- Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010. “Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.” Geithner said investors around the world turn to U.S. Treasury securities and dollar-denominated assets whenever they are worried about global stability. That reflects “basic confidence” in the U.S. and its ability to bounce back from the global recession, he said. Moody’s Investors Service Inc. last week said the U.S. government’s bond rating will come under pressure in the future unless additional measures are taken to reduce budget deficits projected for the next decade.
- Former Federal Reserve Chairman Alan Greenspan said it is “very difficult” to see U.S. unemployment falling soon and that an economic recovery is “going to be a slow, trudging thing.” He also expressed concern about falling stock prices. While the recession is “essentially over,” Greenspan said “it’s very difficult to make the case that unemployment is coming down any time soon.” The former Fed chief spoke on NBC’s “Meet the Press” program. Greenspan, who served as Fed chairman from 1987 until 2006, said he anticipates unemployment to stay between 9 and 10 percent for most of this year, and that the most useful step Congress could take to aid job creation at this point would be to enact tax cuts for small businesses. “They are the big creator of jobs,” he said. “But they won’t hire anybody if they don’t have any business.” A decline in stock prices since the start of the year is “more than a warning sign,” Greenspan said. “It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity. And if stock prices start continuing down, I would get very concerned.” Greenspan said the fourth-quarter’s economic growth rate was helped by inventory rebuilding, suggesting the U.S. economy “shot our ammunition” at the end of 2009. That means economic growth now “doesn’t have the strong momentum I hoped it would have,” Greenspan said.
- Toyota Motor Corp., facing lawsuits and criticism surrounding its recall of millions of cars and a federal probe into a possible brake defect with its Prius hybrid, has boosted its Washington lobbying effort by hiring a firm with deep Democratic ties. Toyota has hired the Glover Park Group, a Washington-based firm whose principals include Joe Lockhart, a White House spokesman under President Bill Clinton, and Joel Johnson, a former senior adviser to Clinton. Lockhart, confirming that Glover Park was hired by Toyota, declined to talk about what the firm was doing.
- The euro fell for a fourth consecutive week versus the dollar and yen on concern budget deficits in Greece and other European nations will hamper the region’s economic recovery. The 16-nation currency yesterday tumbled to an almost one- year low against the yen and to the weakest level in eight months versus the dollar as investors bet sovereign risk crises in nations such as Greece, Portugal and Spain will force policy makers to keep interest rates at record lows for longer. The Swiss franc fell from its highest level in 15 months against the euro as traders speculated the nation’s central bank sold the currency to curb its strength. “Greece was uncovered, and the bloodhounds are out now in the market looking for fiscal instabilities,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at the futures broker MF Global Ltd. in Chicago. “In the recent week, there has been increased rhetoric about Portugal and Spain. It’s putting pressure on the euro.”
- Secretary of State Hillary Clinton said she regards the greatest threat to the U.S. to be weapons of mass destruction in the hands of an international terrorist group. “The biggest nightmare that many of us have is that one of these terrorist member organizations within this syndicate of terror will get their hands on a weapon of mass destruction,” Clinton told CNN’s “State of the Union” program in a taped interview. That’s “the most, yes, threatening prospect we see,” she said. Since the Sept. 11, 2001, attacks in the U.S., the al-Qaeda terrorist network has become “more creative, more flexible, more agile,” Clinton said, according to a transcript of the interview e-mailed by CNN. “They are unfortunately a very committed, clever, diabolical group of terrorists who are always looking for weaknesses and openings.” A nuclear-armed North Korea or Iran “poses both a real or a potential threat,” Clinton said. “But I think that most of us believe the greater threats are the trans-national non-state networks. Primarily the extremists -- the fundamentalist Islamic extremists who are connected to al-Qaeda in the Arab peninsula.”
- Treasuries gained, driving 10-year yields down for a fifth straight week, as concern some European nations might default on their debt drove investors to the safety of U.S. securities. Yields on notes dropped to the lowest levels in at least six weeks as sovereign risk crises in nations such as Greece, Portugal and Spain dulled investors’ appetite for higher- yielding assets. The U.S. economy unexpectedly lost 20,000 jobs last month, a report showed, and the Treasury prepared to sell a record-tying $81 billion in notes and bonds next week. “Sovereign risk has taken center stage and the beat of the drum is starting to get louder and louder,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The safe-haven bid has come back into play, and investors are looking for safety.”
