July 26 (Bloomberg) -- The worst U.S. recession in five decades probably eased in the second quarter as trade and government stimulus mitigated the damage from declines in housing, inventories and consumer and business spending, economists said before a report this week.
The world’s largest economy shrank at a 1.5 percent pace following a 5.5 percent drop in the first three months of 2009, according to the median forecast of 66 economists surveyed by Bloomberg News ahead of Commerce Department figures due July 31. Other reports may show orders for long-lasting goods fell and sales of new houses rose.
Leaner stockpiles set the stage for a return to growth this quarter as manufacturing and homebuilding stabilize, while efforts to revive demand globally boost exports. Consumer spending, which accounts for 70 percent of the economy, may be slower to recover as unemployment is projected to keep rising and home values are likely to fall further.
“The recession has decelerated sharply and is starting to form a bottom,’ said Joel Naroff, chief economist at Naroff Economic Advisors Inc. in Holland, Pennsylvania. “I think we’ll see some growth in the third quarter.” Naroff was the top forecaster in 2008, according to a survey by Bloomberg Markets magazine.
A drop last quarter would be the fourth consecutive decrease in GDP, the longest losing streak since quarterly records began in 1947. The decline so far has been the deepest since 1957-58.
GDP Revisions
The Commerce report will also include GDP revisions that may affect figures going back to when the government started keeping annual records in 1929.
Stocks rallied last week and bond prices fell on signs the economy was bottoming. The Dow Jones Industrial Average broke above 9,000 for the first time since January, gaining 4 percent over the five days to end the week at 9,093.24. Ten-year Treasury notes posted a second weekly loss, yielding 3.66 percent late on July 24.
Orders for durable goods last month fell 0.6 percent, economists project another report from Commerce on July 29 will show. Bookings rose in the prior two months. Excluding demand for transportation equipment, which is often volatile, orders were forecast to be little changed.
Machinery exporters are among those seeing signs of improvement. Caterpillar Inc., the biggest maker of earthmoving equipment, posted second-quarter profit that exceeded analysts’ highest estimate and raised its full-year forecast, saying stimulus programs are starting to support global demand.
Stimulus Working
“We are seeing signs of stabilization that we hope will set the foundation for an eventual recovery,” Chief Executive Officer Jim Owens said in a statement July 21. “Credit markets have improved significantly. Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work.”
The economy will grow at an average 1.5 percent rate in the last six months of the year, according to economists surveyed by Bloomberg in the first week of July. Unemployment, which reached a quarter-century high of 9.5 percent in June, will top 10 percent by the first three months of 2010, the survey showed.
The projections are in line with estimates by Federal Reserve policy makers.
“The pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization,” Fed Chairman Ben S. Bernanke told Congress last week. “The labor market, however, has continued to weaken.”
Housing, Manufacturing
Both manufacturing and housing are showing signs of forming a bottom. Existing home sales have risen for three months, while the Institute for Supply Management’s gauge of factory activity has shown a lessening pace of contraction since January.
New-homes sales probably rose 2.9 percent in June, to a 352,000 annual rate, economists surveyed projected a Commerce report on July 27 will show. Purchases reached a record low in January.
Home prices continue to fall, albeit at a slower pace. The S&P/Case Shiller index of 20 major metropolitan areas, due July 28, will probably show property values fell 17.9 percent in May from a year earlier, according to the median forecast. The measure was down 18.1 percent in the 12 months ended April.
Dropping real-estate prices and rising joblessness have tattered household finances. A survey from the New York-based Conference Board on July 28 may show consumer confidence fell in July for a second month, the survey showed.
Finally, the Federal Reserve on July 29 will issue its compendium of regional economic anecdotes known as the Beige Book. Central bankers will use the survey at their next meeting in August to help formulate policy.
Saturday, July 25, 2009
Bank of Israel May Hold Interest Rate at Record Low: Week Ahead
July 26 (Bloomberg) -- The Bank of Israel will probably hold its benchmark interest rate at a record low tomorrow as the economy contracts and unemployment climbs, a survey showed.
The rate will remain at 0.5 percent for a fifth month, according to eight of the nine economists surveyed by Bloomberg. One economist predicted it would rise to 0.75 percent. The Jerusalem-based central bank will announce its decision at 5:30 p.m. tomorrow.
Governor Stanley Fischer has lowered the base rate by 3.75 percentage points since October to mitigate the effects of the global financial crisis. The economy contracted an annualized 3.7 percent in the first quarter and unemployment rose to 8.4 percent in May, its highest in almost three years.
“The Bank of Israel won’t rush to raise the interest rate due to the uncertainty regarding the degree of recovery in the global market and the worsening in the labor market,” Rafael Gozlan, chief economist at Leader Capital Markets, said by phone from Tel Aviv.
While inflation accelerated to an annual 3.6 percent in June from 2.8 percent the previous month it is likely to moderate beginning in September, Gozlan said. The government’s target range for inflation is 1 percent to 3 percent.
“We believe that the restrained global inflationary environment, together with the weakening of the domestic labor market, will support inflation of about 1 percent or 1.5 percent in the coming year,” Gozlan said.
Inflation Outlook
Inflation will reach 2.5 percent over the next year, according to a Bank of Israel poll of economists released on July 16, up from the 2.4 percent expected in the previous survey.
The shekel traded at 3.8678 late on July 23, compared with 3.8882 on July 17.
Last week, Israel’s benchmark 5.5 percent Mimshal Shiklit bond due in 2017 rose 0.2 shekel to 105.55, with the yield falling 1 basis point to 4.97 percent. The Tel Aviv Stock Exchange’s benchmark TA-25 Index rose 4.7 percent to 915.44
The rate will remain at 0.5 percent for a fifth month, according to eight of the nine economists surveyed by Bloomberg. One economist predicted it would rise to 0.75 percent. The Jerusalem-based central bank will announce its decision at 5:30 p.m. tomorrow.
Governor Stanley Fischer has lowered the base rate by 3.75 percentage points since October to mitigate the effects of the global financial crisis. The economy contracted an annualized 3.7 percent in the first quarter and unemployment rose to 8.4 percent in May, its highest in almost three years.
“The Bank of Israel won’t rush to raise the interest rate due to the uncertainty regarding the degree of recovery in the global market and the worsening in the labor market,” Rafael Gozlan, chief economist at Leader Capital Markets, said by phone from Tel Aviv.
While inflation accelerated to an annual 3.6 percent in June from 2.8 percent the previous month it is likely to moderate beginning in September, Gozlan said. The government’s target range for inflation is 1 percent to 3 percent.
“We believe that the restrained global inflationary environment, together with the weakening of the domestic labor market, will support inflation of about 1 percent or 1.5 percent in the coming year,” Gozlan said.
Inflation Outlook
Inflation will reach 2.5 percent over the next year, according to a Bank of Israel poll of economists released on July 16, up from the 2.4 percent expected in the previous survey.
The shekel traded at 3.8678 late on July 23, compared with 3.8882 on July 17.
Last week, Israel’s benchmark 5.5 percent Mimshal Shiklit bond due in 2017 rose 0.2 shekel to 105.55, with the yield falling 1 basis point to 4.97 percent. The Tel Aviv Stock Exchange’s benchmark TA-25 Index rose 4.7 percent to 915.44
Friday, July 24, 2009
Japan’s 10-Year Bonds Decline as Rising Stocks Damp Demand
July 25 (Bloomberg) -- Japan’s government bonds completed a second weekly loss after the Nikkei 225 Stock Average rose for an eighth day yesterday, the longest rally since November 2005.
Demand for the relative safety of government debt waned after speculation the global recession is easing pushed the yen down to a two-week low against the dollar on July 23, improving the outlook for exporters’ earnings. Foreign investors sold 48.9 billion yen ($515.3 million) in Japanese bonds during the week ended July 17, the Ministry of Finance said in Tokyo this week.
“The weaker yen brightens the short-term economic outlook, pushing up stocks” and that is negative for bonds, said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets.
The yield on the 1.4 percent bond due June 2019 rose 5.5 basis points to 1.375 percent this week in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.484 yen to 100.217 yen. The yield touched 1.395 on July 23, the highest level since June 29.
Five-year yields gained one basis point this week to 0.675 percent. Ten-year bond futures for September delivery fell 0.18 this week to 138.40 at the Tokyo Stock Exchange.
The Nikkei 225 Stock Average climbed 1.6 percent yesterday.
Moving With Stocks
“Selling will dominate the market given the increasing correlation with stock movements,” said Koji Ochiai, a senior market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.
Benchmark 10-year yields had a correlation of 0.75 with the Nikkei 225 in the past week, compared to a relationship of 0.42 the prior five-day period, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.
Losses in bonds were tempered as 10-year yields near the highest level in more than three weeks attracted investors.
“The feeling of buying on dips seems to be strong,” said Shuntaro Take, a Tokyo-based portfolio manager at Tokio Marine & Nichido Fire Insurance Co., a unit of Japan’s biggest casualty insurer. “There might be a lot of people who are targeting near the 0.7 percent level to buy five-year securities.”
The difference in yield, or the spread, between 20- and 10- year Japanese debt held near the widest level since April 2008. The gap was about 77 basis points yesterday.
“Twenty-year bonds are being bought after the spread widened,” said Akio Kato, leader of a six-member team investing in Japanese bonds in Tokyo at Kokusai Asset Management Co., which runs the $47 billion Global Sovereign Open fund, the world’s second-biggest managed debt fund. “Concerns that the government will issue more bonds to spur an economic growth have pushed yields up for long-term bonds.”
The government is planning to sell a record 130.2 trillion yen in bonds this fiscal year to help pay for 25 trillion yen in stimulus measures. Japan’s bonds maturing in more than 10 years have handed investors a loss of 1.5 percent since April 1, according to indexes compiled by Merrill Lynch & Co.
Demand for the relative safety of government debt waned after speculation the global recession is easing pushed the yen down to a two-week low against the dollar on July 23, improving the outlook for exporters’ earnings. Foreign investors sold 48.9 billion yen ($515.3 million) in Japanese bonds during the week ended July 17, the Ministry of Finance said in Tokyo this week.
“The weaker yen brightens the short-term economic outlook, pushing up stocks” and that is negative for bonds, said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets.
The yield on the 1.4 percent bond due June 2019 rose 5.5 basis points to 1.375 percent this week in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.484 yen to 100.217 yen. The yield touched 1.395 on July 23, the highest level since June 29.
Five-year yields gained one basis point this week to 0.675 percent. Ten-year bond futures for September delivery fell 0.18 this week to 138.40 at the Tokyo Stock Exchange.
The Nikkei 225 Stock Average climbed 1.6 percent yesterday.
Moving With Stocks
“Selling will dominate the market given the increasing correlation with stock movements,” said Koji Ochiai, a senior market economist in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.
Benchmark 10-year yields had a correlation of 0.75 with the Nikkei 225 in the past week, compared to a relationship of 0.42 the prior five-day period, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.
Losses in bonds were tempered as 10-year yields near the highest level in more than three weeks attracted investors.
“The feeling of buying on dips seems to be strong,” said Shuntaro Take, a Tokyo-based portfolio manager at Tokio Marine & Nichido Fire Insurance Co., a unit of Japan’s biggest casualty insurer. “There might be a lot of people who are targeting near the 0.7 percent level to buy five-year securities.”
The difference in yield, or the spread, between 20- and 10- year Japanese debt held near the widest level since April 2008. The gap was about 77 basis points yesterday.
“Twenty-year bonds are being bought after the spread widened,” said Akio Kato, leader of a six-member team investing in Japanese bonds in Tokyo at Kokusai Asset Management Co., which runs the $47 billion Global Sovereign Open fund, the world’s second-biggest managed debt fund. “Concerns that the government will issue more bonds to spur an economic growth have pushed yields up for long-term bonds.”
The government is planning to sell a record 130.2 trillion yen in bonds this fiscal year to help pay for 25 trillion yen in stimulus measures. Japan’s bonds maturing in more than 10 years have handed investors a loss of 1.5 percent since April 1, according to indexes compiled by Merrill Lynch & Co.
Sri Lanka Gets $2.6 Billion Loan From IMF to Aid its Economy
July 25 (Bloomberg) -- The International Monetary Fund, which has mounted rescues from Iceland to Ukraine in the past year, said it approved a $2.6 billion loan to Sri Lanka.
The Washington-based lender’s executive board voted today on the 20-month arrangement aimed at helping the island nation rebuild its economy after the end of a 26-year civil war and replenish its international reserves. About $322 million will be made available immediately, the IMF said in a statement today.
