Weekend Headlines
- Lawmakers seeking a compromise on President Barack Obama’s health-care initiative asked Senate leaders to “take additional time” to reach an accord on the legislation. In a letter sent yesterday to Senate Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, six senators who have cast deciding votes in previous legislative battles said the impact of the legislation will “last for generations,” and it is “imperative to proceed thoughtfully and responsibly.” Obama, in remarks at the White House yesterday, urged lawmakers to press ahead and held to his timetable for action in the House and Senate before Congress recesses in August. Senator Ben Nelson, a Nebraska Democrat who was among those signing the letter to Reid and McConnell, said in an interview yesterday that he fears health-care legislation will fail to win bipartisan support if more time isn’t taken to address cost-saving measures. Congressional Budget Office Director Doug Elmendorf has said the current House and Senate bills wouldn’t rein in health-care spending. A health-care proposal in the House could add $239 billion to the U.S. budget deficit over the next 10 years, the budget office said in an analysis yesterday. The plan to extend coverage to 37 million Americans could cost $1 trillion, and leave a budget gap not met by tax increases and spending cuts, the agency said. Any increase in budget deficit would break Obama’s pledge not to add to the budget deficit. “There’s common ground in making sure that we don’t rush to something that just simply can’t get bipartisan support,” said Nelson. He advised Obama to forget about an August deadline for passing bills in the Senate and House and drop the bid for a government-run insurance option, a hallmark of the president’s proposal. The letter underscored the peril Obama faces on the health care issue. If he sacrifices the so-called public option insurance program, he risks a backlash from progressives in the Democratic Party such as Howard Dean, the former Vermont governor and one-time Democratic National Committee chairman who recently threatened to challenge the re- election of Democrats who don’t support that proposal. And if Obama allows the August deadline he imposed to slip, he may risk greater odds the entire initiative will implode as critics are given more time to argue against it. It is crucial for the legislation to be bipartisan, said Senator Kent Conrad, a North Dakota Democrat who sits on the Finance Committee. “For it to be sustainable in the long term, there’s got to be some measure of Republican support for this,” he said. Republican Senators Bob Corker of Tennessee, Collins of Maine, Saxby Chambliss of Georgia and Lisa Murkowski of Alaska met at the White House with Obama earlier this week. Corker said he wasn’t optimistic about the prospects of bipartisan support for a health-care bill. “He agrees that in order for us to achieve savings, we’ve got to work through some delivery-process issues that will stand the test of time,” Corker said of Obama. “On the other hand, he’d rather pass something now than take the time to do that,” said Corker. “He feels some incredible sense of urgency as it relates to his political capital to do something right now even if mistakes are made.” Nelson said he cautioned the president that a vote on the bill in August would probably be a mistake without more painstaking work to carve out cost savings. “I don’t think the president’s anxious to accept that,” he said. The Senate also needs more time to consider options other than a government-run insurer to compete with private companies, which would never win a filibuster-proof 60 votes, said Nelson. “It’s not going to happen,” he said. In addition to the senators balking at quick action, leaders in Congress face a rebellion among a growing number of House Democrats. Twenty-one freshmen House Democrats said in a letter to Speaker Nancy Pelosi they were “extremely concerned” that the proposed surtax on high-income Americans would hurt small businesses, particularly sole proprietors. Michigan Democrat Bart Stupak also said yesterday that he and eight other Democrats on the House Energy and Commerce Committee have the votes to block the legislation if it isn’t changed. The measure “would perpetuate a broken system,” and without changes “our only option is to vote no,” he said.
- Britain’s Unpaid Bills. With its debts soaring and its politics in chaos, the U.K. faces spending cuts, higher taxes and a potential currency collapse.
- Nissan Motor Co., Japan ’s third-largest carmaker, plans to export 60% of its domestic production of electric cars to the US The company will probably export almost 30,000 of the 50,000 electric vehicles it plans to make at the Oppama factory near Yokohama
- China’s arrest of Rio Tinto Group’s Stern Hu is related to a criminal probe into iron-ore price talks, not espionage, and the case may result in a decision to charge the mining executive, Australia’s foreign minister said. Stephen Smith, who met with Vice Foreign Minister He Yafei on July 17, again urged China to provide more information about the arrest of the Australian citizen, the minister told the Australian Broadcasting Corp. today. “If they do charge him, the precise details will be there for all to see,” Smith said.
