Wednesday, September 30, 2009

China Targets Aluminum Sector in Push Against Overcapacity

By CHUIN-WEI YAP BEIJING -- China's cabinet, which has long warned it wants to curb excess capacity in key industrial sectors, set a ban on new aluminum smelters for three years. The State Council, China's highest executive body, also issued new rules to contain overcapacity in seven other sectors, including revisiting a yearslong campaign to curb steel output. China is worried that excess industrial capacity could lead to company closures and layoffs, which could slow the economic recovery. A worker shows an aluminum rod at a store in Shanghai in August. Premier Wen Jiabao said in September that excess industrial capacity due to slower external demand is his biggest worry as China's economy continues to recover. Wednesday's move doesn't change China's broad policy focus on stimulating the economy, but shows that the government is increasingly dealing with excesses of its expansionary policies. A failure to rein in excess capacity "will make it hard to prevent vicious competition in the market and raise profits, and will lead to shuttering of companies, or insufficient use of capacity, layoffs, big increases in bad assets held by banks," the government said in its sternest warning yet on the subject. Aluminum producers in China, which is both the world's largest producer and biggest consumer of the metal, have massively increased production capacity in recent years, taking advantage of rising prices before the economic crisis. The cabinet's move to ban new capacity in aluminum, and to trim outdated capacity at existing smelters -- first proposed by industry officials in February -- is seen as a way to boost aluminum prices and to root out smaller, inefficient aluminum smelters in a sprawling, energy-guzzling industry. But the market largely shrugged off the news Wednesday, a day before China's eight-day national holiday break, and aluminum prices rose only slightly on the London Metal Exchange. Aluminum prices have been major laggards in a wider rally among base metals this year, rising 23% so far, while copper prices almost doubled and zinc prices climbed 42%. "The worry in the industry isn't so much about new capacity, it's about the existing overcapacity," said Wang Zhouyi, senior base-metals analyst for Shanghai Cifco Futures. While the cabinet wants to limit capacity at inefficient aluminum smelters by 800,000 tons over one year, such measures might be cold comfort for a market faced with capacity nearing 20 million tons, and demand projected this year at around 16 million tons. The ban isn't the first time China's cabinet has sought to control aluminum output. It issued an industry-revitalization plan earlier this year with broad aims to consolidate the industry and target overcapacity, but its efforts have so far had limited success, with unbridled production swiftly returning every time prices show signs of inching up. "Aluminum smelters are very flexible," said Wang Lin, an aluminum analyst with CRU, a metals consultancy. "They can pop up very fast, usually when prices recover, and they're quite difficult to control." Uncontrolled aluminum output also has been an irritant for policy makers for environmental reasons. Aluminum production is the most energy-intensive among base metals, with electricity charges accounting for nearly 50% of input costs. As the domestic economy recovers, new problems are arising from the unprecedented amount of credit released to bolster growth. While overcapacity has been an issue for years in key traditional industries such as steel and aluminum, warnings by the State Council in August of overcapacity and redundant construction in such advanced industries as wind power and polysilicon were Beijing's first toward more high-tech sectors. —Terence Poon, Juan Chen and Yue Li contributed to this article. Write to Chuin-Wei Yap at

Hopes for 2010 Overshadow Weak Earnings Season

By JOHANNA BENNETT MORE ARTICLES BY AUTHOR Investors are looking beyond third-quarter corporate profits for justification that the seven-month-old bull market has legs. LARGE U.S. COMPANIES are expected to turn in a ninth straight quarter of year-over-year operating profit declines for the third quarter. But investor hopes are hinged to the fourth quarter and next year, and these expectations have helped drive up share prices in anticipation. The stock market's seven-month rally suggests that investors believe profits and revenue will stop sliding in the fourth quarter. And they think third-quarter earnings -- expected to fall nearly 25% over last year's third quarter -- could actually beat expectations, at least modestly. Projections for 2009 and 2010, meanwhile, have risen since May. The sectors that analysts expect will turn in solid earnings growth next year are technology, energy, materials and consumer-discretionary companies. "I would never classify third-quarter earnings as good, but there are signs of improvement," says Ashwani Kaul, global head of proprietary research for Thomson Reuters. Still, expectations remain low. Despite an eye-popping shift in direction next quarter, full-year earnings for 2009 are expected to shrink 16.7% from last year, according to Thomson Reuters. In 2010, however, the Street sees profits climbing 26%, the first full-year gain since 2006. Stock indexes already reflect much of those hopes. Though down last week, the Standard & Poor's 500 has climbed 57% above the 52-week low reached on March 9, while the Nasdaq has risen 67% and the Dow Jones Industrial Average has gained 49%. -------------------------------------------------------------------------------- Handicapping Profit Growth Percentage changes reflect year-over-year differences. Sector 3Q '09 4Q '09 2009 2010 (Estimate) (Estimate) (Estimate) (Estimate) Technology -15% 22% -10% 24% Financials 63% NA* 104% 71% Health Care -3% -1% 1% 9% Energy -64% -29% -58% 47% Consumer Staples -3% 3% -3% 10% Industrials -45% -17% -34% 13% Consumer 15% 94% 1% 37% Discretionary Utilities -4% -6% -4% 8% Materials -69% 209% -60% 87% Telecommunications -10% 7% -7% 6% Average Growth Rate -24.6% 193.6% -16.7% 26.2% Source: Thomson Reuters and Standard & Poor's as of Sept. 29, 2009 *Thomson Reuters First Call is unable to calculate growth rates from negative base-year earnings. -------------------------------------------------------------------------------- Now, it's up to Corporate America to meet those expectations. "It's show time for earnings," wrote Ed Yardeni, president and chief investment strategist at Yardeni Research, in a note published Monday. David Rosenberg, the chief economist and strategist at Gluskin, Sheff & Associates, sees a "listless" economic recovery next year. (See Barron's, "A Vote for Bonds Over U.S. Stocks," Sept. 14, 2009.) Recent economic data have provided fodder for both bulls and bears. Most forecasters see corporate profits rising in 2010, though how much is up for debate. Thomson Reuters says the consensus among sell-side analysts for operating profits generated by the S&P 500 is $75.59 a share. But Barclays Capital expects $60 a share next year. And economists at S&P see less than $53 a share in 2010, up 10% over the $48 a share expected in 2009. Even if the economy continues to struggle, year-over-year comparisons remain pretty easy. Companies have started restocking depleted inventories. A weak U.S. dollar and recovering overseas economies will boost foreign revenue. Cost cuts have set the stage for fast earnings growth once revenue starts growing again, an event the Street expects next quarter. Consensus estimates compiled by Thomson Reuters see revenue rising 1.9% year over year in the fourth quarter, and 7.5% in the first quarter of 2010. Oil prices should rise next year, a boon for energy companies that have suffered this year from low prices and weak demand, according to Jerry Jordan, manager of the Jordan Opportunity Fund. Expected to fall 58% this year, profits generated by energy companies will jump 47% in 2010, according to Thomson Reuters. Technology, however, remains a favorite among investors and analysts, with profits expected to climb 24% in 2010. Bill Stone, chief investment strategist for PNC Wealth Management, likes IBM (ticker: IBM) and Apple (AAPL), while Jeffrey Kleintop, chief market strategist at LPL Financial, "expects good news" from semiconductor companies, including Intel (INTC). Other sectors could post far bigger gains. Due to fall 60% this year, profits generated by materials companies will climb 87% in 2010. Meanwhile, profits from financials are seen climbing 71% next year over 2009. New accounting rules put in place earlier this year governing how financial companies account for "toxic assets" have some analysts questioning the quality of those earnings. Also, the industry faces more government regulation and possibly more bank failures. "I would not touch them with a ten-foot pole," says Dirk van Dijk, director of research at Zacks Investment Research. Wall Street is convinced that better days are ahead for the markets and the economy but reporter Johanna Bennett examines some scenarios that could burst that bubble. Debate still surrounds profits for consumer-discretionary companies, seen rising 37% next year. Thanks to rising unemployment, consumers remain tightfisted, opting to save money rather than spend it. Still, Americans have embraced bargain hunting, a boon for discounters such as Kohl's (KSS), Ross Stores (ROST) and Dollar Tree (DLTR). "People aren't returning to their old spending habits, at least not quickly," says PNC's Stone. Of course, a lot can happen between now and the end of 2010, by which time the government will be pulling back on its efforts to stabilize the financial system and stimulate the economy. A "W-shaped" recovery -- where the economy falls a second time before resuming growth -- remains a worry. Cost cutting can't drive earnings growth forever, and if revenue forecasts don't pan out, expect a lot of pressure on equities. And with forecasters looking for as little as $53 a share in S&P operating earnings next year, a price-to-earnings ratio based on those estimates -- 20 -- looks pricey. Still, for now, investors expect a slow but steady climb. -------------------------------------------------------------------------------- Full Disclosure • LPL Financial held 281,543 shares of Intel as of June 30, 2009, according to • PNC Wealth Management held 3,276,151 shares of IBM and 973,408 shares of Apple as of June 30, 2009, according to

Bank-Bailout Fund Faces Years in Red as Failures Jolt System

By DAMIAN PALETTA and MICHAEL R. CRITTENDEN WASHINGTON -- The government said the fund that protects consumer bank deposits has fallen into the red and will remain there into 2012, a pointed symbol of how the aftershocks of the financial crisis will reverberate for years as banks continue to fail at a high rate. The negative balance is a headache for the Federal Deposit Insurance Corp., which runs the fund. On Tuesday, it proposed the unprecedented step of having the banking industry prepay $45 billion in fees by the end of the year to give the government more breathing room to handle future failures. The only other time the fund fell into the red was in 1991, during the savings-and-loan crisis, and it shows how U.S. officials underestimated the impact of this crisis on the government's cash needs. FDIC Looks to Fee Prepayments to Replenish Coffers 1:20 The FDIC, faced with a deposit insurance fund expected to be in the red, moves to raise $45 billion to replenish its coffers by having U.S. banks prepay premiums for three years. WSJ's Damian Paletta reports. More Real Time Econ: Key Point on FDIC Proposal "Though some of our largest bank failures have already taken place, there are still hundreds and hundreds of banks that are going to fail in this cycle," said Gerard Cassidy, a bank analyst at RBC Capital Markets. FDIC officials stressed that the fund's depleted state wouldn't affect depositors because federally insured deposits are backed by the full faith and credit of the U.S. government. The prepayment proposal was met with unexpected support from banks. Some saw it as preferable to another option the FDIC seriously considered -- an emergency charge of $5.6 billion on top of the regular fees. This would have likely come directly out of the capital reserves at thousands of banks. FDIC officials said banks would be able to spread the impact of the fee prepayment over several years by the way they account for it on their balance sheet. J.P. Morgan Chase & Co. Chief Executive James Dimon, in an interview, praised the FDIC's plan as "an elegant way for them to do it." In essence, the FDIC is proposing that most banks hand over by the end of the year their deposit-insurance fees -- the fund's standard source of income -- for the end of 2009 and all of 2010, 2011 and 2012. The FDIC said that without the new policy, its cash on hand would be outpaced by its cash needs sometime early next year. Bank failures are expected to hit their peak either this year or in 2010. Depleted Reserves View Interactive See the FDIC's deposit insurance fund balance over time. The FDIC continues to have cash even though its deposit insurance fund has fallen into the red. It has already taken more than $30 billion out of the fund to cover bank failures over the next year. This is the money that is expected to run dry early next year without the prepayment assessments. FDIC officials estimated the deposit insurance fund wouldn't be back to comfortable levels until 2017. Government officials on Tuesday estimated that bank failures from 2009 through 2013 will cost the FDIC $100 billion, up from a projection several months ago of $70 billion. Ninety-five banks have failed so far this year. The FDIC's proposal reflects a growing recognition from government officials that more money will be needed to mop up the mess than they projected just months ago. It is also a stark reminder of how the banking sector continues to be strangled by bad loans. There have been bank failures in most states since January 2008, hitting Georgia, Illinois and California particularly hard. The FDIC had 416 banks on its "problem" list at the end of June, and the number is expected to grow. FDIC officials project the deposit insurance fund will remain in the red into 2012, despite the prepaid assessments from banks. This is largely an accounting issue -- the FDIC has to count the prepaid assessments as both an asset and a liability because it is technically deferred revenue. Another option the FDIC considered was to borrow billions of dollars from the Treasury Department. Officials felt such a move would send the wrong message to the public. "I do think that the American people would prefer to see an end to policies that looked to the federal balance sheet as the remedy to every problem," FDIC Chairman Sheila Bair said. But for the first time, Ms. Bair said Tuesday that she had directed the agency to prepare the "mechanics" for borrowing from the Treasury in case it ever became necessary, although "today is not that day." The evaporating deposit-insurance fund had $10.4 billion in June, the latest figure available, down from $45.2 billion in June 2008. That posed a public-relations problem for Ms. Bair. She has had to both move rapidly to close failing banks, which is costly for her agency, while retaining public confidence in the FDIC. The rising number of bank failures has infuriated some politicians who have recently begun pressuring Ms. Bair's regulators to ease up on their increasingly close supervision of the industry. The FDIC said banks could ask for an exemption if they didn't have the cash on hand to prepay the fees. —David Enrich contributed to this article. Write to Damian Paletta at

