July 31 (Bloomberg) -- Japan’s unemployment rate rose to a six-year high in June, undermining the outlook for consumer spending just as exports start to improve.
The jobless rate advanced to 5.4 percent from 5.2 percent in May, the statistics bureau said today in Tokyo, higher than the 5.3 percent median forecast of economists surveyed. Consumer prices excluding fresh food, the central bank’s preferred gauge, fell a record 1.7 percent in June, a separate report showed.
Economists expect the jobless rate to rise to a record 5.8 percent as production at three quarters of last year’s levels exerts pressure on costs even as companies start to ship more goods. Deflation may erode corporate profits, further hampering Japan’s recovery from its deepest postwar recession.
“Worsening job prospects will continue to weigh on Japan’s recovery,” said Yasuhiro Onakado, chief economist in Tokyo at Daiwa SB Investments Ltd. in Tokyo. “The export recovery is helping production but capacity utilization is still low and companies are still saddled with excess capacity and employment.”
The yen traded at 95.52 per dollar at 10:04 a.m. in Tokyo from 95.46 before the report was published. The Nikkei 225 Stock Average rose 1.4 percent to 10,305.40, heading for its highest close since Oct 6, after Sony Corp. posted a smaller than expected quarterly loss.
Given Japan’s current production levels, companies have 6 million extra workers, the highest ever, the Cabinet Office said last week. A report yesterday showed that while output increased 2.4 percent in June from the previous month, it fell 23.4 percent from a year ago.
Record Low
The number of positions available to each job applicant rose stood at 0.43, a record low, the Labor Ministry said. Economists regard the ratio as a leading indicator for the unemployment rate.
Consumers have received temporary relief from the downturn from Prime Minister Taro Aso’s 25 trillion yen ($262 billion) in stimulus spending that included measures ranging from cash handouts to tax breaks on fuel-efficient vehicles. The packages helped bolster consumer confidence to an 18-month high in June.
Household spending rose 0.2 percent, a second monthly gain, a separate report showed today. Economists expected outlays to increase 0.5 percent.
“Consumer spending will clearly start weaken once the impact of the stimulus packages fades,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
Nintendo Co. and Sony, the largest makers of game consoles, are facing mounting pressure to cut prices after reports yesterday showed sales of the motion-sensing Wii fell for the first time and PlayStation 3 shipments tumbled to a two-year low.
The U.S. unemployment rate rose to a quarter-century high of 9.5 percent in June and in the euro zone it reached a decade high of 9.5 percent in May.
Saving More
At home, consumers are starting to save more, prompting retailers to offer cheaper products to lure consumers. Department store operator Millenium Retailing Inc. will start selling cheaper, generic products in September, according to Nagatoshi Nii, spokesman at the retailer. Aeon Co., Japan’s second-largest retailer, started selling house-brand beer that’s 20 percent cheaper than equivalent products at major breweries.
The drop in consumer prices will probably accelerate through the third quarter and exceed 2 percent in reaction to last year’s record increases in oil, Bank of Japan board member Tadao Noda said yesterday. Declines will moderate after that as the economy improves, he added.
Summer bonuses at Japan’s largest companies will slide a record 18.3 percent this year, according to a survey published last month by the Keidanren, the country’s biggest business lobby. The average budget for this summer vacation for each individual dropped 18 percent to 88,000 yen ($925) from last year, the lowest in four years, Dentsu Research Inc. reported this week.
Thursday, July 30, 2009
HSBC May Post Loss as U.S. Unit Pushes Bad Loans to $15 Billion
July 31 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank by market value, may report a second straight loss after setting aside $15.3 billion, mainly for consumer loans that soured in the U.S.
The first-half net loss probably will be $600 million, compared with earnings of $7.72 billion a year earlier, according to the median estimate of seven analysts surveyed by Bloomberg. London-based HSBC had a $2 billion loss in the second half of 2008 after bad-loan provisions increased 37 percent.
“The key thing is the U.S.,” said Leigh Goodwin, a London-based analyst at Fox-Pitt, Kelton Cochran Caronia Waller LLC, who has an “outperform” rating on HSBC. “We will be looking for any signs they have turned the corner.”
HSBC has disclosed $53 billion of provisions in the past three years, much of which stems from the 2003 takeover of U.S. finance company Household International Inc. HSBC decided in March to stop making consumer loans at the operation and Chief Executive Officer Michael Geoghegan said the same month that the bank’s credit-card unit faces a “difficult” two years because of the sluggish economy.
HSBC is scheduled to report its latest results on Aug. 3. The company increased capital in April with a $17.8 billion rights offer as bad debts in the U.S. eroded reserves. The bank said in May it would take a pretax accounting charge of $4.7 billion for the rights offer because most of the shares were denominated in currencies other than U.S. dollars.
Mostly North America
North America will account for about 61 percent of the first-half provisions, compared with 67 percent during all of 2008, Paul Measday, a London-based analyst at JPMorgan Cazenove Ltd., wrote in a July 17 note to clients. Europe will represent about 19 percent, Asia 9.5 percent and Latin America 9.7 percent, he said.
About 77 percent of the funds set aside for defaults will be for consumer debt, which includes mortgages, auto finance loans, personal loans and credit cards, Measday said.
Chairman Stephen Green said in March that HSBC regrets the decision to buy Household International, now called HSBC Finance. “It’s an acquisition we wish we hadn’t done with the benefit of hindsight, and there are lessons to be learned,” Green told reporters during a March 2 conference call.
HSBC gained 3.3 percent in London trading this year, valuing the bank at 103.2 billion pounds ($170 billion). In the same period, shares of London-based Barclays Plc doubled and the 63-member Bloomberg Europe 500 Banks Index advanced 31 percent.
Not Optimistic
“I can’t imagine HSBC is going to be particularly optimistic about the U.S.” when it posts first-half results, said Julian Chillingworth, chief investment officer at London- based Rathbone Brothers Plc, which manages $21 billion of assets including HSBC stock.
HSBC’s writedowns and credit-market losses are more than twice those of Credit Suisse Group AG and Barclays Plc, according to data compiled by Bloomberg. Since the third quarter of 2007 HSBC’s $42.2 billion compares with $20.1 billion at Barclays and $18.9 billion for Credit Suisse.
Loan-loss provisions may not peak at HSBC’s U.S. unit until 2010, Anil Agarwal, a Hong Kong-based analyst at Morgan Stanley, wrote in a July 17 research note. The company injected $1.7 billion of capital into its U.S. bank and about $1 billion of equity into HSBC Finance in the first quarter. HSBC may have to add a further $6 billion of “capital support” in the next two years, Morgan Stanley analysts estimate.
No Bailout
HSBC’s first-half loss would compare with net income of $4.9 billion at JPMorgan Chase & Co., which posted credit loss provisions of $16.6 billion in the period. Bank of America Corp. made $7.5 billion after setting aside $26.8 billion in the period for credit losses.
HSBC has kept its ranking as the world’s third-largest bank by market value after emerging from the global credit freeze much healthier than U.K. competitors Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, which had to be bailed out by the government. HSBC lends 82 pence for every pound it takes in deposits, compared with 150 pence at Edinburgh-based RBS.
Pretax profit at HSBC’s securities unit, led by Stuart Gulliver, may more than double to about $6 billion, Deutsche Bank analyst Michael Chang wrote in a July 23 note to clients. The division had record first-quarter earnings, lifted by foreign exchange and interest-rate trading and bond sales, the bank said in May. The securities unit “could be a source of upside for consensus expectations on results day,” Chang said.
China Listing
HSBC, which gained more than 17 percent of its profit from China last year, may become one of the first foreign companies to be asked to list its shares in China’s A-share market, Goldman Sachs Group Inc. analyst Roy Ramos wrote in a note July 20. The A-share market includes shares of mainland companies listed on the Shanghai or Shenzhen stock exchanges.
“The branding, advertising and positioning advantages of being one of the first foreign-listed banks in China could be significant” and help increase deposits, Ramos said.
The bank’s currency-trading capabilities in Hong Kong and China also make HSBC “better placed than most” to gain from China’s plan to increase international trade using the yuan, rather than the U.S. dollar, Ramos said. New York-based Goldman Sachs advised HSBC on its rights offering.
