scheduled to be there.

“There won’t be much sweet talk,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London before the meeting. “Central banks could threaten to follow up with action if banks don’t stop taking excessive risks."

Friday, January 8, 2010

U.K. Producer Prices Jump More Than Twice Forecast (Update1)

By Svenja O’Donnell and Scott Hamilton

Jan. 8 (Bloomberg) -- U.K. producer prices jumped more than twice as much as economists forecast in December, a sign the economy’s pickup may be fanning inflation.

The cost of goods at factory gates rose 0.5 percent from November, the Office for National Statistics said today in London. The median forecast of 12 economists in a Bloomberg News survey was for a 0.2 percent increase. On the year, prices climbed 3.5 percent, the most since January.

The British economy is showing signs of emerging from the longest recession on record, giving factories scope to rebuild margins by raising prices. The Bank of England yesterday pledged to spend the remainder of its 200 billion pound ($320 billion) bond purchase program as policy makers assessed the strength of the recovery.

“It’s a sizeable jump,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “We have thought for some time there is more price stickiness out there than people think. There are maybe more inflationary pressures in the pipeline than the Monetary Policy Committee thought.”

The pound was little changed after the report, trading up 0.5 percent on the day at $1.6029 as of 9:31 a.m. in London. The yield on the two-year U.K. government bond, which earlier rose 3 basis points to 1.289 percent, was also little changed.

Out of 10 categories of producer prices, seven rose on the month, led by products including scrap metal, transport and food. On the year, all categories increased, with the biggest gain in petroleum products, the statistics office said.

Raw Materials

Excluding food, beverages, tobacco and petroleum products, prices jumped 0.7 percent on the month and 2.6 percent on the year, the report showed.

Manufacturers are raising prices to offset higher costs of raw materials. Input prices gained 0.1 percent on the month and 6.9 percent from a year earlier in December, the statistics office said. Crude oil prices jumped 66 percent from a year earlier, driving the increase.

Victrex Plc, a U.K. maker of heat-resistant plastics for the automotive and energy industries, said Dec. 8 that margins in the year through September will be flat after a decline in sales caused fixed costs to surge and a weaker pound made imports more expensive.

Higher producer prices raise the prospect of a feed-through to inflation, which was 1.9 percent in November, the fastest pace in six months. The central bank, which targets inflation of 2 percent, predicts it will accelerate towards the 3 percent upper limit before dropping below the goal this year.

Wednesday, January 6, 2010

Retail sales: What the economists say

January 7, 2010 - 11:07AM

Helen Kevans, Economist, JPMorgan

"It looks like despite that (retail) discounting, volumes remained very strong and that underpinned the good results on the retail number. It reaffirms our views that the RBA will hike again in February by 25bps and there will be a string of rate hikes throughout 2010.

"Rates at the moment are just too low for an economy that has proven very resilient and has come out of a global recession rather unscathed. We expect rates at 4.5 per cent mid-year and 5 per cent by year-end."

Michael Blythe, Economist, Commonwealth Bank

"It certainly shows the improvement in consumer sentiment has more than offset the first couple of rate rises. The only downside is that the Christmas trading session did not sound quite as good.

"This shows the Australian economy is certainly on a recovery path. It will certainly revive speculation that the RBA will come back and give us a rate rise in February.

"We have a 25-basis-point rate rise written in for February, with a forecast for rates at 5 percent by the end of 2010."

Brian Redican, Senior Economist, Macquarie

"It is quite extraordinary how strong sales were in November. And it was across all states and all sectors. Along with strong car sales, it sets up the quarter for a very good pick up in private consumption. That should allay concerns that spending would wane now the stimulus cheques had stopped coming and rates were rising. As such, it's another tick in the box for a rate rise in February."

Adam Carr, Chief Economist, ICAP

"There has been a debate about the strength of consumers (and) today's number ends once and for all that debate. Consumers are strong and will continue to be strong.