- Federal Reserve Bank of St. Louis President James Bullard said the U.S. economic recovery is “on track” and that he expects job growth in coming months. “We will see job growth going forward because firms will be caught short of employees,” Bullard, 48, said in a panel discussion yesterday in St. Louis. “That’s one of the things I’m looking forward to.”
- The Dubai government said it lent Dubai World, the state-owned investment company that’s in talks to reschedule about $22 billion of debt, more than $6.2 billion in the past 12 months. “The money is in the form of a loan, on commercial terms, and the Dubai Support Fund hasn’t taken an equity stake in the company or taken any assets from the group,” a government spokeswoman said by phone, declining to be identified, in line with government policy.
- JPMorgan Chase & Co.(JPM) raised almost $700 million to equip the three biggest U.S. theater chains with digital screens and projectors that can show 3-D movies, according to a person with knowledge of the plan.
- Iranian President Mahmoud Ahmadinejad asked his country’s Atomic Energy Organization to start enriching uranium to 20 percent, the level needed to power its Tehran research reactor. “Dr. Salehi, start making 20 percent with the centrifuges,” Ahmadinejad said today, addressing the head of the country’s Atomic Energy Organization, Ali Akbar Salehi, at an exhibit on laser technology.
- Iran’s intelligence agency said security forces arrested seven people linked to a U.S.-funded Farsi-language radio station, including several CIA agents, who were plotting to overthrow the Islamic government. “Seven people tied with counter-revolutionary satellite networks and Zionist media and agents of sedition have been identified and arrested,” the Intelligence Ministry said in a statement according to the official Islamic Republic News Agency.
- SAP AG(SAP) Chief Executive Officer Leo Apotheker unexpectedly resigned after the world’s largest business-management software maker’s supervisory board decided not to extend his mandate. Apotheker’s exit comes less than a year after he took over in May 2009 as the sole CEO of the Walldorf, Germany-based company. SAP said in a statement yesterday that board members Bill McDermott and Jim Hagemann Snabe will take over as co-CEOs.
- BES Investimento do Brasil scrapped an international bond offering of as much as $350 million, capping a week of canceled sales from India to Korea after a global market rout pushed up emerging-market borrowing costs. BES Investimento do Brasil postponed the offering because it would have been more expensive given the “market volatility,” Paulo Augusto Saba, the bank’s managing director for global markets, sales and fixed-income trading in Brazil, said in a phone interview. BES was planning to issue five year bonds, he said. “If we were to do the issuance now, we would have to pay much more, and we didn’t need to do so,” Saba said in a phone interview from Sao Paulo. “I want to do a beautiful deal. I don’t want to do a Frankenstein deal in the market.”
- Gold, trading at a three-month low, may extend its decline to $1,000 an ounce, according to technical analysis by Barclays Capital.
Wall Street Journal:
- An explosion rocked a natural-gas power plant on Sunday morning along the base of a river in Middletown, Conn., sending earthquake-like shockwaves miles away. At least five people were killed and 12 injured on the site, where at least 50 people were working, the Middletown mayor's office said.
- America needs more jobs. To get them, we need business to increase capital investment. This is especially true for well-paying industrial jobs in capital-intensive industries. The best way to do that is to let all businesses, large and small, significantly accelerate depreciation of their capital purchases.
- Democrats gearing up for a possible Supreme Court vacancy are divided over whether President Barack Obama should appoint a prominent liberal voice while their party still commands a large Senate majority, or go with someone less likely to stoke Republican opposition.