The first-half net loss probably will be $600 million, compared with earnings of $7.72 billion a year earlier, according to the median estimate of seven analysts surveyed by Bloomberg. London-based HSBC had a $2 billion loss in the second half of 2008 after bad-loan provisions increased 37 percent.
“The key thing is the U.S.,” said Leigh Goodwin, a London-based analyst at Fox-Pitt, Kelton Cochran Caronia Waller LLC, who has an “outperform” rating on HSBC. “We will be looking for any signs they have turned the corner.”
HSBC has disclosed $53 billion of provisions in the past three years, much of which stems from the 2003 takeover of U.S. finance company Household International Inc. HSBC decided in March to stop making consumer loans at the operation and Chief Executive Officer Michael Geoghegan said the same month that the bank’s credit-card unit faces a “difficult” two years because of the sluggish economy.
HSBC is scheduled to report its latest results on Aug. 3. The company increased capital in April with a $17.8 billion rights offer as bad debts in the U.S. eroded reserves. The bank said in May it would take a pretax accounting charge of $4.7 billion for the rights offer because most of the shares were denominated in currencies other than U.S. dollars.
Mostly North America
North America will account for about 61 percent of the first-half provisions, compared with 67 percent during all of 2008, Paul Measday, a London-based analyst at JPMorgan Cazenove Ltd., wrote in a July 17 note to clients. Europe will represent about 19 percent, Asia 9.5 percent and Latin America 9.7 percent, he said.
About 77 percent of the funds set aside for defaults will be for consumer debt, which includes mortgages, auto finance loans, personal loans and credit cards, Measday said.
Chairman Stephen Green said in March that HSBC regrets the decision to buy Household International, now called HSBC Finance. “It’s an acquisition we wish we hadn’t done with the benefit of hindsight, and there are lessons to be learned,” Green told reporters during a March 2 conference call.
HSBC gained 3.3 percent in London trading this year, valuing the bank at 103.2 billion pounds ($170 billion). In the same period, shares of London-based Barclays Plc doubled and the 63-member Bloomberg Europe 500 Banks Index advanced 31 percent.
Not Optimistic
“I can’t imagine HSBC is going to be particularly optimistic about the U.S.” when it posts first-half results, said Julian Chillingworth, chief investment officer at London- based Rathbone Brothers Plc, which manages $21 billion of assets including HSBC stock.
HSBC’s writedowns and credit-market losses are more than twice those of Credit Suisse Group AG and Barclays Plc, according to data compiled by Bloomberg. Since the third quarter of 2007 HSBC’s $42.2 billion compares with $20.1 billion at Barclays and $18.9 billion for Credit Suisse.
Loan-loss provisions may not peak at HSBC’s U.S. unit until 2010, Anil Agarwal, a Hong Kong-based analyst at Morgan Stanley, wrote in a July 17 research note. The company injected $1.7 billion of capital into its U.S. bank and about $1 billion of equity into HSBC Finance in the first quarter. HSBC may have to add a further $6 billion of “capital support” in the next two years, Morgan Stanley analysts estimate.
No Bailout
HSBC’s first-half loss would compare with net income of $4.9 billion at JPMorgan Chase & Co., which posted credit loss provisions of $16.6 billion in the period. Bank of America Corp. made $7.5 billion after setting aside $26.8 billion in the period for credit losses.
HSBC has kept its ranking as the world’s third-largest bank by market value after emerging from the global credit freeze much healthier than U.K. competitors Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, which had to be bailed out by the government. HSBC lends 82 pence for every pound it takes in deposits, compared with 150 pence at Edinburgh-based RBS.
Pretax profit at HSBC’s securities unit, led by Stuart Gulliver, may more than double to about $6 billion, Deutsche Bank analyst Michael Chang wrote in a July 23 note to clients. The division had record first-quarter earnings, lifted by foreign exchange and interest-rate trading and bond sales, the bank said in May. The securities unit “could be a source of upside for consensus expectations on results day,” Chang said.
China Listing
HSBC, which gained more than 17 percent of its profit from China last year, may become one of the first foreign companies to be asked to list its shares in China’s A-share market, Goldman Sachs Group Inc. analyst Roy Ramos wrote in a note July 20. The A-share market includes shares of mainland companies listed on the Shanghai or Shenzhen stock exchanges.
“The branding, advertising and positioning advantages of being one of the first foreign-listed banks in China could be significant” and help increase deposits, Ramos said.
The bank’s currency-trading capabilities in Hong Kong and China also make HSBC “better placed than most” to gain from China’s plan to increase international trade using the yuan, rather than the U.S. dollar, Ramos said. New York-based Goldman Sachs advised HSBC on its rights offering.
Outside group to take over management of Brazil's TAM
Published: July 31 2009 03:00 | Last updated: July 31 2009 03:00
The controllers of TAM, Brazil's biggest airline, and BTG, a Brazilian investment company, have signed an agreement under which BTG will take over the management of the airline on the promise of developing the business and delivering greater value to its shareholders.
Other international airlines such as Alitalia and Olympic have entered similar arrangements in the past. But this is believed to be the first time that any big listed Brazilian company has reached a management agreement with an outside group.
BTG was created last year by André Esteves, former head of fixed income at UBS and previously a partner at Pactual, a Brazilian investment bank bought by UBS in 2006 and which BTG bought back from the Swiss bank in April this year.
BTG executives have worked with TAM for several years and were among the team that ran its initial share offering in São Paulo in 2004. A person familiar with the agreement said they could be expected to look for unrealised value in TAM operating units such as its loyalty programme and maintenance division, possibly by spinning them off into separate companies.
TAM is Brazil's biggest airline, with about 49 per cent of the domestic market in March. However, its share of the domestic market fell by 2 percentage points in the year to March and last year it made a loss of R$1.36bn (US$722m) after buying fuel on futures markets.
BTG can be expected to bring financial expertise to avoid such mistakes in the future, although the person said this was not the main motivation for the agreement.
Maria Claudia Amaro, chairman of the board of TAM Airlines, said: "The timing is right for TEP [TAM's controlling shareholder] to improve its financial and execution capabilities, as well as its strategic thinking, in evaluating the ever-changing dynamics of the aviation industry. Our intention is to clearly maintain and further promote the TAM brand and the Amaro family's legacy in the aviation industry. We found through this arrangement with BTG, a way to bring in-house world-class financial sophistication and strategic vision, as well as managerial discipline."
Rolim Amaro, TAM's founder and former chief executive, was killed in a helicopter crash in 2001.
"This is an innovative model of asset management [in Brazil], through which BTG will provide TEP with financial sophistication and management and execution capabilities . . The contract represents a milestone in combining the activities of BTG in non-traditional asset management, private equity and merchant banking businesses," said Carlos Fonseca, a partner at BTG.
The controllers of TAM, Brazil's biggest airline, and BTG, a Brazilian investment company, have signed an agreement under which BTG will take over the management of the airline on the promise of developing the business and delivering greater value to its shareholders.
Other international airlines such as Alitalia and Olympic have entered similar arrangements in the past. But this is believed to be the first time that any big listed Brazilian company has reached a management agreement with an outside group.
BTG was created last year by André Esteves, former head of fixed income at UBS and previously a partner at Pactual, a Brazilian investment bank bought by UBS in 2006 and which BTG bought back from the Swiss bank in April this year.
BTG executives have worked with TAM for several years and were among the team that ran its initial share offering in São Paulo in 2004. A person familiar with the agreement said they could be expected to look for unrealised value in TAM operating units such as its loyalty programme and maintenance division, possibly by spinning them off into separate companies.
TAM is Brazil's biggest airline, with about 49 per cent of the domestic market in March. However, its share of the domestic market fell by 2 percentage points in the year to March and last year it made a loss of R$1.36bn (US$722m) after buying fuel on futures markets.
BTG can be expected to bring financial expertise to avoid such mistakes in the future, although the person said this was not the main motivation for the agreement.
Maria Claudia Amaro, chairman of the board of TAM Airlines, said: "The timing is right for TEP [TAM's controlling shareholder] to improve its financial and execution capabilities, as well as its strategic thinking, in evaluating the ever-changing dynamics of the aviation industry. Our intention is to clearly maintain and further promote the TAM brand and the Amaro family's legacy in the aviation industry. We found through this arrangement with BTG, a way to bring in-house world-class financial sophistication and strategic vision, as well as managerial discipline."
