Monday, August 22, 2011

Today's Headlines

  • Italy's Debt May Swell as Austerity Chokes Growth: Euro Credit. Italy’s austerity drive, enacted in exchange for European Central Bank bond purchases driving down borrowing costs, may backfire as it chokes the economic growth needed to ease Europe’s second-biggest debt burden. Prime Minister Silvio Berlusconi’s Cabinet approved 45.5 billion euros ($66 billion) in deficit reductions in Rome on Aug. 12, the nation’s second austerity package in a month, to balance the budget in 2013 and convince investors that Italy can trim debt of about 120 percent of gross domestic product. That’s the biggest ratio in Europe after Greece, whose fiscal woes sparked the sovereign crisis last year. While the back-to-back packages aim to eliminate Italy’s budget gap, spending cuts and tax increases risk damaging the economy at a time when the global recovery is stumbling. The measures, already in effect, require parliamentary approval that starts today as Senate committees review the law before both houses vote in September. “There are clear downside risks to growth emanating from such a sharp fiscal tightening profile, which could tip Italy’s fragile economy into a recession,” said Vladimir Pillonca, an economist at Societe Generale SA in London. That could “weaken revenue growth and undermine the ongoing fiscal adjustment” in the face of other challenges, such as “shocks to risk premiums and/or interest rates.”
  • Bank Debt Risk Surges to Record After Merkel Rejects Euro Bond. The cost of insuring European bank debt surged after German Chancellor Angela Merkel rejected a common euro-area bond, stoking concern the region’s deficit crisis will worsen. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers climbed seven basis points to 242, according to JPMorgan Chase & Co. at 3 p.m. in London, after earlier reaching an all-time high 248.5 based on closing prices. The subordinated index jumped 21 to 430. Swaps on sovereign debt rose for a fifth day after Merkel said joint euro bonds would require European Union treaty changes that would “take years” and might run afoul of the Germany constitution. The Markit SovX Western Europe Index of swaps linked to the debt of 15 governments widened 3 basis points to 292 basis points. The cost of insuring company bonds also rose, with the Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield credit ratings up 5 basis points to 675. The Markit iTraxx Europe index of 125 companies with investment-grade ratings widened 4 basis points to 160 basis points.
  • Hedge Funds Boost Bullish Bets on Agriculture After Heat Wave. Speculators increased bullish bets on agricultural commodities by the most in a month after a U.S. heat wave increased speculation crops were damaged, adding to mounting concern that global supply will fall short of demand. Hedge funds and other speculators raised their net-long positions across 11 agricultural futures and options by 6.7 percent to 675,561 contracts in the week through Aug. 16, U.S. Commodity Futures Trading Commission data show. Bets on soybeans rose 25 percent and those on corn 9.6 percent. Wagers that wheat prices will decline were cut by the most in a month. Combined global stockpiles of rice, corn and wheat will drop 2.5 percent by the end of the harvests, to the lowest in five years, the U.S. Department of Agriculture estimates.
  • Austria wouldn't have "massive benefits" if the euro area issued joint bonds, and it is doubtful whether they would have the highest credit rating, the head of Austria's debt agency was quoted as saying.
  • Avoid Securitized-Debt Risk on Chance of 2008 Repeat, Bank of America Says. Investors should avoid taking risk in all categories of U.S. securitized debt because American and European policy makers may damage financial markets as they respond to a slowing economy and government deficits, according to Bank of America Merrill Lynch analysts.
  • Gold Seen Heading for Biggest Annual Gain in 32 Years on Flight to Safety. Gold may climb the most in more than three decades this year as investors and central banks boost their holdings on concern that global economic growth may stall amid a worsening sovereign-debt crisis in the U.S. and Europe. Gold for immediate delivery may reach $2,000 an ounce by the yearend, extending this year’s gain to 41 percent, according to the median forecast in a Bloomberg survey of 13 traders and analysts at a conference in Kovalam in South India on Aug. 20. That would be the most since the 127 percent surge in 1979, according to Bloomberg data. The metal is set for an 11th year of gains as holdings in exchange-traded products reached a record on Aug. 8 and central banks are adding to their reserves for the first time in a generation.
  • Prostitutes Flood Vallejo After City Slashes Police. When Ruth Rooney moved in 2005 to a two-bedroom house in Vallejo, California, near Napa Valley’s famed wineries, the historic St. Vincent’s Hill neighborhood attracted young professionals and there were few vacancies. Things began to change in 2008 after Vallejo, a city of about 116,000 that had lost its biggest employer, the U.S. Navy’s Mare Island shipyard, filed for bankruptcy, said Rooney, a 54-year-old marketing consultant. “I see prostitutes, pimps and drug dealers out my front window,” Rooney said in a telephone interview Aug. 5. “There’s two on the corner right now.” Her property value has dropped 70 percent in six years, she said.
  • SPDR Gold(GLD) Wrests ETF Crown From S&P 500 Fund as Turmoil Reigns. Gold reached a new milestone in its role as an investment and haven, with the leading exchange- traded fund that tracks bullion surpassing its equities counterpart as the biggest ETF by market value. SPDR Gold Trust’s market capitalization rose to $76.7 billion on Aug. 19, according to the most recent data compiled by Bloomberg, as the metal topped $1,881 an ounce for the first time. SPDR S&P 500 ETF Trust (SPY), which has been the industry’s largest exchange-traded fund since 1993, stood at $74.4 billion, now 3.1 percent smaller. At the start of the year, the Standard & Poor’s 500 Index-tracking ETF was 56 percent larger.