- With his fraud lawsuit last week against Bank of America, New York Attorney General Andrew Cuomo has joined the long queue of politicians blaming bankers as the chief culprits in creating the financial panic and recession. We dealt with the merits of those BofA charges on Saturday, but that isn't the end of this story. There's also the not so small matter of Mr. Cuomo's own role in promoting policies that fed the housing mania and set the stage for the meltdown. Before he pursued statewide office in New York, Andrew Cuomo was Secretary of Housing and Urban Development during Bill Clinton's second term. And lest you think his tenure is forgotten, the HUD Web site has an instructive item in its Archives section. Entitled, "Highlights of HUD Accomplishments 1997-1999," the document chronicles the "accomplishments under the leadership of Secretary Andrew Cuomo, who took office in January 1997." HUD's Web visitors learn that in 1999 "Secretary Cuomo established new Affordable Housing Goals requiring Fannie Mae and Freddie Mac—two government sponsored enterprises involved in housing finance—to buy $2.4 trillion in mortgages in the next 10 years. This will mean new affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent—a 19 percent increase—in the year 2001." It's a sign of Washington's continuing failure to examine its own failures that HUD still views such a policy as an "accomplishment." It's as if the Pentagon described Pearl Harbor as a victory.
- CIT Group(CIT), the small business lender that became one of the biggest victims of the credit crisis, named former Merrill Lynch CEO John Thain as its new chairman and chief executive, effective immediately. Thain, who had been in talks with CIT for weeks about the job, will lead the company's transition into a more streamlined commercial lender focused on serving the small- and middle-sized market sectors.
- Billions of dollars were at stake when 21 executives of Goldman Sachs(GS) and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months. A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer. A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities. Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in. With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman’s role in the insurer’s downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded. The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential. In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm. In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck. Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits. The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G. The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ” Documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover. A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.” Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty — and Goldman became one of the biggest beneficiaries. Mr. Egol structured a group of deals — known as Abacus — so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol’s deals still sat on A.I.G.’s books when the insurer was bailed out. “Al probably did not know it, but he was working with the bears of Goldman,” a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. “He was signing A.I.G. up to insure trades made by people with really very negative views” of the housing market. (very good article)
- More than a hundred retired New York Police Department captains and higher-ranking officers said in a survey that the intense pressure to produce annual crime reductions led some supervisors and precinct commanders to manipulate crime statistics, according to two criminologists studying the department.
- As investor alarm about Greek, Spanish and Portuguese indebtedness increases, the crisis has highlighted the fundamental weakness of the European monetary union. With no strong political arm to ensure that members observe debt limits set by treaty, the responsibility falls to Mr. Trichet to try to resolve the crisis.
- What happens if China's 'bubble' pops? Bubbles in China are about much more than finance. Economic upheaval is a source of potential mass unrest, threatening the Communist Party. "If asset bubbles were to burst, the government would be blamed for the pop," says Freeman at CSIS. "Would the leadership crack down on unhappy, protesting citizens? Would it stifle economic and other freedoms that have been the basis of the country's economic miracle for the past 30 years?" In fact, to keep things flowing, it might open the spigots on exports and try to grow its way back, doubling down on its main engine of growth -- exactly what it did during the global meltdown. And that's where the U.S. needs to worry. An even more export-focused China would mean ever less-expensive goods flowing into the biggest market in the world -- the U.S. "Because prices are so heavily managed, China could easily flood the U.S. and the world with extremely cheap stuff," says Morici. If nearly everything America buys is made in China now, just wait. The trade imbalance would spiral further out of control; and manufacturers in other nations fighting China for market share would be at a greater disadvantage. "Remember, when we talk about bubbles, the stakes are the future of the Communist Party," says Morici. "They'll try to survive no matter what; and it could mean destroying other economies to do it."
- The Treasury’s decision to stop increasing the size of debt auctions may temper a rise in bond yields and bolster the economy just as the Federal Reserve withdraws emergency spending measures. Treasury will sell $81 billion of notes and bonds in its quarterly refunding this week, the same as in the previous auction, and government officials say they’ve already increased enough to fund a budget deficit set to expand 14 percent this year. Restricting growth will cause the difference in yields between 2- and 10-year notes to shrink to 2.15 percentage points by year-end from the record 2.90 percentage points last month, according to Bloomberg surveys of banks and securities firms. The so-called narrower yield curve may cap mortgage rates, which are pegged to 10-year Treasury note yields, as the central bank’s $1.25 trillion in mortgage-bond purchases end on March 31. It also would encourage banks that have relied on profiting from differences between short- and long-term rates to boost loans as the Fed tries to cut its stimulus and lending programs. “The flatter the yield curve, the more apt banks are to lend, because they’re not making this huge carry,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $22 billion. “The impact of mortgage rates on the housing market is going to be benefited by a flatter curve.”