“This money is mainly for reserves and balance-of- payments,” Jaliya Wickramasuriya, the country’s ambassador to the U.S., said in an interview in Washington.
Sri Lanka’s reserves declined by more than half in the six months that began in September to as little as $1.4 billion as the global recession hurt export earnings, prompting it to start talks with the IMF in March.
The IMF has said Sri Lanka’s government has undertaken a program aimed at rebuilding reserves, reducing the fiscal deficit, strengthening the financial sector and reconstructing areas damaged by the conflict.
“The global financial crisis has had a significant impact on Sri Lanka’s economy,” Takatoshi Kato, IMF deputy managing director, said in the statement. “Persistently high budget deficits forced the government to rely on short-term financing from international markets. The global shock resulted in a sudden stop to this financing.”
Sri Lanka’s central bank this month raised its 2009 growth forecast to as much as 4.5 percent from an earlier estimate of 2.5 percent after the government in May defeated the Liberation Tigers of Tamil Eelam, a separatist group.
Sri Lanka aims to cut its budget deficit to 7 percent of gross domestic product in 2009, from 7.7 percent last year, central bank Governor Nivard Cabraal said in a July 21 interview.
The Washington-based lender’s executive board voted today on the 20-month arrangement aimed at helping the island nation rebuild its economy after the end of a 26-year civil war and replenish its international reserves. About $322 million will be made available immediately, the IMF said in a statement today.
“This money is mainly for reserves and balance-of- payments,” Jaliya Wickramasuriya, the country’s ambassador to the U.S., said in an interview in Washington.
Sri Lanka’s reserves declined by more than half in the six months that began in September to as little as $1.4 billion as the global recession hurt export earnings, prompting it to start talks with the IMF in March.
The IMF has said Sri Lanka’s government has undertaken a program aimed at rebuilding reserves, reducing the fiscal deficit, strengthening the financial sector and reconstructing areas damaged by the conflict.
“The global financial crisis has had a significant impact on Sri Lanka’s economy,” Takatoshi Kato, IMF deputy managing director, said in the statement. “Persistently high budget deficits forced the government to rely on short-term financing from international markets. The global shock resulted in a sudden stop to this financing.”
Sri Lanka’s central bank this month raised its 2009 growth forecast to as much as 4.5 percent from an earlier estimate of 2.5 percent after the government in May defeated the Liberation Tigers of Tamil Eelam, a separatist group.
Sri Lanka aims to cut its budget deficit to 7 percent of gross domestic product in 2009, from 7.7 percent last year, central bank Governor Nivard Cabraal said in a July 21 interview.
Thursday, July 23, 2009
Emerging-Market Stocks Attract Most Funds in 6 Weeks
July 24 (Bloomberg) -- Emerging-market equity funds drew $2.6 billion in the week ended July 22, boosted by optimism that U.S. demand for exports will recover, EPFR Global said.
The inflows into emerging-market stock funds were the most since the period ended June 10, the research firm said in a statement yesterday. Global emerging market equity funds attracted $1.08 billion, while those investing in Asian excluding-Japan shares took in $973 million.
Investors have funneled almost $32 billion into emerging market stock funds this year, helping the MSCI Emerging Markets Index to a 45 percent rally. All 10 of the world’s best- performing stock markets belong to developing nations, with Peru, China and Sri Lanka posting the strongest gains.
“Flows into emerging market equity funds rebounded during the third week of July as optimism about a recovery in U.S. demand helped many individual equity markets gain between 3 percent and 8 percent,” EPFR said.
Funds investing in the so-called BRIC nations of Brazil, China, India and Russia added $2.1 billion for an 18th straight week of gains, EFPR said. Mexico funds also posted their strongest weekly inflows since June 2008, gaining 7.2 percent, the research company said.
Equity funds absorbed a total $3.44 billion while fixed income funds had a “rare” week of inflows, attracting $3.98 billion, EPFR added.
The inflows into emerging-market stock funds were the most since the period ended June 10, the research firm said in a statement yesterday. Global emerging market equity funds attracted $1.08 billion, while those investing in Asian excluding-Japan shares took in $973 million.
Investors have funneled almost $32 billion into emerging market stock funds this year, helping the MSCI Emerging Markets Index to a 45 percent rally. All 10 of the world’s best- performing stock markets belong to developing nations, with Peru, China and Sri Lanka posting the strongest gains.
“Flows into emerging market equity funds rebounded during the third week of July as optimism about a recovery in U.S. demand helped many individual equity markets gain between 3 percent and 8 percent,” EPFR said.
Funds investing in the so-called BRIC nations of Brazil, China, India and Russia added $2.1 billion for an 18th straight week of gains, EFPR said. Mexico funds also posted their strongest weekly inflows since June 2008, gaining 7.2 percent, the research company said.
Equity funds absorbed a total $3.44 billion while fixed income funds had a “rare” week of inflows, attracting $3.98 billion, EPFR added.
U.S. Stock Futures Fall on Microsoft, American Express, Amazon
July 24 (Bloomberg) -- U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will slump after climbing to an eight-month high, as Microsoft Corp., American Express Co. and Amazon.com Inc. posted disappointing quarterly results.
Microsoft retreated 6.9 percent on lower profit and sales than analysts estimated. American Express slipped 5 percent after saying earnings decreased as the recession made it harder for cardholders to keep up with payments. Amazon.com lost 6.6 percent following price cuts that caused the online retailer’s revenue to miss projections.
S&P 500 futures expiring in September declined 0.4 percent to 964.70 at 10:26 a.m. in Tokyo. Dow Jones Industrial Average futures dropped 29 points, or 0.3 percent, to 8,962. U.S. stocks surged yesterday, sending the Dow above 9,000 for the first time since January, as EBay Inc., Ford Motor Co. and AT&T Inc. beat estimates and home resales increased more than forecast.
“At these levels in the market, there’s not a lot of room for error,” said Mark Freeman, who helps manage $7.5 billion at Westwood Management Corp. in Dallas. “Anything that deviates brings about a reevaluation by the market.”
Yesterday, the S&P 500 climbed to the highest level since President Barack Obama was elected on Nov. 4, advancing 2.3 percent to 976.29. The Dow gained 188.03 points, or 2.1 percent, to 9,069.29, the highest since one session after Election Day. The Nasdaq Composite Index surged 2.5 percent to 1,973.60 for a 12th straight gain, its longest winning streak since 1992.
Record Pace
Microsoft, American Express and Amazon.com’s worse-than- estimated results followed two weeks of earnings reports that exceeded projections. Among S&P 500 companies that have posted second-quarter results, 74.1 percent beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest full-quarter figure on record, Bloomberg data going back to 1993 show. Three-hundred three S&P 500 companies have yet to report for the period.
Microsoft fell 6.9 percent to $23.80 in late trading in New York. The biggest software maker reported a 29 percent drop in fiscal fourth-quarter earnings and posted sales that missed analysts’ estimates, a sign that demand for Windows and Office software is still declining. Per-share profit excluding some items was 36 cents, missing the average forecast by 2.4 percent.
American Express retreated 5 percent to $27.99. The credit- card issuer reported second-quarter sales of $6.09 billion, or 1.4 percent less than analysts projected. Net income from continuing operations decreased 48 percent to $342 million.
Free Shipping
Amazon.com lost 6.6 percent to $87.66. The world’s largest Internet retailer has sought to ward off competitors by cutting prices and adding products, such as low-cost laptops and outdoor equipment. Its low prices and free-shipping offers have started to eat into profit, said Aaron Kessler, an analyst at Kaufman Brothers LP. Sales of $4.65 billion were 1 percent less than analysts estimated on average.
EBay rallied 11 percent yesterday as its earnings signaled consumers’ appetite for online commerce is starting to recover. Ford jumped 9.4 percent after topping analyst estimates by paring expenses and adding market share. AT&T added 2.6 percent as new customers of Apple Inc.’s iPhone bolstered profit. D.R. Horton Inc. led all 13 stocks in an index of homebuilders higher as sales of existing homes increased for a third straight month. Before yesterday, the Dow last exceeded 9,000 on Jan. 6.
“With the round number of 9,000 not being there for a significant amount of time, it’s encouraging,” Michael Koskuba, who helps oversee $44 billion at Victory Capital Management Inc. in New York, said of yesterday’s rally. “It’s really a result of companies reporting better-than-expected news. That’s encouraging given that we are in a difficult economic environment.”
Microsoft retreated 6.9 percent on lower profit and sales than analysts estimated. American Express slipped 5 percent after saying earnings decreased as the recession made it harder for cardholders to keep up with payments. Amazon.com lost 6.6 percent following price cuts that caused the online retailer’s revenue to miss projections.
S&P 500 futures expiring in September declined 0.4 percent to 964.70 at 10:26 a.m. in Tokyo. Dow Jones Industrial Average futures dropped 29 points, or 0.3 percent, to 8,962. U.S. stocks surged yesterday, sending the Dow above 9,000 for the first time since January, as EBay Inc., Ford Motor Co. and AT&T Inc. beat estimates and home resales increased more than forecast.
“At these levels in the market, there’s not a lot of room for error,” said Mark Freeman, who helps manage $7.5 billion at Westwood Management Corp. in Dallas. “Anything that deviates brings about a reevaluation by the market.”
Yesterday, the S&P 500 climbed to the highest level since President Barack Obama was elected on Nov. 4, advancing 2.3 percent to 976.29. The Dow gained 188.03 points, or 2.1 percent, to 9,069.29, the highest since one session after Election Day. The Nasdaq Composite Index surged 2.5 percent to 1,973.60 for a 12th straight gain, its longest winning streak since 1992.
Record Pace
Microsoft, American Express and Amazon.com’s worse-than- estimated results followed two weeks of earnings reports that exceeded projections. Among S&P 500 companies that have posted second-quarter results, 74.1 percent beat the average analyst forecast, according to data compiled by Bloomberg. That would be the highest full-quarter figure on record, Bloomberg data going back to 1993 show. Three-hundred three S&P 500 companies have yet to report for the period.
Microsoft fell 6.9 percent to $23.80 in late trading in New York. The biggest software maker reported a 29 percent drop in fiscal fourth-quarter earnings and posted sales that missed analysts’ estimates, a sign that demand for Windows and Office software is still declining. Per-share profit excluding some items was 36 cents, missing the average forecast by 2.4 percent.
American Express retreated 5 percent to $27.99. The credit- card issuer reported second-quarter sales of $6.09 billion, or 1.4 percent less than analysts projected. Net income from continuing operations decreased 48 percent to $342 million.
Free Shipping
Amazon.com lost 6.6 percent to $87.66. The world’s largest Internet retailer has sought to ward off competitors by cutting prices and adding products, such as low-cost laptops and outdoor equipment. Its low prices and free-shipping offers have started to eat into profit, said Aaron Kessler, an analyst at Kaufman Brothers LP. Sales of $4.65 billion were 1 percent less than analysts estimated on average.
EBay rallied 11 percent yesterday as its earnings signaled consumers’ appetite for online commerce is starting to recover. Ford jumped 9.4 percent after topping analyst estimates by paring expenses and adding market share. AT&T added 2.6 percent as new customers of Apple Inc.’s iPhone bolstered profit. D.R. Horton Inc. led all 13 stocks in an index of homebuilders higher as sales of existing homes increased for a third straight month. Before yesterday, the Dow last exceeded 9,000 on Jan. 6.
“With the round number of 9,000 not being there for a significant amount of time, it’s encouraging,” Michael Koskuba, who helps oversee $44 billion at Victory Capital Management Inc. in New York, said of yesterday’s rally. “It’s really a result of companies reporting better-than-expected news. That’s encouraging given that we are in a difficult economic environment.”
Philippines Targets Taxis, Hotels as Arroyo Seeks More Revenue
July 24 (Bloomberg) -- The Big Mouth deli was starting what promised to be another busy June day on the central Philippine vacation island of Boracay when 29 tax officers and policemen came to shut it down.
Since the 48-seat restaurant opened July 2008, it avoided paying an estimated 983,000 pesos ($20,437) in taxes by using unregistered cash machines and false sales receipts, according to the Bureau of Internal Revenue.
“This is really psychological warfare,” said Deputy Commissioner Nelson Aspe, who flew from Manila to supervise the closure of three Boracay businesses June 8. “We are sending a strong signal to our taxpayers that we mean business.”