Chinese Insurers Allowed to Invest in Commercial Real Estate

Chinese insurance companies will be allowed to invest directly in commercial real estate for the first time under new regulations that are set to trigger a huge influx of cash into the country’s high-end property market. New regulations allowing insurers to invest in real estate go into effect on Thursday, although details on investment limits and what types of property insurers can buy will not be released for another month at least, according to regulatory officials. Conservative estimates put the amount of potential new investment by Chinese insurers in commercial real estate at $34bn (€23bn, £21bn), according to Jones Lang Lasalle, the real estate consultancy. Based on current average capital values, $34bn is equal to more than twice the value of the Shanghai Grade A office market. China’s high-end, investment-grade market has seen average investment of just $8.5bn in each of the last two full years, and has been falling since the end of last year as a result of the financial crisis. The new regulations were “a key step in a process that has already seen a marked shift from a foreign-dominated real estate investment market to one where domestic players have assumed pre-eminence”, said David Hand, head of investments for Jones Lang Lasalle China. China’s insurers had combined assets of $540bn at the end of August and given the suitability of real estate as an investment to match long-term insurance liabilities, analysts say they are likely to invest as much as they are allowed. Considering the Chinese government’s record on liberalising insurers’ investment scope in the past it is likely the insurance regulator will move slowly and allow insurers to invest only about 5-8 per cent of their assets in real estate at the initial stage. Chinese insurers are currently allowed to invest up to 10 per cent of their total assets directly in equities and another 10 per cent in equity investment funds. Before 2006 they were not allowed to invest directly in equities at all. The expected influx of insurance investment to China’s commercial real estate will provide a huge boost in leading markets such as Beijing, where one-third of the office space is empty, prices are falling and total floor space is expected to double between 2007 and 2011. It also comes at a time when foreign interest in the Chinese market has dried up as a result of the financial crisis and the bursting of property bubbles across the world. Most Chinese insurers are directly owned by the state and some, including the People’s Insurance Company of China, have said they intend to invest in low-income housing when the new rules come into effect. The largest insurance companies have been positioning themselves for at least three years in anticipation of eventually being allowed to invest in real estate. Most have bought large office buildings in the centre of big Chinese cities that are ostensibly for their own use but in reality far exceed their own corporate office space requirements.

Tuesday, September 29, 2009


更新时间:2009-9-15 16:21:57 新闻来源:搜狐焦点网 点击[3555] 评论[1]   关于房地产市场的讨论,是当前宏观经济领域讨论中问题最多、意见最不易统一的领域。鉴于此,笔者认为,目前要选择从长期看来是正确的调控政策,必须先就讨论中经常出现的似是而非的观点,从宏观角度予以理论上的澄清。基于澄清后的正确认识,可以说调控房市的长期政策倾向本应是清晰的、简单的。   关于房价的长期与短期问题   媒体上经常将上海、北京房价与香港比,认为中国房价将持续上涨。确实,如果看好中国经济持续高增长和再过20年经济总量将逼近美国、中国人均收入水平不断提高的前景;如果看好中国经济在进一步提高全球化水平过程中城市化进程的加快,北京、上海等大城市将更加繁荣这一历史必然。由于土地资源有限,从长期看,房价会呈上涨的趋势.   但是,也应该看到,因为经济周期调整的原因、因为目前房地产市场尚未成熟,政策尚需不断完善的因素、因为人口老龄化,城市独身子女家庭继承双方父辈房产逐渐增多的因素、或是宏观政策出现重大失误后的调整因素等等。由于诸多的不确定性,决定了在某个历史时期,房价未必一定是涨,也许是跌,或者涨的趋势根本不是现在人们所预期的走势。因此,投资房市特别是借钱进行投资,也许就会遭到严重损失,甚至是倾家荡产。所以,讨论房价问题,要防止舆论上将长期与短期问题的混淆。   关于民生与市场的问题   经过近几年对房地产市场宏观调控政策的摸索,人们越来越清楚,居民住房问题不仅是个市场问题,也是个民生问题、社会政治问题。调控房市,首先必须基本保障每个公民有最起码的居住权,需要对一部分收入水平较低的家庭,以非市场化的廉租房形式予以保障。在此前提下,才谈得上对除廉租房性质之外的一切住房,从宏观经济变量间平衡的角度出发予以市场化调控。   因此,基于中国人均收入水平仍处于较低阶段的特点,基于国民福利水平的提高是个渐进过程的特点,在调控中,只要是确保了宏观经济的基本平衡,即使面对居民改善性住房及其他房价的上升,舆论上的引导,不能给居民购买改善性住房和大学生毕业没几年就可以按揭买房,以更高的期望值。同样,在调控中,面对改善性住房及其他房价的下跌,也不必惊慌关措,应尽量由市场规律发生作用。因为只要宏观经济保持了基本的平衡,短期内房价出现较大幅度的涨跌,并不意味宏观调控出了问题,需要研究解决的可能是一个不成熟房地产市场中的其他政策制度的问题。只有区分了民生与市场的关系问题,宏观调控才有主动权,才有空间。   关于支柱产业与虚拟资产问题   毫无疑问,房地产市场已是我国重要的支柱产业。尽管如此,我们也应承认,当前的中国,买房既可作为消费,又可作为投资,这也是一个现实。因此,如果政策引导不当,房价上涨预期较快,这时购房的投资、投机因素往往是大于消费因素,虚拟资产的特征会明显突出。而在实际生活中,支柱产业因素与虚拟资产因素又是混合、同时存在的。虚拟资产因素往往又是宏观经济周期过度波动的干扰因素。因此,基于宏观调控的长期政策思考,第一,应想尽办法消除房市中虚拟资产因素对宏观经济周期波动的负面影响;第二,即使作为支柱产业也不是鼓励其做得越大越好,似乎一说支柱产业就不应该在一定时期采取压缩、限制其过快发展的政策。因此对一个支柱产业同样应在宏观经济总量保持平衡的前提下,考虑其在增长与物价诸平衡间的取舍问题。特别是在当今流动性过多、存在资产价格上升压力的情况下,且房市本身诸多制度还不完善、调控房市的政策尚处摸索阶段时,更要关注其虚拟资产因素对宏观经济的负面影响。   在这方面,中国要吸取世界各国发展房地产市场中的经验与教训。凡是将房市作为消费市场的,一国经济周期波动就比较小,如德国、法国等。凡是将房市作为投资市场的,一国经济周期波动就比较大,如美国、日本、西班牙等。基于此现实,“十七大”文件提出要提高老百姓的财产收入,应鼓励老百姓从投资实体经济中获得更多的财产收入(资本回报),而不是鼓励老百姓从投资虚拟资产市场去获得不稳定的财产收入(靠资产价格上涨)。   关于跨期消费与信用膨胀的问题   美国金融危机后,使越来越多的人看清了,中国经济不可持续的问题之一,是结构问题。集中反映诸多结构问题的突出表现是“高储蓄、低消费”的结构问题。因此,扩大消费是当今宏观经济政策调整中的核心内容。由此出发,鼓励居民利用金融功能进行跨期消费是题中之义。但是,跨期消费应该不应该有个“度”?“度”在哪里?这同样又必须从居民可支配收入的增长与宏观经济稳定发展的平衡角度进行思考。相对于房价的持续、快速上涨,如果居民可支配收入增长较慢,此时宏观经济周期波动较大而出现利率水平的频繁调整,原按揭利率水平较低的贷款或首付比例较低的贷款,有可能出现贷款偿付风险,或者出现信用膨胀的宏观风险。因此,从宏观经济平衡增长出发,必须对跨期消费要有一个“度”的控制。既要允许跨期消费,又要防止信用过度膨胀。在这个方面,美国金融危机已提供了一个典型的反面教训。   基于以上四点宏观思考,面对中国当前房市调控中的一系列政策,有些政策在短期内加以纠偏、调整有一定的难度,但从中长期看,必须毫不动摇予以明确坚持的原则是:   第一,对民生与市场问题,要有清晰的区别政策,不能含糊不清。在保民生的廉租房建设上,要把政策用足。从土地、资金供应,到城市交通规划、租金补贴等方面,政府应予以充分的政策倾斜。只有在基本确保民生和社会稳定之后,政府才能有充分的、更大的空间调控房市,才能在调控中减少各种顾虑。当前,在加快廉租房建设的同时,应逐步淡化遭人议论批评的、在民生和市场关系上容易含糊不清的经济适用房政策和其他一些“似民生”又“市场化”的政策。   第二,必须运用税收、金融等手段,减弱房地产市场中的虚拟资产市场因素。这应该是一个长期坚持的方针。为此,(1)应该扩大国有控股企业资本分红的范围与比例,扩大国有控股企业(包括非上市企业)国有股有计划减持套现,在充实财政预算扩大居民消费、鼓励居民私人投资替换国企投资的同时,减少国有大企业资金充裕——投资房市——赚钱——再扩大投资房市,不断出现国企中标“地王”,助推虚拟资产市场膨胀和进一步恶化经济结构的现象。(2)如果要真正鼓励引进外资重点是引管理、引技术,提高引进外资的质量与水平,应尽快调整政策,不鼓励甚至限制外资投资中国房地产行业,减弱其对中国经济周期波动的助推作用。(3)先易后难,通过税收手段,加大对投资房而非自住房的拥房成本(包括物业税)。   第三,只要是涉及金融放大功能的,一定要坚持一定的监管限制政策。对居民改善性住房和第二套住房,要坚持严格的首付按揭制度。对房地产开发企业要坚持严格的自有资本金制度。调控中国当前的房地产市场,不能把焦点仅仅集中在金融政策上。不能将调整购房首付比例作为像调整利率那样,作为日常短期调控手段进行经常性的调整,或者给予微观企业一定的浮动自主权。除廉租房外,对居民购买、流通第二套房的界定统计、按揭首付、按揭利率、出售纳税等涉及投资的一系列行为予以法律意义上的硬约束,不能给予政府主管部门、微观企业经常变动的、市场性的调整。同时,当前认为金融政策是决定房地产冷热的舆论,是不正确的、危险的,要加以正确引导。尽管房地产行业是当前我国国民经济中与其他相关行业一样,是重要的支柱行业,但同样要看到,这个支柱行业与其他相关支柱行业又有不同的虚拟资产意义上的行业因素。在影响经济周期的因素中,此行业发展的快或慢,有着与其他支柱行业相同的影响因素,又有着与其他支柱行业不同的影响因素。因此,越是在宏观经济周期波动较大或者在周期的转折关头,越要警惕过分运用货币政策,防止货币政策助推、夸大房地产市场本身的虚拟资产市场的作用。金融活动的实质是什么?是为社会跨期交易活动提供信用替代品,是在提供替代品的过程中引入信用的不确定性和风险。一定意义上说,房地产市场是一个资产市场。正如在美国极负盛名的美国金融研究会主席富兰克林艾伦曾说过:“当资产价格由金融系统来确定时,可能就会产生泡沫”。因此,我们在运用金融功能支持房地产企业进行跨期生产,和支持居民跨期消费时,都不能仅仅看到其实体经济意义上的投资与消费的作用,而忽视其宏观风险。必须把房地产市场调控政策之一的金融政策,置于经济增长与物价、经济增长与信用供给、国际收支平衡的最基本的长期考量中。   总之,只要在解决好房市中的民生问题,并将房市按消费品市场进行一定风险度控制的制度约束,中国的房市自然会出现一个稳定发展的走势,政府的宏观调控也不会因房市过度波动而带来烦恼与被动。   但是,目前政策的调整也许会影响房地产行业,进而影响投资。对此,调整策略可采取:1)坚持渐变、先易后难、逐步衔接的原则,用两到三年的时间,把调控思路逐渐引导到以消费为导向的发展方向上。2)保持清醒认识,对于短期内投资下降的问题,不应采取简单的饮鸩止渴政策,更不该迁就从长期看早应解决的制度问题。我们应尽快通过改革来实现宏观经济政策和投资消费政策协调发展,从而达到全社会和谐发展的大目标。