- The combination of record earnings growth and the fastest withdrawals from mutual funds since before credit markets froze is creating opportunities for Mario Gabelli. Apple Inc.(AAPL) and Google Inc.(GOOG) are poised to rally after technology companies in the Standard & Poor’s 500 Index fell 7.8 percent this year and bearish options on chipmakers climbed to the highest level since 2003, according to Howard Ward of Gamco Investors Inc. Gabelli’s firm says falling valuations will offset more than $560 million of redemptions from global technology funds at the end of January, a 71-week high.
- Small businesses are becoming the Achilles heel of the U.S. recovery by limiting growth and job creation. Companies with fewer than 500 employees, such as Phoenix Technologies Ltd. and Sonic Corp., helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, New Jersey-based Automatic Data Processing Inc., the world’s largest payroll processor.
San Francisco Chronicle:
- The biggest open secret in the landmark trial over same-sex marriage being heard in San Francisco is that the federal judge who will decide the case, Chief US District Judge Vaughn Walker, is himself gay.George H.W. Bush in 1989, has never taken pains to disguise - or advertise - his orientation. They also don't believe it will influence how he rules on the case he's now hearing - whether Proposition 8, the 2008 ballot measure approved by state voters to ban same-sex marriage, unconstitutionally discriminates against gays and lesbians. Many gay politicians in San Francisco and lawyers who have had dealings with Walker say the 65-year-old jurist, appointed to the bench by President
Professional Wealth Management:
- Fund of funds slow to adapt to new world. The fund of hedge funds model has been challenged by the current climate and is struggling to win back clients, writes Yuri Bender, but does the concept still have a place in private client portfolios?
The concept of the “gate”, established by more than 15 per cent of hedge funds during the crisis of 2008, restricting investors’ access to their money, has left a lasting scar through both the single strategy and fund of hedge funds arena. A series of incidents where major investors, including famous individuals, fell out with friends in the hedge funds industry when their withdrawal requests were refused, led to what Paul Marshall, founder of UK hedge fund group Marshall Wace, called the industry’s “Hotel California moment”, referring to the Eagles song of 1977, with the lyrics: “We are programmed to receive./You can check out any time you like,/But you can never leave.” Gates and lengthy lock-ups have been a key problem for the fund of funds industry. Investors, particularly private clients, who have been sold this model as key to the glitzy, exclusive hedge fund world, have been particularly disappointed in recent times. While the average single strategy fund returned 20 per cent during 2009, the average fund of hedge funds achieved 13 per cent, according to fund performance measurement and analytics experts HFR.
- President Barack Obama has left Democrats as confused as ever about how the White House plans to deliver a health care reform bill this year, after two weeks of inconsistent statements, negligible hands-on involvement and a sudden shift to a jobs-first message. Democrats on Capitol Hill and beyond say they have no clear understanding of the White House strategy — or even whether there is one — and are growing impatient with Obama’s reluctance to guide them toward a legislative solution. At a White House meeting Thursday with Obama and Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi expressed frustration with the slow pace of the negotiations and the president’s decision not to weigh in publicly on a path forward, according to a Democratic source familiar with the meeting. And some Democrats feel that every time they look to White House for clarity, they hear something different, as though the strategy is whatever the president or his top advisers said that day. In the past two weeks, since Democrats lost the Massachusetts Senate race, Obama or his top advisers have suggested all of the following: breaking the bill into smaller parts, keeping it together in one comprehensive package, putting it at the back of legislative line and needing to “punch it through” Congress, as Obama himself said Tuesday.
- The Democratic nominee for Illinois lieutenant governor has dropped out of the race less than a week after winning the nomination amid a political uproar about his past. Scott Lee Cohen announced his decision Sunday night at a Chicago bar. The pawn broker and owner of a cleaning supplies company won the nomination Tuesday. Since then, it has become widely know that he was accused of abusing his ex-wife and holding a knife to the throat of an ex-girlfriend. The girlfriend herself had been charged with prostitution. He also admits using steroids in the past.