- Crude oil stalled near a two-week high on speculation further gains may be limited as U.S. fuel stockpiles increase faster than the nation’s economic recovery. Rising equity markets and a rebound in U.S. housing starts helped push New York oil prices 6.1 percent higher last week, even as gasoline inventories climbed for a fifth week and distillate supplies reached a 24-year high. “It’s still very hard to put together a strong argument for further upside,” said Toby Hassall, research analyst at Commodity Warrants Australia Pty in Sydney. “Oil stockpiles have declined, but if you look at the products, it just doesn’t paint a very strong picture of demand.” U.S. gasoline demand usually peaks June through August with the nation’s summer holiday travel. Demand fell 0.7 percent in the week ended July 10, the Energy Department said last week.
- Morgan Stanley(MS), the world’s third- biggest stock underwriter, won a lead role from the Federal Reserve Bank of New York in arranging initial public offerings of American International Group Inc. units. Morgan Stanley, which is advising the New York Fed on its bailout of AIG, will reap fees from the IPO’s and from sales of other units to buyers, according to documents the agency posted on its Web site yesterday. The bank gets an initial $4 million payment and $2.5 million a quarter for its advisory role.
- Suicide attacks on the “difficult targets” of the Ritz Carlton and JW Marriott hotels in Jakarta show a revival of jihadi terrorism in Indonesia after almost four years, security analysts said. Bombings in the two hotels yesterday killed eight people and injured at least 53. One of the bombers attacked a meeting of chief executive officers organized by CastleAsia, a business advisory firm, in the Marriott, killing the New Zealand-born president of cement-maker PT Holcim Indonesia. The attacks shattered four years of peace in the world’s largest Muslim-majority democracy, where President Susilo Bambang Yudhoyono won a second five-year term after improving security and pledging to boost growth.
- The British economy will shrink 4.4 percent in 2009 before recovering in 2010, Ernst & Young’s Item Club will say tomorrow. The forecast by the research group, which uses the same economic model as the U.K. Treasury, is worse than the 3.5 percent contraction predicted in April. Tomorrow it will also revise up the prediction for 2010 to show the economy expanding 0.5 percent instead of shrinking 0.1 percent.
- Treasury Secretary Timothy Geithner should press banks for more information on how they use the more than $200 billion the government has pumped into U.S. financial institutions, according to a new oversight report. Existing Treasury surveys of TARP banks’ lending don’t show enough about what the banks are up to, said the report by the independent inspector general, which is scheduled for public release tomorrow.
- India won’t bend to demands from the Obama administration or threats from the U.S. Congress to adopt legally binding caps on its carbon emissions, the country’s environment minister told visiting U.S. Secretary of State Hillary Clinton yesterday. “There is simply no case for the pressure” the U.S. is exerting, considering India produces among the lowest per capita emissions in the world, Minister Jairam Ramesh told Clinton during an unexpected discussion of climate negotiations during an event intended to showcase U.S.-Indian cooperation on clean energy at a “green” office building outside New Delhi. “As if this pressure was not enough, we also face the threat of carbon tariffs on our exports to countries such as yours,” Ramesh said, referring to a climate-change bill passed by the U.S. House of Representatives on June 26 that imposes tariffs on exports from countries that refuse to adopt greenhouse gas controls by 2020. Clinton said she understood “completely” India’s argument about the developing world’s low per capita emissions. “But what is happening now,” she said, is that absolute emissions from fast-growing developing economies, especially China, are “going up, and dramatically.” “There is no question that developed countries like mine must lead on this issue and for our part, under President Obama, we are not only acknowledging our contributions to greenhouse gas emissions and climate change, we are taking steps to reverse its ill effects,” Clinton said. “It is essential for major developing countries like India to also lead because over 80 percent of the growth in future emissions will be from developing countries.” “Legally binding” emissions targets won’t be acceptable for India, Ramesh added. “It’s going to be impossible to sell in our democratic system.” In December, negotiators from more than 180 nations will meet in Copenhagen to broker a new treaty to fight global warming by limiting the release of gases from burning fossil fuels and clearing forests.