Rolim Amaro, TAM's founder and former chief executive, was killed in a helicopter crash in 2001.
"This is an innovative model of asset management [in Brazil], through which BTG will provide TEP with financial sophistication and management and execution capabilities . . The contract represents a milestone in combining the activities of BTG in non-traditional asset management, private equity and merchant banking businesses," said Carlos Fonseca, a partner at BTG.
Monday, July 27, 2009
Bank of China Aims to Continue Lending Expansion in Second Half
July 28 (Bloomberg) -- Bank of China Ltd., which doled out the most loans among Chinese banks in the first half, plans to keep growing credit unless the government clamps down on lending.
The nation’s third-largest bank will maintain its original target of generating about 10 percent of China’s new loans in 2009, Beijing-based spokesman Wang Zhaowen said by telephone yesterday. Bank of China may “fine tune” its strategy in line with any government policy changes, he said.
Bank of China advanced a record 902 billion yuan (132 billion) of loans in the first half, leading a credit boom that drove stocks and property prices higher and helped spur an economic recovery. Premier Wen Jiabao last week pledged to maintain a “moderately loose” monetary policy, suggesting the government is more concerned with keeping the economy growing than with preventing a rebound in bad debts.
“Banks have every incentive to dole out more loans,” said Yang Qingli, a Beijing-based analyst at BOCOM International Ltd. “When the government is driving in the fast lane, you can’t just stop immediately.”
New loans in the nation may surge to a record 11 trillion yuan this year as the government is still concerned with “a possible second dip in the recovery path,” BNP Paribas SA said last week. China’s economic growth accelerated to 7.9 percent in the second quarter.
“We will continue to expand lending and other business to implement the government’s fiscal and monetary policy and help economic growth,” Bank of China’s Wang said. “The key strategy won’t change.”
The bank, 67.5 percent government-owned, accounted for 12.2 percent of new loans in China in the first half.
Bad Loans Fall
Non-performing loans at China’s 17 biggest lenders, almost all of which are state-controlled, fell by 43 billion yuan from the start of the year to 444 billion yuan as of June 30. Foreign lenders, which hold less than 3 percent of China’s banking assets, reported an 11 percent increase in soured debts in the period, according to the banking regulator.
The China Banking Regulatory Commission has indicated in past weeks it’s concerned about excessive credit creation. Yesterday, the watchdog told banks to ensure loans intended for investment in fixed assets go to projects that support the real economy.
Chinese banks extended a record 7.37 trillion yuan of new loans in the first half, triple the amount offered in the same period a year earlier and 47 percent more than the government’s full-year target, after lending restrictions were eased in November to stem an economic slowdown.
Standard & Poor’s said July 10 that credit risks are “mounting” at domestic banks and asset quality is likely to deteriorate this year and in 2010. The weakening of asset quality remains “manageable,” the ratings company said.
Bank of China will continue to lend to 10 key industries with government policy support, including steel, shipbuilding and automobile, Wang said. About 30 percent of its loans went to those industries in the first half.
For Related News and Information: Top financial stories: FTOP Stories on China Banks: TNI CHINA BNK Comparison with peers: 3988 HK PPC Banking industry debt and equity monitor: BANK
The nation’s third-largest bank will maintain its original target of generating about 10 percent of China’s new loans in 2009, Beijing-based spokesman Wang Zhaowen said by telephone yesterday. Bank of China may “fine tune” its strategy in line with any government policy changes, he said.
Bank of China advanced a record 902 billion yuan (132 billion) of loans in the first half, leading a credit boom that drove stocks and property prices higher and helped spur an economic recovery. Premier Wen Jiabao last week pledged to maintain a “moderately loose” monetary policy, suggesting the government is more concerned with keeping the economy growing than with preventing a rebound in bad debts.
“Banks have every incentive to dole out more loans,” said Yang Qingli, a Beijing-based analyst at BOCOM International Ltd. “When the government is driving in the fast lane, you can’t just stop immediately.”
New loans in the nation may surge to a record 11 trillion yuan this year as the government is still concerned with “a possible second dip in the recovery path,” BNP Paribas SA said last week. China’s economic growth accelerated to 7.9 percent in the second quarter.
“We will continue to expand lending and other business to implement the government’s fiscal and monetary policy and help economic growth,” Bank of China’s Wang said. “The key strategy won’t change.”
The bank, 67.5 percent government-owned, accounted for 12.2 percent of new loans in China in the first half.
Bad Loans Fall
Non-performing loans at China’s 17 biggest lenders, almost all of which are state-controlled, fell by 43 billion yuan from the start of the year to 444 billion yuan as of June 30. Foreign lenders, which hold less than 3 percent of China’s banking assets, reported an 11 percent increase in soured debts in the period, according to the banking regulator.
The China Banking Regulatory Commission has indicated in past weeks it’s concerned about excessive credit creation. Yesterday, the watchdog told banks to ensure loans intended for investment in fixed assets go to projects that support the real economy.
Chinese banks extended a record 7.37 trillion yuan of new loans in the first half, triple the amount offered in the same period a year earlier and 47 percent more than the government’s full-year target, after lending restrictions were eased in November to stem an economic slowdown.
Standard & Poor’s said July 10 that credit risks are “mounting” at domestic banks and asset quality is likely to deteriorate this year and in 2010. The weakening of asset quality remains “manageable,” the ratings company said.
Bank of China will continue to lend to 10 key industries with government policy support, including steel, shipbuilding and automobile, Wang said. About 30 percent of its loans went to those industries in the first half.
For Related News and Information: Top financial stories: FTOP
Asian Bank Shares Rise on Nomura Call; Shipping Stocks Drop
July 28 (Bloomberg) -- Asian bank stocks rose after Sumitomo Mitsui Financial Group Inc. was upgraded by Nomura Holdings Inc. Shippers fell a second day after Japanese shipping lines forecast losses.
Sumitomo Mitsui, Japan’s third-largest lender, gained 2.9 percent as Nomura said the company’s ability to generate profit make it a top pick. James Hardie Industries NV, the biggest seller of home siding in the U.S., climbed 2.6 percent in Sydney after new-home purchases in America surged the most in eight years. Kawasaki Kisen Kaisha Ltd., Japan’s third-biggest shipping line, sank 1.4 percent to a two-week low after saying it will likely lose money this year.
The MSCI Asia Pacific Index rose 0.2 percent to 109.25 as of 9:55 a.m. in Tokyo, set for an 11th consecutive gain. Acceleration in China’s economic growth and better-than-expected U.S. earnings have helped drive an 11 percent climb in the past 11 days. That’s the longest winning streak since January 2004.
Japan’s Nikkei 225 Stock Average lost 0.3 percent to 10,063.08. CSL Ltd. helped lead gains in Australia after saying it will start trials of its swine flu vaccine.
Futures on the Standard & Poor’s 500 Index slipped 0.2 percent today. The gauge climbed 0.3 percent yesterday as a government report showed sales of new homes jumped 11 percent last month from May, the most in eight years and higher than every economist forecast in a Bloomberg survey.
Sumitomo Mitsui, Japan’s No. 3 listed bank, climbed 2.9 percent to 3,950 yen. The company had its investment rating lifted to “buy” from “neutral” at Nomura with a price estimate of 4,500 yen. Improved capital ratios boost the bank’s growth prospects, Nomura analyst Keisuke Moriyama wrote in a Japanese-language report yesterday.
Sumitomo Mitsui, Japan’s third-largest lender, gained 2.9 percent as Nomura said the company’s ability to generate profit make it a top pick. James Hardie Industries NV, the biggest seller of home siding in the U.S., climbed 2.6 percent in Sydney after new-home purchases in America surged the most in eight years. Kawasaki Kisen Kaisha Ltd., Japan’s third-biggest shipping line, sank 1.4 percent to a two-week low after saying it will likely lose money this year.
The MSCI Asia Pacific Index rose 0.2 percent to 109.25 as of 9:55 a.m. in Tokyo, set for an 11th consecutive gain. Acceleration in China’s economic growth and better-than-expected U.S. earnings have helped drive an 11 percent climb in the past 11 days. That’s the longest winning streak since January 2004.