- President Barack Obama acknowledged Sunday that local opposition is likely to nix the administration’s plan to hold the trial for 9/11 mastermind Khalid Sheikh Mohammed in New York City. “I have not ruled it out,” Obama told Katie Couric of CBS News in a live interview at the White House during the Super Bowl pregame show. “But I think it’s important for us to take into account the practical, logistical issues involved. I mean, if you’ve got a city that is saying ‘no,’ and a police department that’s saying ‘no,’ and a mayor that’s saying ‘no,’ that makes it difficult.” On Jan. 29, a top official involved in the process said the idea is “dead,” and Sen. Charles Schumer (D-N.Y.) issued a statement saying: “It is obvious that they can't have the trials in New York.” Mayor Michael Bloomberg has also expressed opposition, pointing to the projected cost. Nevertheless, White House officials have continued to say publicly that no final decision has been made. Republicans have seized on the issue as part of a broader critique of the Obama administration’s use of civil processes to try accused terrorists.
- The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 26% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (43%) Strongly Disapprove which gives Obama a Presidential Approval Index rating of -17 (see trends).
- Contagion. The key lesson from the ERM crisis of 1992 and the Asian crisis of 1997 is that contagion can emerge quickly and often in unpredictable ways. Unwinding of leveraged positions by distressed market participants, herding behavior among investors, and loss of liquidity that gives way to general flight to quality can all lead to heightened correlations between markets and, in extremely circumstances, set off a self-filling crisis on a regional/global scale.
- The Office of Management and Budget Web site showcased the president's 2011 budget by calling it “a new era of responsibility.” To build upon this they quoted from President Barack Obama's State of the Union address: “Let's invest in our people without leaving them a mountain of debt.” In stark contrast, the president's budget proposal is $1.6 trillion in the red in 2010 — a deficit equal to 10.6 percent of GDP — and shows projected deficits over the period 2011-20 that average 4.5 percent of GDP and are increasing. To me, this looks like we're headed into an era of irresponsibility. The president proposes a goal of balancing the primary budget (i.e., the budget excluding net interest payments) by 2015 and stabilizing the debt-to-GDP ratio. However, neither goal is met under the proposed budget. To make matters worse, excluding net interest payments is flat-out misleading, because net interest payments are 3 percent of GDP by 2015 and 3.5 percent of GDP by 2020. Even after a projected economic recovery, the growth in the deficit will continue to outstrip growth in GDP under this budget. On the spending side, the proposed budget includes $3.8 trillion in spending in 2011, or 25.1 percent of GDP, compared with an average of 20.7 percent of GDP during 1970-2009. In 2020, well after the projected end of the current economic crisis, the level of spending equals 23.7 percent of GDP, 3 percentage points higher than average annual spending over the past 41 years. The current budget includes a three-year freeze in 2010 spending, which is projected to reduce spending by $250 billion over 10 years. To put this in perspective, total spending, 2011-20, is $46 trillion, so the $250 billion cut represents a 0.5 percent cut in spending over the decade (that is one-half of 1 percent). The president's budget says, “This freeze will require a level of discipline with Americans' tax dollars and a number of hard choices and painful tradeoffs not seen in Washington for many years.” Note this is equivalent to an $83 payment per year for each American. This is truly a new era of fiscal discipline.
- Japanese bank lending logged its biggest annual fall in more than four years in January as companies struggling with spare output capacity and a murky economic outlook hesitated to borrow for capital investment.
- The federal government announced it would remain closed on Monday and most schools planned to shut down as residents of the U.S. mid-Atlantic struggled to dig out from a blizzard that dumped two feet (half a meter) of snow on the region.