CIT in Last-Ditch Rescue Bid

Lender Readies Plan to Hand Control to Bondholders; Bankruptcy Filing Is an Option By MIKE SPECTOR and JEFFREY MCCRACKEN The fate of CIT Group Inc. was hanging in the balance Tuesday as the large commercial lender readied a plan that would likely hand control of the company to its bondholders. CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding, said people familiar with the matter. The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured firm. The new debt would mature later than current debt, the impending maturity of which has posed a problem for CIT. The plan sets up a showdown between CIT and its lenders. If the company doesn't receive enough bondholder support, it plans to execute the restructuring in bankruptcy court, the people familiar with the situation said. While the plan is being developed by a steering committee of bondholders in consultation with CIT management, many of those involved said they didn't expect that the company could avoid seeking Chapter 11 bankruptcy protection, given competing bondholder interests. If CIT does file, it would be the fifth-largest bankruptcy filing in U.S. history, by assets, trailing only Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom Inc. and General Motors Corp. CIT would continue operating under creditor protection, although other financial businesses have struggled to remain viable in bankruptcy. View Full Image Getty Images The CIT Group logo in July. The company prepared a plan that would likely hand control to its bondholders. But if not enough bondholders agree to the plan, the company could seek bankruptcy filing. CIT shares, which are down 50% this year, have swung wildly in recent days as an Oct. 1 restructuring deadline neared. On Tuesday, the stock rose 32% and 360 million shares changed hands after news reports of possible bond sales and merger deals. Under either the scenario of a bond exchange or a bankruptcy filing, the shares would lose all or most of their value. CIT declined to comment. The people familiar with the matter cautioned that talks remained fluid and many details remained to be determined, including the amount of debt CIT needed to extinguish to avoid a bankruptcy filing. CIT's board has yet to approve any course of action, these people said. Yet the plan could end what has been a months-long drama over CIT, a century-old company that is one of the largest lenders to thousands small and medium-size businesses, such as Dunkin Donuts franchises. It has been especially important to certain retail and apparel businesses, but got into trouble by plunging, a few years ago, into student lending and subprime mortgage loans. Although CIT owns a Utah bank, it has relied for much of its funding on the capital markets -- bonds and short-term debt called commercial paper. Having run out of funding options this summer, given its "junk" credit rating, CIT faced the looming need to roll over debt that was maturing. The firm teetered on the verge of a bankruptcy filing before it got a rescue package in late July. CIT had sought relief from federal regulators and last December did receive $2.3 billion under the Treasury's Troubled Asset Relief Program. In 2009, however, federal regulators declined further aid, having determined that a failure by CIT wouldn't severely harm the economy. That left the lender scrambling to right a balance sheet burdened by bad real-estate and commercial loans. CIT avoided a bankruptcy filing in late July when a group of large bondholders such as Pimco, Oaktree Capital and Silver Point Capital infused $3 billion in last-minute financing. The money acted like a "bridge" for CIT to prepare a debt-exchange offer. Troubled companies often float the idea of bond-exchange offers in an effort to avoid a bankruptcy-court filing, hoping to push debtholders to make certain concessions. GM this spring offered bondholders a 10% equity stake in exchange for all but $3 billion of $27 billion in unsecured debt. GM failed to get enough takers and in June filed for bankruptcy protection, from which it has since exited. CIT's initial debt-exchange is expected to last about 20 business days, said people familiar with the matter. One additional element would include new secured borrowing of $3 billion to $4 billion, said the people familiar with the matter. Bank regulators are being kept apprised of the situation, said these people One issue is the $2.3 billion taxpayer investment in CIT via TARP. While the U.S. would recover a small amount in any debt-exchange plan, it is likely that much of the sum would be wiped out, said people familiar with the matter. Earlier this year, whether to give CIT further aid beyond TARP presented a difficult question for the Obama administration. Failure to do so opened it to criticism it was aiding giant banks but not a smaller lender, and one on which many smaller businesses rely for financing. CIT had sought to get in on a program in which the Federal Deposit Insurance Corp. guaranteed lenders' debt. The FDIC ultimately declined CIT's entreaties. Write to Mike Spector at and Jeffrey McCracken at

Monday, September 28, 2009


正文 评论 更多中国视点的文章 » 投稿 打印 转发 MSN推荐 博客引用 发布到 字 体中国在创建由大型风场供电的绿色城市上有着雄心壮志,而这一宏伟计划却有着秘尔不宣的尴尬:绿色城市还需配备几十座新的燃煤发电厂。 何以至此?部分原因是风力发电依赖的是风力。为避免风力不足时出现停电情况,地方官员已经寻求将煤电作为后备。 Bloomberg News 今年早些时候,一名工人在江苏省一家风场附近工作。中国希望到2020年,风力等可再生能源能够满足其15%的能源需求,较2005年时增长一倍,旨在以此控制严重的废气排放。但专家称,中国当前的电网不能吸纳可再生能源的发电量增长。去年多达30%的风力发电能力没有并入电网。由此导致现有电厂燃烧更多的煤炭,并且建了新的燃煤电厂以弥补流失的可再生能源发电量。 此外,地方官员希望储备足够的新增燃煤发电能力,从而在风力不足时满足需求。这一点显得非常重要,因为风力相对煤炭而言不太可靠。中国三分之二的电力供应来源于煤炭。风能归根到底依赖风力和风向,而煤炭可以提前储备。 令问题更为复杂的是区域电网之间的传输能力十分薄弱,进而使中国难以将某些地区的过剩电力传输至其他电力短缺地区。 中国也许并非唯一遭遇发展风场时必须增加燃煤发电能力这一尴尬的国家。任何一个国家,如果其能源需求快速增长,电网陈旧老化,当前主要依赖煤炭发电,并计划大规模发展可再生能源,都将面临类似的困境。但中国的难题在于中国新增燃煤发电能力的数量巨大。 中国风能协会(Chinese Wind Power Association)副会长施鹏飞称,随着经济的发展,中国到2020年需要增加大量的燃煤发电能力,建议提早投产这些发电能力,以便促进风电传输。 由于中国大量依赖煤炭,目前中国是世界上按绝对排放量计算的最大温室气体排放国。根据英国石油公司(BP PLC)的世界能源统计年鉴,去年全球新增的煤炭需求中,中国占85%以上。 面对海外就中国温室气体排放增速而对中国施加的压力,中国国家主席胡锦涛上周二在联合国(United Nations)发表讲演,强调中国承诺应对环境变化。他称,中国将降低每单位国内生产总值的能源消耗,并提高可再生能源和核电的发展。胡锦涛称,中国计划到2020年显著降低每单位国内生产总值二氧化碳的排放量,但没有设定具体的排放上限。 中国甘肃省酒泉市的情况显示了在实施减排计划时所面临的复杂局面。甘肃省位于中国西北地区,气候干旱,地势平坦。酒泉市计划到2015年安装总发电能力为12.7百万千瓦的风力涡轮机,超过中国当前的核电能力。 但酒泉市政府还希望建设9.2百万千瓦的新燃煤发电能力,以备风电不足之需,而这相当于匈牙利的全国发电能力。 酒泉发展改革委员会(Jiuquan Development and Reform Bureau)的一位官员上周二称,这些燃煤发电厂的兴建仍有待中央政府的批准。 终端用户消费的风电将最终替代由煤炭等其他污染能源的发电,新建风场将提供的大量电力供应代表着中国在清洁能源利用方面所取得的进展。 中国有大量风力强劲的平原和阳光充足的戈壁沙漠,能够安装风机和太阳能电池板,但这些地区都远离城市和电网基础设施。清洁能源咨询机构Azure International的研究和顾问服务主管梅尔(Sebastian Meyer)说,中国如果希望增加可再生能源在其能源消费中的比例,需要开发更加现代化和灵活的电网。