President Gloria Arroyo is taking unprecedented steps in her final year in office to tackle an entrenched culture of tax evasion that’s contributed to the budget deficit and hampered growth while neighbors prospered. Moody’s Investors Service raised the Philippines’ debt rating yesterday, saying efforts to boost revenue will help improve the country’s finances.
“The country’s long-term fiscal outlook would improve with more progress in shoring up government revenues, both through tightened administration and the introduction of new tax measures,” Tom Byrne, a Moody’s senior vice president, said in a statement from Singapore.
The internal-revenue agency, seeking to recover about 560 billion pesos of lost taxes annually, has increased collection targets and plans to hire 3,000 more accountants and lawyers. By cross-checking taxpayer records with local authorities, it has discovered 30,000 unregistered businesses in Manila’s Marikina municipality alone.
Counting Bed Sheets
Agents are counting hotel bed sheets and will soon scour electricity bills to expose companies that under-declare income. A meter system for taxis was implemented in June.
Authorities have closed 58 restaurants, hotels and shops since January, including Big Mouth, which began getting warning letters in February, the tax bureau said. When the bureau got no response, it closed the restaurant.
“This is unfortunate because business is doing good,” said Randy David, Big Mouth’s manager, as authorities padlocked the shop. He declined to comment on the government’s allegations and said the head office in Manila handled taxes.
Benjamin Diokno, a professor at the University of the Philippines who served as budget secretary under former President Joseph Estrada, said the campaign will have “marginal” effect. “Poor governance and lack of political will” mean enforcers target only “small fry,” he said.
Least Efficient
The Philippines is the fourth-least-efficient tax collector in the world, according to Fitch Ratings. In 2007 and 2008, it booked revenue amounting to 14 percent of gross domestic product a year, two-thirds of the 21 percent the government estimates it should have received, Finance Undersecretary Gil Beltran said.
The only countries with lower revenue-to-GDP ratios are Guatemala, Bermuda and Costa Rica, according to Fitch. It rates Philippine debt BB, two levels below investment grade.
In the past 20 years, the Philippine economy expanded an average 3.9 percent annually, lagging behind Thailand’s 5.4 percent, Malaysia’s 6.5 percent and Singapore’s 6.7 percent. Growth slumped to a decade low of 0.4 percent in the first quarter as exports collapsed, crimping company profits and taxes, which were reduced to 30 percent from 35 percent by a 2005 law that took effect this year.
Revenue Drain
Arroyo, whose presidency ends in 2010, has exacerbated the revenue drain with programs to help Filipinos cope with inflation that soared to a 16-year high of 12.4 percent in August 2008. Last year, she exempted half a million minimum-wage workers from income tax and raised exemptions for salaried employees.
To help ease the crunch, Finance Secretary Gary Teves is asking lawmakers to simplify the cigarette- and liquor-levy structure and reduce tax incentives to boost collections by at least 35 billion pesos annually.
The government trimmed its 2009 spending target last month to 1.489 trillion pesos from 1.495 trillion after revenue declined 5.4 percent in January through May. It has widened the 2009 budget-deficit estimate three times this year to 250 billion pesos, the most since Bloomberg data began in 1985.
“There’s an urgency to bring about change, but how much change can really be achieved” during an economic slump, asked Vishnu Varathan, an economist at Forecast Singapore Pte. “It’s not the right time.”
Caught in Dragnet
Alice Matsuo was caught in the dragnet. Her Alice in Wonderland Boracay Resort failed to pay an estimated 5 million pesos of taxes after she fell ill with cervical cancer in 2006. Authorities closed it June 8.
Matsuo, 55, said there wasn’t anyone to do the paperwork when she got sick. “We weren’t able to pay for two years, but others haven’t been paying for years. They just keep bribing.”
The government has charged 108 tax and customs officers with corruption as part of a program started in 2003 to weed out dishonest officials, Department of Finance data show.
Taxes account for two-thirds of government revenue, putting pressure on people like Araceli Francisco, Internal Revenue regional director for the central island provinces of Samar and Leyte. She must collect 3.44 billion pesos this year from her region, 21 percent more than 2008.
“What we need is support in terms of manpower, logistics and training,” Francisco said. “Collection is becoming harder.”
Since the 48-seat restaurant opened July 2008, it avoided paying an estimated 983,000 pesos ($20,437) in taxes by using unregistered cash machines and false sales receipts, according to the Bureau of Internal Revenue.
“This is really psychological warfare,” said Deputy Commissioner Nelson Aspe, who flew from Manila to supervise the closure of three Boracay businesses June 8. “We are sending a strong signal to our taxpayers that we mean business.”
President Gloria Arroyo is taking unprecedented steps in her final year in office to tackle an entrenched culture of tax evasion that’s contributed to the budget deficit and hampered growth while neighbors prospered. Moody’s Investors Service raised the Philippines’ debt rating yesterday, saying efforts to boost revenue will help improve the country’s finances.
“The country’s long-term fiscal outlook would improve with more progress in shoring up government revenues, both through tightened administration and the introduction of new tax measures,” Tom Byrne, a Moody’s senior vice president, said in a statement from Singapore.
The internal-revenue agency, seeking to recover about 560 billion pesos of lost taxes annually, has increased collection targets and plans to hire 3,000 more accountants and lawyers. By cross-checking taxpayer records with local authorities, it has discovered 30,000 unregistered businesses in Manila’s Marikina municipality alone.
Counting Bed Sheets
Agents are counting hotel bed sheets and will soon scour electricity bills to expose companies that under-declare income. A meter system for taxis was implemented in June.
Authorities have closed 58 restaurants, hotels and shops since January, including Big Mouth, which began getting warning letters in February, the tax bureau said. When the bureau got no response, it closed the restaurant.
“This is unfortunate because business is doing good,” said Randy David, Big Mouth’s manager, as authorities padlocked the shop. He declined to comment on the government’s allegations and said the head office in Manila handled taxes.
Benjamin Diokno, a professor at the University of the Philippines who served as budget secretary under former President Joseph Estrada, said the campaign will have “marginal” effect. “Poor governance and lack of political will” mean enforcers target only “small fry,” he said.
Least Efficient
The Philippines is the fourth-least-efficient tax collector in the world, according to Fitch Ratings. In 2007 and 2008, it booked revenue amounting to 14 percent of gross domestic product a year, two-thirds of the 21 percent the government estimates it should have received, Finance Undersecretary Gil Beltran said.
The only countries with lower revenue-to-GDP ratios are Guatemala, Bermuda and Costa Rica, according to Fitch. It rates Philippine debt BB, two levels below investment grade.
In the past 20 years, the Philippine economy expanded an average 3.9 percent annually, lagging behind Thailand’s 5.4 percent, Malaysia’s 6.5 percent and Singapore’s 6.7 percent. Growth slumped to a decade low of 0.4 percent in the first quarter as exports collapsed, crimping company profits and taxes, which were reduced to 30 percent from 35 percent by a 2005 law that took effect this year.
Revenue Drain
Arroyo, whose presidency ends in 2010, has exacerbated the revenue drain with programs to help Filipinos cope with inflation that soared to a 16-year high of 12.4 percent in August 2008. Last year, she exempted half a million minimum-wage workers from income tax and raised exemptions for salaried employees.
To help ease the crunch, Finance Secretary Gary Teves is asking lawmakers to simplify the cigarette- and liquor-levy structure and reduce tax incentives to boost collections by at least 35 billion pesos annually.
The government trimmed its 2009 spending target last month to 1.489 trillion pesos from 1.495 trillion after revenue declined 5.4 percent in January through May. It has widened the 2009 budget-deficit estimate three times this year to 250 billion pesos, the most since Bloomberg data began in 1985.
“There’s an urgency to bring about change, but how much change can really be achieved” during an economic slump, asked Vishnu Varathan, an economist at Forecast Singapore Pte. “It’s not the right time.”
Caught in Dragnet
Alice Matsuo was caught in the dragnet. Her Alice in Wonderland Boracay Resort failed to pay an estimated 5 million pesos of taxes after she fell ill with cervical cancer in 2006. Authorities closed it June 8.
Matsuo, 55, said there wasn’t anyone to do the paperwork when she got sick. “We weren’t able to pay for two years, but others haven’t been paying for years. They just keep bribing.”
The government has charged 108 tax and customs officers with corruption as part of a program started in 2003 to weed out dishonest officials, Department of Finance data show.
Taxes account for two-thirds of government revenue, putting pressure on people like Araceli Francisco, Internal Revenue regional director for the central island provinces of Samar and Leyte. She must collect 3.44 billion pesos this year from her region, 21 percent more than 2008.
“What we need is support in terms of manpower, logistics and training,” Francisco said. “Collection is becoming harder.”
Wednesday, July 22, 2009
Most Asian Stocks Rise; Funai Gains, National Australia Falls
July 23 (Bloomberg) -- Most Asian stocks rose, led by manufacturers that rely on U.S. demand as American housing prices unexpectedly gained. Financial companies declined after National Australia Bank Ltd. set the price for a share sale.
Funai Electric Co., which gets 71 percent of its revenue in North America, added 3.4 percent in Osaka. National Australia Bank, the nation’s top lender by assets, slumped 5.1 percent after pricing its stock sale at a discount. Woolworths Ltd., Australia’s biggest retailer, sank 2.8 percent as Royal Bank of Scotland Group Plc downgraded the stock on valuations.
“The sentiment is one of cautious optimism,” said Stephen Halmarick, Sydney-based head of investment markets research at Colonial First State, which holds about $110 billion. “The economy and markets are not likely to continue to recover in a straight line. There are going to be ebbs and flows.”
Almost five stocks gained for every three that declined on the MSCI Asia Pacific Index, which added 0.2 percent to 106.86 as of 11:53 a.m. in Tokyo. The gauge has gained 9 percent in the past eight days, the longest winning streak since January.
Hong Kong’s Hang Seng Index climbed 2.2 percent. Japan’s Nikkei 225 Stock Average added 0.1 percent, while Australia’s S&P/ASX 200 Index lost 0.2 percent.
South Korea’s Kospi Index dropped 0.3 percent. STX Pan Ocean Co., the country’s biggest bulk carrier, lost 1.3 percent after shipping fees slid for a third day.
Futures on the U.S. Standard & Poor’s 500 Index gained 0.3 percent. The gauge was little changed yesterday.
U.S. Housing
Average U.S. home prices rose 0.9 percent in May from April, the Federal Housing Finance Agency said yesterday. Prices were estimated to drop 0.2 percent, according to an economist survey.
Funai climbed 3.4 percent to 3,990 yen in Osaka trading. James Hardie Industries NV, the biggest seller of home siding in the U.S., rose 2.1 percent to A$4.85 in Sydney. Toyota Motor Corp., the world’s biggest automaker by market value, added 1.7 percent to 3,660 yen.
“Housing is no longer the drag on the market that kept pulling everything down,” said Mitsushige Akino, who oversees the equivalent of $522 million at Ichiyoshi Investment Management Co. in Tokyo. “Volumes remain light though, so shares are likely to remain range-bound until we can get some new sense of direction.”
National Australia Bank slumped 5.1 percent to A$22.39. The bank said it will sell shares at A$21.50 each ($18), a discount of 8.8 percent from the previous closing price. Rival Suncorp- Metway Ltd. lost 1.5 percent to A$6.80 and Bank of Queensland Ltd. slid 1.6 percent to A$10.33.
Broker Downgrade
Woolworths slumped 2.8 percent to A$26.80. Royal Bank of Scotland Group Plc slashed the rating on the stock to “hold” from “buy,” citing valuations.
The MSCI Asia Pacific Index’s eight-day rally has come amid better-than-expected earnings from U.S. companies including Apple Inc. and International Business Machines Corp. Shares in the gauge are valued at 24 times estimated net income, near the highest in almost four months.
“The market has really run ahead of itself in the last week or so,” Arjuna Mahendran, Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets, said on Bloomberg Television. “We have reasonable optimism that the spate of above-expectation earnings that have been coming out will continue.”
STX dropped 1.3 percent to 11,650 won, while Korea Line Corp., South Korea’s No. 2 shipping line, sank 2.9 percent to 60,300 won. The Baltic Dry Index, a measure of shipping costs for commodities, slid 1.4 percent in London yesterday, bringing its three-day slump to 3.8 percent.
Oil Prices
Inpex Corp., Japan’s top oil explorer, sank 2.1 percent to 714,000 yen, while closest domestic rival Japan Petroleum Exploration Co. fell 2.5 percent to 4,650 yen. Mitsui & Co., a trading company that gets more than half its profit from commodities, sagged 1.6 percent to 1,121 yen.