- A decision by the province that is China’s second-biggest exporter to raise minimum wage rates has heightened expectations that other provinces and cities will soon follow, just as the central government’s attention is shifting from economic stimulus to rising inflation. Eastern Jiangsu province, which exports more than Brazil and South Africa combined, raised its monthly minimum wage rate 13 per cent to Rmb960 ($140) last week. It was the first time the rate had been adjusted in two years. The potential round of minimum wage increases comes amid signs that inflationary pressures are picking up in the Chinese economy after a rapid recovery in the second half of 2009, fuelled by a huge government stimulus program. Government officials are debating whether to slow the pace of new loans and begin appreciating the currency to dampen inflationary expectations. “This could be a red flag about wage inflation,” says Arthur Kroeber, editor of China Economic Quarterly. “Inflation in China is becoming systemic because of rising wages caused by a tighter labor market.” Beijing and cities in southern Guangdong province, the country’s biggest exporter, are considering adjustments.
- The market for carbon trading, never popular in some circles to begin with, is starting to look rather shaky. The bungled Copenhagen summit was bad enough. Now we have the UK energy regulator suggesting the market is not working and that a floor price for carbon should be imposed. Last year the European carbon market – the only one yet – was worth $125bn, according to Bloomberg New Energy Finance. If the US Senate were to agree a cap-and-trade system, that would be worth three times as much. Add Australia, Asia and so forth, and the prospects dazzle. None of that is impossible, though most of it is a stretch. But in the meantime, the gloom down in the valley is deepening. Investments in developing countries under the EU scheme’s so-called offset rules – of which more later – have ground to a halt. And in an unconnected but suggestive development, overall investment in low-carbon technology saw its first annual drop last year. Meanwhile, the scope of the scheme looks like being nibbled away. Begin with the mooted UK price floor for carbon. Carbon traders hate that idea. The market is bedeviled by uncertainties already, without adding more. Where would the floor be set? How long for? And what would be the mechanism for changing it? The problem is that the carbon price – about €13 a ton today – is miles from the €50-€100 needed to make renewable power projects economic. Far better, analysts say, to impose a supplementary tax on fossil-fuel generators, or subsidize renewables directly. Some go further. Simpler ways of cutting emissions, such as insulation, should be tackled by regulation. And at the other extreme, such as creating an integrated European market for renewables, the job belongs to the public sector. In other words, subsidies again. Nibble, nibble. Then we come to the aforesaid vexed question of offsets. That is the system whereby EU companies build projects in developing countries – which are not subject to carbon caps – and thereby earn the right to emit more back home. The premise is that each project emits less than the existing version – or less than some notional alternative, which is not the same thing. There is scope for abuse here. And, some claim, there is growing protest among locals who might not be too keen on a pulp mill or dam at all, let alone one built with foreign capital. Hence the curious sight reported by one environmentalist of thousands of Thais last year waving placards reading “Stop selling carbon credits”.
- We need to cut spending, before there is a financial disaster. Companies and individuals are busily repaying excessive debt. They know the credit card and the overdraft has to be repaid. The private sector overdid the debt in the decade up to the Credit Crunch, and they are now reining in. The government lectured the private sector for overdoing it. Now it is maxing the national credit card and drawing down the second and third mortgage as if it never had to be repaid. As Ireland, Iceland, and Greece have shown, once you lose the confidence of the international money lenders events can move swiftly and force you into unpleasant choices, undermining your living standards rapidly. Then you may have to cut things you really should not be cutting. To avoid this happening to us, we need to start controlling soon. It's not a case of excessive deficits keeping the economy up – they will bring it crashing down if we do not act now. The good news is cutting public spending is technically easy when you look at just how much needless and wasteful spending there is.
- Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU's refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece's drama has already metastasized into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.
- Draft European Union legislation designed to regulate the hedge fund industry would trigger “systemic failure and widespread market disruption” if it became law. Those are the findings of the Financial Markets Law Committee (FMLC), which was established by the Bank of England, on the eve of a critical week for the EU hedge fund directive in Brussels. The Times has learnt that European lawmakers will be presented today with about 2,000 amendments to the draft legislation, each of which must be debated. Lawmakers in Brussels — led by the French — believe that the trading behavior of hedge funds exacerbated the severity of the global credit crisis and played a key role in the collapse of a number of lenders. The French and the Germans have long argued that hedge funds behaved like “locusts” on the financial system. Three quarters of Europe’s hedge funds are based in London and they contribute about £3.5 billion a year in tax revenues to the UK Treasury. Using the European Commission’s Directive on Alternative Investment Fund Managers, a number of politicians in Brussels want to impose regulations on hedge funds that would limit the amount of debt they assume, force them to hoard more capital, disclose more data about their trading practices and clients and effectively block EU and non-EU hedge funds from taking stakes in one another.