"Unless we see a significant moderation in the quarterly growth rate, the RBA will be tightening again in February by 25bps. I see interest rates at 4.5 percent mid-year, and 5-5.25 percent by end of the year."


Tuesday, January 5, 2010

Australian December Services Industry Stalls on Rate Increases

By Jacob Greber

Jan. 6 (Bloomberg) -- Australia’s services industry stalled in December as companies reported a slump in new orders and suppliers cut deliveries.

The performance of services index fell 2.5 points to 50 from November, when it dropped 2.3 points, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. A figure below 50 indicates the industry is shrinking.

Weakening demand for services follows central bank Governor Glenn Stevens’s decision to raise the benchmark lending rate on Dec. 1 for an unprecedented third straight month. Specialty Fashion Group Ltd., an Australian clothing retailer, said today that trading over the Christmas to New Year holiday period was “tough.”

Today’s report “confirms that the recent improvement in the services sector lacks traction and adds weight to arguments for a pause to interest rates,” said Australian Industry Group Chief Executive Heather Ridout.

The index rose in October to the highest level in 19 months before falling in November and last month.

“The business environment remains a challenge for many firms, particularly those in the consumer-related sectors of retail trade,” Ridout said.

Rising retail sales in the first 10 months of last year helped the nation’s economy skirt the global recession after the government distributed more than A$20 billion ($18 billion) in cash to households and the central bank slashed borrowing costs to a half-century low of 3 percent in April. Most of the handouts were completed in the first half of 2009.

Rate Increases

The Reserve Bank began the first of three straight monthly interest-rate increases in October, taking the benchmark rate to 3.75 percent last month.

“Christmas 2009 trading was more challenging than in 2008, with the discounting in the market being more aggressive than we have seen for many years,” Gary Perlstein, chief executive officer at Specialty Fashion, said in a statement today.

“This may be the first indication that there will be more difficult trading conditions” in the first half of 2010, “when consumers will not be receiving government handouts and interest rates are on the rise.”

Investors are betting there is a 48 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 7:28 a.m. Chances of a quarter-point move in March are at 92 percent.

Today’s report, which is based on a poll of about 200 companies, is similar to the U.S. non-manufacturing ISM index.

The report measures sales, new orders, deliveries, inventories and employment for companies such as banks, real estate agents, insurers, restaurants, transport firms and retailers to compile the overall performance of services index.

Friday, January 1, 2010

U.S. Stocks Drop as Crisis Causes S&P 500’s First Decade Loss

By Nikolaj Gammeltoft

Jan. 1 (Bloomberg) -- U.S. stocks fell this week, limiting an advance that sent the Standard & Poor’s 500 Index to its biggest annual increase in six years. The 2009 rally failed to rescue investors from the worst return for any decade.

Ford Motor Co. dropped 1.3 percent for the week, bringing its decade loss to 80 percent after the credit crisis threatened to push the carmaker into bankruptcy last year. Apple Computer Inc., the iPhone maker that beat analysts’ profit estimates for 19 straight quarters, climbed 0.8 percent, extending a 720 percent advance over the last 10 years.

This past year’s rally wasn’t enough to restore money lost in two bear markets after the Internet bubble collapsed in 2000 and more than $1.7 trillion in global bank losses sent the index to a 38 percent decline in 2008. The S&P 500 posted an average decrease of 0.9 percent a year since 1999 including dividends, the first negative return for a decade since data began in 1927, according to S&P analyst Howard Silverblatt.

“This dispelled two myths,” said Robert Arnott, founder of Research Affiliates LLC, which oversees $47 billion in Newport Beach, California. “The notion that investment gains are easy, and the notion that stocks will win for the patient investor, no matter what we pay.”

The S&P 500 slipped 1 percent to 1,115.10 this week, paring its 2009 gain to 23 percent, the biggest advance since it climbed 26 percent in 2003. The Dow Jones Industrial Average fell 0.9 percent to 10,428.05, lowering the yearly increase to 19 percent.