U.S. Drug Companies Chase Vaccines

By JONATHAN D. ROCKOFF and PETER LOFTUS Amid rising concern about the threat of influenza pandemics, three big drug makers announced deals Monday that give them rights to new flu vaccines, placing bets on one of the pharmaceutical industry's brightest, but riskiest, segments. The deals reflect the growing conviction among pharmaceutical executives that vaccines against a variety of maladies, long an industry stepchild, will become an increasingly important source of growth to replace aging blockbusters that are poised to lose patent protection. Workers in Melbourne at a CSL facility that produces flu vaccines. Merck will market CSL's seasonal flu vaccine in the U.S. Vaccine sales are growing faster than sales of other prescription medicines and are largely immune to the generic competition that is already costing drug makers billions of dollars in revenues on their top-selling treatments. Moreover, government agencies both in the U.S. and around the world are increasingly reliable buyers of vaccines as they seek to stockpile medicines that could help protect the public in case of a major flu outbreak. "If you have a new vaccine for a new type of meningitis or swine flu, that clearly is a major public-health issue and, therefore, the willingness to pay is going to be greater," said Murray Aitken, senior vice president of health-care insight at IMS Health. In one of the deals, Johnson & Johnson paid €302 million ($441 million) for an 18% stake in Dutch biotech company Crucell NV, in order to jointly develop vaccines. In addition, Abbott Laboratories confirmed it will acquire a unit of Belgian conglomerate Solvay SA for €4.5 billion in a deal that includes a vaccine-making business. And Merck & Co. said it obtained from Australia's CSL Ltd. for an undisclosed sum the U.S. marketing rights to a seasonal flu vaccine. More Heard on the Street: Abbott Solves Financial Equation Abbott Strikes Deal on Solvay Unit J&J Buys 18% Stake in Crucell Health Blog: Deals to Improve Access to Vaccine Market The deals follow Pfizer Inc.'s accord earlier this year to acquire Wyeth, one of the relatively few big pharmaceutical companies known for its vaccine expertise. Low prices, high costs and fear of lawsuits prompted most large drug makers to abandon the vaccines business in the 1980s and 1990s. Flu vaccines involved "a clunky old egg-based process fraught with difficulty, and the economics stunk," said Alan Shaw, a former Merck vaccines researcher who is now chief executive of VaxInnate, which is trying to make flu vaccine in E. coli bacteria. Big drug companies have re-entered the business as prices have risen and researchers develop new technologies for improving production. Merck's Gardasil, for human papillomavirus, costs $130 a dose, and Prevnar, a pneumococcal vaccine from Wyeth, costs nearly $84 a dose. "Other companies have decided that they really missed out on that tremendous growth opportunity," said Margie McGlynn, president of vaccines and infectious diseases at Merck, which never left the business. With the deal to sell the Afluria seasonal flu vaccine in the U.S., Merck would market eight of the 10 vaccines recommended for adults. Flu vaccines typically average $10 to $20 a dose. Despite their low price, analysts say companies like them because they provide a steady source of revenue. Vaccines are expected to generate $21.5 billion in sales by 2012, according to Sanofi-Aventis SA, a leading vaccine maker. Vaccines are especially attractive to drug companies looking to Brazil, China and other emerging markets for growth. Governments are seeking vaccines to protect their populations from a potential flu pandemic. They also view other vaccines as good values, since for as little as $10 a shot the injections prevent illnesses that would cost far more to treat. Companies, meanwhile, say the relationships forged in selling vaccines can benefit sales of their other products. J&J will be working with Crucell on the development of a vaccine that would protect against all flu strains. "If we developed a universal vaccine, then there would be no need anymore for annual change of the vaccine and probably no need anymore for annual vaccinations," said Paul Stoffels, J&J's global head of pharmaceuticals research and development. Vaccines still carry risks for the companies. Some lawyers are trying to circumvent government efforts, such as a "vaccines court" in the U.S., that shield drug makers from vaccine-related litigation. Foreign governments like Russia have pushed companies to lower their prices. And despite improvements, manufacturing remains difficult and complex. Seasonal flu vaccines, for instance, are tough to produce because they are made inside chicken eggs. Yet there have been so many deals involving big pharmaceutical and smaller vaccine businesses over the past several years that "there are not many companies left" to be bought, said Holger Rovini, lead analyst for infectious diseases at Datamonitor, which advises drug companies on the vaccines market. One remaining potential target, he said, is Baxter International Inc., which is making an H1N1 flu vaccine. A spokesman for Baxter couldn't be reached for comment. For Abbott, vaccines are only part of the rationale for the Solvay deal. In announcing the transaction, Abbott CEO Miles White said he hopes acquiring the company's pharmaceutical assets -- which include cholesterol remedies, hormone treatments and a pipeline with new drugs for hypertension and Parkinson's disease -- will help dispel concerns about the company's future profit growth. Analysts have been particularly concerned about the company's reliance on the arthritis drug Humira, which accounts for 15% of its revenue, but which has suffered significantly slowing growth in recent quarters. Investors responded warmly to the acquisition, pushing Abbott's shares up 2.6% to $48.58 in 4 p.m. composite trading on the New York Stock Exchange. Derrick Sung, analyst with Sanford C. Bernstein & Co., said the deal will boost Abbott's bottom line and help it expand into emerging markets -- an increasingly important strategy as pressures have mounted recently on the U.S. prescription-drug market, long a major profit driver. But Credit Suisse's Catherine Arnold, while acknowledging the profit boost, said she would have preferred to see Abbott pursue "more strategic assets that would add better long-term growth." Write to Peter Loftus at


基于去年下半年较低的基数,2009年全年,中国企业利润增长率应该能达两位数   【《财经网》专栏/专栏作家 陈昌华】今年上半年中国经济状况并不十分理想,因此各方对企业盈利亦未抱太高期望。在绝大部分企业(包括所有A股公司)已公布上半年业绩的情况下,市场和媒体似乎没有太大兴趣来报道和分析。事实上,若虑及经济环境因素,今年上半年,中国企业的盈利表现可能是过去几年中最好的。   在对1774家中国上市公司(包括A股、H股、红筹股和在香港及美国上市的中资民企股)的业绩进行分析后发现,它们在2009年上半年的净利润总额为人民币6009亿元,同比下降13.7%。若我们把原材料和工业设备等这类经济危机“重灾区”行业剔除的话,那其他行业的利润总和比去年同期还略有上升。另一方面,虽然这1774家公司的盈利同比下降,但它们的盈利总和比去年下半年上升了52%。   这是一个相当强劲的反弹,特别是在上半年这些企业的销售情况并不十分理想的情况下。今年上半年,这1700多家上市公司的营业收入为60692亿人民币,比去年同期下降8.6%,较去年下半年亦下跌8.3%。在今年上半年名义GDP增长速度大幅下滑(从去年下半年同比增长14.6%落到今年上半年的3.8%)的背景下,上市公司营业收入下跌并不为奇。但有趣的是,与去年下半年比较,虽然营业收入有所下跌,但利润却大幅反弹,这相当于同去年下半年相比,上市公司的利润率大幅上升。   在1700多家上市公司中,有40多家是金融类企业。虽然金融类上市公司的数量较少,但它们至少占了上市公司利润总和的半壁江山。这些公司利润反弹的主要原因是信贷成本下降(得益于不良贷款率下降)和投资收益上升(主因是A股市场上扬)。在其他非金融类的上市公司中,我们发现,它们的营业利润率和净利润率都比去年下半年大幅上升。   今年上半年,中国上市公司的营业利润和净利润分别为7.3%和5.4%,略低于2008年上半年;但却远高于2008年下半年的2.2%和2.6%。这是个很值得一提的改善——事实上,从2005年左右开始,虽然中国上市公司的盈利上升颇快,但很大程度上是得益于销售收入的高速增长;过去几年来中国上市公司的利润率却是不断下跌的,这一情形一直到2009年上半年才有改观。   那么,对于这些非金融类企业,是什么因素带动他们的利润率上升,而这些因素又是否能长期维持下去呢?   首先,企业努力这一点是不能否定的。自去年下半年金融风暴开始,全球企业(包括中国公司)都开始备战经济“寒冬”。在中央政府主导的财政和信贷政策支持下,中国经济的情形远比预想中要好。因此,在2008年底订下的严格控制成本的各类措施,便为2009年上半年业绩大幅反弹奠定了基础。   然而,尽管节省下的成本可能并不会立即反弹,但在经济开始转好情况下,若要国内企业再大幅压低成本则可能相当困难。因此,从这点来看,如果中国企业能保持现有的利润率水平,已相当不错。   其次,政府的要素价格政策,对石油和发电这两个行业的正面影响最大。在过去几年间,这两个行业面对的最大问题是,尽管原材料涨价,但最终产品因价格管制而不能提价,因此造成炼油和发电两大行业大面积亏损。今年的情况是,煤炭和原油的价格都比以往稳定,政府的调价机制也较过去合理,因此这两个行业的利润率都比以往有所改善。但今后的情形会如何,目前尚难预测。   从过往经验来看,因电力和石油都是影响国内民生的重要大宗产品,故此很难保证,在这些行业所耗用的原材料价格大幅上升时,政府能下大决心让这些企业按比例提价。因此,笔者在这两个行业保持高利润率水平的问题上并不看好。   再次,在经历此次金融风暴后,几乎所有商品的价格都有所下跌,但上游产品价格的下跌远比下游产品“悲惨”。基于中国企业主要集中在中、下游,而上游原材料多依赖于国外供应,这个价格的变化对中国企业是有利的。实际上,过去几年中国企业利润率持续下降的一个重要原因,是上游原材料价格的上升幅度大大超出了下游产品的价格。   当全球经济真正全面复苏之际,目前中国企业的这种“好景”将不能维持。其中最主要的原因在于,全球上游产品基本上是寡头垄断的(铁矿石就是一个最好例子),而下游产品(以钢铁为例)则相当分散。因此,纵使中国企业的总产量很大,但在市场中却没有与之相称的议价能力,更何况一些下游产业的产能过剩更削弱了我们的议价能力。   目前看来,对国内企业有利的一面是全球经济距离全面复苏还尚有时日,因此在2009年下半年甚至2010年上半年,国内企业可能会从上下游产品的价格变化中继续受益,获得一定的利润率;但待经济全面复苏后,这一优势将逐渐衰退。   总体而言,今年下半年,中国企业差不多能够保持上半年的利润率水平。若今年下半年的利润总水平能达到或超过上半年的话,基于去年下半年较低的基数,2009年全年,中国企业的利润增长率应该能达两位数——这在今年初时几乎是不敢想象的。但进入2010年,特别是2010年下半年,企业利润率将面临较大压力,因此营业收入的状况将大体决定中国企业2010年的利润增长速度。■   作者为瑞信中国研究主管、瑞信方正高级研究顾问

China Backs Market Price for Wind Power

By AARON BACK BEIJING -- A Chinese energy-policy official said the price for wind power and other renewable energy should be set by market forces, rejecting calls for fixed prices, a system used in some countries to promote the use of renewable energy. As China looks to renewable sources to fill more of its energy needs, many Chinese power companies are considering wind energy but are worried about profitability and thus looking for price guarantees. "Calls to set renewable-energy prices at a high level through a fixed government price are mainly coming from investors," said Zhang Guobao, vice minister of the National Development and Reform Commission, at a media briefing Friday. "But the result, if prices are fixed too high, would be to impact the widespread use of renewable energy." Renewable-energy prices, and in particular wind-power prices, should be set through a competitive market, said Mr. Zhang, who is also the chief of the National Energy Administration. Current prices for wind power, at about 0.5 yuan to 0.6 yuan per kilowatt hour, are "reasonable," and are higher than coal power prices, Mr. Zhang said. He also referred to incentives for renewable energy already in place in China, such as reduced taxes. Under policies used in some European countries, regional and national utilities are obligated to buy electricity from renewable sources at higher prices. Last week, the NDRC said on-grid tariffs of 0.51 yuan, 0.54 yuan, 0.58 yuan and 0.61 yuan per kilowatt-hour will be set as benchmarks for wind projects across the nation. The rates are in line with tariffs that the NDRC has approved in the past and mainly within the range of what Mr. Zhang called reasonable. In the solar sector, the Ministry of Finance offers subsidies for half the total construction costs of an on-grid solar plant, and as much as 70% for off-grid installations. China is also considering a system of guaranteed minimum tariffs for solar power to be supplied to power grids. Currently, solar-power tariffs are set on a case-by-case basis, leading to uncertainty on the part of investors. Asked about a recent statement from China's State Council, or cabinet, which warned of overcapacity in the wind-power equipment sector, Mr. Zhang stressed that Beijing's concern is over equipment specifically, and not the overall wind power sector. "No one has said that China has too much wind power and needs less," he said. Rather, the government's concern is that the Chinese wind-power equipment sector is too fragmented among many small companies, putting it at a disadvantage to major international companies such as Vestas Wind Systems A/S of Denmark and General Electric Co. of the U.S., Mr. Zhang said. Write to Aaron Back at

Stimulus Funds Speed Transformation Toward 'Smart Grid'