Japan’s Nikkei 225 Stock Average lost 0.3 percent to 10,063.08. CSL Ltd. helped lead gains in Australia after saying it will start trials of its swine flu vaccine.
Futures on the Standard & Poor’s 500 Index slipped 0.2 percent today. The gauge climbed 0.3 percent yesterday as a government report showed sales of new homes jumped 11 percent last month from May, the most in eight years and higher than every economist forecast in a Bloomberg survey.
Sumitomo Mitsui, Japan’s No. 3 listed bank, climbed 2.9 percent to 3,950 yen. The company had its investment rating lifted to “buy” from “neutral” at Nomura with a price estimate of 4,500 yen. Improved capital ratios boost the bank’s growth prospects, Nomura analyst Keisuke Moriyama wrote in a Japanese-language report yesterday.
Ace Sells Equities, Purchases Corporate Debt, U.S. Treasuries
July 28 (Bloomberg) -- Ace Ltd., the Zurich-based insurer and reinsurer with operations in more than 50 countries, said it sold equities in the second quarter as markets rebounded, then purchased corporate debt and U.S. Treasuries.
“With a strong recovery in global equity markets, we also liquidated the majority of our publicly traded equity holdings and invested the proceeds in higher-yielding corporate bonds,” Chief Operating Officer Philip Bancroft said yesterday in a conference call. “The shifts in asset allocation will, with all else being equal, increase book yield and investment income.”
Ace announced yesterday that second-quarter net income declined 28 percent from a year earlier as the value of its investments fell. Insurers have posted more than $200 billion in writedowns and unrealized losses tied to the collapse of the U.S. housing market since the beginning of 2007.
Cash investments were cut by about $1.8 billion in the period, Ace said on the call. The company spent proceeds from equities sales and bought mostly corporate debt, U.S. Treasuries and high-grade mortgages.
Ace, which moved its headquarters to Zurich from Bermuda, has fallen less than 1 percent in New York Stock Exchange composite trading in the past year compared with the 22 percent drop of the 77-company Bloomberg World Insurance Index. The Standard & Poor’s 500 Index has gained 8.7 percent this year while the Dow Jones Industrial Average rose 3.8 percent.
Second-quarter net income dropped to $535 million, or $1.58 a share, from $746 million, or $2.18, Ace said. Profit excluding some investment results was $2.09 a share, beating the $1.96 average estimate of 15 analysts surveyed by Bloomberg.
Plane Crashes
The June 1 Air France crash, which killed 228 people flying to Paris from Rio de Janeiro, contributed to a 37 percent decline in accident and health earnings, Chief Executive Officer Evan Greenberg said in the conference call. Accident and health fell to $87 million from $138 million a year earlier, Ace said.
“We had some one-time good guys last year in the second quarter, and we had some one-time bad guys in the quarter this year that were related to losses,” Greenberg said. “One example is the Air France crash.”
Ace was the lead insurer for the Yemenia Airways Inc. plane that crashed on June 30 with 153 people aboard, according to Insurance Insider. The Yemenia and Air France losses will contribute to what may be the most expensive month for the airline-insurance industry except for September 2001, Aon Corp., the biggest insurance broker, wrote in a July 6 report. Ace spokesman Stephen Wasdick declined to comment on Yemenia.
Corporate Debt
Ace’s net income includes a $171 million loss on the value of holdings including stocks and high-yield corporate debt. That compares with an $8 million investment gain a year earlier. Ace’s book value, a measure of assets minus liabilities, climbed 12 percent from the first quarter to $49.27 as other holdings posted gains that didn’t count toward earnings.
Junk-rated debt returned 23.2 percent in the second quarter, its best ever performance, according to Merrill Lynch & Co.’s High Yield Master II index.
“Our investment portfolio continues to be predominately invested in publicly traded, investment-grade fixed-income securities,” Bancroft said. The average credit rating is AA with more than one half invested in AAA securities, he said.
About 90 percent of the insurer’s $43 billion investment portfolio is in fixed-income holdings including securities backed by residential and commercial mortgages and debt issued by General Electric Co., JPMorgan Chase & Co. and Bank of America Corp.
“With a strong recovery in global equity markets, we also liquidated the majority of our publicly traded equity holdings and invested the proceeds in higher-yielding corporate bonds,” Chief Operating Officer Philip Bancroft said yesterday in a conference call. “The shifts in asset allocation will, with all else being equal, increase book yield and investment income.”
Ace announced yesterday that second-quarter net income declined 28 percent from a year earlier as the value of its investments fell. Insurers have posted more than $200 billion in writedowns and unrealized losses tied to the collapse of the U.S. housing market since the beginning of 2007.
Cash investments were cut by about $1.8 billion in the period, Ace said on the call. The company spent proceeds from equities sales and bought mostly corporate debt, U.S. Treasuries and high-grade mortgages.
Ace, which moved its headquarters to Zurich from Bermuda, has fallen less than 1 percent in New York Stock Exchange composite trading in the past year compared with the 22 percent drop of the 77-company Bloomberg World Insurance Index. The Standard & Poor’s 500 Index has gained 8.7 percent this year while the Dow Jones Industrial Average rose 3.8 percent.
Second-quarter net income dropped to $535 million, or $1.58 a share, from $746 million, or $2.18, Ace said. Profit excluding some investment results was $2.09 a share, beating the $1.96 average estimate of 15 analysts surveyed by Bloomberg.
Plane Crashes
The June 1 Air France crash, which killed 228 people flying to Paris from Rio de Janeiro, contributed to a 37 percent decline in accident and health earnings, Chief Executive Officer Evan Greenberg said in the conference call. Accident and health fell to $87 million from $138 million a year earlier, Ace said.
“We had some one-time good guys last year in the second quarter, and we had some one-time bad guys in the quarter this year that were related to losses,” Greenberg said. “One example is the Air France crash.”
Ace was the lead insurer for the Yemenia Airways Inc. plane that crashed on June 30 with 153 people aboard, according to Insurance Insider. The Yemenia and Air France losses will contribute to what may be the most expensive month for the airline-insurance industry except for September 2001, Aon Corp., the biggest insurance broker, wrote in a July 6 report. Ace spokesman Stephen Wasdick declined to comment on Yemenia.
Corporate Debt
Ace’s net income includes a $171 million loss on the value of holdings including stocks and high-yield corporate debt. That compares with an $8 million investment gain a year earlier. Ace’s book value, a measure of assets minus liabilities, climbed 12 percent from the first quarter to $49.27 as other holdings posted gains that didn’t count toward earnings.
Junk-rated debt returned 23.2 percent in the second quarter, its best ever performance, according to Merrill Lynch & Co.’s High Yield Master II index.
“Our investment portfolio continues to be predominately invested in publicly traded, investment-grade fixed-income securities,” Bancroft said. The average credit rating is AA with more than one half invested in AAA securities, he said.
About 90 percent of the insurer’s $43 billion investment portfolio is in fixed-income holdings including securities backed by residential and commercial mortgages and debt issued by General Electric Co., JPMorgan Chase & Co. and Bank of America Corp.
Sunday, July 26, 2009
As Profit Falls 21%, Verizon Plans to Slash 8,000 Jobs
Published: July 27, 2009
The recession is having two effects on Verizon Communications business. Businesses are cutting back sharply, and laid-off people no longer need corporate cellphones and laptop data cards.
As a result, the company said on Monday, after it reported a 21 percent decline in net income for the second quarter, that it would eliminate 8,000 jobs in the second half of the year.
Consumers, by contrast, keep buying wireless phones and Verizon’s FiOS TV-phone-Internet package, although the company continues to lose a significant share of home phone business to cable operators.
All of Verizon’s job cuts, which will hit employees and contractors, will be made in its landline unit, the part of Verizon’s business that offers traditional communications services over copper or fiber cables to businesses and home users. Verizon lost nearly two million home phone customers in the last year, leaving it with 17.2 million residential voice customers.
Of the company’s 235,000 employees, 148,000 work in the landline unit, with the rest in Verizon Wireless, which is 45 percent owned by Vodafone. The cuts are in addition to 8,000 positions Verizon cut in the last year.