Market Recovery

Equities rebounded in March after investors paid an average 11.9 times earnings for S&P 500 companies, a 23-year low, according to data compiled by Yale University’s Robert Shiller. He adjusts valuations for inflation and uses a decade of profit to smooth out short-term fluctuations.

Since reaching a record 1,565.15 in October 2007, the S&P 500 has fallen 29 percent, erasing about $5.3 trillion of stock market value. The index’s 65 percent gain since March 9 cut the loss in half after the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession, according to data compiled by Bloomberg.

The price of the benchmark index for U.S. equities slid 24 percent over the last 10 years, a smaller loss than the 42 percent retreat suffered during the 1930s. Dividends brought the annualized return during the decade of the Great Depression to 1 percent, according to S&P data.

Relative Value

Investors who put $10,000 in stocks on Dec. 31, 1999, have $9,090 now, while the same amount in 10-year Treasury notes would have grown to about $18,000 following a 6.1 percent annualized return, according to data compiled by Bloomberg. A $10,000 investment in the Reuters/Jefferies CRB Index of 19 raw materials increased 3.3 percent a year to $13,803. Gold futures rose 14 percent a year, turning $10,000 into $37,852.

The average annualized return for U.S. equity mutual funds was 1.7 percent during the decade. Only one fund out of 3,833 gained in 2008: Forester Value Fund rose 0.4 percent that year, according to Chicago-based Morningstar Inc.

Hedge funds’ annualized return was about 6.3 percent since Dec. 31, 1999, according to Hedge Fund Research’s HFRI Fund Weighted Composite Index. The measure rose 19 percent in 2009 through Dec. 15.

“Those who benefited in the decade were short-term investors who were able to take advantage of the volatility in the stock market,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “That isn’t the signal authorities should give players in the market. You want them to think of it as a place where you can save for your retirement.”

JDS Uniphase

JDS Uniphase Corp. fell the most among companies still in the S&P 500, plunging 99 percent. The ranking doesn’t include Lehman Brothers Holdings Inc., Bear Stearns Cos., Houston-based Enron Corp., Clinton, Mississippi-based WorldCom Inc. and 207 other stocks removed from the index since Dec. 31, 1999, according to data compiled by Silverblatt.

JDS, the maker of computer-networking equipment based in Milpitas, California, fell every year except 2003 after declines in the value of companies it bought caused a $56.1 billion loss in 2001. Phone and computer companies were the worst-performing industries in the S&P 500, losing 64 percent and 54 percent since the end of 1999. Cupertino, California-based Apple was an exception, surging to $210.73 from $25.70.

Citigroup, AIG Plunge

Banks and brokerages had the third-biggest drop of the 2000s, led by a 91 percent slump in Citigroup Inc. and a 98 percent tumble in American International Group Inc., both based in New York. Lenders were dragged down by $1.7 trillion of global bank losses and writedowns tied to property loans during the credit crisis that began with mortgage defaults and accelerated with the collapse of New York-based Lehman Brothers in 2008.

Ford also fell every year except in 2003 when the U.S. economy recovered from the first recession of the decade. The Dearborn, Michigan-based auto maker plunged as the American car industry lost market share, culminating with the government taking a 61 percent stake last year in Detroit-based General Motors Co., the biggest U.S. automaker.

Investors may experience more subpar returns, said John Bogle, who founded the Vanguard Group mutual fund company. Those counting on a recovery such as the rally that lifted stocks 18 percent a year in the 1980s will be disappointed, said Bogle, who created the $92 billion Vanguard 500 Index Fund in 1976.

“The 1990s was the golden decade for stocks, the 2000s was the tin decade and the next 10 years will be the bronze decade,” Bogle said. “Stocks will rise 7 to 9 percent over the next 10 years, below the historical norm but better than the last 10.”

Record Deficit

The U.S. budget deficit reached a record of $1.4 trillion in 2009, pushed up by the cost of bank bailouts and benefits after 7.2 million jobs were lost since the recession started two years ago. The U.S. government’s total debt is now more than $12 trillion, according to the U.S. Treasury.