- GOOGLE(GOOG) is developing software for the first phone capable of translating foreign languages almost instantly — like the Babel Fish in The Hitchhiker’s Guide to the Galaxy. By building on existing technologies in voice recognition and automatic translation, Google hopes to have a basic system ready within a couple of years. If it works, it could eventually transform communication among speakers of the world’s 6,000-plus languages.
- UK economy 'faces crisis' warns former IMF economist. Britain should be seen in the same category of countries as Greece and Spain, who are facing severe debt problems, a leading economist has said. Ex-IMF chief economist Simon Johnson, also described the G7 group of leading economies as "fundamentally useless". His comments to the BBC came as G7 finance ministers discussed the growing crisis in some Eurozone nations.
- The "domino effect", or contagion feared by analysts is now spreading rapidly through the so-called Pigs – Portugal, Ireland, Greece and Spain – the nations in the eurozone with the largest national debts and weakest public finances. They also suffer from distressingly high unemployment rates, up to 20 per cent in Spain, and long-term structural issues such as their ageing populations. Doubts persist that they will be able to service their huge budget deficits and the soaring interest burden on record-breaking national debts. The possibility of default or, in an extreme scenario, a break-up of the eurozone is being openly discussed, though it is being resisted by all the governments concerned. Many doubt that the Pigs will be able to push through the tough economic and social reforms essential to restoring market confidence. The expectation is growing that Germany, France and other more solvent members of the currency bloc will be obliged to bail out the weaker links, and that the crisis will drag on until such a resolution is reached. The panic is similar to the debt crisis of Dubai, which had to be rescued by its richer neighbor, Abu Dhabi. Since then, sovereign debt (securities and bonds issued by nation states) has been called "the new sub-prime", suggesting a rerun of the widespread damage that defaults on securities based on US mortgages caused in 2007. A similar downgrade and devaluation of European governments' bonds could also trigger a wider sell-off, and few believe UK gilts would be immune from the onslaught. That, in turn, would spell higher interest rates in Britain, adding hundreds of pounds a month to the average mortgage bill. As with the original credit crunch, this second crunch would devalue where they hold substantial stocks of government bonds, reducing the banks' ability to support lending into the real economy. That could lead to a "double dip" recession.
- A staggering €8bn-€10bn (£7bn-£8.7bn) may have been taken out of Greece by private investors since it became engulfed by economic turmoil in November. Under pressure from the European Union and international markets to rein in the nation's €300bn debt, socialist prime minister, George Papandreou, announced last week that he would have to enforce tough deficit-cutting measures. But the coming austerity package is leading panicked wealthy Greeks to divert their savings out of the country. "In the last four to six weeks a lot of money has been moved abroad; I've heard extraordinary figures," analyst, Kostas Panagopoulos said. "People are moving funds either because they don't trust our banking system, want to avoid what they fear will be taxes on deposits or are simply anxious about the future of our economy."
Euro am Sonntag:
- Kloeckner & Co. SE Chief Executive Officer Gisbert Ruehl said steel companies will probably run into difficulties when looking for credit in the coming months, citing an interview. A squeeze "probably won't be avoidable" because of "the overall economic situation," Ruehl said.
- While the employment-population ratio increased slightly from December to January, and off record lows, the problem of the long-term unemployed continues to grow. Just over 41% of all unemployed workers, over 6.3m workers, have been out of work for 27 weeks or more. Most troubling of all is the continued failure of economic growth to benefit the labor market. Employment fell by over 300,000 jobs during the last three months of 2009, despite strong expansion in GDP. The first quarter of 2010 is unlikely to show as big an output gain, suggesting that the pace of improvement in employment may be slowing, even as regular job growth has yet to return. And the situation may be more dire still; initial jobless claims have grown in recent weeks, indicating that what momentum there was in labor markets has been lost.