AT&T, the other large phone company, has been affected by many of the same trends, although it has been quicker to cut costs. The company has eliminated 14,000 positions this year.
AT&T’s wireless business has been growing faster than Verizon’s, largely because of AT&T’s exclusive deal to offer Apple’s iPhone. AT&T, which reported second-quarter earnings last week, added 1.4 million wireless customers compared with 1.1 million at Verizon. But that growth came at a price. Because of the heavy subsidy AT&T pays to Apple for each iPhone, its wireless profit margins of 38 percent were far lower than the 46 percent at Verizon.
On the landline side, it is Verizon that has increased its growth through investment, but at a cost of profitability. Verizon has invested more in its FiOS fiber optic system than AT&T has spent on upgrading its network, but has lower margins than AT&T. Verizon’s revenue from residential customers is essentially flat over a year ago, while AT&T’s fell by 6.3 percent. Verizon’s average home customer pays the company $72.59 a month, but the average FiOS home pays more than $135 a month.
Verizon added 300,000 FiOS TV customers in the quarter and 303,000 FiOS Internet customers.
For the second quarter, Verizon reported net income of $1.48 billion, or 52 cents a share, down from $1.88 billion, or 66 cents, a year earlier. Most of that decline was related to costs of its planned sale of some rural phone systems to Frontier Communications. Excluding the one-time charges, Verizon earned 63 cents a share, in line with analysts’ estimates and down 6 percent from a year ago.
Total revenue increased by 11.6 percent, to $26.9 billion, but most of that growth came from its acquisition of Alltel. The company’s core business grew by only 1.9 percent, sharply slower than the 5.3 percent pace of a year ago.
Wireless revenue was $15.5 billion, up 9 percent (excluding the acquisition), driven by increased use of data plans by cellphone customers. The most profitable group of wireless customers are those that pay bills every month directly to Verizon. The company added 1.1 million such customers in the quarter, down from 1.5 million in the second quarter of 2008.
Landline revenue was $11.5 billion, down 5.2 percent. The decline came entirely from business customers. The company has stayed in Wall Street’s good graces, however, by cutting costs fast enough to compensate for the decelerating growth. “Their second-quarter results reveal a tightly run ship,” Craig Moffett, an analyst with Sanford C. Bernstein & Company, wrote in a note to clients.
On a conference call with investors Monday, Dennis F. Strigl, Verizon’s president, told investors that he was not concerned about the impact of Apple’s popular iPhone. He said Verizon had many new handsets coming out, including the Palm Pre, which it will start selling early next year. And it is planning to open its own store for smartphone applications by the end of 2009.
Mr. Strigl said AT&T’s exclusive deal with Apple helped everyone. “It accelerated innovation,” he said. “It is very good for our customers. Everyone is coming out with their own iconic devices.”
The recession is having two effects on Verizon Communications business. Businesses are cutting back sharply, and laid-off people no longer need corporate cellphones and laptop data cards.
As a result, the company said on Monday, after it reported a 21 percent decline in net income for the second quarter, that it would eliminate 8,000 jobs in the second half of the year.
Consumers, by contrast, keep buying wireless phones and Verizon’s FiOS TV-phone-Internet package, although the company continues to lose a significant share of home phone business to cable operators.
All of Verizon’s job cuts, which will hit employees and contractors, will be made in its landline unit, the part of Verizon’s business that offers traditional communications services over copper or fiber cables to businesses and home users. Verizon lost nearly two million home phone customers in the last year, leaving it with 17.2 million residential voice customers.
Of the company’s 235,000 employees, 148,000 work in the landline unit, with the rest in Verizon Wireless, which is 45 percent owned by Vodafone. The cuts are in addition to 8,000 positions Verizon cut in the last year.
AT&T, the other large phone company, has been affected by many of the same trends, although it has been quicker to cut costs. The company has eliminated 14,000 positions this year.
AT&T’s wireless business has been growing faster than Verizon’s, largely because of AT&T’s exclusive deal to offer Apple’s iPhone. AT&T, which reported second-quarter earnings last week, added 1.4 million wireless customers compared with 1.1 million at Verizon. But that growth came at a price. Because of the heavy subsidy AT&T pays to Apple for each iPhone, its wireless profit margins of 38 percent were far lower than the 46 percent at Verizon.
On the landline side, it is Verizon that has increased its growth through investment, but at a cost of profitability. Verizon has invested more in its FiOS fiber optic system than AT&T has spent on upgrading its network, but has lower margins than AT&T. Verizon’s revenue from residential customers is essentially flat over a year ago, while AT&T’s fell by 6.3 percent. Verizon’s average home customer pays the company $72.59 a month, but the average FiOS home pays more than $135 a month.
Verizon added 300,000 FiOS TV customers in the quarter and 303,000 FiOS Internet customers.
For the second quarter, Verizon reported net income of $1.48 billion, or 52 cents a share, down from $1.88 billion, or 66 cents, a year earlier. Most of that decline was related to costs of its planned sale of some rural phone systems to Frontier Communications. Excluding the one-time charges, Verizon earned 63 cents a share, in line with analysts’ estimates and down 6 percent from a year ago.
Total revenue increased by 11.6 percent, to $26.9 billion, but most of that growth came from its acquisition of Alltel. The company’s core business grew by only 1.9 percent, sharply slower than the 5.3 percent pace of a year ago.
Wireless revenue was $15.5 billion, up 9 percent (excluding the acquisition), driven by increased use of data plans by cellphone customers. The most profitable group of wireless customers are those that pay bills every month directly to Verizon. The company added 1.1 million such customers in the quarter, down from 1.5 million in the second quarter of 2008.
Landline revenue was $11.5 billion, down 5.2 percent. The decline came entirely from business customers. The company has stayed in Wall Street’s good graces, however, by cutting costs fast enough to compensate for the decelerating growth. “Their second-quarter results reveal a tightly run ship,” Craig Moffett, an analyst with Sanford C. Bernstein & Company, wrote in a note to clients.
On a conference call with investors Monday, Dennis F. Strigl, Verizon’s president, told investors that he was not concerned about the impact of Apple’s popular iPhone. He said Verizon had many new handsets coming out, including the Palm Pre, which it will start selling early next year. And it is planning to open its own store for smartphone applications by the end of 2009.
Mr. Strigl said AT&T’s exclusive deal with Apple helped everyone. “It accelerated innovation,” he said. “It is very good for our customers. Everyone is coming out with their own iconic devices.”
Asian Stocks Advance for 10th Day, Longest Streak Since 2004
July 27 (Bloomberg) -- Asian stocks rose for a 10th day, driving the MSCI Asia Pacific Index to its longest winning streak since 2004, on confidence earnings will increase at financial and mining companies.
Nomura Holdings Inc., Japan’s largest brokerage, rose 3.7 percent after the Nikkei newspaper said the company will likely post its first quarterly profit since 2007. Rio Tinto Group, the world’s third-largest mining company, added 3.1 percent in Sydney after nickel and aluminum prices advanced. Hitachi Ltd. rallied 6.5 percent after the Nikkei said it will launch takeovers of five listed affiliates.
“I expect people to focus on individual stocks with trading cues,” said Tomochika Kitaoka, a senior strategist at Mizuho Securities Co. in Tokyo. Assuming the Nikkei report on Hitachi is true, “overseas investors will likely see the plan as a chance to make Hitachi’s operations more efficient.”
The MSCI Asia Pacific Index climbed 1 percent to 109.03 as of 10:07 a.m. in Tokyo, a 10th straight gain and the longest winning streak since January 2004. Stocks on the gauge traded at 24 times estimated net income, higher than the 16 times for the U.S. Standard & Poor’s 500 Index.
Equity markets open for trading throughout the region climbed. Japan’s Nikkei 225 Stock Average rose 1 percent to 10,043.06. South Korea’s Kospi Index gained 1.3 percent.
Futures on the S&P 500 were little changed today. The gauge added 0.3 percent on July 24 after Federal Reserve Chairman Ben S. Bernanke said the central bank is “winding down” emergency measures aimed at curbing the financial crisis.