“We need to legitimize the recovery and move beyond the artificial government supports for the economy,” said John Lynch, who helps manage $155.5 billion as chief market analyst at Evergreen Investments in Charlotte, North Carolina. “We have to learn our lessons from the dot-com, credit and housing bubbles.”

‘Decade of Delusion’

Stocks rallied in 2009 after Federal Reserve Chairman Ben S. Bernanke held interest rates near zero and launched the biggest expansion of the central bank’s power in its 96-year history. Bernanke pumped money into the economy through the purchase of mortgage-backed debt and U.S. Treasuries and the government pledged more than $200 billion to bail out New York- based securities firm Bear Stearns Cos. and AIG.

Congress authorized the $700 billion Troubled Asset Relief Program to buy toxic assets from lenders including Citigroup and New York-based banks Goldman Sachs Group Inc. and JPMorgan Chase & Co. as the crisis escalated. The Treasury invested more than $200 billion of the money in financial institutions.

“It’s been a decade of delusion,” said Richard Tedlow, professor of business administration of Harvard Business School in Cambridge, Massachusetts. “In many ways, we’re worse off than the 1930s, we’ve created problems of moral hazard and we’re faced with an astounding public debt.”

Year in Review: Stocks, Commodities Rally

Dec. 31 (Bloomberg) -- U.S. stocks posted the biggest annual gain since 2003 and commodities rallied as the Federal Reserve kept its benchmark interest rate near zero and governments around the world enacted stimulus programs to halt the first global recession since World War II.

Click here for a wrap-up of the world’s markets in 2009. See the VIDEO tab above for more on the Year in Review from Bloomberg Television. Click here for a slideshow presentation from Bloomberg BusinessWeek magazine, “The Unbelievable Quotes, Acts and Ideas of 2009.”

Following are more stories looking back on the past year and previewing 2010.

Citigroup, Marshall & Ilsley Post Biggest S&P Drops

Dec. 31 (Bloomberg) -- Citigroup Inc. and Marshall & Ilsley Corp. were among the worst performing stocks in the Standard & Poor’s 500 Index this year, dragged down by defaults on commercial and residential property loans that may extend declines into 2010.

U.S. Treasuries Post Worst Performance Among Sovereign Markets

Dec. 31 (Bloomberg) -- Treasuries fell, posting the worst performance this year among sovereign debt markets as the U.S. sold record amounts of securities, including $118 billion of notes this week, to help spur a recovery from recession.

Tax-Free Shortage May Repeat Muni Debt Outperforming Treasuries

Dec. 31 (Bloomberg) -- Tax-exempt bonds may return more than Treasuries for a second straight year, paced by the biggest increase in taxable state and local issues as U.S. income tax rates are poised to rise in 2011.

M&A Rebound Years Away as Morgan Stanley Sees ‘Gentle Recovery’

Dec. 30 (Bloomberg) -- Takeover advisers who cheered a surprise fourth-quarter surge in mergers and acquisitions may still have years to wait for a return to 2007’s record dealmaking.

Goldman Sachs Takes Biggest Share of $923 Million U.S. IPO Fees

Dec. 29 (Bloomberg) -- Goldman Sachs Group Inc. won the biggest share of the $923 million in fees from U.S. initial public offerings this year, while Citigroup Inc. fell out of the top five after its revenue plummeted more than 50 percent.

Decade’s Worst Funds Never Recovered From Technology-Stock Bust

Dec. 30 (Bloomberg) -- U.S. stock mutual funds with the biggest losses in the past 10 years, a list topped by Fidelity Growth Strategies and Vanguard U.S. Growth, were crushed by the market sell-off at the start of the decade and never recovered.