- Governments worldwide are battling the H1N1 virus, which has taken root across the globe faster than any previous flu pandemic, according to the World Health Organization. The illness is sweeping the southern hemisphere during its usual flu season as tens of thousands of patients test positive in Australia, Argentina, Chile and other nations.
- The largest exchange-traded fund for natural gas, so popular that it ran out of shares two weeks ago, has lost 43 percent this year and probably will keep falling until winter, trailing the fuel it’s supposed to track. The United States Natural Gas Fund will suffer from record- high gas inventories and seasonal prices hitting the ETF harder than the fuel, said Teri Viswanath, the director of commodities research at Credit Suisse Securities USA in Houston. Investors piled into the fund this year, driving up its number of outstanding shares 11-fold. “The amount of interest in this fund is a surprise given the trend in gas is down and not looking to change any time soon,” said Tom Orr, the director of research for Weeden & Co. LP, a Greenwich, Connecticut, securities brokerage, in a telephone interview.
Wall Street Journal:
- Demand for the Federal Reserve's emergency short-term lending programs is abating, the latest sign that credit markets are healing. Borrowing through a program the Fed launched to support the market for commercial paper, short-term corporate IOUs, is at less than one-third its peak level. Securities dealers and investment banks haven't used a Fed borrowing program, launched amid Bear Stearns woes in March 2008, for 10 weeks. Overseas central banks borrowing of dollars from the Fed is running less than a fifth of its $583 billion peak. Meanwhile, a Fed facility that allows securities firms to trade hard-to-sell collateral for Treasury debt showed just $4 billion in volume recently, down from more than $235 billion in October. And the program through which the Fed auctions to banks is down almost 45% from March.
- A group of Democrats elected in recent years from some of the country's richest congressional districts have emerged as a stumbling block to raising taxes on the wealthy to pay for President Barack Obama's ambitious health-care overhaul just as the plan has begun to meet increasing resistance over its cost. Friday, two freshmen representatives -- Dina Titus, from suburban Las Vegas, and Colorado's Jared Polis, representing Boulder, Vail and some of the tonier suburbs of Denver -- joined Republicans to vote against Mr. Obama's top-priority health-care overhaul when it faced a vote in their House Education and Labor Committee. One reason was a one-percentage point-surtax on couples earning between $350,000 and $500,000 -- gradually increasing to 5.4 percentage points on earnings more than $1 million -- to pay for it. "There could come a time," said Rep. Michael McMahon, a freshman Democrat from New York City's borough of Staten Island, when Democrats are in open rebellion. "We will certainly see in the next few weeks where we are going." All together, Democratic plans could push the top tax rate to 47%, the highest level since the tax code was rewritten in 1986. Democrats who served in Congress in 1994 will attest, the game changes when abstractions on taxing the rich turn to reality. President Bill Clinton's 1993 deficit-reduction plan largely focused tax increases on the rich, but the collateral damage on Democrats was broad. And nobody wants to be the next Marjorie Margolies-Mezvinsky, the suburban Philadelphia House freshman who cast the deciding vote on the Clinton budget, only to be swept from office the next year. Boulder's Mr. Polis authored a letter on Friday, signed by 21 freshmen and one sophomore, Rep. Paul Hodes of New Hampshire, opposing the surtaxes. "Especially in a recession, we need to make sure not to kill the goose that will lay the golden eggs of our recovery," they declared.
- Bond giant Pacific Investment Management Co. will be paid at least $3 million every three months to manage a U.S. Federal Reserve program aimed at supporting short-term corporate borrowing markets. On Friday, the Federal Reserve Bank of New York released on its Web site documents detailing arrangements around its various emergency lending programs. In one, the bank said it will pay Newport Beach, Calif.-based Pimco a $3 million fixed fee per quarter "to compensate for overhead and dedicated personnel" related to Pimco's management of the commercial-paper funding facility program. Pimco also will get an asset-management fee of 0.0025 percentage point per quarter on the average of the month-end assets in the program. As of July 15, the facility's net portfolio holdings were $112 billion. The New York Fed recently reported that money manager BlackRock Inc. would minimally be paid $43 million to manage Fed vehicles that hold the assets of Bear Stearns and American International Group Inc. The Fed has faced various levels of controversy about how it has selected investment managers for its various programs.