Financial Profits
Japan’s three largest brokerages, Nomura, Daiwa Securities Group Inc. and Nikko Cordial Corp., which is being acquired by Sumitomo Mitsui Financial Group Inc., likely swung to profit last quarter on rising mutual fund sales and underwriting fees, the Nikkei said yesterday. Nomura jumped 3.7 percent to 824 yen. Daiwa rose 3.9 percent to 556 yen.
The nation’s top three banks also likely became profitable last quarter with a combined net income of as much as 200 billion yen ($2.1 billion), the Mainichi newspaper reported on July 25.
Mitsubishi UFJ Financial Group Inc., the country’s biggest publicly traded lender, rose 1.8 percent to 560 yen, while Mizuho Financial Group Inc. gained 1.9 percent to 212 yen. Sumitomo Mitsui added 1.6 percent to 3,830 yen.
Rio Tinto jumped 3.1 percent to A$59.32. Mitsui & Co., which generates more than half its profits from commodities dealing, climbed 2.2 percent to 1,197 yen. Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, gained 2.1 percent to A$4.42.
Oil, Metals
A gauge of six metals in London climbed for a 10th day to a level not seen since Oct. 9. Crude oil rose 1.3 percent to $68.05 a barrel in New York on July 24, the highest settlement since July 1. Oil dipped 0.4 percent today.
Hitachi rallied 6.5 percent to 313 yen after the Nikkei said the electronics giant will make five listed affiliates into wholly owned subsidiaries. Hitachi Maxell Ltd., Hitachi Plant Technologies Ltd., Hitachi Information Systems Ltd., Hitachi Software Engineering Co. and Hitachi Systems & Services Ltd., were all untraded with the shares bid higher by as much as 11 percent.
A separate Nikkei report said yesterday that JTEKT Corp., a Toyota Motor Corp. affiliate, will spend as much as 40 billion yen to acquire the needle bearings business of U.S.-based Timken Co. JTEKT rallied 4.4 percent to 1,038 yen.
Nomura Holdings Inc., Japan’s largest brokerage, rose 3.7 percent after the Nikkei newspaper said the company will likely post its first quarterly profit since 2007. Rio Tinto Group, the world’s third-largest mining company, added 3.1 percent in Sydney after nickel and aluminum prices advanced. Hitachi Ltd. rallied 6.5 percent after the Nikkei said it will launch takeovers of five listed affiliates.
“I expect people to focus on individual stocks with trading cues,” said Tomochika Kitaoka, a senior strategist at Mizuho Securities Co. in Tokyo. Assuming the Nikkei report on Hitachi is true, “overseas investors will likely see the plan as a chance to make Hitachi’s operations more efficient.”
The MSCI Asia Pacific Index climbed 1 percent to 109.03 as of 10:07 a.m. in Tokyo, a 10th straight gain and the longest winning streak since January 2004. Stocks on the gauge traded at 24 times estimated net income, higher than the 16 times for the U.S. Standard & Poor’s 500 Index.
Equity markets open for trading throughout the region climbed. Japan’s Nikkei 225 Stock Average rose 1 percent to 10,043.06. South Korea’s Kospi Index gained 1.3 percent.
Futures on the S&P 500 were little changed today. The gauge added 0.3 percent on July 24 after Federal Reserve Chairman Ben S. Bernanke said the central bank is “winding down” emergency measures aimed at curbing the financial crisis.
Financial Profits
Japan’s three largest brokerages, Nomura, Daiwa Securities Group Inc. and Nikko Cordial Corp., which is being acquired by Sumitomo Mitsui Financial Group Inc., likely swung to profit last quarter on rising mutual fund sales and underwriting fees, the Nikkei said yesterday. Nomura jumped 3.7 percent to 824 yen. Daiwa rose 3.9 percent to 556 yen.
The nation’s top three banks also likely became profitable last quarter with a combined net income of as much as 200 billion yen ($2.1 billion), the Mainichi newspaper reported on July 25.
Mitsubishi UFJ Financial Group Inc., the country’s biggest publicly traded lender, rose 1.8 percent to 560 yen, while Mizuho Financial Group Inc. gained 1.9 percent to 212 yen. Sumitomo Mitsui added 1.6 percent to 3,830 yen.
Rio Tinto jumped 3.1 percent to A$59.32. Mitsui & Co., which generates more than half its profits from commodities dealing, climbed 2.2 percent to 1,197 yen. Fortescue Metals Group Ltd., Australia’s third-largest iron ore producer, gained 2.1 percent to A$4.42.
Oil, Metals
A gauge of six metals in London climbed for a 10th day to a level not seen since Oct. 9. Crude oil rose 1.3 percent to $68.05 a barrel in New York on July 24, the highest settlement since July 1. Oil dipped 0.4 percent today.
Hitachi rallied 6.5 percent to 313 yen after the Nikkei said the electronics giant will make five listed affiliates into wholly owned subsidiaries. Hitachi Maxell Ltd., Hitachi Plant Technologies Ltd., Hitachi Information Systems Ltd., Hitachi Software Engineering Co. and Hitachi Systems & Services Ltd., were all untraded with the shares bid higher by as much as 11 percent.
A separate Nikkei report said yesterday that JTEKT Corp., a Toyota Motor Corp. affiliate, will spend as much as 40 billion yen to acquire the needle bearings business of U.S.-based Timken Co. JTEKT rallied 4.4 percent to 1,038 yen.
Real Yields Highest Since ‘94 Aid Treasury $115 Billion Auction
July 27 (Bloomberg) -- The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. prepares to sell $115 billion of notes this week.
Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.06 percent on July 24, compared with an average of 2.74 percent over the past 20 years.
The gap helps explain why investors are buying bonds after losing 4.8 percent this year, the steepest decline on record, according to Merrill Lynch & Co. indexes that date back to 1978. While Treasury will probably sell an unprecedented $2 trillion of debt this year, Federal Reserve Chairman Ben S. Bernanke said last week that limited inflation pressures will allow policy makers to keep interest rates near zero.
“Concerns surrounding rising Treasury supply to fund the various U.S. stimulus programs are overblown,” strategists led by Brad Henis in New York at Citigroup Inc., one of the Fed’s 17 primary dealers required to bid at the auctions, wrote in a July 23 research report.
The government is selling $6 billion of 20-year Treasury Inflation Protected Securities, $42 billion of 2-year notes, $39 billion due in 5 years, and $28 billion of 7-year notes through July 30. It’s only the second time that three so-called coupon issues and TIPS will be sold in a single week since the regular sales began in 1976. The previous record was $104 billion in 2-, 5-, and 7-year debt the week of June 22.
Bernanke Rally
Bernanke’s testimony on the economy and monetary policy before Congress last week helped ease concern that efforts by the central bank and the administration of President Barack Obama to end the worst recession in half a century will spark faster inflation.
Treasuries rallied as Bernanke’s spoke, with the yield on the benchmark 3.125 percent note due May 2019 declining 12 basis points, or 0.12 percentage point, to 3.48 percent on July 21. Bonds ended the week little changed at 95 19/32 to yield 3.66 percent in New York, according to BGCantor Market Data.
Citigroup recommends buying 10-year notes when yields approach 4 percent and selling them when they move closer to 3.25 percent. Rates on benchmark 10-year notes fell 34 basis points from this year’s high of 4 percent on June 11.
Bernanke “helped to restore confidence in the market about exit strategies,” said Brian Weinstein, who runs the $9 billion TIPS fund in New York at BlackRock Inc., the largest publicly traded U.S. money manager. “The risk of inflation is longer term.”
Most Since 1950
While the economy is showing “tentative signs of stabilization,” the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period,” Bernanke said in semi-annual testimony before the House Financial Services Committee.
Consumer prices have stabilized, after surging in the year earlier period on rising food and energy costs, as demand cooled following the collapse of global credit markets. Crude oil declined 54 percent to $68.05 a barrel on the New York Mercantile Exchange on July 24, from the record high of $147.27 set on July 11, 2008. The 1.4 percent drop in consumer prices last month was the biggest since January 1950.
Ten-year notes handed investors a loss of 1.6 percent last July once consumer prices were taken into account.