Crude oil futures in New York dropped as much as 0.6 percent in electronic trading today, extending yesterday’s 0.3 percent decline.
Disco Corp., a Japanese maker of precision machinery, rose 3.6 percent to 4,330 yen. First-quarter revenue jumped 42 percent from the previous three months as demand recovered, the company said yesterday in a preliminary report.
Funai Electric Co., which gets 71 percent of its revenue in North America, added 3.4 percent in Osaka. National Australia Bank, the nation’s top lender by assets, slumped 5.1 percent after pricing its stock sale at a discount. Woolworths Ltd., Australia’s biggest retailer, sank 2.8 percent as Royal Bank of Scotland Group Plc downgraded the stock on valuations.
“The sentiment is one of cautious optimism,” said Stephen Halmarick, Sydney-based head of investment markets research at Colonial First State, which holds about $110 billion. “The economy and markets are not likely to continue to recover in a straight line. There are going to be ebbs and flows.”
Almost five stocks gained for every three that declined on the MSCI Asia Pacific Index, which added 0.2 percent to 106.86 as of 11:53 a.m. in Tokyo. The gauge has gained 9 percent in the past eight days, the longest winning streak since January.
Hong Kong’s Hang Seng Index climbed 2.2 percent. Japan’s Nikkei 225 Stock Average added 0.1 percent, while Australia’s S&P/ASX 200 Index lost 0.2 percent.
South Korea’s Kospi Index dropped 0.3 percent. STX Pan Ocean Co., the country’s biggest bulk carrier, lost 1.3 percent after shipping fees slid for a third day.
Futures on the U.S. Standard & Poor’s 500 Index gained 0.3 percent. The gauge was little changed yesterday.
U.S. Housing
Average U.S. home prices rose 0.9 percent in May from April, the Federal Housing Finance Agency said yesterday. Prices were estimated to drop 0.2 percent, according to an economist survey.
Funai climbed 3.4 percent to 3,990 yen in Osaka trading. James Hardie Industries NV, the biggest seller of home siding in the U.S., rose 2.1 percent to A$4.85 in Sydney. Toyota Motor Corp., the world’s biggest automaker by market value, added 1.7 percent to 3,660 yen.
“Housing is no longer the drag on the market that kept pulling everything down,” said Mitsushige Akino, who oversees the equivalent of $522 million at Ichiyoshi Investment Management Co. in Tokyo. “Volumes remain light though, so shares are likely to remain range-bound until we can get some new sense of direction.”
National Australia Bank slumped 5.1 percent to A$22.39. The bank said it will sell shares at A$21.50 each ($18), a discount of 8.8 percent from the previous closing price. Rival Suncorp- Metway Ltd. lost 1.5 percent to A$6.80 and Bank of Queensland Ltd. slid 1.6 percent to A$10.33.
Broker Downgrade
Woolworths slumped 2.8 percent to A$26.80. Royal Bank of Scotland Group Plc slashed the rating on the stock to “hold” from “buy,” citing valuations.
The MSCI Asia Pacific Index’s eight-day rally has come amid better-than-expected earnings from U.S. companies including Apple Inc. and International Business Machines Corp. Shares in the gauge are valued at 24 times estimated net income, near the highest in almost four months.
“The market has really run ahead of itself in the last week or so,” Arjuna Mahendran, Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets, said on Bloomberg Television. “We have reasonable optimism that the spate of above-expectation earnings that have been coming out will continue.”
STX dropped 1.3 percent to 11,650 won, while Korea Line Corp., South Korea’s No. 2 shipping line, sank 2.9 percent to 60,300 won. The Baltic Dry Index, a measure of shipping costs for commodities, slid 1.4 percent in London yesterday, bringing its three-day slump to 3.8 percent.
Oil Prices
Inpex Corp., Japan’s top oil explorer, sank 2.1 percent to 714,000 yen, while closest domestic rival Japan Petroleum Exploration Co. fell 2.5 percent to 4,650 yen. Mitsui & Co., a trading company that gets more than half its profit from commodities, sagged 1.6 percent to 1,121 yen.
Crude oil futures in New York dropped as much as 0.6 percent in electronic trading today, extending yesterday’s 0.3 percent decline.
Disco Corp., a Japanese maker of precision machinery, rose 3.6 percent to 4,330 yen. First-quarter revenue jumped 42 percent from the previous three months as demand recovered, the company said yesterday in a preliminary report.
Indian Two-Year Bonds to Rally on Bank Demand, Policy, RBS Says
July 23 (Bloomberg) -- India’s two-year bonds will rally as banks, the biggest buyers of government debt, shun longer-dated notes on concern officials will have trouble cutting the nation’s budget deficit, Royal Bank of Scotland Group Plc said.
The Reserve Bank of India will tailor its monetary policy to aid the government’s record borrowing, while surplus cash at lenders flush with deposits will fuel demand for the securities, Britain’s biggest state-owned bank said in a research report yesterday. The government’s pledge to reduce its budget gap to 4 percent of gross domestic product in two years from 6.8 percent is “challenging” and will continue to “unsettle financial markets,” the report said.
“Banks are worried about the long-term fiscal consolidation strategy, which is why they are not buying longer- term bonds even as liquidity is ample,” Sanjay Mathur, RBS’s Singapore-based economist, said in an interview.
Investors should buy the 9.39 percent note due in 2011 at yields above 5.25 percent, RBS’s interest-rate strategist Nhan Ngoc Le wrote in the report. Nhan forecast the rate will slide 1 percentage point over six months, compared with a projected 30 basis point, or 0.3 percentage point, drop for 10-year debt. Investors should sell two-year notes if yields climb to 5.5 percent, he said.
The benchmark two-year bond last traded on July 20 at 108.10 rupees per 100-rupee face amount, to yield 4.97 percent.
Nhan recommended avoiding bonds maturing in five years and more “given weak demand, uncertainty about long-term issuance and thin cushion against a potential rise in rates.”
Budget Shortfall
India’s Finance Minister Pranab Mukherjee, in his Budget speech on July 6, estimated the budget deficit will reach a 16- year high in the fiscal year ending March 31. His ministry set an unprecedented borrowing target of 4.5 trillion rupees ($93 billion) as Prime Minister Manmohan Singh increases spending to revive an economy expanding at the slowest pace in six years.
The central bank has cut its overnight lending rate, or repurchase rate, six times since mid-October to a record-low 4.75 percent to stimulate demand in Asia’s third-biggest economy.
India’s rupee will strengthen 10.3 percent to 44 per dollar in the third quarter as the nation’s improving balance of payments becomes “the most dominant driver,” Mathur and Nhan wrote. The broad measure of capital inflows and outflows turned to a surplus of $300 million in the quarter ended March 31, from a record $17.9 billion deficit in the previous three months.
The rupee, which has appreciated 3.8 percent in the past three months, closed at 48.52 per dollar yesterday in Mumbai, according to data compiled by Bloomberg.
The Reserve Bank of India will tailor its monetary policy to aid the government’s record borrowing, while surplus cash at lenders flush with deposits will fuel demand for the securities, Britain’s biggest state-owned bank said in a research report yesterday. The government’s pledge to reduce its budget gap to 4 percent of gross domestic product in two years from 6.8 percent is “challenging” and will continue to “unsettle financial markets,” the report said.
“Banks are worried about the long-term fiscal consolidation strategy, which is why they are not buying longer- term bonds even as liquidity is ample,” Sanjay Mathur, RBS’s Singapore-based economist, said in an interview.
Investors should buy the 9.39 percent note due in 2011 at yields above 5.25 percent, RBS’s interest-rate strategist Nhan Ngoc Le wrote in the report. Nhan forecast the rate will slide 1 percentage point over six months, compared with a projected 30 basis point, or 0.3 percentage point, drop for 10-year debt. Investors should sell two-year notes if yields climb to 5.5 percent, he said.
The benchmark two-year bond last traded on July 20 at 108.10 rupees per 100-rupee face amount, to yield 4.97 percent.
Nhan recommended avoiding bonds maturing in five years and more “given weak demand, uncertainty about long-term issuance and thin cushion against a potential rise in rates.”
Budget Shortfall
India’s Finance Minister Pranab Mukherjee, in his Budget speech on July 6, estimated the budget deficit will reach a 16- year high in the fiscal year ending March 31. His ministry set an unprecedented borrowing target of 4.5 trillion rupees ($93 billion) as Prime Minister Manmohan Singh increases spending to revive an economy expanding at the slowest pace in six years.
The central bank has cut its overnight lending rate, or repurchase rate, six times since mid-October to a record-low 4.75 percent to stimulate demand in Asia’s third-biggest economy.
India’s rupee will strengthen 10.3 percent to 44 per dollar in the third quarter as the nation’s improving balance of payments becomes “the most dominant driver,” Mathur and Nhan wrote. The broad measure of capital inflows and outflows turned to a surplus of $300 million in the quarter ended March 31, from a record $17.9 billion deficit in the previous three months.
The rupee, which has appreciated 3.8 percent in the past three months, closed at 48.52 per dollar yesterday in Mumbai, according to data compiled by Bloomberg.
Singh’s Win to Boost ‘Seductive’ India, Duggal Says
July 23 (Bloomberg) -- Sanjiv Duggal, who manages the world’s largest India fund, said investors should buy the nation’s stocks as Prime Minister Manmohan Singh’s re-election allows him to push asset sales and ease investment rules.
Stocks will benefit as the government implements policies to lure foreign investment and boost growth in Asia’s third- largest economy, said Duggal, Singapore-based investment director at HSBC Holdings Plc’s Halbis Capital Management.
“India is a seductive investment story,” Duggal, 45, who oversees about $6 billion in Indian equities, said in a phone interview from London. “Given that we have a stable government, one could argue that India’s trading multiple could be higher.”
The Bombay Stock Exchange’s Sensitive Index, or Sensex, has surged 82 percent from this year’s low on March 9, outperforming the BRIC countries that include Brazil, Russia and China. Singh’s election victory in May reduced his dependence on allies such as the communist parties, who opposed asset sales and looser foreign investment policies during his first term.
Duggal’s Luxembourg-based $4.6 billion Indian Equity Fund, which targets overseas investors, rose 78 percent this year, the best-performing Indian equity fund with assets of more than $500 million, data compiled by Bloomberg show.
Duggal predicted in March that stocks would rally from a near three-year low on cheaper valuations and government stimulus plans, allowing him to recoup losses after the fund dropped 70 percent in 2008.
Positioned for Growth
“We positioned ourselves for growth and that showed in our performance,” Duggal said yesterday. “The market had built in a worst-case scenario for election results, which turned out very different and acted as a catalyst for the market rally.”
The fund holds more shares of materials producers and carmakers than represented in its benchmark S&P/IFC Emerging Markets Investable India Index. It also owns more real estate and health-care companies compared with the benchmark, he said.
His top 10 investments include Maruti Suzuki India Ltd., the nation’s largest carmaker, and DLF Ltd., the biggest developer. Duggal added Unitech Ltd. and Indiabulls Real Estate Ltd. among developers as concerns about their ability to repay debt eased after raising funds, he said.
Indiabulls, Unitech
Indiabulls and Unitech led Indian companies in raising 55 billion rupees ($1.1 billion) from the sale of shares to large investors in the second quarter, the most since a record 130 billion rupees was raised in the three months ended Dec. 31, 2007, data compiled by Bloomberg show. His fund is “underweight” on consumer, telecommunications, financial, energy and utility stocks, in contrast to the benchmark index.
Brian Jackson, a senior emerging-markets strategist at Royal Bank of Canada, said this week the rally has made Indian stocks expensive. The Sensex now trades at 17 times reported earnings, twice the 8.8 times in March, data compiled by Bloomberg show.
“Although the election results have improved the prospects for reform to some degree, we believe this positive surprise is now priced into Indian asset valuations and are wary of claims the improved political situation justifies further near-term gains,” Jackson said at a conference in Taipei on July 21.
Indian stocks fell the most in six months on July 6 after the government forecast the widest budget deficit in 16 years, increasing the risk of a cut in sovereign ratings.
‘Realistic’ Budget
The government plans to borrow a record 4.51 trillion rupees to fund spending on roads, power and aid for the poor, while it was expected to raise foreign direct investment limits in banks and insurers, Care Ratings said. The Sensex has since risen 5.7 percent.