- The Obama administration is considering overhauling the way terror suspects are interrogated by creating a small team of professionals drawn from across the government, according to people familiar with a proposal that will be submitted to the White House. The new unit, comprising members of spy services and law-enforcement agencies, would be used for so-called high-value detainees, they said. In a switch from Bush-era efforts, it wouldn't be run by the Central Intelligence Agency, though who might be in charge isn't specified. One of the team's tasks would likely be to devise a new set of interrogation methods, according to one person familiar with the proposal. Those techniques could be drawn from sources ranging from scientific studies to the psychology behind television ads.
- New problems are flaring up in Citigroup Inc.'s(C) private-investments division, this time involving two funds overseen by an executive who left this year to join the Obama administration. Clients of a private-equity fund that amassed $3.4 billion to invest in airports, roads and other infrastructure projects last month voted to bar it from making new investments after its co-head quit and several high-profile deals collapsed, according to people familiar with the matter. A second, smaller fund geared toward sustainable development projects failed to attract clients and was shelved late last year. The funds were the progeny of Michael Froman, former operations chief of Citigroup Alternative Investments, who left in January to become a senior White House aide focused jointly on national security and international economic affairs.
- Obama administration officials said they will miss a deadline to make recommendations on detainee policy -- a key part of the plan to close the prison at Guantanamo Bay, Cuba, by January -- and are expected to seek an extension. A White House official downplayed the missed deadline and said the January closure is still on track.
- This year's FN100, Financial News's annual list of the 100 most influential people in European capital markets, has the highest rate of churn in its five-year history. After a year of unprecedented turmoil, only a quarter of last year's entrants have kept their places.
MarketWatch.com:
- The world's biggest miners and steelmakers are on the brink of forging a new system for setting iron-ore prices that is expected to increase the volatility of steel prices but perhaps make the process more transparent, according to a published report Monday. The new system would set iron-ore contract prices on a quarterly basis -- rather than annually as it is now, the Wall Street Journal reported on its Web site. Quarterly fixing of iron ore, which is the key input for steel, is likely to mean global steel prices will be more volatile.
- China has been very late to 3G and late to the iPhone, but this is set to change as Apple readies to release a special edition in China. New reports say the iPhone will be launched with an exclusive arrangement with mobile operator China Unicom Ltd. as early as October.
CNBC.com: China's top banking regulator on Sunday warned of the risks from surging bank lending, singling out the dangers of unhealthy growth in the property market.
NY Times:
- Jamie Dimon, the head of JPMorgan Chase(JPM), will hold a meeting of his board here in the nation’s capital for the first time on Monday, with a special guest expected: the White House chief of staff, Rahm Emanuel. Mr. Emanuel’s appearance would underscore the pull of Mr. Dimon, who amid the disgrace of his industry has emerged as President Obama’s favorite banker, and in turn, the envy of his Wall Street rivals. It also reflects a good return on what Mr. Dimon has labeled his company’s “seventh line of business” — government relations. Mr. Obama’s election brought to power Chicago Democrats well-known to Mr. Dimon from his recent years running a bank there. One of them is Mr. Emanuel, who has accepted the invitation to speak to the board pending a review by the White House counsel. The Treasury secretary, Timothy F. Geithner, declined out of concern that he would be seen as too cozy with a company that has numerous business issues before the department, an administration official said. “It’s a very nice thing for the board to have happen,” said the chief of a major financial company. “But you’d have to have a lot of influence to pull it off.” With the crisis, Mr. Dimon, a longtime Democratic donor, has become even more politically engaged, in the process becoming perhaps the most credible voice of a discredited industry. JPMorgan gave back its bailout money quickly, though like all the country’s big banks it still benefits from government loan guarantees and lending facilities. Mr. Dimon, JPMorgan’s chairman and chief executive, comes to Washington about twice a month, compared with maybe twice a year in the past. He requires senior managers to commute as well. In recent months, he has