By REBECCA SMITH and BEN WORTHEN After struggling to sell cutting-edge products to utilities, technology companies are sensing better times ahead with the influx of $4.5 billion in federal stimulus funds for so-called smart-grid projects. A San Diego Gas & Electric technician installs a residential smart meter. The federal grants are expected to speed transformation of the power grid from a largely electromechanical system into a digital network that gives utilities more efficient ways to send electricity to customers. That could help cut pollution and electric bills. Smart meters, one component of a smart grid, allow utilities to monitor usage almost in real time, letting them charge variable prices based on demand, for example. Corporate and residential customers would acquire tools to manage their energy use. Residential customers could be given an in-home meter to see how much power they are using and what it is costing them. Utilities often take years to make technological change, in part because they must justify large expenditures to utility commissions to recoup costs through rates. Utilities also fear that new equipment could degrade transmission reliability if it doesn't perform flawlessly. But now, utilities are being encouraged by state utility regulators to seek the federal stimulus funds. California regulators this month voted to expedite their review of smart-grid proposals to fit the U.S. Department of Energy's timetable for smart-grid grants. That has opened up a sizeable sales opportunity for a host of tech companies, ranging from giant Cisco Systems Inc. to closely held Tendril Networks Inc. Some tech companies are beefing up staffs to pursue smart-grid projects, while others are helping utilities apply for the grants, the first of which could be doled out as early as next month. Read More Appliances Can Shift to Energy-Saver Modes on Cue North American utilities are expected to spend $10.75 billion on computer hardware, software and services related to the smart grid this year, up from $7.56 billion in 2008, according to research company IDC Energy Insights. The smart-grid market "may be bigger than the whole Internet," said John Chambers, chief executive of networking giant Cisco. Federal assistance "will accelerate the progress of projects [for many utilities] from pilots to full-scaled deployments," said Todd Arnold, senior vice president at Duke Energy Corp. The Charlotte, N.C., company started installing advanced meters in Ohio last year as part of the utility's five-year, $1 billion smart-grid initiative. Duke in August requested $200 million in federal funds to cover a quarter of the cost of installing two million advanced meters in Ohio and Indiana. The meters transmit readings wirelessly to utilities and customers and allow the creation of data portals to monitor energy use. Ambient Corp. of Newton, Mass., started working with Duke in 2005, suggesting ways the utility might use Ambient's communications modules to scoop up data from smart meters to boost grid intelligence. But activity picked up only recently. Ambient last month wrote a letter to the DOE supporting Duke's smart-grid application and this month inked a deal to sell large numbers of modules to the utility, said John Joyce, Ambient's president. The influx of stimulus dollars "is clearly significant for a firm like Ambient" because it stimulates investment in general and "will make us bigger" as utilities add projects, he said. Ambient had 2008 sales of $15 million but declined to give the value of its deal with Duke. Competition for the stimulus grants has been fierce. The DOE last month received roughly 570 applications from utilities requesting as much as $14.6 billion in smart-grid funds -- more than three times the amount available. Grants can be as much as $200 million per project and represent as much as half of a project's cost. Tendril Networks helped a dozen utilities in eight states prepare stimulus applications by offering the services of its lawyers, grant writers and technical advisers. The Boulder, Colo., company, whose products help consumers control their energy use, advised utilities on cost estimates and technology-integration issues. Tendril President Tim Enwall said he has identified two dozen utilities as potential customers if they win the federal grants. The grants could mean $900 million in sales, with about 20 firms like his competing for the business, he said. The grants represent the largest sales opportunity his company has had since it decided to pursue utility sales two years ago and could accelerate the date at which Tendril seeks an initial public offering of stock, he said. The company declines to disclose Tendril's sales or projections. PG&E Corp., meanwhile, has solicited Cisco and International Business Machines Corp. to design displays and manage data for a project to give 75,000 of its 570,000 business customers digital readouts to help them better manage energy use. The San Francisco-based utility is seeking $42.5 million in stimulus funds as part of the $85 million project. Microsoft Corp. in July unveiled software that connects to utilities' systems and allows customers to monitor how much energy they are using. The Redmond, Wash., company also is developing products that will help utilities better manage information, said Troy Batterberry, a product manager in the company's 20-person energy group. And Cisco in June created a unit to focus on smart-grid technology, complete with a dedicated sales force. Mr. Chambers, the CEO, said the team developing smart-grid products has "almost an unlimited budget." The San Jose, Calif., company, which has $36.1 billion in annual revenue, expects to generate at least a $1 billion a year of smart-grid related sales by 2014. Write to Rebecca Smith at and Ben Worthen at

Profits Poised to Surprise Again

By E.S. BROWNING The stock market's strong rally is facing its next test as companies gear up to announce third-quarter earnings that, while still weak, will very possibly be better than investors expect. Earnings in the first two quarters of the year that beat expectations helped propel the market's recovery, and the prospect of a repeat has even some bears wondering if they have been too pessimistic. Morgan Stanley investment strategist Jason Todd, one of the few remaining bears on Wall Street, told clients last week that the stock market is looking stronger than he thought and won't tumble, as he has been predicting, at least through the end of the year. "We think equities will now trade above" his previous target for this year, Mr. Todd said in his report, "in large part because earnings will be higher than we previously anticipated." Until now, Mr. Todd had been predicting the market would fall 14% from today's level by the end of the year. Now he is telling clients that the Standard & Poor's 500-stock index -- which is up 54% from its March 9 low -- is likely to rise marginally between now and year's end and could be up as much as 15% before it gets into trouble. That, keep in mind, is the bearish view. One big reason for the market's continued strength is that expectations were so low for the economy and corporate earnings that the market was able to rise even on modestly good news. "If you are expecting to lose a dime and you lost a nickel, you are a winner," says senior analyst Howard Silverblatt at Standard & Poor's. Expectations remain low. Analysts forecast a 25% decline in third-quarter profits for companies in the S&P 500 compared with a year ago, not counting charges and special items, according to Thomson Reuters. When the quarter began, analysts had been forecasting a drop of 21%. For makers of industrial materials, analysts now forecast a 68% third-quarter profit drop. The expected profit decline for energy companies is 64%, for industrial companies, 45%, and for technology companies, 15%, Thomson Reuters says. The one area where expectations are bubbly is at financial companies, whose escape from death is forecast to result in a 60% year-on-year profit gain. The other bright spot is consumer-discretionary stocks, makers of appliances, cars and other things consumers can easily delay purchasing, whose profits are expected to rise 16% compared with a year ago. The parade of better-than-expected news began in this year's first quarter when S&P 500 profits fell 36%. Analysts had expected worse, so 65% of companies exceeded forecasts, according to Thomson Reuters. The market's rebound has made stocks more expensive relative to their earnings, meaning investors are betting earnings will rebound from their current low levels. Above, traders leave the New York Stock Exchange after the closing Thursday. In the second quarter, although profits fell by almost a third, 73% of companies produced results that were less bad than expected. That tied the first quarter of 2004 for the highest percentage of companies beating estimates since Thomson Reuters started tracking such numbers 15 years ago, and it helped propel stocks still higher. Many people now expect a high percentage of companies once again to do less badly than the analysts forecast. Early results back that view. While only 16 companies have reported third-quarter results so far (these are companies operating on skewed fiscal calendars), 11, or 69%, have exceeded analyst predictions. "Once again, we will see a lot of companies beating estimates" as the earnings season gets going in earnest in October, says Jeffrey Kleintop, chief market strategist at brokerage firm LPL Financial in Boston. Mr. Kleintop thinks that this time, sales are going to be an even bigger surprise than profits. Sales have been slow to recover as consumer spending has remained muted. Companies have been holding up profits by cutting costs. Now, as the recession shows signs of ending, he and others think sales could surprise the analysts, although sales still are likely to be down from a year ago. Stronger-than-expected sales would boost profit margins and give the stock rally fresh fuel. This would also be a welcome sign that earnings are being driven by customer demand and not cost cutting. Companies aren't giving much guidance, Mr. Kleintop says: "They are keeping tight-lipped in hopes that they will beat estimates and get a further boost in their stocks." The market's rebound has made stocks more expensive relative to their earnings, meaning investors are betting earnings will rebound from their current low levels. Based on average earnings over the past 10 years, the price-to-earnings ratio of the S&P 500 has risen to 19 this month from 13 in March, according to Yale economics professor Robert Shiller. On average, the ratio is 15 to 16, so it has moved to above average in that short time from below average. Mr. Silverblatt at S&P says companies in the S&P 500 suffered a staggering sales decline during the 12 months through June -- a total loss of $1.15 trillion, or 12%. They suffered double-digit percentage declines for three quarters in a row. The earnings picture will likely improve further in the fourth quarter, if only because last year's fourth quarter was so bad. Analysts expect fourth-quarter profit declines in only four of the 10 S&P sectors, according to Thomson Reuters: energy, industrials, utilities and health care. For the first quarter of 2010, analysts forecast a profit decline only in telecommunications and utilities, and the drop is expected to be only 2% to 3%. That optimism has some people worried because the higher expectations will come as the government is pulling back on its efforts to stabilize the finance system, and stimulus spending will be slowing. "There is maybe more trouble ahead as we look to the second half of 2010. I am urging clients, while the sun is out now, to benefit from it and get more risk in your portfolios" -- and then be ready to hunker down some time next year, LPL Financial's Mr. Kleintop says. Write to E.S. Browning at

Pessimism Exacts a Price on the Skeptics

By GREGORY ZUCKERMAN Hedge-fund manager Peter Thiel is suffering, not because he lost money in the downturn, but because he missed the rebound. BAD VIBES: Taking the contrarian view as the market has rallied has left some hedge-fund managers, such as Peter Thiel, missing out on big gains. Mr. Thiel, a billionaire co-founder of online payment company PayPal and an early investor in Facebook, thinks the economy is far from recovered and has bet with the bears amid the relentless rally. His fund has seen double-digit declines as other hedge funds have racked up gains. "The recovery is not real," he says. "Deep structural problems haven't been solved and it's unclear how we will create jobs and get the economy growing again -- that's long been my thesis and it still is." The contrarian view puts Mr. Thiel among a group of investors with impressive track records who are holding out, unwilling to buy into the notion of the economy's rebound. In London, the largest fund of John Horseman's $4 billion hedge-fund firm is down 20% this year; "it is hard to build longer-term confidence when employment prospects and job markets are shrinking," he said in a client letter. In New York, a large hedge fund run by investing power Renaissance Technologies dropped almost 12% through August by wagering on stocks with promising earnings prospects and betting against those seen as flimsier. And in Chicago, Benjamin Bornstein's smaller Prospero Capital Management lost almost 5% through the second quarter, but he is still shorting the market. Heavy job losses, weak revenue growth for most companies, full stock-price valuations and an inability of the economy to grow without help from the government are all reasons Mr. Bornstein remains wary of stocks. "I have rarely been so convinced that the next broader market move is down," says Mr. Bornstein, who avoided most of the market's troubles last year. "The problem is that governments do not create income or wealth, and current stimulus equates to a future tax liability. That will become a major concern in mid-2010 when the stimulus is done." Mr. Thiel's Clarium Capital Management, which at one point last year had $6 billion in assets, has seen losses of nearly 16% through mid-September, compared with a 14% rise for hedge funds broadly through August, according to Hedge Fund Research Inc. Clarium now manages about $2 billion. In 2008, Clarium lost 4%, even as the Standard & Poor's 500-stock index fell 38%, and the firm has recorded annual gains averaging 22% since inception in 2002, according to investors. Last year, the fund was sitting on gains of more than 40% before the collapse of energy prices caught Mr. Thiel by surprise, making Mr. Thiel's contrarian stance in the face of losses seem more gutsy. For the skeptics, the stakes are high. The hedge-fund business had its worst year on record last year; another year of disappointing performance could be the death knell for many funds that struggled last year. Mr. Thiel wouldn't seem like an obvious poster boy for the market's worrywarts. A 41-year-old former nationally ranked scholastic chess player and graduate of Stanford Law School, he was chief executive officer of online-pay service PayPal earlier this decade and scored big in 2002 when eBay Inc. bought the company for $1.5 billion. Mr. Thiel added to his venture-capital successes with early investments in firms like Facebook and Palantir Technologies, a high-tech firm that hunts for terrorists. In 2002 he launched Clarium and scored impressive gains for several years, largely by buying up energy investments on the view that growing global demand and more limited supplies would boost oil prices. For much of this year, Mr. Thiel's firm placed a series of bets against the market, in part because valuations on a range of global equity markets have looked rich, he says. As markets have climbed higher, he has been forced to scramble to trim the positions, to avoid deeper losses. He has bet on the Japanese yen, purchased safe bonds, wagered on the dollar, all in the belief fear will return to the markets. He has taken other conservative steps because "a real, sustainable recovery is not possible without productivity growth." "The U.S. and much of the developed world are not very competitive globally -- that would require difficult improvements in technology that I'm not seeing enough of," he says. The most exciting technologies being developed, including robotics, rockets, artificial intelligence and the next wave of biotechnology, are several years down the road, Mr. Thiel argues. Mr. Thiel says he is sensitive to a challenge to pessimistic investors who prospered during the tough period of the past two years -- becoming overly negative. Some of his investors ask Mr. Thiel if he could lose serious money in the short term, he says, even if he is right over the long haul. He is sticking to his stance. "The government has helped stabilize the banking system, but I'm not sure we have a path toward sustainable growth," partly because consumers are dealing with debt and other issues, even as an energy crisis looms, he says. "It always feels unpatriotic to be negative. But too few people are focused on the real problems." —Alistair Barr contributed to this article. Write to Gregory Zuckerman at