Yuan Forwards Rose 5% in 2009 as Recovery Spurred Bets on Gains

Dec. 31 (Bloomberg) -- China’s 12-month yuan forwards gained 5 percent this year as the economy’s recovery from the slowest growth this decade fanned speculation policy makers will allow the currency to resume appreciation. Local bonds fell.

Rupiah Is Asia’s Top Performer as Yields, Growth Attract Funds

Dec. 31 (Bloomberg) -- Indonesia’s rupiah posted its biggest annual advance in seven years as signs the global economy is recovering from the recession encouraged overseas investors to return to emerging-market assets.

Russia Unbeatable to Stock Funds as Kudrin Says Prices Too High

Dec. 30 (Bloomberg) -- Russia is the top investment pick for the biggest emerging-market stock funds in 2010, even after the RTS Index’s world-beating 129 percent rally prompted Finance Minister Alexei Kudrin to say shares are too expensive.

Raphael’s $47.5 Million Muse Beats Matisse to Top 2009 Prices

Dec. 29 (Bloomberg) -- While the art market shrank in 2009, many individual artworks achieved strong results at auction.

Next Decade Will Be Good One for Stock Investors: Matthew Lynn

Dec. 29 (Bloomberg) -- Even the most practiced soothsayer will struggle to make any detailed predictions for the next 10 years. It’s hard enough to know what will happen in the markets in January 2010, never mind December 2019.

Eight Things for Markets to Watch Out for in 2010: Matthew Lynn

Dec. 22 (Bloomberg) -- No one can complain that the last two years have been light on drama. We had the worst financial crash in living memory, and some of the biggest banks in the world effectively came under state control.

My Casualty List Shows Stocks Ready to Rebound: John Dorfman

Dec. 28 (Bloomberg) -- From 1999 through early 2007, I compiled a quarterly Casualty List of banged-up stocks that I believed had good rebound potential.

UK's 'big structural problems' could be cured in 2010, CBI chief says

By Graham Ruddick

Britain's "big structural problems" could be cured within the next parliament and unemployment could pass its peak this year if companies and politicians act decisively, according to the head of the UK's largest business group.

In his New Year message, Richard Lambert, director-general of the CBI, said 2010 would pose "exceptional challenges" for businesses.

The crisis in the banking sector is "far from resolved", he warned, while the fact the Government is yet to establish a credible plan to erode Britain's £178bn budget deficit is a "significant concern".

However, these issues can be overcome and a sustained economic recovery can be secured if the focus is put on policies aimed at driving long-term growth, such as education and skills, enterprise and innovation, competitive taxes and flexible labour markets, private sector investment, trade growth and open markets.

"If 2009 was a year when many companies were preoccupied with survival, 2010 may be a time of opportunities for those with the resources and foresight to grasp them," Mr Lambert said.

"The message is that the UK does indeed face big structural problems – but with sufficient determination they can be largely fixed within the lifetime of the next parliament."

The CBI leader, a former member of the Bank of England's Monetary Policy Committee, said business conditions were stabilising after a tumultuous year on the back of the collapse of Lehman Brothers. However, business leaders fear the UK economy, which is still in recession, is at risk of bumping along the bottom or even slipping into a double dip.

Mr Lambert said that, despite a rise in the capital ratios of banks, there could be "more aftershocks to come from the global credit crunch". He added: "The process of regulatory reform has hardly begun; and the transition to more robust funding structures is likely to be both slow and expensive. In the meantime, net lending to companies is still shrinking, and business investment remains very weak."

There are concerns among economists that a new crisis could emerge from under-pressure sovereign debts. Mr Lambert warned that delays in reducing the UK's £845bn of debt would increase the threat of uncompetitive long-term interest rates and a weak pound, and that the uncertainty was harming businesses.

The general election, set to happen in the first half of 2010, will be a key moment. Mr Lambert said it offered the potential for a "re-energised government" to act decisively on reducing the debt and to take a long-term view about the importance of the financial sector, rather than focusing on "political point scoring around bonuses".

However, Mr Lambert warned of "rumblings" in the public sector as spending is reigned in.