met with officials including Mr. Geithner; the White House economic adviser, Lawrence H. Summers; and lawmakers of both parties. He phones or e-mails Mr. Emanuel at whim. Each week, his staff gives him the names of a half-dozen public officials to call. Mr. Obama has singled out Mr. Dimon for praise more than once. Yet some Democrats say Mr. Dimon can be too outspoken, and deaf to the anti-bank sentiment of the country. A centerpiece of that effort involves regulating the market for derivatives, which Mr. Dimon’s firm dominates. While JPMorgan favors new reporting requirements for the complex financial instruments, it opposes the administration proposal to force trades onto public exchanges; doing so would likely cut into the firm’s lucrative business of selling clients custom-made instruments. Meanwhile, the company’s reputation could be tarnished by investigations into the crisis. Among them, JPMorgan is under scrutiny from the Justice Department and the Securities and Exchange Commission for possible antitrust and securities law violations, including derivatives deals with local governments. Mr. Dimon and Mr. Geithner know each other well from the Federal Reserve Bank of New York, where Mr. Geithner was president and, as such, a JPMorgan regulator. Mr. Dimon sits on the New York Fed’s board. The two men spent untold hours negotiating in 2008 when the government enlisted JPMorgan to buy some of Bear Stearns’s assets and Washington Mutual to prevent their collapse. Mr. Dimon said the two had spoken by phone perhaps 10 times this year. Mr. Emanuel was a senior adviser to President Bill Clinton when he met Mr. Dimon, and briefly entertained a job overture from him at Citigroup. Another Obama associate is on JPMorgan’s payroll. Mr. Dimon hired William M. Daley, a former commerce secretary and Chicago powerbroker, in 2004 as vice chairman and head of Midwest operations. Since 2007, Mr. Daley has overseen global government relations. It was at that time that Mr. Dimon assessed his own performance for his board and gave himself a “D” for effort in Washington. He subsequently revamped the firm’s government affairs office, mindful of Democrats’ ascendance: They had won control of Congress and were favored to seize the White House in 2008.
- Picking Winner in the Next Bull Market. History shows that asset classes that perform best in one bull market — as emerging-market stocks did in the run-up from 2003 to 2007 — rarely repeat that feat in the next. Market watchers say it’s dangerous to base an investment strategy for an extended bull run on early-stage results. In fact, stocks’ behavior in the first two to five months after a bear market can be quite deceiving. Already, market strategists are becoming concerned that the emerging-market rally that began in March has gotten ahead of the fundamentals. The MSCI Emerging Markets index, for example, trades at a price-to-earnings ratio of 16.1, which is 25 percent higher than its average P/E over the last five years. But on the other hand, Mr. Fowler said, if you believe that even after a recovery “the economy will be weak over a sustained period of time and is not going to be driven by American consumption, then I think that leads you to a different group of companies — good growth companies with solid balance sheets.” And that search would lead investors to two asset classes that led the bull market of the late 1990s: large blue-chip growth stocks, which Mr. Fowler says are at reasonably attractive prices, and tech shares, which stand to benefit whether a global recovery is weak or strong. Mr. Fowler points out that “after the last downturn, technology companies got religion and repaired their balance sheets.” In fact, tech companies in the S.& P. 500 now hold more cash relative to their overall assets than any sector in the market.
- Brian Pollett, a music-loving college student here, headed into a local Best Buy(BBY) store last month to pick up some Bose headphones. Why Best Buy? Because he didn’t want to shop online and wait for delivery — and Best Buy’s retail competitors are all out of business.
- The CIT Group(CIT), one of the nation’s leading lenders to small and midsize businesses across the country, was close to a deal Sunday afternoon with some of its major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.
- Some of the very people who made a killing in subprime mortgages are now offering loan modifications for desperate homeowners, sometimes with unsavory tactics.
- Not content with being a sports colossus with broadcasts in 200 countries, ESPN is taking aim at hometown sports coverage, threatening one of the last strongholds of local newspapers and television stations.
Business Week:
Google's(GOOG) push into the Web phone-calling market is likely to cut into sales by Internet phone companies such as eBay's (EBAY) Skype unit, and could put pressure on Microsoft and Cisco, which sell online calling software to businesses.