Sunday, September 27, 2009

Supply Glut Will Put the Heat on Solar Stocks

Gordon L. Johnson II, Solar-Energy Analyst, Hapoalim Securities By BILL ALPERT MORE ARTICLES BY AUTHOR AN INTERVIEW WITH GORDON L. JOHNSON II: An expert on solar-energy stocks, he sees gloomy days ahead for First Solar, SunPower and other names. 10:11 am ET September 26, 2009 Jim Walker wrote: I respectfully disagree. The solar industry is in its infancy, as measured by the man on the street. Me. Drive past 10 houses in any suburban neighborhood USA and count the # of solar panels you find. About 0.01% , if that many. The Solar industry will only become flooded when its cheap and painless to install a complete solution. For example, I went to Home Depot 2 weeks ago to buy solar driveway lights for $49. Self installed in about 10 mins. Just the stick in the ground and pull the tape off the batteries and presto! I now have nighttime driveway lights. I look forward to the day i can light, heat my house, run my frig w/ a similar easy to plug in solar solution that reduces all my other energy cost. We should be so lucky to find its only 3 yrs away but more like 15 yrs away. Solar collection devices may come down in price a bit , but for a consumer and the world, its the total purchase and install price that a bottleneck for adoption. I disagree with Jim because FSLR is more about the commercial side of the business, which is lagging (recessionary). And the reason the Solar industry is still not the top priority of any government administration (Bush, Obama, etc.) and not the favorite industry for subsidies, which it needs badly to build earnings growth. Reply to Gary Lee Coleman 09:17 pm ET September 26, 2009 Jim Walker replied: Gary, Thks for your comments. FSLR is in business to sell solar products. Not sure they care who eventually buys /uses them: Commercial or Consumer. It currently costs $70k (pre-tax breaks) to install a solar system in a residential home or roof of an office building. That its a big ticket sale that FSLR would be happy to have. But the holy grail of solar is thin film technologies that can cheaply coat my home's roof with solar elec. generating capability. (Check out Nanosolar and others who do this. Just re-interating my point that we are in the infancy of the solar mkt. Reply to Jim Walker 09:23 pm ET September 26, 2009 Orlando Perez wrote: I would like to know why Evergreen Solar is never considered on the "list" of companies regardless if they have been in the red. It seems to me that the mainstream does not mention the company intentionally for some suspicious reason. Does anybody know why? He talked about excess capacity. how much incremental demand is needed to soak this up and how can this be gauged? i was in italy this summer and i saw many solar farms along the autostrada that did not exist one year ago. the build out in solar is so potentially enormous. Reply to John Jay Gebhardt 01:42 pm ET September 27, 2009 Richard Miller wrote: With all due respect to Jim, the business model will not work at these rates irrespective of the customers. There are long term solutions that are cheaper per KwH than this solution at these prices. Government intervention will not solve the problem. And with respect to those lights from Home Depot, half of mine stopped working within one month. How are your's working? Reply to Richard Miller 02:11 pm ET September 27, 2009 John Jay Gebhardt replied: solar is not being driven only by price but also in order to combat GLOBAL CLIMATE CHANGE. Reply to John Jay Gebhardt Add a Comment All comments will display your real name. We welcome thoughtful and respectful comments. Please comply with our guidelines. + text size − print email Share Digg facebook twitter LinkedIn StumbleUpon Yahoo! Buzz MySpace NewsVine Mixx single page reprints get rss Subscribe Now With these readers: Or copy the rss link: SOLAR-ENERGY STOCKS HAVE BEEN MORE volatile than the broad market in the past year, and one of the most influential commentators on the group has been Gordon L. Johnson II -- the first analyst hired when Israeli firm Hapoalim Securities started a U.S. research group in 2008. Johnson's investigation of the solar industry's supply-demand problems led him to issue a bear call on the sector, which brought him flak until industry disappointments proved him right and the stocks retreated. Lately, the stocks have reignited. So, in a phone interview, we asked: What's up? Barron's: Do you have a few moments to get famous? Johnson: I don't know. The last time we spoke, First Solar [ticker: FSLR] was below 120, and I didn't think it was going higher. Now, it's 153. I was loved by my clients then. Now, people are scratching their heads. Matthew Furman for Barron's "It takes three years to construct a polysilicon plant. Now all these plants are coming on line, but the solar bubble has burst." --Gordon L. Johnson II What happened? Nothing changed fundamentally. But First Solar made a couple of announcements. The current stock price is going to be a great entry point for short sellers. The stock is definitely overvalued. Before we get into that, let's discuss your background a bit. I grew up in Ohio and went to school at Morehouse College in Atlanta. I got accepted by a couple of really good schools, but my grandmother thought that Morehouse was the best college on earth. I studied business after I noticed that the guys in the business department were wearing suits. I wanted to wear suits, and eventually I decided that I wanted to be an investment banker. When I graduated, it was a tough year for investment banking, but I was one of only two guys at Morehouse who got multiple offers. I started out at JPMorgan Chase, in the investment-banking unit. Later, I decided I wanted to go into research because that seemed like what my skill set really was. I worked at Credit Suisse for about three years, then I jumped over to Bear Stearns and then went to Lehman Brothers, where I covered semiconductors and, later, solar stocks. After Lehman went under, I moved to Hapoalim Securities. Your first call there was in October of last year? Yes. I rated the solar industry Underperform in October 2008. One stock I covered was Suntech [STP], which is based in China and at the time was at 24; it proceeded to go down to 5. I was worried about the financial crisis and the fact that Spain, which had become the largest solar-power market, would be cutting back. That created a massive oversupply, hurting a lot of solar-module manufacturers. At the time, people said that I was just trying to make a name for myself. In fact, someone from Suntech sent my CEO an e-mail saying that I was crazy, there was no oversupply coming and that Suntech stock was going to 30. Basically, that person was trying to get me fired. Did you change your recommendation when Suntech did fall to $5? I kept my Sell rating, but I did say that, at $5, this is probably as low as it gets. That was my price target. Okay, let's look at the big picture for a moment. What kind of global supply-demand picture do you see this year and in 2010? For the photovoltaic sector, supply this year is going to be about 7.1 gigawatts [or billions of watts], and supply next year will be about 10.8 gigawatts. That's total supply. And that excludes all of the thin-film manufacturers, including First Solar. If you include them, the supply gets even bigger. As for demand, it will be about 4.3 gigawatts, maybe 4.4 gigs or 4.5 gigs. In 2010, you'll have demand of roughly 6 gigawatts. So, things will remain challenging for the solar companies. What about crystalline polysilicon itself, the basic material for some solar cells? Polysilicon guys must run their factories at 70% of capacity to break even. In 2005 and 2006, there was an eruption of solar demand due to aggressive incentives in Germany and then Spain. Polysilicon spot prices-which averaged roughly $30 to $40 a kilogram before 2005-went to $450. So, a lot of guys said, "Oh, my God. This is a great market to be in" and built plants. But it takes three years to construct a polysilicon plant. Now all these plants are coming on line, but the solar bubble has burst. Demand is down. Polysilicon is $60 and, in some cases, $50 per kilogram. The price to make this stuff is $25 to $28, so if prices go to $40 or even $35, these guys would still make great margins. But prices will trend toward and maybe below the break-even level. In 2009, we expect total polysilicon supply of 96,432 metric tons and demand of 68,563 metric tons. That doesn't sound good for poly producers like MEMC Electronic Materials [WFR] or Wacker Chemie [WCH.Germany]. Right. People were saying last week that MEMC would be acquired by Wacker. That makes absolutely no sense, and MEMC said just that. Then an analyst said that Wacker had negotiated 20% higher wafer prices, which suggests that demand is strong. In reality, Wacker Chemie hadn't said that. So I have a Hold rating on MEMC. In 2009, they should make 8 cents. MEMC just negatively pre-announced Q3, because of this supply issue. They had production missteps at their Pasadena, Texas, facility. They always call it a one-time event, but they've had a number of production missteps. MEMC is now at 17.68. What's your price target? Nine bucks. What's sent solar stocks up lately? People got excited by China's announcement of a new feed-in tariff. Feed-in tariffs require utilities to subsidize solar installations by paying above-market prices for solar-generated electricity, right? Yes. But it wasn't a national tariff. It was a local one. Nonetheless, a lot of people thought there was going to be massive demand in China for solar modules this year and next. So the day of the announcement, all the Chinese solar stocks were up 30% or 40%. Suntech is one of the stocks that's up. Since I upgraded Suntech to a Hold, it's been in a range of 12 to 18. This year, I downgraded it to Sell again because I saw accounting and other risks there. What kinds of risks? In the first quarter, Suntech created an off-balance-sheet entity called GSF -- for Global Solar Fund. In their SEC filings and on a conference call, they described this as a separate entity that is buying Suntech panels. However, what they said shortly thereafter in questioning was that Suntech has an 86% interest in GSF. Suntech basically took modules out of its inventory and put them into the inventory of this off-balance-sheet entity and then recognized revenue on those modules. Beyond that, Suntech's costs aren't as low as those of the other Chinese module manufacturers. It has the largest commitment to purchase polysilicon at prices above where this material is trading today. Unless they renegotiate those contracts, they are at a structural disadvantage to guys like Yingli [YGE] and Trina Solar [TSL], which didn't sign long-term contracts at these predetermined prices. Another issue: To make a solar-power system, you take polysilicon, put it in a wafer, make solar cells from this and then assemble those cells into a module that can be installed on a roof. Trina and Yingli are vertically integrated all the way up through the wafering process; Suntech outsources its wafering. It's more expensive to do that. Wafering means sawing the raw silicon ingot into thin wafers, right? That's right. And Suntech has a ton of debt that has a pretty high interest rate and as a result they can't price their modules as low as their competitors can. What are your earnings forecasts for Suntech? For this year, seven cents a share; for next year, 12 cents. Suntech's now 16. What's your target? My target is $9. What about other stocks you cover? First Solar was able to come into the market and quite impressively scale up a thin- film manufacturing process that allowed them to produce modules at a significantly lower cost than the crystalline polysilicon guys. At the time, polysilicon prices were at $200. I was saying they are going to $50 in 2009, and people said I was crazy. I said that photovoltaic module prices are going below $2. That's a major risk for First Solar, because First Solar modules have to be priced at a roughly 40-cent discount, given that they are less efficient than the crystalline polysilicon modules, and so you need more of them. Table: What Johnson Would Shun This was when First Solar was in the 180s. Lo and behold, polysilicon prices went to $50 and First Solar's stock went to 90. It hit my price target, and I probably should have upgraded then. But, structurally, nothing has changed. Now the stock is back at 153. We're in an environment of $50 polysilicon right now and I would argue $30 by the end of this year, with photovoltaic-module prices of $1.80-to-$1.50 by the end of this year. At a $1.50, First Solar has to price its thin-film modules at $1.10. Their costs are 90 cents. So, that's not a 50% gross margin. Last quarter, they came out and announced this rebate program and basically proved my thesis correct. The stock plunged and then it recovered. What made people get bullish again? Basically what happened was First Solar started issuing press releases just to get its stock up. They came out and announced a memorandum of understanding to do a solar project in China It's an agreement with a city in Inner Mongolia. It's the equivalent of me signing a deal with a city in Indiana and making it seem that I have an agreement with the U.S. government. They don't have financing. It's contingent on a national feed-in-tariff, which China has said isn't going to happen for two years. It took the Chinese six years to evaluate wind-energy plants and determine that a feed-in tariff for them was warranted. They've only evaluated one solar project. You see First Solar earning what? For 2009, $6.56 per share on revenue of $1.8 billion, then in 2010, $3.07 per share on revenue of $1.9 billion. Are there other solar-energy stocks that we should discuss? One is SunPower [SPWRA]. In the second quarter, sentiment was at an all-time low, and they beat the expected numbers. It surprised me and a lot of other people on the Street. The stock moved massively higher. The issue with SunPower, which is based in San Jose, Calif., is very simple. Their costs to manufacture a panel are significantly higher than the Chinese guys'. But because it was of better quality, they could sell their product at a premium to the other guys. Now the quality of the Chinese modules has gone up, while selling at significantly lower prices because their cost structure is so much lower than SunPower's. What are your numbers for SunPower? For 2009, $1.3 billion in revenues and 98 cents in EPS. Now these are earnings that don't meet GAAP [generally accepted accounting principles], which is what the Street uses to value SunPower. The problem I have is that SunPower has among the highest stock-option expenses in the industry. If you look at SunPower's non-GAAP number, it is around 32 cents, that's how high their equity-option expenses are. For 2010, I see them with $1.8 billion in revenue and $1.11 in EPS. But with stock-option expense, 2010 is closer to 50 cents. And you have a Sell rating on the stock, which is now around 30. A Sell and a $15 target. What about Trina and Yingli? I had Buys on them ahead of the big move. It was a pretty good call. I just realized that the Street wasn't factoring in the gross-margin upside. Then in Q1 and Q2 they guided to higher margins, and the stocks just ripped. They are definitely better-positioned because they have lower costs. This is a commodity market, and they eventually will be the winners. But even among the Chinese, there's competition. Trina is probably the best-positioned. They've worked through a lot of their inventory. However, for Yingli, there is significant risk of an inventory write-down, for Q3 or Q4. They've built significant amounts of inventory, and they've yet to write it down. And there is risk in their accounts receivable -- they are giving their customers price protection. So I'm a little more negatively biased on Yingli. So with Trina now at 32 and Yingli at 12, your recommendations are... Hold. And I have price targets of 24 for Trina and 9 for Yingli. As we speak, you're at a solar conference, correct? Yes. The European Photovoltaic Solar Energy Conference in Hamburg, Germany. And what have you learned there? That Q3 is definitely stronger than Q2. There has been resurgence in demand in late August, early September. So a lot of people are saying this is the time to buy solar stocks. But people aren't really looking at Q4 and 2010, so they are setting themselves up for a potential disappointment. Thanks.