  • All Latin America GDP Growth Forecasts Cut Except Chile by Morgan Stanley. Morgan Stanley cut its forecast for Latin American economic growth this year and next, saying the region is “unlikely to be spared” from a global slowdown. The region’s economies will expand 3.6 percent next year from a previous forecast of 4.6 percent, as slower growth in Europe and the U.S. takes its toll on demand for the region’s commodities, Morgan Stanley’s chief Latin America economist, Gray Newman, said in an e-mailed report.
  • BofA(BAC) Drops Most in S&P on China Construction Stake. Bank of America Corp. (BAC) led decliners in the Standard & Poor’s 500 Index after China Construction Bank Corp. said the U.S. lender will keep at least half its stake, spurring new debate on the American firm’s capital plans. Bank of America slipped 30 cents, or 4.3 percent, to $6.67 at 12:59 p.m. in New York Stock Exchange composite trading and sold for as little as $6.51. The lender, the biggest in the U.S., agreed to retain at least half its 10 percent holding, China Construction President Zhang Jianguo told reporters in Hong Kong. Some analysts, including Charles Peabody of Portales Partners LLC, had estimated the Charlotte, North Carolina-based bank would divest all of its shares.
Wall Street Journal:
  • Tripoli Jubilant, Jittery Amid Pockets of Resistance. Libyan Insurgents Push to Heart of the Capital; Battles at Gadhafi's Compound.
  • World Bank: Ready to Help Libya. As rebels entered the center of Tripoli in what could be their final battle with the regime of Col. Moammar Gadhafi, a senior World Bank official said the bank is ready to offer a new regime financial support if asked.
  • Libya Oil Production Seen Staying Off Line. Key members of the Organization of the Petroleum Exporting Countries are in a holding pattern as the endgame in Libya unfolds.
  • Mortgage Delinquencies Increase. The number of American households that fell behind on their mortgages increased slightly in the second quarter from the previous quarter, according to a survey released Monday, an unwelcome sign for the U.S. economy.
  • Hurricane Hits Puerto Rico, Heads Toward U.S. Puerto Ricans awoke to flooded and debris-strewn streets Monday following the overnight passage of Hurricane Irene, which next took aim at the Dominican Republic on a path that could bring the storm to the U.S. by the end of the week.
  • Chicago Fed Activity Index Improves in July. The Chi Fed's National Activity Index narrowed to negative 0.06 in July, following a revised negative 0.38 in June. But the three-month moving average, which provides a more consistent picture of national economic growth compared to the more volatile monthly index, increased to negative 0.29 from negative 0.54.
  • Spending Cuts, Not Tax Hikes, Best For Deficit: NABE. The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts. The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases. As for how to reduce the deficit, nearly 40 percent said the best way would be to contain Medicare and Medicaid costs. Nearly a quarter recommended overhauling the tax system and simplifying tax rates and exemptions. About 15 percent said the government should enact tough spending caps and cut discretionary spending.
  • US Becomes Food-Stamp Nation, But Is It Sustainable?
  • Greek Collateral Deals Put Bailout at Risk: Moody's. Euro zone states seeking collateral for aid to Greece should think again if they want its bailout to stay on track, a rating agency said, as one of them said it would only press for such guarantees as a last resort.
  • Consumer Confidence Hits New Low, May Be Weaker. U.S. consumer confidence has fallen further after weeks of intensified economic concerns and broad stock market declines, and Conference Board data due later this month could be even weaker than current projections suggest, Consumer Edge Research said on Monday.
Business Insider:
Zero Hedge:
  • Tablet Shipments to Near 250 Million in 2017. Tablet shipments are set to explode in the coming years, a new study from research firm In-Stat has found. According to the company's estimates, worldwide tablet shipments will approach 250 million units in 2017. The firm says iOS and Android will secure over 90 percent of the tablet space between them, while Windows will come in a "distant third."
CNN Money:
  • Fears of Credit Freeze Grow in Europe. The sovereign debt problems in Europe have roiled financial markets around the world. With little relief in sight, investors are growing worried about the possibility of a credit crunch similar to the one that gripped the international banking system three years ago. "We're seeing signs of it starting already," said Patrick Bolton, a professor of finance at Columbia University. "The mechanism and the players are different but there's a very similar dynamic to what we saw in 2008."
  • Icahn Makes $120 Million on Falling S&P. Icahn Capital turned a handsome $120 million profit last week on a $2 billion bet against the stock market, Bloomberg News reports. The giant hedge on his stock bets helped to offset losses on such investments as Clorox Co., which the veteran buyout artist is seeking to buy for $10.2 billion, and pharmaceutical company Forest Laboratories. Icahn boosted his borrowing by more than half to cover collateral for his bet against the Standard & Poor's 500 Index. His funds built the short position with derivatives with a face value in excess of $2 billion. The S&P proceeded to drop by 6% over the week, earning Icahn a paper profit of $120 million.
Rasmussen Reports:
  • Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 20% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-four percent (44%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -24 (see trends).
  • 55% Favor Repeal of Health Care Law. 55% at least somewhat favor repeal of the national health care law, including 44% who Strongly Favor it. Thirty-eight percent (38%) at least somewhat oppose repeal, including 27% who are Strongly Opposed.
Financial Times:
  • Interview: Fed's Bullard Against Prolonging Zero-Rate Policy. The current monetary policy in the U.S. should not be extended with an eye on the calendar, but adjusted based on the state of the economy, Federal Reserve Bank of St. Louis President James Bullard told The Nikkei in a recent interview. The head of the St. Louis branch does not have a vote on the policy-setting Federal Open Market Committee this year. Edited excerpts from the interview follow.
Arabian Business:

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