- The storm over climate change....and why most Canadian media are ignoring it. One of the most common questions I get from readers these days is why are the Canadian media ignoring the growing global controversy over the credibility of climate change research and in particular, of the UN’s Intergovernmental Panel on Climate Change (IPCC)? For example, unless you read the international press, especially the mainstream U.K. newspapers such as The Times, Telegraph and Guardian, you probably haven’t heard much about any of the following controversies in recent days. I’ve chosen half-a-dozen examples above of controversies now engulfing the IPCC and climate research. I could have mentioned others about the now-disputed basis for IPCC claims regarding the impact of global warming on the Amazon rain forest, hurricanes and floods, and new questions about the reliability of weather station data used to make some IPCC claims. Plus, there’s a growing public perception the IPCC has abandoned its proper role as a dispassionate presenter of scientific research to policy makers, to become just another environmental group preaching warmist hysteria. None of this disproves anthropogenic global warming, or proves mankind’s influence on climate is a scientific hoax. But it illustrates the absurdity of the radical warmists’ claim the debate is over, the science is settled and we must all immediately take a vow of poverty to “save the planet.” Why have Canadian media largely ignored this growing controversy? Perhaps the best answer is embarrassment. Having shilled for warmist hysteria for so long, having dismissed any questioning of man-made climate change orthodoxy as equivalent to Holocaust denial, they don’t know how to climb down, or cope with the tidal wave (pardon the pun) of controversy now hitting climate science all over the world. Thus they remain paralyzed, desperately, frantically, pretending no controversy exists. Except it does. And it’s growing.
- Industrial & Commercial Bank of China Ltd. will limit the amount of new loans and pace of lending this year, citing the bank. ICBC will continue to finance existing key government projects and will support industries with low energy consumption, the newspaper said. The bank will curb lending to industries with overcapacity and step up monitoring of loans to local-government financing arms and for land purchases.
Shanghai Securities News:
- China may exit the government's economic stimulus in the second quarter or earlier, citing Chen Dongqi, deputy head of the Chinese Academy of Macroeconomic Research. China is already tweaking policies to tighten credit and rein in the property market, citing Chen.
- Rising global commodities prices, higher food costs caused by bad weather and record credit expansion are putting inflationary pressure on China, citing Yao Jingyuan, chief economist of the National Bureau of Statistics. The central bank may further raise required reserve ratio requirements for banks to limit credit, Yao said.
South China Morning Post:
- The US imposed anti-dumping duties on gift-wrapping ribbons from China and Taiwan, citing the US Dept. of Commerce. The US will charge a 231.4% duty on ribbons from China and 4.54% on those from Taiwan because the mainland and Taiwan were found to be subsidizing the production or exploration of the products.
- More than 20 per cent of all construction projects in Dubai have been put on hold or cancelled in the past year, with most of the remaining projects delayed, an industry auditing company reports. This mirrors a similar slowdown in Ras al Khaimah, Ajman and parts of the capital. “The problem is financing,” said Emil Rademeyer, the director at Proleads, which monitors construction activity across the region. “Without funds, no one can move forward. If the project is well above ground, then I think they’ll finish it. But the smaller players are starting to fall away. Many sites are getting quiet.”
- Made positive comments on (MOT), (JEF), (AAN), (PETM), (WU), (FISV), (MMC), (ADP), (JNJ) and (CSC).
- Made negative comments on (ATHN).
- Reiterated Buy on (AMAG), target $60.
- Reiterated Buy on (FLEX), target $10.
- Reiterated Buy on (LEA), target $86.
- Upgraded (AZO) to Buy, target $188.
Asian indices are -.50% to +.25% on avg.
S&P 500 futures +.10%.
NASDAQ 100 futures +.07%.
BNO Breaking Global News of Note
Earnings of Note
- None of note
- None of note
Other Potential Market Movers
- The Deutsche Bank Small/Mid-Cap Conference, Thomas Weisel Tech/Telecom Conference, UBS Healthcare Services Conference and the Biotech Industry CEO/Investor Conference could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and technology stocks in the region. I expect US stocks to open modestly lower and to rally into the afternoon, finishing modestly higher. The Portfolio is 75% net long heading into the week.