Sales Doubled
The U.S. more than doubled bond and note offerings to $963 billion in the first half of 2009 in an effort to end the recession and finance a budget deficit that the Congressional Budget Office projects will reach $1.85 trillion this year. It may sell another $1.1 trillion in the second half, according to London-based Barclays Plc, another primary dealer.
Including bills, the Treasury has raised $1.046 trillion in new cash this year, according to government data.
“There’ve been very valid concerns about whether the market would be able to take down that kind of supply consistently,” said Christopher Sullivan, who oversees $1.5 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the demand seen at many of the auctions, that fear has been a little bit misplaced.”
At the six sales of two-year notes this year, investors offered an average $2.81 of every $1 of debt sold, compared with $2.34 during the same period last year. For five-year notes, the so-called bid-to-cover ratio has risen to $2.22 in six sales, up from $2.07 last year.
New Cash
This week’s auctions will raise a record $96 billion in new cash, up from the previous record of $85 billion during the week of June 22, according to Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance.
Treasuries rallied that week by the most since the period ended March 20, as the yield on the 10-year note tumbled 24.5 basis points to 3.54 percent.
Citigroup expects that demand to continue as sales in other parts of the bond market decline. While the firm forecasts Treasury supply in fiscal 2010 to be $389 billion higher each quarter than the average from 2003 through 2008, it also sees sales from issuers such as government agencies and companies to be $326 billion lower per quarter.
International Demand
Demand from international investors has increased along with the sales. The government relies on foreign buyers to finance the budget deficit and almost 50 percent of the $6.6 trillion in marketable Treasuries are held outside the country, up from 35 percent in 2000, U.S. figures show.
Indirect bidders, a class of investors that includes central banks, purchased 67.2 percent of the record $27 billion in seven-year notes sold on June 25, or double the amount of bids at the last sale in May, according to the Treasury.
The ratio was the highest since 2004 on the sale of $37 billion in five-year notes the day before, while the $40 billion in two-year notes auctioned on June 23 attracted the highest percentage of indirect bids for that maturity in at least six years.
“U.S. short-term to middle-term securities are attractive because the market is pricing in a rate hike,” said Masataka Horii, one of four managers for the $47 billion Kokusai Global Sovereign Open fund in Tokyo. “But I think the U.S. will keep its zero-rate policy.”
International buyers increased their Treasury holdings by 7 percent through May to $3.29 trillion, while China, the biggest lender to the U.S., raised its holdings to $801.5 billion.
Bond Market Positive
Two-year notes are the only U.S. coupon securities to earn money for investors this year because of speculation the Fed won’t raise its target rate for overnight loans between banks from a range of zero to 0.25 percent.
The notes have returned 0.33 percent, including reinvested interest, according to Merrill Lynch indexes. Five-year notes lost 2.86 percent and 10-year securities are down 9.92 percent.
“What Bernanke said is positive for the bond market,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “Demand should be good because bond investors should take away from Bernanke being very specific that the Federal Reserve is committed to keeping short-term interest rates low.”
Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and inflation, for 10-year notes was 5.06 percent on July 24, compared with an average of 2.74 percent over the past 20 years.
The gap helps explain why investors are buying bonds after losing 4.8 percent this year, the steepest decline on record, according to Merrill Lynch & Co. indexes that date back to 1978. While Treasury will probably sell an unprecedented $2 trillion of debt this year, Federal Reserve Chairman Ben S. Bernanke said last week that limited inflation pressures will allow policy makers to keep interest rates near zero.
“Concerns surrounding rising Treasury supply to fund the various U.S. stimulus programs are overblown,” strategists led by Brad Henis in New York at Citigroup Inc., one of the Fed’s 17 primary dealers required to bid at the auctions, wrote in a July 23 research report.
The government is selling $6 billion of 20-year Treasury Inflation Protected Securities, $42 billion of 2-year notes, $39 billion due in 5 years, and $28 billion of 7-year notes through July 30. It’s only the second time that three so-called coupon issues and TIPS will be sold in a single week since the regular sales began in 1976. The previous record was $104 billion in 2-, 5-, and 7-year debt the week of June 22.
Bernanke Rally
Bernanke’s testimony on the economy and monetary policy before Congress last week helped ease concern that efforts by the central bank and the administration of President Barack Obama to end the worst recession in half a century will spark faster inflation.
Treasuries rallied as Bernanke’s spoke, with the yield on the benchmark 3.125 percent note due May 2019 declining 12 basis points, or 0.12 percentage point, to 3.48 percent on July 21. Bonds ended the week little changed at 95 19/32 to yield 3.66 percent in New York, according to BGCantor Market Data.
Citigroup recommends buying 10-year notes when yields approach 4 percent and selling them when they move closer to 3.25 percent. Rates on benchmark 10-year notes fell 34 basis points from this year’s high of 4 percent on June 11.
Bernanke “helped to restore confidence in the market about exit strategies,” said Brian Weinstein, who runs the $9 billion TIPS fund in New York at BlackRock Inc., the largest publicly traded U.S. money manager. “The risk of inflation is longer term.”
Most Since 1950
While the economy is showing “tentative signs of stabilization,” the central bank intends to maintain a “highly accommodative” monetary policy for “an extended period,” Bernanke said in semi-annual testimony before the House Financial Services Committee.
Consumer prices have stabilized, after surging in the year earlier period on rising food and energy costs, as demand cooled following the collapse of global credit markets. Crude oil declined 54 percent to $68.05 a barrel on the New York Mercantile Exchange on July 24, from the record high of $147.27 set on July 11, 2008. The 1.4 percent drop in consumer prices last month was the biggest since January 1950.
Ten-year notes handed investors a loss of 1.6 percent last July once consumer prices were taken into account.
Sales Doubled
The U.S. more than doubled bond and note offerings to $963 billion in the first half of 2009 in an effort to end the recession and finance a budget deficit that the Congressional Budget Office projects will reach $1.85 trillion this year. It may sell another $1.1 trillion in the second half, according to London-based Barclays Plc, another primary dealer.
Including bills, the Treasury has raised $1.046 trillion in new cash this year, according to government data.
“There’ve been very valid concerns about whether the market would be able to take down that kind of supply consistently,” said Christopher Sullivan, who oversees $1.5 billion as chief investment officer at United Nations Federal Credit Union in New York. “Given the demand seen at many of the auctions, that fear has been a little bit misplaced.”
At the six sales of two-year notes this year, investors offered an average $2.81 of every $1 of debt sold, compared with $2.34 during the same period last year. For five-year notes, the so-called bid-to-cover ratio has risen to $2.22 in six sales, up from $2.07 last year.
New Cash
This week’s auctions will raise a record $96 billion in new cash, up from the previous record of $85 billion during the week of June 22, according to Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance.
Treasuries rallied that week by the most since the period ended March 20, as the yield on the 10-year note tumbled 24.5 basis points to 3.54 percent.
Citigroup expects that demand to continue as sales in other parts of the bond market decline. While the firm forecasts Treasury supply in fiscal 2010 to be $389 billion higher each quarter than the average from 2003 through 2008, it also sees sales from issuers such as government agencies and companies to be $326 billion lower per quarter.
International Demand
Demand from international investors has increased along with the sales. The government relies on foreign buyers to finance the budget deficit and almost 50 percent of the $6.6 trillion in marketable Treasuries are held outside the country, up from 35 percent in 2000, U.S. figures show.
Indirect bidders, a class of investors that includes central banks, purchased 67.2 percent of the record $27 billion in seven-year notes sold on June 25, or double the amount of bids at the last sale in May, according to the Treasury.
The ratio was the highest since 2004 on the sale of $37 billion in five-year notes the day before, while the $40 billion in two-year notes auctioned on June 23 attracted the highest percentage of indirect bids for that maturity in at least six years.
“U.S. short-term to middle-term securities are attractive because the market is pricing in a rate hike,” said Masataka Horii, one of four managers for the $47 billion Kokusai Global Sovereign Open fund in Tokyo. “But I think the U.S. will keep its zero-rate policy.”
International buyers increased their Treasury holdings by 7 percent through May to $3.29 trillion, while China, the biggest lender to the U.S., raised its holdings to $801.5 billion.
Bond Market Positive
Two-year notes are the only U.S. coupon securities to earn money for investors this year because of speculation the Fed won’t raise its target rate for overnight loans between banks from a range of zero to 0.25 percent.