Oaktree to Receive $1 Billion from CIC

By JENNY STRASBURG and RICK CAREW A Los Angeles investment firm has come out a big winner in the battle among some of world's best-known money managers vying for a slice of cash from China's sovereign-wealth fund. China Investment Corp., which is doling out billions of dollars as it tries to profit from a global economic recovery, has committed to invest about $1 billion with Oaktree Capital Management LP, people familiar with the matter said. The big allocation comes as the Chinese fund stands poised to make a wave of investments directly into hedge funds around the world. For more than a year, big-name money managers have aggressively courted CIC, as China's fund is known, looking to Beijing for cash and its influential stamp of approval as anxious investors pulled money out of their funds amid the financial crisis. "CIC represents one of the biggest investment opportunities in the world," says Jake Walthour, who as head of advisory services at Aksia LLC comes into contact with hundreds of hedge funds as he helps investors decide where to put their money. Oaktree is expected to invest CIC's money over the course of several years in distressed debt and other fixed-income assets, and it adds to other inflows to the firm this year, people familiar with the matter say. Oaktree oversees more than $60 billion, making investments in a variety of realms, from debt of battered casino operators to buying whole companies. An Oaktree spokeswoman declined to discuss the matter. A CIC representative didn't respond to a request for comment. Oaktree was founded in 1995 in Los Angeles and New York by a team of debt investors including Howard Marks, who is still its chairman. In July, Oaktree was among nine big asset-management firms chosen by the U.S. Treasury as fund managers for the Public-Private Investment Partnership, or PPIP, the government program designed to rid banks of toxic assets. In recent months, CIC has emerged as the most active government investment fund on the world stage, deploying portions its $300 billion portfolio in deals as diverse as natural resources and real estate, aiming to catch the upside of what its leaders expect to be a global rebound. J.P. Morgan Chase & Co. China analysts estimate that altogether CIC will spend as much as $50 billion on new overseas investments this year. CIC is expected to funnel an additional $2 billion directly into hedge funds in the coming months. To score a spot on the list, some of the world's most famous hedge-fund managers have made a pilgrimage to the 300-foot-tall glass-walled atrium of New Beijing Poly Plaza, CIC's headquarters in the Chinese capital, to pitch their services. They include Eton Park Capital Management boss Eric Mindich and [COMPANY]Paulson & Co.[/COMPANY]'s John Paulson, whose firm made a mint in 2007 betting on a housing-market downturn. 0Already this summer, CIC has funneled a billion dollars into hedge funds, though indirectly. It has channeled that money through two so-called funds of hedge funds—that is, managers that farm out pools of money to dozens of funds—that are run by Blackstone Group LP and Morgan Stanley. CIC owns stakes in both firms, making them familiar partners as it dips its toes into the hedge-fund world. Last year, CIC made a big private-equity investment with J.C. Flowers & Co., allocating $3.2 billion for opportunities among financial institutions. Big Score for Capula As CIC picks up its hedge-fund investments, lesser-known names also are getting a shot. Capula Investment Management LLP, a London-based firm started in 2005 overseeing $3.6 billion in fixed-income assets, received $200 million from the China fund in August, according to people familiar with the situation. Capula is led by Yan Huo, the son and grandson of Chinese physicists who earned a doctorate in electrical engineering from Princeton University and went on to trade proprietary capital at J.P. Morgan Chase & Co. CIC scrutinized Capula's operations and performance for more than a year before finalizing its decision, a person familiar with the matter says. The allocation came after Capula gained 9.5% in 2008, a year when most hedge funds lost money. Fund managers are known to travel the globe hunting for new money, but rarely have so many influential managers gone to such lengths to secure funds from one source. Gaining Sway Other sources of capital grew scarce in the wake of last year's market turmoil. Risk appetites have been low at other sovereign funds in the Middle East and Singapore that took a big hit on investments last year. Their pullback has helped increase China's clout in the hedge-fund industry. Other hedge-fund names mentioned in recent weeks as potential front-runners for CIC money, according to people familiar with the matter, include Winton Capital Management and Lansdowne Capital Ltd., both of London; Och-Ziff Capital Management Group LLC in New York; and Los Angeles-based Canyon Partners. Representatives for the firms declined to comment. Daniel Och, the former Goldman Sachs trader who started Och-Ziff in 1994 and took it public in November 2007, met with CIC in Beijing just this month, people familiar with the matter say. Other managers who have met with CIC include Renaissance Technologies LLC and Citadel Investment Group LLC, people familiar with the matter say. CIC insiders have suggested to advisers that performance concerns at those firms in the past year could hurt their chances of receiving allocations, at least in the short term, people close to the matter say. Representatives for the firms declined to comment. CIC's Gatekeeper At the center of CIC's hedge-fund vetting stands Felix Chee, a Singapore native who formerly oversaw the University of Toronto's endowment fund. While CIC at times has had problems attracting experienced investment professionals, in part due to pay constraints, Mr. Chee has a deep understanding of asset allocation and corporate finance, people who have met with him say. CIC has pushed hard for breaks in fees that could total hundreds of millions of dollars in coming years, according to people familiar with the matter. CIC has considered allocating money to SAC Capital Advisors LP chief Steve Cohen, who has hosted CIC decision-makers at his mansion in Greenwich, Conn. SAC has a strong track record, but CIC has expressed hesitation to pay Mr. Cohen's fees, which are some of the industry's highest, these people say. A spokesman for SAC declined to comment. Droves of investment titans flying in from around the world occasionally have posed logistical snags, with CIC and others sometimes asked to intervene on behalf of fund bosses requesting Beijing landing slots, people familiar with the matter say. The slots are limited and controlled by the Chinese air force. For example, last year as Beijing was hosting the Olympics, Blackstone needed help in getting a landing slot for its chief, Stephen Schwarzman, arriving in his private jet. Write to Jenny Strasburg at and Rick Carew at

Small Investors Make Big Bets on Currencies

By JEFF D. OPDYKE The dollar is zigzagging, falling below the 90 yen mark Friday and testing the depths it plumbed against the euro a year ago. That kind of action is music to the ears of investors such as Ray Firetag. As most of America slept on a recent Monday night, Mr. Firetag was in front of his computer in Elk Grove, Calif., wagering on the Australian dollar. Gold, silver and oil had slipped, and trading in Asian stocks had been weak. The 43-year-old speculator figured the Australian dollar, strongly tied to commodities, would spurt higher against the Japanese yen, then fall as investors overseas responded to weaker commodity prices. He was right, and his trade proved profitable. "I love this work," says Mr. Firetag, who last year left a 14-year career in real estate to trade currencies online full-time. He says he turned his initial $50,000 investment into "something north of seven figures." Ray Firetag of Elk Grove, Calif., has seen particular success trading the Australian dollar. One of the riskiest corners of Wall Street is making a push to attract individual traders like Mr. Firetag. Institutions ranging from the Chicago Mercantile Exchange to Citigroup Inc. and Deutsche Bank AG have recently launched currency products and online currency-trading platforms geared toward smaller account sizes than is typical with institutional currency trading. While central banks and multinational corporations account for the bulk of the nearly $4 trillion in daily world-wide currency trading, currency trading volume among individuals now approaches $120 billion. That is up about 20% from a year ago and nearly double the level three years ago, according to Aite Group, a Boston-based financial-services industry research and advisory firm. At GFT in Ada, Mich., a large online currency-trading platform, volume for the first two quarters was up 78% from a year earlier. Citigroup's CitiFX Pro, an online platform for higher net worth traders, opened shop in the U.S. last year, and plans to be in most major markets globally within six months. The heightened interest in currency trading comes as the dollar is sagging. On Friday, it fell below 90 yen for the first time since early this year. Since April, the yen has gained nearly 12% on the dollar. The euro is pressing up against $1.50, a level it last attained in August 2008. Currencies trade in pairs. In trading the dollar/yen pair, for instance, traders buy one currency and at the same moment sell the other. That is a two-pronged bet that could be affected by economic news or political events out of either country or elsewhere in the world. For example, traders through most of last year sold yen and Swiss francs to buy Australian and New Zealand dollars to profit from the wide gap in interest rates. But when the economic crisis hit, the Australian and New Zealand currencies weakened quickly, leaving many traders with losses. The dollar/yen and the euro/dollar are two of the most popular pairs. The other four that round out the six major pairs pit the dollar against the British pound, the Swiss franc and the Canadian and Australian dollars. Investors are typically attracted to currency trading because of the vast leverage available -- as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars. For example, at 200:1 leverage, common in the industry, a $500 investment controls a standard-sized $100,000 block of cash. But leverage also points to the risk of currency trading. Depending on how much leverage is deployed, a move of just half a penny in the euro/dollar pair, the most popular pair among currency traders, "would eat up your entire capital," says Brian Dolan, chief currency strategist at Many newcomers are lured by currency-trading systems, seminars and software sold online that promise big returns. But beware, says Tony Mossif, who says his experiences working for a currency-trading firm prompted him last year to launch, a free site where users rate forex brokers and currency-trading systems and software. "Some of these systems are just scams," Mr. Mossif says. Gary Tilkin, chief executive of online firm GFT, says trading currencies "is a business for speculators, not investors. It's more common to come in with $2,000 and lose than it is to turn that $2,000 into $25,000." Some individuals can't take the pressure. Tony Wong, a 49-year-old landlord in Orlando, Fla., spent $5,000 to attend an advanced currency-trading workshop about three years ago. At various times, he was trading his native British pound against the U.S. dollar, or trying to exploit longer-term trends he thought he saw in the Japanese yen, or pursuing quick profits on daily gyrations in the euro/dollar pair. On his best days, he could earn $1,000, he says. "But the thing is," Mr. Wong says, "currency trends can reverse so quickly, and by the end of the week you're not laughing, you're crying." Mr. Wong found it difficult to sleep at night "because I was mentally thinking about the trades that were troubling me." Ultimately, he abandoned the currency market after he lost about $2,500. Daniel Acuña, a 26-year-old risk analyst at a bank in San José, Costa Rica, began trading currencies in January, drawn to the market, he says, because of the leverage. "If you can master the art of leverage, you can make a real living. Or it can kill you." It almost killed Mr. Acuña. Using leverage of 100:1, he quickly lost his initial $5,000 investment after trading multiple currency pairs based on multiple strategies all at once -- a scattershot approach that left him unable to manage all the necessary trading. Chastened, Mr. Acuña is back in the game, this time with $1,000. He starts following currency movements when he gets to work, makes a few trades from his desk, "then I intensify my trading at night," he says. He's still using 100:1 leverage, and he trades so-called minilots of $10,000. Each fractional movement adds or subtracts $1 from his account balance. He's at breakeven, but says: "It takes two or three times of wiping out your account before you're able to make money consistently. I'm on my second attempt, and I hope I don't need a third." Write to Jeff D. Opdyke at