“The budget was a more realistic one, though it didn’t touch on things the market was looking for,” says Duggal. “Still, we were fine with the budget, so when markets corrected post the event, we told investors it’s an opportunity to add equities.”
Singh’s government is focused on reviving consumer and investment demand as the nation’s $1.2 trillion economy, pummeled by the global recession, grew 6.7 percent in the year ended March, the weakest pace since 2003.
“If the government can push through reforms, then we would be pretty happy to buy the markets and use dips to increase our exposure,” Duggal said. “The platform is there to deliver a good story.”
Valuations
Valuations of Indian equities are in line with the 10-year average and are lower than those in the past five years, Duggal said. Indian stocks are also trading at half the 36 multiple China’s benchmark Shanghai Composite is valued at, according to data compiled by Bloomberg.
Duggal expects India’s corporate earnings to increase between 15 and 20 percent for the year ending March 2011 even as profit rises less than 10 percent this year, he said. He also expects the rupee to appreciate, without giving a forecast.
“India will remain one of the fastest-growing economies,” Duggal said. “If India does what China has done, then you really have to be invested in India.”
Stocks will benefit as the government implements policies to lure foreign investment and boost growth in Asia’s third- largest economy, said Duggal, Singapore-based investment director at HSBC Holdings Plc’s Halbis Capital Management.
“India is a seductive investment story,” Duggal, 45, who oversees about $6 billion in Indian equities, said in a phone interview from London. “Given that we have a stable government, one could argue that India’s trading multiple could be higher.”
The Bombay Stock Exchange’s Sensitive Index, or Sensex, has surged 82 percent from this year’s low on March 9, outperforming the BRIC countries that include Brazil, Russia and China. Singh’s election victory in May reduced his dependence on allies such as the communist parties, who opposed asset sales and looser foreign investment policies during his first term.
Duggal’s Luxembourg-based $4.6 billion Indian Equity Fund, which targets overseas investors, rose 78 percent this year, the best-performing Indian equity fund with assets of more than $500 million, data compiled by Bloomberg show.
Duggal predicted in March that stocks would rally from a near three-year low on cheaper valuations and government stimulus plans, allowing him to recoup losses after the fund dropped 70 percent in 2008.
Positioned for Growth
“We positioned ourselves for growth and that showed in our performance,” Duggal said yesterday. “The market had built in a worst-case scenario for election results, which turned out very different and acted as a catalyst for the market rally.”
The fund holds more shares of materials producers and carmakers than represented in its benchmark S&P/IFC Emerging Markets Investable India Index. It also owns more real estate and health-care companies compared with the benchmark, he said.
His top 10 investments include Maruti Suzuki India Ltd., the nation’s largest carmaker, and DLF Ltd., the biggest developer. Duggal added Unitech Ltd. and Indiabulls Real Estate Ltd. among developers as concerns about their ability to repay debt eased after raising funds, he said.
Indiabulls, Unitech
Indiabulls and Unitech led Indian companies in raising 55 billion rupees ($1.1 billion) from the sale of shares to large investors in the second quarter, the most since a record 130 billion rupees was raised in the three months ended Dec. 31, 2007, data compiled by Bloomberg show. His fund is “underweight” on consumer, telecommunications, financial, energy and utility stocks, in contrast to the benchmark index.
Brian Jackson, a senior emerging-markets strategist at Royal Bank of Canada, said this week the rally has made Indian stocks expensive. The Sensex now trades at 17 times reported earnings, twice the 8.8 times in March, data compiled by Bloomberg show.
“Although the election results have improved the prospects for reform to some degree, we believe this positive surprise is now priced into Indian asset valuations and are wary of claims the improved political situation justifies further near-term gains,” Jackson said at a conference in Taipei on July 21.
Indian stocks fell the most in six months on July 6 after the government forecast the widest budget deficit in 16 years, increasing the risk of a cut in sovereign ratings.
‘Realistic’ Budget
The government plans to borrow a record 4.51 trillion rupees to fund spending on roads, power and aid for the poor, while it was expected to raise foreign direct investment limits in banks and insurers, Care Ratings said. The Sensex has since risen 5.7 percent.
“The budget was a more realistic one, though it didn’t touch on things the market was looking for,” says Duggal. “Still, we were fine with the budget, so when markets corrected post the event, we told investors it’s an opportunity to add equities.”
Singh’s government is focused on reviving consumer and investment demand as the nation’s $1.2 trillion economy, pummeled by the global recession, grew 6.7 percent in the year ended March, the weakest pace since 2003.
“If the government can push through reforms, then we would be pretty happy to buy the markets and use dips to increase our exposure,” Duggal said. “The platform is there to deliver a good story.”
Valuations
Valuations of Indian equities are in line with the 10-year average and are lower than those in the past five years, Duggal said. Indian stocks are also trading at half the 36 multiple China’s benchmark Shanghai Composite is valued at, according to data compiled by Bloomberg.
Duggal expects India’s corporate earnings to increase between 15 and 20 percent for the year ending March 2011 even as profit rises less than 10 percent this year, he said. He also expects the rupee to appreciate, without giving a forecast.
“India will remain one of the fastest-growing economies,” Duggal said. “If India does what China has done, then you really have to be invested in India.”
Wipro Net Income Exceeds Analyst Estimates on Orders
July 22 (Bloomberg) -- Wipro Ltd., India’s third-largest software exporter, reported profit that exceeded analyst estimates after the company won more orders and froze pay.
Net income, according to U.S. accounting standards, rose 31 percent to 10.7 billion rupees ($221 million) in the three months ended June 30, from 8.14 billion rupees a year earlier, Bangalore-based Wipro said today. Profit beat the 9.2 billion- rupee median of 26 analyst estimates compiled by Bloomberg. Sales gained 6 percent.
Wipro joins larger rivals Tata Consultancy Services Ltd. and Infosys Technologies Ltd. in surpassing analyst expectations, signaling demand for India’s software services may be returning as the global recession eases. Billionaire Chairman Azim Premji, who pared costs by freezing pay for Wipro’s almost 100,000 employees, has acquired businesses to boost sales and aims to increase revenue from markets such as the Middle East and Brazil.
“What we are seeing is that things are better than expected,” Gopal Agrawal, head of equities at Mirae Asset India Investment Co. in Mumbai, said by phone. “Even the U.S. results in the IT space are actually much better than expected, that is why this sector will remain attractive to investors,” said Agrawal, who oversees $50 million including technology shares.
Wipro fell 1.6 percent to close at 451.5 rupees in Mumbai trading, after gaining as much as 4.4 percent. The Bombay Stock Exchange’s Sensitive Index declined 1.5 percent. The stock has climbed 93 percent this year, outpacing the benchmark index’s 54 percent advance.
Sales in the quarter rose to 63.2 billion rupees, lagging behind the analysts’ 64.2 billion rupees projection. Wipro reported profit of 10.1 billion rupees on revenue of 63.9 billion rupees in the period as per International Financial Reporting Standards.
Pricing Pressure
Wipro still faces some pressure from clients to lower rates for its computer services and pricing will continue to have a slightly negative bias, Suresh Vaswani, joint chief executive officer of the information-technology-services unit, said in a televised interview on CNBC-TV18 network.
“We are cautious” about the economic environment, Wipro’s Chief Financial Officer Suresh Senapaty said today. “There has been demand from multiple customers for price changes. So far most of them have gone through; part of it could get impacted in the current quarter.”
Infosys, India’s second-biggest software provider, in April forecast its first annual decline in sales after clients delayed orders. Chief Executive Officer Senapathy Gopalakrishnan in May said India’s biggest technology companies won’t see a rebound in demand until the middle of next year.
“The quarterly numbers are good but I don’t think that it’s entirely correct to say that the clouds have gone away from the sector,” said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt. which has a “reduce” rating on Wipro. “The IT services business continues to remain under pressure.”
‘Signs of Stability’
Wipro, which also makes hydraulic equipment and soaps, earned 77 percent of revenue from its information-technology- services business in the quarter. The unit manages computer networks, operates call centers and provides back-office support for clients including Cisco Systems Inc. and Boeing Co.
“We are starting to see the first signs of stability in the business as ramp-downs start to taper off and volumes start to stabilize,” Premji said in a company release today.
The software exporter said sales at its IT-services business declined to $1.03 billion in the quarter, from $1.07 billion, and matched Wipro’s April projection of between $1.01 billion and $1.03 billion. The company forecast revenue at the unit will drop to between $1.04 billion and $1.05 billion in the three months to Sept. 30, from $1.11 billion a year earlier.
New Contracts
Wipro said it added 26 clients in the quarter and won two multimillion dollar deals in the period.
The company said in May it won a nine-year order from Unitech Ltd.’s wireless unit in India to build and maintain the mobile-phone operator’s computer network, without specifying its value. The same month, Sunoco Inc. renewed a contract worth $34 million over four years with Wipro’s Infocrossing unit.
Wipro in March received an 11.8 billion rupee order to create an online user system for the Indian government’s Employees’ State Insurance Corporation, the company said.
Tata Consultancy Chief Executive Officer Subramanian Ramadorai said on July 20 Citigroup Inc. is helping lead a recovery in demand from financial clients, the Indian software- services company’s biggest contributors to revenue.
The Mumbai-based industry leader, last week, reported profit rose 23 percent to 15.2 billion rupees in the first quarter, beating analysts’ 12.9 billion rupee projection.
International Business Machines Corp., the world’s biggest computer-services provider, on July 16 reported second-quarter earnings that topped analysts’ estimates and raised its full- year forecast.
The U.S. economy will expand faster than previously forecast in the second half of this year and in 2010 as a revival in consumer spending signals an end to the recession, a Bloomberg News survey of economists earlier this month showed.
Net income, according to U.S. accounting standards, rose 31 percent to 10.7 billion rupees ($221 million) in the three months ended June 30, from 8.14 billion rupees a year earlier, Bangalore-based Wipro said today. Profit beat the 9.2 billion- rupee median of 26 analyst estimates compiled by Bloomberg. Sales gained 6 percent.
Wipro joins larger rivals Tata Consultancy Services Ltd. and Infosys Technologies Ltd. in surpassing analyst expectations, signaling demand for India’s software services may be returning as the global recession eases. Billionaire Chairman Azim Premji, who pared costs by freezing pay for Wipro’s almost 100,000 employees, has acquired businesses to boost sales and aims to increase revenue from markets such as the Middle East and Brazil.
“What we are seeing is that things are better than expected,” Gopal Agrawal, head of equities at Mirae Asset India Investment Co. in Mumbai, said by phone. “Even the U.S. results in the IT space are actually much better than expected, that is why this sector will remain attractive to investors,” said Agrawal, who oversees $50 million including technology shares.
Wipro fell 1.6 percent to close at 451.5 rupees in Mumbai trading, after gaining as much as 4.4 percent. The Bombay Stock Exchange’s Sensitive Index declined 1.5 percent. The stock has climbed 93 percent this year, outpacing the benchmark index’s 54 percent advance.
Sales in the quarter rose to 63.2 billion rupees, lagging behind the analysts’ 64.2 billion rupees projection. Wipro reported profit of 10.1 billion rupees on revenue of 63.9 billion rupees in the period as per International Financial Reporting Standards.
Pricing Pressure
Wipro still faces some pressure from clients to lower rates for its computer services and pricing will continue to have a slightly negative bias, Suresh Vaswani, joint chief executive officer of the information-technology-services unit, said in a televised interview on CNBC-TV18 network.
“We are cautious” about the economic environment, Wipro’s Chief Financial Officer Suresh Senapaty said today. “There has been demand from multiple customers for price changes. So far most of them have gone through; part of it could get impacted in the current quarter.”
Infosys, India’s second-biggest software provider, in April forecast its first annual decline in sales after clients delayed orders. Chief Executive Officer Senapathy Gopalakrishnan in May said India’s biggest technology companies won’t see a rebound in demand until the middle of next year.
“The quarterly numbers are good but I don’t think that it’s entirely correct to say that the clouds have gone away from the sector,” said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt. which has a “reduce” rating on Wipro. “The IT services business continues to remain under pressure.”
‘Signs of Stability’
Wipro, which also makes hydraulic equipment and soaps, earned 77 percent of revenue from its information-technology- services business in the quarter. The unit manages computer networks, operates call centers and provides back-office support for clients including Cisco Systems Inc. and Boeing Co.
“We are starting to see the first signs of stability in the business as ramp-downs start to taper off and volumes start to stabilize,” Premji said in a company release today.