Seeking Alpha:
- With equity markets well above their March lows, and decent earnings reports announced by Goldman Sachs (GS) and JP Morgan (JPM) last week, is the worst over for the financials sector? And how do the main European ETF issuers rank by credit spreads? The chart shows the Counterparty Risk Index, as calculated by analysts at Credit Derivatives Research LLC. The index is a simple average of the five-year credit default swap spreads of the 14 banks in which financial sector counterparty risk is overwhelmingly concentrated.
Politico:
- Democratic National Committee's Organizing for America Arm -- criticized by Harry Reid yesterday for an ad pressuring Senate Democrats on health care -- has launched a similar effort in the House. A version of the same ad, in which citizens recount their families' health care woes and declare that "it's time" for reform, will be running in 15 media markets around the country. The ad doesn't say this, but a look at the media markets indicates that the White House political operation hasn't backed off targeting Democrats -- and indeed, has stepped up that program. The ad will appear in 15 markets, all of them within districts of members of the House Energy and Commerce Committee, the key body for a health care bill. All 15 are occupied by members seen as swing voters inside the committee, and 12 of those 15 members are Democrats.
- The rest of the country has a new reason to hate the inside-the-Beltway crowd: Our economy is better than yours. At 6.2 percent, the unemployment rate in the D.C. metro region is lower than in any other major metropolitan area in the country — and far below the 9.5 percent national average. Members of Congress from harder-hit areas can’t help but notice the divide between the relative health of their part-time city and the pain back home. And it particularly rankles conservatives who’ve argued for a smaller federal government but now see it making up one-third of the region’s economy. “What frustrates me so much is you look at Washington and you realize how out of touch we are. This is one of the only cities that’s growing. And how is it growing? Because we’re filling it with federal bureaucrats,” Rep. Christopher Lee (R-N.Y.) complained during a Republican press conference Thursday. “And we can’t afford to pay. We have a $1.8 trillion deficit.”
Rasmussen Reports:
- Sixty-one percent (61%) of voters nationwide say that cost is the biggest health care problem facing the nation today. The latest Rasmussen Reports national telephone survey finds that just 21% believe the lack of universal health insurance coverage is a bigger problem. Only 10% believe the quality of care is the top concern, and two percent (2%) point to the inconvenience factor of dealing with the current medical system. Given a choice between health care reform and a tax hike or no health care reform and no tax hike, 47% would prefer to avoid the tax hike and do without reform. Forty-one percent (41%) take the opposite view.
Energy Information Administration:
- The increasing use of ethanol and increasing light-duty vehicle efficiencies are expected to dampen future refined product demand growth, so the perceived need for future refining capacity growth has been declining. In addition, the recent economic downturn caused petroleum demand to fall in the second half of 2008, resulting in 2008 refinery utilization of only about 85%. Capacity expansions during 2008 were relatively low as well.
Reuters:
- Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon. The planned IPOs, which include units of firms like Apollo Management APOLO.UL and Alliance Bernstein Holding LP, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.
- Porsche SE's controlling families will agree on Thursday to accept an offer by Volkswagen to buy its sports car business Porsche AG for roughly 8 billion euros ($11.28 billion), Der Spiegel reported on Saturday.
Financial Times:
- A reader of this blog drew my attention to the informative Fed publication, the Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet. The most recent installment is that for July 2009. This provides a wealth of information (not enough, of course, but more than is provided by most other central banks) relating to the quality of the assets contained in the special purpose vehicles the central bank has created to house the often distressed assets it has acquired from or funded on behalf of a number of always distressed private counterparties. I will focus here on the three Maiden Lane vehicles created by the Fed to park some of the wonky assets it acquired from Bear Stearns (Maiden Lane (which I shall refer to as Maiden Lane I)) and from AIG (Maiden Lane II and III).