The notes have returned 0.33 percent, including reinvested interest, according to Merrill Lynch indexes. Five-year notes lost 2.86 percent and 10-year securities are down 9.92 percent.
“What Bernanke said is positive for the bond market,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “Demand should be good because bond investors should take away from Bernanke being very specific that the Federal Reserve is committed to keeping short-term interest rates low.”
Bernanke Defends Fed’s Response to Financial Crisis
July 26 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke defended the central bank’s response to the financial crisis and recession in a forum to be televised this week, saying he sought to avoid a “second Great Depression.”
“The problem we have is that in a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,” Bernanke said today at a town- hall-style meeting in Kansas City, Missouri, taped for broadcast on PBS television. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”
Bernanke’s appearance indicates he’s stepping up public- relations efforts while confronting criticism from lawmakers over government aid to big financial firms. His first term at the Fed’s helm ends Jan. 31, and President Barack Obama needs to decide whether to reappoint him for another four years.
“People still have big questions, which are, how did we get in this mess, how do we get out of this mess, how are we going to make sure this mess never happens again?” said Gregory Hess, an economics professor at Claremont McKenna College in California and a member of the Shadow Open Market Committee, a group of economists that critiques the Fed.
Participating in today’s meeting is an “enormously smart decision” for Bernanke, 55, Hess said before the event. “It’s a time where he can really leverage his ability to communicate.”
‘Understand’ Frustration
The Fed rescued Bear Stearns Cos. and American International Group Inc. last year while backing creation of the $700 billion Troubled Asset Relief Program. Bernanke, responding to a small-business owner “frustrated” over billions of dollars in aid provided to large financial firms, said, “I understand your frustration.”
“We’re working really hard to try to make it better,” Bernanke said, referring to Fed efforts to improve credit for small businesses.
The questioner, David Huston, said in an interview after the forum that he hasn’t yet seen positive results. “They can say they’re putting money into the banks to help distribute loans, but I don’t see it,” said Huston, 56, president of Olson Manufacturing and Distribution Inc. in Shawnee, Kansas.
‘Don’t Overstimulate’
At the one-hour event moderated by Jim Lehrer, a PBS news anchor, Bernanke said he expects the U.S. economy to grow at an annual rate of 1 percent in the second half of 2009, while unemployment will exceed 10 percent before beginning to decline. At the same time, “we want to make sure that we don’t overstimulate the economy” and spur inflation, Bernanke said.
For the next couple of years, “inflation will be quite low,” Bernanke said. Asked about the dollar, he said that “the best way to have a strong dollar is to have a strong economy.”
“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again,” Bernanke said.
Lehrer questioned the Fed chief about criticism from Anna Schwartz, the 93-year-old monetary scholar who wrote a New York Times opinion column today arguing against his reappointment. In a companion piece, Nouriel Roubini, the New York University professor who predicted the credit crisis, said Bernanke deserves another term for averting a “near depression.”
Response to Schwartz
“What Ms. Schwartz wanted us to do was to state in advance what our strategy was for saving firms,” Bernanke said. “We had no idea which firm was going to fail and we didn’t have a system, we didn’t have a structure.”
The Fed is “putting the pedal to the metal” with its policy actions, and it’s too early to judge the impact of the $787 billion fiscal stimulus law, he said.
Voter concern that the Fed overstepped its authority prompted a majority of House lawmakers to co-sponsor a measure allowing for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced by Representative Ron Paul of Texas, a Republican.
Asked today about the audit bill, Bernanke said it could result in lawmakers issuing subpoenas over potential decisions to raise interest rates. “I don’t think the American people want Congress running monetary policy,” he said.
The central bank chairman said independence from political interference in setting interest rates produces “much better results” for the economy. “We are very, very sensitive to this issue,” Bernanke said at the forum.
Television Interview
The Fed chief appeared on the CBS program “60 Minutes” in March, his first televised interview since becoming Fed chairman in 2006.
Before that, a Fed chairman last gave a broadcast interview in 1987, when Bernanke’s predecessor, Alan Greenspan, appeared on ABC’s “This Week with David Brinkley.”
Greenspan later said he regretted the interview because he “made some inadvertent news.” Stocks slipped after Greenspan suggested on the program that inflation could become a problem.
Bernanke’s comments are scheduled to air in three segments this week as part of “The NewsHour with Jim Lehrer” on U.S. stations affiliated with PBS, the Public Broadcasting Service.
“The problem we have is that in a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,” Bernanke said today at a town- hall-style meeting in Kansas City, Missouri, taped for broadcast on PBS television. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”
Bernanke’s appearance indicates he’s stepping up public- relations efforts while confronting criticism from lawmakers over government aid to big financial firms. His first term at the Fed’s helm ends Jan. 31, and President Barack Obama needs to decide whether to reappoint him for another four years.
“People still have big questions, which are, how did we get in this mess, how do we get out of this mess, how are we going to make sure this mess never happens again?” said Gregory Hess, an economics professor at Claremont McKenna College in California and a member of the Shadow Open Market Committee, a group of economists that critiques the Fed.
Participating in today’s meeting is an “enormously smart decision” for Bernanke, 55, Hess said before the event. “It’s a time where he can really leverage his ability to communicate.”
‘Understand’ Frustration
The Fed rescued Bear Stearns Cos. and American International Group Inc. last year while backing creation of the $700 billion Troubled Asset Relief Program. Bernanke, responding to a small-business owner “frustrated” over billions of dollars in aid provided to large financial firms, said, “I understand your frustration.”
“We’re working really hard to try to make it better,” Bernanke said, referring to Fed efforts to improve credit for small businesses.
The questioner, David Huston, said in an interview after the forum that he hasn’t yet seen positive results. “They can say they’re putting money into the banks to help distribute loans, but I don’t see it,” said Huston, 56, president of Olson Manufacturing and Distribution Inc. in Shawnee, Kansas.
‘Don’t Overstimulate’
At the one-hour event moderated by Jim Lehrer, a PBS news anchor, Bernanke said he expects the U.S. economy to grow at an annual rate of 1 percent in the second half of 2009, while unemployment will exceed 10 percent before beginning to decline. At the same time, “we want to make sure that we don’t overstimulate the economy” and spur inflation, Bernanke said.
For the next couple of years, “inflation will be quite low,” Bernanke said. Asked about the dollar, he said that “the best way to have a strong dollar is to have a strong economy.”
“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again,” Bernanke said.
Lehrer questioned the Fed chief about criticism from Anna Schwartz, the 93-year-old monetary scholar who wrote a New York Times opinion column today arguing against his reappointment. In a companion piece, Nouriel Roubini, the New York University professor who predicted the credit crisis, said Bernanke deserves another term for averting a “near depression.”
Response to Schwartz
“What Ms. Schwartz wanted us to do was to state in advance what our strategy was for saving firms,” Bernanke said. “We had no idea which firm was going to fail and we didn’t have a system, we didn’t have a structure.”
The Fed is “putting the pedal to the metal” with its policy actions, and it’s too early to judge the impact of the $787 billion fiscal stimulus law, he said.
Voter concern that the Fed overstepped its authority prompted a majority of House lawmakers to co-sponsor a measure allowing for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced by Representative Ron Paul of Texas, a Republican.
Asked today about the audit bill, Bernanke said it could result in lawmakers issuing subpoenas over potential decisions to raise interest rates. “I don’t think the American people want Congress running monetary policy,” he said.
The central bank chairman said independence from political interference in setting interest rates produces “much better results” for the economy. “We are very, very sensitive to this issue,” Bernanke said at the forum.
Television Interview
The Fed chief appeared on the CBS program “60 Minutes” in March, his first televised interview since becoming Fed chairman in 2006.
Before that, a Fed chairman last gave a broadcast interview in 1987, when Bernanke’s predecessor, Alan Greenspan, appeared on ABC’s “This Week with David Brinkley.”
Greenspan later said he regretted the interview because he “made some inadvertent news.” Stocks slipped after Greenspan suggested on the program that inflation could become a problem.
Bernanke’s comments are scheduled to air in three segments this week as part of “The NewsHour with Jim Lehrer” on U.S. stations affiliated with PBS, the Public Broadcasting Service.
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