The software exporter said sales at its IT-services business declined to $1.03 billion in the quarter, from $1.07 billion, and matched Wipro’s April projection of between $1.01 billion and $1.03 billion. The company forecast revenue at the unit will drop to between $1.04 billion and $1.05 billion in the three months to Sept. 30, from $1.11 billion a year earlier.
New Contracts
Wipro said it added 26 clients in the quarter and won two multimillion dollar deals in the period.
The company said in May it won a nine-year order from Unitech Ltd.’s wireless unit in India to build and maintain the mobile-phone operator’s computer network, without specifying its value. The same month, Sunoco Inc. renewed a contract worth $34 million over four years with Wipro’s Infocrossing unit.
Wipro in March received an 11.8 billion rupee order to create an online user system for the Indian government’s Employees’ State Insurance Corporation, the company said.
Tata Consultancy Chief Executive Officer Subramanian Ramadorai said on July 20 Citigroup Inc. is helping lead a recovery in demand from financial clients, the Indian software- services company’s biggest contributors to revenue.
The Mumbai-based industry leader, last week, reported profit rose 23 percent to 15.2 billion rupees in the first quarter, beating analysts’ 12.9 billion rupee projection.
International Business Machines Corp., the world’s biggest computer-services provider, on July 16 reported second-quarter earnings that topped analysts’ estimates and raised its full- year forecast.
The U.S. economy will expand faster than previously forecast in the second half of this year and in 2010 as a revival in consumer spending signals an end to the recession, a Bloomberg News survey of economists earlier this month showed.
Software AG Eyes Eastern Europe, Asia for Future Acquisitions
July 22 (Bloomberg) -- Software AG Chief Executive Officer Karl-Heinz Streibich said he plans to expand Germany’s second- largest software maker into Eastern Europe and Asia with the help of purchases as consolidation in the industry gains pace.
The Darmstadt, Germany-based company will resume takeovers once it has absorbed IDS Scheer AG, which Software AG agreed to buy for 477 million euros ($676.4 million) this month, Streibich said in an interview today. Future acquisitions may be similar in size to IDS Scheer or WebMethods Inc., for which Software AG paid $546 million in June 2007, Streibich said.
“Size plays an important role in the software business to reach profitability and visibility in the market,” he said. “Once we have paid back our loans for IDS Scheer in two to three years, we are free again for new loans and more acquisitions.”
Streibich has made at least nine acquisitions since taking over in October 2003, and IDS Scheer was the largest purchase in Software AG’s 40-year history. Software AG operates in more than 70 countries, and still lacks the size needed to compete with rivals in all but 15 of these markets, the CEO said.
“Consolidation always takes place, and it is important that smaller companies don’t remain small but grow,” Streibich said. Combining with IDS Scheer will lift Software AG’s annual sales to more than 1 billion euros, the CEO said.
Software AG today reported net income of 28.9 million euros for the second quarter. Sales rose 5 percent to 176.4 million euros. Streibich said Software AG will meet its revenue growth target of between 4 percent and 8 percent in 2009 and a margin on its earnings before interest and taxes of between 24.5 percent and 25.5 percent, excluding the integration of IDS.
Revenue growth in the second half will be similar to the preceding six months, when sales rose 4 percent to 341.7 million euros, Streibich predicted.
The Darmstadt, Germany-based company will resume takeovers once it has absorbed IDS Scheer AG, which Software AG agreed to buy for 477 million euros ($676.4 million) this month, Streibich said in an interview today. Future acquisitions may be similar in size to IDS Scheer or WebMethods Inc., for which Software AG paid $546 million in June 2007, Streibich said.
“Size plays an important role in the software business to reach profitability and visibility in the market,” he said. “Once we have paid back our loans for IDS Scheer in two to three years, we are free again for new loans and more acquisitions.”
Streibich has made at least nine acquisitions since taking over in October 2003, and IDS Scheer was the largest purchase in Software AG’s 40-year history. Software AG operates in more than 70 countries, and still lacks the size needed to compete with rivals in all but 15 of these markets, the CEO said.
“Consolidation always takes place, and it is important that smaller companies don’t remain small but grow,” Streibich said. Combining with IDS Scheer will lift Software AG’s annual sales to more than 1 billion euros, the CEO said.
Software AG today reported net income of 28.9 million euros for the second quarter. Sales rose 5 percent to 176.4 million euros. Streibich said Software AG will meet its revenue growth target of between 4 percent and 8 percent in 2009 and a margin on its earnings before interest and taxes of between 24.5 percent and 25.5 percent, excluding the integration of IDS.
Revenue growth in the second half will be similar to the preceding six months, when sales rose 4 percent to 341.7 million euros, Streibich predicted.
India Sets Rules for Overseas Companies Raising Local Funds
July 22 (Bloomberg) -- Overseas companies selling Indian Depositary Receipts must repatriate the money from the country immediately, the Indian central bank said, setting rules for foreign companies seeking to tap the nation’s stock markets.
The IDRs, denominated in rupees and issued by a depositary in India on behalf of an overseas company, won’t be redeemable to investors before the end of one year from the date of issue, the central bank said in a statement on its Web site today.
Foreign institutional investors and non-resident Indians will be allowed to trade in them, while foreign banks operating in India must seek approval to issue the securities, the central bank said. Automatic fungibility, or interchangeability, between the IDRs and the underlying shares won’t be permitted.
The IDRs, denominated in rupees and issued by a depositary in India on behalf of an overseas company, won’t be redeemable to investors before the end of one year from the date of issue, the central bank said in a statement on its Web site today.
Foreign institutional investors and non-resident Indians will be allowed to trade in them, while foreign banks operating in India must seek approval to issue the securities, the central bank said. Automatic fungibility, or interchangeability, between the IDRs and the underlying shares won’t be permitted.
Monday, July 20, 2009
RBA Says Australian Rate Cuts Helping Stoke Demand
July 21 (Bloomberg) -- Australia’s benchmark interest rate at a half-century low of 3 percent is helping drive economic growth amid signs domestic demand is more resilient than expected, the central bank said.
“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.
The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, with fewer people losing their jobs, research company Access Economics said earlier today.
“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.
Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.
Currency, Bonds
The Australian dollar traded at 81.27 U.S. cents at 11:33 a.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield rose 2 basis points, or 0.02 percentage points, to 4.04 percent.
Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending and higher demand for homes, the minutes said.
There are “further signs of stabilization in the world economy,” the central bank said today. “In Japan, recent data had been more encouraging than they had been for some time.”
The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”
China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.
‘Gradual Recovery’
For Australia, “the outlook thus remained for a gradual recovery to begin later in the year, and downside risks to that had diminished,” the Reserve Bank said.
While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.
“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.
Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed by Bloomberg. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.
‘Remarkable Resilience’
“Australia made it through the most dangerous phase of the global recession with only collateral damage, aided by China’s early bounce and the remarkable resilience of Australia’s mums,” Richardson said. Consumers are spending 6 percent more than when the crisis hit.
Still, central bank policy makers judged at their meeting this month that the most likely outcome for the global economy over the next year or two will “be subdued growth.”
“Downside risks had diminished,” the minutes said. “Nonetheless, significant vulnerabilities remained, as households and financial institutions in many major countries continued to repair their balance sheets.”
The long-term impact of the “large run-up” in global government debt that is in prospect “was also unclear.”
Investors have increased bets Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.
Traders forecast the key rate will be 77 basis points higher in a year, the index showed at 8:20 a.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.
“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.
The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, with fewer people losing their jobs, research company Access Economics said earlier today.
“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.
Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.
Currency, Bonds
The Australian dollar traded at 81.27 U.S. cents at 11:33 a.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield rose 2 basis points, or 0.02 percentage points, to 4.04 percent.
Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending and higher demand for homes, the minutes said.
There are “further signs of stabilization in the world economy,” the central bank said today. “In Japan, recent data had been more encouraging than they had been for some time.”
The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”
China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.
‘Gradual Recovery’
For Australia, “the outlook thus remained for a gradual recovery to begin later in the year, and downside risks to that had diminished,” the Reserve Bank said.
While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.
“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.
Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed by Bloomberg. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.
‘Remarkable Resilience’
“Australia made it through the most dangerous phase of the global recession with only collateral damage, aided by China’s early bounce and the remarkable resilience of Australia’s mums,” Richardson said. Consumers are spending 6 percent more than when the crisis hit.
Still, central bank policy makers judged at their meeting this month that the most likely outcome for the global economy over the next year or two will “be subdued growth.”
“Downside risks had diminished,” the minutes said. “Nonetheless, significant vulnerabilities remained, as households and financial institutions in many major countries continued to repair their balance sheets.”
The long-term impact of the “large run-up” in global government debt that is in prospect “was also unclear.”
Investors have increased bets Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.
Traders forecast the key rate will be 77 basis points higher in a year, the index showed at 8:20 a.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.
Bain, Oaktree Said to Team With Local Firm for AIG Taiwan Unit
July 21 (Bloomberg) -- Bain Capital LLC, Morgan Stanley’s private equity unit and Oaktree Capital Management LLC plan to bid together with Chinatrust Financial Holding Co. for American International Group Inc.’s Taiwan unit, three people with knowledge of the matter said.
The companies would bid against Carlyle Group, which is partnering with Fubon Financial Holding Co. for the next round of offers scheduled for late August, the people said, asking not to be identified because the talks are confidential. Morgan Stanley and Blackstone Group LP were hired by AIG to manage the sale.
AIG’s advisers last week asked buyout firms to team up with Fubon, Taiwan’s second-largest publicly traded financial-services company, or Chinatrust, ranked third, to ease regulatory concerns about the sale of the island’s second-biggest insurer to private equity firms. Primus Financial Holdings Ltd. and Cathay Financial Holding Co. have also been invited to put in binding bids next month, the people said.
“The regulator wants the domestic companies to be in the driving seat,” said Chuang Piyen, a Taipei-based analyst at Mega Securities Co. “The buyout firms are likely to be passive investors contributing capital to help the local partner bid.”
Cathay Financial is Taiwan’s largest publicly traded financial-services company. Primus Financial, co-founded by former Citigroup Inc. Asia investment banking chief Robert Morse, has raised more than $1 billion this year.
Morgan Stanley, which owns 4.8 percent of Chinatrust, won approval last month to boost the stake to 9.9 percent through its Asia private equity unit.
Experience in Insurance
The setup of groups bidding for AIG’s Nan Shan Life Insurance Co. unit may change, the people said. Taiwan’s Financial Supervisory Commission has said it wants a buyer of Nan Shan to have experience in insurance.
Nan Shan, the island’s second-biggest life insurer by total premiums, may fetch about $2 billion in the sale, the people said earlier. AIG is aiming to sell assets outside the U.S. to repay loans in a $182.5 billion bailout.
Officials at Bain Capital, Morgan Stanley, Oaktree Capital, Cathay Financial and Primus Financial declined to comment. Sam Lin, a Taipei-based spokesman at Chinatrust, Dorothy Lee, a Hong Kong-based spokeswoman for Carlyle, and Victor Kung, president of Fubon Financial, also declined to comment.
Nan Shan has 4 million policyholders and an 11 percent market share in terms of total premiums. Burdened with unprofitable policies, it raised $1.45 billion in a rights offer last year to avoid slipping below a regulatory capital requirement. AIG owns 97.5 percent of the unit and Nan Shan’s management holds the rest.
The companies would bid against Carlyle Group, which is partnering with Fubon Financial Holding Co. for the next round of offers scheduled for late August, the people said, asking not to be identified because the talks are confidential. Morgan Stanley and Blackstone Group LP were hired by AIG to manage the sale.
AIG’s advisers last week asked buyout firms to team up with Fubon, Taiwan’s second-largest publicly traded financial-services company, or Chinatrust, ranked third, to ease regulatory concerns about the sale of the island’s second-biggest insurer to private equity firms. Primus Financial Holdings Ltd. and Cathay Financial Holding Co. have also been invited to put in binding bids next month, the people said.
“The regulator wants the domestic companies to be in the driving seat,” said Chuang Piyen, a Taipei-based analyst at Mega Securities Co. “The buyout firms are likely to be passive investors contributing capital to help the local partner bid.”
Cathay Financial is Taiwan’s largest publicly traded financial-services company. Primus Financial, co-founded by former Citigroup Inc. Asia investment banking chief Robert Morse, has raised more than $1 billion this year.