The Economic Observer:
- Time to Reevaluate China’s Loose Credit Policy. 1.53 trillion yuan of new loans were released in China last month, driving total new lending for the first half of the year to a record 7.73 trillion yuan, a figure that surpasses total lending in any of the past 60 years. As many experts have noted, although this drastic surge in lending may help to dispel any prospect of deflation, the government's policy of driving investment and expanding domestic demand to achieve the goal of maintaining a GDP growth rate of 8 percent, has led directly to a blow out in credit that has itself led to unforeseeable risks. The yields on some local government investments have been relatively low, are spread out over a long period and future repayments of principle and interest are difficult to guarantee. At the same time, most of the loans have been guaranteed by the government. So, if local governments find themselves in financial difficulty, it's possible that the danger of banks being weighed down with bad loans that emerged in the '90s might reappear. However, the real danger is not connected to investment in large-scale government projects. It's that half of the new loans have flowed directly into the financial system, rather than being injected into the real economy. According to Wei Jianing, the deputy director of the State Council Development Research Center's Macroeconomic Department, in the first half of 2009, 20 percent of credit flowed into the stock market while another 30 percent were churned through the commercial bill market. The basis of China’s economic recovery is still not stable. The 30 percent increase in investment from January to May, has only managed to drive the industrial value-added growth rate up by eight percent. Meanwhile, external demand remains weak, with exports falling 28 percent compared to the same period last year. Moreover, Chinese retailers and distributors are still reducing inventory and the rise in lending has potential to further expand manufacturing output, which in turn means that the pressure created by problems of overcapacity is likely to increase in the future. In addition, asset prices have begun to rise. While consumer prices continue to decline, the real estate market has risen so dramatically that the prices of properties in Beijing and Shenzhen have registered record highs. The Shanghai Composite Index has rallied approximately 80 percent. All this data indicates that the inflated asset prices that emerged in 2007 are about to reappear. However, at that time China's economy was growing rapidly, while now, growth is slow and only slowly beginning to build momentum. Overvalued asset prices present the illusion of prosperity, they also add volatility to the financial market and have a negative influence on growth in the real economy. When the bubble finally bursts, the real economy will suffer the negative effects along with the banking and financial system. It is universally acknowledged that increasing internal demand, and more particularly, domestic consumption, is the engine needed to power the steady growth of China's economy. If too much capital is invested into the asset markets, instead of encouraging spending, this will only reduce the amount of money available for consumption. As a result, we believe that now is the time for the authorities to reassess their macroeconomic policies.
Shanghai Securities News:
- China National Coal Association has advised the country’s energy industry regulator to curb output of the fuel from major producers as a domestic surplus builds up. Coal stockpiles around the country rose 4.2% to 190.6 million tons as of June end from a month earlier, citing an official.
- China
Israeli Army Radio:
- The US State Department called in Michael Oren, Israel ’s ambassador to Washington , to protest plans by a private construction company funded by Miami businessman Irving Moskowitz to build a hotel in east Jerusalem Oren told the Americans that Israel
YNet News:
- George Mitchell , US envoy to the Middle East, has postponed a scheduled visit to Israel The on-line news site said that the delay may be related to an ongoing dispute between Israel and the US over settlement construction in the West Bank .
Weekend Recommendations
Barron's:
- Made positive comments on (DIS), (TWX), (BBBY), (GS), (STD) and (LYV).
- Made negative comments on (POOL).
Night Trading
Asian indices are +.75% to +1.50% on avg.
Asia Ex-Japan Inv Grade CDS Index +.90%.
Morning Preview
US AM Market Call NASDAQ 100 Pre-Market Indicator/Heat Map Pre-market Commentary Pre-market Stock Quote/Chart Global Commentary WSJ Intl Markets Performance Commodity Futures Top 25 Stories Top 20 Business Stories Today in IBD In Play Bond Ticker Economic Preview/Calendar Earnings Calendar
Conference Calendar
Who’s Speaking?
Upgrades/Downgrades Rasmussen Business/Economy Polling
Earnings of Note
Company/Estimate
- (MTB)/.58
- (ETN)/.15
- (HAS)/.24
- (JCI)/.19
- (LXK)/.60
- (LM)/.22
- (LNCR)/.47
- (MDRX)/.15
- (TXN)/.20
- (BSX)/.13
- (HAL)/.27
Upcoming Splits
- None of note
Economic Releases
10:00 am EST
- Leading Indicators for June are estimated to rise .5% versus a 1.2% increase in May.
Other Potential Market Movers
- The Fed’s Lockhart speaking and the (LM) shareholders meeting could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by technology and commodity stocks in the region. I expect US stocks to open mixed and to rally into the afternoon, finishing modestly higher. The Portfolio is 100% net long heading into the week.
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