Friday, September 25, 2009

Durable Goods Unexpectedly Fall

By JEFF BATER WASHINGTON -- Durable-goods orders fell sharply during August as lower aircraft demand caused the largest drop in seven months. Manufacturers' orders for durable goods dropped by 2.4% last month to a seasonally adjusted $164.44 billion, the Commerce Department said Thursday. Durables are designed to last at least three years. The 2.4% drop was the sharpest since 7.8% in January and marked an upset following a key measure that showed U.S. manufacturers' output last month rising for the first time since January 2008. The Institute for Supply Management reported on Sept. 1 that its manufacturing index came in at 52.9 in August, up from 48.9 in July and 44.8 in June. Numbers above 50 indicate growth. The report was taken as a sign the recession in manufacturing had ended. As for August durables, economists surveyed by Dow Jones Newswires had projected orders would climb 0.3%. A barometer for capital spending by U.S. businesses decreased in August. Orders for non-defense capital goods excluding aircraft fell by 0.4%, after decreasing 1.3% in July. Overall durables in July rose 4.8%, revised down from a previously estimated 5.1% increase. Durables year to date are down 24.9%, in unadjusted terms, from the same, eight-month period in 2008. Unfilled manufacturers' orders for durables, a sign of future demand, fell 0.4%. That's the 11th drop in a row. Manufacturers kept cutting inventory hard, Friday's data showed. Manufacturers' inventories of durable goods decreased in August by 1.3%. Orders in August for transportation-related goods plunged 9.3%. Motor vehicle orders rose 0.4%, a limp reading considering the success of the "cash for clunkers" program. Aircraft orders fell, down 42.2% for commercial and 10.6% for military planes. Excluding the transportation sector, orders for all other durables were unchanged in August. Demand ex-transportation had climbed 0.9% in July. Orders climbed for metals and machinery, while falling for electrical equipment and computers. August capital goods orders dropped 5.9%. Non-defense capital goods -- items meant to last 10 years or longer -- fell 7.1%. Defense-related capital goods orders went up by 1.1%. Orders for all durables except defense goods decreased by 2.4% in August, after going 4.2% higher in July. Durable-goods shipments of manufacturers fell 1.4% last month. Write to Jeff Bater at

Losses on Banks' Big Loans: $53 Billion

By DAVID ENRICH A record-breaking surge in problems among giant loans is likely to spell trouble for many banks. Federal regulators on Thursday reported that banks and other institutions are facing $53 billion in losses on loans of at least $20 million that were financed by three or more banks. The level of losses on these loans, used to finance commercial real-estate projects, corporate buyouts and other big-ticket ventures, was nearly triple the prior record set in 2002. It also eclipsed the total losses identified over the past eight years. The results of the so-called Shared National Credit exam, conducted yearly by the four federal bank-regulatory agencies, are likely to force many banks in the third quarter to charge off more loans and to set aside additional funds to cover future defaults. "These results are a disaster," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "Banks are going to be forced to build up reserves. ... This will have a tangible impact on banking results" in the third quarter. The pain is expected to be especially severe for large regional banks. Many such lenders were helping to underwrite huge loans with lax terms until mid-2007, when the credit crisis started to intensify as housing markets collapsed. In the second quarter, regulators started informing the nation's top few banks about the exam's findings, leading those institutions to write down some big loans. Starting last month, regulators began to disclose their findings to smaller banks. Already, some banks have warned that the federal exam will depress third-quarter results due in mid-October. Last week, Fifth Third Bancorp of Cincinnati said at a New York conference that it expects to suffer about $110 million in loan losses in the third quarter due to the exam. Chief Executive Kevin Kabat called the figure "higher than we expected." "The exam seems to have been more rigorous than usual, which is probably appropriate in this environment," Mr. Kabat said. The regulators' bleak findings contributed to a broad sell off in bank stocks on Thursday, analysts said. The KBW index of bank stocks sank 2%. The exam also points to trouble for financial institutions other than U.S. banks that are holding troubled loans. The regulators said that foreign banks hold about 38% of the $2.9 trillion in loans that were examined in the survey. About 21% of the loans are held by hedge funds, insurance companies, pension funds and other entities. But such nonbanks hold a disproportionate share of about 47% of loans that were classified as problematic. Write to David Enrich at

Thursday, September 24, 2009

Growing Pains

--big risk for med term growth is policy mistake, hiking rates prematurly --GDP and ISM growth usually preceded rate hiks by 1 year. but rate hiks concides with inflation expectation September 24, 2009 By Manoj Pradhan London Risky asset markets are booming, US growth is set to resume with a bang in 3Q09 and the ISM has bounced solidly off its lows. Yet central bank officials have remained active in warding off attempts by markets to price in early hikes in policy rates. Experience from the previous three recessions in the US suggests that the Fed is likely to look through improvements in GDP and the ISM. Instead, its rate hikes have coincided strikingly with an upturn in inflation expectations. In our view, the biggest risk to medium-term growth is a policy mistake. Stronger-than-expected growth over the next few quarters may lead to a rise in inflation expectations, which may in turn prompt a premature start to the tightening cycle, as it seems to have done in the past. ‘Stylised facts': Using the previous three US recessions as a guide to possible exit policies, a few important ‘stylised facts' assert themselves: • A resumption of growth and an upturn in business sentiment predate even the end of easing, and lead the beginning of rate hikes by long intervals; • The end of easing and the trough in policy rates occur about a year before the Fed starts hiking rates again; • Rate hikes by the Fed occur around the same time as the upturn in inflation expectations with striking regularity. A revival of growth has not triggered rate hikes in the past... GDP and ISM turnarounds on all three occasions preceded even the end of the policy rate cuts. Rate hikes were, on average, about a year further away. The fact that the Fed waited for a significant period of time beyond the trough in growth and business sentiment provides a gauge of how long it takes to ensure that recovery is entrenched and able to withstand a withdrawal of stimulus. One reason for this is that the early part of the recovery is usually based on this policy stimulus. A further reason is that disinflation usually continues well into the early recovery phase. Policymakers ideally start withdrawing stimulus only when growth is self-sustaining and inflation looks poised to increase. This time is no different in that regard. Our US economics team expects growth to resume with a strong start in 3Q09 but still see a policy exit a long way away (see Fed Exit Strategy Still Far Off, Richard Berner and Dave Greenlaw, September 21, 2009), with the first rate hikes coming in 3Q10. The rate hikes will arrive about 11 quarters after the start of the recession - bang in line with past experience. The upturn in GDP and ISM, however, has taken longer to materialise, which means that the interval between a turnaround in output and sentiment and the first rate hike is shorter in this recession than it has been on average in the past three cycles. Why? The massive monetary and fiscal stimulus provided to the global economy has led to a resumption of growth sooner than would have otherwise been possible. This time around, central banks are likely trying to find a balance between waiting for a self-sustained recovery and not waiting too long and risk stoking an asset price bubble. Unless, that is, the stylised relationship between inflation expectations and policy rate hikes reasserts itself and forces their hand. ...but rising inflation expectations seem to have been a trigger: While the trough in output and business sentiment led rate hikes and even the end of rate cuts, the trough in inflation expectations has coincided with the beginning of policy tightening on every occasion in the previous three recoveries. There is reason to believe that policy rates were reacting to the rise in inflation expectations. On each occasion in the past, the increase in the fed funds rate has at least been equal to the rise in inflation expectations, and rates have risen at a faster rate in the last two episodes in order to raise the ex-ante real interest rate. It is still possible that this survey measure of inflation expectations was reacting to the same strengthening fundamentals that drove policy rates higher (i.e., we could be mistaking correlation for causation), but the consistency in each recession of the timing and the speed with which policy rates were raised makes such a caveat less likely to be true, in our view. Comparisons with the past are not easy... It is difficult to compare monetary policy in this cycle with the past because the monetary stimulus has been markedly different. Policy rates of all major central banks are very close to zero while monetary easing is still being delivered by central banks via their ongoing QE programmes. The end of rate cuts as they approached zero cannot therefore be considered the end of easing. The time between the end of easing and beginning of tightening is therefore even smaller this time around. On the way up, raising rates is going to be that much trickier thanks to the need to unwind active QE. Looking at the policy rate profile of central banks who have adopted QE measures will therefore provide only part of the story because those hikes will be influenced to a great deal by how successfully central banks are able to negotiate unwinding their QE purchases. ...but while history may not repeat itself, it may rhyme: On the evidence, it is difficult to rule out the possibility that a premature start to the hiking cycle could be precipitated by an earlier-than-expected rise in inflation expectations. The base case from our US team is for headline CPI inflation and core inflation to breach 2.5% and 2%, respectively in 2011 but remain stable and benign. However, given the rapid growth of narrow money in the economies where QE has been adopted and the difficulties surrounding policy tightening (see "QExit", The Global Monetary Analyst, May 20, 2009), the risks to inflation are likely biased to the upside. In a recent note, we pointed out that the biggest risk to medium-term growth was from a policy mistake, most likely through an aggressive response to stronger-than-expected growth in the near term (see "‘Up' with ‘Swing'?" The Global Monetary Analyst, September 16, 2009). Such a ‘blow-out' scenario is not our base case, but the policy stimulus has produced upside surprises so far and there is no obvious reason to think that it will find less traction going forward. If growth were to surprise to the upside, rising inflation expectations would be a natural response. Rising inflation expectations seem to have triggered rate hikes in the past. They might well do so again.