Morgan Stanley, which owns 4.8 percent of Chinatrust, won approval last month to boost the stake to 9.9 percent through its Asia private equity unit.
Experience in Insurance
The setup of groups bidding for AIG’s Nan Shan Life Insurance Co. unit may change, the people said. Taiwan’s Financial Supervisory Commission has said it wants a buyer of Nan Shan to have experience in insurance.
Nan Shan, the island’s second-biggest life insurer by total premiums, may fetch about $2 billion in the sale, the people said earlier. AIG is aiming to sell assets outside the U.S. to repay loans in a $182.5 billion bailout.
Officials at Bain Capital, Morgan Stanley, Oaktree Capital, Cathay Financial and Primus Financial declined to comment. Sam Lin, a Taipei-based spokesman at Chinatrust, Dorothy Lee, a Hong Kong-based spokeswoman for Carlyle, and Victor Kung, president of Fubon Financial, also declined to comment.
Nan Shan has 4 million policyholders and an 11 percent market share in terms of total premiums. Burdened with unprofitable policies, it raised $1.45 billion in a rights offer last year to avoid slipping below a regulatory capital requirement. AIG owns 97.5 percent of the unit and Nan Shan’s management holds the rest.
Australian Mums Help Economy Survive Global Crisis, Access Says
July 21 (Bloomberg) -- Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, with fewer people losing their jobs, Access Economics said.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of the Canberra-based research company said in a report today. Three months ago, Access forecast a 0.2 percent decline.
Consumer and business confidence is rebounding after reports showed Australia was one of the few economies including China and India to grow in the first quarter, helped by the lowest interest rates in half a century and A$12 billion ($9.8 billion) in government cash handouts to households. The government now faces a “budget repair task” as its stimulus package creates budget deficits until fiscal 2013, Access said.
“Australia made it through the most dangerous phase of the global recession with only collateral damage, aided by China’s early bounce and the remarkable resilience of Australia’s mums,” Richardson said. Consumers are spending 6 percent more than when the crisis hit.
China’s economy, Australia’s second-largest trade partner, grew 7.9 percent in the second quarter, making it the first of the major economies to rebound from the global recession, a report showed on July 16.
Still, “China’s bounce is built on sandy soils, and may not guarantee ongoing gains for Australia’s economy by late 2010 and 2011,” Richardson said.
Jobless Rate
Access said Australia’s jobless rate will peak at 7.5 percent, a percentage point lower than the government’s prediction. Access previously forecast a jobless rate of 8.5 percent.
“That is good news, but it is still putting lipstick on a pig,” Richardson said. “We aren’t out of the woods yet. Consumers will flag from here” as the impact from government handouts fades.
“Similarly, businesses will be winding back spending through 2009-10, and the A$50 billion stripped from coal and iron ore export earnings is yet to hit profits and incomes,” he added.
To cushion Australia against the worst global recession since the Great Depression, central bank Governor Glenn Stevens slashed the benchmark interest rate by a record 4.25 percentage points between September and April to 3 percent.
Inflation Risk
Stevens left the rate unchanged on July 7 for a third month, and said slowing inflation gives policy makers scope to cut again if needed to spur domestic demand.
“The risk is that a world awash in money sees inflation in the recovery,” Richardson said. “Inflation risks are rising, though not as much as markets may fear. Both global and Australian interest rates will therefore lift during 2010 and into 2011.”
Signs are also emerging that the world’s biggest economy may be emerging from recession, with the index of U.S. leading indicators rising in June for a third consecutive month.
The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.7 percent, more than forecast, after a revised 1.3 percent gain in May, the New York- based research group said. It is the first time the index has climbed for three months in a row since 2004.
The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of the Canberra-based research company said in a report today. Three months ago, Access forecast a 0.2 percent decline.
Consumer and business confidence is rebounding after reports showed Australia was one of the few economies including China and India to grow in the first quarter, helped by the lowest interest rates in half a century and A$12 billion ($9.8 billion) in government cash handouts to households. The government now faces a “budget repair task” as its stimulus package creates budget deficits until fiscal 2013, Access said.
“Australia made it through the most dangerous phase of the global recession with only collateral damage, aided by China’s early bounce and the remarkable resilience of Australia’s mums,” Richardson said. Consumers are spending 6 percent more than when the crisis hit.
China’s economy, Australia’s second-largest trade partner, grew 7.9 percent in the second quarter, making it the first of the major economies to rebound from the global recession, a report showed on July 16.
Still, “China’s bounce is built on sandy soils, and may not guarantee ongoing gains for Australia’s economy by late 2010 and 2011,” Richardson said.
Jobless Rate
Access said Australia’s jobless rate will peak at 7.5 percent, a percentage point lower than the government’s prediction. Access previously forecast a jobless rate of 8.5 percent.
“That is good news, but it is still putting lipstick on a pig,” Richardson said. “We aren’t out of the woods yet. Consumers will flag from here” as the impact from government handouts fades.
“Similarly, businesses will be winding back spending through 2009-10, and the A$50 billion stripped from coal and iron ore export earnings is yet to hit profits and incomes,” he added.
To cushion Australia against the worst global recession since the Great Depression, central bank Governor Glenn Stevens slashed the benchmark interest rate by a record 4.25 percentage points between September and April to 3 percent.
Inflation Risk
Stevens left the rate unchanged on July 7 for a third month, and said slowing inflation gives policy makers scope to cut again if needed to spur domestic demand.
“The risk is that a world awash in money sees inflation in the recovery,” Richardson said. “Inflation risks are rising, though not as much as markets may fear. Both global and Australian interest rates will therefore lift during 2010 and into 2011.”
Signs are also emerging that the world’s biggest economy may be emerging from recession, with the index of U.S. leading indicators rising in June for a third consecutive month.
The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.7 percent, more than forecast, after a revised 1.3 percent gain in May, the New York- based research group said. It is the first time the index has climbed for three months in a row since 2004.
Sunday, July 19, 2009
India to Unveil Inflation Index to Correct Price ‘
July 20 (Bloomberg) -- India will adopt a new consumer price index next year after policy makers said the current main inflation gauge of wholesale prices doesn’t reflect the true costs borne by people.
India’s statistics department releases four consumer price indices for different groups such as farm and industrial workers. The central bank and the finance ministry use the wholesale price index as the benchmark as the other inflation measures don’t capture the aggregate price picture.
“For macro purposes, you need a unified consumer price index,” Pronab Sen, the top bureaucrat in India’s statistics ministry said in an interview on July 17. “We are hopeful that by the end of next year we should be able to come up with one.”
Gains in the weekly wholesale prices hovered near 1 percent in May while increases in the four consumer indices, announced monthly, ranged between 7 percent and 10 percent. Governor Duvvuri Subbarao said the divergence in various price measures “complicates” monetary policy formulation while Finance Secretary Ashok Chawla said the “disconnect” must be rectified.
“The issue is causing some problems at this point in time,” said Chawla, the top bureaucrat in India’s finance ministry. “Policy makers have to tread with a certain amount of caution.”
Sen said the only “compelling” logic for a unified consumer price index is for monetary policy purposes, as there is nothing “intrinsically wrong” with the wholesale price gauge and the four consumer price measures.
‘Legitimate Information’
The wholesale price index provides a snapshot of producer prices while the consumer price gauges show the final cost paid by consumers.
“So you can have a situation where wholesale prices are going down and consumer prices are rising, and what it’s basically saying is that the cost of production is decreasing and that’s legitimate information,” Sen said.
“Similarly, regarding consumer prices, whose cost of consumption am I interested in?” Sen asked. “As far as the government is concerned, you would want to measure the cost of living of the most disadvantaged part of society.”
And the existing consumer price indices do exactly that, Sen said.
The consumer price index for agriculture labor measures the poorest segment of the rural population while the consumer price index for industrial workers measure the weakest part of India’s urban centers, Sen said.
He said the statistics department will continue to release the existing consumer indices and the wholesale index even after the new, unified consumer index is unveiled next year.
Measuring Services
The new consumer index, with a base year of 2007-2008, will be compiled from a sample of 2,000 villages, Sen said. He said the statistics department has subcontracted the field work to the postal department, which has put 2,400 people on the job.
Statistics in India haven’t kept pace with other changes in the economy as well, he said.
“The biggest problem is measuring services,” whose share in India’s $1.2 trillion economy has doubled to about 55 percent in the past two decades, Sen said.
“The bulk of our growth is coming from services, which is not the case with China, where growth is powered by manufacturing,” Sen said. “Traditional statistical systems are much better at measuring physical products and are in fact pretty bad at measuring services.”
There are some services such as transport that can be measured and “almost everything else can’t,” Sen said.
Extracting Teeth
“For example, how do you define the product of a dentist,” Sen asked. “Extraction of a front tooth is a different product from the extraction of a back tooth,” he said.
Similarly, in insurance, there are so many products and each one of them is unique, Sen said. “Even if two people have the same life insurance product with the same coverage, their premium will be different -- what premium do I use,” he asked.
The problems in measuring services don’t hinder computation of the gross domestic product, which can be arrived at by ascertaining the turnover of the services, Sen said.
“The reason we need it is because all economic systems require an early measurement of what’s happening in the economy,” Sen said. “The GDP we can announce at best quarterly and that too comes after a two-month lag. If you want to know what’s happened to services last month, we won’t know.”
“This is an area where a lot of research work is going on around the world,” Sen said.
For Related News and Information:
India’s statistics department releases four consumer price indices for different groups such as farm and industrial workers. The central bank and the finance ministry use the wholesale price index as the benchmark as the other inflation measures don’t capture the aggregate price picture.
“For macro purposes, you need a unified consumer price index,” Pronab Sen, the top bureaucrat in India’s statistics ministry said in an interview on July 17. “We are hopeful that by the end of next year we should be able to come up with one.”
Gains in the weekly wholesale prices hovered near 1 percent in May while increases in the four consumer indices, announced monthly, ranged between 7 percent and 10 percent. Governor Duvvuri Subbarao said the divergence in various price measures “complicates” monetary policy formulation while Finance Secretary Ashok Chawla said the “disconnect” must be rectified.
“The issue is causing some problems at this point in time,” said Chawla, the top bureaucrat in India’s finance ministry. “Policy makers have to tread with a certain amount of caution.”
Sen said the only “compelling” logic for a unified consumer price index is for monetary policy purposes, as there is nothing “intrinsically wrong” with the wholesale price gauge and the four consumer price measures.
‘Legitimate Information’
The wholesale price index provides a snapshot of producer prices while the consumer price gauges show the final cost paid by consumers.
“So you can have a situation where wholesale prices are going down and consumer prices are rising, and what it’s basically saying is that the cost of production is decreasing and that’s legitimate information,” Sen said.
“Similarly, regarding consumer prices, whose cost of consumption am I interested in?” Sen asked. “As far as the government is concerned, you would want to measure the cost of living of the most disadvantaged part of society.”
And the existing consumer price indices do exactly that, Sen said.
The consumer price index for agriculture labor measures the poorest segment of the rural population while the consumer price index for industrial workers measure the weakest part of India’s urban centers, Sen said.
He said the statistics department will continue to release the existing consumer indices and the wholesale index even after the new, unified consumer index is unveiled next year.
Measuring Services
The new consumer index, with a base year of 2007-2008, will be compiled from a sample of 2,000 villages, Sen said. He said the statistics department has subcontracted the field work to the postal department, which has put 2,400 people on the job.
Statistics in India haven’t kept pace with other changes in the economy as well, he said.
“The biggest problem is measuring services,” whose share in India’s $1.2 trillion economy has doubled to about 55 percent in the past two decades, Sen said.
“The bulk of our growth is coming from services, which is not the case with China, where growth is powered by manufacturing,” Sen said. “Traditional statistical systems are much better at measuring physical products and are in fact pretty bad at measuring services.”
There are some services such as transport that can be measured and “almost everything else can’t,” Sen said.
Extracting Teeth
“For example, how do you define the product of a dentist,” Sen asked. “Extraction of a front tooth is a different product from the extraction of a back tooth,” he said.
Similarly, in insurance, there are so many products and each one of them is unique, Sen said. “Even if two people have the same life insurance product with the same coverage, their premium will be different -- what premium do I use,” he asked.
The problems in measuring services don’t hinder computation of the gross domestic product, which can be arrived at by ascertaining the turnover of the services, Sen said.
“The reason we need it is because all economic systems require an early measurement of what’s happening in the economy,” Sen said. “The GDP we can announce at best quarterly and that too comes after a two-month lag. If you want to know what’s happened to services last month, we won’t know.”
“This is an area where a lot of research work is going on around the world,” Sen said.
For Related News and Information:
Tata Consultancy Sees More Demand at Citigroup, Banks
July 20 (Bloomberg) -- Tata Consultancy Services Ltd., India’s largest computer-services provider, is seeing increased demand from financial clients including Citigroup Inc., Chief Executive Officer Subramanian Ramadorai said.
“Demand is increasing as we speak,” Ramadorai said of business from Citigroup. JPMorgan Chase & Co. and Bank of America Corp. were also interested in services from Tata Consultancy, the chief executive said in a Bloomberg Television interview today.
Increased orders from financial services companies, Tata Consultancy’s biggest source of revenue, may help Indian outsourcers recover from the global recession that’s forced companies to tighten their technology-spending budgets. Cost cuts including a pay freeze and a cap on hiring helped Tata Consultancy beat earnings expectations July 17, joining nearest rival Infosys Technologies Ltd.
“Some segments where it was looking quite bad till recently, I think the situation is getting much better,” said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt., which raised its rating on the stock to “accumulate” from “reduce” after the results.
Tata Consultancy climbed 12 percent to 484.25 rupees at 10 a.m. in Mumbai trading, its biggest increase since May 18 after the company reported earnings that beat analyst estimates on July 17. The stock was the second-biggest contributor to the benchmark Sensitive Index’s 1.5 percent advance and the biggest gainer today on the 967-member MSCI AC Asia Pacific Index.
Profit Beats Estimates
The Mumbai-based software provider last week reported net income rose 23 percent to 15.2 billion rupees ($312 million) in the three months ended June 30. That compared with the 12.9 billion-rupee median of 21 estimates compiled by Bloomberg.
Sales rose to 72.1 billion rupees, beating the median analyst estimate of 69.2 billion rupees, after Tata Consultancy won eight large deals, including five from companies in the U.S. Banks and financial firms contributed 44 percent of revenue.
Ramadorai said demand from banks was across geographies.
“Other banks are looking at rationalization, some of the consolidation with the mergers that took place, some of the compliance related activities,” he said. “Banks in the European parts of the world in addition to the Indian banks,” were also interested in hiring Tata Consultancy, Ramadorai said.
Tata Consultancy, which provides computer services and back-office support to Citigroup, Volkswagen AG and other customers, said it won a multimillion dollar order from a specialty retailer in the U.S., where it gets half its sales. The Indian company also signed a multi-year contract with an Australian energy retailer for managing software applications.
The share of revenue from Tata Consultancy’s 10 biggest customers rose to 28 percent in the quarter, from 26.9 percent in the preceding three months, the company said in a presentation to analysts and posted on its Web site.
“Demand is increasing as we speak,” Ramadorai said of business from Citigroup. JPMorgan Chase & Co. and Bank of America Corp. were also interested in services from Tata Consultancy, the chief executive said in a Bloomberg Television interview today.
Increased orders from financial services companies, Tata Consultancy’s biggest source of revenue, may help Indian outsourcers recover from the global recession that’s forced companies to tighten their technology-spending budgets. Cost cuts including a pay freeze and a cap on hiring helped Tata Consultancy beat earnings expectations July 17, joining nearest rival Infosys Technologies Ltd.
“Some segments where it was looking quite bad till recently, I think the situation is getting much better,” said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Pvt., which raised its rating on the stock to “accumulate” from “reduce” after the results.
Tata Consultancy climbed 12 percent to 484.25 rupees at 10 a.m. in Mumbai trading, its biggest increase since May 18 after the company reported earnings that beat analyst estimates on July 17. The stock was the second-biggest contributor to the benchmark Sensitive Index’s 1.5 percent advance and the biggest gainer today on the 967-member MSCI AC Asia Pacific Index.
Profit Beats Estimates
The Mumbai-based software provider last week reported net income rose 23 percent to 15.2 billion rupees ($312 million) in the three months ended June 30. That compared with the 12.9 billion-rupee median of 21 estimates compiled by Bloomberg.
Sales rose to 72.1 billion rupees, beating the median analyst estimate of 69.2 billion rupees, after Tata Consultancy won eight large deals, including five from companies in the U.S. Banks and financial firms contributed 44 percent of revenue.
Ramadorai said demand from banks was across geographies.
“Other banks are looking at rationalization, some of the consolidation with the mergers that took place, some of the compliance related activities,” he said. “Banks in the European parts of the world in addition to the Indian banks,” were also interested in hiring Tata Consultancy, Ramadorai said.
Tata Consultancy, which provides computer services and back-office support to Citigroup, Volkswagen AG and other customers, said it won a multimillion dollar order from a specialty retailer in the U.S., where it gets half its sales. The Indian company also signed a multi-year contract with an Australian energy retailer for managing software applications.
The share of revenue from Tata Consultancy’s 10 biggest customers rose to 28 percent in the quarter, from 26.9 percent in the preceding three months, the company said in a presentation to analysts and posted on its Web site.
CIT Is Said to Obtain Urgent Loan to Prevent Bankruptcy
Published: July 19, 2009
Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.
The deal will buy CIT some time to restructure its business model and reduce its voluminous debt load, after the company failed to win crucial concessions from Washington regulators. The company had planned to file for bankruptcy protection as soon as Monday afternoon if it could not attract enough capital from private investors, including big bondholders and its banks.
Under the terms of the deal, CIT would receive $3 billion from some of its main bondholders, though at an initial rate of about 10.5 percent. The money, arranged by Barclays Capital, is meant to give the company several weeks to set up an exchange of bondholders’ debt for equity, alleviating some of the pressure from billions of dollars in obligations.
CIT’s board approved the deal around 10:30 p.m. Sunday, these people said.
For more than a week, CIT, which is 101 years old, posed a difficult question for regulators: Should they step in to save yet another foundered financial institution?
Regulators felt some political pressure to intervene, because of CIT’s big presence in lending to small businesses across the country and because the government had already invested $2.33 billion in the company.
But officials eventually concluded that CIT, unlike the banks that were bailed out last year, posed no risk to the global financial system, leaving its fate in the hands of the private market.
The plan was formed after days of round-the-clock negotiations between CIT and its financial and legal advisers, and a group of large bondholders represented by the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul, Weiss, Rifkind, Wharton & Garrison. The two firms previously represented the biggest group of large bondholders in General Motors.
Jeffrey M. Peek, CIT’s chief executive and the architect of the lender’s ill-timed aggressive push into subprime mortgages and student loans, was active in the financing talks, according to people briefed on the matter. Mr. Peek, a longtime banker who lost a race to become Merrill Lynch’s chief executive, called upon many of his acquaintances on Wall Street to provide some form of aid.
Even as CIT negotiated with its bondholders, it also had teams from the investment bank Evercore Partners and the law firm Skadden, Arps, Slate, Meagher & Flom prepare for a potential Chapter 11 filing. Several advisers, including JPMorgan Chase and Morgan Stanley, had begun preliminary discussions about raising $2 billion to $3 billion in debtor-in-possession financing, money needed to get a company through bankruptcy.
It remains unclear whether CIT’s long-sought lifeline will be enough to give it the room to make crucial changes to its business at a time when it is unable to obtain financing from the capital markets. While it maintains a bank subsidiary in Utah, the company has traditionally relied on money that it borrows in the capital markets to make loans to its customers.
Once the credit markets froze and investors became leery of CIT’s loan portfolio, the company was in peril.
Were CIT to fail, the company — with $75 billion in assets — would become the largest casualty in the finance sector since Lehman Brothers collapsed last fall. Since then, federal regulators have been pumping billions of dollars into numerous banks across the country to prop them up and create some stability in the financial system.
A failure of CIT could have sent ripple effects through the nation’s small and midsize businesses. While most of its portfolio consisted of term loans, the company dominated the market for factoring, a type of lending common within the manufacturing and retail sectors.
Many analysts and federal regulators have questioned why CIT did not try to change its risky business model sooner. Last December, amid the market turmoil, the Bush administration rushed through the company’s application to become a bank holding company and gave it $2.33 billion through the Troubled Asset Relief Program.
Yet the company made no move to build a sturdier business model. Instead, it applied for access to a program through the Federal Deposit Insurance Corporation that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.
Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, a government official briefed on the situation said.
When that door closed last week, CIT executives still held out hope that they would receive approval from regulators to transfer $10 billion in assets to the company’s Utah bank, a move that would have given it access to loans from the Federal Reserve. But regulators demanded that such a move be accompanied by CIT’s raising a significant amount of private capital, which at the time seemed nearly impossible.
A third front of the debate was whether, after throwing large sums of money to some of the nation’s largest banks, the Obama administration was doing enough to brace up institutions that lend money to smaller businesses. Many of those large banks, including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America, reported either record or substantially improved results last week.
Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.
The deal will buy CIT some time to restructure its business model and reduce its voluminous debt load, after the company failed to win crucial concessions from Washington regulators. The company had planned to file for bankruptcy protection as soon as Monday afternoon if it could not attract enough capital from private investors, including big bondholders and its banks.
Under the terms of the deal, CIT would receive $3 billion from some of its main bondholders, though at an initial rate of about 10.5 percent. The money, arranged by Barclays Capital, is meant to give the company several weeks to set up an exchange of bondholders’ debt for equity, alleviating some of the pressure from billions of dollars in obligations.
CIT’s board approved the deal around 10:30 p.m. Sunday, these people said.
For more than a week, CIT, which is 101 years old, posed a difficult question for regulators: Should they step in to save yet another foundered financial institution?
Regulators felt some political pressure to intervene, because of CIT’s big presence in lending to small businesses across the country and because the government had already invested $2.33 billion in the company.
But officials eventually concluded that CIT, unlike the banks that were bailed out last year, posed no risk to the global financial system, leaving its fate in the hands of the private market.
The plan was formed after days of round-the-clock negotiations between CIT and its financial and legal advisers, and a group of large bondholders represented by the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul, Weiss, Rifkind, Wharton & Garrison. The two firms previously represented the biggest group of large bondholders in General Motors.
Jeffrey M. Peek, CIT’s chief executive and the architect of the lender’s ill-timed aggressive push into subprime mortgages and student loans, was active in the financing talks, according to people briefed on the matter. Mr. Peek, a longtime banker who lost a race to become Merrill Lynch’s chief executive, called upon many of his acquaintances on Wall Street to provide some form of aid.
Even as CIT negotiated with its bondholders, it also had teams from the investment bank Evercore Partners and the law firm Skadden, Arps, Slate, Meagher & Flom prepare for a potential Chapter 11 filing. Several advisers, including JPMorgan Chase and Morgan Stanley, had begun preliminary discussions about raising $2 billion to $3 billion in debtor-in-possession financing, money needed to get a company through bankruptcy.
It remains unclear whether CIT’s long-sought lifeline will be enough to give it the room to make crucial changes to its business at a time when it is unable to obtain financing from the capital markets. While it maintains a bank subsidiary in Utah, the company has traditionally relied on money that it borrows in the capital markets to make loans to its customers.
Once the credit markets froze and investors became leery of CIT’s loan portfolio, the company was in peril.
Were CIT to fail, the company — with $75 billion in assets — would become the largest casualty in the finance sector since Lehman Brothers collapsed last fall. Since then, federal regulators have been pumping billions of dollars into numerous banks across the country to prop them up and create some stability in the financial system.
A failure of CIT could have sent ripple effects through the nation’s small and midsize businesses. While most of its portfolio consisted of term loans, the company dominated the market for factoring, a type of lending common within the manufacturing and retail sectors.
Many analysts and federal regulators have questioned why CIT did not try to change its risky business model sooner. Last December, amid the market turmoil, the Bush administration rushed through the company’s application to become a bank holding company and gave it $2.33 billion through the Troubled Asset Relief Program.
Yet the company made no move to build a sturdier business model. Instead, it applied for access to a program through the Federal Deposit Insurance Corporation that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.
Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, a government official briefed on the situation said.
When that door closed last week, CIT executives still held out hope that they would receive approval from regulators to transfer $10 billion in assets to the company’s Utah bank, a move that would have given it access to loans from the Federal Reserve. But regulators demanded that such a move be accompanied by CIT’s raising a significant amount of private capital, which at the time seemed nearly impossible.
A third front of the debate was whether, after throwing large sums of money to some of the nation’s largest banks, the Obama administration was doing enough to brace up institutions that lend money to smaller businesses. Many of those large banks, including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America, reported either record or substantially improved results last week.
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